ITEM 1. BUSINESS
GENERAL
The Company believes itself to be one of the six largest global lighting companies in the world and one of only three major international producers to offer lamps, fixtures and ballasts. Through its acquisition-driven growth strategy, the Company is realizing its goal of becoming one of the world's largest broadly integrated lighting systems suppliers to the industrial, commercial and consumer markets. Prior to 1997, the Company was primarily a vertically integrated manufacturer and supplier of miniature lighting products. In January 1997, the Company significantly expanded its operations with the acquisition of Gustav Bruckner GmbH ("Bruckner"), which engineers, designs and manufactures automated miniature lamp-making equipment, and Valmont Electric, Inc. ("Power Lighting Products"), a manufacturer and supplier of lighting ballasts. Additionally, in September 1997, the Company completed the purchase of Sylvania Lighting International, B.V., a significant global lighting company and the third largest lighting company in Europe ("SLI"). SLI, together with Bruckner and Power Lighting Products, are collectively referred to herein as "The 1997 Acquisitions." The SLI acquisition constituted the largest and most important of the acquisitions made by the Company to date. See "ACQUISITIONS."
With the integration of SLI, the Company is able to offer a complete range of lighting products throughout the world. The Company's product categories include lamps, fixtures, miniature lighting assemblies and ballasts. The Company offers incandescent, fluorescent, compact fluorescent, high intensity discharge ("HID"), halogen, special, and miniature lamps to its customers. The Company's fixture range is comprised of accent/decorative and commercial/industrial fixtures. Accent and decorative fixtures range from simple downlights and spotlights to high performance lighting fixtures for art galleries and museums; its commercial/industrial fixtures are dominated by fluorescent ceiling mounted fixtures. Miniature lighting assemblies manufactured by the Company are used in various product applications, including automobile message centers, and aviation and telecommunications status arrays. Magnetic and electronic lighting ballasts, designed and manufactured by the Company, supply power to start and operate fluorescent and HID lamps and signage products (neon displays).
The Company has positioned itself to provide "one stop" lighting solutions for its customers' lighting requirements. The Company's strategy is to operate as a vertically integrated manufacturer producing both discrete lighting components and high value-added integrated lighting products. Through its acquisitions, the Company has gained the ability to offer its global customers extensive design, engineering, and manufacturing capabilities, while providing local, responsive service. With operations in more than 30 countries located within the Americas, Europe, Australia and Asia, the Company's customers include architects, designers, contractors, wholesalers, retailers and original equipment manufacturers ("OEMs").
Primarily as a result of the Company's successful growth and operating strategies, net sales increased from $57.4 million for the year ended December 3, 1995 to $330.0 million for the year ended November 30, 1997. In addition, operating income increased from $12.2 million for the year ended December 3, 1995 to $27.4 million for the year ended November 30, 1997. For the year ended November 30, 1997, giving effect to The 1997 Acquisitions on a pro forma basis, the Company's net sales and operating income was $755.4 and $46.5 million, respectively. In addition, for the year ended November 30, 1997, giving effect to The 1997 Acquisitions on a pro forma basis, approximately 80.9% and 81.6% of the Company's net sales and operating income, respectively, were outside the United States.
GROWTH STRATEGY
Recent acquisitions and a joint venture have greatly increased the Company's stature as a major international lighting manufacturer. The Company believes that it is now well positioned to continue its growth due to several factors. Management believes that its industry knowledge, experience consummating and integrating acquisitions and its access to capital, will facilitate the Company's expansion both domestically and worldwide. Acquisitions have provided the Company with certain cross selling opportunities by expanding the Company's product line to include new, complimentary products and by giving the Company access to new markets in which to sell existing products. Internal growth will be driven by increasing sales to existing and new customers, continued geographic expansion, and the leveraging of new technologies to participate in the highest growth and highest margin segments of the lighting market.
Complimentary Acquisitions and Joint Ventures. Within the lighting industry there are many well known companies which produce various lighting related products. The Company has used strategic acquisitions and alliances to effect its vertical and horizontal integration strategies. Acquisitions are selected based upon their ability to augment the Company's technology, engineering and design capabilities, broaden its product offerings, increase manufacturing facilities, access related global markets, and provide cost reduction opportunities and other operational synergies. The Company believes that its extensive knowledge of the fragmented areas of the lighting industry provides an important competitive advantage in identifying domestic and international acquisition opportunities. Additionally, the Company believes that its demonstrated success in integrating and improving acquired businesses will continue to provide the Company with significant growth opportunities. The Company has recently entered into an agreement to acquire a niche market lighting company for approximately $25 million. Although the Company intends to seek additional acquisition and joint venture opportunities, it currently has no other agreements, arrangements or understandings with respect to any particular acquisition or joint venture, and there can be no assurance that any other acquisitions or joint ventures will be completed.
Increasing Sales to Existing and New Customers. The Company focuses on expanding its market by designing, developing, and marketing "one stop" lighting solutions, a strategy through which the Company seeks to exploit cross selling opportunities between customers of existing and acquired businesses. Through its European acquisitions, especially SLI and W. Albrecht GmbH u.Co.KG ("Alba"), the Company has gained a substantial international presence in the lighting industry. The Company is seeking to capitalize on the global distribution networks and recognized and respected names of Sylvania* and Alba to introduce the Company's ballast and miniature lighting products overseas. Moreover, the Company's foreign operations have broad product lines of consumer and industrial lamps and fixtures which the Company intends to market domestically. In addition, the Company plans to aggressively market complimentary products such as ballasts, manufactured by Power Lighting Products, which can be used with linear and compact fluorescent and HID lighting products manufactured by SLI. The Company believes that its "one stop" strategy has enabled it to establish strategic relationships with its customers and provides an excellent opportunity for the Company to increase its sales to existing and new customers.
Diverse Geographic Operations. An important element of the Company's growth strategy is to continue to establish manufacturing operations in areas of high customer density or where manufacturing efficiencies can be realized. The Company's operations are currently located in the Americas, Europe, Australia and to a lesser extent the Asia market. The Company intends to continue to expand its operations as necessary to better serve its existing customers' objectives regarding cost, shipping location,
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* In general lighting the Company owns and has the exclusive right to use the "Sylvania" trademark in all countries of the world except the United States, Canada and Mexico.
frequency of interaction with manufacturing specialists and local requirements of end-market countries and to develop new business.
OPERATING STRATEGY
The Company's operating strategy is designed to enhance its international presence as a leading designer, manufacturer and supplier of lighting products in its related markets and to increase profitability through continued vertical integration and automation, product innovation, significant cost reduction programs and its focus on superior product quality and customer service.
Vertical Integration and Automation. The Company intends to further enhance its presence in the lighting industry by continuing the vertical integration of its operations by broadening the range of lighting components which it manufactures and uses in its lighting products. As the Company increases the percentage of Company-manufactured components used in its lighting products, it achieves greater control over the quality of such products and improves the cost-effectiveness of its operations. The Company's ability to manufacture a wide array of lighting components also facilitates the production of more complex, value-added products, which generally have higher average selling prices per unit and higher margins than discrete lighting components. The Company's vertical integration also improves manufacturing flexibility, enabling the Company to respond quickly to customers' specialized needs and shifts in demand. As lighting products have become more technically advanced, the Company has increasingly automated its manufacturing operations. By custom designing and manufacturing its own equipment, the Company has the ability to automate single, labor intensive steps within an assembly line operation as well as entire product assembly lines. The Company intends to continue to expand the automation at its manufacturing facilities in order to reduce the costs of producing its lighting products and to increase production and quality. Management believes that increased automation should further improve the Company's ability to meet customers' demand for "just-in-time" delivery of products. Also, by maintaining its own lamp making machinery capabilities, the Company further enhances its cost control and speed in introducing automation for new products.
Technology-driven Product Innovation. Lighting products and the related manufacturing technology are becoming increasingly sophisticated. Through the acquisition of various niche companies operating within the lighting industry, the Company's technology expertise has expanded. The Company has utilized its technical expertise to develop close working relationships with its customers by designing and manufacturing lighting solutions in cooperation with such customers to meet their specific needs. In addition, the Company closely monitors developing technologies within the industry and its sales data to determine which new lighting products to introduce. In January 1997, the Company entered into a joint venture agreement with Schott Corporation ("Schott"), a major global glass manufacturer, to expand both companies' fiberoptic activities in North America. Through its acquisition of SLI, the Company has gained access to SLI's significant expertise in product and process innovation in various areas including lamp photometric performance, energy-efficiency and miniaturization and product life extension as well as in the reduction or elimination of use of environmentally hazardous materials. The Company believes that it can expand its business by offering new products and
entering new niche markets in which it can be one of a few leading suppliers. Diversification in products and markets will continue to be a key component of the Company's operating strategy.
Improving Operating Efficiencies. The Company has realized various cost savings in connection with the integration of acquired companies. Cost reduction initiatives have included the consolidation of certain administrative functions, vertical integration with existing operations and leveraging of combined purchasing power. Sales personnel have, for example, been reduced in instances in which the Company's existing customer base has overlapped the customer base of acquired businesses. Vertical integration, through the substitution of components manufactured by the Company for those previously purchased by acquired companies from outside suppliers, will provide additional cost savings. The Company has also capitalized on its purchasing power for those materials and products which it does not manufacture. In connection with such integration, the Company has adjusted, in some cases, the product mix manufactured by acquired companies in an effort to improve profitability; such actions have had the short-term effect in certain cases of reducing the net sales of such acquired companies. Given that the recently acquired businesses have been operating at significantly lower operating margins than the Company's base business, these acquisitions have resulted in temporary contraction of consolidated operating margins. The recent acquisition of SLI with the extensive geographical and physical infrastructure of manufacturing, sales and administrative facilities worldwide provides a significant opportunity for improved operating efficiencies.
Responsiveness and Quality. The Company believes that responsiveness to customers' demands and the need to supply quality products are critical factors for success in the lighting industry. The Company's ability to conceive, design, trial, test and tool up for a new product launch in a very short period of time is a significant competitive advantage for the Company. Management has developed "Competency Centers" within its manufacturing facilities. These Competency Centers support specialist engineering teams which work in an integrated manner with marketing and manufacturing specialists. In addition, the Company has developed the technology to monitor and control its production performance. As a result of these initiatives, the Company's miniature lighting assemblies have achieved a preferred supplier designation from several of its most important OEM customers, including Q-1 certification from Ford Motor Company and a Quality Excellence award from Chrysler Corp. In addition, the Company has received certifications as a QS-9000, ISO 9001 and Euro-Net ISO 9000 and 9001 supplier.
ACQUISITIONS
The following table sets forth the acquisitions which have been consummated by the Company since October 1992:
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(1) The Company acquired substantially all of the assets of (i) STT Holdings Limited, which included two of its subsidiaries (STT Badalex Limited and STI Lighting Limited), and (ii) PRT Shipping Limited.
(2) In connection with the Alba acquisition, the Company acquired (i) W. Albrecht GmbH u. Co. KG ("Alba Germany"), (ii) Alba Light Design GmbH ("Alba-Light Design"), (iii) Alba Lamps, Inc. ("Alba-USA"), and (iv) certain other affiliated entities. The Company also acquired a majority interest in A&S Electric, spol.s.r.o. ("Alba- CZ") and Alba Technology (M) Sdn. Bhd. ("Alba-Malaysia").
JOINT VENTURE
On January 29, 1997 the Company entered into a joint venture agreement with Schott to form a company to be owned 51% by the Company and 49% by Schott. The purpose of the joint venture is to expand each company's respective fiberoptic activities in North America. Schott, headquartered in Mainz, Germany, is one of the world's largest manufacturers of optical and technical glasses for commercial, industrial, scientific, and consumer markets.
INDUSTRY OVERVIEW
The lighting industry is a large, mature market, which is characterized by the long life cycle of its lighting products. The global lighting industry consists of many firms, ranging from large, multinational, multiproduct, publicly owned companies to small, single-product, private firms. Participation in the industry is marked by the presence of three dominant firms and the maturity of market segments. The three leading global lighting companies are General Electric, Osram and Philips. While these companies are active in all of the major sectors of the lamp industry, concentration levels vary by sector and region. SLI is the third largest lighting company in Europe. The lamp market is highly concentrated whereas the miniature lighting market and the fixture markets are highly fragmented. The ballast market is concentrated and consists of several large companies including Power Lighting Products. Smaller firms have found or created niches in certain markets which have been defined by specific competencies, technologies or differentiated products. Some specialized areas, such as normal line voltage halogens, compact fluorescents and metal halides, have recently experienced a rapid rate of growth.
The lamp market exhibits a large degree of stability and maturity, because much of the demand is generated by replacement needs. Management believes that trends toward more efficient, longer life lamps will continue to reduce the absolute number of units sold but that increases in the average price per unit should more than offset the decline and result in overall growth of the market. Increased usage and applications will depend largely on economic growth, especially housing starts and new vehicle sales. However, economic development in areas such as Eastern Europe and Central and South America should provide accelerated growth opportunities. Aggregate sales of lamps have demonstrated moderate
cyclicality and seasonality. The fourth quarter tends to be the industry's strongest demand period, given abbreviated daylight hours and increased holiday light usage.
Three forces are converging that should influence the increased global use of lamps in the coming years:
- More companies in both manufacturing and the service sector, run overtime in the evenings or operate second and third shifts at night.
- Vendors are aggressively marketing more energy-efficient and user-friendly lamps; customers are responding by purchasing such lamps, even though they cost more than the old lamps.
- Increased world demand by developing countries for lighting products, including Eastern Europe, Central and South America and Asia.
PRODUCTS AND MARKETS
Prior to 1997, nearly two-thirds of the Company's net revenues were attributable to miniature lighting assemblies, with miniature discrete bulbs and light emitting diodes ("LED's") accounting for the bulk of the remainder. The Company's product category profile has changed dramatically with the addition of SLI and Power Lighting Products. The following sets forth the percentage of net sales by product category for the years ended December 1, 1996, and November 30, 1997, and, giving effect to The 1997 Acquisitions on a pro forma basis for the year ended November 30, 1997.
The Company sells its products globally under a variety of brand names in over 30 countries. Its flagship brand Sylvania* is one of the world's leading lighting brands covering a full line of lamps, industrial and commercial fixtures, and specialty products. Other lamp and fixture lines include Concord, architectural and display lighting; Claude, consumer and industrial/commercial lamps and fixtures; Lumiance, display lighting fixtures; Linolite, residential and commercial task lighting fixtures; and Le Dauphin, high fashion table fixtures. Miniature lighting assemblies are sold under the Chicago Miniature Lamp (U.S.) and Alba (Germany) labels. Ballasts are sold under the Power Lighting Products brand label. While the Company predominantly sells its products under its own brands, it also sells under its customers' brands, a practice which is common in the retail sector. SLI also sells to other lighting companies under their labels.
The Company's manufacturing and developmental activities are focused on the following product areas:
- ENERGY-EFFICIENT, LONG LIFE COMPACT FLUORESCENT LAMPS with novel features and improved performance characteristics. SLI continues to address the market's demand for affordable, retrofit energy-saving products with longer life.
- ENERGY-SAVING, TUNGSTEN HALOGEN LAMPS using normal line voltage. These lamps have the capability of replacing standard incandescent, incandescent reflector lamps and low voltage tungsten halogen lamps. They also eliminate the need for costly transformers. SLI has demonstrated leadership in this category with the 1994 introduction of a new range of "high voltage" halogen reflector lamps, known as Hi-Spot, and supplemented in 1996 with a miniature 50 millimeter, line voltage lamp, for which over 100 leading fixture companies have introduced products.
- HIGH INTENSITY DISCHARGE LAMPS for general lighting as well as for specialist applications, particularly film, TV studio, theater and audio-visual use. In general lighting, SLI has demonstrated its innovation by the 1995 introduction of twin-arc high pressure sodium (SHP) and mercury-free SHP lamps.
- ENERGY-SAVING TRIPHOSPHOR FLUORESCENT LAMPS in standard lengths with improved lumen maintenance, which increase the useful life of the lamps.
- METAL HALIDE LAMPS combine superior energy efficient illumination with long lamp life, excellent color rendition and compact lamp size. It is the fastest growing segment of the domestic lighting market.
- TREND-SETTING ACCENT FIXTURES which track both the requirements of the market place, and the emergence of new concept lamps, notably line voltage halogen, metal halide and compact fluorescent. New fixtures have been launched in response to new legislation, requiring low glare in the area of visual display units, as well as lower wattage per square meter of illuminated surface.
- INDUSTRIAL/COMMERCIAL LIGHTING FIXTURES to suit the changing performance and aesthetic requirement of commercial markets.
- MINIATURE LIGHTING ASSEMBLIES used mainly as visual fault or status indication and for illumination in sophisticated lighting assemblies for automobile message centers and telecommunication status array.
- MAGNETIC AND ELECTRONIC BALLASTS supply power to start and operate fluorescent, compact fluorescent and HID lamps and signage products (neon displays). Patented Solium ballast technology allows three way switching and dimming capabilities to compact fluorescent lamps.
The Company's customer profile has also changed materially since the acquisition of SLI. The Company's customers currently include architects, designers, contractors, wholesalers, retailers, distributors and OEM's whereas prior to The 1997 Acquisitions, the Company's primary market for its miniature lighting products were the OEM's in the electronics and communications, automotive, appliance and aviation industries. The Company does not believe that any one customer accounts for more than 5% of net sales. The Company's main customer base for lamps and industrial/commercial fixtures is the wholesale channel (approximately 65% of the Company's revenue, of which more than 10% is through international electrical wholesalers such as Rexel, Sonepar and Hagemeyer). The retail market for lamps is characterized by a small number of large accounts and is under competitive and pricing pressure from suppliers located in the Pacific Rim, especially in compact fluorescent lamps, which provide an attractive combination of high unit price and low freight cost. The professional installer market is important to the Company for lamps and accent fixture products. These products, which the Company sells under the Concord and Lumiance brands often require specification approval.
MANUFACTURING
The Company's manufacturing operations are vertically integrated through design, engineering, manufacturing, assembly and sales. This integration enables the Company to control product cost more effectively, help ensure quality and offer its customers a wide array of products and services. The Company's manufacturing capabilities include lamp forming and cutting, socket manufacturing, drawing glass and plastic fiber, lamp equipment manufacturing, plastic injection molding, production of complex molds and dies, and various assembly operations. The Company manufactures approximately 90% of its own products.
The Company operates within Competency Centers, which specialize in the manufacturing of different lamp and fixture products - fluorescent lamps in Germany; specialty incandescent lamps and industrial/commercial fixtures in France; HID, halogen and standard incandescent lamps in Belgium; compact fluorescent lamps and accent fixtures in the UK and accent fixtures in the Netherlands. The Company has also arranged its marketing, design and process engineering efforts on the Competency Center basis. The product marketing director is based at the Competency Center site and works with the plant manager and the engineering team.
The Company has specialized design and engineering capabilities which it uses to improve its manufacturing process by automating single, labor intensive operations as well as entire product assembly lines. Most of the Company's automated manufacturing equipment is custom designed by its own engineers and is proprietary. The Company fabricates most of its own equipment and many parts are machined in-house and customized to perform specific functions. The Company develops and uses automated material handling, testing and packaging systems, and it has automated the manufacture of its various lamps, fixtures and miniature lighting assemblies. By automating its operations, the Company has been able to reduce
its manufacturing costs, thereby enabling it to be competitive with products produced worldwide.
The Company uses both internally-produced and purchased components in its products. The Company purchases approximately 90% of its incandescent glass shells from a joint venture consisting of Philips and Osram and 80% of its fluorescent glass tubing from Osram. Any interruption in the supply of incandescent shells or fluorescent tubing could have an adverse effect on the Company's operations. The Company purchases certain of its raw materials, including plastic, metals, glass, copper, filaments, gases, electrodes, electronic components, wire and resistors for use in the manufacture of lamps, fixtures, ballasts and assemblies. All such raw materials are readily available and are generally purchased from a variety of independent, non-competing suppliers. All LEDs used by the Company in its lighting assemblies are currently imported from the Pacific Rim. The Company intends to equip a facility for, or to acquire a business primarily engaged in, the production of LEDs.
The Company has developed a high level of skills in the design and construction of high-speed automated equipment and has combined this with materials management efficiency in its manufacturing facilities. The Company has 25 manufacturing facilities in 13 countries, including 4 facilities in the U.S.
RESEARCH AND DEVELOPMENT
Prior to the acquisition of SLI, the Company devoted little of its resources to research and development. SLI's research and development, in recent years, has been focused on product and process innovation, applying proven lighting technologies, rather than in the exploration of new lighting techniques. Much of SLI's focus has been directed toward improvements in material science to improve lamp photometric performance, energy-efficiency and miniaturization as well as to lengthen the life of its products and reduce or eliminate the use of environmentally hazardous materials. Through a technical agreement, in effect from January 1993 to September 1997, SLI was entitled to royalty free use of Osram's worldwide intellectual property including patents, research and development, product and process know-how for use outside the United States, Canada and Mexico. Commencing in September 1997, SLI continues to have the right to use all of the information and know-how acquired up to 1997 (but not to receive new Osram technology and know-how) within its existing business outside the United States, Canada and Mexico. While the Company cannot use the Sylvania name in the United States, Canada and Mexico, this restriction will not prohibit the Company from selling a broad range of lighting products, which are not dependent upon Osram technology. Additionally, the Company has developed its own competency in lighting technologies and manufacturing processes and has successfully produced innovations such as line voltage halogen products and sensor operated compact fluorescent lamps. The Company's research and development expenditures were $1,926,000 in the fiscal year ended November 30, 1997 and $7,584,000 in fiscal 1997, giving effect to The 1997 Acquisitions on a pro forma basis. Certain of the Company's competitors are significantly larger than the Company and devote a substantial amount of money to research and development.
SALES AND MARKETING
The Company sells its lighting products through a direct sales force, sales representatives and distribution companies. The Company employs approximately 1,021 people in sales and marketing, with 674 in Europe, 124 in the U.S., 97 in Australia, 80 in Central and South America and 46 in Asia. In addition, the Company's sales force is augmented with independent sales representative organizations, with approximately 677 sales people responsible for sales in designated geographic territories in the United States, Canada and Europe.
The Company advertises in most major electronic and electrical trade publications. To help ensure positive results of its advertising programs, the Company has developed a lead fulfillment and tracking program
that monitors opportunities for the internal sales force, the sales representatives and distributors. The Company also publishes full-line catalog/data books and CD Roms for use by its customers.
INTERNATIONAL OPERATIONS
Approximately 60.9% and 68.6% of the Company's net sales and operating income, respectively, for the year ended November 30, 1997 were outside the United States. Giving effect to The 1997 Acquisitions on a pro forma basis, approximately 80.9% and 81.6% of the Company's net sales and operating income, respectively, were outside the United States. The Company currently operates in more than thirty countries located in the Americas, Europe, Australia and Asia. As a result of its foreign sales and facilities, the Company's operations are subject to the risks of doing business abroad.
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(1) At December 3, 1995, December 1, 1996 and November 30, 1997.
THE 1997 ACQUISITIONS
Bruckner
In January 1997, the Company through its subsidiary Alba, acquired all of the capital stock of Bruckner. Bruckner engineers, designs and manufactures automated miniature lamp-making equipment at its manufacturing facility in Coburg, Germany. The purchase price was approximately $1.7 million which was paid from the cash proceeds received from the Company's public offering which occurred in October 1996.
Power Lighting Products.
On January 30, 1997, the Company consummated the purchase of all of the outstanding capital stock of Power Lighting Products. Power Lighting Products is a manufacturer of magnetic and electronic ballasts for the linear and compact fluorescent, sign and HID lighting markets. The purchase price was approximately
$22 million and the source of funds was cash proceeds from the Company's public offering which occurred in October 1996.
Power Lighting Products was established in 1987 when Valmont Industries, Inc. purchased the business and certain assets of the ballast division of General Electric. Power Lighting Products is currently a significant supplier of both magnetic and electronic ballasts with approximately a 10% share of a total U.S. market estimated at $900 million to $1 billion. Revenues for 1996 approximated $93.0 million and the company reported an operating loss of approximately $600,000 for such year. Lighting ballasts (magnetic and electronic) supply power to start and operate linear and compact fluorescent, HID lamps and signage products (neon displays). Magnetic ballasts use an older and well established technology and have a less expensive initial cost than electronic ballasts. Despite higher initial cost, electronic ballasts are gaining market share as they provide reduced energy consumption and longer lamp life. In recent years, lighting retrofit projects driven by energy efficiency regulations and utility rebates have accelerated the increasing market share of electronic ballasts. Power Lighting Products provides the Company with relationships with major OEM's. Sales to OEM's account for approximately 60% of Power Lighting Products sales. These OEM's also represent sales opportunities for many of the Company's other products. Power Lighting Products sells approximately 30% of its products through electric distributors and 10% directly to the "Do-It-Yourself" retail store market. The Company views these distribution channels as a major part of its future domestic marketing strategy as it expands its range of products.
SLI
On September 8, 1997, the Company consummated the purchase of all of the outstanding shares of capital stock of SLI, a privately held company headquartered in Geneva, Switzerland for $161.5 million cash, financed with the Company's internal cash and a $250.0 million credit facility provided by BankBoston. Originally founded in the United States, SLI has been in the business of producing lamps since 1900. GTE acquired the business in 1959 at which time the company did business exclusively in the United States. The company expanded into Europe in 1961 with its photoflash product ("flash cube") which is used with cameras. Between 1966 and 1985, GTE grew the worldwide operations of SLI, setting up plants in Central and South America between 1966 and 1979 and opening operations in Australia and Asia during the 1970's. In the 1980's the Company made two acquisitions; Claude, a French lamp and fixture manufacturer and Rotaflex, a European fixture manufacturer. In 1993, GTE sold SLI, excluding the North American business, to a group of private investors. GTE sold its North American business, including the trade name "Sylvania" for use in North America, to Osram.
SLI is an integrated designer, manufacturer and seller of lighting systems which are comprised of lamps and fixtures. SLI manufactures and offers a wide range of lamps (incandescent, fluorescent, compact fluorescent, HID, halogen, and special lamps) and a substantially complete range of fixtures to meet the lighting needs of its customers, which include architects, designers, consultants, installers, contractors, wholesale distributors, OEMs, large industrial users and retailers. SLI's product portfolio is sold under several brands, most notably the "Sylvania" name, for which SLI has rights in all regions with the exception of North America and Mexico. For its year ended December 31, 1996 SLI reported revenues of approximately $610.0 and operating income of approximately $12.0 million. SLI manufactures approximately 90% of all its product requirements in-house through 13 plants in 9 countries; 8 plants are in Europe, three are in Central and South America and two in Australia. SLI conducts its operations in over 30 countries through sales and distribution facilities. SLI did not have a miniature lighting line, and its products did not overlap those of the Company. Management believes that SLI is complimentary from both a product line and geographical standpoint.
The acquisition of SLI, a large user of ballasts with no ballast manufacturing capability, is expected to produce significant synergistic effects for the Company and its Power Lighting Products subsidiary. The recent acquisition of Solium in November 1997, with its unique
and patented electronic ballast design and technology, is also expected to create additional benefits for the Company.
COMPETITION
The industry in which the Company operates is highly competitive. Most of the Company's competitors offer products in some but not all of the markets served by the Company. The Company competes primarily on the basis of brand awareness, price, product quality, design and engineering, customer service and distribution strength. The lamp manufacturing industry is dominated by Philips, Osram and General Electric. Typically in the larger global markets, Philips, Osram and General Electric each have a market share in excess of 25%. The Company believes that it is the third largest lighting company in Europe, behind Philips and Osram, with an estimated 11% European market share. The fixture and miniature lighting assembly markets are highly fragmented with many suppliers. The ballast market is concentrated by several large companies including Power Lighting Products. Its competitors include MagneTek, Advance Transformer (a division of Philips) and Motorola. Some of the Company's competitors have substantially greater resources than the Company.
BACKLOG
A substantial portion of the Company's business, servicing the wholesale and retail channels, is done on a daily basis, and therefore the Company does not have more than a few days of backlog.
ENVIRONMENTAL REGULATIONS
The Company has invested heavily and progressively in capital and operating costs in complying with or in anticipation of regulatory and non-regulatory environmental requirements. SLI has worked with a leading international environmental consultant, in evaluating potential environmental liabilities at all SLI manufacturing locations relating to possible soil, air and/or ground water contamination. A program of improvement projects was initiated to achieve compliance with international standards. An environmental management system is now in place at all of the SLI manufacturing locations.
The Company uses a radioactive gas in its manufacture of neon bulbs in the United States, and maintains a U.S. Nuclear Regulatory Commission license for the use of such gas. The Company must comply with federal, state and local regulations pertaining to the storage and discharge of radioactive materials. In view of the low dosage of radioactivity in the gas used, the requirements for compliance with these regulations do not, and the Company anticipates will not, have any material adverse effect upon its capital expenditures, results of operations or financial condition.
EMPLOYEES
As of November 30, 1997, the Company employed approximately 7,408 employees of whom 3,545 were employed in Europe, 591 in the U.S., 82 in Canada, 2,879 in Central and South America, 227 in Australia and 84 in Asia. Manufacturing and engineering operations employed 5,927 people, sales and marketing employed 1,021 people, and administration and finance employed 460 people. Union recognition and collective bargaining arrangements are in place in 8 countries (including the United States), covering a total of approximately 3400 persons (144 in the United States). These agreements are with various labor unions and consortiums and expire at various dates. Management believes that it has a good relationship with its unionized and non-unionized employees.
ITEM 2.
ITEM 2. PROPERTIES
Manufacturing operations are carried on at manufacturing plants located in the following countries:
* Includes warehouse space.
The Company also has sales offices in over thirty countries located throughout the world.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no meetings of shareholders during the fourth quarter of the fiscal year covered by this report.
ITEM 4A. EXECUTIVE OFFICERS OF REGISTRANT.
The following table sets forth the names and ages of all executive officers of the Registrant, including all positions and offices with the Registrant held by such person, and the period during which he/she has served as such.
Each of the executive officers listed above serves at the pleasure of the Board of Directors for a term until his or her successor is duly elected and qualified. The following is a summary of the business experience during the past five years of each of the Company's executive officers.
Frank M. Ward has served as President and Chief Executive Officer and Director of the Company and its predecessor, Xenell Corporation ("Xenell"), since 1985. Prior to 1985, Mr. Ward was President of Xenell Marketing Corporation, an organization formed to manage the product development, marketing and distribution
of the products of Xenell. Mr. Ward received a Bachelor of Science degree in Electrical Engineering from Northeastern University and has completed post graduate studies in physics and metallurgy.
Norman Scoular has been President and CEO of SLI since its inception in 1993, and currently oversees SLI's lamp and fixture operations. He has spent the majority of his business career in various senior management posts with European electrical product based groups, including Philips, GEC and F.K.I. He has a General Engineering degree from Herriot Watt University and is a chartered accountant.
Richard F. Parenti joined the Company in October 1987, and held the position of controller from 1988 to 1992. He was appointed Vice President-Finance in 1992. Since 1992 he has served as a senior financial officer of the Company. Mr. Parenti has a Bachelor of Business Administration degree in accounting from Loyola University, Chicago.
Linda A. Moulton joined the Company as treasurer in December 1997 coming from State Street Bank (Boston), where since 1993 she headed the Large Corporations Department, which was made up of a group of lending professionals that concentrated on specialized companies with sales exceeding $150 million. Prior thereto, from 1990-1993, she was a Vice-President and a manager of the Boston branch of The Daiwa Bank, Ltd. Ms. Moulton has been in banking and finance for more than 15 years. She has a Bachelor of Science degree in Psychology from Brown University and a Masters Degree in International Affairs from Columbia University.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
From the effective date of the Company's initial public offering on June 16, 1995, the Company's Common Stock has been and continues to be traded on the over-the-counter market and is included for quotation on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ"). There was no public market for the Company's Common Stock prior to June 16, 1995, when it was listed on NASDAQ's National Market System.
The following table sets forth the range of high and low bid information for the Company's Common Stock for the period from the initial public offering through the Fourth Quarter of fiscal 1997. Such information has been adjusted for stock splits, the most recent of which was a 3 for 2 split in the form of a dividend, payable to the stockholders of record as of February 23, 1998.
[S] [C] [C] Second Quarter 16.67 11.33 Third Quarter 21.56 15.50 Fourth Quarter 25.67 18.00
* For the period from the initial public offering on June 16, 1995 through August 27, 1995.
The market information above is derived from quotations on the National Market System of NASDAQ. Such market quotations reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.
As of February 25, 1998, the approximate number of holders of record of the Company's Common Stock was 112 and the number of beneficial holders, including individual participants in security position listings with clearing agencies, was estimated at approximately 4,000.
DIVIDENDS
The Company has not paid any cash dividends to date and does not anticipate or contemplate paying cash dividends in the foreseeable future. In addition, the Company is prohibited from paying cash dividends by its credit facilities. It is the present intention of management of the Company to utilize all available funds for working capital and expansion of its operations.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data of the Company for, and as of the end of, the years ended November 30, 1997, December 1, 1996 and December 3, 1995 have been derived from the audited consolidated financial statements of the Company, which have been audited by Ernst & Young LLP. The selected financial data of the Company for, and as of the end of, the nine months ended November 27, 1994 have been derived from the audited consolidated financial statements of the Company. The selected financial data of the Company for, and as of the end of, the year ended February 27, 1994 and February 28, 1993 have been derived from the audited combined financial statements of the Company. The following data should be read in conjunction with the Company's Financial Statements and Notes included elsewhere in this Report.
(1) The results of operations and financial positions of Xenell and the Company are combined for the Company's year ended February 27, 1994. (2) The Company changed its financial reporting year-end from the last Sunday in February to the Sunday closest to December 1, which resulted in a year containing 39 weeks in 1994. (3) Revenues, expenses, assets, and liabilities are significantly affected by the number and timing of acquisitions made by the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business-Acquisitions,". (4) Between February 28, 1993 and January 1, 1994, Xenell was taxed as an "S" corporation under the Internal Revenue Code, as amended (the "Code"). Provision (benefit) for income taxes during such period reflects the provision (benefit) for income taxes attributable to certain other companies taxed as "C" corporations under the Code and consolidated with the Company's results of operations during such period. (5) See Note 2 of Notes to the Company's Financial Statements for stock split information. (6) Reflects cash dividends paid by Xenell to Mr. Frank M. Ward, the Company's Chief Executive Officer and founder, during the period in which Xenell was taxed as an "S" corporation under the Code.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The Company is a leading, vertically integrated designer, manufacturer and seller of lighting systems, which are comprised of lamps, fixtures, and ballasts. Through its 13 acquisitions completed since 1992, the Company has grown from a specialized manufacturer of neon lamps and miniature lighting assemblies into a full range supplier of lamps (incandescent, fluorescent, compact fluorescent, HID, halogen, miniature incandescent, neon, LED's and special lamps), a near full range supplier of fixtures and fiber optic lighting systems and a full range supplier of magnetic and electronic ballasts. The Company believes that it is one of the six largest global lighting companies and one of only three major international producers to offer an integrated package of lamps, fixtures and ballasts. The Company serves a diverse, international customer base, has 25 manufacturing plants in 13 countries and operates throughout the world.
The Company was established in 1985, and completed its initial public offering ("IPO") in June 1995 and a subsequent offering of Common Stock in October 1996. An important part of the Company's initial development has been its geographic and product range expansion through acquisitions. Since its IPO and prior to The 1997 Acquisitions, the Company completed the following acquisitions:
- Fredon, a tool, die and mold maker; - Badalex, an engineering and design builder of automated lamp-making equipment; - CML Fiberoptics, an established producer of high tech fiber optic products and manufacturer of glass and plastic fibers; - CML Europe, a U.K. manufacturer of halogen and specialty lamps; - Alba, a German manufacturer of miniature and subminiature lamps and value added assemblies.
Such acquisitions, together with pre-IPO 1995 acquisition of CML Canada, a manufacturer and supplier of miniature lighting assemblies and bulb sockets, are hereinafter referred to as "Prior Acquisitions."
In January 1997, the Company acquired Bruckner which engineers, designs and manufactures automated miniature lamp-making equipment and Power Lighting Products, a manufacturer of magnetic and electronic ballasts for the linear and compact fluorescent, sign, and HID lighting markets. In September 1997, the Company acquired 100% of the outstanding stock of SLI, a privately held company based in Geneva, Switzerland, for $161.5 million in cash, its largest acquisition to date. SLI is one of the world's premier full-line lighting companies, manufacturing and marketing six well respected lamp, fixture, and specialized lighting brands throughout the world, except for North America.
Both the Prior Acquisitions and The 1997 Acquisitions were funded with a combination of the proceeds from the Company's Common Stock offerings, bank borrowings and cash flow from operations.
The Company's acquisition strategy has a significant impact on year to year comparisons of revenues and earnings. The fiscal year ended November 30, 1997 includes operating results for eleven months of Bruckner, ten months of Power Lighting Products and three months of SLI. The operating results for the fiscal year ended December 1, 1996 includes the full year results of Badalex, CML Europe, CML Fiberoptics, and seven months of Alba. The operating results for the fiscal year ended December 3, 1995 includes eight months of CML Canada and three months of Fredon.
The following discussion and analysis of the results of operations for the twelve months ended November 30, 1997 should be read in conjunction with the Consolidated Financial Statements of the Company with accompanying notes. Except for historical matters contained herein, the matters discussed herein are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect assumptions and involve risks and uncertainties which may affect Chicago Miniature Lamp, Inc.'s business and prospects and cause actual results to differ materially from these forward-looking statements and should be read in conjunction with the "Risk Factors" section of this Report on Form 10-K.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items in the Company's Consolidated Statements of Income expressed as a percentage of net sales:
Year ended November 30, 1997 compared to year ended December 1, 1996
Net sales increased from $94.2 million for the year ended December 1, 1996 to $330.0 million for the year ended November 30, 1997. This increase was primarily attributable to The 1997 Acquisitions and to a lesser extent, growth in market share and customer development. The 1997 Acquisitions accounted for $223.7 million of the increase in net sales. The Company's strategy of integrating acquisitions can affect sales comparisons as existing capacity is utilized for internal purposes.
Gross margin increased from $33.0 million for the year ended December 1, 1996, to $98.0 million for the year ended November 30, 1997, due primarily to the increase in sales volume attributed The 1997 Acquisitions. Gross margin, as a percentage of net sales, decreased from 35.1%, for the year ended December 1, 1996, to 29.7%, for the year ended November 30, 1997, due to the impact of lower margins at the companies acquired in The 1997 Acquisitions, primarily the Power Lighting Products ballast business which has traditionally been a lower margin business in relationship to the Company's other products. The 1997 Acquisitions gross margin, as a percentage of The 1997 Acquisitions sales, was 28% since acquisition. This gross margin percentage is expected to improve as restructuring plans developed at the time of acquisition are implemented. However, the Company's gross margin percentage is subject to the impact of seasonality and product mix.
Selling, general and administrative expenses increased from $14.6 million for the year ended December 1, 1996 to $65.5 million for the year ended November 30, 1997. This increase was largely due to the impact of The 1997 Acquisitions. As a percentage of net sales, selling, general and administrative expenses increased from 15.4%, for the year ended December 1, 1996, to 19.8%, for the year ended November 30, 1997, primarily as a result of The 1997 Acquisitions. The Company's strategy is to decrease selling, general and administrative expense of The 1997 Acquisitions through restructuring plans which are currently being implemented. Additionally, the Company intends to further utilize the selling, general and administrative infrastructure of The 1997 Acquisitions as a base for further sales growth.
In the fiscal year ended November 30, 1997, the Company approved a restructuring plan which resulted in a non-recurring charge of $5.1 million. The restructuring plan was put into effect to consolidate
certain operations, reduce operating cost structures and improve future operating results. The provision relates to the consolidation of certain North American and European operations and includes costs associated with the excess of net book value over estimated recoverable value for certain assets, severance payments and the probable closure or transfer of certain assets. The Company believes this restructuring, along with restructuring plans developed and accrued for at the time of the SLI purchase, better positions the integration of SLI into the Company. Reference Note 8 of the Notes to the Company's Consolidated Financial Statements.
Interest expense, net, increased from $301,000, for the year ended December 1, 1996, to $1,156,000, for the year ended November 30, 1997, primarily as a result of the new and existing bank financing in connection with the SLI acquisition on September 8, 1997. Interest income of approximately $4.1 million was generated, for the year ended November 30, 1997, primarily from the investment of $98.3 million in proceeds from the Company's secondary offering in October 1996. A portion of these proceeds were used during the year for The 1997 Acquisitions ($65.0 million), the repurchase of common stock ($8.7 million) and for other capital expenditures.
Other income increased from $1,294,000, in the year ended December 1, 1996, to $2,326,000, in the year ended November 30, 1997. This increase includes a $985,000 gain from the sale of a 49% interest in CML Fiberoptics to Schott Corporation in connection with the formation of the Schott CML Fiberoptics joint venture. The remainder of the increase and substantially all of the remaining balance of Other Income for the year ended November 30, 1997 is the result of recording the effects of foreign exchange transactions. The Company, which has substantial foreign operations and activity, enters into foreign currency contracts to protect the Company from the risk that sales and purchases of products in foreign currencies will be adversely affected by changes in exchange rates. The Company does not hold or issue financial instruments for trading purposes.
As a result of the above, income before provision for income taxes, increased from $19.5 million, for the year ended December 1, 1996, to $28.5 million, for the year ended November 30, 1997. As a percentage of net sales, income before provision for income taxes, decreased from 20.7%, for the year ended December 1, 1996, to 8.6%, for the year ended November 30, 1997.
For the year ended November 30, 1997, the Company recorded a tax provision of $7.6 million on a pre-tax income of $28.5 million, for an effective rate of 26.6%, compared to a 31.0% rate on $19.5 million for the year ended December 1, 1996. The lower effective tax rate in the current year is due to the impact of income in countries with lower effective tax rates and realization of tax attributes, including net operating loss carry forwards, acquired in the SLI acquisition. A lower than U.S. statutory effective tax rate is expected to continue for several years. Reference Note 5 of the Company's Consolidated Financial Statements.
Year ended December 1, 1996 compared to year ended December 3, 1995
Net sales increased from $57.4 million, for the year ended December 3, 1995, to $94.2 million, for the year ended December 1, 1996. This increase in sales was primarily attributable to the Prior Acquisitions, growth in market share and continued customer development. The Prior Acquisitions accounted for $29.8 million of the increase in net sales. A number of the Company's Prior Acquisitions were not included in the operations of the Company for the year ended December 3, 1995. The Company's strategy of integrating prior acquisitions can affect sales comparisons as existing capacity is utilized for internal purposes.
Gross margin increased from $20.7 million, for the year ended December 3, 1995, to $33.0 million, for the year ended December 1, 1996, due primarily to the increase in sales volume. Gross margin, as a percentage of net sales, decreased from 36.0% for the year ended December 3, 1995 to 35.5%, for the year
ended December 1, 1996, due to a change in product mix and the impact of lower margins at the companies acquired in the Prior Acquisitions.
Selling, general and administrative expenses increased from $8.5 million, for the year ended December 3, 1995, to $14.6 million, for the year ended December 1, 1996. This increase was largely due to the Prior Acquisitions. As a percentage of net sales, selling, general and administrative expenses increased from 14.7%, for the year ended December 3, 1995, to 15.4%, for the year ended December 1, 1996, primarily as a result of the integration of the Prior Acquisitions. The Company's strategy is to improve upon and utilize the selling, general and administrative infrastructure of the Prior Acquisitions as a base for further sales growth.
Interest expense, net, decreased from $803,000, for the year ended December 3, 1995, to $301,000, for the year ended December 1, 1996, primarily as a result of the reduction of outstanding debt in June 1995, with a portion of the net proceeds from the Company's initial public offering and cash flow from operations. This reduction in debt was offset by new debt incurred to finance certain acquisitions. Interest income of approximately $600,000 was generated from the investment of the proceeds from the secondary offering which occurred in October, 1996.
Other income increased from $47,000, in the year ended December 3, 1995, to $1,294,000, in the year ended December 1, 1996. Substantially all of this increase in income results from recording the effects of foreign exchange transactions. The Company, which has substantial foreign operations and activity, enters into foreign currency contracts to protect the Company from the risk that sales and purchases of products in foreign currencies will be adversely affected by changes in exchange rates. Additionally, the Company made yen denominated borrowings at favorable interest rates, which debt was marked to market at the existing exchange rates, as of the reporting dates, and resulted in an unrealized gain of $440,000 in 1996. The Company does not hold or issue financial instruments for trading purposes.
As a result of the above, income before provision for income taxes, increased from $11.5 million, for the year ended December 3, 1995, to $19.5 million, for the year ended December 1, 1996. As a percentage of net sales, income before provision for income taxes, increased from 20.0%, for the year ended December 3, 1995, to 20.7%, for the year ended December 1, 1996.
For the year ended December 1, 1996, the Company recorded a tax provision of $6.0 million on a pre-tax income of $19.5 million for an effective rate of 31% compared to 26% in the year ended December 3, 1995. The higher tax rate in the current year is due to the increase in pre-tax income generated in countries with higher tax rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's major uses of cash have historically been for acquisitions, working capital to support sales growth and ongoing capital expenditures for facilities and equipment improvement. Sources of cash have typically included operating cash flow, bank borrowings and proceeds from the sale of common stock. In October, 1996, the Company completed a secondary offering pursuant to which the Company issued and sold 5,287,125 shares of its Common Stock and received net proceeds of approximately $98.3 million. The Company used the net proceeds of this offering to reduce debt, and to expand its manufacturing infrastructure primarily through acquisitions and capital expenditures.
The Company's cash on hand as, of November 30, 1997, was $73.4 million. Net cash provided by operating activities was $31.7 million, for the year ended November 30, 1997, and the cash used in investing activities totaled $189.3 million. The investing activities primarily included the Bruckner and Power Lighting Products acquisitions, which together totaled approximately $25.0 million and the SLI acquisition in connection with which
the Company paid approximately $161.5 million in cash. Net cash provided by financing activities aggregated $121.9 million, which included $132.4 million in net borrowings under the Company's credit facilities and repurchases of common stock totaling $8.7 million.
In connection with the SLI acquisition (Reference Note 1 in the Notes to the Company's Consolidated Financial statements) on September 8, 1997, the Company entered into a new bank financing agreement. The agreement provides for a $250 million, secured, revolving credit facility, which includes (i) a $50.0 million foreign currency facility; and (ii) a $15 million letter of credit facility. These credit facilities mature in August, 2002.
On September 8, 1997, the Company used $40.0 million of internal cash on hand and drew approximately $121.5 million under the revolving credit facility to finance the acquisition of SLI. Additionally, the Company drew $61.9 million to refinance indebtedness of the Company and its English and German subsidiaries and to pay certain expenses incurred in connection with the SLI acquisition.
As of November 30, 1997, the Company had available borrowings of approximately $66.6 million under the bank financing agreement. The face amount of letters of credit issued under the bank financing agreement totaled approximately $3.4 million.
The Company conducts business in countries outside of the United States which exposes the Company to fluctuations in foreign currency exchange rates. The Company may enter into short-term forward exchange contracts to hedge this risk according to its outlook on future exchange rates; nevertheless, fluctuations in foreign currency exchange rates could have an adverse effect on the Company's business.
The Company believes that cash from operations and borrowings available under the Company's credit facility will be sufficient to meet the Company's working capital and capital expenditure needs for the foreseeable future.
SEASONALITY
In view of the acquisition of SLI, it is expected that the Company's operations will experience certain seasonal patterns. Generally, SLI's sales have been highest in the fourth quarter of each year due to abbreviated daylight hours and increase holiday light usage.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have a time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will be required to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year
2000 and thereafter. The Company presently believes that with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company.
The Company will utilize both internal and external resources to reprogram, or replace, and test the software for the Year 2000 modifications. The Company anticipates completing the Year 2000 project within one year but not later than December 31, 1998, which is prior to any anticipated impact on its operating systems. The total cost of the Year 2000 project is estimated at $500,000 and is being funded through operating cash flows. The project cost associated with new software acquired at the time of the SLI and Power Lighting Products acquisitions does not impact the Company's Year 2000 project cost estimate. The remaining costs attributable to these new software purchases are estimated to total approximately $2 million.
The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertanties.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item is found immediately following the signature page of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
Reference is made to the Company's definitive proxy statement for the 1998 annual shareholders meeting involving the election of directors, which will be filed with the Commission within 120 days after the end of the fiscal year covered by this Report. The information required by this Item and contained in such definitive proxy statement is incorporated herein by reference. Reference is also made to Item 4A in Part I of this Report with respect to the executive officers of Registrant.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Reference is made to the Company's definitive proxy statement for the 1998 annual shareholders meeting involving the election of directors, which will be filed with the Commission within 120 days after the end of the fiscal year covered by this Report.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Reference is made to the Company's definitive proxy statement for the 1998 annual shareholders meeting involving the election of directors, which will be filed with the Commission within 120 days after the end of the fiscal year covered by this Report.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to the Company's definitive proxy statement for the 1998 annual shareholders meeting involving the election of directors, which will be filed with the Commission within 120 days after the end of the fiscal year covered by this Report.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
1. Financial Statements filed as part of this Report:
(a) Chicago Miniature Lamp, Inc. and subsidiaries
Report of Independent Auditors-Ernst &Young LLP
Consolidated Balance Sheets of Registrant dated November 30, 1997 and December 1, 1996
Consolidated Statements of Income of Registrant for the fiscal years ended November 30, 1997, December 1, 1996 and December 3, 1995
Consolidated Statements of Stockholders' Equity for the fiscal years ended November 30 1997, December 1, 1996 and December 3,
Consolidated Statements of Cash Flows of Registrant for the fiscal years ended November 30, 1997, December 1,1996 and December 3, 1995
Notes to Consolidated Financial Statements of Registrant
(b) CML Canada, Inc.
Report of Hards Pearson
Balance Sheets of CML Canada dated November 30, 1997 and December 1, 1996
Statements of Income for years ended November 30, 1997 and December 1, 1996
Statements of Retained Earnings for years ended November 30, 1997 and December 1, 1996
Statements of Cash Flow for the years ended November 30, 1997 and December 1, 1996
Notes to Financial Statements
2. Schedules.
All schedules other than Schedule II, Valuation and Qualifying Accounts, set forth below, are omitted as the required information is inapplicable or is presented in the financial statements or related notes which are incorporated herein by reference.
3. Exhibits.
3.1 Certificate of Incorporation of Registrant (a)
3.1(a) Amended Certificate of Incorporation of Registrant (a)
3.2 Bylaws of Registrant (a)
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Form of Common Stock Certificate of Registrant (a)
9. Copy of Voting Trust Agreement by and among the registrant, Frank M. Ward and Eileen M. Ward, Francis J. Ward, Eileen C. Ward, Thomas J. Ward, Julianne Ward, Stephen P. Ward of Registrant (a)
9.2 Form of Revocable Trust Agreement of Registrant (a)
10.1 Copy of Registrant's Incentive and Non-Statutory Stock Option Plan of Registrant (a)
10.1(a) Copy of Amendment to Registrant's Incentive and Non-Statutory Stock Option Plan of Registrant (a)
10.2 Copy of Share Purchase Agreement dated October 1, 1992 (CML-Delaware) of Registrant (a)
10.3 Copy of the Agreement for the Sale of Assets and Intellectual Property Rights dated October 20, 1992 (CML-Delaware) of Registrant (a)
10.4 Copy of Asset Purchase Agreement dated March 1, 1993 (Glolite Sales, Ltd.) of Registrant (a)
10.5 Copy of Contract for Purchase and Sale of Stock dated March 31, 1994 (IDI) of Registrant (a)
10.6 Copy of Agreement of Merger (Xenell Corp.) of Registrant (a)
10.7 Copy of Collective Bargaining Agreement between Local 3 Bakery and Confectionery Workers International Union of America, AFL-CIO of Registrant (a)
10.8 Copy of Executive Employment Agreement with Frank M. Ward of Registrant (b)
10.9 Copy of Bill of Sale dated February 25, 1994 between the Registrant and Mr. Ward, Quit Claim Deed and Demand Note relating to the purchase by the Registrant of ht Pauls Valley facility of Registrant (a)
10.10 Copy of Lease Agreement between the Registrant and Paul and Antoinette Nigito (IDI location) of Registrant (a)
10.11 Copy of Lease Agreement between the Registrant and TCC Chevy Chase Business Park Partnership (Chicago) of Registrant (a)
10.12 Copy of Lease Agreement between the Registrant and PV Investors (Oklahoma) of Registrant (a)
10.13 Copy of Contract for Purchase and Sale of Stock by and between the shareholders of Plastomer Inc. and the Registrant of Registrant (a)
10.14 Copy of Collective Bargaining Agreement between Plastomer Inc. and Local 722, United Rubber, Cork, Linoleum and Plastic Workers of America of Registrant (a)
10.15 Copy of Third Amended and Restated Credit Agreement between the Company, Industrial Devices, Inc. and Bank IV Oklahoma, N.A. dated June 30, 1995 (c)
(a) First Amendment and Modification Agreement to Third Amended and Restated Credit Agreement among the Company, Industrial Device, Inc. and Bank IV Oklahoma, N.A. dated December 6, 1995 (d) (b) Second Amendment and Modification Agreement to Third Amended and Restated Credit Agreement with Bank IV Oklahoma, N.A. dated February 23, 1995 (d) (c) Third Amendment and Modification Agreement to Third Amended and Restated Credit Agreement with Bank IV Oklahoma, N.A. dated April 26, 1996 (b) (d) Fourth Amendment and Modification Agreement to Third Amended and Restated Credit Agreement with Bank IV Oklahoma, N.A. dated July 22, 1996 (h) (e) Fifth Amendment and Modification Agreement to Third Amended and Restated Credit Agreement with Bank IV Oklahoma, N.A. dated August 2, 1996 (h)
10.16 Copy of Commitment letter dated July 1, 1996 from Bank IV Oklahoma, N.A. of Registrant (h)
10.17 Copy of Contract for Purchase and Sale of Stock dated August 11, 1995 (Fredon) (c)
10.18 Copy of Agreement for purchase of assets dated November 10, 1995 (Badalex) (e)
10.19 Copy of Contract for Purchase and Sale of Stock dated December 1, 1995 (CML-Fiberoptics) (c)
10.20 Copy of Agreement for purchase of assets of Phoenix Lighting (UK) Limited by and among Phoenix Lighting (UK) Limited, Lynn Robert Bailey, Christopher John Barlow and Chicago Miniature Lamp Limited dated December 18, 1995 (d)
10.21 Copy of Lease Agreement by and between Industrial Devices, Inc. and Park Street Associates dated December 19, 1995 (d)
10.22 Aircraft Purchase and Sale Agreement with Rigi, Inc. dated December 21, 1995 (d)
10.23 Copy of Agreement on Sale and Transfer of Shares and Interests in the Alba/Albrecht Group dated May 15, 1996 (f)
10.24 Copy of Contract for Exchange of Stock by and between Werner A. Arnold and the Company dated May 15, 1996 (f)
10.25 Copy of Contract for Purchase and Sale of Stock of Alba Lamps, Inc. by and between Werner A. Arnold and the Company dated May 15, 1996 (f)
10.26 Copy of Contract for Purchase and Sale of Stock of Alba-Malaysia by and between Werner A. Arnold and the Company dated May 15, 1996 (f)
10.27 Copy of Employment Agreement with Werner A. Arnold dated May 30, 1996 (f)
10.28 Copy of Contract for Purchase and Sale of Stock of Valmont Electric, Inc. by and between the Company and Schott Enterprises, Inc. (i)
10.29 Copy of Joint Venture Agreement between Schott Corporation, Chicago Miniature Lamp, Inc., CML Fiberoptics, Inc., Electro Fiberoptics Corp. and Schott CML Fiberoptics LLC, dated January 28, 1997(j)
10.30 Copy of Stock Purchase Agreement between the Company and Sylvania Lighting International, B.V. (k)
21.0 List of subsidiaries*
23.1 (a) Consent of Ernst & Young LLP* (b) Consent of Hards Pearson*
27.0 Financial Data Schedule (for SEC use only)
- -------------------- * Filed herewith
(a) Incorporated by reference to the Exhibits included in the Company's Registration Statement on Form S-1, File No. 33-90416 (b) Incorporated by reference to the Exhibits included in the Company's Form 10-Q for the quarter ended June 2, 1996, File No. 0-25848 (c) Incorporated by reference to the Exhibits included in the Company's Form 10-K for the year ended December 3, 1995, File No. 0-25848 (d) Incorporated by reference to the Exhibits included in the Company's Form 10-Q for the quarter ended March 3, 1996, File No. 0-25848 (e) Incorporated by reference to the Exhibits included in the Company's Form 8-K dated November 22, 1995, File No. 0-25848 (f) Incorporated by reference to the Exhibits included in the Company's Form 8-K dated June 14, 1996, File No. 0-25848 (g) Incorporated by reference to the Exhibits included in the Company's Form 8-K dated November 10, 1995, File No. 0-25848 (h) Incorporated by reference to the Exhibits included in the Company's Registration Statement on Form S-1, File No. 333-11041 (i) Incorporated by reference to the Exhibit included in the Company's Form 8-K dated January 30, 1997, File No. 0-25848 (j) Incorporated by reference to the Exhibit included in the Company's Form 10-K dated December 1, 1996, File No. 0-25848 (k) Incorporated by reference to the Exhibit included in the Company's Form 8-K dated September 10, 1997 File No. 0-25848
(b) Reports on Form 8-K.
Report on Form 8-K, dated September 10, 1997, reporting the Registrant's acquisition of all of the outstanding shares of capital stock of Sylvania Lighting, Inc.
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.
Dated: March 9, 1998 CHICAGO MINIATURE LAMP, INC.
By: /s/ Frank M. Ward ---------------------------------------------------- Frank M. Ward, Chief Executive and Financial Officer
By: /s/ Richard F. Parenti ---------------------------------------------------- Richard F. Parenti, Chief Accounting Officer
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.
INDEX TO EXHIBITS FILED HEREWITH
Chicago Miniature Lamp, Inc. and Subsidiaries
Consolidated Financial Statements
Years ended November 30, 1997, December 1, 1996, and December 3, 1995
CONTENTS
Report of Independent Auditors
The Board of Directors and Shareholders Chicago Miniature Lamp, Inc.
We have audited the accompanying consolidated balance sheets of Chicago Miniature Lamp, Inc. and subsidiaries as of November 30, 1997 and December 1, 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for the years ended November 30, 1997, December 1, 1996, and December 3, 1995. Our audits also included the financial statement schedule for the years ended November 30, 1997, December 1, 1996, and December 3, 1995, listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We did not audit the financial statements of Chicago Miniature Lamp (Canada), Inc., a wholly owned subsidiary, which statements reflect total assets of $10,469,000 and $9,887,000 as of November 30, 1997 and December 1, 1996, respectively, and total revenues of $14,605,000 and $13,031,000 for the years ended November 30, 1997 and December 1, 1996 and $7,064,000 for the period from March 30, 1995 (date of acquisition) to December 3, 1995. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for Chicago Miniature Lamp (Canada), Inc., is based solely on the report of the other auditors.
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 and the report of other auditors provides a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chicago Miniature Lamp, Inc. and subsidiaries at November 30, 1997 and December 1, 1996, and the consolidated results of their operations and their cash flows for the years ended November 30, 1997, December 1, 1996, and December 3, 1995, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule for the years ended November 30, 1997, December 1, 1996, and December 3, 1995, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Chicago, Illinois January 9, 1998, except for the 1998 stock split as described in Note 2, as to which the date is, February 11, 1998
Chicago Miniature Lamp, Inc. and Subsidiaries
Consolidated Balance Sheets (Dollars in Thousands)
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
Chicago Miniature Lamp, Inc. and Subsidiaries
Consolidated Statements of Income (Dollars in Thousands, Except Per Share Amounts)
The accompanying notes are an integral part of these financial statements.
Chicago Miniature Lamp, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Dollars in Thousands)
The accompanying notes are an integral part of these financial statements.
Chicago Miniature Lamp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Dollars in Thousands)
The accompanying notes are an integral part of these financial statements.
Chicago Miniature Lamp, Inc. and Subsidiaries Notes to Consolidated Financial Statements
1. ORGANIZATION AND ACQUISITIONS
Chicago Miniature Lamp, Inc. (an Oklahoma corporation) and subsidiaries (collectively, the Company) designs, manufactures and sells lighting systems which are comprised of lamps, fixtures and ballasts. The Company offers a complete range of lamps (incandescent, flourescent, compact flourescent, high intensity discharge, halogen, miniature incandescent, neon, LED's, and special lamps), a near complete range of fixtures, and fiber optic lighting systems. The Company serves a diverse international customer base and markets, has major plants in 13 countries and operates throughout the world.
In March 1995, the Company initiated operations at IDI Internacional, S.A. located in Costa Rica. Operations at this facility include the manufacture of value-added lighting assemblies.
On March 30, 1995, the Company acquired all of the capital stock of Chicago Miniature Lamp (Canada) Inc. (CML Canada; formerly named Plastomer, Inc.), a Canadian company, for $5.0 million Canadian in cash. The foreign currency exchange rate as of March 30, 1995, was 0.713 U.S. dollars to one Canadian dollar. CML Canada manufactures injection molded components for the automotive industry.
In August 1995, the Company acquired all of the capital stock of Fredon Development Industries, Inc. (Fredon) for $2,245,000 in cash.
On November 10, 1995, the Company, through its wholly owned subsidiary Badalex Limited (Badalex), acquired substantially all of the assets of STT Badalex Limited, STI Lighting Limited, PRT Shipping Limited, and STT Holdings Limited, all companies formed under the laws of England for approximately $4.2 million in cash. The Company also assumed liabilities of up to $4.8 million. At the end of 1995, the purchase allocation was preliminary. In 1996, adjustments were made to goodwill in the amount of $2.8 million. Badalex designs and manufactures lamp machinery.
On December 1, 1995, the Company acquired all of the outstanding stock of Electro Fiberoptics, Inc. for $1.6 million in cash. This acquisition was made through the Company's wholly owned subsidiary, CML Fiberoptics, Inc. (Fiberoptics). In January 1997, the Company entered into a joint venture agreement with Schott Corporation forming Schott CML Fiberoptics L.L.C. In connection with the joint venture agreement, the Company contributed substantially all the assets of Fiberoptics and approximately $300,000 cash in exchange for 51% of the units of the joint venture.
In December 1995, the Company through Badalex acquired certain assets of Phoenix Lighting (UK) Limited for approximately $2,400,000 in cash.
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND ACQUISITIONS (CONTINUED)
Effective May 1, 1996, the Company acquired all the outstanding equity of W. Albrecht GmbH U.Co. KG (Germany) and Alba Lamps, Inc. (USA) and certain equity interests in their affiliates (collectively Alba) for approximately $8.5 million in cash, 225,000 shares of common stock of the Company, and the assumption of approximately $4.9 million of bank debt (total consideration of approximately $16,650,000). Alba is a manufacturer and supplier of miniature lamps, value-added assemblies and instrument backed lighting systems.
In January 1997, the Company through Alba, acquired all the capital stock of Gustav Bruckner GmbH (Bruckner) for DM 400,000 and the assumption of approximately DM 2.4 million in bank debt (total consideration of approximately $1,652,000).
On January 30, 1997, the Company acquired all the outstanding capital stock of Valmont Electric, Inc. for approximately $22.3 million in cash and changed the entity name to Power Lighting Products, Inc. (PLP). PLP is a manufacturer of magnetic and electronic ballasts.
Effective September 1, 1997, the Company acquired all the outstanding capital stock of Sylvania Lighting International, B.V. and its subsidiaries (SLI) for $161.5 million in cash financed with the Company's cash and a new credit facility (Note 4). SLI is an integrated designer, manufacturer, and seller of lighting systems. SLI has a total of 13 manufacturing facilities in Europe, Latin America, and Australia and sells to customers throughout the world.
In September 1997, the Company, through Alba, acquired an additional 38% of A&S Electric s.r.o., Czech Republic for DM 150,000 and 4,500 shares of common stock of the Company (total consideration of approximately $185,000).
On November 24, 1997, the Company acquired certain assets of Solium, Inc. for $2,500,000 in cash.
For financial reporting purposes, each acquisition was accounted for as a purchase, and the purchase price was allocated to assets acquired and liabilities assumed based on the estimated fair market value existing at the date of acquisition. The excess of purchase price over fair market value of net assets acquired is reflected in the accompanying consolidated balance sheets as goodwill. The PLP and SLI allocations are based on preliminary information and are subject to adjustment.
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND ACQUISITIONS (CONTINUED)
Based on unaudited data, the following table presents selected financial information for the Company and its subsidiaries on a pro forma basis, assuming the companies had been consolidated since December 4, 1995:
The pro forma results are not necessarily indicative of future operations or the actual results that would have occurred had the acquisitions been made as of December 4, 1995.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated from the consolidated financial statements. The minority interests represent the separate ownership of A&S Electric s.r.o., Czech Republic (A&S) (40% in 1996 and up to September 1997, 2% thereafter), Alba Technology (M) Sdn. Bdn., Malaysia (30% in 1996 and 1997), and Schott CML Fiberoptics L.L.C. (49% in 1997).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
FISCAL YEAR
In January 1998, the Company changed its financial reporting year-end to the Sunday nearest to December 31 of each year. Previously, the fiscal year ended the Sunday nearest December 1.
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
INVESTMENTS
Management determines the appropriate classification of investments at the time of purchase and reevaluates such designation as of each balance sheet date. Investments are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at cost adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest expense, net.
INVENTORIES
Inventories are stated at the lower cost, determined by the first in, first out (FIFO) method, or market. Inventories consist of the following (dollars in thousands):
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. The Company provides for depreciation using the straight-line method over the following estimated useful lives:
Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the remaining lease term.
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired related to the business acquisitions described in Note 1. Goodwill is amortized on a straight-line basis over 40 years. Accumulated amortization is approximately $593,000 and $377,000 at November 30, 1997 and December 1, 1996, respectively. Amortization expense was approximately $216,000, $200,000, and $53,000, for the years ended November 30, 1997, December 1, 1996, and December 3, 1995, respectively. The Company periodically assesses whether a change in circumstances has occurred subsequent to an acquisition which would indicate whether the future useful life of an asset should be revised. The Company considers the future earnings potential of the acquired business in assessing the recoverability of goodwill.
OTHER INTANGIBLE ASSETS
Other intangible assets include the fair value of engineering technology, patents, noncompete, and other agreements related to the business acquisitions described in Note 1. The intangibles are being amortized using the straight-line method over their respective useful lives or contract periods, which range from 3 to 25 years. Accumulated amortization is approximately $2,290,000 and $1,810,000 at November 30, 1997 and December 1, 1996, respectively. Amortization expense was approximately $480,000, $392,000, and $380,000 for the years ended November 30, 1997, December 1, 1996, and December 3, 1995, respectively.
WARRANTY COSTS
PLP provides a limited warranty on all of its products. The warranty period is two years from the date of manufacture for magnetic ballasts and five years (three years prior to June 1994) from the date of manufacture for electronic ballasts. Under the terms of the warranty policy, PLP will replace any ballast that fails during the warranty period. Provision for the estimated warranty costs is made in the period in which such costs become probable. As a result of the change in the length of the warranty period in 1994 and changes in the product design, PLP has limited history for electronic ballasts from which warranty costs may be estimated. It is therefore reasonably possible that actual warranty costs may differ from the amount accrued in the accompanying balance sheet.
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TREASURY STOCK
In February 1997, the board of directors authorized, subject to certain business and market conditions, the repurchase of shares of the Company's stock. At November 30, 1997, a total of 643,345 shares have been repurchased.
FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to reduce its exposure to adverse fluctuations in interest and foreign exchange rates. Financial instruments are not used for trading purposes.
The Company and its subsidiaries utilize forward foreign currency exchange contracts to minimize the impact of currency movements, principally on anticipated intercompany inventory purchases and loans denominated in currencies other than their functional currencies.
The Company may enter into interest rate swap agreements to limit the effect of increases in the interest rates on any floating rate debt. The differential is accrued as interest rates change and is recorded in interest expense.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time of shipment.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the year incurred and totaled $1,926,000 in 1997. The costs incurred in 1996 and 1995 were not material.
INCOME TAXES
Deferred income taxes are recognized based on the expected future tax consequences of differences between the financial statement and tax bases of assets and liabilities, calculated using enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return.
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Transactions arising in foreign currencies have been translated at rates of exchange in effect at the dates of the transactions. Gains or losses during the year have been included in net income. Assets and liabilities of foreign affiliates are translated at current exchange rates, and income statement accounts are translated at the average rates during the period. Related translation adjustments are reported as a component of stockholders' equity.
STOCK SPLITS AND RECAPITALIZATION
The Company effected a 99-for-1 recapitalization on December 1, 1994, and a stock split effected in the form of a dividend of 0.716-for-1 in February 1995. On August 5, 1996, the Company approved a three-for-two stock split of its outstanding common stock to be effected in the form of a 50% stock dividend. The dividend was paid on August 27, 1996, to shareholders of record August 16, 1996.
On February 11, 1998, the Company approved a three-for-two stock split of its outstanding common stock to be effected in the form of a 50% stock dividend. The dividend is to be paid on March 6, 1998 to shareholders of record February 23, 1998.
All share and per share data have been adjusted to reflect these stock splits and recapitalization as of the earliest period presented.
STOCK-BASED COMPENSATION
Stock-based compensation awards are accounted for under APB Opinion No. 25 Accounting for Stock Issued to Employees. In October 1995, Statement of Financial Accounting Standards No. 123 (FASB No. 123), Accounting for Stock-Based Compensation was issued. FASB No. 123 establishes an alternative method of accounting for stock-based employee compensation plans (Note 10).
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER COMMON SHARE
Pursuant to certain Securities and Exchange Commission requirements, earnings per common share have been computed giving retroactive effect to the stock dividends and recapitalization described above.
In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share, which is required to be adopted by the Company in fiscal 1998. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating earnings per share, the dilutive effect of stock options will be excluded from basic earnings per share, but included in the computation of diluted earnings per share. The Company has historically excluded the dilutive effect of common stock equivalents in the calculation of primary and fully diluted earnings per share as the effect has been less than 3%. As such, basic earnings per share under the new standard will remain unchanged from primary earnings per share. The impact on diluted earnings per share for the year ended November 30, 1997 is not expected to be material.
SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (Statement 131), which is effective for years beginning after December 15, 1997. Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Statement 131 is effective for financial statements for fiscal years beginning after December 15, 1997, and therefore the company will adopt the new requirements retroactively in 1998. Management has not completed its evaluation of Statement 131, but does not anticipate that the adoption of this statement will have a significant effect on the Company's reported segments.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 financial statements have been reclassified to conform with the 1997 presentation.
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following:
4. DEBT
Debt consists of the following:
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. DEBT (CONTINUED)
On September 8, 1997, the Company entered into a $250,000,000 credit agreement that provides for acquisition loans, a maximum of $15,000,000 under letters of credit and bankers' acceptances, revolving loans, and a maximum of $10,000,000 in swing loans. Borrowings under this agreement, which expires August 31, 2002, totaled $183,375,000 at November 30, 1997. The U.S. dollar loans bear interest at LIBOR (6.03% at November 30, 1997) plus a margin or prime (8.5% at November 30, 1997) plus a margin, payable quarterly. Foreign-denominated loans bear interest at local spot rates. The interest rate margin (1.5% for LIBOR loans and .5% for prime loans at November 30, 1997) fluctuates based on the Company's leverage ratio. The agreement provides for a quarterly commitment fee (.25% to .375%), based on the Company's leverage ratio. Mandatory prepayments are required upon the occurrence of certain events, as defined in the agreement.
The credit agreement is secured by substantially all the Company's assets and requires the Company to comply with a number of affirmative and negative covenants. Among other things, the credit agreement requires the Company to satisfy certain financial tests and ratios and restricts the payment of cash dividends.
At November 30, 1997, long-term debt includes $18,977,000 denominated in Deutsche Marks and $3,311,000 denominated in Belgian Francs under the credit agreement. The Deutsche Mark loan bears interest at 5.35% per annum and the Belgian Franc loan bears interest at 5.40% per annum. The amounts outstanding at November 30, 1997, have been adjusted based on the exchange rate at that date and an unrealized gain of $401,000 has been recorded.
Interest expense was $5,238,000, $936,000, and $1,155,000 for the years ended November 30, 1997, December 1, 1996 and December 3, 1995, respectively.
As of November 30, 1997, annual debt principal payments required were as follows (dollars in thousands):
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES
The following is a summary of income before income taxes (dollars in thousands):
The following is a summary of the provision for income taxes (dollars in thousands):
The Company's manufacturing facility in Costa Rica is operated under a tax holiday, which expires in 2005. The impact of this tax holiday was an increase to net income of $1,393,000 or $.05 per share for the year ended November 30, 1997, $1,309,000 or $.05 per share for the year ended December 1, 1996, and $742,000 or $.04 per share for the year ended December 3, 1995.
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
A reconciliation between the provision for income taxes computed at statutory rates and the amount reflected in the accompanying consolidated statements of operations is as follows (dollars in thousands):
The significant items comprising deferred tax liabilities are as follows (dollars in thousands):
SLI had net operating loss (NOL) carryforwards for tax purposes of approximately $144,806,000 at September 1, 1997. The valuation allowance originated
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
in 1997 upon the acquisition of SLI (see Note 1) and has been reduced through the utilization of NOL carryforwards of $2,211,000. SLI has NOL carryforwards for tax purposes of approximately $135,977,000 at November 30, 1997, of which approximately $37,900,000 expire through 2007 and $98,077,000 do not expire. Approximately 25% of these NOL carryforwards relate to operations in France (which expire through 2002), approximately 25% relate to operations in Belgium (which do not expire) and the remaining NOL carryforwards relate to operations in various other tax jurisdictions outside the United States.
Bruckner had NOL carryforwards for tax purposes of approximately $1,906,000 at January 7, 1997 (see Note 1). Bruckner has NOL carryforwards for tax purposes of approximately $2,295,000 at November 30, 1997, which do not expire.
6. ACCRUED EXPENSES
Accrued expenses consist of the following (dollars in thousands):
7. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. RESTRUCTURING
In fiscal 1997, the Company approved a restructuring plan which resulted in a charge of approximately $5.1 million. This restructuring plan was put into effect to consolidate certain operations, reduce operating cost structure and improve future operating results. The provision relates to the consolidation of certain North American and European operations and includes costs associated with the excess of net book value over estimated recoverable value for certain assets, severance payments, and the probable closure or transfer of certain assets.
Additionally, the Company approved a restructuring plan as part of the SLI purchase in fiscal 1997. The purchase liabilities recorded included approximately $16.8 million for severance and related costs and $8.2 million for costs associated with the shutdown and consolidation of certain acquired facilities. At November 30, 1997, liabilities for approximately $16.2 million in severance costs and $8.2 million for facility-related costs remained on the balance sheet. The Company expects to substantially complete its termination of employees and consolidation of facilities by the end of fiscal 1999.
9. COMMITMENTS
LEASES
The Company leases certain facilities and equipment under operating lease and sublease agreements that expire at various dates from the current year to 2010. As of November 30, 1997, the aggregate minimum future commitments under operating leases are as follows (dollars in thousands):
Rent expense for the years ended November 30, 1997, December 1, 1996, and December 3, 1995, was $2,846,000, $948,000 and $593,000, respectively.
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. STOCK OPTION PLAN
In January 1995, the Company's Board of Directors approved a stock option plan for up to 675,000 shares (amended to 3,000,000 shares on July 2, 1997) of common stock. The plan provides for the granting of both incentive stock options (as defined in section 422 of the Internal Revenue Code) and nonqualified stock options. Options may be granted under the plan on such terms and at such prices as determined by the Board of Directors, except that the per share exercise price of incentive stock options cannot be less than the fair market value of the common stock on the date of grant. Each option will be exercisable after the period or periods specified in the option agreement, but no option may be exercisable after the expiration of 10 years from the date of grant.
In September 1997, the Board of Directors approved the Special 1997 Stock Option Plan for up to 3,000,000 shares of common stock. The plan provides for the granting of incentive stock options to employees outside the U.S. and Canada and certain other persons. The Board of Directors may determine the terms and prices of each grant, except that no option may be exercisable after the expiration of 10 years from the date of grant. The Board granted options for 2,026,500 shares under this plan in September 1997.
The Company has elected to follow APB No. 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB No. 123 requires use of option valuation models that were not developed for the use in valuing employee stock options. Pro forma information regarding net income is required by FASB No. 123, which also requires that the information be determined as if the Company had accounted for the employee stock options granted subsequent to December 3, 1995, under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the years ended November 30, 1997 and December 1, 1996, respectively: risk-free interest rates of 6.1% and 6.5%; no dividend yield; and a weighted-average expected life of the option of 7 years. The volatility factor was assumed to be 0.3.
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. STOCK OPTION PLAN (CONTINUED)
The Black-Scholes option valuation model was developed for the use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's option, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the respective option. Because FASB No. 123 is applicable only to options granted subsequent to December 3, 1995, its pro forma impact will not be fully reflected until 2000. The Company's pro forma net income and pro forma net income per share on a historical basis would be $18,248 and $.63 and $13,039 and $.54 and $8,174 and $.39 for the years ended November 30, 1997, December 1, 1996, and December 3, 1995, respectively.
The table below summarized option activity through November 30, 1997:
355,765 options were exercisable at November 30, 1997, at a weighted average exercise price of $10.175.
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PLANS
The Company sponsors separate noncontributory, defined-benefit pension plans (the Plans) covering eligible employees, including employees in foreign countries. The domestic plans cover union employees of Chicago Miniature Lamp, Inc. (formerly Industrial Devices, Inc.) and substantially all employees of Fredon. As a result of the SLI acquisition in 1997, the Company also has plans covering employees in various foreign locations. The principal locations are Germany, the United Kingdom, and Switzerland. Benefits are based on years of service and compensation. The Plans' 1997 and 1996 combined funded status (based on the most recent valuations) and the amounts recognized in the accompanying consolidated balance sheets are as follows (dollars in thousands):
The components of net periodic pension cost for the significant locations are as follows (dollars in thousands):
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The assumptions used for the significant locations were as follows:
Alba and Bruckner also maintain defined benefit plans with benefit obligations of approximately $4.4 million and $3.2 million at November 30, 1997 and December 1, 1996, respectively. The pension expense for these plans, consisting primarily of interest cost, for the periods ended November 30, 1997 and December 1, 1996 was $344,000 and $124,000. The Alba plan was suspended in 1996.
DEFINED CONTRIBUTION PLANS
The Company sponsors a number of defined contribution plans. Participation in these plans is available to all U.S. non-union employees and employees in various other countries. Company contributions to these plans are based on either a percentage of employee contributions or on a specified amount per hour based on the provisions of each plan. The Company's expense under these plans was approximately $650,000, $38,000, and $41,000 for the years ended November 30, 1997, December 1, 1996 and December 3, 1995, respectively.
12. CAPITAL STOCK
In December 1996, the Company amended its Articles of Incorporation to increase the authorized shares of common stock to 100,000,000 shares.
At November 30, 1997, 5,772,003 shares of common stock have been reserved for future issuance upon the exercise of stock options.
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Interest Rate Risk Management
The Company uses interest rate swaps to reduce the impact on interest expense of fluctuating interest rates on its variable rate debt. Under the Company's interest rate swap agreement, the Company agreed with the counterparty to exchange, at quarterly intervals, the difference between the Company's fixed pay rate and the counterparty's variable pay rate of three-month LIBOR. At November 30, 1997, the notional principal amounts of fixed interest rate swap agreements was $40 million having a fixed rate of 5.82%.
In connection with the interest swap agreement, the Company sold an option to the counterparty whereby the counterparty may terminate the swap agreement on January 29, 1999. The fair value of the option at November 30, 1997, was estimated to be approximately $388,000.
Foreign Exchange Risk Management
The Company hedges certain foreign currency transactions and firm foreign currency commitments by entering into forward exchange contracts (forward contracts). Gains and losses associated with currency rate changes on forward contracts hedging foreign currency transactions are recorded currently in income. Gains and losses on forward contracts hedging firm foreign currency commitments are deferred off-balance sheet and included as a component of the related transaction, when recorded; however, a loss is not deferred if deferral would lead to the recognition of a loss in future periods. The aggregate foreign exchange gains recorded in 1997 and 1996 were approximately $1,664,000 and $1,283,000, respectively.
The forward contracts have maturities of one to 12 months. The counterparties to the Company's forward contracts consist of a number of major international financial institutions. The credit ratings and concentration of risk of these financial institutions are monitored on a continuing basis and management believes they present no significant credit risk to the Company.
At November 30, 1997 and December 1, 1996, the Company had foreign currency forward contracts with notional amounts totaling $28.8 million and $8 million, respectively.
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable, and accruals are a reasonable estimate of their fair value due to the short-term nature of these instruments. The Company's domestic long-term borrowings have variable interest rates and carrying value approximates fair value at November 30, 1997. The following table summarizes the estimated fair value of the Company's remaining financial instruments at November 30, 1997 and December 1, 1996 (dollars in thousands):
14. SELECTED QUARTERLY FINANCIAL DATA
The following is a summary of unaudited quarterly financial data for the fiscal years ended November 30, 1997 and December 1, 1996.
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. GEOGRAPHIC SEGMENT INFORMATION
Prior to February 1995, the Company's operations were solely in the United States. As described in Note 1, the Company made acquisitions during fiscal 1995 in Canada, the United Kingdom, and commenced operations in Costa Rica and during fiscal 1996 in Germany. The SLI acquisition in fiscal 1997 expanded operations of the Company to include Western Europe, Latin America, and Australia.
Financial information as of and for the years ended November 30, 1997, December 1, 1996, and December 3, 1995, summarized by geographic area, is as follows:
Chicago Miniature Lamp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
Interarea transfers primarily represent shipments of work in process and finished goods inventory to subsidiaries and affiliates. These interarea shipments are made at transfer prices which approximate prices charged to unaffiliated customers and have been eliminated from consolidated net revenues. Corporate assets consist primarily of cash equivalents.
AUDITORS' REPORT
To the Shareholder of CHICAGO MINIATURE LAMP (CANADA) INC.
We have audited the balance sheet of CHICAGO MINIATURE LAMP (CANADA) INC. as at November 30, 1997 and the statements of income, retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material respects, the financial position of the company as at November 30, 1997 and the results of its operations and the changes in its financial position for the year then ended in accordance with generally accepted accounting principles in the United States.
Barrie, Canada, December 31, 1997.
Chartered Accountants
CHICAGO MINIATURE LAMP (CANADA) INC.
BALANCE SHEET
As at November 30 (with comparative figures as at December 1, 1996)
See accompanying notes
On behalf of the Board:
Director Director
CHICAGO MINIATURE LAMP (CANADA) INC.
STATEMENT OF INCOME
Year ended November 30 (with comparative figures for the year ended December 1, 1996)
See accompanying notes
CHICAGO MINIATURE LAMP (CANADA) INC.
STATEMENT OF RETAINED EARNINGS
Year ended November 30 (with comparative figures for the year ended December 1, 1996)
See accompanying notes
CHICAGO MINIATURE LAMP (CANADA) INC.
STATEMENT OF CASH FLOWS
Year ended November 30 (with comparative figures for the year ended December 1, 1996)
See accompanying notes
CHICAGO MINIATURE LAMP (CANADA) INC.
NOTES TO THE FINANCIAL STATEMENTS
November 30, 1997 (with comparative figures as at December 1, 1996)
1. OPERATIONS
The company is a manufacturer and supplier of miniature light socket assemblies to the automotive industry. The assemblies are used primarily for instrument clusters, warning lights, climate control modules and courtesy lights.
ARTICLES OF AMENDMENT
On May 9, 1997, the company filed articles of amendment to change its name to Chicago Miniature Lamp (Canada) Inc. The company was formerly known as Plastomer Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements of the company have been prepared in accordance with generally accepted accounting principles, on a basis consistent with that of the preceding year. The following is a summary of the more significant accounting policies:
INVENTORY
Inventory is valued at the lower of cost or net realizable value. Cost has been determined on the first-in, first-out basis. Net realizable value for finished goods has been defined as standard selling price less normal profit margin. Net realizable value for raw materials has been defined as net replacement cost.
FIXED ASSETS
Based on purchase accounting, the fixed assets are stated at the lower of appraised value, as determined by appraisals dated April 5, 1995 and May 3, 1995, less accumulated depreciation and net recoverable amount. Additions after these dates are stated at the lower of cost less accumulated depreciation and net recoverable value. Depreciation is provided on the straight-line basis, with half rates applied in the year of acquisition, over the following periods:
CHICAGO MINIATURE LAMP (CANADA) INC.
NOTES TO THE FINANCIAL STATEMENTS
November 30, 1997 (with comparative figures as at December 1, 1996)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
GOODWILL
Goodwill is recorded at cost less accumulated amortization. Amortization is provided on the straight-line basis over a period of 40 years.
TRANSLATION OF FOREIGN CURRENCY
Transactions arising in foreign currencies [principally United States dollars and British pounds] have been translated at rates of exchange in effect at the dates of the transactions. Monetary items denominated in foreign currencies have been translated at rates of exchange in effect at the balance sheet date. Gains or losses during the year have been included in net income.
3. INVENTORY
4. FIXED ASSETS
CHICAGO MINIATURE LAMP (CANADA) INC.
NOTES TO THE FINANCIAL STATEMENTS
November 30, 1997 (with comparative figures as at December 1, 1996)
5. GOODWILL
6. DUE TO RELATED PARTIES
IDI Internacional, S.A. was paid $67,374 to provide sub-assembly services for the company's LED product line.
The company purchased a piece of production equipment from Badalex Ltd. for $859,297.
Both of the above sister corporations deal on terms that are substantially the same as to independent customers.
Chicago Miniature Lamp, Inc. pays certain expenditures on behalf of the company and purchases finished goods. They also provide executive, information system and marketing services for which they receive a yearly management fee. Finished goods purchased in the year by this company were $154,189.
CHICAGO MINIATURE LAMP (CANADA) INC.
NOTES TO THE FINANCIAL STATEMENTS
November 30, 1997 (with comparative figures as at December 1, 1996)
7. CAPITAL STOCK
8. NET CHANGE IN NON-CASH WORKING CAPITAL BALANCES
Decreases in assets and increases in liabilities result in a source of funds. Increases in assets and decreases in liabilities result in a use of funds and are indicated by brackets.
CHICAGO MINIATURE LAMP (CANADA) INC.
NOTES TO THE FINANCIAL STATEMENTS
November 30, 1997 (with comparative figures as at December 1, 1996)
9. PENSION PLAN
Prior to July 31, 1997 the company maintained a defined benefit pension plan of which substantially all employees are members. Current and past service costs are charged to income as incurred and funded as required by actuarial valuations.
The most recent triennial actuarial valuation, scheduled for January 1, 1997 is not yet complete. However, the plan's most recent financial statements as at December 31, 1996 indicate a surplus of $89,335.
The pension expense, all for current service costs, is $62,579 [1996 - $96,8371. Effective July 1, 1997 the company introduced a Group Registered Retirement Savings Plan and began the process of winding-up the defined benefit plan. The accumulated net assets of the defined benefit plan will be distributed to the members for transfer to a "locked-in" Registered Retirement Savings Plan.
10. OPERATING LEASES
Minimum lease payments over the next four years with respect to vehicle and office equipment operating leases are as follows:
11. CONTINGENT LIABILITY
During the year, the company pledged an unlimited guarantee in favour of BANKBOSTON, N.A. over the indebtedness of its parent company, Chicago Miniature Lamp, Inc.
12. COMMITMENTS
The company has committed to $739,500 of capital asset purchases for the coming year. Progress payments totaling $571,152 have been made to suppliers as a result of these commitments. These payments are included under "Construction-in-progress" [Note 4] in the financial statements.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS CHICAGO MINIATURE LAMP, INC. AND SUBSIDIARIES (Dollars in thousands)
(1) Represents allowance for doubtful accounts acquired as a result of the 1997 acquisitions of PLP, Bruckner and SLI, and the currency transaction adjustment in the allowance account during the period.
(2) Represents deferred tax asset valuation allowance included in opening balance sheet of SLI, a 1997 business combination.
(3) Represents allowance for doubtful accounts as a result of the 1996 acquisition of Alba.
(4) Represents allowance for doubtful accounts acquired as a result of the 1995 acquisition of CML Canada.