UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] |
| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended February 28, 2004 | ||
or | ||
[ ] |
| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ____________________ to ____________________ |
Commission File Number: | 0-12906 |
Richardson Electronics, LTD |
(Exact name of registrant as specified in its charter) |
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Delaware | 36-2096643 | |
(State or other jurisdiction of | (IRS Employer Identification Number) | |
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40W267 Keslinger Road |
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(Address of principal executive offices) | (Zip code) |
(630) 208-2200 |
(Registrant's telephone number, including area code) |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X] | Yes |
| [ ] | No |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
[X] | Yes |
| [ ] | No |
As of April 6, 2004, there were outstanding 12,514,986 shares of Common Stock, $.05 par value, inclusive of 1,495,955 shares held in treasury, and 3,171,320 shares of Class B Common Stock, $.05 par value, which are convertible into Common Stock on a share-for-share basis.
1
RICHARDSON ELECTRONICS, LTD.
QUARTERLY FINANCIAL REPORT
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION | ||||
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Condensed Consolidated Balance Sheets as of February 28, 2004 and May 31, 2003 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk | 15 | |||
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PART II - OTHER INFORMATION |
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RICHARDSON ELECTRONICS, LTD
CONDENSED CONSOLIDATED BALANCE SHEETS
As of | ||||||||||
February 28, | May 31, | |||||||||
(in thousands, except per share amounts) | 2004 | 2003 | ||||||||
(unaudited) | (as restated, | |||||||||
| see Note B) | |||||||||
ASSETS | ||||||||||
Current Assets |
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| Cash and cash equivalents |
| $ | 19,727 |
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| $ | 16,874 |
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| Receivables, less allowance of $3,306 and $3,350 |
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| 96,302 |
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| 85,355 |
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| Inventories |
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| 93,207 |
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| 95,896 |
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| Prepaid expenses |
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| 4,051 |
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| 6,919 |
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| Deferred income taxes, net |
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| 20,506 |
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| 19,401 |
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| Total current assets |
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| 233,793 |
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| 224,445 |
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Property, plant and equipment, net | 30,747 | 31,088 | ||||||||
Goodwill and intangible assets, net |
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| 5,891 |
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| 6,129 |
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Other assets |
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| 4,705 |
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| 3,269 |
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Total assets |
| $ | 275,136 |
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| $ | 264,931 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
Current Liabilities |
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| Accounts payable |
| $ | 30,724 |
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| $ | 23,660 |
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| Accrued liabilities |
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| 21,122 |
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| 17,421 |
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| Current portion of long-term debt |
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| 4,488 |
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| 46 |
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| Total current liabilities |
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| 56,334 |
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| 41,127 |
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Long-term debt |
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| 127,455 |
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| 138,396 |
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Deferred income taxes, net |
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| 8,282 |
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| 5,269 |
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Other non-current liabilities |
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| 127 |
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| 5,049 |
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| Total liabilities |
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| 192,198 |
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| 189,841 |
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Stockholders’ Equity |
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| Common stock ($.05 par value; issued 12,500 shares at February 28, 2004 and 12,258 shares at May 31, 2003) |
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| 625 |
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| 613 | |||
| Class B common stock, convertible ($.05 par value; issued 3,171 shares at February 28, 2004 and 3,207 shares at May 31, 2003) |
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| 159 |
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| 160 | |||
| Preferred stock ($1.00 par value; no shares issued) |
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| - |
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| - |
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| Additional paid-in capital |
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| 93,886 |
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| 91,962 |
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| Common stock in treasury, at cost (1,496 shares at February 28, 2004 and 1,506 shares at May 31, 2003) |
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| (8,864 | ) |
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| (8,922 | ) | |
| Retained earnings |
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| 8,026 |
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| 6,079 |
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| Unearned compensation |
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| (368 | ) |
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| (541 | ) | |
| Accumulated other comprehensive loss |
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| (10,526 | ) |
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| (14,261 | ) | |
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| Total stockholders’ equity |
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| 82,938 |
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| 75,090 |
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Total liabilities and stockholders' equity |
| $ | 275,136 |
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| $ | 264,931 |
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See notes to condensed consolidated financial statements. |
3
RICHARDSON ELECTRONICS, LTD
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE- AND NINE-MONTH PERIODS ENDED FEBRUARY 28, 2004 AND FEBRUARY 28, 2003
Three months ended | Nine months ended | ||||||||||||||||
(unaudited, in thousands, except per share amounts) | February 28, | February 28, | February 28, | February 28, | |||||||||||||
(as restated, | (as restated, | ||||||||||||||||
see Note B) | see Note B) | ||||||||||||||||
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Net sales | $ | 127,338 |
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| $ | 118,010 | $ | 374,695 |
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| $ | 345,582 |
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Cost of products sold | 95,802 | 89,808 | 283,102 |
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| 261,313 |
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| Gross margin | 31,536 | 28,202 |
| 91,593 |
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| 84,269 |
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Selling, general and administrative expenses | 27,101 | 25,451 |
| 78,441 |
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| 74,155 |
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| Operating income | 4,435 | 2,751 |
| 13,152 |
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| 10,114 |
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Other (income) expense |
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| Interest expense | 2,577 | 2,634 |
| 7,682 |
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| 7,757 |
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| Other, net | 365 | 224 |
| 252 |
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| 390 | |||||||||
Total other (income) expense | 2,942 | 2,858 |
| 7,934 |
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| 8,147 | ||||||||||
| Income (loss) before income tax and cumulative effect of accounting change | 1,493 | (107 | ) |
| 5,218 |
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| 1,967 |
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Income tax | 493 | (5 | ) |
| 1,621 |
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| 825 | |||||||||
| Income (loss) before cumulative effect of accounting change | 1,000 | (102 | ) |
| 3,597 |
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| 1,142 |
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Cumulative effect of accounting change, net of tax (Note E) | - | - | - |
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| (17,862 | ) | ||||||||||
| Net income (loss) | $ | 1,000 |
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| $ | (102 | ) | $ | 3,597 |
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| $ | (16,720 | ) | ||
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Income (loss) per share - basic: |
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| Income (loss) per share before cumulative effect of accounting change | $ | 0.07 | $ | (0.01 | ) | $ | 0.26 |
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| $ | 0.08 |
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Cumulative effect of accounting change, net of tax (Note E) | - | - | - |
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| (1.30 | ) | ||||||||||
| Net income (loss) per share | $ | 0.07 | $ | (0.01 | ) | $ | 0.26 |
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| $ | (1.22 | ) | ||||
| Average shares outstanding | 14,102 | 13,759 | 14,002 |
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| 13,742 |
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Income (loss) per share - diluted: |
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| Income (loss) per share before cumulative effect of accounting change | $ | 0.07 | $ | (0.01 | ) | $ | 0.25 |
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| $ | 0.08 |
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Cumulative effect of accounting change, net of tax (Note E) | - | - | - |
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| (1.28 | ) | ||||||||||
| Net income (loss) per share | $ | 0.07 | $ | (0.01 | ) | $ | 0.25 |
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| $ | (1.20 | ) | ||||
| Average shares outstanding | 14,560 | 13,759 | 14,374 |
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| 13,989 |
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Dividends per common share | $ | 0.04 | $ | 0.04 | $ | 0.12 |
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| $ | 0.12 |
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Statement of comprehensive income (loss): |
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| Net income (loss) | $ | 1,000 | $ | (102 | ) | $ | 3,597 |
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| $ | (16,720 | ) | ||||
| Foreign currency translation | 2,149 | 2,124 |
| 2,803 |
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| 380 |
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201 | (90 | ) | 413 | (293 | ) | ||||||||||||
| Fair value adjustments - cash flow hedges | 174 | (44 | ) |
| 519 |
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| (297 | ) | |||||||
| Comprehensive income (loss) | $ | 3,524 | $ | 1,888 | $ | 7,332 |
| $ | (16,930 | ) | ||||||
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See notes to condensed consolidated financial statements. |
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4
RICHARDSON ELECTRONICS, LTD
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED FEBRUARY 28, 2004 AND FEBRUARY 28, 2003
(unaudited, in thousands) | Nine months ended | ||||||||
| February 28, 2004 | February 28, 2003 | |||||||
OPERATING ACTIVITIES |
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Net income (loss) |
| $ | 3,597 |
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| $ | (16,720 | ) | |
Non-cash charges to income (loss): |
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| Depreciation |
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| 3,788 |
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| 4,072 |
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| Amortization of intangibles and financing costs |
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| 225 |
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| 201 |
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| Income tax provision |
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| 1,621 |
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| (66 | ) |
| Goodwill impairment charge |
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| - |
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| 17,862 | ||
| Other, net |
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| 665 |
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| 884 |
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| Total non-cash charges |
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| 6,299 |
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| 22,953 | |
Changes in working capital, net of effects of currency translation: |
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| Accounts receivable |
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| (8,864 | ) |
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| 3,312 | |
| Inventories |
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| 4,324 |
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| (3,218 | ) | |
| Other current assets |
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| (511 | ) |
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| (628 | ) |
| Accounts payable |
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| 7,593 |
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| (6,980 | ) |
| Other liabilities |
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| 1,753 |
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| (1,233 | ) | |
| Net changes in working capital |
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| 4,295 |
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| (8,747 | ) |
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Net cash provided by (used in) operating activities |
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| 14,191 |
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| (2,514 | ) | |
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FINANCING ACTIVITIES |
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| Proceeds from borrowings |
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| 29,105 |
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| 29,538 | ||
| Payments on debt |
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| (36,713 | ) |
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| (23,847 | ) |
| Proceeds from stock issuance |
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| 1,537 |
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| 203 |
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| Cash dividends |
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| (1,651 | ) |
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| (2,151 | ) |
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Net cash provided by (used in) financing activities |
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| (7,722 | ) |
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| 3,743 |
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INVESTING ACTIVITIES |
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| Capital expenditures |
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| (3,861 | ) |
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| (4,958 | ) |
| Earnout payment related to acquisitions |
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| (1,008 | ) |
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| (764 | ) |
| Other |
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| - |
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| (407 | ) |
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Net cash used in investing activities |
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| (4,869 | ) |
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| (6,129 | ) | |
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| Effect of exchange rate changes on cash and cash equivalents |
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| 1,253 |
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| 1,471 | ||
Net increase (decrease) in cash and cash equivalents | 2,853 | (3,429 | ) | ||||||
| Cash and cash equivalents at beginning of period |
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| 16,874 |
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| 15,296 | ||
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Cash and cash equivalents at end of period |
| $ | 19,727 |
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| $ | 11,867 |
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See notes to condensed consolidated financial statements. |
5
RICHARDSON ELECTRONICS, LTD
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note A – Basis of Presentation
The accompanying unaudited Consolidated Financial Statements (Statements) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the results of interim periods have been made and such adjustments were of a normal and recurring nature. The results of operations and cash flows for the three- and nine-month periods ended February 28, 2004 are not necessarily indicative of the results that may be expected for the year ended May 31, 2004.
For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A for the fiscal year ended May 31, 2003. Certain fiscal 2003 balances have been reclassified to conform to the fiscal 2004 presentation.
Note B - Restatement
The Company identified an accounting error in a foreign subsidiary which affected previously reported interest expense for seven quarters beginning with the third quarter of fiscal 2002 and ending with the first quarter of fiscal 2004. The correction of the error, which aggregated to $738, is presented as a restatement of these prior periods. The restatement increases diluted earnings per share to $0.15 for the second quarter of fiscal 2004 versus the $0.11 published in the December 18, 2003 earnings release. The Company filed Form 10-K/A for fiscal 2003 and Form 10-Q/A for the first quarter of fiscal 2004 on January 30, 2004 to reflect these changes.
A reconciliation of reported net income (loss) to amended net income (loss), including the additional interest expense for the affected quarters, is provided in the following table:
FY 2004 | FY 2003 | FY 2002 | ||||||||||||||||||||||||||
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1st Qtr | 4th Qtr | 3rd Qtr | 2nd Qtr | 1st Qtr | 4th Qtr | 3rd Qtr | ||||||||||||||||||||||
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Reported net income (loss) | $ | 506.0 | $ | (11,163.0 | ) | $ | (5.0 | ) | $ | 1,190.0 | $ | (17,578.0 | ) | $ | (9,075.0 | ) | $ | (2,743.0 | ) | |||||||||
Additional interest expense | (113.9 | ) | (107.6 | ) | (96.8 | ) | (112.1 | ) | (118.3 | ) | (108.9 | ) | (80.2 | ) | ||||||||||||||
Amended net income (loss) | $ | 392.1 | $ | (11,270.6 | ) | $ | (101.8 | ) | $ | 1,077.9 | $ | (17,696.3 | ) | $ | (9,183.9 | ) | $ | (2,823.2 | ) | |||||||||
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Reported basic and diluted income (loss) per share | $ | 0.04 | $ | (0.81 | ) | $ | - | $ | 0.09 | $ | (1.28 | ) | $ | (0.66 | ) | $ | (0.20 | ) | ||||||||||
Additional interest expense | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||||||||||
Amended basic and diluted net income (loss) per share | $ | 0.03 | $ | (0.82 | ) | $ | (0.01 | ) | $ | 0.08 | $ | (1.29 | ) | $ | (0.67 | ) | $ | (0.21 | ) | |||||||||
Note C - Change in Accounting Principle
At February 28, 2004, the Company’s worldwide inventories were stated at the lower of cost or market using the first-in, first-out (FIFO) method. Effective June 1, 2003, the North American operations, which represent a majority of the Company’s operations and approximately 76% of the Company’s inventories, changed from the last-in, first-out (LIFO) method to the FIFO method. All other inventories were consistently stated at the lower of cost or market using the FIFO method. The Company believes that the FIFO method is preferable because it provides a better matching of revenue and expenses. The accounting change was not material to the financial statements for any of the periods presented, and accordingly, no retroactive restatement of prior years’ financial statements was made. Inventories include material, labor and overhead associated with such inventories.
Note D – Restructuring Charges
As a result of the Company's fiscal 2003 restructuring initiative, a restructuring charge, including severance and lease termination costs of $1,730, was recorded in selling, general and administrative expenses for the year ended May 31, 2003. Severance costs of $328 were paid in fiscal 2003 with the remaining balance payable in fiscal 2004. The following table depicts the amounts associated with the activity related to the restructuring initiative through February 28, 2004:
6
Restructuring | Paid | Unpaid | ||||||||||||||
liability | through | Reversal | balance as of | |||||||||||||
| May 31, 2003 |
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Employee severance and related costs | $ | 1,192 | $ | 891 | $ | 292 | $ | 9 | ||||||||
Lease termination costs | 210 | - | 210 | - | ||||||||||||
Total | $ | 1,402 | $ | 891 | $ | 502 | $ | 9 | ||||||||
The reversal of the employee severance and related costs resulted from the difference between the estimated severance costs and the actual payouts and was recorded in the quarter ended November 29, 2003. All employees originally notified were terminated. The lease termination did not occur as the agreement for the replacement facility was not finalized. The lease termination reversal was recorded in the quarter ended August 30, 2003.
Note E – Goodwill and Other Intangible Assets
Effective June 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. This statement changed the accounting for goodwill and indefinite-lived intangible assets from an amortization approach to an impairment-only approach. As a result of the adoption of SFAS No. 142, the Company recorded a transitional impairment charge during the first quarter of fiscal 2003 of $21,587 ($17,862 net of tax), presented as a cumulative effect of accounting change. This charge related to the Company's segments as follows: RF & Wireless Communications Group (RFWC), $20,456; and Security Systems Division (SSD), $1,131.
The Company periodically reviews the carrying amount of goodwill to determine whether an additional impairment may exist. A fair value approach is used to test goodwill for impairment. An impairment charge is recognized for the amount, if any, by which the carrying amount of the goodwill exceeds its fair value. Management establishes fair values using discounted cash flows. When available and as appropriate, management uses comparative market multiples to corroborate discounted cash flow results. The Company performed its annual impairment test during the fourth quarter of fiscal 2003. The Company did not find any indication that additional impairment existed and, therefore, no additional impairment loss was recorded.
The table below provides changes in the carrying values of goodwill and intangible assets not subject to amortization by reportable segment:
Goodwill and intangible assets not subject to amortization | ||||||||||||||||||||
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RFWC | IPG | SSD | DSG | Total | ||||||||||||||||
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Balance at May 31, 2003 | $ | - | $ | 882 | $ | 1,714 | $ | 2,959 | $ | 5,555 | ||||||||||
Modification of earnout payment | - | - | - | (58 | ) | (58 | ) | |||||||||||||
Foreign currency translation | - | 7 | 46 | - | 53 | |||||||||||||||
Balance at February 28, 2004 | $ | - | $ | 889 | $ | 1,760 | $ | 2,901 | $ | 5,550 | ||||||||||
Intangible assets subject to amortization as of February 28, 2004 and May 31, 2003 are as follows:
February 28, 2004 | May 31, 2003 | |||||||||||||||
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Amount | Amortization | Amount | Amortization | |||||||||||||
Intangible assets subject to amortization: | ||||||||||||||||
Deferred financing costs | $ | 2,192 | $ | 1,863 | $ | 2,191 | $ | 1,647 | ||||||||
Patents, trademarks and customer lists | 470 | 458 | 478 | 448 | ||||||||||||
Total | $ | 2,662 | $ | 2,321 | $ | 2,669 | $ | 2,095 | ||||||||
Amortization expense for the third quarter and nine months is as follows:
Amortization expense for the | ||||||||||||||||
Third Quarter | Nine Months | |||||||||||||||
FY 2004 |
| FY 2003 |
| FY 2004 |
| FY 2003 | ||||||||||
Intangible assets subject to amortization: | ||||||||||||||||
Deferred financing costs | $ | 71 | $ | 56 | $ | 215 | $ | 191 | ||||||||
Patents and trademarks | 4 | 4 | 10 | 10 | ||||||||||||
Total | $ | 75 | $ | 60 | $ | 225 | $ | 201 | ||||||||
7
The amortization expense associated with the existing intangible assets subject to amortization is expected to be $299, $180, $75 and $20 in fiscal 2004, 2005, 2006, and 2007, respectively. The weighted average number of years of amortization expense remaining is 1.5.
Note F – Warranties
The Company offers warranties for specific products it manufactures. The Company also provides extended warranties for some products it sells that lengthen the period of coverage specified in the manufacturer’s original warranty. Terms generally range from one to three years.
Warranty reserves are established for costs that are expected to be incurred after the sale and delivery of the products subject to warranty. Such expected costs are accrued at the time revenue is recognized. The warranty reserves are determined based on known product failures, historical experience, and other currently available evidence. The reserve is included in "Accrued Liabilities" on the Condensed Consolidated Balance Sheets.
Changes in the warranty reserve for the nine months ended February 28, 2004 were as follows:
Warranty | |||||
| Reserve | ||||
Balance at May 31, 2003 | $ | 672 | |||
Accruals for products sold | 369 | ||||
Utilization | (76 | ) | |||
Balance at February 28, 2004 | $ | 965 | |||
The increase in the warranty accrual represents warranties related to a new product offering by the Company's Display Systems Group beginning in the third quarter of fiscal 2003.
Note G – Income Taxes
The income tax provisions for the nine-month periods ended February 28, 2004 and 2003 are based on the estimated annual effective tax rate of 31.1% and 41.9%, respectively. The difference between the effective tax rate and the U.S. statutory rate of 35% primarily results from the Company's geographic distribution of taxable income and losses, certain non-tax deductible charges, and the Company's foreign sales corporation benefit on export sales, net of state income taxes.
Income tax refund, net of foreign estimated tax payments, was $2,801 for the nine months ended February 28, 2004.
Note H – Calculation of Earnings per Share
Basic income (loss) per share is calculated by dividing net income by the weighted average number of Common and Class B Common shares outstanding. Diluted income (loss) per share is calculated by dividing net income (loss) (adjusted for interest savings, net of tax, on assumed conversion of bonds) by the actual shares outstanding and share equivalents that would arise from the exercise of stock options, certain restricted stock awards, and the assumed conversion of convertible bonds when such assumptions have a dilutive effect on the calculation. The Company’s 8¼% and 7¼% convertible debentures are excluded from the calculation in both fiscal 2004 and 2003, as assumed conversion and effect of interest savings would be anti-dilutive. The per share amounts presented in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) are based on the following amounts:
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Income (loss) before cumulative effect of accounting change | $ | 1,000 | $ | (102 | ) | $ | 3,597 | $ | 1,142 | |||||||
Cumulative effect of accounting change | - | - | - | (17,862 | ) | |||||||||||
Net income (loss) | $ | 1,000 | $ | (102 | ) | $ | 3,597 | $ | (16,720 | ) | ||||||
Denominator: | ||||||||||||||||
Denominator for basic EPS | ||||||||||||||||
Weighted average common shares outstanding | 14,102 | 13,759 | 14,002 | 13,742 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Unvested restricted stock awards | 31 | - | 35 | 49 | ||||||||||||
Dilutive stock options | 427 | - | 337 | 198 | ||||||||||||
Shares applicable to diluted income (loss) per common share | 14,560 | 13,759 | 14,374 | 13,989 | ||||||||||||
8
The effect of potentially dilutive stock options is calculated using the treasury stock method. Certain stock options are excluded from the calculations because the average market price of the Company's stock during the period did not exceed the exercise price of those options. For the three-month period ended February 28, 2004, there were 446 such options. However, some or all of the above mentioned options may be potentially dilutive in the future.
Note I – Stock-Based Compensation
The Company has stock-based compensation plans under which stock options are granted to key managers at the market price on the date of grant. Most of these new grants are fully exercisable after five years and have a ten-year life. Three such grants were issued during the nine months ended February 28, 2004.
The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB interpretation No. 44,Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion 25, issued in March 2000, to account for its stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No.123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No.123. The following table illustrates the pro-forma effect on net income (loss) attributable to common stockholders if the fair value-based method had been applied to all outstanding and unvested awards in each period.
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Net income (loss), as reported | $ | 1,000 | $ | (102 | ) | $ | 3,597 | $ | (16,720 | ) | ||||||
Add: Stock-based compensation expense included in | 74 | 76 | 193 | 198 | ||||||||||||
Deduct: Stock-based compensation expense determined | (279 | ) | (316 | ) | (805 | ) | (917 | ) | ||||||||
Pro-forma net income (loss) | $ | 795 | $ | (342 | ) | $ | 2,985 | $ | (17,439 | ) | ||||||
Net income (loss) per share, basic: | ||||||||||||||||
Reported net income (loss) | $ | 0.07 | $ | (0.01 | ) | $ | 0.26 | $ | (1.22 | ) | ||||||
Pro-forma compensation expense, net of taxes | (0.01 | ) | (0.01 | ) | (0.05 | ) | (0.05 | ) | ||||||||
Pro-forma net income (loss) per share | $ | 0.06 | $ | (0.02 | ) | $ | 0.21 | $ | (1.27 | ) | ||||||
Net income (loss) per share, diluted: | ||||||||||||||||
Reported net income (loss) | $ | 0.07 | $ | (0.01 | ) | $ | 0.25 | $ | (1.20 | ) | ||||||
Pro-forma compensation expense, net of taxes | (0.02 | ) | (0.01 | ) | (0.04 | ) | (0.05 | ) | ||||||||
Pro-forma net income (loss) per share | $ | 0.05 | $ | (0.02 | ) | $ | 0.21 | $ | (1.25 | ) | ||||||
Note J – Segment Information
The marketing, sales, product management, and purchasing functions of the Company consist of four strategic business units (SBU’s): RF & Wireless Communications Group (RFWC), Industrial Power Group (IPG), Security Systems Division (SSD), and Display Systems Group (DSG).
RFWC serves the expanding global RF and wireless communications market, including infrastructure and wireless networks, as well as the fiber optics market. The Company's team of RF and wireless engineers assists customers in designing circuits, selecting cost effective components, planning reliable and timely supply, prototype testing, and assembly. The group offers its customers and vendors complete engineering and technical support from the design-in of RF and wireless components to the development of engineered solutions for their system requirements.
IPG serves the industrial market’s need for both vacuum tube and solid-state technologies. The group provides replacement products for systems using electron tubes as well as design and assembly services for new systems employing power semiconductors. As electronic systems increase in functionality and become more complex, the Company believes the need for intelligent, efficient power management will continue to increase and drive power conversion demand growth.
SSD is a global provider of closed circuit television, fire, burglary, access control, sound, and communication products and accessories for the residential, commercial, and government markets. The division specializes in closed circuit television design-in support, offering extensive expertise with applications requiring digital technology. SSD products are primarily used for security and access control purposes but are also utilized in industrial applications, mobile video, and traffic management.
9
Each SBU is directed by a Vice President and General Manager who reports to the President and Chief Operating Officer. The President evaluates performance and allocates resources, in part, based on the direct operating contribution of each SBU. Direct operating contribution is defined as gross margin less product management and direct selling expenses.
Accounts receivable, inventory, goodwill, and some intangible assets are identified by SBU. Cash, net property and other assets are not identifiable by SBU. Operating results for each SBU are summarized in the following table:
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FY 2004 | ||||||||||||||||||||
RFWC | $ | 55,973 | $ | 13,162 | $ | 6,787 | $ | 81,052 | $ | - | ||||||||||
IPG | 27,514 | 8,383 | 5,872 | 49,687 | 889 | |||||||||||||||
SSD | 25,260 | 6,394 | 3,495 | 38,031 | 1,760 | |||||||||||||||
DSG | 16,813 | 4,146 | 2,294 | 21,170 | 2,901 | |||||||||||||||
Total | $ | 125,560 | $ | 32,085 | $ | 18,448 | $ | 189,940 | $ | 5,550 | ||||||||||
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FY 2003 | ||||||||||||||||||||
RFWC | $ | 51,499 | $ | 11,293 | $ | 5,560 | $ | 86,699 | $ | - | ||||||||||
IPG | 23,371 | 7,156 | 4,722 | 47,594 | 880 | |||||||||||||||
SSD | 23,205 | 5,859 | 3,217 | 33,614 | 1,581 | |||||||||||||||
DSG | 18,047 | 4,381 | 2,730 | 26,075 | 2,175 | |||||||||||||||
Total | $ | 116,122 | $ | 28,689 | $ | 16,229 | $ | 193,982 | $ | 4,636 | ||||||||||
Nine Months | ||||||||||||||||||||
FY 2004 | ||||||||||||||||||||
RFWC | $ | 163,493 | $ | 37,190 | $ | 19,514 | $ | 81,052 | $ | - | ||||||||||
IPG | 81,232 | 24,730 | 17,570 | 49,687 | 889 | |||||||||||||||
SSD | 76,541 | 19,419 | 10,829 | 38,031 | 1,760 | |||||||||||||||
DSG | 47,756 | 12,132 | 6,648 | 21,170 | 2,901 | |||||||||||||||
Total | $ | 369,022 | $ | 93,471 | $ | 54,561 | $ | 189,940 | $ | 5,550 | ||||||||||
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FY 2003 | ||||||||||||||||||||
RFWC | $ | 152,377 | $ | 34,079 | $ | 17,258 | $ | 86,699 | $ | - | ||||||||||
IPG | 71,149 | 22,236 | 15,227 | 47,594 | 880 | |||||||||||||||
SSD | 69,601 | 17,306 | 9,671 | 33,614 | 1,581 | |||||||||||||||
DSG | 46,169 | 11,977 | 7,110 | 26,075 | 2,175 | |||||||||||||||
Total | $ | 339,296 | $ | 85,598 | $ | 49,266 | $ | 193,982 | $ | 4,636 | ||||||||||
Fiscal 2003 data has been reclassified to conform with the current presentation, which includes the reclassification of the broadcast tubes product line from RFWC to the IPG business unit. Fiscal 2003 quarterly sales for the broadcast tubes were $4,685, $4,625, $4,717, and $3,995 for the first, second, third, and fourth quarters, respectively.
A reconciliation of sales, gross margin, direct operating contribution and assets to the relevant consolidated amounts follows. Freight, Medical Glassware business, Logistics business, and miscellaneous sales are included in "Other sales". "Other assets" primarily represent miscellaneous receivables, manufacturing and other inventories, intangible assets subject to amortization, and investments.
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Sales - segments total | $ | 125,560 | $ | 116,122 | $ | 369,022 | $ | 339,296 | ||||||||
Other sales | 1,778 | 1,888 | 5,673 | 6,286 | ||||||||||||
Sales | $ | 127,338 | $ | 118,010 | $ | 374,695 | $ | 345,582 | ||||||||
Gross margin - segments total | $ | 32,085 | $ | 28,689 | $ | 93,471 | $ | 85,598 | ||||||||
Gross margin on other sales | (549 | ) | (487 | ) | (1,878 | ) | (1,329 | ) | ||||||||
Gross margin | $ | 31,536 | $ | 28,202 | $ | 91,593 | $ | 84,269 | ||||||||
Segment profit contribution | $ | 18,448 | $ | 16,229 | $ | 54,561 | $ | 49,266 | ||||||||
Gross margin on other sales | (549 | ) | (487 | ) | (1,878 | ) | (1,329 | ) | ||||||||
Regional selling expenses | (4,693 | ) | (4,388 | ) | (13,624 | ) | (12,776 | ) | ||||||||
Administrative expenses | (8,771 | ) | (8,603 | ) | (25,907 | ) | (25,047 | ) | ||||||||
Operating income | $ | 4,435 | $ | 2,751 | $ | 13,152 | $ | 10,114 | ||||||||
Segment assets | $ | 189,940 | $ | 193,982 | ||||||||||||
Cash and cash equivalents | 19,727 | 11,867 | ||||||||||||||
Other current assets | 24,557 | 21,212 | ||||||||||||||
Net property | 30,747 | 30,588 | ||||||||||||||
Other assets | 10,165 | 8,488 | ||||||||||||||
Total assets | $ | 275,136 | $ | 266,137 | ||||||||||||
10
The Company sells its products to companies in diversified industries and performs periodic credit evaluations of its customers' financial condition. Terms are generally on open account, payable net 30 days in North America, and vary throughout Europe, Asia/Pacific and Latin America. Estimates of credit losses are recorded in the financial statements based on periodic reviews of outstanding accounts and actual losses have been consistently within management's estimates.
Note K – Recently Issued Pronouncements
On December 23, 2003, the FASB issued FASB Statement No. 132 (Revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits. This standard increases the existing GAAP disclosure requirements by requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs, and related information. Companies will be required to segregate plan assets by category, such as debt, equity, and real estate, and to provide certain expected rates of return and other informational disclosures. Statement 132(R) also requires companies to disclose various elements of pension and postretirement benefit costs in interim-period financial statements for quarters beginning after December 15, 2003. The Company does not expect the new pronouncement to have a material impact on Company's disclosure requirements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except per share amounts and except where indicated)
Third Quarter Overview
In the quarter ended February 28, 2004, the Company posted sales of $127.3 million, which marked a record fiscal third quarter sales level for the Company and the seventh consecutive quarter of year-over-year sales growth. Net income for the quarter was $1,000 or $0.07 per share compared to a net loss of $102 or $0.01 per share a year ago as a 7.9% increase in sales and 90 basis point gross margin improvement was partially offset by a 6.5% increase in selling, general and administrative (SG&A) expenses. The Company’s SG&A expenses represented 21.3% as a percentage of sales in the quarter compared to 19.9% in the prior quarter and 21.6% a year ago.
The Company experiences moderate seasonality in its business and typically realizes lower sequential sales in its first and third quarters, reflecting decreased transaction volume in the summer and holiday months. In fiscal 2004, the sequential third quarter sales decline was 0.6% compared to a larger sales decline of approximately 3%, on average, since fiscal 1993.
In the quarter, the Company reduced debt by $2.9 million to $131.9 million while cash was down $1.0 million to $19.7 million as operations continued to generate positive cash flows. A portion of the long-term debt in the amount of $4,403 was reclassified to current liabilities representing a sinking fund payment on the Company's 7 1/4 % debentures and remaining liability associated with the interest rate exchange agreements. The sinking fund payment had been reported as long-term debt in the Company's press release issued on March 23, 2004. Inventory, accounts receivable and accounts payable were up by $1.9 million, $2.4 million, and $1.2 million, respectively. Equity increased $3.8 million to $82.9 million primarily due to a favorable exchange rate impact, proceeds from stock option exercises, and positive earnings.
During the second quarter, the Company identified an accounting error that occurred in its Swedish subsidiary which affected interest expense previously reported for the prior seven quarters in the aggregate amount of $738. On January 30, 2004, the Company filed amended Form 10-K/A for fiscal 2003 and Form 10-Q/A for the period ended August 30, 2003, which increased interest expense reported in those periods (See Note B to Condensed Consolidated Financial Statements).
Results of Operations
Sales and Gross Margins
11
Consolidated sales for the quarter ended February 28, 2004 increased $9.3 million or 7.9% from the prior year to $127.3 million. For the nine-month period, sales were up 8.4% to $374.7 million with increased demand across all SBUs and all geographic areas. Consolidated gross margin increased 90 basis points for the third quarter mainly driven by the increase in RFWC margins. Gross margin for the nine-month period was flat.
Sales, percentage changes from the prior year, gross margins and gross margin percent of sales by SBU are summarized in the following table. Freight, Medical Glassware business (sold in fiscal 2002), Logistics business, and miscellaneous costs are included under the caption “Other.”
By Business Unit: | ||||||||||||||||||||||||||||
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RFWC | $ | 55,973 | $ | 51,499 | 8.7 | % | $ | 13,162 | 23.5 | % | $ | 11,293 | 21.9 | % | ||||||||||||||
IPG | 27,514 | 23,371 | 17.7 | % | 8,383 | 30.5 | % | 7,156 | 30.6 | % | ||||||||||||||||||
SSD | 25,260 | 23,205 | 8.9 | % | 6,394 | 25.3 | % | 5,859 | 25.2 | % | ||||||||||||||||||
DSG | 16,813 | 18,047 | (6.8) | % | 4,146 | 24.7 | % | 4,381 | 24.3 | % | ||||||||||||||||||
Other | 1,778 | 1,888 | (549 | ) | (487 | ) | ||||||||||||||||||||||
Total | $ | 127,338 | $ | 118,010 | 7.9 | % | $ | 31,536 | 24.8 | % | $ | 28,202 | 23.9 | % | ||||||||||||||
Nine Months | ||||||||||||||||||||||||||||
RFWC | $ | 163,493 | $ | 152,377 | 7.3 | % | $ | 37,190 | 22.7 | % | $ | 34,079 | 22.4 | % | ||||||||||||||
IPG | 81,232 | 71,149 | 14.2 | % | 24,730 | 30.4 | % | 22,236 | 31.3 | % | ||||||||||||||||||
SSD | 76,541 | 69,601 | 10.0 | % | 19,419 | 25.4 | % | 17,306 | 24.9 | % | ||||||||||||||||||
DSG | 47,756 | 46,169 | 3.4 | % | 12,132 | 25.4 | % | 11,977 | 25.9 | % | ||||||||||||||||||
Other | 5,673 | 6,286 | (1,878 | ) | (1,329 | ) | ||||||||||||||||||||||
Total | $ | 374,695 | $ | 345,582 | 8.4 | % | $ | 91,593 | 24.4 | % | $ | 84,269 | 24.4 | % | ||||||||||||||
RFWC three month and nine months sales increased 8.7% and 7.3%, respectively, from fiscal 2003 levels, driven by strength in Network Access and Passive/Interconnect product lines partially offset by weakness in some specialty and Broadcast products. For nine months, the Network Access and Passive/Interconnect posted growth of 17.4% and 15.0% to $60.1 million and $31.1 million, respectively, compared to the prior year, associated with wireless product demand increases. RWFC gross margin was up 160 basis points for the quarter and 30 basis points for nine months led by the growth of higher margin Network Access and Passive/Interconnect products.
IPG sales increased 17.7% and 14.2% for the quarter and nine months, respectively, amid continued strong broad-based demand for both power components and tube products. Power components were up 29% to $8.8 million for the quarter and 21% to $24.6 million for nine months. The tube businesses increased 13% to $18.7 million for the quarter and 12% to $56.7 million for nine months. Margins were essentially flat in the quarter and down 90 basis points for nine months primarily due to the exchange rate impact on the cost of certain tube products manufactured in Europe.
SSD posted a strong quarter, with sales increasing 8.9% and margins increasing 10 basis points from a year ago, fueled by continued expansion of the North America business. For nine months, sales were up 10.0% while gross margins increased 50 basis points due to the impact of exchange rates partially offset by competitive pricing pressure.
DSG sales declined 6.8% for the third quarter mainly due to the timing of project-based business for custom displays. Nine months sales were up 3.4% as Medical monitor sales increased by 20.6 % to $19.2 million. High margin legacy cathode ray tube products were down 24.2% to $2.6 million for the quarter and 10.9% to $7.9 million for nine months, negatively affecting gross margin.
Sales, percentage change from the prior year, gross margin, and gross margin percent of sales by geographic area are summarized in the following table. Previously reported sales under the caption “Direct Export” and some of the "Corporate" sales were identified by geographic area and reclassified accordingly. The caption “Corporate” consists primarily of Freight and Corporate provisions.
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Third Quarter | ||||||||||||||||||||||||||||
North America | $ | 68,423 | $ | 66,873 | 2.3 | % | $ | 17,712 | 25.9 | % | $ | 17,243 | 25.8 | % | ||||||||||||||
Europe | 29,163 | 26,521 | 10.0 | % | 8,519 | 29.2 | % | 7,374 | 27.8 | % | ||||||||||||||||||
Asia/Pacific | 23,630 | 18,759 | 26.0 | % | 5,640 | 23.9 | % | 4,397 | 23.4 | % | ||||||||||||||||||
Latin America | 5,429 | 4,997 | 8.6 | % | 1,244 | 22.9 | % | 1,263 | 25.3 | % | ||||||||||||||||||
Corporate | 693 | 860 | (1,579 | ) | (2,075 | ) | ||||||||||||||||||||||
Total | $ | 127,338 | $ | 118,010 | 7.9 | % | $ | 31,536 | 24.8 | % | $ | 28,202 | 23.9 | % | ||||||||||||||
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North America | $ | 199,556 | $ | 196,041 | 1.8 | % | $ | 52,332 | 26.2 | % | $ | 51,230 | 26.1 | % | ||||||||||||||
Europe | 86,105 | 75,453 | 14.1 | % | 24,905 | 28.9 | % | 20,708 | 27.4 | % | ||||||||||||||||||
Asia/Pacific | 71,120 | 56,690 | 25.5 | % | 16,227 | 22.8 | % | 13,200 | 23.3 | % | ||||||||||||||||||
Latin America | 15,106 | 15,033 | 0.5 | % | 3,545 | 23.5 | % | 4,054 | 27.0 | % | ||||||||||||||||||
Corporate | 2,808 | 2,365 | (5,416 | ) | (4,923 | ) | ||||||||||||||||||||||
Total | $ | 374,695 | $ | 345,582 | 8.4 | % | $ | 91,593 | 24.4 | % | $ | 84,269 | 24.4 | % | ||||||||||||||
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12
Sales in North America increased 2.3% in the third quarter and 1.8% for nine months as double-digit growth in Canada was offset by a decline in the U.S primarily due to a completion of a large wireless infrastructure project in the prior year.
The Company had a strong quarter in Europe with sales growth of 10% from a year ago led by Italy where sales were up 57% to $5.2 million followed by Spain and France where sales grew by 13% and 17% to $3.1 million and $4.8 million, respectively. For nine months, sales were up 14.1% as all regions posted increases in sales partially due to the weakening US dollar.
The Company posted a sales increase in Asia/Pacific of 26.0% in the quarter and 25.5% for nine months as sales in all regions grew in the nine-month period from fiscal 2003. The Company's quarterly sales in China more than doubled over last year to $6.0 million in the third quarter. The margins in China, however, are among the lowest in the area due to the high level of contract manufacturing and component sales, driving down the overall Asia/Pacific gross margin.
In Latin America sales increased 8.6% in the quarter driving a nine-month sales increase of 0.5%. Sales in Mexico grew 19% to $5.3 million while sales in Brazil were down 4% to $6.2 million during the nine-month period.
Fiscal 2004 gross margins by geographic area experienced significant fluctuations from an increase of 150 basis points in Europe to a decrease of 350 basis points in Latin America, principally resulting from changes in the sales mix.
Selling, General and Administrative (SG&A) Expenses
For the three- and nine-month periods, SG&A expenses increased by $1,650 or 6.5% to $27.1 million and by $4.3 million or 5.8% to $78.4 million, respectively. This was primarily due to foreign currency translation as a result of the weakening US dollar, increased PeopleSoft implementation costs, and increased incentives on higher sales, partially offset by a reduction in the bad debt accrual. For nine months, SG&A as a percent of sales decreased to 20.9% compared to 21.5% a year ago, as the Company realized savings from the recent restructuring initiative and a reduction of past due account receivable balances resulting in lower bad debt expense.
Interest and Other Expenses
For three- and nine-month periods, interest expense was relatively flat as both average borrowing levels and the weighted-average interest rate remained essentially the same compared to the prior year. Cash payments for interest were $8,488 for nine months ended February 28, 2004.
Other, net included a foreign exchange loss of $445 for the three months and $21 for the nine months in fiscal 2004 compared to a foreign exchange loss of $178 for the three months and $435 for the nine months in fiscal 2003. Also included in Other, net for the nine-month period are net investment income of $189 in 2004 and net investment loss of $20 in 2003. In 2004, the Company recorded a loss of $308 due to a loss on disposition of fixed assets and an other-than-temporary investment impairment loss of $210.
Income Tax Provision
The effective tax rate was 31.1% for the nine-month period of fiscal 2004 compared to 41.9% in fiscal 2003. The effective tax rate differs from the statutory rate of 35.0% primarily due to the impact of certain non-tax deductible charges, the Company's foreign sales corporation benefits on export sales, state taxes, and the tax impact of non-U.S. operations. As the Company restated fiscal 2003 results because of the accounting error in its Swedish subsidiary associated with the interest expense, no adjustment was made to the income tax provision since the Company does not believe it is more likely than not that the benefits of the foreign losses will be realized. As a result, there were significant fluctuations in the income tax rate in fiscal 2003 and the first half of fiscal 2004.
Future effective tax rates could be adversely affected by lower than anticipated earnings in countries where the Company has lower statutory rates, changes in the valuation of certain deferred tax assets or liabilities, or changes in tax laws or interpretations thereof. In addition, the Company is subject to the examination of its income tax returns by the Internal Revenue Service and other tax authorities and regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes.
Net Income (Loss)
Net income for the third quarter of fiscal 2004 was $1,000 or $0.07 per share compared to a net loss of $102 or $0.01 per share a year ago. Net income for nine months of fiscal 2004 was $3,597, or $0.25 per share, compared to net income before cumulative effect of accounting change of $1,142, or $0.08 per share, in the nine months of the prior year. The cumulative effect of accounting change included in the 2003 net results represents a goodwill and other intangible assets impairment charge in the amount of $17.9 million, net of taxes of $3.7 million. The impairment was recorded as a change in accounting principle in the first quarter of fiscal 2003. (See Note E to the Condensed Consolidated Financial Statements).
13
Liquidity and Capital Resources
Cash and cash equivalents were $19.7 million at February 28, 2004, an increase of $2.9 million from the beginning of the year. During the first nine months of fiscal 2004, the Company generated $14.2 million of cash from operating activities. Working capital decreased $4.3 million, largely due to an increase in accounts payable of $7.6 million and decrease in inventory of $4.3 million partially offset by an $8.9 million accounts receivable increase.
Inventory days were approximately 89 in the third quarter of fiscal 2004, compared with 97 days at the end of fiscal 2003. Inventory levels and the associated inventory turns reflect the Company's ongoing inventory management efforts. Inventory management remains an area of focus as the Company seeks to balance the need to maintain strategic inventory levels to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and customer requirements.
The Company has a multi-currency revolving credit facility agreement in the amount of $102.0 million that matures in September of 2005 and bears interest at applicable LIBOR rates plus a margin, varying with certain financial performance criteria. At February 28, 2004, the applicable margin was 225 basis points, $60.5 million was outstanding and $41.5 million was available under the total facility. The available amount was reduced to $17.8 million due to the borrowing base limitations.
In the nine-month period of fiscal 2004, the Company reduced its debt by $6.5 million to $131.9 million as $7.6 million was paid down under the multi-currency credit facility partially offset by foreign currency exchange impact. The Company was in compliance with all debt covenants for the period ended February 28, 2004. Quarterly dividends of $0.04 per common share and $0.036 per class B common share in the total amount of $1,651 for nine months were offset by $1,537 in proceeds from the exercise of stock options by employees, resulting in net cash used in financing activities of $7.7 million.
The Company spent approximately $3.9 million on capital projects during the nine months of fiscal 2004 primarily related to PeopleSoft development costs and ongoing investments in information technology infrastructure. Management estimates the capital expenditures to increase as the PeopleSoft implementation progresses. The $1,008 earnout payment represents a cash outlay associated with the Pixelink and Celti acquisitions as the business units achieved certain operating performance criteria.
On March 12, 2004, the Company filed registration statement relating to a proposed exchange offer of convertible subordinated senior notes for all of the Company's outstanding 7 ¼ % and 8 ¼ % convertible debentures and a concurrent offering of 3,450 shares of the Company's common stock, including 450 shares that may be issued pursuant to the underwriters over-allotment option. Proceeds from the sale of the shares of common stock would be used to reduce the Company's indebtedness through the redemption of its outstanding 7 ¼ % and 8 ¼ % convertible debentures, which remain outstanding after the exchange offer, and the repayment of borrowings under its bank credit agreement. In connection with the exchange offer and the concurrent stock offering, the Company is required to obtain the consent and waiver from the lenders of certain covenants contained in the credit agreement. The Company has had discussions with the lenders concerning exchange offer and the concurrent offering of common stock and expects to finalize the necessary consent and waiver shortly. The registration statements relating to these securities have been filed with the Securities and Exchange Commission but have not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement covering such securities becomes effective. This report shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. Any offer of the securities will be made solely by means of the prospectus included in the applicable registration statement. No assurance can be given that the transactions will be successfully completed.
Special Note Regarding Forward-Looking Statements, Risk Factors and Analyst Reports
All statements other than statements of historical facts included in this report are statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. The words "expect," "estimate," "anticipate," "predict," "believe" and similar expressions and variations thereof are intended to identify forward-looking statements. Such statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) trends affecting the Company's financial condition or results of operations; (ii) the Company's financing plans; (iii) the Company's business and growth strategies, including potential acquisitions; and (iv) other plans and objectives for future operations. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those predicted in the forward-looking statements or which may be anticipated from historical results or trends.
In addition to the other information included in this quarterly report on Form 10-Q, investors should consider carefully numerous risks that effect the Company's business and the results of its operations. Some of these risks include, without limitation:
- - recent operating and net losses of the Company and the possibility of future losses;
- - significant investments in inventory, recent significant charges for inventory obsolescence and overstock, and the possibility of future charges;
- - dependence on products designed and manufactured by others and the Company's ability to respond to anticipate changes in the marketplace;
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- - significant debt that limits the Company's financial resources and ability to compete;
- - factors beyond the Company's control that affect its ability to service its debt and meet its other obligations;
- - any reduction in voting power of Edward J. Richardson that does not allow him to elect a majority of directors, which would cause a default under the Company's credit agreement;
- - dependence on executive officers and other key personnel;
- - restrictions in the credit agreement and indentures relating to outstanding convertible debentures; and
- - intense competition in the Company's markets.
For more discussion of such risks, see "Risk Factors" in the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2004.
These risks are not exhaustive. Other sections of this report may include additional factors, which could adversely affect the Company's business and financial performance. Moreover, the Company operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Investors should also be aware that while the Company does, from time to time, communicate with securities analysts, it is against the Company's policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a description of the Company’s market risks, see “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management and Market Sensitive Financial Instruments” in the Company’s Annual Report on Form 10-K/A for the fiscal year ended May 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. At the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including Chairman of the Board and Chief Executive Officer ("CEO") and Senior Vice President and Chief Financial Officer ("CFO"), of the effectiveness of the Company's disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective.
There have been no changes in the Company's internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS (in thousands, except where indicated)
On December 20, 2002, the Company filed a complaint against Signal Technology Corporation in the United States District Court for the Northern District of Illinois, which the Company dismissed on February 27, 2003. On February 14, 2003 Signal Technology filed a declaratory judgment suit against the Company in Superior Court, Boston, Massachusetts, and on March 4, 2003, the Company filed a complaint against Signal Technology Corporation in the Circuit Court of Cook County, Illinois. On February 13, 2004, the Company dismissed its complaint in Circuit Court, Cook County, Illinois. From November 6, 2000 through December 6, 2001, Signal Technology issued six purchase orders to purchase low-frequency amplifiers and other electronic components from the Company and subsequently refused to take delivery of the components. The Company is claiming damages of approximately $2.0 million resulting from Signal Technology's refusal to take delivery. Signal’s declaratory judgment suit in Massachusetts seeks a ruling that it has no liability to the Company, but Signal has not asserted any claim against the Company.
The Company filed a complaint against Microsemi Corporation on February 13, 2004, in the Circuit Court of Kane County, Illinois. Microsemi is a former supplier of electronic components to the Company. From May through August, 2002, the Company sought to return certain components to Microsemi pursuant to the terms of a distribution agreement between Microsemi and the Company and Microsemi refused to accept the Company's return. In this suit, the Company alleged breach of contract and seeks damages in excess of $814.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMSSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held October 15, 2003, three proposals were submitted to a vote of the Company's stockholders: (1) the election of directors; (2) the Amendment to 1999 Stock Purchase Plan to increase the number of shares to the Plan by 100,000; (3) the appointment of KPMG LLP as independent auditors for fiscal year ending May 31, 2004. Shareholders present in person or by proxy holding shares representing a total of 42,073,949 votes out of a total 45,479,624 entitled to vote at the meeting were present, which was more than the number of votes necessary to constitute a quorum. The following table sets forth the results of the voting:
Proposal | Number of affirmative votes | Withheld authority | |||||||||
1. |
| Election of directors: |
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|
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|
|
|
|
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Edward J. Richardson | 41,498,020 | 575,729 | |||||||||
Scott Hodes | 40,763,376 | 1,310,373 | |||||||||
Samuel Rubinovitz | 42,016,993 | 56,756 | |||||||||
Arnold R. Allen | 41,496,920 | 576,829 | |||||||||
Jacques Bouyer | 41,968,439 | 105,310 | |||||||||
Dario Sacomani | 41,497,920 | 575,829 | |||||||||
Harold L. Purkey | 42,019,023 | 54,726 | |||||||||
Ad Ketelaars | 41,498,220 | 575,529 | |||||||||
Bruce W. Johnson | 41,493,814 | 579,935 | |||||||||
John R. Peterson | 42,019,023 | 54,726 | |||||||||
| |||||||||||
Proposal | For | Against | Abstain | Not voted | |||||||
2. |
| Amendment to 1999 Stock Purchase Plan | 38,898,802 |
| 60,086 |
| 1,993,161 |
| 1,121,770 |
| |
3. | Appointment of KPMG LLP as independent auditors | 42,013,609 | 51,993 | 8,347 | N/A |
Each of the proposals set forth above received more than the required number of votes for approval and was therefore duly and validly approved by the stockholders.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits | ||
| ||
31.1 |
| Certification of Edward J. Richardson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 |
| Certification of Dario Sacomani pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| Certification of Edward J. Richardson and Dario Sacomani pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| ||
(b) Reports on form 8-K | ||
| ||
Form 8-K filed on 12/04/03 under Item 9 announcing date of fiscal 2004 second quarter conference call. | ||
Form 8-K filed on 12/19/03 under Item 9 announcing fiscal 2004 second quarter results. | ||
Form 8-K filed on 1/14/04 under Item 9 announcing Richardson's fiscal 2004 third quarter dividend. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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|
|
|
|
|
RICHARDSON ELECTRONICS, LTD | ||
| (Registrant) | |
| ||
Date: April 8, 2004 |
| By: /s/ DARIO SACOMANI |
Dario Sacomani |
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