Form 10-Q/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number | |
For the quarterly period ended May 31, 2007 | 1-8798 |
Nu Horizons Electronics Corp.
(Exact name of registrant as specified in its charter)
Delaware | 11-2621097 | |
(State of other jurisdiction of | (I.R.S. Employer | |
incorporation or organization | Identification No.) |
70 Maxess Road, Melville, New York | 11747 | |
(Address of principal executive offices) | (Zip Code) |
(631) 396 -5000
(Registrant’s telephone number, including area code)
_____________________________________________________
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No__
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one)
Large accelerated filer o Accelerated filer x Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act). Yes o No x
The number of shares outstanding of registrant’s common stock, as of June 30, 2007:
Common Stock - Par Value $.0066 | 18,357,087 | |
Class | Outstanding Shares |
EXPLANATORY NOTE:
Nu Horizons Electronics Corp. (the “Company,” “Nu Horizons,” “we” or “our”) is amending its Quarterly Report on Form 10-Q for the three months ended May 31, 2007 originally filed on July 9, 2007 (the "Original Form 10-Q").
As previously reported in a current report on Form 8-K filed on October 3, 2007, the Audit Committee of the Company's Board of Directors, together with management, concluded that, due to the tax adjustments described below and in Note 2 of the Notes to the Interim Consolidated Financial Statements included herein, (1) our previously issued financial statements and any related reports of our independent registered public accounting firm for the fiscal years ended February 28, 2002 through 2007 and the financial statements contained in the first quarter fiscal 2008 Form 10-Q should no longer be relied upon because of such errors in those financial statements, (2) our earnings and press releases and similar communications should no longer be relied upon to the extent that they relate to these financial statements, and (3) our financial statements and Form 10-K for the fiscal year ended February 28, 2007 and first quarter fiscal 2008 Form 10-Q should be restated to reflect the correct accounting for income taxes as discussed below.
In preparing the fiscal 2007 tax returns, developing the fiscal 2008 tax provision, and reviewing our accounting for income taxes in connection with the application of the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Tax - an Interpretation of FASB Statement No. 109", we determined that there were errors in the prior years' tax returns and the application of FASB Statement No. 109 - Accounting for Income Taxes. Consequently, there was an understatement of our provision for income tax expense for prior periods and the related U.S. income tax obligations. On November 21, 2007, we filed our amended Annual Report on Form 10-K/A for fiscal year ended February 28, 2007 (the "2007 Form 10-K/A").
Accordingly, adjustments have been made to the aforementioned interim consolidated condensed financial statements contained in the Original Form 10-Q for the quarterly period ended May 31, 2007, which are reflected in this Form 10-Q/A (the "Form 10-Q/A") to restate for income tax expense and the related obligations. The changes impacting the financial statements are explained in further detail in Note 2 of the Notes to Interim Consolidated Condensed Financial Statements included herein. In addition to the changes to our financial statements, including the notes therein (Item 1), Items 2 and 4 of Part I of the Original Form 10-Q have been revised to reflect the following changes:
· | We expanded our disclosure in Item 2 to explain the material variances from the same period of the prior year in reported income taxes; and |
· | We have updated Item 4 - Controls and Procedures to address management’s re-evaluation of disclosure controls and procedures as of May 31, 2007 resulting from its reassessment and identification of a material weakness in internal control over financial reporting related to the facts and circumstances surrounding the errors that led to the restatement of our Original Form 10-Q. See Item 4 (Controls and Procedures) for further discussion. New certifications of the principal executive officer and principal financial officer are included in Part II as exhibits to this Form 10-Q/A. |
Except for the foregoing amended and restated information, the Company has not modified or updated the disclosures in the Original Form 10-Q. As such, this Form 10-Q/A continues to describe conditions as of the filing date of the Original Form 10-Q, and does not reflect events, results or developments that have occurred after the date of the Original Form 10-Q or modify or update those disclosures affected by subsequent events, except as specifically referenced herein and as discussed in the Subsequent Events Note 10 of the Notes to Financial Statements contained in Part I, Item 1.
This Form 10-Q/A reflects changes resulting from the restatement of amounts in the Form 10-K/A, as well as the restatement of amounts for income tax expense and the related obligations for the first quarter of fiscal 2008 as reported in the Original Form 10-Q.
The events resulting in the filing of this Form 10-Q/A and the financial results reported in this Form 10-Q/A had no impact on the calculations of our bank debt covenants for any quarterly or annual period. However, this restatement has, in fact, contributed to the delay in filing the fiscal 2008 quarterly report on Form 10-Q for the three months ended August 31, 2007, which required us to obtain waivers from our banks, which waivers were obtained on October 25, 2007.
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NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
INDEX
Page(s) | |||
Explanatory Note | 2. | ||
Part I. | Financial Information | ||
Item 1. | Financial Statements | ||
Consolidated Condensed Statements of Income (as restated) (unaudited) - Three Months Ended May 31, 2007 and 2006 | 4. | ||
Consolidated Condensed Balance Sheets (as restated) - May 31, 2007 (unaudited) and February 28, 2007 | 5. | ||
Consolidated Condensed Statements of Cash Flows (as restated) (unaudited) - Three Months Ended May 31, 2007 and 2006 | 6. | ||
Notes to Interim Consolidated Condensed Financial Statements (as restated) (unaudited) | 7.-13. | ||
Review Report of Independent Registered Public Accounting Firm (Restated) | 14. | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (as restated) | 15.-18. | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 19. | |
Item 4. | Controls and Procedures (revised) | 20.-21. | |
Part II. | Other Information | 22. | |
SIGNATURES | 23. | ||
CERTIFICATIONS |
3
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
For The Three Months Ended | |||||||
May 31, 2007 | May 31, 2006 | ||||||
(As Restated, see Note 2) | (As Restated, see Note 2) | ||||||
NET SALES | $ | 192,327,000 | $ | 187,760,000 | |||
COSTS AND EXPENSES: | |||||||
Cost of sales | 162,789,000 | 159,470,000 | |||||
Operating expenses | 25,597,000 | 22,123,000 | |||||
188,386,000 | 181,593,000 | ||||||
OPERATING INCOME | 3,941,000 | 6,167,000 | |||||
OTHER (INCOME) EXPENSE: | |||||||
Interest (income) | (15,000 | ) | (61,000 | ) | |||
Interest expense | 928,000 | 962,000 | |||||
913,000 | 901,000 | ||||||
INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTERESTS | 3,028,000 | 5,266,000 | |||||
Provision for income taxes | 1,250,000 | 2,603,000 | |||||
INCOME BEFORE MINORITY INTERESTS | 1,778,000 | 2,663,000 | |||||
Minority interest in earnings of subsidiaries | 90,000 | 149,000 | |||||
NET INCOME | $ | 1,688,000 | $ | 2,514,000 | |||
NET INCOME PER COMMON SHARE | |||||||
Basic | $ | .09 | $ | .14 | |||
Diluted | $ | .09 | $ | .14 | |||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | |||||||
Basic | 18,217,603 | 17,596,232 | |||||
Diluted | 19,046,335 | 18,293,721 |
See accompanying notes
4
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
May 31, 2007 | February 28, 2007 | |||||||||
(unaudited) | ||||||||||
(As Restated, see Note 2) | (As Restated, see Note 2) | |||||||||
- ASSETS - | ||||||||||
CURRENT ASSETS: | ||||||||||
Cash | $ | 3,787,000 | $ | 4,747,000 | ||||||
Accounts receivable - net of allowance for doubtful accounts of $4,921,000 and $4,985,000, respectively | 128,999,000 | 119,946,000 | ||||||||
Inventories | 134,072,000 | 119,311,000 | ||||||||
Prepaid expenses and other current assets | 4,043,000 | 4,625,000 | ||||||||
TOTAL CURRENT ASSETS | 270,901,000 | 248,629,000 | ||||||||
PROPERTY, PLANT AND EQUIPMENT - NET | 4,857,000 | 3,381,000 | ||||||||
OTHER ASSETS: | ||||||||||
Cost in excess of net assets acquired | 8,332,000 | 8,332,000 | ||||||||
Deferred tax asset | 3,082,000 | 3,082,000 | ||||||||
Other assets | 4,851,000 | 4,055,000 | ||||||||
$ | 292,023,000 | $ | 267,479,000 | |||||||
- LIABILITIES AND SHAREHOLDERS’ EQUITY - | ||||||||||
CURRENT LIABILITIES: | ||||||||||
Accounts payable | $ | 61,815,000 | $ | 62,410,000 | ||||||
Accrued expenses | 7,797,000 | 8,765,000 | ||||||||
Bank credit line | 2,693,000 | 2,327,000 | ||||||||
Income taxes payable | 9,639,000 | 8,179,000 | ||||||||
TOTAL CURRENT LIABILITIES | 81,944,000 | 81,681,000 | ||||||||
LONG TERM LIABILITIES: | ||||||||||
Revolving credit line | 52,200,000 | 30,000,000 | ||||||||
Due to seller | 3,378,000 | 3,378,000 | ||||||||
Deferred tax liability | 2,778,000 | 2,725,000 | ||||||||
TOTAL LONG TERM LIABILITIES | 58,356,000 | 36,103,000 | ||||||||
MINORITY INTEREST IN SUBSIDIARIES | 2,038,000 | 1,948,000 | ||||||||
COMMITMENTS AND CONTINGENCIES | ||||||||||
SHAREHOLDERS’ EQUITY: | ||||||||||
Preferred stock, $1 par value, 1,000,000 shares authorized; none issued or outstanding | - | - | ||||||||
Common stock, $.0066 par value, 50,000,000 shares authorized; 18,357,087 and 18,158,034 shares issued and outstanding for May 31, 2007 and February 28, 2007, respectively | 121,000 | 120,000 | ||||||||
Additional paid-in capital | 53,803,000 | 53,512,000 | ||||||||
Retained earnings | 95,790,000 | 94,102,000 | ||||||||
Other accumulated comprehensive (loss) income | (29,000 | ) | 13,000 | |||||||
TOTAL SHAREHOLDERS’ EQUITY | 149,685,000 | 147,747,000 | ||||||||
$ | 292,023,000 | $ | 267,479,000 |
See accompanying notes
5
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Three Months Ended | |||||||
May 31, 2007 | May 31, 2006 | ||||||
(As Restated, see Note 2) | (As Restated, see Note 2) | ||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Cash received from customers | $ | 183,274,000 | $ | 178,186,000 | |||
Cash paid to suppliers and employees | (202,796,000 | ) | (192,117,000 | ) | |||
Interest received | 15,000 | 61,000 | |||||
Interest paid | (704,000 | ) | (962,000 | ) | |||
Income taxes paid | (1,446,000 | ) | (603,000 | ) | |||
Net cash (used) by operating activities | (21,657,000 | ) | (15,435,000 | ) | |||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Capital expenditures | (1,847,000 | ) | (297,000 | ) | |||
Net cash (used in) investing activities | (1,847,000 | ) | (297,000 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Borrowings under revolving credit line | 79,736,000 | 83,650,000 | |||||
(Repayments) under revolving credit line | (57,170,000 | ) | (64,850,000 | ) | |||
Proceeds from exercise of stock options | 20,000 | 106,000 | |||||
Excess tax benefits from stock based compensation | - | 25,000 | |||||
Net cash provided by financing activities | 22,586,000 | 18,931,000 | |||||
EFFECT OF EXCHANGE RATE CHANGE | (42,000 | ) | (12,000 | ) | |||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (960,000 | ) | 3,187,000 | ||||
Cash and cash equivalents, beginning of year | 4,747,000 | 10,873,000 | |||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 3,787,000 | $ | 14,060,000 | |||
RECONCILIATION OF NET INCOME TO NET CASH FROM OPERATING ACTIVITIES: | |||||||
NET INCOME | $ | 1,688,000 | $ | 2,514,000 | |||
Adjustments: | |||||||
Depreciation and amortization | 371,000 | 311,000 | |||||
Bad debt reserve | - | 58,000 | |||||
Deferred income tax | 53,000 | 350,000 | |||||
Minority interest | 90,000 | 149,000 | |||||
Stock based compensation | 272,000 | 138,000 | |||||
Changes in assets and liabilities net of effect of acquisition: | |||||||
Accounts receivable | (9,053,000 | ) | (9,574,000 | ) | |||
Inventories | (14,761,000 | ) | (10,487,000 | ) | |||
Due to seller | |||||||
Prepaid expenses and other current assets | 582,000 | (735,000 | ) | ||||
Other assets | (796,000 | ) | (121,000 | ) | |||
Accounts payable and accrued expenses | (1,563,000 | ) | 111,000 | ||||
Income taxes | 1,460,000 | 1,851,000 | |||||
NET CASH (USED) BY OPERATING ACTIVITIES | $ | (21,657,000 | ) | $ | (15,435,000 | ) |
See accompanying notes
6
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (AS RESTATED)
(UNAUDITED)
1. | BASIS OF PRESENTATION: |
In the opinion of management, the accompanying unaudited interim consolidated condensed financial statements of Nu Horizons Electronics Corp. (the “Company”), its wholly owned subsidiaries NIC Components Corp., NUHC Inc., Nu Horizons International Corp., Nu Horizons Electronics Asia PTE LTD, Nu Horizons Electronics Hong Kong Limited, Nu Horizons Electronics Europe Limited, DT Electronics Limited, Titan Supply Chain Services Corp., Titan Supply Chain Services PTE LTD, Titan Supply Chain Services Limited, Nu Horizons Electronics (Shanghai) Co. Ltd., Nu Horizons Electronics Asia Pte Ltd. Korea, Razor Electronics, Inc. and Nu Exchange B2B, Inc. and its majority owned subsidiaries, NIC Components Asia PTE LTD and NIC Components Europe Limited contain all adjustments necessary to present fairly the Company’s financial position as of May 31, 2007 and February 28, 2007 and the results of its operations for the three month periods ended May 31, 2007 and 2006, and its cash flows for the three month periods ended May 31, 2007 and 2006.
The accounting policies followed by the Company are set forth in Note 2 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K/A for the year ended February 28, 2007, which is incorporated herein by reference. Specific reference is made to that report for a description of the Company’s securities and the notes to consolidated financial statements included therein. The accompanying unaudited interim consolidated condensed financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in the United States of America
The results of operations for the three-month period ended May 31, 2007 are not necessarily indicative of the results to be expected for the full year.
2. | RESTATEMENT OF FINANCIAL STATEMENTS: |
On July 9, 2007, the Company filed its Quarterly Report on Form 10-Q for the three months ended May 31, 2007 (the "Original Form 10-Q"). In preparing the fiscal 2007 tax returns, developing the fiscal 2008 tax provision, and reviewing our accounting for income taxes in connection with the application of the provision of Financial Accounting Standards Board ("FASB") Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Tax - an Interpretation of FASB Statement No. 109", we determined that there were errors in the prior years' tax returns and the application of FASB Statement No. 109 - Accounting for Income Taxes. Consequently, there was an understatement of our provision for income taxes expense and the related U.S. income tax obligations, a majority of which related to our foreign operations, for the quarter ended May 31, 2007 and for the years ended February 28, 2002 through 2007.
As a result of the tax adjustments described above and noted below, our management and the Audit Committee of the Company's Board of Directors concluded, as reported in a current report on Form 8-K filed on October 3, 2007, that (1) our previously issued financial statements and any related reports of our independent registered public accounting firm for the fiscal years ended February 28, 2002 through 2007 and the first quarter of fiscal 2008 should no longer be relied upon because of the aforementioned errors in those financial statements, (2) our earnings and press releases and similar communications should no longer be relied upon to the extent that they relate to these financial statements, and (3) our financial statements, Form 10-K for the fiscal year ended February 28, 2007 and Original Form 10-Q should be restated to reflect the correct accounting for income taxes discussed above. On November 21, 2007, we filed our amended Annual Report on Form 10-K/A for the fiscal year ended February 28, 2007.
7
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (AS RESTATED)
(UNAUDITED)
2. | RESTATEMENT OF FINANCIAL STATEMENTS (Continued): |
The following table summarizes the impact of the restatement discussed above on the previously issued Interim Consolidated Condensed Financial Statements as of May 31, 2007 and for the three months ended May 31, 2007 and 2006:
As of May 31, 2007 | ||||||||||
As Previously Reported | Adjustment | As Restated | ||||||||
Consolidated Balance Sheet | ||||||||||
Prepaid and other current assets | $ | 3,872,000 | $ | 171,000 | $ | 4,043,000 | ||||
Deferred tax asset | - | 3,082,000 | 3,082,000 | |||||||
Accrued expenses | 7,611,000 | 186,000 | 7,797,000 | |||||||
Income taxes payable | 5,261,000 | 4,378,000 | 9,639,000 | |||||||
Deferred tax liability | 2,422,000 | 356,000 | 2,778,000 | |||||||
Minority interest | 2,002,000 | 36,000 | 2,038,000 | |||||||
Additional paid in capital | 50,961,000 | 2,842,000 | 53,803,000 | |||||||
Retained earnings | 100,335,000 | (4,545,000 | ) | 95,790,000 |
As of February 28, 2007 | ||||||||||
As Previously Reported | Adjustment | As Restated | ||||||||
Consolidated Balance Sheet | ||||||||||
Prepaid and other current assets | $ | 4,454,000 | $ | 171,000 | $ | 4,625,000 | ||||
Deferred tax asset | - | 3,082,000 | 3,082,000 | |||||||
Accrued expenses | 8,579,000 | 186,000 | 8,765,000 | |||||||
Income taxes payable | 3,927,000 | 4,252,000 | 8,179,000 | |||||||
Deferred tax liability | 2,369,000 | 356,000 | 2,725,000 | |||||||
Minority interest | 1,912,000 | 36,000 | 1,948,000 | |||||||
Additional paid in capital | 50,670,000 | 2,842,000 | 53,512,000 | |||||||
Retained earnings | 98,521,000 | (4,419,000 | ) | 94,102,000 |
For the Three Months Ended May 31, 2007 | ||||||||||
As Previously Reported | Adjustment | As Restated | ||||||||
Consolidated Statement of Operations | ||||||||||
Provision for income taxes | $ | 1,124,000 | $ | 126,000 | $ | 1,250,000 | ||||
Net income | 1,814,000 | (126,000 | ) | 1,688,000 | ||||||
Net income per common share: | ||||||||||
Basic | $ | .10 | $ | (.01 | ) | $ | .09 | |||
Diluted | $ | .10 | $ | (.01 | ) | $ | .09 |
For the Three Months Ended May 31, 2006 | ||||||||||
As Previously Reported | Adjustment | As Restated | ||||||||
Consolidated Statement of Operations | ||||||||||
Provision for income taxes | $ | 1,956,000 | $ | 647,000 | $ | 2,603,000 | ||||
Minority interest | 135,000 | 14,000 | 149,000 | |||||||
Net income | 3,175,000 | (661,000 | ) | 2,514,000 | ||||||
Net income per common share: | ||||||||||
Basic | $ | .18 | $ | (.04 | ) | $ | .14 | |||
Diluted | $ | .17 | $ | (.03 | ) | $ | .14 |
8
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (AS RESTATED)
(UNAUDITED)
2. | RESTATEMENT OF FINANCIAL STATEMENTS (Continued): |
For the Three Months Ended May 31, 2007 | ||||||||||
As Previously Reported | Adjustment | As Restated | ||||||||
Consolidated Statement of Cash Flows | ||||||||||
Net income | $ | 1,814,000 | $ | (126,000 | ) | $ | 1,688,000 | |||
Income taxes | 1,334,000 | 126,000 | 1,460,000 |
For the Three Months Ended May 31, 2006 | ||||||||||
As Previously Reported | Adjustment | As Restated | ||||||||
Consolidated Statement of Cash Flows | ||||||||||
Net income | $ | 3,175,000 | $ | (661,000 | ) | $ | 2,514,000 | |||
Minority interest | 135,000 | 14,000 | 149,000 | |||||||
Income taxes | 1,204,000 | 647,000 | 1,851,000 |
3. | ACQUISITION: |
On August 29, 2006, the Company acquired the outstanding shares of DT Electronics Limited ("DT"), an entity engaged in the electronic components distribution business in the United Kingdom. The operating results of DT are reflected in the accompanying financial statements since the date of acquisition. Reference is made to Note 3 of the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K/A for the year ended February 28, 2007 in which the Company has previously disclosed certain purchase price information, as well as the preliminary allocations of the net consideration paid. The preliminary purchase price allocation is subject to refinement when the valuation of intangibles is complete.
The following unaudited pro forma information of the Company is provided to give effect to the DT acquisition assuming it occurred as of March 1, 2006, the beginning of the earliest period presented:
For the Three Months Ended | ||||
May 31, 2006 | ||||
Net sales | $ | 193,328,000 | ||
Net income | $ | 2,731,000 | ||
Net income per share: | ||||
Basic | $ | .16 | ||
Diluted | $ | .15 |
The pro forma amounts above reflect interest on the purchase price assuming the acquisition occurred as of March 1, 2006, with interest calculated at the Company's borrowing rate under its credit facility for the period. The pro forma net earnings above assumes an income tax provision at the Company's consolidated tax rate for the applicable year. The information presented above is for illustrative purposes only and is not indicative of results that may have been achieved if the acquisition had occurred as of the beginning of the Company's 2007 fiscal year or of future operating performance.
9
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (AS RESTATED)
(UNAUDITED)
4. | PROPERTY, PLANT AND EQUIPMENT: |
Property, plant and equipment consists of the following: | |||||||
May 31, 2007 | February 28, 2007 | ||||||
Furniture, fixtures and office equipment | $ | 10,187,000 | $ | 8,895,000 | |||
Computer equipment | 8,759,000 | 8,204,000 | |||||
Leasehold improvements | 1,255,000 | 1,255,000 | |||||
20,201,000 | 18,354,000 | ||||||
Less: accumulated depreciation and amortization | 15,344,000 | 14,973,000 | |||||
$ | 4,857,000 | $ | 3,381,000 |
Depreciation expense for the quarters ended May 31, 2007 and 2006 aggregated $371,000 and $311,000, respectively.
5. | DEBT: |
On January 31, 2007, the Company entered into an amended and restated secured revolving line of credit agreement with eight banks, which currently provides for maximum borrowings of $150,000,000 (the "Revolving Credit Line"). The Revolving Credit Line provides for borrowings utilizing an asset based formula predicated on a certain percentage of outstanding domestic accounts receivable and inventory levels at any given month end. Borrowings under the Revolving Credit Line bear interest at either (i) the lead bank’s prime rate or (ii) LIBOR plus 150 basis points, at the option of the Company, through September 30, 2011, the due date of the loan. Direct borrowings under the Revolving Credit Line were $52,200,000 at May 31, 2007 and $30,000,000 at February 28, 2007. LIBOR rates ranged from 6.82% to 6.90% at May 31, 2007. As of the end of each of the fiscal periods, the Company was in compliance with all of the required bank covenants under the Revolving Credit Line.
6. | NET INCOME PER SHARE: |
Basic earnings per share is computed based upon the weighted average number of common shares outstanding and excludes any potential dilution. Diluted earnings per share reflect potential dilution from the exercise of common stock equivalents into common stock.
For the Three Months Ended | |||||||
May 31, 2007 | May 31, 2006 | ||||||
NUMERATOR: | |||||||
Net income | $ | 1,688,000 | $ | 2,514,000 | |||
DENOMINATOR: | |||||||
Basic earnings per common share - weighted-average number of common shares outstanding | 18,217,603 | 17,596,232 | |||||
Effect of dilutive stock options | 828,732 | 697,489 | |||||
Diluted earnings per common share - adjusted weighted-average number of common shares outstanding | 19,046,335 | 18,293,721 |
10
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (AS RESTATED)
(UNAUDITED)
7. | STOCK BASED COMPENSATION: |
Effective March 1, 2006, the Company adopted the provisions of FASB Statement No. 123 (revised 2004), "Share-Based Payment" and the Securities and Exchange Commission Staff Accounting Bulletin No. 107 (collectively "Statement No. 123R"), which requires share-based payment ("SBP") awards exchanged for employee services to be measured at fair value and expensed in the consolidated statements of operations over the requisite employee service period.
Stock Options
Stock options granted to date under each of the Company’s 1998 and 2000 Stock Option Plans, 2000 Key Employee Stock Option Plan and 2002 Key Employee Stock Incentive Plan, as amended, generally expire ten years after the date of grant and become exercisable in two equal annual installments commencing one year from date of grant. Stock options granted under the Company’s Outside Director Stock Option Plan and 2000 and 2002 Outside Directors’ Stock Option Plans expire ten years after the date of grant and become exercisable in three equal annual installments on the date of grant and the succeeding two anniversaries thereof. The exercise price for options cannot be less than the fair market value of the Company’s common stock on the date of grant.
The following information relates to the stock option activity for the three months ended May 31, 2007:
Options | Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||
Outstanding at March 1, 2007 | 2,126,818 | $ | 6.85 | ||||||||||
Granted | 0 | $ | 0 | ||||||||||
Exercised | (6,250 | ) | $ | 8.03 | |||||||||
Forfeited | 0 | $ | 0 | ||||||||||
Outstanding at May 31, 2007 | 2,120,568 | $ | 6.85 | 4.3 years | $ | 11,351,000 | |||||||
Exercisable at May 31, 2007 | 2,044,818 | $ | 6.70 | 4.1 years | $ | 11,248,000 |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the first quarter of fiscal 2008 and the weighted average exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on May 31, 2007. This amount changes based on the fair market value of the Company’s common stock. The total intrinsic value of options exercised for the three months ended May 31, 2007 and 2006 was $25,000 and $160,000, respectively.
Restricted Stock
Subject to the terms and conditions of the 2002 Key Employee Stock Option Plan, as amended, the compensation committee may grant shares of restricted stock. Shares of restricted stock awarded may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable period of restriction established by the compensation committee and specified in the award agreement. Compensation expense is recognized on a straight-line basis as shares become free of forfeiture restrictions (i.e., vest), generally over a seven-year period.
Summary of Non-Vested Shares
The following information summarizes the changes in non-vested restricted stock for the three months ended May 31, 2007:
Shares | Weighted Average Grant Date Fair Value | ||||||
Non-vested shares at March 1, 2007 | 263,000 | $ | 9.98 | ||||
Granted | 200,500 | 11.56 | |||||
Vested | (20,786 | ) | 8.45 | ||||
Forfeited | (2,572 | ) | 8.42 | ||||
Non-vested shares at May 31, 2007 | 440,142 | 10.78 |
11
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (AS RESTATED)
(UNAUDITED)
7. | STOCK BASED COMPENSATION (continued): |
As of May 31, 2007, there was $4,948,000 of total unrecognized compensation cost related to non-vested shares and stock options which is expected to be recognized over a period of 7 years.
Compensation Expense
As a result of adopting SFAS 123(R), the Company recorded, as a component of operating expenses, a charge of $272,000 ($171,000 net of related taxes or approximately $.01 per share) for the three months ended May 31, 2007 relating to the expensing of stock options and restricted stock.
8. | BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION: |
Management believes that the Company is operating in a single business segment, distribution of electronic components, in accordance with the rules of SFAS No. 131 (“Disclosure About Segments of an Enterprise and Related Information”).
Approximately 71% of the Company’s business is conducted in the United States, while the remaining operations are conducted overseas through foreign subsidiaries.
Revenues, by geographic area, for the first quarter of each of our last two fiscal years are as follows:
May 31, 2007 | May 31, 2006 | ||||||
Americas | $ | 136,256,000 | $ | 148,749,000 | |||
Europe | 14,427,000 | 4,218,000 | |||||
Asia/Pacific | 41,644,000 | 34,793,000 | |||||
$ | 192,327,000 | $ | 187,760,000 |
Total assets, by geographic area, as of the first quarter ended in each of our last two fiscal years are as follows:
May 31, 2007 | May 31, 2006 | ||||||
(As Restated) | |||||||
Americas | $ | 181,308,000 | $ | 181,661,000 | |||
Europe | 35,486,000 | 7,595,000 | |||||
Asia/Pacific | 75,229,000 | 78,223,000 | |||||
$ | 292,023,000 | $ | 267,479,000 |
Long lived assets (net), by geographic area, as of the first quarter ended in each of our last two fiscal years are as follows:
May 31, 2007 | May 31, 2006 | ||||||
Americas | $ | 4,178,000 | $ | 2,940,000 | |||
Europe | 60,000 | 23,000 | |||||
Asia/Pacific | 619,000 | 637,000 | |||||
$ | 4,857,000 | $ | 3,600,000 |
9. | INCOME TAXES: |
Effective March 1, 2007, we adopted the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For benefits to be recognized in the financial statements, a tax position must be more-likely-than-not to be sustained upon examination by the taxing authorities based on the technical merits of the position. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
12
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (AS RESTATED)
(UNAUDITED)
9. | INCOME TAXES (continued): |
In preparing the fiscal 2007 tax returns, developing the fiscal 2008 tax provision, and reviewing our accounting for income taxes in connection with the application of FIN 48, we determined that there were errors in the prior years' tax returns and the application of FASB Statement No. 109 - Accounting for Income Taxes. Consequently, there was an understatement of our provision for income tax expense for prior periods and the related U.S. income tax obligations, a majority of which is related to our foreign operations, requiring the restatement of our financial statements for the fiscal years ended February 28, 2005 through 2007, as well as similar prior period adjustments (see Note 2). Upon adoption of FIN 48, there was approximately $2,000,000 of unrecognized tax benefit included in the Condensed Consolidated Balance Sheet as of March 1. 2007, which may be reduced over the next twelve months upon filing our amended tax returns. The Company plans to amend its 2005 and 2006 tax returns in fiscal year 2008. As a result, the Company estimates that the $2,000,000 of unrecognized tax benefit will be reduced. If any uncertain tax positions were sustained by the taxing authorities, the Company's effective tax rate would be reduced. As of March 1, 2007, we had accrued approximately $144,000 and $615,000 for the payment of potential tax-related interest and penalties, respectively on the $2 million of uncertain tax positions
The liability for uncertain tax positions is included in the Condensed Consolidated Balance Sheet as of May 31, 2007. There were no significant changes to our uncertain tax positions during the three months ended May 31, 2007. For the three months ended May 31, 2007, interest and penalties increased by $76,000 and $162,000, respectively. The Company recognizes accrued interest and penalties related to uncertain tax positions in federal, foreign, state and local income tax expense. As of May 31, 2007, we had accrued approximately $220,000 and $777,000 for the payment of potential tax-related interest and penalties, respectively. The increase in tax penalties and interest during the quarter is primarily related to the underpayment of tax in 2007.
10. | SUBSEQUENT EVENTS: |
a. | Litigation: |
On or about October 4, 2007, a Consolidated Amended Class Action Complaint for Securities Fraud ("Amended Complaint") was filed in the United States District Court for the District of California in the matter entitled Louis Grasso, individually and on behalf of all others similarly situated, Plaintiff, v. Vitesse Semiconductor Corporation, Louis Tomasetta, Yatin Mody, Eugene F. Hovanec, Silicon Valley Bank, Nu Horizons Electronics Corp, Titan Supply Chain Services, Corp. (Formerly Known as Titan Logistics Corp.), and KPMG LLP, Defendants. Pursuant to the Amended Complaint, Nu Horizons, Titan, Silicon Valley Bank, and KPMG LLP were added as defendants to the putative class action which had been commenced by certain purchasers of Vitesse common stock. In the Amended Complaint, plaintiff alleges that Nu Horizons and Titan violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seeks rescission or unspecified damages on behalf of a purported class which purchased Vitesse common stock during the period from January 27, 2003 to and including April 27, 2006. As of November 21, 2007, a class has not been certified. Nu Horizons believes that the plaintiff’s claims are without merit and intends to defend vigorously against the plaintiff’s allegations.
b. | DT Electronics Limited - Allocation of Intangible Assets: |
The final allocation of the purchase price for the DT Electronics acquisition (see Note 3) resulted in an indentifiable intangible asset-customer list of $3,764,000 based on an independent valuation of fair value completed in the second quarter of fiscal 2008. The customer list will be amortized over its estimated useful life of 17 years.
As a result of the segregation of the cost in excess of net assets acquired, a deferred tax liability of approximately $1,000,000 will be reflected in the next quarter.
13
Review Report of Independent Registered Public Accounting Firm
To The Board of Directors and Stockholders
Nu Horizons Electronics Corp.
Melville, New York
We have reviewed the condensed consolidated balance sheet of Nu Horizons Electronics Corp. and subsidiaries (the Company) as of May 31, 2007, and the related condensed consolidated statements of income for the three month periods ended May 31, 2007 and 2006, and cash flows for the three month periods ended May 31, 2007 and 2006 included in the accompanying Securities and Exchange Commission Form 10-Q for the period ended May 31, 2007. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the Financial Statements, the Company has filed an amended Form 10-K/A for the year ended February 28, 2007 and has restated its financial statements for the three months ended May 31, 2007 and 2006 in this Form 10-Q/A, to reflect adjustments to the provision for income taxes.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheet of Nu Horizons Electronics Corp. as of February 28, 2007, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 7, 2007 (November 21, 2007 as to the effects of the restatement discussed in Note 2 and the subsequent events discussed in Note 16), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of February 28, 2007, as restated is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/ LAZAR LEVINE & FELIX LLP
New York, New York
July 3, 2007
(November 21, 2007, as to the
restatement discussed in Note 2
and the subsequent events discussed
in Note 10)
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (RESTATED)
Forward Looking Statements:
Statements in this Form 10-Q quarterly report may be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements that express the Company’s intentions, beliefs, expectations, strategies, predictions or any other statements relating to its future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those risks discussed from time to time in the Company’s Form 10-K/A annual report for the year ended February 28, 2007, and in other documents which the Company files with the Securities and Exchange Commission. In addition, such statements could be affected by risks and uncertainties related to product demand, market and customer acceptance, competition, government regulations and requirements, pricing and development difficulties, as well as general industry and market conditions and growth rates, and general economic conditions. Any forward-looking statements speak only as of the date on which they are made, and the Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q.
For a description of the Company's critical accounting policies and an understanding of the significant factors that influenced the Company's performance during the quarters ended May 31, 2007 and 2006, this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the consolidated financial statements, including the related notes, appearing in Item 1 of this Report, as well as the Company's Annual Report on Form 10-K/A for the year ended February 28, 2007.
Overview:
Nu Horizons Electronics Corp. and its wholly-owned subsidiaries are engaged in the distribution of high technology active and passive electronic components to a wide variety of original equipment manufacturers (“OEMs”) of electronic products. Active components distributed by the Company include semiconductor products such as memory chips, microprocessors, digital and linear circuits, microwave/RF and fiberoptic components, transistors and diodes. Passive components distributed by NIC, NIA and NIE, principally to OEMs and other distributors nationally, consist of a high technology line of chip and leaded components including capacitors, resistors and related networks. In addition, the Company distributes Sun Microsystems boards, servers, storage and software to OEMs (referred to as "Systems").
The electronics manufacturing and the electronics distribution industries in which the Company operates have experienced double digit increases in sales dollar volume for several years. Additionally, there have been recent consolidations in the electronics distribution industry, resulting in greater market share for certain of the remaining companies. The increase in sales volume has been accompanied by continued downward margin pressures, primarily due to the industry shift to production in Asia.
The Company recognized the industry shift to overseas production and the need to serve its suppliers on a global basis. As a result, the Company adopted a strategy of expanding its Asian and European operations by investing in human resources and expanding its sales force and engineering personnel. In prior years, we invested in Asia and currently we are staffed with 144 employees in 19 offices, with a warehouse in Singapore. In fiscal 2007, we continued our growth strategy of expanding our European presence by acquiring DT Electronics Limited on August 29, 2006, with 37 employees and a warehouse in Coventry, England. Most recently, we opened our first office in Munich, Germany and on June 6, 2007, the Company acquired Dacom Süd Electronics Vertriebs GmbH ("Dacom"), a franchised electronics component distributor, based in Munich, Germany. The Company paid approximately $2,700,000 in cash. Dacom had approximately $6,000,000 in sales for calendar year 2006. We expect that the acquisition of Dacom will accelerate our expansion in the European market.
It is difficult for the Company, as a distributor, to forecast the material trends of the electronic component and computer products industry because the Company does not typically have material forward-looking information available from its customers and suppliers for periods beyond approximately three to four months. As such, management relies on the publicly available information published by certain industry groups and other related analyses to evaluate its longer term prospects.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (RESTATED)
Overview (continued):
The Company is continuing to cooperate with the investigation by the Securities and Exchange Commission ("SEC") in the action captioned "In the Matter of Vitesse Semiconductor Corp." The cost of such cooperation may require the Company to incur significant amounts for professional fees and related expenses. As of May 31, 2007, approximately $105,000 of such costs were incurred. Management is presently unable to determine the duration of the SEC investigation and, consequently, the total costs that will be incurred by the Company.
The tables below provide a quarter-over-quarter summary of sales for the Company:
Quarterly Analysis of Sales
Quarters Ended May 31 | Percentage Change | |||||||||||||||
2007 | % of Total | 2006 | % of Total | 2007 to 2006 | ||||||||||||
Sales by Type: | ||||||||||||||||
Electronic Components | $ | 179,209,000 | 93 | % | $ | 157,246,000 | 84 | % | 14 | % | ||||||
Systems | 13,118,000 | 7 | % | 30,514,000 | 16 | % | (57 | )% | ||||||||
$ | 192,327,000 | 100 | % | $ | 187,760,000 | 100 | % | 2 | % |
The following table sets forth for the quarters ended May 31, 2007 and 2006, certain items in the Company’s consolidated statements of operations expressed as a percentage of net sales.
Three Months Ended May 31, | |||||||
2007 | 2006 | ||||||
(restated) | (restated) | ||||||
Net sales | 100.0 | % | 100.0 | % | |||
Cost of sales | 84.6 | 84.9 | |||||
Gross profit | 15.4 | 15.1 | |||||
Operating expenses | 13.3 | 11.8 | |||||
Interest expense | .5 | .5 | |||||
Interest (income) | .0 | .0 | |||||
Income before taxes | 1.6 | 2.8 | |||||
Income tax provision | .7 | 1.4 | |||||
Income after taxes, before minority interests | .9 | 1.4 | |||||
Minority interests | .0 | .1 | |||||
Net income | .9 | 1.3 |
Results of Operations:
For the quarter ended May 31, 2007, consolidated net sales increased to $192,327,000 from $187,760,000 for the prior year quarter. Net income for the first quarter of fiscal 2008 was $1,688,000 or $.09 per basic and diluted share as compared to net income of $2,514,000 or $.14 per basic and $.14 per diluted share in last year’s first fiscal quarter.
Sales of electronic components, excluding Systems, for the three month period ended May 31, 2007 were $179,209,000 as compared to $157,246,000 for the comparable period of the prior year, an increase of approximately $21,963,000 or 14%. On a sequential basis, sales of electronic components for the current three month period increased approximately $23,310,000, or 15%, from $155,899,000 for the quarter ended February 28, 2007. Management believes that this sales increase is primarily due to increased market share resulting from industry consolidation, its increased sales personnel and the expansion of its line card and customer base. The lack of near term visibility in the electronics manufacturing and the electronics distribution industry makes it difficult for management to estimate the Company’s overall sales volume and earnings for the balance of the Company’s current fiscal year. Management believes, however, that the industry growth rate in the near term will be in the single digits.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (RESTATED)
Results of Operations (continued):
Core electronics distribution sales in the current quarter were negatively impacted by a general softness in the passive component market due to over-capacity, resulting in decreased demand which could continue in the near term. System sales have declined primarily due to the loss of business with certain key customers. Sales of Systems for the quarter ended May 31, 2007 were $13,118,000, compared to $30,514,000 in 2006.
The electronics components gross profit was $28,512,000 for the first quarter of fiscal 2008 and $24,431,000 for the first quarter of fiscal 2007. The gross profit margin for the quarter ended May 31, 2007 was 15.4% as compared to 15.1% for the prior year quarter ended May 31, 2006. The increase in total gross profit margin is due to reduced sales of lower margin Systems business.
Operating expenses increased to $25,597,000 for the three months ended May 31, 2007, from $22,123,000 for the three month period ended May 31, 2006, an increase of approximately $3,474,000 or 15.7%. Approximately $1,581,000, or 46%, of the operating expense increase relates to the inclusion of the operating expenses of DT Electronics, which was purchased on August 29, 2006, and which is not included in the first quarter of fiscal 2007. The remaining dollar increase in operating expenses was due to increases in the following expense categories: approximately $1,122,000 or 32% of the increase for the three month period was for personnel related costs such as bonuses, commissions, salaries, travel and fringe benefits, in each case primarily related to new hires to support expanded supplier relationships. Management made a strategic decision to invest in expanding the Company’s personnel during the recent phase of industry consolidation. Management believes this investment will enable the Company to continue to achieve sales growth in excess of that currently being experienced by the industry, although no assurances can be given in this regard. Approximately $771,000 or 22% of the increase was a result of the net increases in various other expenses and fees such as transportation, rents, utilities, telephone, insurance and computer expenses, among others.
Interest expense decreased to $928,000 for the three months ended May 31, 2007, from $962,000 for the three month period ended May 31, 2006 due to lower average borrowings during the 2007 period.
Tax expense as a percentage of income before provision for income taxes and minority interest (the "effective tax rate") is 41.3% for the current quarter ended May 31, 2007 and 49.4% for the quarter ended May 31, 2006. The effective rate for the first quarter of fiscal 2008 is higher than the statutory rate principally due to penalties and interest of $237,000 associated with the correction of errors in our United States Federal and state tax returns discussed in Note 2 of the financial statements contained herein. The effective tax rate in the first quarter of fiscal 2007 is also higher due to higher tax expense of $647,000 associated with the aforementioned restatement.
Net income for the three month period ended May 31, 2007 was $1,688,000 or $.09 per basic and diluted share as compared to net income of $2,514,000 or $.14 per basic and diluted share for the three month period ended May 31, 2006. Management attributes the decrease in earnings for the period primarily due to decreased Systems sales and the other matters discussed above.
Liquidity and Capital Resources:
On May 31, 2007, the Company's current ratio was 3.3:1 as compared to 3.0:1 at February 28, 2007. Working capital increased from approximately $166,948,000 at February 28, 2007 to approximately $188,957,000 at May 31, 2007, while cash decreased from February 28, 2007 to May 31, 2007 by approximately $960,000 to $3,787,000, as follows:
Net cash used by operating activities | $ | (21,657,000 | ) | |
Net cash used by investing activities | (1,847,000 | ) | ||
Net cash provided by financing activities | 22,586,000 | |||
Exchange rate changes | (42,000 | ) | ||
Decrease in cash | $ | (960,000 | ) |
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (RESTATED)
Liquidity and Capital Resources (continued):
On January 31, 2007, the Company entered into an amended and restated secured revolving line of credit agreement, as amended, with eight banks, which currently provides for maximum borrowings of $150,000,000 (the "Revolving Credit Line"). The Revolving Credit Line provides for borrowings utilizing an asset based formula predicated on a certain percentage of outstanding domestic accounts receivable and inventory levels at any given month end. Based on the asset based formula, the Company may not be able to borrow the maximum amount available under its Revolving Credit Line at all times. Borrowings under the Revolving Credit Line bear interest at either (i) the lead bank’s prime rate or (ii) LIBOR plus 150 basis points, at the option of the Company, through September 30, 2011, the due date of the loan. Direct borrowings under the Revolving Credit Line were $52,200,000 at May 31, 2007 and $30,000,000 at February 28, 2007. As of the end of each of the fiscal periods, the Company was in compliance with all of the required bank covenants.
The Company also has a receivable financing agreement (the "Bank Credit Line") with a bank in England which provides for maximum borrowings of £2,500,000 (approximately $4,600,000) which bear interest at the bank's base rate plus 1.65%. The interest rate at May 31, 2007 was 7.15%. The Company owes $2,693,000 and $2,327,000 at May 31, 2007 and February 28, 2007 respectively.
On November 20, 2006, the Company entered a revolving credit agreement with a Singapore bank to provide a $30,000,000 secured line of credit to the Company’s Asian subsidiaries and thereby finance the Company’s Asian operations. Borrowings under the agreement utilize an asset based formula based on a certain percentage of outstanding accounts receivable and inventory levels at any given month end. Borrowings under the Singapore credit line bear interest at SIBOR plus 1.5 percent. At May 31, 2007, there were no borrowings under this credit line.
At May 31, 2007, the Company had approximately $75,000,000 in the aggregate available under all of its bank credit facilities.
The Company anticipates that its resources provided by its cash flow from operations and the aforementioned agreements, will be sufficient to meet its financing requirements for at least the next twelve-month period.
Off-Balance Sheet Arrangements:
As of May 31, 2007, the Company had no off-balance sheet arrangements.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All of the Company’s bank debt and the associated interest expense are sensitive to changes in the level of interest rates. The Company’s U.S. credit facility bears interest based on interest rates tied to the prime or LIBOR rate, either of which may fluctuate over time based on economic conditions. A hypothetical 100 basis point (one percentage point) increase in interest rates would have resulted in incremental interest expense of approximately $90,000 for the three month period ended May 31, 2007. The Company's U.K. and Singapore loan facilities also bear interest based on fluctuating interest rates. Due to the limited amount of the Company's U.K. borrowings and the fact that the Company is not borrowing any amounts under its Singapore loan facility, a hypothetical 100 basis point increase in interest rates under these facilities would not have been material in the quarter ended May 31, 2007. As a result, the Company is subject to market risk for changes in interest rates and could be subjected to increased or decreased interest payments if market rates fluctuate and the Company is in a borrowing mode.
The Company has several foreign subsidiaries in Asia, the United Kingdom and Canada. The Company does business in more than one dozen countries and currently generates approximately 29% of its revenues from outside the Americas. The Company’s ability to sell its products in foreign markets may be affected by changes in economic, political or market conditions in the foreign markets in which the Company does business.
The Company’s total assets in its foreign subsidiaries was $110,715,000 and $85,818,000 at May 31, 2007 and 2006 respectively, translated into US dollars at the closing exchange rates. The Company also acquires certain inventory from foreign suppliers and as such, faces risk due to adverse movements in foreign currency exchange rates. These risks could have a material impact on the Company’s results in future periods. The potential loss based on end of period balances and prevailing exchange rates resulting from a hypothetical 10% strengthening of the dollar against foreign currencies was not material in the quarter ended May 31, 2007. The Company does not currently employ any currency derivative instruments, futures contracts or other currency hedging techniques to mitigate its risks in this regard.
19
ITEM 4. CONTROLS AND PROCEDURES (REVISED)
Management's Quarterly Evaluation of Disclosure Controls and Procedures (Revised)
We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms, and that information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
In connection with the restatement of its financial statements related to income tax expense and the related obligations, the Company reevaluated its disclosure controls and procedures as of the end of the period covered by this report. Based upon the reevaluation that was conducted, management, including our Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s disclosure controls and procedures were not effective as of May 31, 2007 because of a material weakness in its internal controls over financial reporting regarding the accounting for income taxes due to the existence of errors in the Company’s income tax returns and the application of FASB No. 109 - Accounting for Income Taxes, causing an understatement of the Company’s provision for income tax expense for prior periods and the related U.S. income tax obligations, which resulted in the Company having to restate its consolidated financial statements as described in Note 2 to the interim consolidated condensed financial statements included elsewhere herein. Notwithstanding the existence of such material weakness, management has concluded that the interim consolidated condensed financial statements included in this Form 10-Q/A fairly present in all material respects the Company's financial condition as of May 31, 2007 and February 28, 2007, the results of operations and cash flows for each of the three months ended May 31, 2007 and 2006.
Changes in Internal Controls (Revised)
There were no changes made in our internal controls over financial reporting that occurred during our most recently completed fiscal quarter ended May 31, 2007 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting other than the remediation described below.
As a result of the DT acquisition, the Company is currently evaluating the internal controls for DT's operations. The Company is in the process of integrating DT's operations, including its inventory management systems, sales order system and other controls.
After the Company filed its Original Form 10-Q for the quarter ended May 31, 2007, the Company identified an error in the Company’s previously issued consolidated financial statements and concluded that the financial statements included in the Form 10-K for its fiscal year ended February 28, 2007 and in the Form 10-Q for the quarter ended May 31, 2007 should be restated, as discussed in Note 2 to the interim consolidated financial statements included elsewhere in this Form 10-Q/A. The Company determined that this error resulted from a material weakness in the operating effectiveness of the Company’s internal controls over financial reporting relative to its accounting for income taxes.
After the period covered by this Quarterly Report on Form 10-Q/A, in order to remediate the material weakness in internal controls over the Company's accounting for income taxes, the Company engaged an independent registered public accounting firm (other than its auditors, Lazar Levine & Felix LLP) to prepare its tax returns and review and advise Company personnel on the preparation of the quarterly tax provision in accordance with FASB Statement No. 109 - Accounting for Income Taxes.
20
ITEM 4. CONTROLS AND PROCEDURES (REVISED) (continued)
Inherent Limitations on Effectiveness of Controls (Revised)
The Company’s system of internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
All internal control systems, no matter how well designed and operated, can provide only reasonable assurance with respect to financial statement preparation and presentation. Management does not expect that the Company’s disclosure controls and procedures will prevent all error and fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within the company have been detected, even with respect to those systems of internal control that are determined to be effective. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company’s system contains self monitoring mechanisms, and actions are taken to correct deficiencies as they are identified. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and the Company’s chief executive officer and chief financial officer have concluded that such disclosure controls and procedures are effective at the “reasonable assurance” level.
21
PART II. OTHER INFORMATION
ITEM 1A Risk Factors
There have not been any material changes to the Company’s risk factors as discussed in Item 1A - Risk Factors in the Company’s Annual Report on Form 10-K/A for the year ended February 28, 2007.
ITEM 6. Exhibits:
3.1 | Certificate of Incorporation, as amended (Incorporated by Reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended November 30, 2000). | |
3.2 | By-laws, as amended (Incorporated by Reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended February 29, 1988) | |
4.1 | Specimen Common Stock Certificate (Incorporated by Reference as Exhibit 4.1 to the Company’s Registration Statement on Form S-1, Registration No. 2-89176). | |
31.1 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Nu Horizons Electronics Corp. Registrant | ||
Date: November 21, 2007 | | |
/s/ Arthur Nadata | ||
Arthur Nadata | ||
Chairman and Chief Executive Officer |
Date: November 21, 2007 | | |
/s/ Kurt Freudenberg | ||
Kurt Freudenberg | ||
Executive Vice President and Chief Financial Officer |
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Exhibit Index
Exhibits
31.1 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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