Five-Year Financial Review
(in thousands, except per share amounts) Year Ended May 31
Statement of Operations Data 1999 1998 1997(1) 1996 1995(2)
--------- --------- --------- --------- ---------
Net sales $320,941 $304,172 $255,139 $239,667 $208,118
Cost of products
sold 231,328 217,509 187,675 169,123 152,785
Selling, general and
administrative expenses 70,870 65,393 62,333 52,974 48,674
Other expense, net 6,886 7,334 7,856 5,559 4,028
--------- --------- --------- --------- ---------
Income (loss) before income taxes
and extraordinary item 11,857 13,936 (2,725) 12,011 2,631
Income tax provision
(benefit) 3,505 4,200 (1,720) 3,900 150
--------- --------- --------- --------- ---------
Income (loss) before extraordinary
item 8,352 9,736 (1,005) 8,111 2,481
Extraordinary gain (loss),
net of tax -- -- (488) -- 527
--------- --------- --------- --------- ---------
Net income (loss) $ 8,352 $ 9,736 $ (1,493) $ 8,111 $ 3,008
========= ========= ========= ========= =========
Income (loss) per share - basic:
Before extraordinary item $ .60 $ .79 $ (.08) $ .70 $ .22
Extraordinary gain (loss),
net of tax -- -- (.04) -- .05
--------- --------- --------- --------- ---------
Net income (loss) per share $ .60 $ .79 $ (.12) $ .70 $ .27
========= ========= ========= ========= =========
Income (loss) per share - diluted:
Before extraordinary item $ .60 $ .77 $ (.08) $ .68 $ .21
Extraordinary gain (loss),
net of tax -- -- (.04) -- .05
--------- --------- --------- --------- ---------
Net income (loss) per share $ .60 $ .77 $ (.12) $ .68 $ .26
========= ========= ========= ========= =========
Dividends per common share $ .16 $ .16 $ .16 $ .16 $ .16
========= ========= ========= ========= =========
Year Ended May 31
Net Sales by Strategic Business Unit 1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
Electron Device Group (EDG) $119,882 $119,157 $113,700 $109,925 $105,454
Solid State & Components (SSC) 93,463 88,014 74,209 67,976 52,409
Display Products Group (DPG) 37,416 30,639 29,377 36,154 36,502
Security Systems Division (SSD) 70,180 66,362 37,853 25,612 13,753
--------- -------- --------- --------- ---------
Consolidated $320,941 $304,172 $255,139 $239,667 $208,118
========= ======== ========= ========= =========
As of May 31
Balance Sheet Data 1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
Receivables $ 62,448 $ 63,431 $ 53,333 $ 48,232 $ 42,768
Inventories 107,724 96,443 92,194 94,327 81,267
Working capital, net 161,640 149,577 140,821 133,151 106,235
Property, plant and equipment, net 23,047 18,477 17,526 16,054 16,388
Total assets 235,678 209,700 192,514 180,158 173,514
Long-term debt 113,658 87,427 107,275 92,025 79,647
Stockholders' equity 84,304 91,585 59,590 62,792 56,154
(1)In 1997, the Company recorded special charges for severance and other costs
related to a corporate reorganization and a re-evaluation of reserve
estimates which increased cost of products sold by $7,200 and selling,
general and administrative expenses by $3,800. Net of tax, these charges
reduced income by $6,712, or $.56 per share. The Company also recorded an
extraordinary loss of $800, less a related tax benefit of $312, or $.04 per
share, on the exchange of certain of the Company's debentures.
(See Note B to Consolidated Financial Statements.)
(2)In 1995, the Company recorded a charge which reduced gross margin by $4,700
and net income by $2,300, or $.25 per share, for the settlement of a claim
related to a 1989 contract. The Company also recorded an extraordinary gain
of $864, less tax of $337, or $.05 per share, on the repurchase of certain
of the Company's debentures.
Page 6
Management's Discussion and Analysis
Results of Operations
Sales and Gross Margin Analysis
Richardson Electronics, Ltd. is a specialized international distributor
of electronic components, equipment and assemblies primarily for niche
industrial applications. The marketing and sales structure of the Company is
organized in four strategic business units (SBUs): Electron Device Group
(EDG), Solid State and Components (SSC), Display Products Group (DPG) and
Security Systems Division (SSD). Consolidated sales in fiscal 1999
were a record $320.9 million. Sales by SBU and percent of consolidated sales
are presented in the following table (in thousands):
Sales 1999 % 1998 % 1997 %
-------- ----- -------- ----- -------- -----
EDG $119,882 37.3 $119,157 39.2 $113,700 44.6
SSC 93,463 29.1 88,014 28.9 74,209 29.1
DPG 37,416 11.7 30,639 10.1 29,377 11.5
SSD 70,180 21.9 66,362 21.8 37,853 14.8
-------- ----- -------- ----- -------- -----
Total $320,941 100.0 $304,172 100.0 $255,139 100.0
======== ===== ======== ===== ======== =====
Sales growth of 5.5% in 1999 and 19.2% in 1998 benefited from several
business acquisitions. Excluding the effect of these acquisitions, internally
generated sales growth was 1.6% in 1999 and 11.8% in 1998.
Gross margin for each SBU and margin as a percent of sales are shown in
the following table. Gross margin reflects the distribution product margin less
overstock, customer returns and other provisions. In 1997, gross margin was
reduced by a $7.2 million charge - see Note B to the Consolidated Financial
Statements. Manufacturing variances, warranty provisions, LIFO provisions and
miscellaneous costs are included under the caption "Corporate" (in thousands):
Gross Margins 1999 % 1998 % 1997 %
-------- ----- -------- ----- -------- -----
EDG $ 36,828 30.7 $ 37,219 31.2 $ 32,220 28.3
SSC 26,590 28.4 25,160 28.6 19,923 26.8
DPG 11,474 30.7 10,464 34.2 8,465 28.8
SSD 16,184 23.1 15,335 23.1 8,267 21.8
-------- -------- --------
Total 91,076 28.4 88,178 29.0 68,875 27.0
Corporate (1,463) (1,515) (1,411)
-------- -------- --------
Consolidated $ 89,613 27.9 $ 86,663 28.5 $ 67,464 26.4
======== ======== ========
Sales and gross margin trends are analyzed for each strategic business
unit in the following sections.
Electron Device Group
EDG serves the vacuum tube industry, which is characterized by mature
products, the emergence of tube rebuilders and vigorous price competition. The
Company estimates that overall industry sales are modestly contracting. EDG's
net sales gain of 0.6% in 1999 reflects a 7.0% contraction of the core business
offset by growth in medical x-ray imaging and the sale of logistics services.
The core business was adversely affected by economic difficulties in Latin
America and weak demand for microwave products used in the manufacture of
semiconductors. The 4.8% sales growth in 1998 resulted from an increase in
market share and emphasis on medical x-ray imaging. Foreign sales as a percent
of total sales for EDG were 50.9%, 54.8% and 56.5% in 1999, 1998 and 1997,
respectively.
The medical electronics replacement business is a growth segment of the
vacuum tube industry. Demand for rebuilt x-ray, computed tomography (CT),
medical resonance imaging (MRI) and radiation therapy components is expected to
continue to grow in response to the cost effectiveness of purchasing rebuilt
components as opposed to purchasing new or rebuilt products directly from
original equipment manufacturers. The Company has expanded its medical sales
force and acquired existing x-ray tube and image intensifier reloading
facilities in the United States and built a similar facility in the
Netherlands. Sales in this EDG product line increased 9.5% to $22.3 million in
1999, following a 21.9% increase in 1998. Other growth areas in EDG, include
microwave generators, pulse power tubes, industrial magnetrons and broadcast
transmitters.
Gross margin as a percent of sales was 30.7% in 1999, compared to 31.2%
in 1998 and 30.6% (adjusted to exclude the special charge) in 1997. The gross
margin change in 1999 reflects a change in product mix as lower-margin medical
sales comprise a larger portion of total sales. The margin improvement in 1998
resulted from additional focus on pricing policies, emphasis on proprietary
product lines and value-added services.
Solid State and Components
SSC operates in several markets, including the rapidly growing wireless
telecommunications industry. Sales increased 6.2% in 1999 to $93.5 million,
following an 18.6% increase in 1998. Sales growth in 1999 slowed due to a
general weakness in the semiconductor industry. Sales outside of the United
States represented 43.7%, 39.8% and 37.6% of SSC's sales in 1999, 1998 and
1997, respectively. The largest sales gains in 1999 outside the United States
were in Asia/Pacific, up 55.9%, and Europe, up 17.2%.
During fiscal 1999, the Company acquired TRL Technologies, Inc. Although
the acquisition added only $800,000 to fiscal 1999 sales, their design and
manufacturing capabilities in the wireless telecommunications market are
projected to generate significant sales in future years, including a $4.5
million contract to be delivered in fiscal 2000.
Gross margin as a percent of sales was 28.4% in 1999, compared to 28.6%
in 1998 and 30.1% (adjusted to exclude the special charge) in 1997. The decline
in margin in 1999 reflects competitive pricing pressures and changes
in product mix.
Page 7
Management's Discussion and Analysis
Display Products Group
DPG sales increased 22.1% in 1999 and 4.3% in 1998. The sales growth in
1999 reflects the expansion of the DPG product line into monitors and related
systems integration. Sales outside the United States represented 39.9%, 48.8%
and 46.1% of DPG's sales in 1999, 1998 and 1997, respectively.
Sales growth also benefited from the acquisitions of Eternal Graphics in
March 1998 and PixeLink in March 1999. Excluding the effect of acquisitions,
DPG's sales growth was 10.4% in 1999 and 0.7% in 1998.
Gross margin as a percent of sales was 30.7% in 1999, compared to 34.2%
in 1998 and 35.1% (adjusted to exclude the special charge) in 1997. The margin
trend reflects competitive pressure, a shift in product mix from CRT's to
monitors and other display products and industry shortages.
Security Systems Division
SSD provides security systems and related design services with an
emphasis on closed circuit television (CCTV). In December 1998, the Company
acquired Adler Video Systems, a distributor in southern California with annual
sales of approximately $8.4 million. This purchase follows the acquisition of
two Canadian distributors, Security Service International, Inc. (SSI) in August
1997 and Burtek Systems Inc. (Burtek) in February 1997, with annual sales of
approximately $20.0 million and $18.0 million, respectively. These acquisitions
contributed to the 5.8% growth in sales in 1999 and the 75.3% sales growth in
1998. Excluding the effect of acquisitions, sales declined 4.4% in 1999 and
increased 27.7% in 1998. SSD's sales in 1999 were adversely affected by a soft
Canadian economy and by foreign exchange, as a 7.0% decline in the value of the
Canadian dollar generated a 3.4% reduction in reported sales. Sales outside of
the United States represented 59.4% of SSD's sales in 1999, 63.5% in 1998, and
47.7% in 1997.
Gross margin was 23.1% of sales in 1999 and 1998 and 21.8% of sales in
1997. The improvement in gross margin in 1998 reflects proprietary product
lines and franchises obtained with the SSI and Burtek acquisitions. Inventory
turnover rates achieved by SSD are significantly higher than the Company's
other SBU's, mitigating the effect of lower gross margin rates.
Sales by Geographic Area
On a geographic basis, the Company categorizes its sales by destination:
North America, Europe, Latin America, Asia/Pacific and Other. Prior year data
has been restated to reflect this categorization. Other includes sales to
export distributors and to countries where the Company does not have offices,
including Eastern Europe and the Middle East. Sales and gross margin by
geographic area are as follows (in thousands):
Sales 1999 % 1998 % 1997 %
-------- ----- -------- ----- -------- -----
North America $205,013 63.8 $189,116 62.2 $153,205 60.0
Europe 65,365 20.4 62,706 20.6 51,681 20.3
Latin America 16,734 5.2 20,755 6.8 17,861 7.0
Asia/Pacific 23,390 7.3 21,155 7.0 20,261 7.9
Other 10,439 3.3 10,440 3.4 12,131 4.8
-------- ----- -------- ----- -------- -----
Consolidated $320,941 100.0 $304,172 100.0 $255,139 100.0
======== ===== ======== ===== ======== =====
Gross Margins 1999 % 1998 % 1997 %
-------- ----- -------- ----- -------- -----
North America $ 55,569 27.1 $ 53,372 28.2 $ 40,596 26.5
Europe 20,607 31.5 19,449 31.0 15,016 29.1
Latin America 4,729 28.3 5,763 27.8 4,313 24.1
Asia/Pacific 7,169 30.6 6,427 30.4 5,682 28.0
Other 3,002 28.8 3,167 30.3 3,268 26.9
-------- -------- --------
Total 91,076 28.4 88,178 29.0 68,875 27.0
Corporate (1,463) (1,515) (1,411)
-------- -------- --------
Consolidated $ 89,613 27.9 $ 86,663 28.5 $ 67,464 26.4
======== ======== ========
North American sales increased 8.4% in 1999, following a 23.5% increase
in 1998. The 1999 increase reflects growth in SSC, DPG monitor sales and
acquisitions. The 1998 increase reflects growth in SSC, EDG, SSD and
acquisitions. Sales in Europe increased 4.2% in 1999 and 21.3% in 1998.
The crash in Asian markets affected sales for the latter half of fiscal
1998 and the first half of fiscal 1999. Performance improved significantly in
the second half of 1999. Overall, Asia/Pacific sales grew 4.4% in 1998 and
10.6% in 1999. Shortly after the Asian crisis, the Brazilian market declined.
Latin American sales did not recover throughout 1999, as sales declined 19.4%
in 1999 after a 16.2% increase in 1998.
Sales denominated in currencies other than U.S. dollars were 40.2%,
39.0% and 34.0% of total sales in 1999, 1998 and 1997, respectively. Foreign
currency exchange rate changes reduced foreign sales by an average of 3.0%
in 1999 and 5.9% in 1998. Average selling prices, excluding the effects of
exchange rate changes declined 0.4% in 1999 and 0.3% in 1998 and were
unchanged in 1997.
The following table reconciles product margins on distribution activities
to gross margins reported in the Consolidated Statements of Operations:
(% of sales) 1999 1998 1997
-------- -------- --------
Distribution product margin 29.0 % 29.6 % 29.9 %
Customer returns and scrap (0.4) (0.6) (0.3)
Freight costs not inventoried (0.3) (0.3) (0.3)
Overstock provisions - 0.1 (3.0)
Other costs (0.4) (0.3) 0.1
-------- -------- --------
Gross margin 27.9 % 28.5 % 26.4 %
======== ======== ========
Page 8
Fluctuations in distribution margins primarily reflect the shift in
product mix as SSD sales have increased as a percent of consolidated sales.
Distribution margins are also affected by changes in selling prices, product
costs, and foreign exchange rate variations. In 1997, in conjunction with a
review of operations, and in response to changed market conditions, the Company
re-evaluated its reserves for overstock inventory. As a result of this
review, the Company provided a $7.2 million charge to cost of sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses represented 22.1% of sales
in 1999, 21.5% in 1998 and 24.4% in 1997. In the third quarter of 1999, the
Company adjusted staffing in light of current sales levels, resulting in a
reduction in annual operating costs of approximately $2.5 million, beginning
in the fourth quarter. Related severance costs were $340,000. In the fourth
quarter of 1999, the Company recorded a $500,000 provision for potential
losses on certain Latin American accounts receivable. The 1998 improvement
reflects policy and procedural changes initiated by the Company to reduce
costs. In 1997, selling, general and administrative expenses included
a $3.8 million special charge for severance and other costs related to a
corporate reorganization. Excluding the special charge, 1997 expenses were
22.9% of sales.
Other (Income) Expense
Interest expense decreased 4.9% in 1999, reflecting lower borrowing
levels during the year. Investment income includes realized capital gains
of $39,000 in 1999 and $506,000 in 1998. Foreign exchange and other expenses
primarily reflect changes in the value of the U.S. dollar relative to foreign
currencies.
Income Tax Provision
The effective tax rates were 29.6% in fiscal 1999, 30.1% in 1998
and 63.1% in 1997. The 1999 and 1998 rates differ from the statutory rate
of 34.0% primarily due to the Company's foreign sales corporation benefit
on export sales. The 1997 rate reflects the realization of tax benefits on
prior years' foreign losses, foreign sales corporation benefits on export
sales and state taxes.
Net Income (Loss) and per Share Data
Net income declined 14.2% in 1999, to $8.4 million, or $.60 per share,
from $9.7 million, or $.77 per share in 1998. A special charge was recorded in
1997 for severance and other costs related to a corporate reorganization and
the re-evaluation of certain reserves which reduced income before extraordinary
loss by $6.7 million, or $.56 per share. Also in 1997, an extraordinary loss
reduced income by $488,000, or $.04 per share.
Financial Condition
Liquidity
The Company provides engineered solutions, including prototype design and
assembly, in niche product areas to its customers. Additionally, the Company
specializes in certain products representing trailing-edge technology that may
not be available from other sources, and may not be currently manufactured. In
many cases, the Company's products are components of production equipment for
which immediate availability is critical to the customer. Accordingly, the
Company enjoys higher gross margins, but necessarily has larger investments in
inventory than those of a commodity electronics distributor.
Liquidity is provided by the operating activities of the Company,
adjusted for non-cash items, and is reduced by working capital requirements,
debt service, capital expenditures, dividends, business acquisitions and, in
1999, purchases of treasury stock. Cash provided by operations was $4.1 million
in fiscal 1999, $6.3 million in 1998 and $3.6 million in 1997. Additional
investments in working capital to support sales growth were $10.2 million,
$10.6 million and $7.3 million in 1999, 1998 and 1997, respectively.
At May 31, 1999, the Company had net operating loss carryforwards of
$7.3 million for U.S. federal and state income tax purposes, which are
available to offset future tax liabilities. Current earnings levels are
sufficient to realize these carryforwards before they expire.
The Company proposed a plan, which has been accepted by the Illinois
Environmental Protection Agency, to monitor and process soil and groundwater
at the LaFox facility. Contamination is believed to have resulted from
practices previously employed at the site. The present value of the
estimated future remediation costs was charged to operations in 1996. The
balance of the reserve is $544,000 and is included in accrued liabilities at
May 31, 1999.
Financing
In March 1998, the Company replaced its existing senior revolving
credit note agreement with a new $50.0 million floating-rate revolving credit
agreement expiring March 1, 2001. Loans under the agreement bear interest at
prime or 125 basis points over the London Inter-Bank Offered Rate (LIBOR),
at the Company's option. The premium over LIBOR can be reduced if the Company
meets certain performance benchmarks. At May 31, 1999, $16.4 million was
available under this line.
In fiscal 1999, the Company purchased a suite of enterprise resource
planning software utilizing state-of-the-art client-server technology. The
Company entered into a financing arrangement with quarterly payments through
March 2001 and an implicit interest rate of 7.5%.
Page 9
Management's Discussion and Analysis
In May 1998, the Company sold 2.1 million shares of its Common Stock in
a public offering at a price of $12.50 per share. The net proceeds to the
Company, after deducting an underwriting discount of 6% and issuance costs of
$253,000, were $24.1 million. The proceeds were used to reduce borrowings
under the Company's revolving debt agreement.
In fiscal 1999, the Company purchased 2.0 million shares of its Common
Stock at an average cost of $5.76 per share.
Based on shares outstanding at May 31, 1999, annual dividend payments
approximate $2.0 million. The policy regarding payment of dividends is
reviewed periodically by the Board of Directors in light of the Company's
operating needs and capital structure.
Currency Fluctuations
The Company's foreign denominated assets and liabilities are cash,
accounts receivable, inventory and accounts payable, primarily in Canada and
member countries of the European community and, to a lesser extent, in
Asia/Pacific and Latin America. The Company monitors its foreign exchange
exposures and, while historically has not, in the future may enter into
forward contracts to hedge significant transactions. Other tools that may
be used to manage foreign exchange exposures include the use of currency
clauses in sales contracts and the use of local debt to offset asset exposures.
There are no outstanding forward exchange contracts at May 31, 1999.
Impact of Year 2000
The year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year. The Company's current
computer database correctly stores date stamps that include four digit years.
The Company sets standard configuration guidelines for personal computer
systems used within the Company, which are year 2000 compliant. Based on a
recent assessment, the Company anticipates its systems will function properly
with respect to dates in the year 2000 and thereafter.
Future operating results may also be affected by the readiness of the
Company's trading partners to meet year 2000 requirements. The Company is in
the process of surveying its vendors of products with embedded chips or date-
sensitive systems concerning their year 2000 readiness. The use of electronic
data interchanges by the Company is limited to a few vendors and customers and
the Company does not anticipate significant year 2000 issues relating to
interface systems with these parties. The Company has no single customer that
accounts for more than 2% of its sales or any vendor that accounts for more
than 9% of its purchases. Based upon the foregoing, the Company believes that
its risk of significant financial impact resulting from the inability of its
trading partners to meet year 2000 requirements is minimal.
Conversion to the Euro
On January 1, 1999, eleven member countries of the European Union began
conversion to a common currency, the Euro. From January 1, 1999 until
January 1, 2002, companies operating in Europe must be able to process business
transactions either in legacy currencies or in Euros. After January 1, 2002,
all transactions will be processed only in Euros. These changes could have
significant impacts on transaction processing costs, pricing policies and
foreign currency exchange risk management.
The Company has verified that its transaction processing systems can
accommodate the Euro and dual currency processing requirements without
significant additional costs. While the exact impact on pricing is
indeterminable, the Company believes that since most of its pricing is based
on U.S. dollar costs, the effect of conversion to the Euro will not be
significant. The Company expects to adopt the Euro as the functional currency
for each of its subsidiaries within the European Union. While it is possible
that this change may result in reduced volatility of foreign exchange results,
these benefits cannot be quantified at this time.
Risk Management and Market Sensitive Financial Instruments
As discussed above, the Company's debt financing, in part, varies with
market rates and certain of its operations and assets and liabilities are
denominated in foreign currencies that subject the Company to foreign exchange
risk.
In order to provide the user of these financial statements guidance
regarding the magnitude of these risks, the Securities and Exchange
Commission requires the Company to provide certain disclosures based upon
hypothetical assumptions. Specifically, these disclosures require the
calculation of the effect a 10% increase in market interest rates and a uniform
10% strengthening of the U. S. dollar against foreign currencies would have on
the reported net earnings of the Company. Under these assumptions in 1999,
additional interest expense, tax effected, would have reduced net income by
$150,000 and foreign currency exchange rates would have decreased net income by
$140,000.
The interpretation and analysis of these disclosures should not be
considered in isolation since such variances in interest rates and foreign
currency exchange rates would likely influence other economic factors. Such
factors, which are not readily quantifiable, would likely also affect the
Company's operations.
Safe Harbor Statement Under the Private Securities Litigation Reform
Act of 1995
Except for the historical information contained herein, the matters
discussed in this Annual Report (including the Annual Report on Form 10-K)
are forward-looking statements relating to future events which involve certain
risks and uncertainties, including those identified herein and in the Annual
Report on Form 10-K.
Page 10
Consolidated Balance Sheets
As of May 31
(in thousands) 1999 1998
-------- --------
Assets
Current assets
Cash and equivalents $ 12,569 $ 8,031
Receivables, less allowance
of $2,584 and $2,230 62,448 63,431
Inventories 107,724 96,443
Other 12,817 9,681
-------- --------
Total current assets 195,558 177,586
Property, plant and equipment, net 23,047 18,477
Other assets 17,073 13,637
-------- --------
Total assets $235,678 $209,700
======== ========
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 21,829 $ 17,320
Accrued liabilities 10,259 10,286
Notes and current portion of
long-term debt 1,830 403
-------- --------
Total current liabilities 33,918 28,009
Long-term debt 113,658 87,427
Deferred income taxes 3,798 2,679
-------- --------
Total liabilities 151,374 118,115
Stockholders' equity
Common Stock, $.05 par value 570 561
Class B Common Stock, convertible,
$.05 par value 162 162
Preferred Stock, $1.00 par value - -
Additional paid-in capital 82,309 80,606
Treasury stock (11,532) -
Retained earnings 23,044 16,842
Foreign currency translation adjustment (10,249) (6,586)
-------- --------
Total stockholders' equity 84,304 91,585
-------- --------
Total liabilities and stockholders'
equity $235,678 $209,700
======== ========
See notes to consolidated financial statements.
Page 11
Consolidated Statements of Operations
Year Ended May 31
(in thousands, except per share amounts) 1999 1998 1997
-------- -------- --------
Net sales $320,941 $304,172 $255,139
Cost of products sold 231,328 217,509 187,675
-------- -------- --------
Gross margin 89,613 86,663 67,464
Selling, general and
administrative expenses 70,870 65,393 62,333
-------- -------- --------
Operating income 18,743 21,270 5,131
Other (income) expense:
Interest expense 7,689 8,084 7,622
Investment income (636) (1,005) (392)
Foreign exchange and other (167) 255 626
-------- -------- --------
6,886 7,334 7,856
-------- -------- --------
Income (loss) before income taxes
and extraordinary item 11,857 13,936 (2,725)
Income tax provision (benefit) 3,505 4,200 (1,720)
-------- -------- --------
Income (loss) before extraordinary item 8,352 9,736 (1,005)
Extraordinary loss, net of tax benefit - - (488)
-------- -------- --------
Net income (loss) $ 8,352 $ 9,736 $ (1,493)
======== ======== ========
Income (loss) per share - basic:
Before extraordinary item $ .60 $ .79 $ (.08)
Extraordinary loss, net of tax
benefit - - (.04)
-------- -------- --------
Net income (loss) per share $ .60 $ .79 $ (.12)
======== ======== ========
Average shares outstanding 13,822 12,264 11,892
Income (loss) per share - diluted:
Before extraordinary item $ .60 $ .77 $ (.08)
Extraordinary loss, net of tax
benefit - - (.04)
-------- -------- --------
Net income (loss) per share $ .60 $ .77 $ (.12)
======== ======== ========
Average shares outstanding 14,026 12,689 11,892
Dividends per common share $ .16 $ .16 $ .16
Comprehensive income (loss):
Net income (loss) $ 8,352 $ 9,736 $ (1,493)
Foreign currency translation adjustment (3,663) (2,983) (1,190)
-------- -------- --------
Comprehensive income (loss) $ 4,689 $ 6,753 $ (2,683)
======== ======== ========
See notes to consolidated financial statements.
Page 12
Consolidated Statements of Cash Flows
Year Ended May 31
(in thousands) 1999 1998 1997
------- ------- -------
Operating activities:
Net income (loss) $ 8,352 $ 9,736 $(1,493)
Adjustments to reconcile net
income (loss) to cash provided
by operating activities:
Depreciation 3,605 3,477 2,627
Amortization of intangibles
and financing costs 633 632 1,318
Deferred income taxes 1,237 2,779 (3,305)
Stock contribution to
employee ownership plan 485 285 800
Special charges -- -- 11,000
------- ------- -------
Net adjustments 5,960 7,173 12,440
------- ------- -------
Changes in working capital,
net of currency translation
effects and business acquisitions:
Receivables 1,108 (9,170) (4,277)
Inventories (10,985) (3,658) 406
Other current assets (3,015) 186 253
Accounts payable 3,172 4,366 (3,719)
Accrued liabilities (509) (2,350) 28
------- ------- -------
Net changes in working capital (10,229) (10,626) (7,309)
------- ------- -------
Net cash provided by
operating activities 4,083 6,283 3,638
------- ------- -------
Financing activities:
Proceeds from borrowings 31,528 16,731 57,890
Payments on debt (3,743) (35,642) (42,640)
Proceeds from sale of common stock 385 26,933 536
Purchases of treasury stock (11,527) -- --
Cash dividends (2,150) (1,976) (1,855)
------- ------- -------
Net cash provided
by financing activities 14,493 6,046 13,931
------- ------- -------
Investing activities:
Business acquisitions (3,795) (6,798) (9,902)
Capital expenditures (7,647) (4,116) (4,004)
Other (2,596) (3,396) (435)
------- ------ -------
Net cash used in
investing activities (14,038) (14,310) (14,341)
------- ------- -------
Increase (decrease) in cash
and equivalents 4,538 (1,981) 3,228
Cash and equivalents at beginning of year 8,031 10,012 6,784
------- ------- -------
Cash and equivalents at end of year $12,569 $ 8,031 $10,012
======= ======= =======
See notes to consolidated financial statements.
Page 13
Consolidated Statements of Stockholders' Equity
Shares Issued Accumulated
--------------- Additional Other
(shares and dollars Class B Par Paid-in Treasury Retained Comprehensive
in thousands) Common Common Value Capital Stock Earnings Income(Loss) Total
------ ------- ----- ---------- -------- -------- ------------- -------
Balance June 1, 1996 8,562 3,244 $590 $ 52,185 $ -- $ 12,430 $ (2,413) $62,792
Shares contributed
to ESOP 84 -- 5 795 -- -- -- 800
Shares issued under ESPP
and stock option plan 74 -- 4 532 -- -- -- 536
Conversion of Class B
shares to common
shares 1 (1) -- -- -- -- -- --
Dividends -- -- -- -- -- (1,855) -- (1,855)
Currency translation -- -- -- -- -- -- (1,190) (1,190)
Net loss -- -- -- -- -- (1,493) -- (1,493)
------ ------- ----- ---------- --------- -------- ------------- -------
Balance May 31, 1997 8,721 3,243 599 53,512 -- 9,082 (3,603) 59,590
Shares contributed
to ESOP 34 -- 2 283 -- -- -- 285
Shares issued under ESPP
and stock option plan 354 -- 19 2,845 -- -- -- 2,864
Public stock offering 2,070 -- 103 23,966 -- -- -- 24,069
Conversion of Class B
shares to common
shares 4 (4) -- -- -- -- -- --
Dividends -- -- -- -- -- (1,976) -- (1,976)
Currency translation -- -- -- -- -- -- (2,983) (2,983)
Net income -- -- -- -- -- 9,736 -- 9,736
------ ------- ----- ---------- --------- -------- ------------ -------
Balance May 31, 1998 11,183 3,239 723 80,606 -- 16,842 (6,586) 91,585
Shares contributed
to ESOP 12 -- 1 484 -- -- -- 485
Shares issued under ESPP
and stock option plan 189 -- 8 1,219 (5) -- -- 1,222
Purchase of 2,000 shares
of Common Stock -- -- -- -- (11,527) -- -- (11,527)
Conversion of Class B
shares to common
shares 6 (6) -- -- -- -- -- --
Dividends -- -- -- -- -- (2,150) -- (2,150)
Currency translation -- -- -- -- -- -- (3,663) (3,663)
Net income -- -- -- -- -- 8,352 -- 8,352
------ ------- ----- ---------- --------- -------- ------------ -------
Balance May 31, 1999 11,390 3,233 $ 732 $ 82,309 $(11,532) $ 23,044 $ (10,249) $84,304
====== ======= ===== ========== ========= ======== ============ =======
See notes to consolidated financial statements.
Page 14
Notes to Consolidated Financial Statements
(in thousands, except per share amounts)
Note A -- Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include the
accounts and operations of the Company and its subsidiaries. All significant
intercompany transactions are eliminated.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications: Certain amounts in the 1998 and 1997 financial statements
are reclassified to conform to the 1999 presentation.
Cash Equivalents: The Company considers short-term investments that have a
maturity of three months or less, when purchased, to be cash equivalents. The
carrying amounts reported in the balance sheet for cash and equivalents
approximate the fair market value of these assets.
Inventories: Inventories are stated at the lower of cost or market. Inventory
costs determined using the last-in, first-out (LIFO) method represent 78% of
total inventories at May 31, 1999 and 80% at May 31, 1998. For the remaining
inventories, cost is determined on the first-in, first-out (FIFO) method. If
the FIFO method had been used for all inventories, the total amount of
inventories would have been increased by $2,058 and $3,569 at May 31, 1999
and 1998, respectively. As a result of the increase in overstock reserves
recorded in 1997, the LIFO carrying value of all inventories approximated
market value at May 31, 1999 and 1998. Substantially all inventories represent
finished goods held for sale.
Property, Plant and Equipment: Property, plant and equipment are stated at
cost. Provisions for depreciation are computed principally using the
straight-line method over the estimated useful life of the asset. Property,
plant and equipment consist of the following:
May 31
1999 1998
-------- --------
Land and improvements $ 2,764 $ 2,721
Buildings and improvements 18,776 18,479
Machinery and equipment 36,003 28,595
-------- --------
Property at cost 57,543 49,795
Accumulated depreciation (34,496) (31,318)
-------- --------
Property, net $ 23,047 $ 18,477
======== ========
Other Assets: Deferred financing costs, goodwill and other deferred charges
are amortized using the straight-line method. Goodwill is generally amortised
over a period of 20 to 40 years. However, the Company continually evaluates
the carrying value of goodwill based upon its recoverability from related
projected undiscounted cash flows. Other assets consist of the following:
May 31
1999 1998
-------- --------
Investments (at market) $ 2,603 $ 2,931
Notes receivable 5,680 3,158
Deferred financing costs, net 436 502
Goodwill, net 7,126 5,558
Other deferred charges, net 1,228 1,488
-------- --------
Other assets, net $ 17,073 $ 13,637
======== ========
Accrued Liabilities: Accrued liabilities consist of the following:
May 31
1999 1998
-------- --------
Compensation and payroll taxes $ 4,048 $ 5,072
Interest 2,758 2,546
Income taxes 1,042 362
Other accrued expenses 2,411 2,306
-------- --------
Accrued liabilities $ 10,259 $ 10,286
======== ========
Foreign Currency Translation: Foreign currency balances and financial
statements are translated into U.S. dollars at end-of-period rates, except
that revenues and expenses are translated at the current rate on the date of
the transaction. Gains and losses resulting from foreign currency transactions
are included in income currently. Foreign currency transaction gains (losses)
reflected in operations are $77, $(299), and $(563) in 1999, 1998, and 1997,
respectively. Gains and losses resulting from translation of foreign subsidiary
financial statements are credited or charged directly to a separate component
of stockholders' equity.
Revenue Recognition: Revenues are recorded upon shipment.
Income Taxes: Deferred tax assets and liabilities are established for
differences between financial reporting and tax accounting of assets and
liabilities and are measured using the marginal tax rates.
Stock-Based Compensation: The Company accounts for its stock option plans in
accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As such,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. Statement of
Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based
Compensation", requires estimation of the fair value of options granted to
employees. As permitted by SFAS No. 123, the Company presents this estimated
fair value information in Note G.
Page15
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Earnings per Share: Basic earnings per share is calculated by dividing net
income (loss) by the weighted average number of Common and Class B Common
shares outstanding. Diluted earnings per share is calculated by dividing net
income (loss) by the actual shares outstanding and share equivalents that
would arise from the exercise of stock options. The per share amounts
presented in the Consolidated Statement of Operations are based on the
following amounts:
1999 1998 1997
------- ------- -------
Numerator for EPS:
Income (loss) before
extraordinary item $ 8,352 $ 9,736 $(1,005)
Extraordinary loss, net of tax - - (488)
------- ------- -------
Net income (loss) $ 8,352 $ 9,736 $(1,493)
======= ======= =======
Denominator for basic EPS:
Beginning shares outstanding 14,422 11,964 11,806
Additional shares issued 106 300 86
Reduction for shares acquired (706) - -
------- ------- -------
Average shares outstanding 13,822 12,264 11,892
======= ======= =======
Denominator for diluted EPS:
Average shares outstanding 13,822 12,264 11,892
Effect of dilutive stock options 204 425 -
------- ------- -------
Average shares outstanding 14,026 12,689 11,892
======= ======= =======
Out-of-the-money (exercise price higher than market price) stock options
and the Company's 8 1/4% and 7 1/4% convertible debentures are excluded from
the calculation because they are anti-dilutive. In-the-money stock options are
excluded from the calculation in 1997 because the Company reported a net loss.
Note B -- Special Charges and Extraordinary Item
In fiscal 1997, the Company re-evaluated its reserve estimates in light
of changed market conditions and provided for severance and other costs
associated with a corporate reorganization. Inventory reserve adjustments of
$7,200 are included in cost of sales, and provisions for accounts receivable,
severance and other costs of $3,800 are included in selling, general and
administrative expense. Collectively, these charges amount to $11,000, or
$6,712, net of tax, reducing earnings per share by $.56.
Also in fiscal 1997, the Company recorded an $800 extraordinary charge
for the write-off of unamortized debt issuance costs associated with a portion
of the Company's 7 1/4% convertible subordinated debentures, which were
exchanged for a new 8 1/4% debenture. Net of tax, the charge was
$488, or $.04 per share.
Note C -- Acquisitions
Fiscal 1999: In December 1998, the Company's SSD unit acquired Adler
Video Systems, a southern California based distributor of closed circuit
television (CCTV) systems with annual sales of approximately $8,400. The
Company also made three smaller acquisitions with annual sales of about
$2,000 each. These acquisitions included TRL Technologies, a manufacturer
of amplifier circuits for the SSC business unit's wireless communications
operations; Sahab S.A., a Mexican distributer of broadcast transmitters for
the EDG Business unit; and PixeLink, a systems integrator specializing in
medical monitors for the DPG business unit.
The aggregate cash outlay for business acquisitions in 1999 was $3,795.
Additional non-cash payments of $1,113 were made in the form of the Company's
Common Stock and the foregiveness of an account receivable.
Fiscal 1998: In August 1997 the Company's SSD unit acquired the assets of
Security Service International, Inc. (SSI), a Canadian distributor of security
systems with annual sales of approximately $20,000. In March 1998, the Company
acquired Eternal Graphics, a systems integrator specializing in financial
applications for the DPG business unit with annual sales of approximately
$4,200.
Fiscal 1997: In February 1997, the SSD unit acquired Burtek Systems, Inc.,
(Burtek) a security systems distributor operating in Canada with annual sales of
approximately $18,000. In October 1996, the SSC business unit acquired Compucon
Distributors, Inc., a distributor of interconnect devices operating in the
Northeastern United States with annual sales of approximately $8,000.
Each of the acquisitions was accounted for by the purchase method, and
accordingly, their results of operations are included in the Consolidated
Statements of Operations from the respective dates of acquisition. The impact
of these acquisitions on results of operations was not significant and would
not have been significant if they had been included for the entire year. If
each of these acquisitions had occurred at the beginning of the year,
consolidated sales would have increased by approximately $6,900, $6,000 and
$12,000 in 1999, 1998 and 1997, respectively.
The terms of certain of the Company's acquisition agreements provide for
additional consideration to be paid if the acquired entity's results of
operations exceed certain targeted levels. Such amounts are paid in cash and
recorded when earned as additional consideration, and in 1999, amounted
to $927. Assuming the goals established in all agreements outstanding at
May 31, 1999 were met, additional consideration aggregating approximately
$4,500 would be payable through 2003.
Note D -- Marketing Agreements
The Company is party to several marketing distribution agreements with
various manufacturers in the electron tube and semiconductor businesses. The
most significant is a distribution agreement with Communications and Power
Industries, Inc., formerly the Electron Device Group of Varian Associates, Inc.
Product sales under this distribution agreement accounted for 7.9%, 9.6%, and
13.0%, of net sales in fiscal 1999, 1998 and 1997, respectively.
Page 16
Note E -- Debt Financing
Long-term debt consists of the following:
May 31
1999 1998
-------- --------
8 1/4% Convertible debentures, due June 2006 $ 40,000 $ 40,000
7 1/4% Convertible debentures, due
December 2006 30,825 30,825
Floating-rate revolving credit facility,
due March 2001 (6.07% at May 31, 1999) 33,582 6,582
Revolving credit and term loan due
March 2001 (5.63% at May 31, 1999) 7,694 9,365
Software financing arrangement 2,673 -
Other 714 1,058
-------- --------
Long-term debt 115,488 87,830
Less current portion (1,830) (403)
-------- --------
Long-term debt $113,658 $ 87,427
======== ========
The 7 1/4% convertible debentures are unsecured and subordinated to other
long-term debt, including the 8 1/4% convertible debentures. Each $1,000 of the
7 1/4% debenture is convertible into the Company's Common Stock at any time
prior to maturity at $21.14 per share and the 8 1/4% debentures are convertible
at $18.00 per share. The Company is required to make sinking fund payments of
$3,850 in 2004 and $6,225 in 2005.
The Company has a $50,000 floating-rate revolving credit facility which
expires March 1, 2001. At May 31, 1999, $33,582 was outstanding under this
agreement. Loans under the agreement bear interest at the Company's option at
prime or at a premium over LIBOR. The premium over LIBOR varies with certain
performance benchmarks. At May 31, 1999, the premium was 125 basis points and
$16,400 was available for future borrowing.
To complete the acquisition of Burtek in 1997, a subsidiary of the
Company entered into a revolving credit and term loan agreement aggregating
$6,000 with a Canadian affiliate of the Company's primary bank. The loan is
guaranteed by the Company and bears interest at the Canadian prime rate. The
amount of this agreement was increased to $12,100 in August 1997 to facilitate
the acquisition of SSI and matures March 1, 2001. At May 31, 1999, $7,694 was
outstanding and an additional $948 was available under the agreement.
In fiscal 1999, the Company purchased a suite of enterprise resource
planning software utilizing state-of the-art client-server technology. The
Company entered into a financing arrangement with quarterly payments through
March 2001 with an average implicit interest rate of 7.5%.
The loan and debenture agreements contain financial covenants with which
the Company was in full compliance at May 31, 1999. The most restrictive
covenants set benchmark levels for tangible net worth, debt to tangible net
worth ratio, cash flow to senior funded debt and annual debt service coverage.
Aggregate maturities of debt during the next five years are: $1,830 in
2000, $42,833 in 2001 and $3,850 in 2004. Cash payments for interest were
$7,477, $8,387 and $7,463 in 1999, 1998 and 1997, respectively.
In the following table, the fair values of the Company's 7 1/4% and
8 1/4% convertible debentures are based on quoted market prices. The fair
values of the bank term loans are based on carrying value, adjusted for market
interest rate changes.
1999 1998
-------------------- --------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
8 1/4% Convertible
debentures $ 40,000 $ 33,800 $ 40,000 $ 38,000
7 1/4% Convertible
debentures 30,825 22,965 30,825 27,126
Floating-rate revolving
credit facility 33,582 33,582 6,582 6,582
Revolving credit and
term loan 7,694 7,694 9,365 9,365
Software financing
arrangement 2,673 3,036 - -
Other 714 714 1,058 1,058
-------- -------- -------- --------
Total 115,488 101,791 87,830 82,131
Less current portion (1,830) (1,830) (403) (403)
-------- -------- -------- --------
Total $113,658 $ 99,961 $ 87,475 $ 81,728
======== ======== ======== ========
Note F -- Income Taxes
The components of income (loss) before income taxes and extraordinary
item are:
1999 1998 1997
---------- ---------- ----------
United States $ 9,531 $ 11,070 $ (4,558)
Foreign 2,326 2,866 1,833
---------- ---------- ----------
Income (loss) before taxes
and extraordinary item $ 11,857 $ 13,936 $ (2,725)
========== ========== ==========
Page 17
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
The provision (benefit) for income taxes differs from income taxes
computed at the federal statutory tax rate of 34.0% as a result of the following
items:
1999 1998 1997
---------- ---------- ----------
Federal statutory rate 34.0 % 34.0 % 34.0 %
Effect of:
State income taxes, net of
federal tax benefit 2.8 3.5 11.3
FSC benefit on export sales (7.2) (6.2) 12.3
Realization of tax benefit on
prior years' foreign losses - - 14.7
Foreign taxes at other rates 0.5 (0.3) (7.5)
Other (0.5) (0.9) (1.7)
---------- ---------- ----------
Effective tax rate 29.6 % 30.1 % 63.1 %
========== ========== ==========
The provision (benefit) for income taxes before extraordinary item
consist of the following:
1999 1998 1997
---------- ---------- ----------
Currently payable:
Federal $ 1,294 $ 973 $ 299
State (44) 155 -
Foreign 1,018 293 609
---------- ---------- ----------
Total currently payable 2,268 1,421 908
Deferred:
Federal 730 1,867 (2,626)
State 545 275 (441)
Foreign (38) 637 439
---------- ---------- ----------
Total deferred 1,237 2,779 (2,628)
---------- ---------- ----------
Income tax provision (benefit) $ 3,505 $ 4,200 $ (1,720)
========== ========== ==========
In 1995, due to the timing and nature of a claim settlement, the Company
utilized a ten-year carryback provision permitted by the Internal Revenue
Service. The Company's U.S. federal tax returns have been examined through
1995. As part of this examination, in December 1997, the Internal Revenue
Service contested the Company's carryback of the aforementioned claim
settlement. The Company is appealing the IRS position. However, if the Company
were ultimately unsuccessful, the claim would be available for carryforward at
the then current statutory rate and the impact on the Company's financial
position and results of operations would not be material.
Operating loss carryforwards of $7,300 for U.S. tax purposes expire in
2009 and 2010. Net income taxes paid were $1,758, $850, and $523 in 1999, 1998
and 1997, respectively.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Non-current deferred tax assets and liabilities are offset on the balance sheet
within tax jurisdictions. Significant components of the Company's deferred
tax assets and liabilities as of May 31, 1999 and 1998 are as follows:
Balance Sheet Presentation
--------------------------
Current Noncurrent
Asset (1) Liability
----------- -----------
At May 31, 1999:
Deferred tax assets:
Intercompany profit in inventory $ 1,492 $ -
Inventory valuation 5,674 -
Environmental and other reserves - 756
Other, net 11 -
---------- -----------
Deferred tax assets 7,177 756
Deferred tax liabilities:
Accelerated depreciation - (3,834)
Other, net - (720)
---------- -----------
Net deferred tax $ 7,177 $ (3,798)
========== ===========
At May 31, 1998:
Deferred tax assets:
Intercompany profit in inventory $ 1,372 $ -
Inventory valuation 5,748 -
Environmental and other reserves - 955
Other, net 15 180
--------- -----------
Deferred tax assets 7,135 1,135
Deferred tax liabilities:
Accelerated depreciation - (3,633)
Other, net - (181)
---------- -----------
Net deferred tax $ 7,135 $ (2,679)
========== ===========
(1) Included in other current assets on the balance sheet
Note G -- Stockholders' Equity
The Company has authorized 30,000 shares of Common Stock, 10,000 shares
of Class B Common Stock, and 5,000 shares of Preferred Stock. The Class B
Common Stock has ten votes per share. The Class B Common Stock has
transferability restrictions; however, it may be converted into Common Stock on
a share-for-share basis at any time. With respect to dividends and
distributions, shares of Common Stock and Class B Common Stock rank equally and
have the same rights, except that Class B Common Stock is limited to 90% of
the amount of Common Stock cash dividends.
In May 1998, the Company sold 2,070 shares of its Common Stock through
a public offering at a price of $12.50 per share. The net proceeds to the
Company, after deducting an underwriting discount of 6% and issuance costs
of $253 were $24,069. Proceeds were used to pay down the revolving credit
facility.
In fiscal 1999, the Company purchased 2,000 shares of Common Stock at
an average cost of $5.76 per share.
Page 18
Total Common Stock issued and outstanding at May 31, 1999 was 9,390
shares. An additional 9,621 shares of Common Stock have been reserved for
future issuance under the Employee Stock Option Plans and potential conversion
of the convertible debentures and Class B Common Stock.
The Employee Stock Purchase Plan (ESPP) provides substantially all
employees an opportunity to purchase Common Stock of the Company at 85% of the
stock price at the beginning of the year or the end of the year, whichever is
lower. At May 31, 1999, the plan had no shares reserved for future issuance. On
July 13, 1999, the Board of Directors approved the 1999 Employee Stock Purchase
Plan, authorizing an additional 150 shares for future issuance. The plan is
subject to stockholders' approval, which will be voted upon at the annual
meeting on October 12, 1999.
The Employees' 1998 Incentive Compensation Plan authorizes the issuance
of up to 800 shares as incentive stock options, non-qualified stock options or
stock awards. Under this plan and predecessor plans, 2,304 shares are reserved
at May 31, 1999 for future issuance. The Plan authorizes the granting of
incentive stock options at the fair market value at the date of grant.
Generally, these options become exercisable over staggered periods and expire
up to ten years from the date of grant.
Under the 1996 Stock Option Plan for Non-Employee Directors and a
predecessor plan, at May 31, 1999, 400 shares of Common Stock have been
reserved for future issuance relating to stock options exercisable based on the
passage of time. Each option is exercisable over a period from its date of
grant at the market value on the grant date and expires after ten years.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its option plans and, accordingly, has not recorded compensation
expense for such plans. SFAS No. 123 requires the calculation of the fair
value of each option granted. This fair value is estimated on the date of grant
using the Black-Scholes option-pricing model with the assumptions indicated
below. Had the plans and stock purchase plan been treated as compensatory under
the provisions of SFAS No. 123, the Company's net income (loss) and net income
(loss) per share would have been affected as follows:
1999 1998 1997
------- ------- -------
Net income (loss), as reported $ 8,352 $ 9,736 $(1,493)
Proforma net income (loss) 7,629 9,261 (1,800)
Proforma net income (loss) per share
Basic $ .55 $ .76 $ (.15)
Diluted .54 .73 (.15)
Assumptions used:
Risk-free interest rate 5.4% 5.5% 5.2%
Annual standard deviation
of stock price 50% 40% 40%
Average expected life (years) 6.1 5.6 6.0
Annual dividend rate $ .16 $ .16 $ .16
Average fair value per option $ 3.31 $ 3.49 $ 3.07
Option value of ESPP per share $ 1.13 $ 1.19 $ 1.50
Fair value of options granted
during the year $ 1,115 $ 948 $ 940
The effect of applying SFAS No. 123 in this proforma disclosure is not
indicative of the effects on future years, because SFAS No. 123 does not apply
to grants issued prior to fiscal 1996.
A summary of the share activity and weighted average exercise prices for
the Company's option plans is as follows:
Outstanding Exercisable
----------------- -----------------
Shares Price Shares Price
------- ------ ------- ------
At June 1, 1996 1,252 $ 7.10 855 $ 7.16
Granted 286 8.00
Exercised (33) 4.82
Cancelled (16) 7.72
-------
At May 31, 1997 1,489 7.31 936 7.21
Granted 291 8.70
Exercised (308) 6.57
Cancelled (99) 7.26
-------
At May 31, 1998 1,373 7.74 697 7.52
Granted 338 7.19
Exercised (20) 4.68
Cancelled (5) 7.86
--------
At May 31, 1999 1,686 $7.66 855 $7.62
The following table summarizes information about stock options outstanding as
of May 31, 1999:
Outstanding Exercisable
Exercise ----------------------- -----------------------
Price Range Shares Price Life Shares Price Life
------ ------ ----- ------ ------ -----
$3.75 to $5.375 136 $ 4.54 5.8 104 $ 4.40 5.1
$6.00 to $7.50 750 6.93 6.9 324 6.79 4.7
$8.00 to $8.50 666 8.19 6.1 337 8.10 4.3
$10.813 to $12.95 134 12.35 5.6 90 12.60 4.1
------ ------
Total 1,686 $ 7.66 6.4 855 $ 7.62 4.5
====== ======
Page 19
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Note H -- Employee Retirement Plans
The Company's domestic employee retirement plans consist of a profit
sharing plan and a stock ownership plan (ESOP). Annual contributions in cash
or Company stock are made at the discretion of the Board of Directors. In
addition, the profit sharing plan has a 401(k) provision whereby the Company
matches 50% of employee contributions up to 4% of base pay. Charges to expense
for discretionary and matching contributions to these plans were $1,370,
$1,341 and $995 in 1999, 1998 and 1997, respectively. Such amounts included
contributions in stock of $285 in 1998 and $800 in 1997, based on the stock
price at the date contributed. Shares are included in the calculation of
earnings per share and dividends are paid to the ESOP from the date the shares
are contributed. Foreign employees are covered by a variety of government
mandated programs.
Note I -- Industry and Market Information
The following disclosures are made in accordance with the SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information". The
marketing and sales structure of the Company is organized into four strategic
business units (SBU's): Electron Device Group (EDG), Solid State and Components
(SSC), Display Products Group (DPG) and Security Systems Division (SSD).
EDG's principal products, electron tubes, are used to control, switch,
oscillate or amplify electrical power. This technology has been used for more
than 80 years throughout the industrialized world. EDG serves a multitude of
industries including automotive, avionics, communications, marine, plastics,
rubber, steel, textile, medical imaging and wafer fabrication for
semiconductors. EDG's products are largely for replacement applications.
SSC's products include radio frequency and microwave components and power
semiconductors. These products are used in wireless communication and
industrial applications, serving many of the same customers and industries as
EDG. SSC's products are in most cases used in original equipment applications.
DPG's products include cathode ray tubes, monitors and related systems
integration. Large computer systems using multiple data display terminals
represent the largest market served by DPG. Typical users include hospitals,
airports, brokerage offices, financial institutions, television studios,
utilities and assembly lines. DPG's products are largely for replacement
applications and system upgrades.
SSD serves the commercial security and surveillance industry, with
emphasis on closed circuit television systems, components and related design
and integration services. SSD's customer base includes industrial end-users
and system installers.
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. In North America
and Europe, the sales force is organized by SBU and, accordingly, these costs
are included in direct expenses. In Latin America, Asia/Pacific and the rest
of the world, the regional sales force is shared and, accordingly, is not
included in direct expenses. Inter-segment sales are not significant.
Accounts receivable, inventory, goodwill and certain notes receivable are
identified by SBU. Cash, net property and other assets are not identifiable by
SBU. Accordingly, depreciation, amortization expense and financing costs are
not identifiable by SBU.
Operating results for each SBU are summarized in the following table:
EDG SSC DPG SSD Total
--------- --------- --------- --------- ---------
Fiscal 1999
Sales $ 119,882 $ 93,463 $ 37,416 $ 70,180 $ 320,941
Gross Margin 36,828 26,590 11,474 16,184 91,076
Contribution 27,491 15,754 7,647 7,201 58,093
Assets 75,112 48,493 19,207 30,341 173,153
Fiscal 1998
Sales $ 119,157 $ 88,014 $ 30,639 $ 66,362 $ 304,172
Gross Margin 37,219 25,160 10,464 15,335 88,178
Contribution 27,968 15,703 7,828 7,088 58,587
Assets 70,633 43,007 15,350 28,684 157,674
Fiscal 1997
Sales $ 113,700 $ 74,209 $ 29,377 $ 37,853 $ 255,139
Gross Margin 32,220 19,923 8,465 8,267 68,875
Contribution 24,436 11,545 6,333 4,381 46,695
Assets 68,770 39,134 16,721 14,265 138,890
Page 20
A reconciliation of gross margin, direct operating contribution and
assets to the relevant consolidated amounts is as follows. (Other assets not
identified includes miscellaneous receivables, manufacturing inventories and
other assets.)
1999 1998 1997
--------- --------- ---------
Gross margin - segments total $ 91,076 $ 88,178 $ 68,875
Manufacturing variances and
other costs (1,463) (1,515) (1,411)
--------- --------- ---------
Gross margin $ 89,613 $ 86,663 $ 67,464
========= ========= =========
Segment profit contribution $ 58,093 $ 58,587 $ 46,695
Manufacturing variances and
other costs (1,463) (1,515) (1,411)
Regional selling expenses (13,062) (12,360) (16,293)
Administrative expenses (24,825) (23,442) (23,860)
--------- --------- ---------
Operating income $ 18,743 $ 21,270 $ 5,131
========= ========= =========
Segment assets $ 173,153 $ 157,674 $ 138,890
Cash and equivalents 12,569 8,031 10,012
Other current assets 12,817 9,681 10,497
Net property 23,047 18,477 17,526
Other assets not identified 14,092 15,837 15,589
--------- --------- ---------
Total assets $ 235,678 $ 209,700 $ 192,514
========= ========= =========
Geographic sales information is grouped by customer destination into five
areas: North America, Europe, Latin America, Asia/Pacific and Other. Sales to
Mexico are included as part of Latin America. Other includes sales to export
distributors and to countries where the Company does not have sales offices,
including Eastern Europe and the Middle East.
The United States and Canada are the only countries for which sales
disclosure under SFAS No. 131 is required. Fiscal 1999 sales and long-lived
assets (net property and other assets) were as follows:
Sales Assets
--------- ---------
United States $ 162,388 $ 30,937
Canada 42,625 2,773
--------- ---------
North America 205,013 33,710
Europe 65,365 2,967
Latin America 16,734 300
Asia / Pacific 23,390 540
Other 10,439 0
--------- ---------
Total $ 320,941 $ 37,517
========= =========
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
Latin America, and vary throughout Europe and the Far East. 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 J -- Litigation
On June 19, 1990, the Company was served with a complaint in Panache
Broadcasting of Pennsylvania, Inc. v. Richardson Electronics, Ltd.; Varian
Associates, Inc.; and Varian Supply Company (VASCO - a joint venture between
the Company and Varian Associates, Inc.), in U.S. District Court for the
Eastern Division of Pennsylvania alleging violations of Sections 1 and 2 of the
Sherman Act and Section 7 of the Clayton Act. This is a class action for the
purpose of determining liability only on behalf of all persons and businesses
in the U.S. "who purchased electron power tubes from one or more of the
defendant corporations at any time" since the formation of VASCO. The suit
seeks treble damages alleged to be in excess of $100, injunctive relief and
attorneys' fees. The litigation has been transferred to the U.S. District
Court for the Northern District of Illinois, Eastern Division as cause
No. 90C6400, and is in the discovery stage. The Company is defending itself
against this action. It is not possible at this time to predict the outcome of
this legal action.
Note K -- Selected Quarterly Financial Data
(Unaudited)
Summarized quarterly financial data for 1999 and 1998 follow. The fourth
quarter of fiscal 1999 includes a $500 provision for bad debts in Latin America
which reduced net income by $305 or $.02 per share. There were no material
fourth quarter adjustments in 1998.
First Second Third Fourth
-------- -------- -------- --------
1999:
Net sales $ 76,038 $ 82,232 $ 77,092 $ 85,579
Gross margin 21,712 23,262 21,388 23,251
Net income 2,501 3,279 693 1,879
Net income per share - basic .17 .23 .05 .15
Net income per share - diluted .17 .23 .05 .15
1998:
Net sales $ 71,600 $ 78,646 $ 73,196 $ 80,730
Gross margin 20,638 22,348 20,860 22,817
Net income 1,808 2,740 2,182 3,006
Net income per share - basic .15 .23 .18 .23
Net income per share - diluted .15 .22 .17 .23
Page 21
Report of Independent Auditors
Stockholders and Directors
Richardson Electronics, Ltd.
LaFox, Illinois
We have audited the accompanying consolidated balance sheets of
Richardson Electronics, Ltd. and subsidiaries as of May 31, 1999 and 1998,
and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended
May 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Richardson Electronics, Ltd. and subsidiaries at May 31, 1999 and 1998,
and the consolidated results of their operations and cash flows for each
of the three years in the period ended May 31, 1999, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
July 13, 1999
Officers and Directors
Corporate Officers
Edward J. Richardson
Chairman of the Board and Chief Executive Officer
Bruce W. Johnson
President and Chief Operating Officer
Charles J. Acurio
Executive Vice President and General Manager, Display
Products Group
Pierluigi Calderone
Vice President and Managing Director of European Operations
Kevin M. Connor
Vice President of Sales, Solid State and Components Group
Flint Cooper
Executive Vice President and General Manager, Security
Systems Division
Lawrence T. Duneske
Vice President, Worldwide Logistics
William J. Garry
Senior Vice President, Finance and Chief Financial Officer
Joseph C. Grill
Vice President, Human Resources
Norman A. Hilgendorf
Vice President and General Manager, Solid State and
Components Group
Kathleen M. McNally
Vice President, Marketing Operations
Bart Petrini
Executive Vice President and General Manager, Electron
Device Group
Robert Prince
Executive Vice President, Worldwide Sales
Kevin F. Reilly
Vice President and Chief Information Officer
William G. Seils
Senior Vice President, General Counsel and Corporate
Secretary
Ronald G. Ware
Treasurer and Assistant Secretary
Board of Directors
Edward J. Richardson (1)
Arnold R. Allen
Consultant
Jacques Bouyer (6)
Consultant
Kenneth J. Douglas (2,3,4,7)
William J. Garry
Scott Hodes (2,3,5)
Partner, Law Firm of Ross & Hardies
Bruce W. Johnson (1)
Ad Ketelaars (6)
CEO Comsys Holding B.V.
Harold L. Purkey (2)
President, Forum Capital Markets
Samuel Rubinovitz (1,3,4,5,6)
Consultant & Chairman of the Board, LTX Corporation
(1) Executive Committee
(2) Audit Committee
(3) Compensation Committee
(4) Stock Option Committee
(5) Executive Oversight Committee
(6) Strategic Planning Committee
(7) Retiring Director
Page 22
Stockholder Information
Corporate Office
Richardson Electronics, Ltd.
40W267 Keslinger Road
P.O. Box 393
LaFox, Illinois 60147-0393
(630) 208-2200
Internet: www.rell.com
E-Mail: info@rell.com
Annual Meeting
We encourage stockholders to attend the annual meeting scheduled for Tuesday,
October 12, 1999 at 3:15 p.m. at the Company's corporate office. Further
details are available in your proxy materials.
Transfer Agent and Registrar
Continental Stock Transfer Company
2 Broadway, 19th Floor
New York, NY 10004
Auditors
Ernst & Young LLP
233 S. Wacker Drive
Chicago, Illinois 60606
Brokerage Reports
Barrington Research
McDonald & Company Securities, Inc.
Stifel, Nicolaus & Company, Inc.
Tucker Anthony Cleary Gull
Market Makers
Barrington Research
William Blair & Co.
Forum Capital Markets
McDonald & Company Securities, Inc.
Smith Barney Shearson
Stifel, Nicolaus & Company, Inc.
Tucker Anthony Cleary Gull
Wechsler & Krumholz, Inc.
Form 10K and Other Information
A copy of the Company's Annual Report on Form 10K, filed with the Securities
and Exchange Commission is available without charge upon request. All
inquiries should be addressed to the Investor Relations Department, Richardson
Electronics, Ltd., 40W267 Keslinger Road, P.O. Box 393, LaFox, Illinois 60147-
0393. Press releases and other information can be found on the Internet at the
Company's home page at http://www.rell.com.
Market Price of Common Stock
The Common Stock is traded on the NASDAQ National Market System under the
symbol "RELL". The number of stockholders of record of Common Stock and
Class B Common Stock at May 31, 1999 was 663 and 24, respectively. The Company
believes there are approximately an additional 1,300 holders who own shares of
the Company's Common Stock in street name. The quarterly market price ranges of
the Company's Common Stock were as follows:
1999 1998
--------------------- ----------------------
Fiscal Quarters High Low High Low
--------- --------- ---------- --------
First $ 14 $ 7 1/2 $ 8 3/4 $ 8
Second 8 3/4 6 7/16 13 3/4 8 3/8
Third 10 5 1/4 12 5/8 9 3/4
Fourth 6 7/8 4 7/8 14 1/2 10 1/4
Page 23
Richardson Electronics, Ltd. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
(in thousands)
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
- ------------------------------ ---------- ------------------------ --------- ----------
(1) (2)
Balance Charged Charged to Balance
at to Costs Other at
Beginning and Accounts- Deductions- End of
DESCRIPTION of Period Expenses Describe Describe Period
- ------------------------------ ---------- ---------- ---------- ---------- ----------
Year ended May 31, 1999:
Allowance for sales
returns and doubtful
accounts $ 2,230 $ 934 $ - $ 580 <F1> $ 2,584
Other reserves $ 1,362 $ 46 <F2> $ - $ 172 <F3> $ 1,236
Year ended May 31, 1998:
Allowance for sales
returns and doubtful
accounts $ 2,102 $ 431 $ - $ 303 <F1> $ 2,230
Other reserves $ 1,956 $ 41 <F2> $ - $ 635 <F3> $ 1,362
Year ended May 31, 1997:
Allowance for sales
returns and doubtful
accounts $ 1,461 $ 1,749 $ - $ 1,108 <F1> $ 2,102
Other reserves $ 1,539 $ 900 <F4> $ - $ 483 <F3> $ 1,956
<FN>
<F1> Uncollectible amounts written off, net of recoveries and foreign currency translation.
<F2> Provision to increase EPA groundwater remediation reserve
<F3> Expenditures made for reserved items
<F4> Provision for corporate reorganization and increase in EPA groundwater remediation reserve.
</FN>