1
Exhibit 99.3
Milgray Electronics, Inc. Page 1 of 12
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REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Milgray Electronics, Inc.
We have audited the accompanying consolidated balance sheets of Milgray
Electronics, Inc. and Subsidiaries as of September 30, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended September 30, 1996.
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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Milgray
Electronics, Inc. and Subsidiaries as of September 30, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended September 30, 1996, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Melville, New York
October 24, 1996
2
Exhibit 99.3
Milgray Electronics, Inc. Page 2 of 12
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Milgray Electronics, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30 1996 1995
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ASSETS
Current Assets
Cash and cash equivalents $ 1,787 $ 1,909
Accounts receivable, net of allowance for
doubtful accounts of $1,277 and $1,066 37,510 39,105
Inventories 55,419 48,525
Prepaid expenses and sundry receivables 713 459
Income taxes refundable 634
Deferred income taxes 593 618
-------- --------
Total current assets 96,656 90,616
======== ========
Property, plant and equipment, at cost, net 3,783 3,347
Other assets
Security deposits and sundry 302 383
-------- --------
$100,741 $ 94,346
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 13,953 $ 19,280
Accrued expenses and sundry liabilities
Accrued payroll 1,729 1,841
Other 1,504 2,697
Income taxes payable 265 1,088
Current maturities of long-term debt 36 50
-------- --------
Total current liabilities 17,487 24,956
Long-term debt 36,887 31,633
Deferred income taxes 327 330
Commitments and contingencies
Stockholder's equity
Common stock, par value $.25 per share; authorized,
60,000,000 shares; issued, 6,816,902 shares 1,704 1,704
Retained earnings 44,406 35,793
-------- --------
46,110 37,497
Less treasury stock - at cost (43,726 shares) 70 70
-------- --------
46,040 37,427
-------- --------
$100,741 $ 94,346
======== ========
The accompanying notes are an integral part of these statements.
3
Exhibit 99.3
Milgray Electronics, Inc. Page 3 of 12
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Milgray Electronics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Year ended September 30 1996 1995 1994
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Net sales $ 275,399 $ 239,519 $ 181,844
---------- ---------- ----------
Costs and expenses
Cost of sales 214,788 183,457 140,079
Selling, general and administrative 43,986 39,292 31,001
Interest 2,587 1,816 1,111
---------- ---------- ----------
261,361 224,565 172,191
---------- ---------- ----------
Income before income taxes 14,038 14,954 9,653
Income tax provision 5,425 5,638 3,460
---------- ---------- ----------
Net income $ 8,613 $ 9,316 $ 6,193
========== ========== ==========
Net income per share $ 1.27 $ 1.38 $ .93
========== ========== ==========
Common shares and equivalents outstanding 6,773,176 6,752,056 6,695,170
========== ========== ==========
The accompanying notes are an integral part of these statements.
4
Exhibit 99.3
Milgray Electronics, Inc. Page 4 of 12
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Milgray Electronics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended September 30 1996 1995 1994
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Cash flows from operating activities
Net income $ 8,613 $ 9,316 $ 6,193
-------- -------- --------
Adjustments to reconcile net income to net
cash used in operating activities
Depreciation and amortization of property,
plant and equipment 482 435 348
Amortization of other assets 222 130 154
Deferred income taxes 22 (299) 46
Change in allowance for doubtful accounts 211 194 151
Decrease (increase) in operating assets
Accounts receivable 1,384 (9,771) (4,599)
Inventories (6,894) (19,059) (1,267)
Prepaid expenses and sundry receivables (254) 375 (463)
Income taxes refundable (634) 23 62
Other assets (141) (72) (164)
Increase (decrease) in operating liabilities
Accounts payable (5,327) 7,960 (2,608)
Accrued expenses and sundry liabilities (1,305) 1,094 761
Income taxes payable (823) 716 (2,047)
-------- -------- --------
(13,057) (18,274) (9,626)
-------- -------- --------
Net cash used in operating activities (4,444) (8,958) (3,433)
-------- -------- --------
Cash flows from investing activities
Acquisition of property, plant and equipment (832) (534) (908)
-------- -------- --------
Net cash used in investing activities (832) (534) (908)
-------- -------- --------
Cash flows from financing activities
Repayment of long-term debt $ (71) $ (50) $ (1,291)
Net borrowings under revolving credit facility 5,225 8,950 5,975
Proceeds from exercise of stock options 113 175
-------- -------- --------
Net cash provided by financing activities 5,154 9,013 4,859
-------- -------- --------
Net (decrease) increase in cash
and cash equivalents (122) (479) 518
Cash and cash equivalents at beginning of year 1,909 2,388 1,870
-------- -------- --------
Cash and cash equivalents at end of year $ 1,787 $ 1,909 $ 2,388
======== ======== ========
Supplemental cash flow information:
Interest paid $ 2,673 $ 1,762 $ 1,043
Income taxes paid 6,860 4,646 5,680
The accompanying notes are an integral part of these statements.
5
Exhibit 99.3
Milgray Electronics, Inc. Page 5 of 12
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Milgray Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - GENERAL AND SUMMARY OF ACCOUNTING POLICIES
Milgray Electronics, Inc. and Subsidiaries (the "Company") distributes
electronic components produced by a large number of manufacturers. The Company's
sales are made to customers mainly in the electronic, defense and computer
industries located principally in the United States, Canada and Western Europe.
A summary of the significant accounting policies applied in the of the
accompanying consolidated financial statements follows:
1. Principles of Consolidation
The consolidated financial statements include the accounts of Milgray
Electronics, Inc. and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
2. Revenue Recognition
The Company recognizes revenue as products are shipped.
3. Inventories
Inventories, consisting primarily of merchandise purchased for resale,
have been valued at the lower of cost or market, on the moving average
cost method.
4. Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation of
furniture, fixtures, equipment and computer equipment is computed for
financial reporting and tax purposes on the straight-line and
accelerated basis over the estimated useful lives of the assets which
are 5 to 10 years for furniture, fixtures and equipment and 5 to 7
years for computer equipment. The building and improvements are being
depreciated on a straight-line basis over 40 years for financial
reporting purposes and 15 to 32 years for tax purposes. Leasehold
improvements are amortized over the lesser of the useful life of the
asset or the term of the lease without regard to renewal options.
5. Income Taxes
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and
loss carryforwards and tax credit carryforwards for which income tax
benefits are expected to be realized in future years. A valuation
allowance is established to reduce deferred tax assets if it is more
likely than not that all or some portion of such deferred tax assets
will not be realized. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date.
6
Exhibit 99.3
Milgray Electronics, Inc. Page 6 of 12
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - continued
6. Net Income Per Share
The computation of net income per share of common stock is based upon
the weighted average number of common shares outstanding during the
period plus (in periods in which they have a dilutive effect) common
stock equivalents representing shares issuable upon the exercise of
stock options. In 1996, no stock options were outstanding (see Note G)
and in 1995 and 1994, stock options were not considered in the
computation of net income per shares since their inclusion would not be
materially dilutive.
7. Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of customers comprising the Company's
customer base, and their dispersion across many geographical regions.
At September 30, 1996, 1995 and 1994, the Company had no significant
concentration of credit risk.
8. Cash and Cash Equivalents
The Company includes checks which have not been paid by its disbursing
banks as cash in bank and as accounts payable. The amount of checks
that have not been paid by the Company's disbursing banks was
approximately $3,169,000 and $2,207,000 as of September 30, 1996 and
1995, respectively.
Cash equivalents include all highly liquid instruments purchased with
an original maturity of three months or less.
9. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
year-end and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
10. Reclassifications
Certain amounts in the 1995 consolidated financial statements were
reclassified to conform to the 1996 presentation.
7
Exhibit 99.3
Milgray Electronics, Inc. Page 7 of 12
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
September 30, 1996 1995
- ---------------------------------------------------------------
(in thousands)
Land $ 206 $ 206
Building and improvements 2,049 2,040
Furniture, fixtures and equipment 2,223 1,684
Computer equipment 1,940 1,632
Leasehold improvements 90 31
------ ------
6,508 5,593
Less accumulated depreciation
and amortization 2,725 2,246
------ ------
$3,783 $3,347
====== ======
NOTE C - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Fair Value of Financial
Instruments," requires disclosure of the estimated fair value of an entity's
financial instrument assets and liabilities. The Company's principal financial
instrument consists of its revolving credit agreement with banks. The Company
believes that the carrying amount of such debt approximates the fair value as
the variable interest rates approximate the current prevailing interest rate.
8
Exhibit 99.3
Milgray Electronics, Inc. Page 8 of 12
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following:
September 30, 1996 1995
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(in thousands)
Bank loan (a) $36,850 $31,625
Equipment loans, collateralized and due
through November 1998 73 58
------- -------
36,923 31,683
Less current maturities 36 50
------- -------
$36,887 $31,633
======= =======
(a) On August 29, 1996, the Company entered into a new unsecured revolving
credit agreement with three banks which provides for maximum
outstanding borrowings of $70,000,000 and extends the maturity date
through August 29, 2001. This agreement replaced the then existing
unsecured revolving credit agreement, as amended, for maximum
borrowings of $50,000,000 which was due December 31, 1998. Maximum
borrowings under the new agreement are based upon the sum of eligible
inventory (the lesser of 50% of inventory or $30,000,000) and 90% of
eligible accounts receivable. The credit agreement provides for a
commitment fee of .1875% per annum on the daily unused portion of the
facility, payable quarterly. The credit agreement contains various
restrictions and conditions; the most restrictive of these requires
that the Company maintain certain liabilities to net worth, inventory,
interest, and current ratios and tangible net worth. The agreement also
restricts the payment of dividends. The rate of interest payable under
the new agreement is, at the Company's option, a function of the prime
rate, Eurodollar rate and the Banker's Acceptance Rates, as defined.
Long-term debt matures as follows (in thousands):
1997 $ 36
1998 30
1999 7
2000 --
2001 36,850
-------
$36,923
=======
9
Exhibit 99.3
Milgray Electronics, Inc. Page 9 of 12
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - INCOME TAXES
The income tax provision (benefit) consists of the following:
September 30 1996 1995 1994
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(in thousands)
Current
Federal $ 4,270 $ 4,678 $ 2,815
State and local 899 908 556
Foreign 93 126 15
U.S. Territory 141 225 28
------- ------- -------
5,403 5,937 3,414
Deferred 22 (299) 46
------- ------- -------
$ 5,425 $ 5,638 $ 3,460
======= ======= =======
A reconciliation of income taxes computed at the Federal statutory rate and
the effective income tax rate is as follows:
September 30 1996 1995 1994
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(in thousands)
Income taxes at statutory rate 35.0% 35.0% 34.0%
State and local income taxes (net of
Federal income tax benefit) 4.2 4.0 3.8
Exemption from United States territory
income taxes (0.5) (0.7) (2.1)
Other (0.1) (0.6) 0.1
---- ---- ----
Effective income tax rate 38.6% 37.7% 35.8%
==== ==== ====
Foreign withholding taxes of 5% have been provided on undistributed earnings of
a U.S. territory subsidiary of approximately $1,362,000, $1,377,000, and
$1,521,000 for the years ended September 30, 1996, 1995 and 1994, respectively.
These earnings are considered to be permanently reinvested. If the earnings were
not considered permanently reinvested, approximately $67,000, $68,000 and
$76,000 of deferred income taxes would have been provided for in the years ended
September 30, 1996, 1995 and 1994, respectively.
10
Exhibit 99.3
Milgray Electronics, Inc. Page 10 of 12
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - continued
The components of the Company's deferred tax assets and liabilities are
summarized below:
September 30 1996 1995
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(in thousands)
Deferred tax assets
Allowance for doubtful accounts $434 $362
Bonus accrued 85 85
401(k) contribution accrued 105 235
Other 34 34
---- ----
Gross deferred tax assets 658 716
---- ----
Deferred tax liabilities
Depreciation 361 364
Other receivable 43
Other 31 21
---- ----
Gross deferred tax liabilities 392 428
---- ----
Net deferred tax assets $266 $288
==== ====
The above amounts are presented in the consolidated balance sheets as of
September 30, 1996 and 1995 as $593,000 and $618,000, respectively, of current
deferred tax assets and $327,000 and $330,000, respectively, of noncurrent
deferred tax liabilities.
NOTE F - COMMON STOCK
On July 19, 1995, the Company's Board of Directors authorized a two-for-one
stock split in the form of a 100% stock dividend payable on October 19, 1995 to
stockholders of record on September 28, 1995. On August 9, 1994, the Company's
Board of Directors authorized a two-for-one stock split in the form of a 100%
stock dividend payable on September 23, 1994 to stockholders of record on August
30, 1994. The par value of the new shares issued totaled $847,000 and $419,000
for the 1995 and 1994 stock splits, respectively. In 1995, the par value was
transferred to the common stock account from capital in excess of par value in
an amount equal to the balance existing at the time of the stock split of
$835,000, and from retained earnings for the remaining par value of $12,000. In
1994, the entire par value was transferred to the common stock account from
capital in excess of par value. All references in the financial statements to
average number of shares outstanding, per share amounts and stock option plan
data for prior periods presented have been restated to reflect the stock splits.
On September 20, 1995, the Company's stockholders approved the increase of the
authorized number of shares of the Company's common stock from 4,000,000 to
60,000,000 shares.
11
Exhibit 99.3
Milgray Electronics, Inc. Page 11 of 12
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - COMMITMENTS AND CONTINGENCIES
1. At September 30, 1996, the Company was obligated under operating leases
for real property for varying periods expiring through the year 2001.
The approximate future minimum annual rental payments under operating
leases are approximately as follows (in thousands):
1997 $ 984
1998 793
1999 699
2000 426
2001 160
------
$3,062
======
In addition, certain of the lease arrangements require the Company to
pay increases in certain expenses such as real estate taxes and other
operating expenses.
Total rental expense for real property charged to operations for the
year ended September 30, 1996, 1995 and 1994, was approximately
$1,060,000, $861,000, and $692,000, respectively.
2. The Company had a qualified incentive stock option plan for key
employees. This plan provided for the grant of options to purchase up
to 600,000 shares of the Company's common stock upon terms and
conditions (including price, exercise date and number of shares)
determined by the Board of Directors. The option price was not less
than the fair market value of the stock on the date that the option was
granted. The plan expired on October 17, 1993. No options were
outstanding as of September 30, 1995.
A summary of the option transactions for the years ended
September 30, 1995 and 1994 is as follows:
September 30 1995 1994
- ----------------------------------------------------------------------------------
Options outstanding at beginning of period 64,000 172,000
Exercised (64,000) (108,000)
---------- --------
Options outstanding at end of period
(all exercisable) -- 64,000
========== ========
Exercise price of outstanding options $1.235 to
$2.19
Exercise price of options exercised $1.235 to $1.235 to
during the period $2.19 $2.19
3. During 1984, the Company established a noncontributory profit-sharing
plan for all eligible domestic employees. No contribution was made
during the years ended September 30, 1996, 1995 and 1994. Contributions
to the plan were at the discretion of the Board of Directors. On
January 4, 1995, the Company merged the plan with the Milgray
Electronics, Inc. Profit Sharing and 401(k) Savings Plan.
12
Exhibit 99.3
Milgray Electronics, Inc. Page 12 of 12
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - continued
4. During 1989, the Company established a 401(k) plan for all eligible
domestic employees. The Company may contribute to the plan from its
current or accumulated net profits as determined by the Board of
Directors. On January 4, 1995, the Company merged the plan with the
Milgray Electronics, Inc. Profit Sharing and 401(k) Savings Plan. The
Company made contributions of approximately $360,000, $350,000 and
$180,000 during the years ended September 30, 1996, 1995 and 1994,
respectively.
NOTE H - SUBSEQUENT EVENT (UNAUDITED)
On November 27, 1996, the Company and Bell Industries, Inc. ("Bell") announced
that they have signed a merger agreement for Bell to acquire the Company for
$14.77 per share in cash, or approximately $100 million. Bell, based in Los
Angeles, California, distributes products for the electronic, computer, graphic
and other industrial markets in the United States. Bell's common stock (ticker
symbol BI) is listed on the New York and Pacific Stock Exchanges. Bell reported
sales of $611 million and net income of $16.1 million, or $2.13 per share, for
the four quarters ended September 30, 1996.
The merger agreement is subject to customary closing conditions, including the
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
and the receipt of financing by Bell. Bell has initiated a cash tender offer for
the Company's shares and those of the Company's majority shareholder. The tender
will be subject to customary conditions, including the tender of at least 66-2/3
percent of the Company's outstanding shares. The tender offer will be followed
by a second-step cash merger at the same price. Bell expects to complete the
acquisition in early 1997.