UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ------------- Commission File Number 0-23426 REPTRON ELECTRONICS, INC. ----------------------------------------------------------------- (Exact name of registrant as specified in its charter) Florida 38-2081116 - -------------------------------------------------- --------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation or organization) 14401 McCormick Drive, Tampa, Florida 33626 ---------------------------------------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (813) 854-2351 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Each Class Name of Each Exchange on Which Registered - ------------------- ----------------------------------------- Common Stock, $.01 par value None 6 3/4 Convertible Subordinated Notes, due 2004 None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] - Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of shares of the registrant's common stock held by non-affiliates of the registrant as of March 25, 2002 was approximately $20,920,059. The number of shares of the registrant's common stock issued and outstanding as of March 25, 2002 was 6,417,196. Documents Incorporated by Reference: Parts of Reptron's definitive proxy statement for the Annual Meeting of Reptron's Shareholders to be held on June 24, 2002 are incorporated by reference into Part III of this Form. REPTRON ELECTRONICS, INC. FORM 10-K Fiscal Year ended December 31, 2001 Item Number in PART I Page Form 10-K ---- - ------------- 1. Business.............................................................................. 3 2. Properties............................................................................ 14 3. Legal Proceedings..................................................................... 14 4. Submission of Matters to a Vote of Security Holders................................... 14 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters........................................................... 15 6. Selected Financial Data............................................................... 16 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 17 7a. Quantitative and Qualitative Disclosures about Market Risk............................ 22 8. Financial Statements and Supplementary Data........................................... 22 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................ 22 PART III 10. Directors and Executive Officers of the Registrant.................................... 23 11. Executive Compensation................................................................ 23 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters........................................ 23 13. Certain Relationships and Related Transactions........................................ 23 PART IV 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K............................................................... 24 2 PART I References to "Reptron", "the Company", "we", "us" and "our" refer to Reptron Electronics, Inc., and its subsidiaries, unless the context otherwise requires. This document contains certain forward-looking statements that involve a number of risks and uncertainties. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Factors that could cause actual results to differ materially include the following: business conditions and growth in Reptron's industry and in the general economy; competitive factors; risks due to shifts in market demand; the ability of Reptron to complete acquisitions; and the risk factors listed from time to time in Reptron's reports filed with the Securities and Exchange Commission as well as assumptions regarding the foregoing. The words "believe", "plans", "estimate", "expect", "intend", "anticipate", and similar expressions and variations thereof identify certain of such forward-looking statements, which speak only as of the dates on which they were made. Reptron undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors. Readers are cautioned not to place undue reliance on these forward-looking statements. Item 1. Business General We are a leading electronics manufacturing supply chain services company providing demand creation distribution of electronic components, custom logistics and supply chain management services, engineering services, display integration services and electronic manufacturing services through its two business segments, Electronic Component Distribution ("ECD") and Electronic Manufacturing Services ("EMS"). The ECD segment is comprised of Reptron Distribution and Reptron Computer Products. The EMS segment is comprised of Reptron Manufacturing Services and Reptron Display and Systems Integration. These business units, although operated independently, are complementary, enabling Reptron to provide customers with a wide range of products and value-added services, as well as a single source for product, material logistics, engineering, assembly and test requirements. Reptron believes that its approach of total customer solutions serving the supply chain needs of its customers distinguishes it in the electronics industry, provides a high level of value to its customer base and enables it to maintain long term relationships with an increasing number of its customers. Reptron was incorporated under the laws of Michigan in 1973 and reincorporated under the laws of Florida in 1993. Reptron's principal executive offices are located at 14401 McCormick Drive, Tampa, Florida 33626, and its telephone number is (813) 854-2351. The Electronic Component Distribution and Electronic Manufacturing Services Industry Electronic Component Distribution. Most manufacturers of electronic components rely on independent distributors, such as Reptron, to extend their marketing operations. As a stocking, marketing and financial intermediary, a distributor relieves the manufacturer of part of the costs associated with the stocking and selling of its products, including otherwise potentially sizeable investments in inventories, accounts receivable and personnel. At the same time, the distributor offers to a broad range of customers the convenience of diverse inventory, flexible deliveries and a wide range of value-added services to help manage material procurement requirements. Manufacturers have historically viewed their distributors as essential extensions of their marketing organizations and by customers who recognize the value that distributors add to the total material procurement process. In recent years, two important trends have developed in the U.S. electronic component distribution industry. First, manufacturers of electronic components are reducing the number of distributors who are authorized to sell their products. Consequently, the reduced number of authorized distributors must be able to service the market historically addressed by the previous and larger pool of distributors. This trend is the result of the need for original electronic component manufacturers to reduce their operating costs. Engaging a smaller number of distributors allows the manufacturer to reduce support staff. 3 A second trend in the industry is the increasing percentage of distribution sales associated with value-added services. This trend is the result of original equipment manufacturers' ("OEMs") need to reduce their operating costs. By interacting with distributors through the use of in-plant stores, automated inventory replenishment systems utilizing traditional electronic data interchange ("EDI") or the emerging e-commerce technology and outsourcing of product assembly, among other actions, OEMs may reduce their total material acquisition cost. The distributor assumes a larger role in the management of the supply chain in these types of engagements. Electronics Manufacturing Services. The EMS industry has experienced rapid changes over the past several years as an increasing number of OEMs have chosen to outsource printed circuit board assemblies and display product integration and assembly to electronics manufacturing specialists such as Reptron Manufacturing Services and Reptron Display and System Integration. Factors driving OEMs to favor outsourcing to electronics manufacturing specialists include: . Reduced Time to Market. Because of the intense competitive pressures and rapidly progressing technology in the electronics industry, OEMs are faced with increasingly short product life-cycles and therefore have a growing need to reduce the time required to bring a product to market. OEMs can reduce their time to market by using an electronics manufacturer's established manufacturing expertise and infrastructure. . Minimized Capital Investment. As electronic products have become more technologically advanced, the manufacturing process has become increasingly automated and highly intricate, and manufacturers have had to invest in new capital equipment at an accelerated rate. By outsourcing to electronics manufacturing specialists, OEMs are able to lower their investment in inventory, facilities and equipment, thereby enabling them to allocate capital to other activities such as sales and marketing and research and development. . Focused Resources. Because the electronics industry is experiencing greater levels of competition and more rapid technological change, many OEMs increasingly seek to focus their resources on activities and technologies that add greater value. By offering turnkey manufacturing services and comprehensive electronic assembly, electronics manufacturing specialists permit OEMs to focus on their core business activities, such as product development, marketing and distribution. . Access to Leading Edge Manufacturing Technology. Electronic products and electronics manufacturing technology have become increasingly sophisticated and complex. OEMs desire to work with electronics manufacturing specialists in order to gain access to their technological expertise in process development and control. . Improved Inventory Management and Purchasing Power. Electronics industry OEMs are faced with increasing difficulties in planning, procuring and managing their inventories efficiently due to frequent design changes, short product life-cycles, large investments in electronic components, component price fluctuations and the need to achieve economies of scale in materials procurement. Electronics manufacturing specialists are able to manage both procurement and inventory, and have demonstrated proficiency in purchasing components at improved pricing. Strategy Reptron's principal business objective is to expand its presence as a leading electronics supply chain services company. In order to implement its objective, Reptron has formulated a strategy based upon the following key elements: . Continue to Leverage Complementary Businesses. Reptron operates as an electronics supply chain services company that provides value-added distribution of electronic components and targeted electronics manufacturing services. Reptron Distribution emphasizes its value-added services as a method to lower the customer's total material acquisition costs. Reptron Manufacturing Services provides turnkey manufacturing, including materials management, board assembly and post-production testing. Reptron Display and System Integration provides design engineering and systems integration of display solutions, including turnkey manufacturing and testing. These three business units, although operated independently, are complementary, enabling Reptron to provide customers with a wide range of products and value-added services, as well as a single source for product, material, logistics, engineering, assembly and test requirements. 4 . Increase Sales from Value-Added Services. Reptron seeks to enhance sales by providing total customer solutions through its value-added services. Reptron has developed a comprehensive value-added service offering which includes inventory control programs (e.g., bonded, consigned, just-in-time), in-plant stores, automated inventory replenishment systems utilizing EDI and other e-commerce technology, custom supply chain logistics services, component programming, custom display solutions and electronics manufacturing. These value-added programs allow the OEMs to reduce their total acquisition costs for materials. An increasing percentage of industry sales are being generated from value-added engagements and management believes Reptron is well positioned to capitalize on this trend. In 2001, approximately 32% of Reptron Distribution sales were generated through value-added services. . Target Manufacturing Customers in Specific Market Segments. Reptron Manufacturing Services follows a well-defined strategy in its EMS business. Reptron Manufacturing Services focuses on complex assemblies in low-to-medium volumes for commercial and industrial customers. Additionally, Reptron Manufacturing Services seeks customers that will utilize its ability to assemble customers' products by integrating printed circuit board assemblies into other elements of the customers' products (sometimes referred to as total "box build"). Reptron Manufacturing Services also seeks customer relationships in which Reptron Manufacturing Services is the primary source and avoids engagements requiring an overflow supplier. Reptron Manufacturing Services targets customers in a variety of industries to establish diversity among the customers and industries served. . Leverage Investments Made in its Manufacturing Facilities. Reptron has invested in facilities that will allow it to expand its business. Reptron believes its manufacturing facilities can accommodate approximately $300 million in annual contract manufacturing net sales based on the types of business currently transacted by Reptron Manufacturing Services. Reptron Manufacturing Services' 2001 combined sales totaled approximately $171 million. Consequently, Reptron believes there is adequate capacity to support future sales growth. . Expand Through Business Combinations and Internal Growth. Reptron seeks to expand its operations by further enhancing its supply chain services offerings. Further, Reptron believes that significant opportunities exist to expand its operations into geographic areas that it currently does not serve and to increase its presence in existing markets. This expansion of services and presence can be attained through business combinations, by opening new sales offices or by creating new business operations. Certain Considerations Credit Agreement. Five lenders have made available to us a $75 million revolving credit facility (the "Credit Agreement") through January 8, 2004. Borrowings under the Credit Agreement are Collateralized by all inventory, accounts receivable, equipment and general intangibles. The Credit Agreement limits the amount of capital expenditures and prohibits the payment of dividends thereby restricting the distribution of retained earnings. Prior to the end of the fiscal year, we anticipated that at December 31, 2001 we would not be in compliance with the fixed charge coverage ratio covenant provided for in the Credit Agreement. Consequently, prior to year end, we and our lenders reached an agreement to amend the Credit Agreement to be effective as of December 31, 2001. The amendment was to provide for removal of the fixed charge coverage ratio covenant for only the period ending December 31, 2001 and was to add future quarterly earnings requirements. The amendment was signed on February 20, 2002 and by its terms was effective December 31, 2001. Amounts outstanding under the Credit Agreement as of December 31, 2001 were approximately $50.6 million. Management believes that we will not be in compliance with the earnings requirement contained in the Credit Agreement, as amended, for at least the first quarter of 2002. Management has historically been able to obtain waivers for non-compliance of Credit Agreement covenants and believes that we will receive the necessary waiver for the first quarter of 2002 and future additional waivers when and if needed. Over the last 12 months we have experienced declines in sales and profitability and, therefore, we cannot assure you that we will be able to comply with these financial covenants in the future or that we will receive waivers from our lenders for non-compliance with these covenants. If our lenders were to terminate the Credit Agreement, for any reason, the elimination of that source of liquidity would have a material adverse effect on our business and financial condition. 6 3/4% Convertible Subordinated Notes. We currently have approximately $76.3 million of 6 3/4% Convertible Subordinated Notes Due on August 1, 2004 (the "Convertible Notes"). The holders of the Convertible Notes have the right to convert any portion of the principal amount of the outstanding Convertible Notes, at the date of conversion, into shares of our common stock at any time prior to the close of business on August 1, 2004, at a conversion rate of 35.0877 shares of common stock per $1,000 principal amount of the Convertible Notes (equivalent to a conversion price of approximately $28.50 per share). There is no requirement that the holders of the Convertible Notes convert on or before August 1, 2004. To the extent that the Convertible Notes are not converted into our common stock on or before August 1, 2004, we will be required to repay the indebtedness or make other arrangements to refinance the indebtedness evidenced by the Convertible Notes. We cannot assure you that the Convertible Notes will be converted into our common stock, or that we will be able to repay or refinance the Convertible Notes upon their maturity. If we fail to repay or refinance the Convertible Notes on or before August 1, 2004, it will result in a default of the Convertible Notes, which would have a material adverse effect on our business and financial condition. 5 The holders of the Convertible Notes have the right to make demand for payment under the following events: . failure to pay the principal or redemption price of the Convertible Notes when due, whether or not such payment is prohibited by the subordination provisions of the Indenture; . failure to pay any interest on the Convertible Notes when due, continuing for 30 days, whether or not such payment is prohibited by the subordination provisions of the Indenture; . default in our obligation to provide a notice of a "change in control" as provided in the Indenture; . upon a "change of control" as provided in the Indenture; . failure to perform any other covenant of Reptron in the Indenture, continuing for 60 days after written notice as provided in the Indenture; . any indebtedness for money borrowed by us in an aggregate principal amount in excess of $5,000,000 is not paid at final maturity or upon acceleration thereof and such default in payment or acceleration is not cured or rescinded within 30 days after written notice as provided in the Indenture; and . certain events of bankruptcy, insolvency or reorganization. Current adverse economic environment. During 2001, the United States economy declined into recession. Many companies in the electronics industry began experiencing significant contraction due to adverse market conditions, during 2001. We believe that these two conditions, among others, caused the most severe annual decline the industry has ever experienced. We have continued cost cutting measures, initiated in 2001, that were directed at addressing these market conditions. There can be no assurance, however, that these cost cutting measures will be effective or adequate to compensate for the significant reductions in our sales and earnings. If current economic conditions continue for an extended period of time, we believe that this will have a material adverse effect on our operating results and financial condition. Dependence upon Key Vendors. Many of the components distributed by Reptron Distribution are currently manufactured by a relatively small number of independent vendors. Four vendors collectively accounted for approximately 43% and 41% of Reptron Distribution's net sales in 2001 and 2000, respectively (26% and 25% of Reptron's total 2001 and 2000 net sales, respectively). Reptron does not have long-term distribution contracts with its vendors. These contracts are non-exclusive and typically are cancelable upon 30 to 90 days written notice. Additionally, our management believes that vendors are consolidating their distribution relationships. We believe that our future success will depend, in large part, on maintaining our existing vendor relationships. The loss of, or significant disruptions in the relationship with, one or more of Reptron's principal vendors could have a material adverse effect on Reptron's future operating results. See "Reptron Distribution - Vendors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Customer Concentration and Other Factors Affecting Operating Results. Reptron's business units have certain customers that account for a significant part of their respective net sales. Reptron Distribution's ten largest customers collectively represented 32% and 27% of its net sales in 2001 and in 2000 (19% and 16% of Reptron's total net sales in 2001 and 2000, respectively). Reptron Manufacturing Services' three largest customers accounted for approximately 17%, 10% and 6% of its net sales in 2001, respectively, and 16%, 9% and 8% of its net sales in 2000, respectively, (7%, 4% and 3% of Reptron's total net sales in 2001, respectively, and 6%, 4% and 3% of Reptron's total net sales in 2000, respectively). The loss of one or more of these major customers, or a reduction in their level of purchasing, could have a material adverse effect on Reptron's business, results of operations and financial condition. Reptron Manufacturing Services' operating results are affected by a number of factors, including fixed plant utilization, price competition, ability to keep pace with technological developments, the degree of automation that can be used in an assembly process, efficiencies that can be achieved by managing inventories and fixed assets, the timing of orders from major customers, the timing of capital expenditures in anticipation of increased sales, incurring substantial start-up costs on new assemblies, customer product delivery requirements and costs and shortages of components and labor. In addition, because of the limited number of Reptron Manufacturing Services' customers and the corresponding concentration of its accounts receivable, the insolvency or other inability or unwillingness of its customers to pay for manufacturing services could have a material adverse effect on Reptron's operating results. See - "Reptron Distribution - Marketing and Customers" and "Reptron Manufacturing Services - Marketing and Customers." 6 The Volume and Timing of Customer Sales May Vary- Reptron Distribution. The results for Reptron Distribution may vary widely based upon customer demand and general economic conditions. Consistent with historical periods of economic downturn in the electronics industry (including the current economic downturn), in 2001 Reptron Distribution experienced a significant reduction in orders and increases in order cancellations and requests for delayed deliveries as well as increases in instances of customers being unable to pay for product. There can be no assurance that Reptron Distribution's contractual arrangements will adequately compensate it for the loss of sales due to these factors. Sustained economic downturn in the electronics industry will result in a material adverse effect on Reptron Distribution's operating results and financial condition. The Volume and Timing of Customer Sales May Vary - Reptron Manufacturing Services. The volume and timing of purchase orders placed by Reptron Manufacturing Services' customers are affected by a number of factors, including variation in demand for customers' products, customer attempts to manage inventory, changes in product design or specifications and changes in the customers' manufacturing strategies. Reptron Manufacturing Services typically does not obtain long-term purchase orders or commitments but instead works with its customers to develop nonbinding forecasts of future requirements. Based on such nonbinding forecasts, Reptron Manufacturing Services makes commitments regarding the level of business that it will seek and accept, the timing of production schedules and the levels and utilization of personnel and other resources. A variety of conditions, both specific to each individual customer and generally affecting each customer's industry, may cause customers to cancel, reduce or delay orders that were either previously made or anticipated. Generally, customers may cancel, reduce or delay purchase orders and commitments without penalty, except for payment for services rendered or product completed and, in certain circumstances, payment for materials purchased and charges associated with such cancellation, reduction or delay. Significant or numerous cancellations, reductions or delays in orders by customers, or any inability by customers to pay for services provided by us or to pay for components and materials purchased by us on such customers' behalf, could have a material adverse effect on our operating results. Competition; Effects on Gross Margin. We face substantial competition. We believe that many of our competitors have international operations and significantly greater manufacturing, financial, marketing and research and development resources and broader name recognition. Reptron Distribution faces competition from hundreds of electronic component distributors of various sizes, locations and market focuses (e.g., military, commercial, consumer) and competes principally on the basis of product selection, reputation and customer service. We believe that vendor representation and product diversity create segmentation among distributors. Reptron Distribution has several primary competitors that carry similar lines. Reptron Manufacturing Services and Reptron Display and System Integration compete in a highly fragmented market composed of a diverse group of EMS providers. Reptron believes that the key competitive factors in its markets are manufacturing flexibility, price, manufacturing quality, advanced manufacturing technology and reliable delivery. Additionally, Reptron Manufacturing Services faces the potential risk that its customers may elect to produce their products internally, thereby eliminating manufacturing opportunities for Reptron Manufacturing Services. There can be no assurance that Reptron will be able to continue to compete effectively with existing or potential competitors. In addition, we believe that gross margins in the businesses in which Reptron competes have experienced substantial fluctuation depending upon market forces. See " - Competition." Availability of Components. We rely on third-party suppliers for electronic components. We believe that component shortages may have a material adverse effect on Reptron's ability to service its customers. At various times, there have been shortages of components in the electronics industry and from time to time the supply of certain electronic components is subject to limited allocations. If shortages of components should occur, we expect that we may be forced to delay shipment or to purchase components at higher prices (that may not be able to be passed on to our customers), which may have a material adverse effect on customer demand, our ability to service customer needs or our gross margins. We believe that any of these events could have a material adverse effect on our operating results. Dependence Upon Key Personnel. The success of Reptron to date has been largely dependent upon the efforts and abilities of Reptron's key managerial and technical employees. The loss of the services of certain of these key employees or an inability to attract or retain qualified employees could have a material adverse effect on Reptron. 7 Volatility of Component Pricing. Reptron Distribution sells a significant amount of commodity-type components that have historically experienced volatile pricing. These components include dynamic random access memory ("DRAM") and static random access memory ("SRAM") products. If market pricing for these components decreases significantly, Reptron may experience periods when its investment in component inventory exceeds the market price of such components. Such market conditions could have a negative impact on sales and gross profit margins. Most of the components sold through the Reptron Computer Products division are not supplied under distribution agreements and consequently, this inventory is not subject to those contractual protections afforded under standard distribution agreements. See "- Reptron Distribution - Vendors." Reptron Distribution We were founded in 1973 in Detroit, Michigan as a distributor of electronic components. Reptron Distribution now operates from a network of sales offices, outside sales personnel and in-house telemarketing sales, which management believes collectively addresses most of the total available electronic components market in the United States as well as selected international markets. Products. Reptron Distribution represents over 30 vendor lines and distributes more than 45,000 separate items. The products that Reptron distributes can be broadly divided into three main groups: semiconductors, passive products and electromechanical components. Semiconductors accounted for approximately 83% and 68% of Reptron Distribution's net sales in 2001 and 2000, respectively. Reptron Distribution's product offering includes application specific integrated circuits ("ASICs"), flat panel displays, a variety of memory devices (i.e.., dynamic, static, programmable) and microprocessors and controllers produced by over 22 vendors. Reptron represents a number of leading semiconductor manufacturers, including Hitachi, Sharp, OKI and Samsung. Passive products and electromechanical components accounted for the remaining 17% and 32% of net sales of Reptron Distribution in 2001 and 2000, respectively. Among these components are capacitors, resistors, relays, power supplies and connectors manufactured by over 12 vendors, such as Astec, Vishay, Lambda and Seiko MPD. Reptron Distribution's largest four vendor lines collectively represented 43% and 41% of Reptron Distribution's net sales in 2001 and 2000, respectively (26% and 25% of Reptron's total net sales in 2001 and 2000, respectively). See "Certain Considerations-Dependence Upon Key Vendors." Reptron's Computer Product unit is devoted primarily to selling memory modules. This business unit employs a separate sales and support staff that focuses on a different market niche and customer base than is serviced by Reptron Distribution. This unit sells primarily to computer integrators, retail stores, internet retailing and value-added resellers. Sales are generally characterized by higher volumes, lower gross profit margins and lower selling, general and administrative expenses than other electronic component sales generated by Reptron Distribution. Sales from Reptron Computer Products accounted for 15% and 8% of Reptron Distribution's net sales in 2001 and 2000, respectively (9% and 5% of Reptron's total net sales in 2001 and 2000, respectively). Services. Reptron Distribution sells to over 7,000 customers representing diverse industries including: robotics, telecommunications, computers and computer peripherals, consumer electronics, healthcare, industrial controls and contract manufacturing. Services provided to these customers include component sales, inventory replenishment programs, in-plant stores, component programming, EDI, and other internet based communications. During 2001 and 2000, approximately 32% and 34%, respectively, of Reptron Distribution's net sales were generated through these value-added services. Reptron believes that an increasing percentage of Reptron Distribution's net sales will be generated through its value-added services as customers continue to search for ways to reduce costs. Reptron has invested significantly in information technology and support staff to help increase net sales from value-added services. For its vendors, Reptron Distribution has developed product promotion and customer identification programs that help vendors build recognition of individual products and target and market to specific types of customers. Vendors. In selecting vendors to represent, Reptron Distribution considers numerous factors, including product demand, availability and compatibility with existing product lines. Reptron Distribution has non-exclusive, geographically limited agreements with its franchised vendors for the sale of their products, which we believe is customary in the industry. Reptron Distribution's agreements with vendors do not restrict us from selling similar products manufactured by our vendors' competitors, and typically allow termination by either party upon 30 to 90 days notice. 8 Reptron Distribution's franchised vendors generally protect Reptron against potential write-downs of inventories based upon vendors' price reductions or technological changes. Under the terms of most of Reptron Distribution's franchised distributor agreements, if we comply with certain conditions, the vendor is required, pursuant to price protection privileges, to credit us for decreases in inventory value resulting from reductions in the vendor's list prices of the items. In addition, under the stock rotation terms of Reptron Distribution's franchised distributor agreements, we have the right to return to the vendor for credit against current obligations or future orders a specified portion of those inventory items purchased within a designated period. A vendor that elects to terminate a distributor agreement is generally required to purchase from us the total amount of its products carried in our inventory, less a restocking charge. We believe that our distributor agreements are on terms and conditions consistent with industry standards. Reptron Distribution will, as well, purchase inventory from non-franchise vendors, which inventory is not subject to price protection and stock rotation privileges. Most of the components sold through the Computer Products division are not supplied under distribution agreements with our vendors, and consequently, this inventory is not subject to the price protection and stock rotation privileges. Marketing and Customers. Reptron Distribution has developed a focused sales strategy. Large key accounts are identified in each market and field sales personnel are assigned to serve these accounts directly. All other customers in each market are served by a corporate sales team which operates from our corporate headquarters. The corporate sales team also services customers in regions of the country where we do not have dedicated sales personnel. Reptron Distribution has approximately 7,000 customers located throughout the United States. Reptron Distribution's customers are in diverse industries, including robotics, telecommunications, computers and computer peripherals, consumer electronics, healthcare, industrial controls and contract manufacturing. Property and Offices. Reptron owned a 77,500 square-foot facility in Tampa, Florida, which houses centralized division support personnel, the corporate sales team, management staff and executive offices for Reptron Distribution. In December 2001, we sold this facility and currently sublease that portion of the building we occupy. During 2002, Reptron plans on moving into a 150,000 square foot facility that it owns, and which is located near its current 77,500 square-foot headquarters building. Reptron leases a 71,500 square foot distribution center in Reno, Nevada. Substantially all of Reptron Distribution's shipments originate from the Reno facility. Reptron leases 18 office suites serving as sales offices for Reptron Distribution. These offices average approximately 2,000 square feet in size and contain a small space for warehousing of inventory and sales materials. Lease terms on these facilities range from three to five years and expire at various dates through August 2004. One of these facilities, located in the Detroit area, is owned by our chief executive officer. The table below shows the metropolitan location of each sales office: Office ------ Atlanta, Georgia Baltimore, Maryland Boston, Massachusetts Chicago, Illinois Cleveland, Ohio Dallas, Texas Detroit, Michigan Hauppauge (Long Island), New York Huntsville, Alabama Irvine, California Minneapolis, Minnesota Philadelphia, Pennsylvania Portland, Oregon Robinson Point, Singapore Salem, New Hampshire San Diego, California San Jose, California Tampa, Florida Toronto, Canada 9 Additionally, we have outside sales personnel serving customers in the following metropolitan locations: Austin, Texas Dayton, Ohio Ft. Lauderdale, Florida Guadalajara, Mexico Hartford, Connecticut Los Angeles, California Raleigh, North Carolina Rochester, New York Sacramento, California Seattle, Washington Reptron Manufacturing Services We entered into the electronics manufacturing services business through an acquisition in 1986. Reptron Manufacturing Services' net sales have grown from approximately $83.0 million in 1995 to $171.4 million in 2001. Manufacturing Operations. Reptron Manufacturing Services provides turnkey manufacturing services, including the purchase of customer-specified components from its extensive network of component suppliers (including Reptron Distribution), assembly of components on printed circuit boards and performance of post-production testing. In addition, total box build assembly generated approximately 20% of Reptron Manufacturing Services' net sales in 2000 and 2001. Reptron Manufacturing Services attempts to perform as much of a given manufacturing process as is feasible and generally does not perform labor-only, consignment assembly functions unless management believes that such engagements may provide a direct route to turnkey contracts. Reptron Manufacturing Services provides design-for-manufacturability engineering services as well as surface mount technology ("SMT") conversion, pin through hole ("PTH") interconnection technologies and printed circuit board layout services for existing products. Reptron Manufacturing Services also provides test process design capabilities that include the design and development of test fixtures and procedures and software for both in-circuit tests and functional tests of circuit boards, components and products. Reptron Manufacturing Services is able to efficiently manage its materials procurement and inventory management functions. The inherent scheduling and procurement challenges in low-to-medium volume production of a large number of different circuit board assemblies requires a high level of expertise in material procurement. Reptron Manufacturing Services obtains its electronic components from a wide variety of manufacturers and distributors, some of which are procured through Reptron Distribution. Marketing and Customers. Reptron Manufacturing Services follows a well-defined marketing strategy, which includes the following key elements: . Target Customers Requiring Complex Printed Circuit Board Assemblies. Reptron Manufacturing Services focuses on complex assemblies in low-to-medium volumes for customers primarily in the telecommunications, healthcare, industrial/instrumentation, banking and office products industries. Reptron Manufacturing Services does not manufacture high volume printed circuit board assemblies for the personal computer, consumer products or automotive industries. Reptron Manufacturing Services targets customers requiring a high number of different circuit board assemblies, thereby seeking to minimize its exposure to any one product made for a specific customer. Reptron Manufacturing Services focuses on the low-to-medium volume batch business because of its reduced volatility. Reptron Manufacturing Services gains access to a significant number of these kinds of customers through its relationship with Reptron Distribution and the efforts of its direct sales force. Additionally, Reptron Manufacturing Services expands its market and customer development through its independent sales representatives. 10 . Target Customer Relationships where Reptron Manufacturing Services is the Primary Source. Reptron Manufacturing Services seeks engagements with customers that have decided to strategically outsource substantially all circuit board assembly. Consequently, Reptron Manufacturing Services markets its services as a "partnership" with the customer and encourages the customer to view Reptron Manufacturing Services as an extension of its own manufacturing capabilities. Reptron Manufacturing Services attempts to avoid relationships where Reptron Manufacturing Services is used as an overflow supplier to manage volume requirements. . Maintain a Diverse Customer and Industry Base. Reptron Manufacturing Services targets customers primarily in the telecommunications, medical, industrial/instrumentation, banking and office products industries and seeks to maintain a diversity of customers among these industries and within each industry. In addition, Reptron Manufacturing Services believes that the industries that it targets make products that generally have longer life cycles, more stable demand and less price pressure compared to consumer oriented products. Nevertheless, Reptron Manufacturing Services' customers from time to time, experience downturns in their respective businesses resulting in fluctuations in demand for Reptron Manufacturing Services' services. See "- Certain Considerations - The Volume and Timing of Customer Sales May Vary." Our marketing cycle for customers meeting these criteria typically spans six-to-twelve months. Additionally, the start-up phase for an engagement may run an additional six months. Typically, during this phase, significant investments are made by Reptron Manufacturing Services and the customer to successfully launch a high number of different, complex circuit board assemblies. Reptron Manufacturing Services works closely with its customers in all phases of design, start-up and production, and through this cooperative effort develops a close working relationship with the customer. These relationships, and the investments made both in time and financial resources by the customer and Reptron Manufacturing Services, management believes, promotes long-term customer loyalty. Reptron Manufacturing Services utilizes a broad marketing approach which includes the Reptron Distribution sales force, manufacturers' sales representatives and a direct sales force. Reptron Manufacturing Services seeks to maintain diversity within its customer base and industries served. During 2001, Reptron Manufacturing Services' largest three customers represented 17%, 10% and 6%, respectively of Reptron Manufacturing Services' 2001 net sales (7%, 4% and 3%, respectively of total Reptron net sales). During 2000, Reptron Manufacturing Services' largest three customers represented 16%, 9% and 8%, respectively of Reptron Manufacturing Services' 2000 net sales (6%, 4% and 3%, respectively of total Reptron net sales). The following table sets forth the principal industries and the percentage of Reptron Manufacturing Services sales derived from various industries for 2001 and 2000. 2001 2000 ---------- ---------- Industry % of Sales % of Sales - -------------------------------------------------------------------------------- Medical 22% 24% Semiconductor Equipment 14% 24% Industrial/Instrumentation 18% 16% Telecommunications 15% 14% Banking 21% 13% Other 10% 9% Manufacturing Facilities. Reptron Manufacturing Services operates three plants. These manufacturing facilities are equipped with advanced SMT assembly equipment and PTH insertion equipment. The Gaylord, Michigan 80,000 square foot manufacturing facility is owned by us and was constructed in 1988. The Tampa, Florida 150,000 square foot manufacturing and warehouse facility is owned by us and was completed in the first quarter of 1997. Reptron Manufacturing Services leases six buildings in Hibbing, Minnesota, which total 127,000 square feet. These buildings are owned in part by four individuals on Reptron Manufacturing's senior management team. Reptron Manufacturing Services has a variety of automated and manual test equipment capable of performing in-circuit and functional testing, as well as a skilled staff of technicians who perform customer-specific or product-specific testing requirements. The Hibbing, Minnesota manufacturing plant accounted for approximately 38% of Reptron Manufacturing Services' 2001 net sales, with the Tampa, Florida plant totaling approximately 34% of 2001 net sales, and the Gaylord, Michigan manufacturing plant totaling approximately 28% of 2001 net sales. 11 On October 27, 1999, Reptron completed its acquisition of Applied Instruments, of Fremont, California and re-branded the operations Reptron Display and System Integration in 2000. Founded in 1987, Reptron Display and System Integration provides display design engineering, video display solutions (both cathode ray tube and flat panel technology) and system integration of custom turnkey industrial computer based products, systems integration and turnkey manufacturing services to its OEM customers. Reptron Display and System Integration operates from a 40,000 square foot facility in Fremont, California, and has approximately 50 employees. The unit generated approximately $9.3 million and $18.3 million in net sales in 2001 and 2000, respectively. Competition We face substantial competition. Many of our competitors in each division have international operations and significantly greater manufacturing, financial, marketing and research and development resources and broader name recognition than we do. Reptron Distribution faces competition from hundreds of electronic component distributors of various sizes, locations and market focuses (e.g. military, commercial, consumer) and competes principally on the basis of product selection and value-added customer service. Vendor representation and product diversity create segmentation among distributors. Reptron Distribution has several primary competitors that carry similar significant Asian semiconductor vendors, as well as competitors who manufacture electronic components domestically. Reptron Distribution attempts to differentiate itself from these competitors through its wide offering of value-added services, including electronics manufacturing services through Reptron Manufacturing Services and Reptron Display and System Integration. Reptron Manufacturing Services competes in a highly fragmented market composed of a diverse group of EMS providers. Reptron Manufacturing Services believes that the key competitive factors in its markets are manufacturing flexibility, price, manufacturing quality, advanced manufacturing technology and reliable delivery. Many EMS providers operate high-volume facilities and focus on target markets, such as the computer industry, that Reptron Manufacturing Services does not seek to serve. Reptron Manufacturing Services considers its key competitive advantages to include its expertise in low-to-medium volume, flexible batch processing, its provision of value-added services and its material management techniques. We believe that Reptron Manufacturing Services' expertise in flexible, batch processing differentiates it from its high-volume competitors because of the relative complexity of economically fulfilling a large number of batch contracts. We also believe that by focusing on low-to-medium volume production runs, by manufacturing products using Reptron Distribution's product line and by leveraging Reptron Distribution's sales force and customer base, Reptron Manufacturing Services competes effectively. See - -"Certain Considerations--Competition; Effects on Gross Margin." Reptron Display and System Integration competes in a highly fragmented market composed of a diverse group of display integration and electronic component distributors that have strategic alliances with display integration companies. We believe that market reputation combined with a high degree of technical competency, has allowed Reptron Display and System Integration to compete effectively in the marketplace. Management Information Systems We have made significant investments in computer hardware, software and management information system ("MIS") personnel. The Reptron Distribution, Reptron Manufacturing Services and Reptron Display and System Integration's MIS departments collectively employ approximately 40 individuals who are responsible for hardware upgrades, maintenance of current software and related databases and augmenting software packages with custom programming. We currently maintain an internet web page that provides a wide variety of information, as well as, links to vendors and customers. Our expanded use of web based technologies include enhanced e-mail and interactive use of the our intranet for data warehouse applications such as quality documentation, human resources documentation, MIS systems documentation and interactive corporate forms. We operate within Reptron Distribution and Reptron Manufacturing Services with UNIX-based software packages written in a fourth generation language. The UNIX-based software packages used by Reptron Distribution and Reptron Manufacturing Services may be operated on a variety of hardware platforms. Therefore, neither division is restricted to the use of computer hardware from any one supplier and do not have the constraints associated with proprietary hardware or software. 12 Reptron Distribution operates an integrated distribution software package that has been greatly enhanced with custom programming. This system allows management to direct the entire Reptron Distribution operation by connecting all sales offices to the corporate headquarters. Reptron Manufacturing Services operates an integrated MRP II package which has also been greatly enhanced by its MIS staff through custom programming. This system is used to operate and integrate Reptron Manufacturing Services' manufacturing plants with central administrative functions. Reptron Display and System Integration operates on a newly acquired integrated software package, MAS90. This client-server software has minimal hardware performance requirements and interfaces with a number of database formats, allowing the flexibility of utilizing third-party reporting tools. Employees As of February 26, 2002, we employed 1,532 persons, of whom 321 were dedicated to Reptron Distribution, 1,139 were dedicated to Reptron Manufacturing Services, 51 were dedicated to Reptron Display and System Integration and 21 were corporate employees. Hourly employees at the manufacturing plant in Hibbing, Minnesota are covered under a collective bargaining agreement with the International Brotherhood of Electrical Workers. The current term of the collective bargaining agreement expires in September 2006. 13 Item 2. Properties We occupy a number of facilities located throughout the United States. Currently, we operate four manufacturing facilities, 18 sales offices, one main warehouse and a corporate headquarters facility. Owned facilities. We own a 150,000 square foot facility located in Tampa, Florida which the Tampa Reptron Manufacturing Services plant and administrative offices occupy. We also own a 80,000 square foot Reptron Manufacturing Services facility in Gaylord, Michigan. Leased facilities. During 2001, we sold our corporate headquarters facility located at 14401 McCormick Drive, Tampa, Florida and leased back 26,000 square feet. We are currently renovating a portion of our 150,000 square foot facility located in Tampa, Florida to accommodate our corporate personnel, management staff and executive offices for Reptron Distribution. The Tampa sales office and corporate sales operations for Reptron Distribution will also be located in these renovated offices. We lease 18 office suites serving as sales offices for Reptron Distribution. These offices average approximately 2,000 square feet in size and contain a small space for warehousing inventory and sales materials. Lease terms on these offices range from three to five years and expire at various dates through August 2004. Additionally, in November 2000 we entered into a lease for a warehouse facility in Reno, Nevada that is approximately 71,000 square feet for Reptron Distribution. The lease terms on the facility expire in December 2010. The warehouse and distribution operations were fully transferred to the Nevada facility in the first half of 2001. We also lease a total of 127,000 square feet of manufacturing and administrative offices for the Reptron Manufacturing Services operation in Hibbing, Minnesota. The lease on the buildings expires in December 2002. We also lease a total of 40,000 square feet of manufacturing and administrative offices for the Reptron Display and System Integration operation in Fremont, California. The lease on the buildings expires in July 2004. Item 3. Legal Proceedings We are one of ninety-one defendants in a patent infringement action commenced in April 2000, in the United States District Court for the District of Arizona, by the Lemelson Medical, Education & Research Foundation, Limited Partnership ("Lemelson"). Lemelson alleges that we and the other co-defendants have infringed various patents that purportedly cover the use of "machine vision" and "bar code" scanning equipment. Lemelson has asserted similar claims against other companies in our industry, as well as against companies in other industries. We understand that Lemelson has entered into licenses with others, for the patents alleged to be infringed by us. If our defenses of the alleged claims prove unsuccessful, we cannot ensure that we will be offered a license of the Lemelson patents. Based on our understanding of the terms that Lemelson has made available to other licensees, if such a license is negotiated, we believe that obtaining a license from Lemelson under the same or similar terms would not have a material adverse effect on our results of operations or financial condition. However, if a license is effectuated, we cannot ensure that its terms, or the ultimate resolution of this matter, will not have a material adverse effect on our operating results or financial condition. We are, from time to time, involved in litigation relating to claims arising out of our operations in the ordinary course of business. We believe that none of these claims, which were outstanding as of December 31, 2001, should have a material adverse impact on our financial condition or results of operations. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of our shareholders during the fourth quarter of the fiscal year ending December 31, 2001. 14 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters Our common stock is traded on The NASDAQ National Market System under the symbol "REPT". The following table sets forth, for the periods indicated, the high and low close prices of our common stock as reported by the NASDAQ National Market System: Fiscal 2000 High Low - ----------- ------- ------ First Quarter $11.36 $ 7.63 Second Quarter $13.13 $ 9.00 Third Quarter $17.00 $11.69 Fourth Quarter $15.19 $ 5.59 Fiscal 2001 High Low - ----------- ------- ------- First Quarter $ 11.75 $5.69 Second Quarter $ 8.20 $4.02 Third Quarter $ 6.70 $2.60 Fourth Quarter $ 4.10 $2.41 Fiscal 2002 High Low - ----------- ------- ------- First Quarter (through March 25, 2002) $5.00 $3.00 On March 25, 2002, the last sale price of our common stock, as reported by The NASDAQ National Market System was $3.26 per share. As of March 25, 2002, there were approximately 100 holders of record of our common stock and approximately 1,500 beneficial shareholders. We have never declared or paid dividends on our common stock. We do not intend, for the foreseeable future, to declare or pay any cash dividends and intend to retain earnings, if any, for the future operation and expansion of our business. Our current line of credit prohibits the payment of dividends. 15 Item 6. Selected Financial Data The following table summarizes selected financial data of Reptron and should be read in conjunction with the Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. Year Ended December 31, -------------------------------------------------------------- 1997 1998 1999 2000 2001 ---------- ---------- ---------- ---------- ---------- (In thousands except share and per share data) Operating Statement Data: Net sales - Electronic Component Distribution ........ $ 187,267 $ 156,507 $ 198,132 $ 345,906 $ 227,259 Net sales - Electronic Manufacturing Services ........ 116,644 146,282 161,085 230,553 171,388 ---------- ---------- ---------- ---------- ---------- Total net sales ............................... $ 303,911 $ 302,789 $ 359,217 $ 576,459 $ 398,647 ========== ========== ========== ========== ========== Gross profit - Electronic Component Distribution/1/ $ 35,375 $ 25,081 $ 34,525 $ 63,027 $ 31,174 Gross profit - Electronic Manufacturing Services/2/ 18,780 12,847 17,249 30,535 14,981 ---------- ---------- ---------- ---------- ---------- Total gross profit ............................ 54,155 37,928 51,774 93,562 46,155 Selling, general and administrative expenses ......... 38,154 51,206 55,902 71,543 66,685 ---------- ---------- ---------- ---------- ---------- Operating income (loss) ....................... 16,001 (13,278) (4,128) 22,019 (20,530) Interest expense, net ................................ 6,184 8,339 8,582 11,425 10,754 ---------- ---------- ---------- ---------- ---------- Earnings (loss) before income taxes ........... 9,817 (21,617) (12,710) 10,594 (31,284) Income tax provision (benefit)/3/..................... 3,677 (8,470) (4,703) 4,903 (9,460) ---------- ---------- ---------- ---------- ---------- Net earnings (loss) before extraordinary item 6,140 (13,147) (8,007) 5,691 (21,824) Extraordinary gain on extinguishment of debt, net -- -- 12,776 -- -- ---------- ---------- ---------- ---------- ---------- Net earnings (loss) ........................... $ 6,140 $ (13,147) $ 4,769 $ 5,691 $ (21,824) ========== ========== ========== ========== ========== Net earnings (loss) per common share - basic ......... $ 1.01 $ (2.15) $ 0.78 $ 0 .91 $ (3.42) ========== ========== ========== ========== ========== Weighted average Common Stock shares Outstanding - basic .............................. 6,077,084 6,118,023 6,151,563 6,252,938 6,389,474 ========== ========== ========== ========== ========== Net earnings (loss) per common share - diluted ....... $ 0.98 $ (2.15) $ 0.78 $ 0.83 $ (3.42) ========== ========== ========== ========== ========== Weighted average Common Stock equivalent shares outstanding - diluted ..................... 6,247,050 6,118,023 6,151,563 6,836,911 6,389,474 ========== ========== ========== ========== ========== December 31, ---------------------------------------------------- 1997 1998 1999 2000 2001 -------- -------- -------- -------- -------- Balance Sheet Data: Working capital ......................... ............ $137,572 $101,829 $ 95,677 $146,708 $100,972 Total assets ............................ ............ 222,514 210,083 215,853 294,606 199,395 Long-term obligations - including current portion .............................. ............ 133,693 133,163 119,797 162,461 132,704 Shareholders' equity .................... ............ 54,975 42,126 46,960 53,775 32,172 /(1)/ Net of inventory writedown of $10.0 million in the second quarter of 2001. /(2)/ Net of inventory writedown of $2.0 million in the second quarter of 2001. /(3)/ Net of deferred tax benefit reserve of $2.2 million recorded in 2001. 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This document contains certain forward-looking statements that involve a number of risks and uncertainties. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Factors that could cause actual results to differ materially include the following: business conditions and growth in Reptron's industry and in the general economy; competitive factors; risks due to shifts in market demand; the ability of Reptron to complete acquisitions; and the risk factors listed from time to time in Reptron's reports filed with the Securities and Exchange Commission as well as assumptions regarding the foregoing. The words "believe", "plans", "estimate", "expect", "intend", "anticipate", and similar expressions and variations thereof identify certain of such forward-looking statements, which speak only as of the dates on which they were made. Reptron undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors. Readers are cautioned not to place undue reliance on these forward-looking statements. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this report. Results of Operations The following table sets forth, for the periods indicated, the percentage of Reptron's net sales represented by each line item presented, except for Reptron Distribution and Electronic Manufacturing Services gross profit, which is presented as a percentage of net sales of the respective segments: Year ended December 31, ----------------------- 1999 2000 2001 ----- ----- ----- Net sales - Electronic Component Distribution 55.2% 60.0% 57.0% Net sales - Electronic Manufacturing Services 44.8 40.0 43.0 ----- ----- ----- Total net sales ................................... 100.0% 100.0% 100.0% ===== ===== ===== Gross profit - Electronic Component Distribution/1/ 17.4% 18.2% 13.7% ===== ===== ===== Gross profit - Electronic Manufacturing Services/2/ 10.7% 13.2% 8.7% ===== ===== ===== Total gross profit ................................ 14.4% 16.2% 11.6% Selling, general and administrative expenses ............. 15.5 12.4 16.7 ----- ----- ----- Operating income (loss) .................................. (1.1) 3.8 (5.1) Interest expense, net .................................... 2.4 2.0 2.7 ----- ----- ----- Earnings (loss) before income taxes ...................... (3.5)% 1.8% (7.8)% Income tax provision (benefit)/3/......................... (1.3) 0.8 (2.4) ----- ----- ----- Net earnings (loss) before extraordinary item ............ (2.2)% 1.0% (5.4)% Extraordinary gain on extinguishment of debt, net of tax 3.5% --% -- ----- ----- ----- Net earnings (loss) ............................... 1.3% 1.0% (5.4)% ===== ===== ===== /(1)/ 18.1% excluding a $10.0 million inventory writedown in the second quarter of 2001. /(2)/ 9.9% excluding a $2.0 million inventory writedown in the second quarter of 2001. /(3)/ (2.9)% excluding a $2.2 million deferred tax benefit reserve recorded in 2001. 17 2001 Compared to 2000 Net Sales. Total net sales decreased $177.8 million, or 30.9%, from $576.5 million in 2000 to $398.6 million in 2001. ECD total net sales decreased $118.6 million, or 34.3%, from $345.9 million in 2000 to $227.3 million in 2001. Management believes that this decrease resulted primarily from a significant industry-wide slowdown in the sales volume and price reductions of electronic components in the United States. Sales of semiconductors, passive components and electromechanical components accounted for 83%, 7% and 10%, respectively, of 2001 ECD net sales compared to 67%, 24% and 9%, respectively, of 2000 ECD net sales. Sales generated from the top four ECD vendors accounted for approximately $102 million, or 43% of 2001 ECD net sales, as compared with approximately $147 million or 41% of 2000 ECD net sales. EMS net sales decreased $59.2 million, or 25.7%, from $230.6 million in 2000 to $171.4 million in 2001. This decrease is primarily attributable to decreased demand within the semiconductor equipment and telecommunications customer base of EMS. The three largest EMS customers accounted for approximately 17%, 10% and 6%, respectively, of 2001 EMS net sales (7%, 4% and 3%, respectively, of total Reptron 2001 net sales) as compared to 16%, 9% and 8%, respectively, of 2000 EMS net sales (6%, 4% and 3%, respectively, of total Reptron 2000 net sales). Gross Profit. Total gross profit decreased $47.4 million or 50.7%, from $93.6 million in 2000 to $46.2 million in 2001. During the second quarter of 2001, we recorded a non-cash inventory writedown charge of $12.0 million which is included in cost of sales. As a result of this charge, gross margin decreased from 14.6% to 11.6% in 2001 as compared to 16.2% in 2000. The remaining decrease in gross profit is primarily attributable to the overall decline in business as a result of general economic conditions. ECD gross profit decreased $31.9 million, or 50.5%, from $63.0 million in 2000 to $31.2 million in 2001. During the second quarter of 2001, the ECD segment recorded a non-cash inventory writedown charge of $10.0 million to reflect the rapid decline in market pricing for electronic components and as a result of distributor supplier lines terminated by Reptron. This charge is included in cost of sales and caused gross margin to decline from 18.1% to 13.7% in 2001. ECD gross margin was 18.2% in 2000. The decrease in gross profit dollars, excluding the effect of the inventory charge, is due to a decrease in sales experienced in 2001 as compared to 2000. EMS gross profit decreased $15.6 million, or 50.9%, from $30.5 million in 2000 to $15.0 million in 2001. During the second quarter of 2001, the EMS segment recorded a non-cash inventory writedown charge of $2.0 million as a result of excess components due to significant reductions in customer demands and decline in pricing of electronic components. This charge is included in cost of sales and caused gross margin to decline from 9.9% to 8.7% in 2001 as compared to 13.2% in 2000. The decrease in gross profit and gross margin from prior periods is primarily attributable to the under-absorption of fixed costs in the manufacturing process as a result of the significant reduction of sales orders in 2001 versus 2000. Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased $4.9 million, or 6.8%, from $71.5 million 2000 to $66.7 million ($67.8 million excluding a $1.1 million gain on the sale of assets in the fourth quarter of 2001) in 2001. These expenses, as a percentage of net sales, increased from 12.4% in 2000 to 16.7% in 2001. The remaining decrease in selling, general and administrative expenses is primarily attributable to cost cutting measures implemented in 2001. Our overall employee base declined from 2,142 in 2000 to 1,532 in 2001, a 28.5% reduction in workforce. Interest Expense. Net interest expense decreased $0.7 million, or 5.9%, from $11.4 million in 2000 to $10.8 million in 2001. This decrease in net interest expense is the result of the combination of an increase in average outstanding debt of $7.9 million from $141.1 million in 2000 to $149.0 million in 2001, and a decrease in average interest rates from 8.1% in 2000 to 7.2% in 2001. 18 2000 Compared to 1999 Net Sales. Total net sales increased $217.3 million, or 60.5%, from $359.2 million in 1999 to $576.5 million in 2000. ECD total net sales increased $147.8 million, or 74.6%, from $198.1 million in 1999 to $345.9 million in 2000. This increase resulted primarily from improved market conditions for the sale of electronic components in the United States. Additionally, we made significant investments in personnel and infrastructure, which has aided in sales volume growth. Sales of semiconductors, passive components and electromechanical components accounted for 68%, 24% and 8%, respectively, of 2000 ECD net sales compared to 67%, 24% and 9%, respectively, of 1999 ECD net sales. Sales generated from the top four ECD vendors accounted for approximately $147 million, or 41% of 2000 ECD net sales, as compared with approximately $68.0 million or 34% of 1999 ECD net sales. EMS net sales increased $69.5 million, or 43.1%, from $161.1 million in 1999 to $230.6 million in 2000. After adjusting for net sales of Reptron Display and System Integration, acquired in October, 1999, 2000 net sales increased $53.5 million or 33.6% as compared with 1999 net sales. This increase was primarily attributable to increased demands from within the existing customer base of EMS. The three largest EMS customers accounted for approximately 16%, 9% and 8%, respectively, of 2000 EMS net sales (6%, 4% and 3%, respectively, of our total 2000 net sales) as compared to 11%, 8% and 7%, respectively, of 1999 EMS net sales (5%, 3% and 3%, respectively, of our total 1999 net sales). Sales from the Hibbing, Minnesota; Tampa, Florida; Gaylord, Michigan and Fremont, California manufacturing facilities accounted for approximately 37%, 32%, 23% and 8% respectively, of EMS 2000 net sales as compared with 26%, 30%, 43% and 1%, respectively, of EMS 1999 net sales. Gross Profit. Total gross profit increased $41.8 million or 80.7%, from $51.8 million in 1999 to $93.6 million in 2000. The gross margin increased from 14.4% in 1999 to 16.2% in 2000. ECD gross profit increased $28.5 million, or 82.6%, from $34.5 million in 1999 to $63.0 million in 2000. ECD gross margin increased from 17.4% in 1999 to 18.2% in 2000. This increase in gross margin was due primarily to improved selling and pricing practices and stronger electronic component market conditions experienced in 2000 as compared with market conditions in 1999. EMS gross profit increased $13.3 million, or 77.0%, from $17.2 million in 1999 to $30.5 million in 2000 and its gross margin increased from 10.7% in 1999 to 13.2% in 2000. This increase in gross margin was primarily attributable to the improvements in asset utilization and manufacturing processes. Additionally, the Fremont plant generated higher gross margins than the other EMS facilities in 2000. Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased $15.6 million, or 28.0%, from $55.9 million 1999 to $71.5 million in 2000. Selling, general and administrative expenses of Reptron Display and System Integration were approximately $3.7 million. After adjusting for the effects of Reptron Display and System Integration, the increase in selling, general and administrative expenses was primarily attributable to increased variable expenses associated with increased sales volumes. These expenses, as a percentage of net sales, decreased from 15.6% in 1999 to 12.4% in 2000. Interest Expense. Net interest expense increased $2.8 million, or 33.1%, from $8.6 million in 1999 to $11.4 million in 2000. This increase in net interest expense resulted primarily from an increase in average outstanding debt of $16.1 million from $126.5 million, during 1999 to $142.6 million during 2000. In addition, our overall average interest rate increased from 6.8% during 1999 to 8.0% during 2000. Currency Fluctuation Reptron pays for its purchases from foreign sources, including Asian manufacturers, in United States dollars, which reduces the adverse effects of currency fluctuations. Reptron has not experienced substantial adverse effects from currency fluctuations to date. 19 Liquidity and Capital Resources Reptron primarily finances its operations through subordinated notes, bank credit lines, capital equipment leases, and short-term financing through supplier credit lines. Net cash used in or provided by operating activities has historically been provided by net income (loss) levels combined with fluctuations in inventory, accounts receivable and accounts payable. Operating activities for 2001 provided cash of approximately $30.7 million. This increase in cash flow resulted primarily from decreases in accounts receivables of $47.3 million and inventories of $37.1 million, excluding a non-cash inventory writedown of $12.0 million in the second quarter of 2001. These items were partially offset by decreases in accounts payable of $38.3 million and accrued expenses of $4.3 million. Days sales in accounts receivable were approximately 60 days at December 31, 2001 compared to 53 days at December 31, 2000. Annualized inventory turns for 2001 were 3.7 times compared to 4.5 times for 2000. Capital expenditures totaled approximately $4.4 million in 2001. These capital expenditures were primarily for the acquisition of manufacturing equipment. These purchases were funded by the working capital line of credit. Five lenders have made available to Reptron a $75 million revolving credit facility (the "Credit Agreement") through January 8, 2004. Borrowings under the Credit Agreement are collateralized by all inventory, accounts receivable, equipment and general intangibles. The Credit Agreement limits the amount of capital expenditures and prohibits the payment of dividends thereby restricting the distribution of retained earnings. The Credit Agreement provides for, upon notice to the lender, advancement of funds pursuant to either a Domestic Rate Loan (variable at the prime rate, 4.75% at December 31, 2001) or a Eurodollar Rate loan based on the London Interbank Offered Rate ("LIBOR") plus an indexed spread (4.8% at December 31, 2001). Upon notice to the lenders, advances may be converted from one type of loan to the other. As of December 31, 2001, we were able to borrow the full credit facility based on the borrowing advance formulas provided for in the Credit Agreement, as amended. Prior to the end of the fiscal year, we anticipated that at December 31, 2001 we would not be in compliance with the fixed charge coverage ratio covenant provided for in the Credit Agreement. Consequently, prior to year end, we and our lenders reached an agreement to amend the Credit Agreement to be effective as of December 31, 2001. The amendment was to provide for removal of the fixed charge coverage ratio covenant for only the period ending December 31, 2001 and was to add future quarterly earnings requirements. The amendment was signed on February 20, 2002 and by its terms was effective December 31, 2001. Amounts outstanding under the Credit Agreement as of December 31, 2001 were approximately $50.6 million. Management believes that we will not be in compliance with the earnings requirement contained in the Credit Agreement, as amended, for at least the first quarter of 2002. Management has historically been able to obtain waivers for non-compliance of Credit Agreement covenants and believes that we will receive the necessary waiver for the first quarter of 2002 and future additional waivers when and if needed. There can be no assurance that we will be able to comply with these financial covenants in the future or that we will receive waivers from our lenders for non-compliance with these covenants. The elimination of the liquidity provided by the Credit Agreement would have a material adverse effect on our business and financial condition. Management believes that available credit facilities will be sufficient to meet our capital expenditures and working capital needs of our operations as presently conducted. However, future liquidity and cash requirements will depend on a wide range of factors, including the level of business in existing operations, expansion of facilities and possible acquisitions. In particular, management is considering various alternatives related to the payment of approximately $76.3 million of our Convertible Notes, which will become due in August 2004. If the Convertible Notes are not converted into our common stock we will be required to repay the indebtedness or make other arrangements to refinance the Convertible Notes. If we fail to do so, it will result in a default of the Convertible Notes, which would have a material adverse effect on our business. While there can be no assurance that such financing will be available in amounts and on acceptable terms, management believes that such financing would likely be available on acceptable terms. New Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for the year beginning January 1, 2002, however, certain provisions of that Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. 20 In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. The provisions of the statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. We have engaged a third party valuation consultant to assist in evaluating the impact of the adoption of these standards but have not yet determined the full effect of these recent accounting pronouncements on our financial position and results of operations. However, beginning January 1, 2002, we will no longer amortize the excess of cost over net assets acquired. This amortization expense was approximately $1.4 million in 2001. 21 Item 7a. Quantitative and Qualitative Disclosures about Market Risk While Reptron had no holdings of derivative financial or commodity instruments at December 31, 2001, we are exposed to financial market risks, including changes in interest rates. Approximately 60% of interest bearing borrowings have a fixed interest rate. However, borrowings under the working capital Credit Facility bears interest at a variable rate based on the prime rate or the LIBOR. Based on the average floating rate borrowings outstanding throughout 2001, a 90 basis point change in the interest rates would have caused Reptron's interest expense, net of the income tax effect, to change by approximately $675,000. Reptron believes that this amount is not significant to the 2001 results of operations. Item 8. Financial Statements and Supplementary Data The financial statements required by this Item are contained in pages F-1 through F-21 of this Report. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None 22 PART III Item 10. Directors and Executive Officers of the Registrant Information required by this Item is incorporated by reference to the definitive proxy statement to be filed by Reptron for the Annual Meeting of Shareholders to be held June 24, 2002. Item 11. Executive Compensation Information required by this Item is incorporated by reference to the definitive proxy statement to be filed by Reptron for the Annual Meeting of Shareholders to be held June 24, 2002. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this Item is incorporated by reference to the definitive proxy statement to be filed by Reptron for the Annual Meeting of Shareholders to be held June 24, 2002. Item 13. Certain Relationships and Related Transactions Information required by this Item is incorporated by reference to the definitive proxy statement to be filed by Reptron for the Annual Meeting of Shareholders to be held June 24, 2002. 23 PART IV Item 14. Exhibits, Financial Statements, Schedule, and Reports on Form 8-K (a) The following documents are filed as part of the report: 1. and 2. The financial statements and schedule filed as part of this report are listed separately in the Index to Financial Statements and Schedules beginning on page F-1 of this report. 3. For Exhibits see Item 14(c), below. (b) No reports on Form 8-K have been filed during the period ended December 31, 2001, by Reptron. (c) List of Exhibits: Exhibit No. Description - ----------- ----------- 3.1 Articles of Incorporation (1) 3.1(a) Articles of Amendment to the Articles of Incorporation (5) 3.2 Bylaws (1) 4.1 Specimen Certificate for the Common Stock of Registrant (1) 4.2 Form of Indenture (4) 4.3 Form of Convertible Subordinated Note (included in Exhibit 4.2) 4.4 See Items 10.8 to 10.13 10.1 Reptron Electronics, Inc. Employee Profit Sharing Plan (1) 10.2 Reptron Electronics, Inc. Amended and Restated Incentive Stock Option Plan (2) 10.3 Reptron Electronics, Inc. Non-Employee Director Stock Option Plan (2) 10.4 Reptron Electronics, Inc. 401(k) Retirement Savings Plan (3) 10.5 Employment Agreement between Michael L. Musto and Reptron Electronics, Inc., dated June 5, 1998 (7) 10.6 Employment Agreement between Paul Plante and Reptron Electronics, Inc., dated January 5, 1999 (13) 10.7 Employment Agreement between Jack Killoren and Reptron Electronics, Inc., dated January 14, 1999 (9) 10.8 Revolving Credit Facility and Security Agreement between PNC Bank, National Association and Reptron Electronics, Inc., dated January 8, 1999 (8) 10.9 Revolving Credit and Security Agreement First Amendment between PNC Bank, National Association and Reptron Electronics, Inc., dated November 10, 1999 (11) 10.10 Revolving Credit and Security Agreement Second Amendment between PNC Bank, National Association and Reptron, dated February 28, 2000 (11) 10.11 Revolving Credit and Security Agreement Third Amendment between PNC Bank, National Association and Reptron Electronics, Inc., dated May 5, 2000 10.12 Revolving Credit and Security Agreement Fourth Amendment between PNC Bank, National Association and Reptron Electronics, Inc., dated July 20, 2000 (13) 24 Exhibit No. Description - ----------- ----------- 10.13 Revolving Credit and Security Agreement Fifth Amendment between PNC Bank, National Association and Reptron Electronics, Inc., dated September 27, 2001 (14) 10.14 Revolving Credit and Security Agreement Sixth Amendment between PNC Bank, National Association and Reptron Electronics, Inc., dated December 31, 2001 10.15 Distributor Contract between the Electronic Components Division of Seiko Instruments U.S.A., Inc. and Reptron Electronics, Inc., dated February 11, 1998 (6) 10.16 Distributor Contract between Micro Printer Division of Seiko Instruments U.S.A., Inc. and Reptron Electronics, Inc., dated February 4, 1998 (6) 10.17 Distributor Agreement between Samsung Semiconductor, Inc. and Reptron Electronics, Inc., dated June 1, 1998 (8) 10.18 Distributor Agreement between Samsung Display Devices Inc. and Reptron Electronics, Inc., dated June 24, 1999 (10) 10.19 Commercial Mortgage Agreement between General Electric Capital Business Asset Funding Corporation and Reptron Electronics, Inc. dated February 29, 2000 (12) 23.1 Consent of Grant Thornton LLP 24.1 Power of Attorney (See Signature Page) - ---------- (1) Filed with Reptron's Registration Statement on Form S-1, dated February 8, 1994 (File No. 33-75040). (2) Filed with Reptron's Registration Statement on Form S-8, dated December 22, 1994 (File No. 33-87854) (3) Filed with Reptron's Registration Statement on Form S-8, dated June 6, 1997 (File No. 333-28727) (4) Filed with Reptron's Amendment No. 1 to Registration Statement on Form S-3, dated August 4, 1997 (File No. 333-31605) (5) Filed with Reptron's Form 10-Q for the quarter ended June 30, 1997 (6) Filed with Reptron's Form 10-K for the year ended December 31, 1997 (7) Filed with the Company's Form 10-Q for the quarter ended June 30, 1998 (8) Filed with Reptron's Form 10-K for the year ended December 31, 1998 (9) Filed with Reptron's Form 10-Q for the quarter ended March 31, 1999 (10) Filed with Reptron's Form 10-Q for the quarter ended September 30, 1999 (11) Filed with Reptron's Form 10-K for the year ended December 31, 1999 (12) Filed with Reptron's Form 10-Q for the quarter ended March 31, 2000 (13) Filed with Reptron's Form 10-K for the Year Ended December 31, 2000 (14) Filed with Reptron's Form 10-Q for the quarter ended September 30, 2001 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Tampa, State of Florida, on March 30, 2002. REPTRON ELECTRONICS, INC. By: /s/ Michael L. Musto ------------------------ Michael L. Musto, Chief Executive Officer Power of Attorney Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. Each person whose signature appears below constitutes and appoints Paul J. Plante, his true and lawful attorney-in-fact and agent, with full power of substitution and revocation, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, may lawfully do or cause to be done by virtue hereof. SIGNATURES TITLE DATE ---------- ----- ---- /s/ Michael L. Musto Chief Executive Officer, and Director March 30, 2002 - ----------------------------------- (Principal Executive Officer) Michael L. Musto /s/ Paul J. Plante President, Chief Operating Officer, March 30, 2002 - ----------------------------------- Principal Accounting Officer and Paul J. Plante Director /s/ Leigh A. Lane Secretary and Director March 30, 2002 - ----------------------------------- Leigh A. Lane /s/ William L. Elson Director March 30, 2002 - ----------------------------------- William L. Elson /s/ John J. Mitcham Director March 30, 2002 - ----------------------------------- John J. Mitcham /s/ Vincent Addonisio Director March 30, 2002 - ----------------------------------- Vincent Addonisio /s/ William U. Parfet Director March 30, 2002 - ----------------------------------- William U. Parfet 26 REPTRON ELECTRONICS, INC. INDEX TO FINANCIAL STATEMENTS AND SCHEDULE Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets as of December 31, 2000 and 2001 F-3 Consolidated Statements of Operations for the years ended December 31, 1999, 2000 and 2001 F-4 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1999, 2000 and 2001 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 2000 and 2001 F-6 Notes to Consolidated Financial Statements F-7 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE F-20 Schedule II -- Valuation and Qualifying Accounts for the years ended December 31, 1999, 2000 and 2001 F-21 Report Of Independent Certified Public Accountants -------------------------------------------------- Board of Directors Reptron Electronics, Inc. We have audited the accompanying consolidated balance sheets of Reptron Electronics, Inc. and its wholly owned subsidiaries as of December 31, 2000 and 2001, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of Reptron's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 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 Reptron Electronics, Inc. and subsidiaries as of December 31, 2000 and 2001, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ GRANT THORNTON LLP Tampa, Florida February 1, 2002 F-2 REPTRON ELECTRONICS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, ------------------- 2000 2001 -------- -------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 188 $ 197 Accounts receivable - trade, net 100,311 53,018 Inventories, net 124,695 75,633 Prepaid expenses and other 2,298 1,995 Income taxes receivable -- 5,900 Deferred tax benefit 62 -- -------- -------- Total current assets 227,554 136,743 PROPERTY, PLANT AND EQUIPMENT - AT COST, NET 33,051 27,133 EXCESS OF COST OVER NET ASSETS ACQUIRED(GOODWILL), NET 31,473 30,073 DEFERRED INCOME TAX -- 3,551 OTHER ASSETS 2,528 1,895 -------- -------- $294,606 $199,395 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable - trade $ 65,199 $ 26,873 Current portion of long-term obligations 2,476 1,252 Accrued expenses 11,941 7,646 Income taxes payable 1,230 -- -------- -------- Total current liabilities 80,846 35,771 NOTE PAYABLE TO BANK 77,409 50,596 LONG-TERM OBLIGATIONS, less current portion 82,576 80,856 COMMITMENTS AND CONTINGENCIES -- -- SHAREHOLDERS' EQUITY Preferred Stock - authorized 15,000,000 shares of $.10 par value; no shares issued -- -- Common Stock - authorized 50,000,000 shares of $.01 par value; issued and outstanding, 6,359,257 and 6,397,196 shares, respectively 64 64 Additional paid-in capital 22,862 23,083 Retained earnings 30,849 9,025 -------- -------- 53,775 32,172 -------- -------- $294,606 $199,395 ======== ======== The accompanying notes are an integral part of these statements. F-3 REPTRON ELECTRONICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) Year Ended December 31, ------------------------------------- 1999 2000 2001 ---------- ---------- ---------- Net sales $ 359,219 $ 576,459 $ 398,647 Cost of goods sold 307,443 482,897 352,492 ---------- ---------- ---------- Gross profit 51,774 93,562 46,155 Selling, general and administrative expenses 55,902 71,543 66,685 ---------- ---------- ---------- Operating income (loss) (4,128) 22,019 (20,530) Interest expense, net 8,582 11,425 10,754 ---------- ---------- ---------- Earnings (loss) before income taxes (12,710) 10,594 (31,284) Income tax provision (benefit) (4,703) 4,903 (9,460) ---------- ---------- ---------- Net earnings (loss) before extraordinary item (8,007) 5,691 (21,824) Extraordinary gain on extinguishment of debt, net of tax of $8,518 12,776 -- -- ---------- ---------- ---------- Net earnings (loss) $ 4,769 $ 5,691 $ (21,824) ========== ========== ========== Net earnings (loss) per common share - basic: Earnings (loss) before extraordinary item $ (1.30) $ .91 $ (3.42) Extraordinary gain 2.08 -- -- ---------- ---------- ---------- Net earnings (loss) per common share - basic $ .78 $ .91 $ (3.42) ========== ========== ========== Weighted average Common Stock shares outstanding - basic 6,151,563 6,252,938 6,389,474 ========== ========== ========== Net earnings (loss) per common share - diluted: Earnings (loss) before extraordinary item $ (1.30) $ .83 $ (3.42) Extraordinary gain 2.08 -- -- ---------- ---------- ---------- Net earnings (loss) per common share - diluted $ .78 $ .83 $ (3.42) ========== ========== ========== Weighted average Common Stock equivalent shares outstanding - diluted 6,151,563 6,836,911 6,389,474 ========== ========== ========== The accompanying notes are an integral part of these statements. F-4 REPTRON ELECTRONICS, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (in thousands, except share data) Total Additional Shares Par Paid-In Retained Shareholders' Outstanding Value Capital Earnings Equity ----------- ----- ---------- -------- ------------- Balance at January 1, 1999 6,147,119 $61 $21,676 $ 20,389 $ 42,126 Exercise of stock options 20,000 1 64 -- 65 Net earnings -- -- -- 4,769 4,769 --------- --- ------- -------- -------- Balance at December 31, 1999 6,167,119 62 21,740 25,158 46,960 Exercise of stock options 192,138 2 1,122 -- 1,124 Net earnings -- -- -- 5,691 5,691 --------- --- ------- -------- -------- Balance at December 31, 2000 6,359,257 64 22,862 30,849 53,775 Exercise of stock options 37,939 -- 221 -- 221 Net loss -- -- -- (21,824) (21,824) --------- --- ------- -------- -------- Balance at December 31, 2001 6,397,196 $64 $23,083 $ 9,025 $ 32,172 ========= === ======= ======== ======== The accompanying notes are an integral part of this statement. F-5 REPTRON ELECTRONICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year ended December 31, -------------------------------- 1999 2000 2001 -------- -------- -------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net earnings (loss) $ 4,769 $ 5,691 $(21,824) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 10,694 10,568 10,339 Extraordinary gain (12,776) -- -- Gain on sale of assets -- (530) (1,111) Deferred income taxes (6,219) (582) (3,489) Change in assets and liabilities (net of effect of acquisition): Accounts receivable - trade (11,115) (37,557) 47,293 Inventories 10,831 (42,142) 49,062 Prepaid expenses and other current assets 7,212 (180) 303 Other assets (329) (419) (79) Accounts payable - trade 15,662 23,137 (38,326) Accrued expenses (3,657) 3,627 (4,295) Deferred revenue (70) -- -- Income taxes payable/receivable 966 784 (7,130) -------- -------- -------- Net cash provided by (used in) operating activities (5,694) (37,603) 30,743 Cash flows from investing activities: Net cash paid for acquisitions (8,075) -- -- Purchases of property, plant and equipment (3,921) (8,339) (4,448) Proceeds from the sale of property, plant and equipment 101 2,234 3,250 -------- -------- -------- Net cash used in investing activities (11,895) (6,105) (1,198) Cash flows from financing activities: Net proceeds (payments) on note payable to bank 37,413 39,996 (26,813) Proceeds from long-term obligations 48 6,015 -- Payments on long-term obligations (29,894) (3,347) (2,944) Proceeds from exercise of stock options 65 1,124 221 -------- -------- -------- Net cash provided by (used in) financing activities 7,632 43,788 (29,536) Net increase (decrease) in cash and cash equivalents (9,957) 80 9 Cash and cash equivalents at beginning of period 10,065 108 188 -------- -------- -------- Cash and cash equivalents at end of period $ 108 $ 188 $ 197 ======== ======== ======== The accompanying notes are an integral part of these statements. F-6 REPTRON ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 2000 and 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reptron Electronics, Inc. ("Reptron") is a leading electronics manufacturing supply chain services company operating as a national distributor of electronic components, a contract manufacturer of electronic products and a display solution provider. Our Electronic Component Distribution ("ECD") customers are in diverse industries including robotics, telecommunications, computers and computer peripherals, consumer electronics, healthcare, industrial controls and contract manufacturing. Our Electronic Manufacturing Services ("EMS") segment manufactures electronic products according to customer design, primarily for customers in the telecommunications, healthcare, industrial/instrumentation, banking and office products industries. As a display solution provider, we provide display design engineering, systems integration and turnkey manufacturing services. A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows. 1. Principles of Consolidation --------------------------- The financial statements include the accounts of Reptron Electronics, Inc. and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated. 2. Cash Equivalents ---------------- For purposes of the statement of cash flows, Reptron considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. 3. Inventories ----------- Inventories are stated at the lower of cost or market. For EMS, cost is determined using the first-in, first-out method (FIFO). ECD uses the average cost method to measure cost, which approximates FIFO. 4. Property, Plant and Equipment ----------------------------- Depreciation is provided for, using the straight-line method, in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives (buildings 39 1/2 years, most other asset categories 5 years). Leasehold improvements are amortized using the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter. Leased equipment under capital leases is amortized using the straight-line method over the lives of the respective leases or over the service lives of the assets for those leases which substantially transfer ownership. Accelerated methods are used for tax depreciation. 5. Excess of Cost Over Net Assets Acquired (Goodwill) -------------------------------------------------- The excess of cost over net assets acquired is amortized over a twenty or thirty year period, as applicable, using the straight-line method. Excess of cost over net assets acquired was approximately $35,029,000 less accumulated amortization which totaled approximately $3,556,000 and $4,956,000 at December 31, 2000 and 2001, respectively. 6. Impairment of Assets -------------------- Reptron's policy is to periodically review and evaluate whether there has been a permanent impairment in the value of long-lived assets, certain identifiable intangibles and goodwill. Factors considered in the valuation include current operating results, trends and anticipated undiscounted future cash flows. An impairment loss is recognized to the extent that the sum of discounted estimated future cash flows (using the Company's incremental borrowing rate over a period of less than 30 years) that is expected to result from the use of the asset is less than the carrying value. There have been no impairment losses in 1999, 2000 or 2001. F-7 REPTRON ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999, 2000 and 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 7. Income Taxes ------------ Reptron accounts for income taxes on the liability method, as provided by Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting For Income Taxes." Under the liability method specified by SFAS 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. 8. Earnings Per Common Share ------------------------- Earnings per share are computed using the basic and diluted calculations, as provided by SFAS No. 128 "Earnings per Share". SFAS No. 128 eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share together with disclosure of how the per share amounts were computed. 9. Use of Estimates ---------------- In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 10. Stock Based Compensation ------------------------ Reptron presents the disclosure provisions of SFAS No. 123 "Accounting for Stock Based Compensation" as it relates to stock options granted to employees. As permitted by SFAS No. 123, Reptron applies Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations in measuring compensation for stock options issued. 11. Revenue Recognition ------------------- Revenues are recognized upon shipment of product, at which time title to goods has transferred to the buyer. The Company performs periodic credit evaluations of its customers' financial condition and does not require collateral on its accounts receivable. Credit losses are provided for in the financial statements and consistently have been within management's expectations. Accounts receivable are presented net of an allowance for doubtful accounts of $1,574,000 and $1,000,000 in 2000 and 2001, respectively. The Company incurred $514,000, $1,222,000, and $1,562,000 of bad debt expense during 1999, 2000, and 2001, respectively. 12. Recent Accounting Pronouncements -------------------------------- In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for the year beginning January 1, 2002, however, certain provisions of that Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. F-8 REPTRON ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999, 2000 and 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. The provisions of the statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company has engaged a third party valuation consultant to assist in evaluating the impact of the adoption of these standards and has not yet determined the full effect of adoption on its financial position and results of operations. However, beginning January 1, 2002, the Company will no longer amortize the excess of cost over net assets acquired. This amortization expense was approximately $1.4 million in 2001. 13. Reclassifications ----------------- Certain reclassifications have been made to conform to the 2001 presentation. NOTE B - STATEMENTS OF CASH FLOWS Supplemental disclosures of cash flow information (in thousands): Year Ended December 31 -------------------------------- 1999 2000 2001 ------ ------- ------- Cash paid during the year for: Interest $9,207 $11,098 $11,131 Income taxes $1,090 $ 4,662 $ 1,178 Reptron incurred approximately $264,000, and $2,000,000 of obligations under capital leases for the acquisition of equipment during 1999 and 2000, respectively. No capital lease obligations were incurred in 2001. On October 27, 1999 Reptron completed the acquisition of Applied Instruments ("Applied"). At closing, the assets were recorded at approximately $9.4 million, consisting of the sum of a cash payment of $7.5 million, acquisition costs, and among the assumption of stated liabilities, $1.4 million of bank debt. Reptron allocated approximately $6.4 million of the purchase price to goodwill. See Note K. NOTE C - INVENTORIES Inventories consist of the following (in thousands): December 31, ---------------------- 2000 2001 -------- -------- Electronic Component Distribution: Inventories $ 87,284 $44,509 Electronic Manufacturing Services: Work in process 13,101 9,326 Raw materials 27,082 24,632 Less reserve for excess and obsolete inventory (2,772) (2,834) -------- ------- $124,695 $75,633 ======== ======= During 2001, the Company recorded a $12 million charge to writedown inventories to the lower of cost or market. This writedown was necessitated by a significant decline in component pricing, excess components due to significant reductions in EMS customer demands, and vendor line terminations. F-9 REPTRON ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999, 2000 and 2001 NOTE D - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following (in thousands): December 31, --------------------- 2000 2001 -------- -------- Land and buildings $ 14,873 $ 12,022 Furniture, fixtures and equipment 50,915 51,842 Leasehold improvements 3,351 4,338 -------- -------- 69,139 68,202 Less accumulated depreciation and amortization (36,088) (41,069) -------- -------- $ 33,051 $ 27,133 ======== ======== NOTE E - NOTE PAYABLE TO BANK Reptron is party to an amended and restated revolving credit agreement ("Credit Agreement") dated January 8, 1999. Five lenders have made available to the Company a $75 million revolving credit facility through January 8, 2004. Borrowings under the Credit Agreement are collateralized by all inventory, accounts receivable, equipment and general intangibles. The Credit Agreement limits the amount of capital expenditures and prohibits the payment of dividends thereby restricting the distribution of retained earnings. The Credit Agreement provides for, upon notice to the lender, advancement of funds pursuant to either a Domestic Rate Loan (variable at the prime rate, 4.75% at December 31, 2001) or a Eurodollar Rate loan based on the LIBOR rate plus an indexed spread (4.8% at December 31, 2001). Upon notice to the lenders, advances may be converted from one type of loan to the other. Prior to the end of the fiscal year, the Company anticipated that at December 31, 2001 it would not be in compliance with the fixed charge coverage ratio covenant provided for in the Credit Agreement. Consequently, prior to year end, the Company and its lenders reached an agreement to amend the Credit Agreement to be effective as of December 31, 2001. The amendment was to provide for removal of the fixed charge coverage ratio covenant for only the period ending December 31, 2001 and was to add quarterly earnings requirements. The amendment was signed on February 20, 2002 and by its terms was effective December 31, 2001. Amounts outstanding under the Credit Agreement as of December 31, 2001 were approximately $50.6 million. Management believes that the Company will not be in compliance with the earnings requirement contained in the Credit Agreement, as amended, for at least the first quarter of 2002. Management has historically been able to obtain waivers for non-compliance of Credit Agreement covenants and believes that it will receive the necessary waiver for the first quarter of 2002 and future additional waivers when and if needed. Accordingly, the note payable has been classified as a non-current obligation. There can be no assurance that the Company will be in compliance with, or be able to obtain waivers of non-compliance with the revised covenants for 2002. NOTE F - LONG-TERM OBLIGATIONS Long-term obligations consist of the following at December 31 (in thousands): 2000 2001 ------- ------- Convertible subordinated notes, due August, 2004, with semi-annual interest installments at a rate of 6.75% $76,315 $76,315 Notes payable collateralized by the Tampa manufacturing facility, due in monthly principal and interest installments of $39.6, through March, 2015, at an interest rate of 8.6% 3,887 3,740 Capitalized lease obligations for equipment, due in monthly principal and interest payments through 2003 3,688 1,731 Others 1,162 322 ------- ------- 85,052 82,108 Less current maturities 2,476 1,252 ------- ------- $82,576 $80,856 ======= ======= F-10 REPTRON ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999, 2000 and 2001 NOTE F - LONG-TERM OBLIGATIONS - Continued The $76.3 million 6 3/4% Convertible Subordinated Notes (the "Notes") outstanding as of December 31, 2000 and 2001 pay interest semi-annually on February 1 and August 1. At the option of the holder, the Notes are convertible into shares of Reptron Common Stock at a rate of 35.0877 shares per $1,000 of principal. If the Notes are not converted into Reptron Common Stock the Company will be required to repay the indebtedness or make other arrangements to refinance the Notes. If the Company fails to do so, it will result in a default of the Notes, which would have a material adverse effect on the Company. At December 31, 2001, aggregate maturities of long-term obligations are as follows (in thousands): Year ending December 31, ------------------------ 2002 $ 1,252 2003 977 2004 76,531 2005 236 2006 254 Thereafter 2,858 ------- $82,108 ======= At December 31, 2001, the net book value of equipment under capital leases is approximately $1,968,000. The related capital lease obligations are included with long-term obligations. Interest payable was $2,714,000 and $2,337,000 at December 31, 2000 and 2001, respectively. Interest payable consists primarily of accrued interest on the convertible subordinated notes due 2004 which have interest payment dates of February 1 and August 1. Accrued interest on these notes was $2,159,000 at December 31, 2000 and 2001. NOTE G - INCOME TAXES The income tax provision (benefit) for the years ended December 31, 1999, 2000 and 2001, respectively, is as follows (in thousands): December 31, ---------------------------------------- 1999 2000 2001 ------ ------ ------- Current $1,303 $5,485 $(5,971) Deferred 2,512 (582) (3,489) ------ ------ ------- $3,815 $4,903 $(9,460) ====== ====== ======= Reptron's effective tax rate differs from the statutory U. S. federal income tax rate as a result of the following: Year Ended December 31, ----------------------- 1999 2000 2001 ---- ---- ----- Statutory federal tax rate 34.0% 34.0% 34.0% State income taxes of approximately 7.6%, 8.5% and 7.4% in 1999, 2000, and 2001, net of federal tax benefit 5.0 5.6 5.0 Meals and entertainment 2.6 2.9 (0.6) Non-deductible goodwill 3.3 2.7 (0.9) Other (0.5) 1.1 (0.3) Deferred tax valuation allowance 0.0 0.0 (7.0) ---- ---- ---- Effective tax rate 44.4% 46.3% 30.2% ==== ==== ==== F-11 REPTRON ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999, 2000 and 2001 NOTE G - INCOME TAXES - Continued Deferred income tax assets and liabilities resulting from differences between accounting for financial statement purposes and tax purposes pursuant to SFAS No. 109, are summarized as follows (in thousands): December 31 ---------------- 2000 2001 ------ ------- Deferred tax assets Net operating loss carryforward $ 58 $ 3,579 AMT and other tax credit carryforward -- 1,647 Inventory reserves 1,109 1,454 Accrued expenses 180 98 Accrued vacation 198 116 Allowance for bad debts 629 400 Other 67 141 ------ ------- 2,241 7,435 ------ ------- Deferred tax liabilities Depreciation 1,952 1,369 Excess of cost over net assets acquired 213 304 Other 14 11 ------ ------- 2,179 1,684 ------ ------- Net deferred tax asset (liability) 62 5,751 Less: valuation allowance -- (2,200) ------ ------- $ 62 $ 3,551 ====== ======= Reptron has net operating loss carryforwards of approximately $7.7 million for Federal and $28.5 million for state income tax purposes, which expire in the years 2018 through 2021. Realization of the tax loss and credit carryforwards is contingent upon future taxable earnings in the appropriate jurisdictions. Valuation allowances have been recorded in 2001 for deferred tax assets which may not be realized. Each carryforward item is reviewed for expected utilization, using a "more likely than not" approach, based on the character of the carryforward item (credit, loss, etc.), the associated taxing jurisdiction (federal or state), the relevant history for the particular item, the applicable expiration dates, and identified actions under the control of the Company in realizing the associated carryforward benefits. The Company assesses the available positive and negative evidence surrounding the recoverability of the deferred tax assets and applies its judgement in estimating the amount of valuation allowance necessary under the circumstances. The Company continues to assess and evaluate strategies that will enable the carryforward, or a greater portion thereof, to be utilized, and will reduce the valuation allowance appropriately for each item at such time when it is determined that the "more likely than not" criterion is satisfied. NOTE H - COMMITMENTS AND CONTINGENCIES Operating Leases - ---------------- Reptron has operating leases for facilities and certain machinery and equipment which expire at various dates through 2006. Certain leases provide for payment by Reptron of any increases in property taxes and insurance over a base amount and others provide for payment of all property taxes and insurance by Reptron. See Note L for lease with related parties. F-12 REPTRON ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999, 2000 and 2001 NOTE H - COMMITMENTS AND CONTINGENCIES - Continued Future minimum payments, by year and in the aggregate, under noncancellable operating leases consist of the following at December 31, 2001 (in thousands): Year ending December 31, - ------------------------ 2002 $2,646 2003 2,030 2004 1,436 2005 913 2006 505 Thereafter 1,224 Total rent expense for the years ended December 31, 1999, 2000 and 2001 was approximately, $1,737,000, $1,878,000, and $3,021,000, respectively. Litigation - ---------- Reptron is one of ninety-one defendants in a patent infringement action commenced by the Lemelson Medical, Education & Research Foundation, Limited Partnership ("Lemelson"). Lemelson alleges that Reptron and the other co-defendants have infringed various patents that purportedly cover the use of "machine vision" and "bar code" scanning equipment. Lemelson has asserted similar claims against other companies in Reptron's industry, as well as against companies in other industries. Reptron understands that Lemelson has entered into licenses of the patents alleged to be infringed with others. If Reptron's defenses of the alleged claims prove unsuccessful, Reptron cannot assure that it will be offered a license of the Lemelson patents. Based on Reptron's understanding of the terms that Lemelson has made available to other licensees, if such a license is negotiated, Reptron believes that obtaining a license from Lemelson under the same or similar terms would not have a material adverse effect on its results of operations or financial condition. However, if a license is effectuated, Reptron cannot assure that its terms, or the ultimate resolution of this matter, will not have a material adverse effect on Reptron's operating results or financial condition. Reptron is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of business. Reptron believes that none of these claims, which were outstanding as of December 31, 2001, should have a material adverse impact on its financial condition or results of operations. NOTE I - SHAREHOLDERS' EQUITY The Board of Directors is authorized, without further shareholder action, to divide any or all shares of the authorized Preferred Stock into series and to fix and determine the designations, preferences, relative rights, qualifications, limitations or restrictions thereon, of any series so established, including voting powers, dividend rights, liquidation preferences, redemption rights and conversion privileges. The Board of Directors has not authorized any issuance of Preferred Stock and there are no plans, agreements, or understandings for the authorization or issuance of any shares of Preferred Stock. F-13 REPTRON ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999, 2000 and 2001 NOTE J - EMPLOYEE BENEFITS Stock Option Plans - ------------------ Reptron's Incentive Stock Option Plan (the "ISO Plan") was adopted in November, 1993 to provide for the grant to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code. A total of 2,000,000 shares of Common Stock has been reserved for issuance under the ISO Plan. In May 2001, Reptron's shareholders approved the establishment of the Reptron 2002 Incentive Stock Option Plan (the "2002 Plan"). The 2002 Plan has essentially the same terms and conditions and is administered identically to the ISO Plan. A total of 1,000,000 shares of Common Stock has been reserved for issuance under the 2002 Plan. Reptron also offers a Director's Stock Option Plan (the "DSO Plan") that has a total of 450,000 shares of Common Stock reserved for issuance under this plan. Both the ISO Plan and DSO Plan is intended to provide incentives to directors, officers, and other key employees and to enhance Reptron's ability to attract and retain qualified employees. Stock options are granted for the purchase of Common Stock at a price not less than the fair market value on the date of grant. The following table summarizes the activity in Common Stock subject to options for the three years ended December 31, 2001: Range Weighted Weighted of Average Average Exercise Exercise Remaining Shares Price Price Contractual Life --------- ------------- -------- ---------------- (In Years) Outstanding at December 31, 1998 1,142,339 $4.38 - 9.13 $5.95 8.6 Granted 174,750 $2.94 - 6.00 $3.56 Exercised (20,000) $ 3.19 $3.19 Forfeited (101,876) $3.55 - 6.00 $5.83 --------- Outstanding at December 31, 1999 1,195,213 $2.94 - 9.13 $5.65 7.8 Granted 228,257 $8.00 - 15.97 $8.36 Exercised (192,138) $3.10 - 11.10 $5.85 Forfeited (78,708) $3.55 - 11.59 $6.48 --------- Outstanding at December 31, 2000 1,152,624 $2.94 - 15.97 $6.14 7.4 Granted 429,249 $4.30 - 10.84 $7.84 Exercised (37,939) $5.85 - 11.13 $5.82 Forfeited (118,503) $3.19 - 10.56 $6.16 --------- Outstanding at December 31, 2001 1,425,431 $2.94 - 15.97 $6.63 7.0 ========= The following table summarizes information about Common Stock options outstanding at December 31, 2001: Options Outstanding Options Exercisable - ----------------------------------------------------------- ---------------------- Weighted Weighted Weighted Number Average Average Number Average Range of Outstanding Remaining Exercise Exercisable Exercise Exercise Prices at 12/31/01 Contractual Life Price at 12/31/01 Price - --------------- ----------- ---------------- -------- ----------- -------- (In Years) $2.94 - 3.66 99,313 7.4 $ 3.29 71,691 $ 3.25 $4.23 - 5.89 44,450 4.9 $ 5.04 32,201 $ 5.00 $6.00 - 6.00 761,668 6.0 $ 6.00 639,591 $ 6.00 $6.09 - 8.56 452,000 8.8 $ 7.85 27,907 $ 8.01 $8.57 - 15.97 68,000 8.0 $11.43 28,626 $11.33 --------- ------- 1,425,431 7.0 $ 6.63 800,016 $ 5.98 ========= ======= F-14 REPTRON ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999, 2000 and 2001 NOTE J - EMPLOYEE BENEFITS - Continued At December 31, 1999 and 2000, exercisable shares totaled 459,305 and 559,055 at weighted average exercise prices of $5.72 and $5.88, respectively. The duration of options granted under the ISO Plan is ten years from the date of grant, or such other date as determined by the Board of Directors. In general, the options must be exercised while employed by Reptron or 90 days thereafter. The options may be exercised in four equal annual increments, cumulatively, beginning one year after the date of grant, and all such options may be exercised in full four years after the date of grant. The options are non-transferable other than by will or by the laws of descent and distribution. Reptron has adopted the disclosure provisions of SFAS No. 123, as it relates to employee awards. APB No. 25 is applied in accounting for Reptron's plans. Accordingly, no compensation expense is recognized related to the stock based compensation plans. The pro forma net earnings (loss) and net earnings (loss) per common share, if Reptron had elected to account for its plans consistent with the methodology prescribed by SFAS No. 123, are as follows: 1999 2000 2001 ------ ------ -------- (in thousands except per share data) --------------------------------- Net earnings (loss): As reported $4,769 $5,691 $(21,824) Pro forma $3,879 $4,929 $(22,655) Net earnings (loss) per common share - basic: As reported $ 0.78 $ 0.91 $ (3.42) Pro forma $ 0.63 $ 0.79 $ (3.55) Net earnings (loss) per common share - diluted: As reported $ 0.78 $ 0.83 $ (3.42) Pro forma $ 0.63 $ 0.72 $ (3.55) The fair value of each option grant is estimated on the date of grant using the Binomial options pricing model with the following weighted average assumptions used for grants in 1999, 2000 and 2001, respectively, no dividend yields for all years; expected volatility of 53.7%, 54.1% and 50.0%; risk free interest rates of approximately 5.7%, 5.0% and 5.0%; and expected lives of 3.8, 3.9 and 4.0 years. The weighted average fair value of options granted in 1999, 2000 and 2001 are $1.63, $3.59 and $3.39, respectively. 401(k) Plans - ------------ In 1993, Reptron established a deferred compensation plan (the "Plan") under section 401(a) of the Code. Substantially all of the officers and employees of Reptron are eligible to participate in the Plan. Employees are eligible to participate in the Plan after ninety days of service and after attaining age 18. At its discretion, Reptron may make matching contributions to the Plan. Employees are always vested in their contributions and are fully vested in the employer contributions after five years of service. Reptron contributed approximately $109,000, $242,000 and $260,000 to the Plan in 1999, 2000 and 2001, respectively. Hibbing Electronics Corporation's ("Hibbing") employees are eligible to participate in Hibbing's voluntary retirement savings plan upon completion of six months of qualified service. Employee contributions up to 4% of wages, as defined, are partially matched by the Company. Reptron contributed approximately $59,000 during 1999. Applied employees are eligible to participate in Applied's voluntary retirement savings plan upon completion of six months of qualified service. There were no employer contributions for 1999. F-15 REPTRON ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999, 2000 and 2001 NOTE J - EMPLOYEE BENEFITS - Continued On January 1, 2000, the Company merged the 40l(k) Plans of Hibbing Electronics and Applied Instruments LLC into the amended Reptron Electronics, Inc 401(k) Retirement Savings Plan. The amended plan allows for participation of employees after 90 days of service and after attaining the age of 18. At its discretion, Reptron may make matching contributions to the Plan. Employees are always vested in their contributions and are fully vested in the employer contributions after five years of service. Participants enrolled in the Hibbing Electronics Corporation Plan prior to January 1, 2000 are fully vested after four years of service. NOTE K - ACQUISITIONS On October 27, 1999 Reptron completed the acquisition of Applied Instruments ("Applied"). At closing, the assets were recorded at approximately $9.4 million, consisting of the sum of a cash payment of $7.5 million, acquisition costs, and among the assumption of stated liabilities, $1.4 million of bank debt. Reptron allocated approximately $6.4 million of the purchase price to goodwill. Reptron allocated approximately $4.0 million of the purchase to tangible assets. In addition, Reptron assumed certain building and equipment lease obligations. Management has determined that the goodwill associated with this transaction will be amortized over a 20 year life. The results of operations of Applied Instruments have been reflected in Reptron's results of operations beginning immediately subsequent to the acquisition date of October 27, 1999. Under the terms of the purchase agreement and based on the results of operations during the fiscal year 2000, the sellers earned an additional $2,247,000. This additional consideration was added to goodwill as of December 31, 2000. No additional payment was earned in fiscal year 2001. Additional purchase consideration may be earned during 2002 based upon Applied Instruments performance. The remaining installment cannot exceed $3.5 million. NOTE L - RELATED PARTY TRANSACTIONS A director of Reptron serves as its general counsel and received approximately $200,000, $174,000 and $190,000 for services rendered during 1999, 2000 and 2001, respectively. Reptron leases one of its distribution sales offices (Detroit, Michigan) from the CEO of Reptron. The building includes office and warehouse space and totals approximately 10,000 square feet. Rent expenses on this facility totaled $72,000 in 1999, 2000 and 2001, which management believes to be comparable to the rent that would be paid to an unrelated party. The lease expires in November 2003. Reptron also leases a total of 127,000 square feet of manufacturing and administrative offices for the Hibbing, Minnesota manufacturing operation. These properties are owned, in part, by four individuals on the senior management team of that facility. Rent expense on these properties totaled $478,000, $514,000, and $484,000 for the years ended December 31, 1999, 2000, and 2001, respectively, which management believes to be comparable to the rent that would be paid to an unrelated party. During 1999, Reptron's CEO beneficially acquired a portion of Reptron's convertible subordinated 6.75% notes with a face value of $8.0 million. Interest on these notes was approximately $359,000 in 1999 and approximately $540,000 in 2000 and 2001. Also in 1999, Reptron's President and COO beneficially acquired a portion of Reptron's convertible subordinated 6.75% notes with a face value of $117,000. Interest on these notes was approximately $3,000 in 1999 and approximately $8,000 in 2000 and 2001. The Company occasionally leases an airplane from a company controlled by Reptron's CEO. The lease is based on a per hour use charge. Payments for the use of the airplane were $12,000, $33,000 and $68,000 during 1999, 2000, and 2001, respectively. NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS At December 31, 2001, the carrying amount of cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short-term maturities of these items. The fair market value of Reptron's convertible subordinated 6.75% notes is $41,973,000, based on the average of the bid and ask prices of the notes on December 31, 2001. The carrying amounts of all other current and long-term portions of notes payable, and long-term obligations approximate fair market value since the interest rates on most of these instruments change with market interest rates. F-16 REPTRON ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999, 2000 and 2001 NOTE N - EARNINGS (LOSS) PER SHARE The following table sets forth the computation of basic and diluted net earnings (loss) per common share: 1999 2000 2001 ---------- ---------- ----------- Numerator: Net earnings (loss) (in thousands) $ 4,769 $ 5,691 $ (21,824) ========== ========== =========== Denominator: For basic earnings (loss) per share - Weighted average shares 6,151,563 6,252,938 6,389,474 Effect of dilutive securities: Employee stock options -- 583,973 -- ---------- ---------- ----------- For diluted earnings (loss) per share 6,153,563 6,836,911 6,389,474 ========== ========== =========== Net earnings (loss) per common share - basic $ .78 $ .91 $ (3.42) ========== ========== =========== Net earnings (loss) per common share - diluted $ .78 $ .83 $ (3.42) ========== ========== =========== In 1999 and 2001 all options have been excluded from the computation of diluted earnings per share because the options' exercise price exceeded the average market price of the common stock, therefore, the effect on earnings per share would be anti-dilutive. The convertible notes (See Note F) were not included in the computation of diluted earnings per share for all years due to the conversion price of $28.50 exceeding the average market price of the common stock and, therefore, the effect would be anti-dilutive. F-17 REPTRON ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999, 2000 and 2001 NOTE O - FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Reptron has two material industry segments: Electronic Component Distribution and Electronic Manufacturing Services. Electronic Component Distribution purchases a wide variety of electronic components, including semiconductors, passive products and electromechanical components, for distribution to manufacturers and wholesalers throughout the United States. Electronic Manufacturing Services manufactures electronic products (including display solutions) according to customer design for a select number of customers throughout the country representing a diverse range of industries. Intersegment sales include a margin, based on market pricing, which is eliminated in consolidation. The following table shows net sales, operating income, identifiable assets, depreciation and amortization expense and capital expenditures as of and for the years ended 1999, 2000 and 2001. Year Ended December 31, ------------------------------------ 1999 2000 2001 -------- -------------- -------- (in thousands) ------------------------------------ Net sales Unaffiliated customers Electronic Component Distribution $198,132 $345,906 $227,259 Electronic Manufacturing Services 161,085 230,553 171,388 -------- -------- -------- 359,217 576,459 398,647 Intersegment sales 6,779 8,718 10,007 -------- -------- -------- $365,996 $585,177 $408,654 ======== ======== ======== Operating income (loss) Electronic Component Distribution $ (3,884) $ 14,929 $(14,570) Electronic Manufacturing Services (244) 7,090 (5,960) -------- -------- -------- $ (4,128) $ 22,019 $(20,530) ======== ======== ======== Identifiable assets Electronic Component Distribution $ 55,587 $152,341 $ 73,806 Electronic Manufacturing Services 154,874 140,539 113,965 -------- -------- -------- 210,461 292,880 187,771 Corporate 5,392 1,726 11,624 -------- -------- -------- $215,853 $294,606 $199,395 ======== ======== ======== Capital expenditures (including capital leases) Electronic Component Distribution $ 1,222 $ 1,282 $ 1,850 Electronic Manufacturing Services 2,898 8,882 2,513 -------- -------- -------- 4,120 10,164 4,363 Corporate 65 175 85 -------- -------- -------- $ 4,185 $ 10,339 $ 4,448 ======== ======== ======== Depreciation and amortization Electronic Component Distribution $ 1,825 $ 1,933 $ 1,782 Electronic Manufacturing Services 8,086 7,916 7,761 -------- -------- -------- 9,911 9,849 9,543 Corporate 783 719 796 -------- -------- -------- $ 10,691 $ 10,568 $ 10,339 ======== ======== ======== Net interest expense is not reflected in the industry segment information, presented above, as it is not taken into consideration in management's analysis of segment performance. F-18 REPTRON ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999, 2000 and 2001 NOTE P - SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the quarterly results of operations for the quarterly periods of 2000 and 2001, (in thousands except per share data): Three Months Ended ------------------------------------------------ 2001 March 31 June 30 September 30 December 31 ---- -------- -------- ------------ ----------- Net sales $134,230 $ 99,327 $ 84,913 $ 80,177 Gross profit 21,627 2,264 12,038 10,226 Operating income 2,878 (16,322) (3,228) (3,858) Net earnings (270) (11,852) (3,674) (6,028) Net earnings per common share - basic $ (0.04) $ (1.85) $ (0.57) $ (0.94) Net earnings per common share - diluted $ (0.04) $ (1.85) $ (0.57) $ (0.94) 2000 ---- Net sales $122,993 $140,880 $152,653 $159,933 Gross profit 19,699 23,683 25,040 25,140 Operating income 3,125 5,316 6,591 6,987 Net earnings 388 1,382 1,893 2,028 Net earnings per common share - basic $ 0.06 $ 0.22 $ 0.30 $ 0.33 Net earnings per common share - diluted $ 0.06 $ 0.20 $ 0.27 $ 0.30 F-19 Report Of Independent Certified Public Accountants On Schedule -------------------------------------------------------------- Board of Directors Reptron Electronics, Inc. In connection with our audit of the consolidated financial statements of Reptron Electronics, Inc., referred to in our report dated February 1, 2002, which is included in this Annual Report on SEC Form 10-K for the year ended December 31, 2001, we have also audited Schedule II for each of the three years in the period then ended. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. /s/ GRANT THORNTON LLP Tampa, Florida February 1, 2002 F-20 SCHEDULE II REPTRON ELECTRONICS, INC. Valuation and Qualifying Accounts For the Years Ended December 31, 1999, 2000, and 2001 (in thousands) Column A Column B Column C Column D Column E -------- ---------- ---------- ------------ -------- Balance at Charged to Accounts Balance Beginning Costs and Written Off, at End Description of Year Expenses Net of Year ----------- ---------- ---------- ------------ -------- Allowance for Doubtful Accounts Year Ended December 31, 1999 $ 483 $ 514 $ (388) $ 609 Year Ended December 31, 2000 $ 609 $ 1,222 $ (257) $1,574 Year Ended December 31, 2001 $1,574 $ 1,562 $(2,136) $1,000 Deferred Tax Asset Valuation Allowance Year Ended December 31, 1999 $ -- $ -- $ -- $ -- Year Ended December 31, 2000 $ -- $ -- $ -- $ -- Year Ended December 31, 2001 $ -- $ 2,200 $ -- $2,200 Reserve for Excess and Obsolete Inventory Year Ended December 31, 1999 $1,948 $ -- $ 318 $1,630 Year Ended December 31, 2000 $1,630 $ 2,337 $ 1,195 $2,772 Year Ended December 31, 2001 $2,772 $14,397 $14,335 $2,834 F-21 Exhibit Index ------------- Exhibit No. Description - ----------- ----------- 10.11 Revolving Credit and Security Agreement Third Amendment between PNC Bank, National Association and Reptron Electronics, Inc., dated May 5, 2000 10.14 Revolving Credit and Security Agreement Sixth Amendment between PNC Bank, National Association and Reptron Electronics, Inc., dated December 31, 2001 23.1 Consent of Grant Thornton LLP