TEN-YEAR FINANCIAL SUMMARY IN THOUSANDS EXCEPT PER SHARE DATA - ------------------------------------------------------------------------------------------------------------- Years ended June 30 - ------------------------------------------------------------------------------------------------------------- OPERATING RESULTS: 1998 1997 1996 Net sales $74,146 84,840 80,964 Cost of sales 62,557 65,769 65,604 - ------------------------------------------------------------------------------------------------------------- Gross profit 11,589 19,071 15,360 - ------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses 14,565 15,598 16,749 Restructuring and unusual charges 5,063 -- -- - ------------------------------------------------------------------------------------------------------------- Operating income (loss) (8,039) 3,473 (1,389) - ------------------------------------------------------------------------------------------------------------- Other income (expense) (403) 376 (305) Income (loss) before income tax expense (benefit) (8,442) 3,849 (1,694) Income tax expense (benefit) (2,261) 1,494 465 - ------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $(6,181) 2,355 (2,159) - ------------------------------------------------------------------------------------------------------------- Return on net sales (8.3%) 2.8% (2.7%) - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- PER SHARE INFORMATION: - ------------------------------------------------------------------------------------------------------------- Net income (loss), basic and dilutive $ (1.26) .48 (.40) Cash dividends .12 .12 .12 Basic weighted average shares outstanding 4,892 4,892 5,333 Dilutive weighted average shares outstanding 4,892 4,911 5,333 Book value at year-end* 4.73 6.37 6.13 - ------------------------------------------------------------------------------------------------------------- BALANCE SHEET: - ------------------------------------------------------------------------------------------------------------- Working capital $10,740 16,581 10,328 Property, plant and equipment - net 19,424 21,188 23,618 Total assets 42,302 49,696 51,466 Long-term debt 7,607 5,926 3,036 Shareholders' equity 23,128 31,140 29,968 - ------------------------------------------------------------------------------------------------------------- OTHER DATA: - ------------------------------------------------------------------------------------------------------------- Current ratio to 1.0 1.9 2.4 1.6 Return on shareholders' average equity (22.8%) 7.8% (6.0%) Capital expenditures 7,818 4,202 7,474 Depreciation and amortization 8,557 5,451 6,135 *On the basis of year-end outstanding common shares. See Note 17 of Notes to Consolidated Financial Statements for Selected Quarterly Financial Data, including dividend payments on common shares. ROBINSON NUGENT, INC. AND SUBSIDIARIES 4 - --------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 1989 - --------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS: Net sales 80,679 67,557 58,671 50,759 53,061 55,031 53,149 Cost of sales 59,329 49,642 42,986 38,750 41,529 41,802 39,504 - --------------------------------------------------------------------------------------------------------------------------- Gross profit 21,350 17,915 15,685 12,009 11,532 13,229 13,645 - --------------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses 15,586 13,727 12,039 10,985 11,153 12,724 11,531 Restructuring and unusual charges -- -- 620 -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------- Operating income (loss) 5,764 4,188 3,026 1,024 379 505 2,114 - --------------------------------------------------------------------------------------------------------------------------- Other income (expense) (170) 841 (464) 214 438 (259) 236 Income (loss) before income tax expense (benefit) 5,594 5,029 2,562 1,238 817 246 2,350 Income tax expense (benefit) 1,855 2,410 900 290 250 (450) 400 - --------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) 3,739 2,619 1,662 948 567 696 1,950 - --------------------------------------------------------------------------------------------------------------------------- Return on net sales 4.6% 3.9% 2.8% 1.9% 1.1% 1.3% 3.7% - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- PER SHARE INFORMATION: - --------------------------------------------------------------------------------------------------------------------------- Net income (loss), basic and dilutive .69 .49 .31 .18 .10 .13 .33 Cash dividends .12 .12 .08 .08 .08 .08 .08 Basic weighted average shares outstanding 5,337 5,315 5,315 5,315 5,315 5,315 5,840 Dilutive weighted average shares outstanding 5,383 5,368 5,331 5,315 5,315 5,315 5,840 Book value at year-end* 6.79 5.91 5.31 5.52 5.17 5.34 4.96 - --------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET: - --------------------------------------------------------------------------------------------------------------------------- Working capital 15,875 15,014 14,780 17,431 16,210 16,595 14,609 Property, plant and equipment - net 24,609 19,344 15,871 15,506 15,216 16,077 15,843 Total assets 54,169 45,377 40,727 40,520 38,743 40,823 38,170 Long-term debt 4,143 2,408 2,166 3,409 3,234 3,589 3,519 Shareholders' equity 36,480 31,419 28,231 29,346 27,490 28,370 26,179 - --------------------------------------------------------------------------------------------------------------------------- OTHER DATA: - --------------------------------------------------------------------------------------------------------------------------- Current ratio to 1.0 2.3 2.4 2.5 3.4 3.2 3.0 2.9 Return on shareholders' average equity 11.0% 8.8% 5.8% 3.3% 2.0% 2.6% 6.3% Capital expenditures 5,929 5,793 4,060 2,382 2,488 1,994 1,036 Depreciation and amortization 3,714 3,003 3,031 2,809 2,897 2,752 3,100 ROBINSON NUGENT, INC. AND SUBSIDIARIES 5 - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION - ------------------------------------------------------------------------------- Certain statements in the following discussions regarding the Company's future product and business plans, financial results, performance and events are forward-looking statements and are based on current expectations. Actual results may differ materially due to a number of risks and uncertainties, including the risks detailed below in "Risk Factors That May Affect Future Results." - ------------------------------------------------------------------------------- 1998 vs. 1997. Customer orders for the fiscal year ended June 30, 1998, were $69.9 million, down $13.6 million or 16.3%, compared to customer orders of $83.5 million in the prior year. Sales in fiscal 1998 were $74.1 million, compared to sales of $84.8 million in the prior year. The Company's net loss for fiscal 1998 was $6.2 million or $1.26 cents per common share, including restructuring and unusual expenses of $5.1 million ($3.6 million after taxes), compared to net income of $2.4 million or 48 cents in the prior fiscal year. Customer sales in the United States were $48.7 million compared to $55.2 million in the prior year. The Company experienced a decrease in the sales of older, more mature products, such as pin grid array sockets, surface mount plastic leaded chip carrier sockets, stamped and screw machine sockets, as well as older versions of PC board and backpanel connectors. Cable assembly sales in the United States were also lower than the previous year. These sales reductions were partially offset by an increase in sales of newer, more profitable PC board and backpanel connectors used in high-speed routers, computer workstations, high-end servers and other communication and networking components. European customer sales were $18.5 million compared to $22.0 million in the prior year, a decline of $3.5 million or 16%, measured in U.S. dollars, or 13% when measured in local currencies, such as the pound sterling, Swiss franc and German mark. This sales decline is due primarily to a reduction in the sales of screw machine and stamped sockets. Helping to counter part of this decline, the Company experienced an increase in sales of new designs of smart card reader connectors and PCMCIA connectors used in electronic memory applications currently in demand by major communication and satellite broadcasting companies in Europe. Management expects sales of these types of products to continue to grow in the future. Customer sales in Asia, which includes sales generated from our operations in Japan, Malaysia and Singapore, were $7.0 million compared to $7.6 million in the prior year. The sales decline in this region is due primarily to lower sales of screw machine and stamped sockets and certain types of PC board connectors. This region generated higher sales in pin grid array sockets, cable-to-board connectors and cable assemblies. The Company expects sales to improve in this region due to the recent development and introduction of a new product line consisting of small outline memory module connectors. The economic conditions in the region and the instability of the Japanese yen, Malaysian ringgit and other Asian currencies had some impact on the current year sales of the Company. The strength of the dollar and pound sterling against these currencies caused products produced in the U.S. and Scotland to be more expensive than locally produced products. Gross profits of $11.6 million in fiscal 1998 decreased $7.5 million or 39.3% compared to fiscal 1997. The lower gross profits reflect the lower sales in the United States, Europe and Asia Pacific, coupled with higher research, development and engineering expenses associated with new product development. Research, development and engineering expenses, which were included in gross profit, were $4.0 million for fiscal 1998 compared to $3.4 million for fiscal 1997. These expenses represented 5.4% of sales in 1998 compared to 4.0% in the prior year as the Company increased its investment in the development of new and improved product offerings. The Company recorded $5.1 million of restructuring and unusual charges in the current year. These charges include $3.1 million of restructuring and reorganization expenses, as well as $2.0 million of unusual charges related to a reduction in the carrying value of various assets. The $3.1 million of restructuring charges includes costs related to the closure and move of the Company's cable assembly facility in North Carolina ($1.6 million), the reorganization of the sales, management and manufacturing organizations in Europe and North America ($0.5 million), and the cost to discontinue several product lines ($1.0 million). While the new cable assembly facility in Reynosa, Mexico, will start operations in September 1998, the costs associated with the closure of the North Carolina facility have been recognized in fiscal 1998. These restructuring plans were implemented to allow the Company to compete more effectively in a changing, highly competitive market place. Unusual charges of $2.0 million reflect a reduction in the carrying value of various assembly equipment, mold tools and dies. These costs result from an evaluation of the Company's ability to recover asset costs given existing market conditions. A major portion of these asset value reductions relate to the Company's decision to phase out certain products where increased offshore competition has resulted in unacceptable profit margins. In addition, the Company has reduced the carrying value of other assets due to present market demand and the low profitability of these products. Selling, general and administrative expenses (SG&A) of $14.6 million decreased by $1.0 million or 6.5% in 1998 compared to 1997. The decrease in SG&A primarily reflects lower selling expenses in Europe due to the consolidation and reorganization of several sales offices and the elimination of bonus expense in 1998. The Company paid approximately $.4 million in bonus awards in 1997, which were granted under the incentive bonus plan for executive officers and key employees. No awards were made under this program in 1998. Administrative expenses in Asia were lower compared to the prior year, due primarily to changes in currency exchange rates. The U. S. dollar strengthened relative to the Singapore dollar and the Japanese yen. Other expenses increased the Company's loss by $0.4 million in fiscal 1998, compared to other income of $0.4 million in fiscal 1997. The other income in 1997 was primarily attributable to income from a $0.5 million settlement of a patent infringement charge the Company had filed against a competitor, and currency exchange gains of approximately $0.4 million. The Company recognized $0.1 million of currency gain in 1998. The currency gains in the current and prior years were primarily related to intercompany receivable and payable positions between the Company's subsidiaries. The provision for income taxes was provided using the appropriate effective tax rates for each of the tax jurisdictions in which the Company operates. The Company recognized a tax benefit of $546 for deferred tax assets related to the U.S. operations. No tax benefit has been recognized on the pretax losses incurred in Belgium, Scotland, Malaysia and Japan. The Company maintains a valuation allowance of approximately $1.5 million for tax benefits of prior period net operating losses in these tax jurisdictions. At such time as management is able to project the probable utilization of all or part of these net operating loss carry-forward provisions, the valuation allowances for these deferred tax assets will be reversed. The net loss in fiscal 1998 amounted to $6.2 million or $1.26 per share, including restructuring and unusual charges of $5.1 million ($3.6 million after income taxes or 73 cents per share), compared to a net income of $2.4 million or 48 cents per share in the prior year. Operations in the United States, Europe and Asia incurred net losses, after restructuring unusual charges and taxes of $3.8 million, $2.4 million and $15,000 respectively. The recent currency crisis in Asia had an impact on the Company's operating results in the year. While sales in Japan were unfavorably impacted by the strengthening of the U. S. dollar against the Japanese yen, operating results in Southeast Asia were affected favorably due to the fact that most of the Company's sales to customers in Southeast Asia are transacted in U. S. dollars. These sales were not significantly affected by the currency crisis. Cost of sales and operating expenses in Southeast Asia were lower in the period due primarily to the devaluation of the Malaysian ringgit and the Singapore dollar, compared to the U. S. dollar. ROBINSON NUGENT, INC. AND SUBSIDIARIES 6 - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) - ------------------------------------------------------------------------------- 1997 vs. 1996. Customer orders for the fiscal year ended June 30, 1997, were $83.5 million, up $1.9 million or 2.4%, compared to customer orders of $81.6 million in the prior year. Sales in fiscal 1997 were $84.8 million, compared to sales of $81.0 million in the prior year. The Company's net income for fiscal 1997 was $2.4 million or 48 cents per common share compared to net loss of $2.2 million or 40 cents in the prior fiscal year. The increase in 1997 sales reflected higher sales of smart card reader connectors and PC memory card products in Europe, and pin grid array sockets, PC board connectors and backpanel connector products (METPAK?2) in the United States. The higher revenue items were partially offset by a lower volume of sales of plastic leaded chip carrier sockets and screw machine products, worldwide. Customer sales in the United States of $52.8 million increased 2% from the prior year and represented 62% of consolidated sales in 1997, compared to 64% in 1996. European sales of $21.6 million in fiscal year 1997 increased by $2.0 million, and represented 26% of the Company's consolidated sales in 1997, compared to 24% in 1996. Asia sales (from the Company's Japan, Malaysia and Singapore operations) of $8.2 million in fiscal 1997 were slightly higher than the prior year, due to higher screw machine sales in Japan and cable assembly and connector sales in Malaysia. Gross profits of $19.1 million in fiscal 1997 increased $3.7 million or 24.2% compared to fiscal 1996. The higher gross profits reflected the higher gross profits from operations in the United States, Europe and Asia Pacific, lower research, development and engineering expenses, and the effect of manufacturing cost reduction programs. Prior year gross profits reflect an adjustment that reduced the carrying values of various production equipment. During the fourth quarter of 1996, the Company determined that shorter product life cycles and increasingly competitive market conditions negatively affected the carrying values of various production equipment. Therefore, a charge of $1.8 million pretax ($1.2 million after-tax) was recorded. Research, development and engineering expenses, which were included in gross profit, were $3.4 million for fiscal 1997, compared to $3.7 million for fiscal 1996. Engineering represented 4.0% of sales in 1997, compared to 4.5% in the prior year. Selling, general and administrative expenses of $15.6 million decreased by $1.1 million or 7.1% in 1997, compared to 1996. The decrease in SG&A primarily reflects lower administrative expenses in Europe partially offset by approximately $.4 million in bonus awards, granted under the incentive bonus plan for executive officers and key employees. No awards were made under this program in 1996. The prior year results also include a charge of $.6 million relating to the elimination of goodwill. Administrative expenses in Asia remained relatively unchanged, as compared to the prior year. Other income (expense) in fiscal 1997 increased net income by $.4 million, compared to a net expense of $.3 million in fiscal 1996. The increase in 1997 is primarily attributable to income from a $.5 million settlement of a patent infringement charge the Company had filed against a competitor and currency exchange gains of approximately $.4 million. These currency gains were generated primarily in Europe, on the strengthening of the Pound Sterling against other European currencies. The currency gains were primarily related to intercompany receivable and payable positions between the Company's subsidiaries. The provisions for income taxes in 1997 and 1996 were provided on the basis of effective tax rates in the respective countries. The Company did recognize approximately $85,000 in tax benefits resulting from prior year losses used to offset current year income at certain foreign operations. However, the Company still has approximately $.8 million in tax benefits resulting from loss carry-forwards in foreign countries that will not be recognized until management is able to project the probable utilization of all or part of these losses. - ------------------------------------------------------------------------------- Liquidity and Capital Resources. Working capital as of June 30, 1998, was at $10.7 million compared to $16.6 million at June 30, 1997. The Company's current ratio at June 30, 1998, was 1.9 to 1 compared to 2.4 to 1 at June 30, 1997. Cash balances at June 30, 1998, were $0.9 million compared to $4.1 million at year-end June 30, 1997. The Company's long-term debt as a percentage of stockholders' equity was 32.9% at year-end 1998, compared to 19.1% at year-end 1997. Capital expenditures were primarily for improvements to, and the expansion of, our molding, plating and stamping capabilities, as well as expenditures for new mold tools, contact dies and assembly equipment, and other expenditures related to the Company's program to replace its management information systems. Total capital expenditures were $7.8 million in the fiscal year 1998, compared to $4.2 million in 1997. The Company believes future cash requirements for capital expenditures and working capital can be funded from operations, supplemented by proceeds from the existing long-term credit agreement and a new $1.3 million long-term loan to be secured by a mortgage on the Company's facility in Dallas, Texas. This loan will be closed in fiscal 1999. The Company currently has $1.8 million in unused and available credit under the existing credit agreement at June 30, 1998. - ------------------------------------------------------------------------------- RISK FACTORS THAT MAY AFFECT FUTURE RESULTS - ------------------------------------------------------------------------------- New Products and Technological Change. The Company's results of operations and competitive strength depend upon the successful and rapid development of new products and enhancements to existing products. The market for the Company's products is characterized by rapid technological advances and changes in customer demand, which necessitate frequent product introductions and enhancements. These factors can result in unpredictable product transition and shortened product life cycles, and can render existing products obsolete or unmarketable. The Company must make significant investments in research and product development and successfully introduce competitive new products and enhancements on a timely basis. The success of new product introductions is dependent on a number of factors, including the rate at which a new product gains acceptance and the Company's ability to effectively manage product transitions. The development of new technology, products, and enhancements is complex and involves uncertainties, which increases the risk of delays in the introduction of new products and enhancements. From time to time the Company has encountered delays that have adversely affected the Company's financial results and competitive position in the market. There can be no assurances that the Company will not encounter development or production delays, or that despite intensive testing by the Company, flaws in design or production will not occur in the future. Design flaws could result in the Company experiencing a rate of failure in its products that delays the shipment or sale of its products, triggers substantial repair or replacement costs, damages the Company's reputation and causes material adverse effect upon the Company's financial results. The Company has historically generated its revenue and operating profits primarily from the sale of products to the computer, network equipment and communications industries. The Company is focusing resources on expanding further into these markets. There can be no assurances that the Company will be successful in expanding these markets. - ------------------------------------------------------------------------------- Dependence on Key Customers. Many of the Company's products are designed specifically for individual customers. Future revenue from these products is therefore dependent on the customer's continued need and acceptance of these products. - ------------------------------------------------------------------------------- Competition. The market for the Company's products is intensely competitive and subject to continuous, rapid technological change, frequent product performance improvements and price reductions. In the connector marketplace, competition comes from companies that have substantially greater resources, including AMP, Inc., Molex, Inc., Berg Electronics Corp. and Methode Electronics, Inc., as well as several other similarly sized com- ROBINSON NUGENT, INC. AND SUBSIDIARIES 7 - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) - ------------------------------------------------------------------------------- panies. The Company expects that the markets for its products will continue to change as customer buying patterns continue to migrate to emerging products and technologies. The Company's ability to compete will depend to a considerable extent on its ability to continuously develop and introduce new products and enhancements to existing products. Increased competition may result in price reductions, reduced margins and declining market share, which may have a material adverse effect on the Company's business and financial results. - ------------------------------------------------------------------------------- Intellectual Property. The Company's intellectual property rights are material assets and key to its business and competitive strength. Robinson Nugent protects its intellectual property rights through a combination of patents, trademarks, copyrights, confidentiality procedures, trade secret laws and licensing arrangements. The Company's policy is to apply for patents, or other appropriate proprietary or statutory protection, when it develops new or improved technology that is important to its business. Such protection, however, may not preclude competitors from developing products similar to the Company's products. In addition, competitors may attempt to restrict the Company's ability to compete by advancing various intellectual property legal theories which could, if enforced by the courts, restrict the Company's ability to develop and manufacture interoperable products. Also, the laws of certain foreign countries do not protect the Company's intellectual property rights to the same extent as the laws of the United States. The Company also relies on certain technology that is licensed from others. The Company is unable to predict whether its license arrangements can be renewed on terms acceptable to the Company. The failure to successfully protect its intellectual property rights or obtain licenses from others as needed could have a material adverse effect on the Company's business and financial results. The connector industry is characterized by vigorous pursuit and protection of intellectual property rights or positions, which in some instances has resulted in significant litigation that is often protracted and expensive. From time to time, Robinson Nugent has commenced actions against other companies to protect or enforce its intellectual property rights. Similarly, from time to time, the Company has been notified that it may be infringing certain patent or other intellectual property rights of others. Licenses or royalty agreements are generally offered in such situations. Litigation by or against the Company may result in significant expense and divert the efforts of the Company's technical and management personnel, whether or not such litigation results in any determination unfavorable to the Company. In the event of an adverse result, the Company could be required to pay substantial damages; cease the manufacture, use and sale of infringing products; expend significant resources to develop non-infringing technology; or discontinue the use of certain processes if it is unable to enter into royalty arrangements. There can be no assurances that litigation will not be commenced in the future regarding patents, copyrights, trademarks or trade secrets or that any license, royalty or other rights can be obtained on acceptable terms, or at all. - ------------------------------------------------------------------------------- Information Systems. The Company is currently in the process of replacing the management information systems of its operations in the United States, Europe and Asia including order management, manufacturing resource planning, finance and accounting. These systems are scheduled to be operational by June 30, 1999 at a total cost of approximately $5.0 million. The implementation program is on schedule and the Company has incurred costs of approximately $1.4 million as of June 30, 1998. Software and hardware have been purchased and installed. Systems are currently being tested in a pilot program. While the Company expects that the new integrated systems will increase operational efficiencies, support future growth, and address the impact of the year 2000 on current systems, the Company's future operating results and financial condition could be adversely affected by functional or performance difficulties with the new system during the transition period. The Company does not presently have a contingency plan in the event of failure of these new management information systems, and is uncertain as to the effects of any such failure on the Company's results of operations, liquidity and financial condition. The Company intends to create a contingency plan during fiscal 1999. In addition, other information and operational systems have to be assessed related to the impact of the year 2000. Plans are being developed to address system modifications required by December 31, 1999. The Company has considered the potential effect on the Company's business, results of operations, and financial condition if key suppliers and vendors do not become year 2000 compliant in a timely manner. Management has taken reasonable steps to verify the Year 2000 readiness of its suppliers. - ------------------------------------------------------------------------------- Manufacturing Risks; Dependence on Suppliers. The Company uses standard molding compounds and pin sockets for many of its products and believes that, in most cases, there are a number of alternative, competent vendors for these components. In addition, the Company designs its own custom stamped and formed connector contacts. Robinson Nugent enters into agreements with custom stamping manufacturers to design and build stamping dies to produce proprietary stamped and formed contacts for the Company. The Company believes that these stamping operations are currently the only suppliers of these particular components that meet the Company's specifications and design requirements. Alternative sources are not readily available. An unanticipated failure of any sole source supplier to meet the Company's requirements for an extended period, or an interruption of the Company's ability to secure comparable components, could have a material adverse effect on its revenue and results of operations. In the event a sole source supplier was unable or unwilling to continue to supply components, the Company would have to identify and qualify other acceptable suppliers. This process could take an extended period, and no assurance can be given that any additional source would become available or would be able to satisfy the Company's production requirements on a timely basis. - ------------------------------------------------------------------------------- Earnings Fluctuations. The Company's reported earnings have fluctuated significantly in the past and may continue to fluctuate significantly in the future from quarter to quarter due to a variety of factors, including, among others, the effects of (i) customers' historical tendencies to make purchase decisions in the second half of the fiscal year, (ii) the timing of the announcement and availability of products and product enhancements by the Company and its competitors, (iii) fluctuating foreign currency exchange rates, (iv) changes in the mix of products sold, (v) variations in customer acceptance periods for the Company's products, and (vi) global economic conditions. - ------------------------------------------------------------------------------- Volatility of Stock Price. The trading price of the Company's common stock has fluctuated and in the future may fluctuate substantially in response to anticipated or reported operating results, industry conditions, new product or product development announcements by the Company or its competitors, announced acquisitions and joint ventures by the Company or its competitors, broad market trends unrelated to the Company's performance, general market and economic conditions, international currency fluctuations and other events or factors. Further, the volatility of the stock markets in recent years has caused wide fluctuations in trading prices of stocks of companies independent of their individual operating results. In the future, the Company's reported operating results may be below the expectations of stock market analysts and investors, and in such events, there could be an immediate and significant adverse effect on the trading price of the company's common stock. - ------------------------------------------------------------------------------- Impact of Recent Accounting Pronouncements. The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" in 1998. SFAS No. 128 specifies the computation, presentation, and disclosure requirements for earnings per share. This statement's objective is to simplify the computation of earnings per share (EPS) and to make the U.S. standard for computing earnings per share more compatible with the EPS standards of other countries. The Financial Accounting Standards Board has issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. The Company will ROBINSON NUGENT, INC. AND SUBSIDIARIES 8 adopt this new standard in fiscal 1999. The Company does not expect adoption of this standard will have a material impact on its financial statements. SFAS No. 131 specifies the way that public business enterprises report information about operating segments in annual financial statements and requires that enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company will adopt the new standard in fiscal 1999. The Company does not expect adoption of this standard will have a material impact on its financial statements. - ------------------------------------------------------------------------------- OPERATING RESULTS AS A PERCENTAGE OF NET SALES - ------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------- Net Sales 100.0% 100.0% 100.0% Cost of sales 84.4 77.5 81.0 - ---------------------------------------------------------------------------------------------- Gross profit 15.6 22.5 19.0 - ---------------------------------------------------------------------------------------------- Selling, general and administration expenses 19.6 18.4 20.7 - ---------------------------------------------------------------------------------------------- Provision for restructuring and unusual expenses 6.8 -- -- - ---------------------------------------------------------------------------------------------- Operating income (loss) (10.8) 4.1 (1.7) - ---------------------------------------------------------------------------------------------- Other income (expense) ( .5) .4 (0.3) - ---------------------------------------------------------------------------------------------- Income (loss) before income tax expense (benefit) (11.3) 4.5 (2.0) - ---------------------------------------------------------------------------------------------- Income tax expense (benefit) (3.0) 1.7 0.7 - ---------------------------------------------------------------------------------------------- NET INCOME (LOSS) (8.3%) 2.8% (2.7%) - ---------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PRICE RANGE AND DIVIDEND INFORMATION - ------------------------------------------------------------------------------- The following table sets forth the high and low closing price of the Company's common shares, which are traded over the Nasdaq National Market under the symbol: RNIC, and the cash dividends declared per share in each of the quarters during the past three fiscal years ended June 30, 1998. Cash Price Range Dividends High Low - ------------------------------------------------------------------------------- FISCAL 1998 - ------------------------------------------------------------------------------- First quarter ended September 30 $ 7 3/4 5 1/32 $ .03 Second quarter ended December 31 6 1/8 3 7/8 .03 Third quarter ended March 31 5 3/4 3 5/8 .03 Fourth quarter ended June 30 6 1/8 3 3/4 .03 - ------------------------------------------------------------------------------- FISCAL 1997 - ------------------------------------------------------------------------------- First quarter ended September 30 $ 6 1/8 4 3/8 $ .03 Second quarter ended December 31 5 3/8 4 1/4 .03 Third quarter ended March 31 5 1/4 4 1/4 .03 Fourth quarter ended June 30 6 1/4 4 5/8 .03 - ------------------------------------------------------------------------------- FISCAL 1996 - ------------------------------------------------------------------------------- First quarter ended September 30 $10 7/8 8 1/8 $ .03 Second quarter ended December 31 9 7/8 5 3/8 .03 Third quarter ended March 31 6 3/8 4 1/2 .03 Fourth quarter ended June 30 7 1/4 4 3/4 .03 As of June 30, 1998, the Company had approximately 750 holders of record of its common shares. ROBINSON NUGENT, INC. AND SUBSIDIARIES 9 - ------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET - ------------------------------------------------------------------------------- IN THOUSANDS June 30 - ------------------------------------------------------------------------------------------------ ASSETS 1998 1997 1996 - ------------------------------------------------------------------------------------------------ Current Assets: Cash and cash equivalents $ 959 4,118 2,368 Receivables, less allowance for doubtful receivables of $571 in 1998, $564 in 1997 and $739 in 1996 9,274 11,784 10,433 Inventories 10,062 11,100 13,446 Other current assets 2,012 1,371 1,532 - ------------------------------------------------------------------------------------------------ Total current assets 22,307 28,373 27,779 - ------------------------------------------------------------------------------------------------ Property, plant and equipment, at cost less accumulated depreciation and amortization 19,424 21,188 23,618 Other assets 571 135 69 - ------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 42,302 49,696 51,466 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------ Current Liabilities: Current installments of long-term debt $ 367 386 713 Short-term bank borrowings 570 -- 6,400 Accounts payable 5,147 4,265 5,450 Accrued expenses 5,483 5,560 4,799 Income taxes payable -- 1,581 89 - ------------------------------------------------------------------------------------------------ Total current liabilities 11,567 11,792 17,451 - ------------------------------------------------------------------------------------------------ Long-term debt, excluding current installments 7,607 5,926 3,036 Deferred income taxes -- 838 1,011 - ------------------------------------------------------------------------------------------------ Total liabilities 19,174 18,556 21,498 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ Commitments and contingencies -- -- -- - ------------------------------------------------------------------------------------------------ Shareholders' Equity: Common shares without par value Authorized 15,000 shares 20,950 20,950 20,950 Retained earnings 14,563 21,290 19,521 Equity adjustment from foreign currency translation 713 2,073 2,847 Employee stock purchase plan loans and deferred compensation (106) (177) (354) Less cost of common shares in treasury (12,992) (12,996) (12,996) - ------------------------------------------------------------------------------------------------ Total shareholders' equity 23,128 31,140 29,968 - ------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 42,302 49,696 51,466 - ------------------------------------------------------------------------------------------------ SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. ROBINSON NUGENT, INC. AND SUBSIDIARIES 10 - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------- IN THOUSANDS EXCEPT PER SHARE DATA Years ended June 30 - ------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------- Net sales $74,146 84,840 80,964 Cost of sales 62,557 65,769 65,604 - ------------------------------------------------------------------------------------------------- Gross profit 11,589 19,071 15,360 - ------------------------------------------------------------------------------------------------- Selling, general and administrative expenses 14,565 15,598 16,749 Restructuring and unusual expenses 5,063 -- -- - ------------------------------------------------------------------------------------------------- Operating income (loss) (8,039) 3,473 (1,389) - ------------------------------------------------------------------------------------------------- Other Income (expense): Interest income 84 124 129 Interest expense (592) (678) (511) Currency exchange gain 105 393 81 Settlement of patent infringement claim -- 500 -- Royalty income -- 37 118 Other -- -- (122) - ------------------------------------------------------------------------------------------------- Total other income (expense) (403) 376 (305) - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- Income (loss) before income tax expense (benefit) (8,442) 3,849 (1,694) - ------------------------------------------------------------------------------------------------- Income tax expense (benefit) (2,261) 1,494 465 - ------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $(6,181) 2,355 (2,159) - ------------------------------------------------------------------------------------------------- Net income (loss) per common share, basic and dilutive $ (1.26) .48 (.40) - ------------------------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. ROBINSON NUGENT, INC. AND SUBSIDIARIES 11 - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------- IN THOUSANDS EXCEPT PER SHARE DATA Employee Stock Purchase Foreign Plan Loans Common shares Retained currency and Deferred Treasury shares Years ended June 30, 1998, 1997 and 1996 Shares Amount earnings translation Compensation Shares Amount - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT JULY 1, 1995 6,850 $20,896 $22,325 $ 3,774 $(768) (1,480) $ (9,747) - ----------------------------------------------------------------------------------------------------------------------------------- Net loss -- -- (2,159) -- -- -- -- Dividends ($.12 per share) -- -- (645) -- -- -- -- Equity adjustments from foreign currency translation -- -- -- (927) -- -- -- Stock purchase plan repayments -- -- -- -- 192 -- -- Amortization of deferred compensation -- -- -- -- 151 -- -- Stock purchase plan terminations, including the loss on disposition of stock held by the plan trust -- (5) -- -- 71 -- -- Stock awards 1 7 -- -- -- -- -- Purchase of treasury stock -- -- -- -- -- (499) (3,372) Stock options exercised -- 3 -- -- -- -- -- Investment in RNBelgium -- 49 -- -- -- 20 123 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 1996 6,851 $20,950 19,521 2,847 (354) (1,959) $(12,996) - ----------------------------------------------------------------------------------------------------------------------------------- Net income -- -- 2,355 -- -- -- -- Dividends ($.12 per share) -- -- (586) -- -- -- -- Equity adjustments from foreign currency translation -- -- -- (774) -- -- -- Stock purchase plan repayments -- -- -- -- 93 -- -- Amortization of deferred compensation -- -- -- -- 51 -- -- Stock purchase plan terminations -- -- -- -- 33 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 1997 6,851 $20,950 21,290 2,073 (177) (1,959) $(12,996) - ----------------------------------------------------------------------------------------------------------------------------------- Net loss -- -- (6,181) -- -- -- -- Dividends ($.12 per share) -- -- (587) -- -- -- -- Equity adjustments from foreign currency translation -- -- -- (1,360) -- -- -- Stock purchase plan repayments -- -- -- -- 60 -- -- Amortization of deferred compensation -- -- -- -- 11 -- -- Stock purchase plan forfeitures -- -- 38 -- -- (7) (38) Stock options exercised -- -- -- -- -- 5 32 Treasury shares sold -- -- 3 -- -- 2 10 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 1998 6,851 $20,950 $14,563 $ 713 $(106) (1,959) $(12,992) - ----------------------------------------------------------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. ROBINSON NUGENT, INC. AND SUBSIDIARIES 12 - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------- IN THOUSANDS Years ended June 30 - ------------------------------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income (loss) $(6,181) 2,355 (2,159) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Elimination of RNBelgium goodwill -- -- 636 Depreciation and amortization 8,557 5,451 6,135 Reduction and disposal of property plant and equipment 360 233 1,971 (Increase) decrease in receivables 2,510 (1,351) 1,776 (Increase) decrease in inventories 1,038 2,346 (2,168) (Increase) decrease in other current assets (498) 67 731 Increase (decrease) in accounts payable and accrued expenses 805 (424) (338) Increase (decrease) in income taxes payable (1,581) 1,492 (352) (Increase) decrease in deferred income taxes (1,409) (79) 110 - ------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 3,601 10,090 6,342 - ------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Capital expenditures (7,818) (4,202) (7,474) Proceeds from the sale of property plant and equipment -- 117 -- (Increase) decrease in other assets (47) (83) 41 - ------------------------------------------------------------------------------------------------------ Net cash used in investing activities (7,865) (4,168) (7,433) - ------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Proceeds from short-term bank borrowings 570 -- 6,262 Repayment of short-term bank borrowings -- (300) (389) Proceeds from long-term debt 3,250 -- 193 Repayment of long-term debt (1,426) (3,189) (723) Cash dividends (587) (586) (645) Issuance of common shares -- -- 5 Sale of treasury shares 13 -- -- Purchase of treasury shares -- -- (3,372) Repayment of employee stock purchase plan loans 60 93 192 Proceeds from stock purchase plan terminations -- 33 66 Proceeds from exercised stock options 32 -- 3 - ------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 1,912 (3,949) 1,592 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash (807) (223) (593) - ------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents (3,159) 1,750 (92) Cash and cash equivalents at beginning of year 4,118 2,368 2,460 - ------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 959 4,118 2,368 - ------------------------------------------------------------------------------------------------------ SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. ROBINSON NUGENT, INC. AND SUBSIDIARIES 13 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- IN THOUSANDS EXCEPT PER SHARE DATA - ------------------------------------------------------------------------------- NOTE 1 NATURE OF OPERATIONS AND ORGANIZATIONS - ------------------------------------------------------------------------------- Robinson Nugent, Inc. designs, manufactures, and markets electronic connectors, integrated circuit sockets and cable assemblies. Its products are sold throughout the world for use by manufacturers of computers, networks and telecommunications equipment, industrial controls, and a wide variety of other products to interconnect components of electronic systems. - ------------------------------------------------------------------------------- NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ------------------------------------------------------------------------------- Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. - ------------------------------------------------------------------------------- Cash and Cash Equivalents. Cash and cash equivalents are defined as cash in banks and investment instruments having maturities of ninety-one days or less on their acquisition date. - ------------------------------------------------------------------------------- Inventories. Inventories are stated at the lower of cost (first-in, first-out method) or market (net realizable value). - ------------------------------------------------------------------------------- Property, Plant and Equipment. Depreciation is provided by the straight-line method over the estimated useful lives of buildings, ranging from 30 to 45 years, and machinery and equipment, ranging from 3 to 12 years, for financial reporting purposes. Depreciation expense includes the amortization of buildings capitalized under lease obligations in accordance with Statement of Financial Accounting Standards No. 13 - "Accounting for Leases". Depreciation expense was $8,507 in 1998, $5,383 in 1997 and $5,901 in 1996. - ------------------------------------------------------------------------------- Income Taxes. The Company follows SFAS No. 109 - "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or income tax return. In estimating future tax consequences, SFAS No. 109 generally considers all expected future events other than enactments of changes in the tax laws or rates. - ------------------------------------------------------------------------------- Research, Development and Engineering. Research, development, and engineering expenditures for the creation and application of new and improved products and manufacturing processes were approximately $3,950 in 1998, $3,400 in 1997 and $3,700 in 1996. Research, development and engineering costs are charged to operations as incurred. - ------------------------------------------------------------------------------- Government Incentive Grants. The Company has received an incentive grant, from the government in Scotland related to capital expenditures for equipment and machinery over the period of 1995 1998. The Company's policy is to recognize this capital expenditure grant over the estimated useful life of the equipment and machinery. The financial statements include grant income of approximately $254 in 1998, $272 in 1997 and $231 in 1996. - ------------------------------------------------------------------------------- Disclosure of Certain Significant Risks and Uncertainties. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The Company's periodic filings with the Securities and Exchange Commission include, where applicable, disclosures of estimates, assumptions, uncertainties and concentrations in products, sources of supply and markets that could affect the financial statements and future operations of the Company. - ------------------------------------------------------------------------------- Concentration of Credit Risk. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash investments and trade receivables. The Company has cash investment policies that limit the amount of credit exposure to any one issuer and restrict placement of these investments to issuers evaluated as credit worthy. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base and their dispersion across many different industries and geographies. - ------------------------------------------------------------------------------- Foreign Currency. The accounts of foreign subsidiaries are measured using local currency as the functional currency. For these operations, assets and liabilities are translated into U.S. dollars at period-end exchange rates, and income and expense accounts are translated at average monthly exchange rates. Net exchange gains or losses resulting from such translation are excluded from net income and accumulated in a separate component of shareholders' equity. Gains and losses from foreign currency transactions are included as a separate component of other income (expense) in the consolidated statements of operations. - ------------------------------------------------------------------------------- New Accounting Standards. The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" in 1998. SFAS No 128 specifies the computation, presentation, and disclosure requirements for earnings per share (EPS). This Statement's objective is to simplify the computation of earnings per share and to make the U.S. standard for computing earnings per share more comparable with EPS standards of other countries. The Financial Accounting Standards Board has issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. The Company will adopt the new standard in fiscal 1999. The Company does not expect adoption of this standard will have a material impact on its financial statements. SFAS No. 131 specifies the way that public business enterprises report information about operating segments in annual financial statements and requires enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company will adopt the new standard in fiscal 1999. The Company does not expect adoption of this standard will have a material impact on its financial statements. - ------------------------------------------------------------------------------- International Operations. In connection with its international operations, the Company is subject to various risks inherent in foreign activities. These risks may include unstable economic and political conditions, changes in trade policies and regulations of countries involved, fluctuations in currency exchange rates and requirements for letters of credit or bank guarantees. Most of the Company's international ROBINSON NUGENT, INC. AND SUBSIDIARIES 14 - ------------------------------------------------------------------------------- NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) - ------------------------------------------------------------------------------- operations are in western European countries, mainly Great Britain, Switzerland, Belgium and the Netherlands and to a lesser degree in the Asian countries of Japan, Singapore and Malaysia. The Company is exposed to risks associated with fluctuations in exchange rates including the Swiss franc, British pound sterling, Deutsche mark, Malaysian ringgit and the Netherlands guilder. The Company limits its exposure to these risks by incurring and paying for its expenses in the same currencies as those of its revenue. It is the Company's policy not to enter into derivative financial instruments for speculative purposes. There were no derivative financial instruments outstanding as of June 30, 1998. - ------------------------------------------------------------------------------- Common Share Data. Per common share data for 1998, 1997 and 1996 is presented using basic and dilutive weighted average number of common shares outstanding. The following is the reconciliation of the numerators and denominators used to compute the net income (loss) per common share, basic and dilutive: - ------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Numerator Income (loss) available to common shareholders $(6,181) 2,355 (2,159) Denominator Basic-weighted shares outstanding (in thousands) 4,892 4,892 5,333 Stock options -- 19 -- - ------------------------------------------------------------------------------------------------------------- Dilutive-weighted shares outstanding (in thousands) 4,892 4,911 5,333 - ------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) PER COMMON SHARE, BASIC AND DILUTIVE $ (1.26) .48 (.40) - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NOTE 3 INVENTORIES - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Inventories consist of the following: Finished goods $ 2,970 3,873 4,526 Work in process 5,595 5,933 7,021 Raw material and supplies 1,497 1,294 1,899 - ------------------------------------------------------------------------------------------------------------- Total $10,062 11,100 13,446 - ------------------------------------------------------------------------------------------------------------- A portion of the gold and gold content in inventories is provided under a consignment agreement with a bank. Under terms of the gold consignment agreement, the Company has pledged certain inventories with gold content as collateral. Such inventories were approximately $350 at June 30, 1998. - ------------------------------------------------------------------------------- NOTE 4 PROPERTY, PLANT AND EQUIPMENT - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- A summary of property, plant and equipment follows: Land $ 732 808 836 Buildings 12,942 12,464 12,886 Machinery and equipment 49,416 46,778 47,122 - ------------------------------------------------------------------------------------------------------------- 63,090 60,050 60,844 - ------------------------------------------------------------------------------------------------------------- Less accumulated depreciation and amortization 43,666 38,862 37,226 - ------------------------------------------------------------------------------------------------------------- TOTAL $19,424 21,188 23,618 - ------------------------------------------------------------------------------------------------------------- In June of 1997, management approved a plan to move all of its electro- plating and component assembly operations from its plant in Delemont, Switzerland, to its facility in Inchinnan, Scotland, and to sell the facility in Delemont. Management has evaluated the current market value of this building and estimates that its net realizable value should be approximately equal to the net book value of $2,000. ROBINSON NUGENT, INC. AND SUBSIDIARIES 15 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- IN THOUSANDS EXCEPT PER SHARE DATA - ------------------------------------------------------------------------------- NOTE 5 ACCRUED EXPENSES - ------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------- A summary of accrued expenses follows: Compensation $ 955 1,560 1,394 Commissions 721 741 719 Distributor allowances 447 885 692 State and local taxes 440 510 548 Pension and retirement plans 52 273 267 Deferred grant income -- 217 300 Provision for closure of North Carolina plant 1,432 -- -- Other 1,436 1,374 879 - ---------------------------------------------------------------------------------------------- Total $5,483 5,560 4,799 - ---------------------------------------------------------------------------------------------- In May of 1998, management approved a plan to move all of its cable assembly operations from its plant in Kings Mountain, North Carolina, to a leased facility in Reynosa, Mexico. The provision for the closure of this facility includes the present value of the remaining future lease payments on this building, plus accruals for severance payments and other costs related to this closure. - ------------------------------------------------------------------------------- NOTE 6 DEBT - ------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Long-term debt consists of the following: United States' obligation: Loans under a long-term credit agreement $6,180 4,000 -- Obligation under purchase agreement for the acquisition of RN Belgium, interest imputed at 8%, paid off in June 1997 -- -- 567 Foreign obligations: 6.875% fixed-rate real estate mortgage, payable in annual installments through 2004, with interest 1,335 1,594 2,092 7.25% fixed-rate real estate mortgage, payable in quarterly installments through 2000 142 214 318 7.65% fixed-rate real estate mortgage payable in quarterly installments through 2001 106 150 217 10.0% capitalized lease obligation, payable to bank in monthly installments through 2002 123 237 274 Other long-term debt 88 117 281 - ---------------------------------------------------------------------------------------------------------------------------- Total 7,974 6,312 3,749 - ---------------------------------------------------------------------------------------------------------------------------- Less current installments of long-term debt 367 386 713 - ---------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT $7,607 5,926 3,036 - ---------------------------------------------------------------------------------------------------------------------------- In September 1998, the Company agreed to amend the long-term credit agreement with its primary lending institution. This agreement provides for up to $8 million in revolving credit loans and is secured by a lien on inventories and receivables. The Company had $1.82 million in unused and available credit under this agreement at June 30, 1998. The average interest rate on this debt was 7.19%. This agreement includes various operating and financial covenants, including a minimum current ratio, a maximum ratio of indebtedness to tangible net worth, a minimum fixed charge coverage ratio and a funded debt ratio. The agreement terminates in December 2001, and can be extended by mutual consent of the Company and the bank. The aggregate maturities of long-term debt for the five years ending June 30, 2003, amount to $367 in 1999, $349 in 2000, $296 in 2001, $6,408 in 2002, $195 in 2003 and $359 thereafter. Total interest paid under the long-term debt agreements was $539 in 1998, $363 in 1997 and $259 in 1996. Total interest paid under the short-term bank borrowings was $3 in 1998, $315 in 1997 and $252 in 1996. In addition, the Company has short-term lines of credit available in Malaysia and Belgium at interest rates of 13.80% and 8.75%, respectively. Total unused and available credit under these agreements was approximately $269, as of June 30, 1998. The weighted average interest rate on short-term debt was 8.5% in 1998 and 7.2% in 1996. There was no outstanding short-term debt as of June 30, 1997. Property, plant, equipment and other current assets, with an approximate net book value of $4,360, is pledged as collateral under the various long-term debt agreements. ROBINSON NUGENT, INC. AND SUBSIDIARIES 16 In April 1998, the Company entered into a short-term financing agreement with a bank to purchase software associated with the Robinson Nugent Information System Enhancement Project. The Company has obtained $570 in short-term borrowings under this agreement as of June 30, 1998. Interest on the outstanding borrowings, at the bank's prime rate (8.5% at June 30, 1998) is payable monthly. The Company will pay off this short-term loan and enter into an operating lease for this software in September, 1998. - ------------------------------------------------------------------------------- NOTE 7 FAIR VALUE OF FINANCIAL INSTRUMENTS - ------------------------------------------------------------------------------- The fair values of the Company's noncurrent financial liabilities are shown below. The fair values of current assets and current liabilities are assumed to be equal to their reported carrying amounts. - ------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------- Carrying Fair Carrying Fair Carrying Fair Amount Value Amount Value Amount Value - ------------------------------------------------------------------------------- Long-term debt $7,974 7,872 6,312 6,190 3,749 3,587 - ------------------------------------------------------------------------------- The valuations for long-term debt are determined based on the expected future payments discounted at risk-adjusted rates. - ------------------------------------------------------------------------------- NOTE 8 INCOME TAXES - ------------------------------------------------------------------------------- The provision (benefit) for income taxes follows: - ------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------- Current: Federal $(1,132) 1,098 65 State (38) 172 (8) Foreign 318 303 298 - ------------------------------------------------------------------------------- Total current (852) 1,573 355 - ------------------------------------------------------------------------------- Deferred: Federal (1,149) (44) 216 State (173) (2) 40 Foreign (87) (33) (146) - ------------------------------------------------------------------------------- Total deferred (1,409) (79) 110 - ------------------------------------------------------------------------------- TOTAL $(2,261) 1,494 465 - ------------------------------------------------------------------------------- The following reconciles income taxes computed at the U.S. Federal statutory rate to income taxes reported for financial reporting purposes: - ------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Income tax expense (benefit) at statutory rate $(2,870) 1,309 (576) Non-U.S. tax-exempt (earnings) losses 729 (146) 791 Tax-exempt earnings of FSC -- (89) 33 Foreign taxes, net of U.S. tax credit 197 293 175 State and local taxes, net of U.S. Federal income tax (139) 112 21 Research and experimentation credit (59) (44) -- Other (119) 59 21 - ------------------------------------------------------------------------------------------------------------- Income taxes as reported $(2,261) 1,494 465 - ------------------------------------------------------------------------------------------------------------- No U.S. Federal income taxes have been provided at June 30, 1998, on approximately $6,685 of accumulated earnings of certain foreign subsidiaries since the Company plans to reinvest such amounts for an indefinite future period. The Company made income tax payments, net of tax refunds received, of $770 in 1998, $1 in 1997 and $805 in 1996. The net current and non-current components of deferred income taxes recognized in the balance sheet at June 30 follows: - ------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------- Net current assets $ 745 602 696 Net non-current assets (liabilities) 428 (838) 1,011 - ------------------------------------------------------------------------------- Net assets (liabilities) $ 1,173 (236) (315) - ------------------------------------------------------------------------------- ROBINSON NUGENT, INC. AND SUBSIDIARIES 17 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- IN THOUSANDS EXCEPT PER SHARE DATA - ------------------------------------------------------------------------------- NOTE 8 INCOME TAXES (CONTINUED) - ------------------------------------------------------------------------------- The tax effect of the significant temporary differences that comprise the deferred tax assets and liabilities at June 30 follows: - ------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ 1,504 815 900 Employee compensation and benefits 355 322 276 Inventories and other current assets 247 258 275 State and local income taxes, net of U.S. Federal income tax benefit 141 23 43 Plant closing settlement costs 541 -- -- Other accrued expenses 68 42 32 - ------------------------------------------------------------------------------------------------------------- Total deferred tax assets $ 2,856 1,460 1,526 - ------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation and amortization (179) (881) (941) - ------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities (179) (881) (941) - ------------------------------------------------------------------------------------------------------------- Net deferred tax assets before valuation allowance 2,677 579 585 - ------------------------------------------------------------------------------------------------------------- Deferred tax assets valuation allowance (1,504) (815) (900) - ------------------------------------------------------------------------------------------------------------- NET DEFERRED TAX ASSETS (LIABILITIES) 1,173 (236) (315) - ------------------------------------------------------------------------------------------------------------- During the year the Company has recognized a tax benefit of approximately $546 for deferred tax assets related to the U.S. operations. Management anticipates future taxable income from U.S. operations will utilize these tax assets. At June 30, 1998, certain foreign subsidiaries have accumulated net operating loss carryforwards of $5,289, which begin to expire in various years through 2013. Management is unable at this time to project future taxable income that will utilize the deferred benefit of these loss carry-forwards. As a result, a valuation allowance has been established of $1,504. The tax benefit of these carryforwards will be recognized when management is able to project future taxable income of these foreign subsidiaries. The change in the deferred income tax expense (benefit) represents the effect of changes in the amounts of temporary differences. The tax effect of changes in those temporary differences is presented below: - ---------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Depreciation and amortization $ (702) (63) 47 State and local income taxes, net of U.S. Federal income tax benefit (118) 20 25 Employee compensation and benefits (33) -- -- Plant closing settlement costs (541) -- -- Accrued expenses (26) (63) 98 Foreign tax -- -- (86) Minimum tax credit -- 10 (10) Inventories and other current assets 11 17 36 - ---------------------------------------------------------------------------------------------------------------------------- Total $(1,409) (79) 110 - ---------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NOTE 9 LEASED ASSETS AND LEASE COMMITMENTS - ------------------------------------------------------------------------------- The consolidated financial statements include land and buildings under a capital lease as follows: - ---------------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------- Land and buildings $ 497 802 1,807 Less accumulated amortization 124 118 594 - ---------------------------------------------------------------------------------------- Net assets under a capitalized lease 373 684 1,213 - ---------------------------------------------------------------------------------------- The Company leases office and plant facilities, automobiles, computer systems, and certain other equipment under noncancelable operating leases, which expire at various dates. Taxes, insurance, and maintenance expenses are normally obligations of the Company. Rental expenses charged to operations under operating leases amounted to $1,359 in 1998, $1,312 in 1997 and $1,342 in 1996. ROBINSON NUGENT, INC. AND SUBSIDIARIES 18 - ------------------------------------------------------------------------------- NOTE 9 LEASED ASSETS AND LEASE COMMITMENTS (CONTINUED) - ------------------------------------------------------------------------------- A summary of future minimum lease payments follows: - ------------------------------------------------------------------------------- Year ending June 30 - ------------------------------------------------------------------------------- Capital Operating lease leases ----------------------- 1999 $ 36 879 2000 36 684 2001 37 573 2002 37 460 2003 4 425 Later Years _ 247 - ------------------------------------------------------------------------------- Total minimum lease payments 150 3,268 - ------------------------------------------------------------------------------- Less amount representing interest 27 - ------------------------------------------------------------------------------- PRESENT VALUE OF NET MINIMUM LEASE PAYMENTS (INCLUDED IN LONG-TERM DEBT) $ 123 16 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NOTE 10 EMPLOYEE BENEFITS - ------------------------------------------------------------------------------- The Company has a defined contribution pension plan and a defined contribution 401(k) plan for eligible employees in the United States. Annual contributions by the Company to the defined contribution pension plan are based upon specified percentages of the annual compensation of participants. Under the terms of the 401(k) plan, employees may contribute a portion of their compensation to the plan and the Company makes matching contributions up to a specified level. The contributions charged to expense under the defined contribution plans were $524 in 1998, $488 in 1997 and $488 in 1996. Personnel in Europe and Asia are provided retirement benefits under various programs that are regulated by foreign law. Annual contributions are generally regulated in amount and shared equally by the Company and its employees. The Company's share of annual contributions to the aforementioned foreign defined contribution plans was $254 in 1998, $380 in 1997 and $335 in 1996. - ------------------------------------------------------------------------------- NOTE 11 STOCK OPTION PLANS - ------------------------------------------------------------------------------- In September 1993, a stock option plan for eligible employees and nonemployee directors was adopted by the Board of Directors and subsequently approved, in November 1993, by the shareholders of the Company. The new plan replaced plans that expired in April 1993. Under the terms of the new plan, the Board of Directors is authorized to grant options in the aggregate of 500 common shares of the Company to eligible employees and a predetermined annual number of shares to nonemployee directors at prices not less than the market value at the date of grant. In 1998, the Board of Directors authorized an additional 500 common shares to the pool of shares available for option grants under the terms of the plan. Fifty percent of the options are exercisable after the first anniversary of the date of grant. One hundred percent of the options are exercisable after the second anniversary date of the grant. All options expire ten years after the date of the grant. Terms and conditions of the new plan are similar to those of the expired plans. The following is a summary of the option transactions under the expired plans and the plan adopted in 1993. - -------------------------------------------------------------------------------------------- 1998 SHARES WEIGHTED AVERAGE OPTION PRICE PER SHARE - -------------------------------------------------------------------------------------------- Shares under option at beginning of year 500 $ 6.56 Granted 144 6.25 Expired (19) 10.88 Cancelled (43) 7.09 Exercised (5) 6.17 - -------------------------------------------------------------------------------------------- Shares under option at end of year 577 6.30 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- 1997 SHARES WEIGHTED AVERAGE OPTION PRICE PER SHARE - -------------------------------------------------------------------------------------------- Shares under option at beginning of year 385 $ 7.62 Granted 204 5.19 Expired (3) 11.50 Cancelled (86) 7.92 - -------------------------------------------------------------------------------------------- Shares under option at end of year 500 6.56 - -------------------------------------------------------------------------------------------- ROBINSON NUGENT, INC. AND SUBSIDIARIES 19 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- IN THOUSANDS EXCEPT PER SHARE DATA - ------------------------------------------------------------------------------- NOTE 11 STOCK OPTION PLANS (CONTINUED) - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- 1996 SHARES WEIGHTED AVERAGE OPTION PRICE PER SHARE - -------------------------------------------------------------------------------------------- Shares under option at beginning of year 291 $ 7.16 Granted 103 9.08 Expired (1) 13.25 Cancelled (7) 9.14 Exercised (1) 6.63 - -------------------------------------------------------------------------------------------- Shares under option at end of year 385 7.62 - -------------------------------------------------------------------------------------------- A total of 360, 282, and 242 shares at an average option price per share of $6.59, $7.34, and $7.00 were exercisable and 532, 130, and 252 shares were available for future grants at June 30, 1998, 1997 and 1996, respectively. The following table summarizes information about stock options outstanding at June 30, 1998: - --------------------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable - --------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Number average average Number average Range of outstanding remaining exercise exercisable exercised exercise prices at 6/30/98 contractual life price at 6/30/98 price $4.00 to 5.875 262 4.76 $ 4.79 165 $ 4.61 $6.00 to 7.375 170 7.22 $ 6.46 50 $ 6.57 $8.625 to 9.25 145 6.35 $ 8.85 145 $ 8.85 - --------------------------------------------------------------------------------------------------------------------------- $4.00 to 9.25 577 5.89 $ 6.30 360 $ 6.59 - --------------------------------------------------------------------------------------------------------------------------- The weighted average fair value of options granted during 1998, 1997, and 1996 were $2.19, $1.64, and $3.18, respectively. The fair value of each stock option granted in 1998, 1997 and 1996 was estimated as of the date of the grant using the Black-Scholes option-pricing model with the following assumptions for 1998, 1997, and 1996, respectively: dividend yield of 1.6% to 2.8%,1.3% to 2.6%, and 1.3% to 2.6%; volatility factor of 37%, 32%, and 32%; a range of risk-free interest rates of 5.5% to 6.0%, 5.9% to 6.7%, and 5.9% to 6.7%; and expected lives of 5 years for all three years. In accordance with Accounting Principles Board No. 25, the Company has not recognized any compensation cost for the stock option plan. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income (loss) and earnings (loss) per share would have been reduced (increased) to the pro forma amounts indicated below: - ---------------------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------- Net income (loss) As reported $(6,181) $2,355 $(2,159) Pro forma (6,471) 2,183 (2,283) Earnings (loss) per share As reported (1.26) .48 (.40) Pro forma (1.32) .45 (.43) The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. - ------------------------------------------------------------------------------- NOTE 12 STOCK PURCHASE PLAN - ------------------------------------------------------------------------------- In 1993, the Company adopted an employee stock purchase plan for key employees that provided for participants of the plan to purchase common shares of the Company on the open market through an independent trustee. The plan permitted the Board of Directors to authorize interest-free loans to the participants for the purchase of stock. Shares are held in trust as collateral for the loans, which are payable by the participants of the plan over a period not to exceed ten years. The plan also provided for participants to receive from the Company a matching number of common shares of the Company, based upon a vesting schedule and the participants' level of purchased shares. The plan terminated in 1994 with respect to new participation. The loans ($98 in 1998, $158 in 1997 and $284 in 1996) and deferred compensation charges ($8 in 1998, $19 in 1997 and $70 in 1996) associated with the plan are classified as a reduction of shareholders' equity. The amortization of the deferred compensation charged to expense was $11 in 1998, $51 in 1997 and $151 in 1996. ROBINSON NUGENT, INC. AND SUBSIDIARIES 20 - ------------------------------------------------------------------------------- NOTE 13 SHAREHOLDER RIGHTS PLAN - ------------------------------------------------------------------------------- The Company adopted a shareholder rights plan in April 1988 for the purpose of deterring coercive or unfair takeover tactics and encouraging a potential acquirer to negotiate with the Board of Directors before attempting to gain control of the Company. Under the terms of the plan, rights to purchase additional common shares were distributed as a dividend to shareholders of record on May 6, 1988, and will be distributed with respect to shares which are issued after May 6, 1988. The rights are attached to each issued and outstanding share and were to expire on April 15, 1998. The Plan was amended in January 1998 to extend expiration date to April 15, 2008. At issuance, the rights are not exercisable and are not detachable from common shares. Accordingly, the rights do not provide any immediate value to shareholders. The Company may redeem the rights for one cent per right at any time prior to becoming exercisable. The rights become exercisable ten days after public disclosure that a person acquired 20% or more, or commenced a tender offer or exchange offer for 30% or more, of the issued and outstanding common shares, unless such acquisition or tender offer was approved in advance by the disinterested directors of the Company. Thereafter, the rights will trade separately from the common shares, and separate certificates representing the rights will be issued. Each right grants an eligible holder the right to purchase for $40.00 additional common shares of the Company, or in the event of certain mergers or business combinations, additional shares of the survivor's common shares. The number of common shares to be issued upon exercise of a right is based upon the then current market value of the common shares, subject to certain adjustments. - ------------------------------------------------------------------------------- NOTE 14 SETTLEMENT OF PATENT INFRINGEMENT CLAIM - ------------------------------------------------------------------------------- In April 1997, the Company accepted a lump sum payment and recognized pretax income of $500 ($315 after related income taxes) from a settlement of a patent infringement claim against a competitor. - ------------------------------------------------------------------------------- NOTE 15 SIGNIFICANT CUSTOMER - ------------------------------------------------------------------------------- No sales to a single customer exceeded 10% of total sales in 1998, 1997 or 1996. - ------------------------------------------------------------------------------- NOTE 16 BUSINESS SEGMENT AND FOREIGN SALES - ------------------------------------------------------------------------------- The Company operates within the electronic connectors segment of the electronics industry. Products are sold throughout the world for use by manufacturers of computers, telecommunications equipment, automobiles, industrial controls, medical instrumentation, and a wide variety of other products to interconnect components of electronic systems. The sales and marketing operations outside the United States are conducted in Japan, Singapore, the Netherlands and Sweden. During 1998, the Company had manufacturing operations located in the United States, Scotland, Belgium, and Malaysia. ROBINSON NUGENT, INC. AND SUBSIDIARIES 21 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- IN THOUSANDS EXCEPT PER SHARE DATA - ------------------------------------------------------------------------------- NOTE 16 BUSINESS SEGMENT AND FOREIGN SALES (CONTINUED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Sales 1998 1997 1996 - ------------------------------------------------------------------------------- United States Domestic $ 46,955 52,849 51,664 Export: Europe 78 57 58 Asia 7 194 1,285 Rest of World 1,653 2,128 1,447 - ------------------------------------------------------------------------------- Total sales to customers 48,693 55,228 54,454 - ------------------------------------------------------------------------------- Intercompany 7,342 8,447 6,813 - ------------------------------------------------------------------------------- Total United States 56,035 63,675 61,267 - ------------------------------------------------------------------------------- Europe Domestic 18,472 21,552 19,553 Export: Asia - 422 1,752 - ------------------------------------------------------------------------------- Total sales to customers 18,472 21,974 21,305 - ------------------------------------------------------------------------------- Intercompany 3,806 4,293 3,517 - ------------------------------------------------------------------------------- Total Europe 22,278 26,267 24,822 - ------------------------------------------------------------------------------- Asia Domestic 6,981 7,543 5,120 Export to rest of world -- 95 85 - ------------------------------------------------------------------------------- Total sales to customers 6,981 7,638 5,205 - ------------------------------------------------------------------------------- Intercompany 4,128 2,883 2,448 - ------------------------------------------------------------------------------- Total Asia 11,109 10,521 7,653 - ------------------------------------------------------------------------------- Eliminations (15,276) (15,623) (12,778) - ------------------------------------------------------------------------------- CONSOLIDATED $ 74,146 84,840 80,964 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- IDENTIFIABLE ASSETS - ------------------------------------------------------------------------------- United States $ 34,274 39,310 38,984 Europe 14,544 16,891 17,349 Asia 3,417 5,739 4,704 Eliminations (11,933) (12,244) (9,571) - ------------------------------------------------------------------------------- Consolidated $ 42,302 49,696 51,466 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES - ------------------------------------------------------------------------------- United States $ (6,298) 3,939 384 Europe (2,217) 205 (1,546) Asia 73 (295) (532) - ------------------------------------------------------------------------------- Consolidated $ (8,442) 3,849 (1,694) - ------------------------------------------------------------------------------- Intercompany sales of finished products were generally priced to share profits based upon current market conditions. Items requiring further processing were priced at cost plus a fixed percentage. ROBINSON NUGENT, INC. AND SUBSIDIARIES 22 - ------------------------------------------------------------------------------- NOTE 17 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - ------------------------------------------------------------------------------- Three months ended - ---------------------------------------------------------------------------------------------------------------------------- For the year ended June 30, 1998 Sept. 30, 1997 Dec. 31, 1997 Mar. 31, 1998 June 30, 1998 Total - ---------------------------------------------------------------------------------------------------------------------------- Net sales $18,543 19,576 19,658 16,369 74,146 Gross profit $ 3,386 3,524 2,929 1,750 11,589 Net loss $ (132) (232) (3,288) (2,529) (6,181) Net loss per common share, basic and dilutive $ (.03) (.05) (.67) (.52) (1.26) Dividends per common share $ .03 .03 .03 .03 .12 Three months ended - ---------------------------------------------------------------------------------------------------------------------------- For the year ended June 30, 1997 Sept. 30, 1996 Dec. 31, 1996 Mar. 31, 1997 June 30, 1997 Total - ---------------------------------------------------------------------------------------------------------------------------- Net sales $21,123 20,100 21,651 21,966 84,840 Gross profit $ 4,727 4,248 5,177 4,919 19,071 Net income $ 402 138 939 876 2,355 Net income per common share, basic and dilutive $ .08 .03 .19 .18 .48 Dividends per common share $ .03 .03 .03 .03 .12 Net income (loss) per share amounts are calculated independently for each of the periods presented. The sum of the quarters may not equal the full year net income (loss) per share amounts. Fourth quarter 1998 revenue was down $5,600 compared to fourth quarter 1997. This revenue decrease reflected lower revenues in all the geographic regions served by the Company. The Company experienced lower sales in older, more mature, backpanel connectors and stamped or screw machine sockets and connectors. Gross profits decreased primarily due to the lower volumes in the United States, Europe and Asia. Gross profits are net of engineering charges associated with new product development. Engineering charges amounted to $1,032 or 6.3% of net sales in the fourth quarter, compared to $993 or 4.5% of net sales in the prior year, and reflect a 3.9% increase in spending as the Company increased its investment in the development of new and improved product offerings. The Company reported $1,970 of restructuring and unusual charges in the fourth quarter. These charges include $1,608 of restructuring charges related to the closure and move of the Company's North American cable assembly operations. In May of 1998, management approved a plan to move these operations from its plant in Kings Mountain, North Carolina to a new facility in Reynosa, Mexico. Assembly operations are expected to begin in Reynosa in September of 1998. Management anticipates that the closure of the North Carolina facility will be completed by December of 1998. An additional $280 of these restructuring and unusual charges relate to the cost of workforce reductions implemented to reduce the Company's cost structure. The remaining $82 of these charges relate to a reduction in the carrying value of certain assets. The charges incurred in the fourth quarter were part of a restructuring program that was initiated in the prior quarter. - ------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT - ------------------------------------------------------------------------------- The Board of Directors and Shareholders of Robinson Nugent, Inc.: We have audited the accompanying consolidated balance sheets of Robinson Nugent, Inc. and Subsidiaries, as of June 30 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The Consolidated Financial Statements of the Company as of and for the years ended June 30, 1997 and 1996, were audited by other auditors whose report, dated August 5, 1997, expressed an unqualified opinion on those consolidated statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1998 consolidated financial statements, present fairly in all material respects, the financial position of Robinson Nugent, Inc. and Subsidiaries as of June 30, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Louisville, Kentucky July 31, 1998 ROBINSON NUGENT, INC. AND SUBSIDIARIES 23