EX-13 7 0007.txt Five-Year Financial Review
(in thousands, except per share amounts) Statement of Operations Data Year Ended May 31 2000 1999 1998 1997(1) 1996 --------- --------- --------- --------- --------- Net sales $407,178 $320,941 $304,172 $255,139 $239,667 Cost of products sold 299,246 231,328 217,509 187,675 169,123 Selling, general and administrative expenses 81,489 70,870 65,393 62,333 52,974 Other expense, net 7,839 6,886 7,334 7,856 5,559 --------- --------- --------- --------- --------- Income (loss) before income taxes and extraordinary item 18,604 11,857 13,936 (2,725) 12,011 Income tax provision (benefit) 5,500 3,505 4,200 (1,720) 3,900 --------- --------- --------- --------- --------- Income (loss) before extraordinary item 13,104 8,352 9,736 (1,005) 8,111 Extraordinary gain (loss), net of tax -- -- -- (488) -- --------- --------- --------- --------- --------- Net income (loss) $ 13,104 $ 8,352 $ 9,736 $ (1,493) $ 8,111 ========= ========= ========= ========= ========= Income (loss) per share - basic: Before extraordinary item $ 1.03 $ .60 $ .79 $ (.08) $ .70 Extraordinary gain (loss), net of tax -- -- -- (.04) -- --------- --------- --------- --------- --------- Net income (loss) per share $ 1.03 $ .60 $ .79 $ (.12) $ .70 ========= ========= ========= ========= ========= Income (loss) per share - diluted: Before extraordinary item $ 1.00 $ .60 $ .77 $ (.08) $ .68 Extraordinary gain (loss), net of tax -- -- -- (.04) -- --------- --------- --------- --------- --------- Net income (loss) per share $ 1.00 $ .60 $ .77 $ (.12) $ .68 ========= ========= ========= ========= ========= Dividends per common share $ .16 $ .16 $ .16 $ .16 $ .16 ========= ========= ========= ========= ========= Net Sales by Strategic Business Unit (2) Year Ended May 31 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- Net Sales by Strategic Business Unit: RF & Wireless Communications Group (Wireless) $154,502 $104,347 $100,358 $ 89,115 $ 83,768 Industrial Power Group (Industrial) 87,584 77,389 84,587 81,427 82,799 Medical Systems Group (Medical) 39,461 37,523 23,849 17,261 11,261 Security Systems Group (Security) 84,504 70,180 66,362 37,853 25,614 Display Systems Group (Display) 41,127 31,502 29,016 29,483 36,225 --------- --------- --------- --------- --------- Consolidated $407,178 $320,941 $304,172 $255,139 $239,667 ========= ========= ========= ========= ========= Balance Sheet Data Year Ended May 31 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- Receivables $ 77,821 $ 62,448 $ 63,431 $ 53,333 $ 48,232 Inventories 119,224 107,724 96,443 92,194 94,327 Working capital, net 174,270 161,640 149,577 140,821 133,151 Property, plant and equipment, net 25,851 23,047 18,477 17,526 16,054 Total assets 264,925 235,678 209,700 192,514 180,158 Long-term debt 117,643 113,658 87,427 107,275 92,025 Stockholders' equity 93,993 84,304 91,585 59,590 62,792
(1)In 1997, the Company recorded special charges for severance and other costs related to a corporate reorganization and a re-evaluation of reserve estimates which increased cost of products sold by $7,200 and selling, general and administrative expenses by $3,800. Net of tax, these charges reduced income by $6,712, or $.56 per share. The Company also recorded an extraordinary loss of $800, less a related tax benefit of $312, or $.04 per share, on the exchange of certain of the Company's debentures.(See Note B to the Consolidated Financial Statements.) (2)The Company reorganized in 2000 from a product-oriented to a market-focused structure. Historical data for 1996 through 1999 have been restated to conform to the new organization. (12) Management's Discussion and Analysis Results of Operations Sales and Gross Margin Analysis Richardson Electronics, Ltd. is a specialized global distributor serving the RF and wireless communications, industrial power conversion, medical imaging, security and display systems markets. The marketing and sales structure of the Company consists of five strategic business units (SBUs): RF & Wireless Communications Group (Wireless), Industrial Power Group (Industrial), Medical Systems Group (Medical), Security Systems Group (Security) and Display Systems Group (Display). The Company completed its reorganization in 2000 from a product-oriented to a market-focused structure. Historical data for 1999 and 1998 has been restated to conform to the new organization. Consolidated sales in fiscal 2000 were a record $407.2 million. Sales by SBU and percent of consolidated sales are presented in the following table (in thousands): Sales (in thousands) 2000 % 1999 % 1998 % -------- ----- -------- ----- -------- ----- Wireless $154,502 37.9 $104,347 32.5 $100,358 33.1 Industrial 87,584 21.5 77,389 24.1 84,587 27.8 Medical 39,461 9.7 37,523 11.7 23,849 7.8 Security 84,504 20.8 70,180 21.9 66,362 21.8 Display 41,127 10.1 31,502 9.8 29,016 9.5 -------- ----- -------- ----- -------- ----- Consolidated $407,178 100.0 $320,941 100.0 $304,172 100.0 ======== ===== ======== ===== ======== ===== Gross margin for each SBU and margin as a percent of sales are shown in the following table. Gross margin reflects the distribution product margin less customer returns, engineering costs, overstock, and other provisions. Manufacturing variances, warranty provisions, LIFO provisions and miscellaneous costs are included under the caption "Corporate" (in thousands): Gross Margins (in thousands) 2000 % 1999 % 1998 % -------- ----- -------- ----- -------- ----- Wireless $40,524 26.2 $28,764 27.6 $27,269 27.2 Industrial 31,037 35.4 27,861 36.0 30,117 35.6 Medical 7,430 18.8 7,923 21.1 5,363 22.5 Security 19,846 23.5 16,184 23.1 15,335 23.1 Display 10,273 25.0 10,344 32.8 10,094 34.8 -------- ----- -------- ----- -------- ----- Total 109,110 26.8 91,076 28.4 88,178 29.0 Corporate (1,178) (1,463) (1,515) -------- ----- -------- ----- -------- ----- Consolidated $107,932 26.5 $89,613 27.9 $86,663 28.5 ======== ===== ======== ===== ======== ===== Sales and gross margin trends are analyzed for each strategic business unit in the following sections. RF & Wireless Communications Group Wireless serves the rapidly expanding voice and data telecommunications market and the radio and television broadcast industry. Wireless' team of sales engineers provides engineering design, prototype assembly and testing of discrete devices and components for the telecommunications market and both vacuum tube and solid state components, systems design and integration services for the broadcast market. Sales increased 48.1% in 2000 to $154.5 million, including a 65.3% gain in telecommunications. Sales growth in 1999 was 4.0%, due to a general weakness in the semiconductor industry. Sales outside of the United States represented 52.4%, 51.2% and 49.8% of Wireless's sales in 2000, 1999 and 1998, respectively. The largest sales gains in 2000 outside the United States for Wireless telecommunications were in Asia / Pacific, up 93.2%, and Europe, up 60.9%. In June 1998, the Company acquired TRL Technologies, Inc. Although the acquisition added only $800,000 to fiscal 1999 sales, their RF & wireless engineering and manufacturing capabilities resulted in design and assembly contracts generating $7.4 million sales in 2000 and backlog of $18.3 million at May 31, 2000. Gross margin as a percent of sales was 26.2% in 2000, compared to 27.6% in 1999 and 27.2% in 1998. The decline in margin in 2000 reflects research and development, engineering charges and start-up costs related to the TRL contracts and, to a lesser extent, competitive pricing pressures in the broadcast market and changes in product mix. Industrial Power Group Industrial serves a broad range of customers including the steel, automotive, textile, plastics, semiconductor, marine and avionics industries. Industrial's specialized product and sales organization employs both vacuum tube and power semiconductor technologies to meet customer needs in applications such as motor speed controls, industrial heating, laser technology, semiconductor manufacturing equipment, radar and welding. Industrial's sales gain of 13.2% in 2000 reflects a 36.1% growth in the sale of power semiconductors and components and a 15.7% gain in magnetrons, microwave generators and related products, offset by flat sales of vacuum tube products. A strong recovery in the semiconductor wafer fabrication market contributed to the sales growth. Sales in 1999 reflect a 7.5% contraction as the core business was adversely affected by economic difficulties in Latin America and weak demand for microwave products used in the manufacture of semiconductors. Foreign sales as a percent of total sales for Industrial were 50.1%, 50.6% and 49.8% in 2000, 1999 and 1998, respectively. Gross margin for the Industrial market has been stable, at 35.4%, 36.0% and 35.6% in 2000, 1999 and 1998, respectively. Medical Systems Group Medical serves the medical imaging market, providing upgrades and integration services in addition to a wide range of diagnostic imaging components. Products include glassware, medical imaging intensifiers and tubes, high- resolution color and monochrome displays, generators, cable assemblies and test equipment. (13) Management's Discussion and Analysis Medical sales increased 5.2% to $39.5 million in 2000, following a 57.3% increase in 1999. Sales growth slowed in 2000 as original equipment manufacturers, the Company's principal competition, focused more of their efforts on the medical products replacement market. Sales outside of the United States represented 23.2%, 26.2% and 32.2% of Medical's sales in 2000, 1999 and 1998, respectively. Gross margin as a percent of sales was 18.8% in 2000, compared to 21.1% in 1999 and 22.5% in 1998. The gross margin trend reflects the increased competition in the replacement market. The gross margin in 2000 was also affected by production inefficiencies in tube reloading. Security Systems Division Security provides security systems and related design services with an emphasis on closed circuit television (CCTV). Sales increased 20.4% in 2000 and 5.8% in 1999. In December 1998, the Company acquired Adler Video Systems, a distributor in southern California with annual sales of approximately $8.4 million. This purchase followed the acquisition of a Canadian distributor, Security Service International, Inc. in August 1997, with annual sales of $20.0 million. Excluding the effect of acquisitions, sales increased 7.1% in 2000 and declined 4.4% in 1999. Security's sales in 1999 were affected by a soft Canadian economy and by foreign exchange, as a 7.0% decline in the value of the Canadian dollar generated a 3.4% reduction in reported sales. Sales outside of the United States represented 56.5% of Security's sales in 2000, 59.5% in 1999, and 63.5% in 1998. Gross margin was 23.5% of sales in 2000 and 23.1% of sales in 1999 and 1998. Inventory turnover rates achieved by Security are significantly higher than the Company's other SBU's, mitigating the effect of lower gross margin rates. Display Systems Group Display provides system integration and custom product solutions for the public information display, financial, point-of-sale and general data display markets. Display sales increased 30.6% in 2000 and 8.6% in 1999. The sales growth in both years reflects the expansion of the Display product line to include monitors, flat panel displays and related systems integration. Revenues of Eternal Graphics, acquired in March 1998, and Pixelink, in March 1999, were responsible for 1999 sales growth. Acquisition revenues had a nominal effect on sales growth in 2000. Sales outside the United States represented 29.7%, 43.7% and 48.8% of Display's sales in 2000, 1999 and 1998, respectively. Growth in monitor sales in the U.S. was the predominant cause of the shift in geographic sales. Gross margin as a percent of sales was 25.0% in 2000, compared to 32.8% in 1999 and 34.8% in 1998. The margin trend reflects a shift in product mix from CRT's to monitors and other display products. The gross margin rate in 2000 was also affected by several large contracts at lower margins. Sales by Geographic Area On a geographic basis, the Company categorizes its sales by destination: North America, Europe, Latin America, Asia/Pacific and Other. Prior year data has been restated to reflect this categorization. Other includes sales to export distributors and to countries where the Company does not have offices. Sales and gross margin by geographic area are as follows (in thousands): Sales (in thousands) 2000 % 1999 % 1998 % -------- ----- -------- ----- -------- ----- North America $265,569 65.3 $205,013 63.9 $189,116 62.2 Europe 77,792 19.1 67,668 21.1 62,706 20.6 Asia/Pacific 34,305 8.4 24,208 7.5 21,155 7.0 Latin America 19,316 4.7 16,734 5.2 20,755 6.8 Other 10,196 2.5 7,318 2.3 10,440 3.4 -------- ----- -------- ----- -------- ----- Consolidated $407,178 100.0 $320,941 100.0 $304,172 100.0 ======== ===== ======== ===== ======== ===== Gross Margins (in thousands) 2000 % 1999 % 1998 % -------- ----- -------- ----- -------- ----- North America $70,029 26.4 $55,569 27.1 $53,372 28.2 Europe 22,942 29.5 20,607 30.5 19,449 31.0 Asia/Pacific 11,042 32.2 7,169 29.6 6,427 30.4 Latin America 5,410 28.0 4,729 28.3 5,763 27.8 Other 3,573 35.0 3,002 41.0 3,167 30.3 -------- ----- -------- ----- -------- ----- Total 112,996 27.8 91,076 28.4 88,178 29.0 Corporate (5,064) (1,463) (1,515) -------- ----- -------- ----- -------- ----- Consolidated $107,932 26.5 $89,613 27.9 $86,663 28.5 ======== ===== ======== ===== ======== ===== North American sales increased 29.5% in 2000 and 8.4% in 1999. The 2000 increase primarily reflects the strong growth in Wireless and Display markets. The 1999 increase includes 5.9% as a result of acquisitions and 2.5% due to internal growth. Sales in Europe increased 15.0% in 2000 and 7.9% in 1999. Growth in both years was adversely affected by foreign exchange as the U.S. dollar strengthened relative to local currencies. Sales in Asia/Pacific markets increased 41.7% in 2000 and 14.4% in 1999. Sales in the first half of 1999 were affected by the economic slowdown and monetary crisis in Asia. Performance improved significantly in the second half of 1999 and continued to improve in 2000, primarily due to the recovery in semiconductor markets. Sales in Latin America increased 15.4% in 200 after a decline of 19.4% in 1999. Shortly after the Asian crisis, the Brazilian market declined. Latin American sales remained depressed throughout 1999, but began a steady recovery in 2000. Sales denominated in currencies other than U. S. dollars were 39.0%, 40.2% and 39.0% of total sales in 2000, 1999 and 1998, respectively. Foreign currency exchange rate changes reduced foreign sales by an average of 2.5%, 3.0% and 5.9% in 2000, 1999 and 1998, respectively. Average selling prices, excluding the effects of exchange rate changes declined 1.3%, 0.4% and 0.3% in 2000, 1999 and 1998 respectively. (14) Management's Discussion and Analysis Other Cost of Sales The following table reconciles product margin to gross margin reported in the Consolidated Statements of Operations: (% of sales) 2000 1999 1998 -------- -------- -------- Product margin 28.0 % 29.0 % 29.6 % Customer returns and scrap (0.5)% (0.4)% (0.6)% Engineering costs (0.3)% (0.1)% 0.0 % Freight costs not inventoried (0.3)% (0.3)% (0.3)% Overstock provisions (0.1)% 0.0 % 0.1 % Other costs (0.3)% (0.3)% (0.3)% -------- -------- -------- Gross margin 26.5 % 27.9 % 28.5 % ======== ======== ======== Fluctuations in product margin primarily reflect the shift in product mix as Security sales have increased as a percent of consolidated sales and as monitor sales have replaced CRT sales in the Display group. Selling, General and Administrative Expenses Selling, general and administrative expenses represented 20.0% of sales in 2000, 22.1% in 1999 and 21.5% in 1998. In the third quarter of 1999, the Company adjusted staffing in light of current sales levels, resulting in a reduction in annual operating costs of approximately $2.5 million, beginning in the fourth quarter. Related severance costs were $340,000. In the fourth quarter of 1999, the Company recorded a $500,000 provision for potential losses on certain Latin American accounts receivable. During fiscal 2000, the Company recorded additional provisions of $469,000 as prospects for a partial recovery on these receivables diminished. These accounts were fully reserved at May 31, 2000. Other (Income) Expense Interest expense increased 15.8% in 2000, reflecting higher borrowing levels to support the growth of the Company and higher interest rates. Interest expense decreased 4.9% in 1999, reflecting lower borrowing levels during the year. Investment income includes realized capital gains of $877,000, $39,000 and $506,000 in 2000, 1999 and 1998. Foreign exchange and other expenses primarily reflect changes in the value of the U. S. dollar relative to foreign currencies. Income Tax Provision The effective tax rates were 29.6% in fiscal 2000 and 1999 and 30.1% in 1998. The rates differ from the statutory rate of 34.0% primarily due to the Company's foreign sales corporation benefit on export sales and , in 2000, realization of tax benefit on prior years' foreign losses, offset by state income taxes. Net Income and per Share Data Net income increased 56.9% in 2000, to $13.1 million, or $1.00 per share, from $8.4 million, or $.60 per share in 1999. Financial Condition Liquidity The Company provides engineered solutions, including prototype design and assembly, in niche markets. Additionally, the Company specializes in certain products representing trailing-edge technology that may not be available from other sources, and may not be currently manufactured. In many cases, the Company's products are components of production equipment for which immediate availability is critical to the customer. Accordingly, the Company enjoys higher gross margins, but necessarily has larger investments in inventory than those of a commodity electronics distributor. Liquidity is provided by the operating activities of the Company, adjusted for non-cash items, and is reduced by working capital requirements, debt service, capital expenditures, dividends, business acquisitions and, in 1999, purchases of treasury stock. Cash provided by operations was $4.1 million in 2000 and 1999 and $6.3 million in 1998. Additional investments in working capital to support sales growth were $15.4 million, $10.2 million and $10.6 million in 2000, 1999 and 1998, respectively. The Company proposed a plan, which has been accepted by the Illinois Environmental Protection Agency, to monitor and process soil and groundwater at the LaFox facility. Contamination is believed to have resulted from practices previously employed at the site. The present value of the estimated future remediation costs was charged to operations in 1996. The balance of the reserve is $520,000 and is included in accrued liabilities at May 31, 2000. Financing At May 31, 2000, the Company had a $50.0 million floating-rate revolving credit agreement. Loans under the agreement bore interest at prime or 125 basis points over the London Inter-Bank Offered Rate (LIBOR), at the Company's option. At May 31, 2000, $10.4 million was available under this line. A Canadian subsidiary of the Company had a revolving credit and term loan agreement aggregating $12.1 million with a Canadian affiliate of the Company's primary bank. The loan was guaranteed by the Company and bore interest at the Canadian prime rate. On July 28, 2000, the Company refinanced the revolving credit facility and the Canadian credit agreement with an $80.0 million multi-currency revolving credit facility. The agreement matures in July 2004 and bears interest at applicable LIBOR rates plus a margin, varying with certain financial performance criteria. At initial funding, the margin was 150 basis points. In addition, the Company entered into certain interest rate swap arrangements for the term of the facility, fixing the interest rate on $33.9 million at an average rate of 8.3%. (15) Management's Discussion and Analysis In fiscal 1999, the Company purchased a suite of enterprise resource planning software utilizing state-of-the-art technology. The Company entered into a financing arrangement with quarterly payments through March 2001 at an implicit interest rate of 7.5%. In fiscal 1998, the Company sold 2.1 million shares of its Common Stock in a public offering at a price of $12.50 per share. The net proceeds to the Company, after deducting an underwriting discount of 6% and issuance costs of $253,000, were $24.1 million. The proceeds were used to reduce borrowings under the Company's revolving debt agreement. In fiscal 1999, the Company purchased 2.0 million shares of its Common Stock at an average cost of $5.76 per share. Based on shares outstanding at May 31, 2000, annual dividend payments approximate $2.0 million. The policy regarding payment of dividends is reviewed periodically by the Board of Directors in light of the Company's operating needs and capital structure. Currency Fluctuations The Company's foreign denominated assets and liabilities are cash, accounts receivable, inventory and accounts payable, primarily in Canada and member countries of the European community and, to a lesser extent, in Asia / Pacific and Latin America. The Company monitors its foreign exchange exposures and, while historically has not, may in the future enter into forward contracts to hedge significant transactions. Other tools that may be used to manage foreign exchange exposures include the use of currency clauses in sales contracts and the use of local debt to offset asset exposures. There are no outstanding forward exchange contracts at May 31, 2000. Conversion to the Euro On January 1, 1999, eleven member countries of the European Union began conversion to a common currency, the Euro. From January 1, 1999 until January 1, 2002, companies operating in Europe must be able to process business transactions either in legacy currencies or in Euros. After January 1, 2002, all transactions will be processed only in Euros. The Company has modified its transaction processing systems to accommodate the Euro and dual currency processing requirements without significant additional costs. While the exact impact on pricing is indeterminable, the Company believes that since most of its pricing is based on U.S. dollar costs, the effect of conversion to the Euro has not been significant. Risk Management and Market Sensitive Financial Instruments As discussed above, the Company's debt financing, in part, varies with market rates and certain of its operations and assets and liabilities are denominated in foreign currencies that subject the Company to foreign exchange risk. In order to provide the user of these financial statements guidance regarding the magnitude of these risks, the Securities and Exchange Commission requires the Company to provide certain disclosures based upon hypothetical assumptions. Specifically, these disclosures require the calculation of the effect a 10% increase in market interest rates and a uniform 10% strengthening of the U. S. dollar against foreign currencies would have on the reported net earnings of the Company. Under these assumptions, additional interest expense, tax effected, would have reduced net income by $210,000 in 2000 or $150,000 in 1999 and foreign currency exchange rates would have decreased net income by $250,000 in 2000 or 140,000 in 1999. The interpretation and analysis of these disclosures should not be considered in isolation since such variances in interest rates and exchange rates would likely influence other economic factors. Such factors, which are not readily quantifiable, would likely also affect the Company's operations. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 Except for the historical information contained herein, the matters discussed in this Annual Report (including the Annual Report on Form 10-K) are forward- looking statements relating to future events which involve certain risks and uncertainties, including those identified herein and in the Annual Report on Form 10-K. Further, there can be no assurance that the trends reflected in historical information will continue in the future. (16) Consolidated Balance Sheets As of May 31 (in thousands) 2000 1999 --------- --------- Assets Current assets Cash and equivalents $ 11,832 $ 12,569 Receivables, less allowance of $2,991 and $2,584 77,821 62,448 Inventories 119,224 107,724 Other 13,346 12,817 --------- --------- Total current assets 222,223 195,558 Property, plant and equipment, net 25,851 23,047 Other assets 16,851 17,073 --------- --------- Total assets $264,925 $235,678 ========= ========= Liabilities and stockholders' equity Current liabilities Accounts payable 30,882 21,829 Accrued liabilities 14,452 10,259 Notes and current portion of long-term debt 2,619 1,830 --------- --------- Total current liabilities 47,953 33,918 Long-term debt 117,643 113,658 Deferred income taxes 5,336 3,798 --------- --------- Total liabilities 170,932 151,374 Stockholders' equity Common Stock, $.05 par value 583 570 Class B Common Stock, convertible, $.05 par value 162 162 Preferred Stock, $1.00 par value -- -- Additional paid-in capital 84,514 82,309 Treasury stock (11,045) (11,532) Retained earnings 34,184 23,044 Foreign currency translation adjustment (14,405) (10,249) --------- --------- Total stockholders' equity 93,993 84,304 --------- --------- Total liabilities and stockholders' equity $264,925 $235,678 ========= ========= See notes to consolidated financial statements. (17) Consolidated Statements of Operations Year Ended May 31 (in thousands, except per share amounts) 2000 1999 1998 --------- --------- --------- Net sales $407,178 $320,941 $304,172 Cost of products sold 299,246 231,328 217,509 --------- --------- --------- Gross margin 107,932 89,613 86,663 Selling, general and administrative expenses 81,489 70,870 65,393 --------- --------- --------- Operating income 26,443 18,743 21,270 Other (income) expense: Interest expense 8,911 7,689 8,084 Investment income (1,032) (636) (1,005) Foreign exchange and other (40) (167) 255 --------- --------- --------- 7,839 6,886 7,334 --------- --------- --------- Income before income taxes 18,604 11,857 13,936 Income tax provision 5,500 3,505 4,200 --------- --------- --------- Net income $ 13,104 $ 8,352 $ 9,736 ========= ========= ========= Net income per share: Basic $ 1.03 $ .60 $ .79 Diluted $ 1.00 $ .60 $ .77 Dividends per common share $ .16 $ .16 $ .16 Comprehensive income: Net income $ 13,104 $ 8,352 $ 9,736 Foreign currency translation adjustment (4,156) (3,663) (2,983) --------- --------- --------- Comprehensive income $ 8,948 $ 4,689 $ 6,753 ========= ========= ========= See notes to consolidated financial statements. (18) Consolidated Statements of Cash Flows Year Ended May 31 (in thousands) 2000 1999 1998 -------- -------- --------- Operating Activities: Net income $13,104 $ 8,352 $ 9,736 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 4,415 3,605 3,477 Amortization of intangibles and financing costs 744 633 632 Deferred income taxes 1,292 1,237 2,779 Stock contribution to employee ownership plan -- 485 285 -------- -------- -------- Net adjustments 6,451 5,960 7,173 -------- -------- -------- Changes in working capital, net of currency translation effects and business acquisitions: Receivables (17,072) 1,108 (9,170) Inventories (11,307) (10,985) (3,658) Other current assets (351) (3,015) 186 Accounts payable 9,130 3,172 4,366 Accrued liabilities 4,159 (509) (2,350) -------- -------- -------- Net changes in working capital (15,441) (10,229) (10,626) -------- -------- -------- Net cash provided by operating activities 4,114 4,083 6,283 -------- -------- -------- Financing activities: Proceeds from borrowings 12,316 31,528 16,731 Payments on debt (7,641) (3,743) (35,642) Proceeds from sales of common stock 2,716 385 26,933 Purchases of treasury stock (11) (11,527) -- Cash dividends (1,964) (2,150) (1,976) -------- -------- -------- Net cash provided by financing activities 5,416 14,493 6,046 -------- -------- -------- Investing activities: Capital expenditures (7,026) (3,795) (6,798) Business acquisitions (2,356) (7,647) (4,116) Other (885) (2,596) (3,396) -------- -------- -------- Net cash used in investing activities (10,267) (14,038) (14,310) -------- -------- -------- Increase (decrease) in cash and equivalents (737) 4,538 (1,981) Cash and equivalents at beginning of year 12,569 8,031 10,012 -------- -------- -------- Cash and equivalents at end of year $11,832 $12,569 $ 8,031 ======== ======== ======== (19)
Consolidated Statements of Stockholders' Equity Shares Issued Accumulated --------------- Additional Other (shares and dollars Class B Par Paid-in Treasury Retained Comprehensive in thousands) Common Common Value Capital Stock Earnings Income(Loss) Total ------- ------- ----- --------- --------- -------- ------------ -------- Balance June 1, 1997 8,721 3,243 $ 599 $ 53,512 $ -- $ 9,082 $ (3,603) $59,590 Shares contributed to ESOP 34 -- 2 283 -- -- -- 285 Shares issued under ESPP 354 -- 19 2,845 -- -- -- 2,864 Public stock offering 2,070 -- 103 23,966 -- -- -- 24,069 Conversion of Class B 4 (4) -- -- -- -- -- -- Dividends -- -- -- -- -- (1,976) -- (1,976) Currency translation -- -- -- -- -- -- (2,983) (2,983) Net income -- -- -- -- -- 9,736 -- 9,736 ------- ------- ----- --------- --------- -------- ------------ -------- Balance May 31, 1998 11,183 3,239 723 80,606 -- 16,842 (6,586) 91,585 Shares contributed to ESOP 12 -- 1 484 -- -- -- 485 Shares issued under ESPP 189 -- 8 1,219 (5) -- -- 1,222 Purchase of 2,000 shares of common stock -- -- -- -- (11,527) -- -- (11,527) Conversion of Class B shares to common 6 (6) -- -- -- -- -- -- Dividends -- -- -- -- -- (2,150) -- (2,150) Currency translation -- -- -- -- -- -- (3,663) (3,663) Net income -- -- -- -- -- 8,352 -- 8,352 ------- ------- ----- --------- --------- -------- ------------ -------- Balance May 31, 1999 11,390 3,233 732 82,309 (11,532) 23,044 (10,249) 84,304 Shares issued under ESPP 279 -- 13 2,205 498 -- -- 2,716 Purchase of Common Stock -- -- -- -- (11) -- -- (11) Conversion of Class B shares of common stock 1 (1) -- -- -- -- -- -- Dividends -- -- -- -- -- (1,964) -- (1,964) Currency translation -- -- -- -- -- -- (4,156) (4,156) Net income -- -- -- -- -- 13,104 -- 13,104 ------- ------- ----- --------- --------- -------- ------------ -------- Balance May 31, 2000 11,670 3,232 $745 $ 84,514 $(11,045) $34,184 $ (14,405) $93,993 ======= ======= ===== ========= ========= ======== ============ ========
See notes to consolidated financial statements Note A -- Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts and operations of the Company and its subsidiaries. All significant intercompany transactions are eliminated. The Company accounts for its results of operations on a 52/53 week year, ending on the Saturday nearest May 31. Fiscal 2000 contained 53 weeks, including 14 weeks in the first quarter. Fiscal 1999 and 1998 each contained 52 weeks. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications: Certain amounts in the 1999 and 1998 financial statements are reclassified to conform to the 2000 presentation. Cash Equivalents: The Company considers short-term investments that have a maturity of three months or less, when purchased, to be cash equivalents. The carrying amounts reported in the balance sheet for cash and equivalents approximate the fair market value of these assets. Inventories: Inventories are stated at the lower of cost or market. Inventory costs determined using the last-in, first-out (LIFO) method represent 79% of total inventories at May 31, 2000 and 78% at May 31, 1999. For the remaining inventories, cost is determined on the first-in, first-out (FIFO) method. If the FIFO method had been used for all inventories, the total amount of inventories would have been increased by $542 and $2,058 at May 31, 2000 and 1999, respectively. As a result of overstock reserves, the LIFO carrying value of all inventories approximated market value at May 31, 2000 and 1999. Substantially all inventories represent finished goods held for sale. Property, Plant and Equipment: Property, plant and equipment are stated at cost. Provisions for depreciation are computed principally using the straight- line method over the estimated useful life of the asset. Property, plant and equipment consist of the following: May 31 2000 1999 --------- --------- Land and improvements $ 2,770 $ 2,764 Buildings and improvements 19,310 18,776 Machinery and equipment 42,011 36,003 --------- -------- Property, at cost 64,091 57,543 Accumulated depreciation (38,240) (34,496) --------- --------- Property,plant and equipment net $ 25,851 $ 23,047 ========= ========= Other Assets: Deferred financing costs, goodwill and other deferred charges are amortized using the straight-line method. Goodwill is generally amortized over a period of 20 to 40 years. The Company continually evaluates the carrying value of goodwill based upon its recoverability from related projected undiscounted cash flows. Other assets consist of the following: May 31 2000 1999 --------- --------- Investments (at market) $ 3,497 $ 2,603 Notes receivable 544 5,680 Deferred financing costs, net 370 436 Goodwill, net 9,844 7,126 Property held for sale 1,732 - Other deferred charges, net 864 1,228 --------- --------- Other assets, net $ 16,851 $ 17,073 ========= ========= Accrued Liabilities: Accrued liabilities consist of the following: May 31 2000 1999 --------- --------- Compensation and payroll taxes $ 5,986 $ 4,048 Interest 3,042 2,758 Income taxes 2,452 1,042 Other accrued expenses 2,972 2,411 --------- --------- Accrued liabilities $ 14,452 $ 10,259 ========= ========= Foreign Currency Translation: Foreign currency balances and financial statements are translated into U. S. dollars at end-of-period rates, except that revenues and expenses are translated at the current rate on the date of the transaction. Gains and losses resulting from foreign currency transactions are included in income currently. Foreign currency transaction gains (losses) reflected in operations are $60, $77, and $(299) in 2000, 1999, and 1998, respectively. Gains and losses resulting from translation of foreign subsidiary financial statements are credited or charged directly to a separate component of stockholders' equity. Revenue Recognition: Revenues are recorded when title passes to the customer. Income Taxes: Deferred tax assets and liabilities are established for differences between financial reporting and tax accounting of assets and liabilities and are measured using the marginal tax rates. Stock-Based Compensation: The Company accounts for its stock option plans in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. However, all grants under the Company's option plans have been made at the fair market value on the date of grant. Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation", requires estimation of the fair value of options granted to employees. As permitted by SFAS No. 123, the Company presents this estimated fair value information in Note E. (25) Notes to Consolidated Financial Statements (In thousands, except per share amounts) Earnings per Share: Basic earnings per share is calculated by dividing net income by the weighted average number of Common and Class B Common shares outstanding. Diluted earnings per share is calculated by dividing net income (adjusted for interest savings, net of tax, on assumed bond conversions) by the actual shares outstanding and share equivalents that would arise from the exercise of stock options and the assumed conversion of convertible bonds. The per share amounts presented in the Consolidated Statement of Operations are based on the following amounts: 2000 1999 1998 -------- -------- -------- Numerator for basic EPS: Net income $13,104 $ 8,352 $ 9,736 ======== ======== ======== Denominator for basic EPS: Shares outstanding, June 1 12,623 14,422 11,964 Additional shares issued 61 106 300 Reduction of shares acquired - (706) - -------- -------- -------- Average shares outstanding 12,684 13,822 12,264 ======== ======== ======== Numerator for diluted EPS: Net income $13,404 $ 8,352 $ 9,736 Interest saving, net of Tax, on assumed conversions of bonds 3,459 - - -------- -------- -------- Adjusted net income $16,563 $ 8,352 $ 9,736 ======== ======== ======== Denominator for diluted EPS: Average shares outstanding 12,684 13,822 12,264 Effect of dilutive stock options 216 204 425 Assumed converstion of bonds 3,680 - - -------- -------- -------- Adjusted shares outstanding 16,580 14,026 12,689 ======== ======== ======== Out-of-the-money (exercise price higher than market price) stock options are excluded from the calculation because they are anti-dilutive. The Company's 81/4% and 71/4% convertible debentures are excluded from the calculation in 1999 and 1998 as assumed conversion would be anti-dilutive. Note B -- Acquisitions Fiscal 2000: In December 1999, the Company's Wireless unit acquired the assets and liabilities of Apoio Technico, a distributer of broadcast transmitters and equipment in Brazil with annual sales of $8,000. In May 2000, the Wireless unit also acquired the assets and liabilities of Broadcast Richmond, a global distributer and installer of broadcast equipment located in Richmond, Indiana, with annual sales of $2,000. The aggregate cash outlay for business acquisitions made in 2000 was $391. Additional non-cash payments of $5,058 were made in the form of the foregiveness of an account receivable. Fiscal 1999: In December 1998, the Company's Security unit acquired Adler Video Systems, a southern California based distributor of closed circuit television (CCTV) systems with annual sales of $8,400. The Company also made three smaller acquisitions with annual sales of approximately $2,000 each. These acquisitions included TRL Industries, a manufacturer of amplifier circuits for the Wireless business unit's wireless communications operations; Sahab S.A., a Mexican distributer of broadcast transmitters for the Wireless business unit; and Pixelink, a systems integrator specializing in monitors for the Display business unit. The aggregate cash outlay for business acquisitions made in 1999 was $2,868. Additional non-cash payments of $1,113 were made in the form of the Company's Common Stock and the foregiveness of a note receivable. Fiscal 1998: In August 1997 the Company's Security unit acquired the assets of Security Service International, Inc., a Canadian distributor of security systems with annual sales of approximately $20,000. In March, 1998, the Company acquired Eternal Graphics, a systems integrator specializing in financial applications for the Display business unit with annual sales of $4,200. The aggregate cash outlay for business acquisitions made in 1998 was $5,742. Each of the acquisitions was accounted for by the purchase method, and accordingly, their results of operations are included in the consolidated statements of operations from the respective dates of acquisition. The impact of these acquisitions on results of operations was not significant and would not have been significant if they had been included for the entire year. If each of these acquisitions had occurred at the beginning of the year, consolidated sales would have increased by approximately $6,000, $6,900 and $6,000 in 2000, 1999 and 1998, respectively. The terms of certain of the Company's acquisition agreements provide for additional consideration to be paid if the acquired entity's results of operations exceed certain targeted levels. Such amounts are paid in cash and recorded when earned as additional consideration, and amounted to $1,965, $927 and $1,056 in 2000, 1999 and 1998, respectively. Assuming the goals established in all agreements outstanding at May 31, 2000 were met, additional consideration aggregating approximately $4,783 would be payable through 2004. Note C -- Debt Financing Long-term debt consists of the following: May 31 2000 1999 --------- --------- 8 1/4% Convertible debentures, due June 2006 $ 40,000 $ 40,000 7 1/4% Convertible debentures, due December 2006 30,825 30,825 Floating-rate revolving credit facility, due June 2001 (7.46% at May 31, 2000) 39,582 33,582 Revolving credit and term loan due June 2001 (6.95% at May 31, 2000) 7,646 7,694 Software financing 1,588 2,673 Other 621 714 --------- --------- Long-term debt 120,262 115,488 Less current portion (2,619) (1,830) --------- --------- Long-term debt $117,643 $113,658 ========= ========= The 7 1/4% convertible debentures are unsecured and subordinated to other long-term debt, including the 8 1/4% convertible debentures. Each $1,000 of the 7 1/4% debenture is convertible into the Company's Common Stock at any time prior to maturity at $21.14 per share and the 8 1/4% convertible debentures are convertible at $18.00 per share. The Company is required to make sinking fund payments of $3,850 in 2004 and $6,225 in 2005. (22) Notes to Consolidated Financial Statements (In thousands, except per share amounts) At May 31, 2000, the Company had a $50,000 floating-rate revolving credit facility expiring June 2001. Loans under the agreement bore interest at the Company's option at prime or at a premium over LIBOR. The premium over LIBOR varied with certain performance benchmarks. At May 31, 2000, the premium was 125 basis points, and $10,400 was available for future borrowing. A Canadian subsidiary of the Company had a revolving credit and term loan agreement aggregating $12,100 with a Canadian affiliate of the Company's primary bank. The loan was guaranteed by the Company and bore interest at the Canadian prime rate. On July 28, 2000, the Company refinanced the revolving credit facility and the Canadian credit agreement with an $80,000 multi-currency revolving credit facility. The agreement matures in July 2004 and bears interest at applicable LIBOR rates plus a margin, varying with certain financial performance criteria. At initial funding, the margin was 150 basis points. In addition, the Company entered into certain interest rate swap arrangements for the term of the facility, fixing the interest rate on $33.9 million at an average rate of 8.3%. In fiscal 1999, the Company purchased a suite of enterprise resource planning software utilizing state-of the-art client-server technology. The Company entered into a financing arrangement with quarterly payments through March 2001 at an average implicit interest rate of 7.5%. In the following table, the fair values of the Company's 7 1/4% and 8 1/4% convertible debentures are based on quoted market prices at the end of the fiscal year. The fair values of the bank term loans are based on carrying value, adjusted for market interest rate changes. 2000 1999 ------------------ ------------------ Carrying Fair Carrying Fair Value Value Value Value --------- --------- --------- --------- 8 1/4% Convertible debentures $ 40,000 $ 34,400 $ 40,000 $ 33,800 7 1/4% Convertible debentures 30,825 24,352 30,825 22,965 Floating-rate revolving credit facility 39,582 39,582 33,582 33,582 Revolving credit and term loan 7,646 7,646 7,694 7,694 Software financing arrangment 1,588 1,674 2,673 3,036 Other 621 621 714 714 --------- --------- --------- --------- Total 120,262 108,275 115,488 101,791 Less current portion (2,619) (2,619) (1,830) (1,830) --------- --------- --------- --------- Total $117,643 $105,656 $113,658 $ 99,961 ========= ========= ========= ========= The loan and debenture agreements contain financial covenants with which the Company was in full compliance at May 31, 2000. The most restrictive covenants set benchmark levels for tangible net worth, debt to tangible net worth ratio, cash flow to senior funded debt and annual debt service coverage. Aggregate maturities of debt during the next five years are: $2,619 in 2001, $263 in 2002, $3,850 in 2004 and $45,807 in 2005. Cash payments for interest were $8,627, $7,477 and $8,387 in 2000, 1999 and 1998, respectively. Note D -- Income Taxes The components of income before income taxes are: 2000 1999 1998 ---------- --------- --------- United States $ 16,199 $ 9,531 $ 11,070 Foreign 2,405 2,326 2,866 ---------- ---------- --------- Income (loss) before taxes and extraordinary item $ 18,604 $ 11,857 $ 13,936 ========== ========== ========= The provision for income taxes differs from income taxes computed at the federal statutory tax rate of 34% as a result of the following items: 2000 1999 1998 ---------- ---------- ---------- Federal statutory rate 34.0 % 34.0 % 34.0 % Effect of: State income taxes, net of federal tax benefit 3.2 2.8 3.5 FSC benefit on export sales (4.4) (7.2) (6.2) Realization of tax benefit on prior years' foreign losses (2.8) - - Foreign taxes at other rates 0.5 0.5 (0.3) Other (0.9) (0.5) (0.9) ---------- ---------- ---------- Effective tax rate 29.6 % 29.6 % 30.1 % ========== ========== ========== The provisions for income taxes consist of the following: 2000 1999 1998 ---------- ---------- ---------- Currently payable: Federal $ 2,224 $ 1,294 $ 973 State 192 (44) 155 Foreign 1,792 1,018 293 ---------- ---------- ---------- Total currently payable 4,208 2,268 1,421 Deferred: Federal 2,023 730 1,867 State 739 545 275 Foreign (1,470) (38) 637 ---------- ---------- ---------- Total deferred 1,292 1,237 2,779 ---------- ---------- ---------- Income tax provision $ 5,500 $ 3,505 $ 4,200 ========== ========== ========== (23) Notes to Consolidated Financial Statements (In thousands, except per share amounts) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of May 31, 2000 and 1999 are as follows: Balance Sheet Presentation Current Noncurrent Asset (1) Liability ---------- ---------- At May 31, 2000: Deferred tax assets: Intercompany profit in inventory $ 1,469 $ - Inventory valuation 5,898 - Environmental and other reserves - 545 Other, net 73 71 ---------- ---------- Deferred tax assets 7,440 616 Deferred tax liabilities: Accelerated depreciation - (4,182) Other, net - (1,770) ---------- ---------- Net deferred tax $ 7,440 $ (5,336) At May 31, 1999: Deferred tax assets: Intercompany profit in inventory 1,492 - Inventory valuation 5,674 - Environmental and other reserves - 756 Other, net 11 - ---------- ---------- Deferred tax assets 7,177 756 Deferred tax liabilities: Accelerated depreciation - (3,834) Other, net - (720) ---------- ---------- Net deferred tax $ 7,177 $ (3,798) ========== ========== (1) Included in other current assets on the balance sheet In 1995, due to the timing and nature of a claim settlement, the Company utilized a ten-year carryback provision under the Internal Revenue Code. The Company's U. S. federal tax returns have been examined through 1995. As part of this examination, in December 1997, the Internal Revenue Service contested the Company's carryback of the aforementioned claim settlement. The Company is appealing the IRS position. However, if the Company were ultimately unsuccessful, the claim would be available for carryforward at the then current statutory rate and the impact on the Company's financial position and results of operations would not be material. Income taxes paid were $2,313, $1,758, and $850 in 2000, 1999 and 1998, respectively. Note E -- Stockholders' Equity The Company has authorized 30,000 shares of Common Stock, 10,000 shares of Class B Common Stock, and 5,000 shares of Preferred Stock. The Class B Common Stock has ten votes per share. The Class B Common Stock has transferability restrictions; however, it may be converted into Common Stock on a share-for- share basis at any time. With respect to dividends and distributions, shares of common stock and Class B common stock rank equally and have the same rights, except that Class B common stock is limited to 90% of the amount of common stock cash dividends. In May 1998, the Company sold 2,070 shares of its common stock through a public offering at a price of $12.50 per share. The net proceeds to the Company, after deducting an underwriting discount of 6% and issuance costs of $253 were $24,069. Proceeds were used to pay down the revolving credit facility. In fiscal 1999, the Company purchased 2,000 shares of Common Stock at an average cost of $5.76 per share. Total Common Stock issued and outstanding at May 31, 2000 was 9,755 shares. An additional 9,430 shares of Common Stock have been reserved for the potential conversion of the convertible debentures and Class B Common Stock and for future issuance under the Employee Stock Option Plans. The Employee Stock Purchase Plan (ESPP) provides substantially all employees an opportunity to purchase Common Stock of the Company at 85% of the stock price at the beginning or the end of the year, whichever is lower. At May 31, 2000, the plan had 64 shares reserved for future issuance. The Employees' 1998 Incentive Compensation Plan authorizes the issuance of up to 800 shares as incentive stock options, non-qualified stock options or stock awards. Under this plan and predecessor plans, 2,069 shares are reserved at May 31, 2000 for future issuance. The Plan authorizes the granting of incentive stock options at the fair market value at the date of grant. Generally, these options become exercisable over staggered periods and expire up to ten years from the date of grant. Under the 1996 Stock Option Plan for Non-Employee Directors and a predecessor plan, at May 31, 2000, 382 shares of Common Stock have been reserved for future issuance relating to stock options exercisable based on the passage of time. Each option is exercisable over a period from its date of grant at the market value on the grant date and expires after ten years. The Company applies APB Opinion No. 25 and related interpretations in accounting for its option plans and, accordingly, has not recorded compensation expense for such plans. SFAS No. 123 requires the calculation of the fair value of each option granted. (25) Notes to Consolidated Financial Statements (In thousands, except per share amounts) This fair value is estimated on the date of grant using the Black-Scholes option-pricing model with the assumptions indicated below. Had the Company's option plans and stock purchase plan been treated as compensatory under the provisions of SFAS No. 123, the Company's net income and net income per share would have been affected as follows: 2000 1999 1998 ------- ------- ------- Net income, as reported $13,104 $ 8,352 $ 9,736 Proforma net income 12,300 7,629 9,261 Profoma net income per share: Basic $ .97 $ .55 $ .76 Assuming full dilution .95 .54 .73 Assumptions used: Risk-free interest rate 6.0% 5.4% 5.5% Annual standard deviation of stock price 55% 50% 40% Average expected life (years) 5.5 6.1 5.6 Annual dividend rate $ .16 $ .16 $ .16 Average fair value per option $ 3.59 $ 3.31 $ 3.49 Option value of ESPP per share $ 1.24 $ 1.13 $ 1.19 Fair value of options granted during the year $ 991 $ 1,115 $ 948 The effect of applying SFAS No. 123 in this proforma disclosure is not indicative of the effects on future years, because SFAS No. 123 does not apply to grants issued prior to fiscal 1996. A summary of the share activity and weighted average exercise prices for the Company's option plans is as follows: Outstanding Exercisable -------------------- ------------------- Shares Price Shares Price -------- -------- -------- -------- At June 1, 1997 1,489 $ 7.31 936 $ 7.21 Granted 291 8.70 Exercised (308) 6.57 Cancelled (99) 7.26 -------- At May 31, 1998 1,373 7.74 697 7.52 Granted 338 7.19 Exercised (20) 4.68 Cancelled (5) 7.86 -------- At May 31, 1999 1,686 7.66 855 7.62 Granted 296 7.81 Exercised (292) 6.98 Cancelled (131) 7.66 -------- At May 31, 2000 1,559 7.82 755 7.82 The following table summarizes information about stock options outstanding as of May 31, 2000: Outstanding Exercisable ------------------- ------------------- Exercise Price Range Shares Price Life Shares Price Life ----------------- ------- ----- ---- ------- ----- ---- $3.75 to $5.375 87 $4.46 6.1 72 $4.27 4.2 $6.00 to $7.50 793 6.90 6.3 308 6.83 4.5 $8.00 to $8.50 505 8.23 7.1 277 8.15 4.8 $10.813 to $13.25 174 12.52 5.8 98 12.59 3.8 ------- ------- Total 1,559 755 ======= ======= Note F -- Employee Retirement Plans The Company's domestic employee retirement plans consist of a profit sharing plan and a stock ownership plan (ESOP). Annual contributions in cash or Company stock are made at the discretion of the Board of Directors. In addition, the profit sharing plan has a 401(k) provision whereby the Company matches 50% of employee contributions up to 4% of base pay. Charges to expense for discretionary and matching contributions to these plans were $1,790, $1,370 and $1,341 in 2000, 1999 and 1998, respectively. Such amounts included contributions in stock of $1,310 for 2000 and $285 for 1998, based on the stock price at the date contributed. Shares are included in the calculation of earnings per share and dividends are paid to the ESOP from the date the shares are contributed. Foreign employees are covered by a variety of government mandated programs. Note G -- Industry and Market Information The following disclosures are made in accordance with the SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information". The Company completed the reorganization of its marketing and sales structure into five strategic business units (SBU's) in fiscal 2000. Historical data for 1999 and 1998 have been restated to conform to the new organization structure. The new units are: RF & Wireless Communications Group (Wireless), Industrial Power Group (Industrial), Medical Systems Group (Medical), Security Systems Division (Security) and Display Systems Group (Display). Wireless serves the rapidly expanding wireless voice and data telecommunications industry and radio and television broadcast industry. Industrial serves a broad range of customers including the steel, automotive, textile, plastics, semiconductor, marine and avionics industries. Medical serves the medical imaging market, providing system upgrade and integration services in addition to a wide range of diagnostic imaging components. Security is a full-line distributor of CCTV, fire, burglary, access control, sound and communication products and accessories. Display provides system integration and custom product solutions for the public information display, financial, point-of-sale and general data display markets. (25) Notes to Consolidated Financial Statements (In thousands, except per share amounts) Each SBU is directed by a Vice President and General Manager who reports to the President and Chief Operating Officer. The President evaluates performance and allocates resources, in part, based on the direct operating contribution of each SBU. Direct operating contribution is defined as gross margin less product management and direct selling expenses. In North America and Europe, the sales force is organized by SBU and, accordingly, these costs are included in direct expenses. In Latin America, Asia / Pacific and the rest of the world, the regional sales force is shared and, accordingly, is not included in direct expenses. Inter-segment sales are not significant. Accounts receivable, inventory, goodwill and certain notes receivable are identified by SBU. Cash, net property and other assets are not identifiable by SBU. Accordingly, depreciation, amortization expense and financing costs are not identifiable by SBU. Operating results for each SBU are summarized in the following table: Gross Sales Margin Contribution Assets ---------- --------- ------------ --------- Fiscal 2000 Wireless $ 154,502 $ 40,524 $ 26,694 $ 86,638 Industrial 87,584 31,037 24,117 42,449 Medical 39,461 7,430 4,065 26,654 Security 84,504 19,846 9,699 33,470 Display 41,127 10,273 5,758 19,825 ---------- --------- ------------ --------- Total $ 407,178 $109,110 $ 70,333 $209,036 ========== ========= ============ ========= Fiscal 1999 Wireless $ 104,347 $ 28,764 $ 18,042 $ 63,751 Industrial 77,389 27,861 21,318 43,661 Medical 37,523 7,923 4,817 25,870 Security 70,180 16,184 7,179 31,685 Display 31,502 10,344 6,517 20,918 ---------- --------- ----------- --------- Total $ 320,941 $ 91,076 $ 57,873 $185,885 ========== ========= =========== ========= Fiscal 1998 Wireless $ 100,358 $ 27,269 $ 17,764 $ 56,687 Industrial 84,587 30,117 23,659 45,558 Medical 23,849 5,363 2,619 19,853 Security 66,362 15,335 7,084 30,245 Display 29,016 10,094 7,458 16,900 ---------- --------- ----------- --------- Total $ 304,172 $ 88,178 $ 58,584 $169,243 ========== ========= =========== ========= A reconciliation of gross margin, direct operating contribution and assets to the relevant consolidated amounts is as follows. (Other assets not identified includes miscellaneous receivables, manufacturing inventories and other assets.) 2000 1999 1998 --------- --------- --------- Segment gross margin $109,110 $ 91,076 $ 88,178 Manufacturing variances and other costs (1,178) (1,463) (1,515) --------- --------- --------- Gross margin 107,932 89,613 86,663 ========= ========= ========= Segment contribution 70,333 57,873 58,584 Manufacturing variances and other costs (1,178) (1,463) (1,515) Regional selling expenses (14,489) (12,842) (12,357) Administrative expenses (28,223) (24,825) (23,442) --------- --------- --------- Operating income 26,443 18,743 21,270 ========= ========= ========= Segment assets 209,036 185,885 169,243 Cash and equivalents 11,832 12,569 8,031 Other current assets 13,346 12,817 9,681 Net property 25,851 23,047 18,477 Other assets 4,860 1,360 4,268 --------- --------- --------- Total assets $264,925 $235,678 $209,700 ========= ========= ========= Geographic sales information is grouped by customer destination into five areas: North America, Europe, Latin America, Asia/Pacific and Other. Sales to Mexico are included as part of Latin America. Other includes sales to export distributors and to countries where the Company does not have sales offices. The United States and Canada are the only countries for which sales disclosure under SFAS No. 131 is required. Fiscal 2000 sales and long-lived assets (net property and other assets, excluding investments) were as follows: Sales Assets --------- -------- United States $212,376 $31,213 Canada 53,193 2,260 --------- -------- North America 265,569 33,473 Europe 77,792 2,929 Asia / Pacific 34,305 625 Latin America 19,316 2,178 Other 10,196 0 --------- -------- Total $407,178 $39,205 ========= ======== The Company sells its products to companies in diversified industries and performs periodic credit evaluations of its customers' financial condition. Terms are generally on open account, payable net 30 days in North America and Latin America, and vary throughout Europe and the Far East. Estimates of credit losses are recorded in the financial statements based on periodic reviews of outstanding accounts and actual losses have been consistently within management's estimates. (26) Notes to Consolidated Financial Statements (In thousands, except per share amounts) Note H -- Litigation On June 19, 1990, the Company was served with a complaint in Panache Broadcasting of Pennsylvania, Inc. v. Richardson Electronics, Ltd.; Varian Associates, Inc.; and Varian Supply Company (VASCO - a joint venture between the Company and Varian Associates, Inc.), in U. S. District Court for the Eastern Division of Pennsylvania alleging violations of Sections 1 and 2 of the Sherman Act and Section 7 of the Clayton Act. This is a class action for the purpose of determining liablility only on behalf of all persons and businesses in the U. S. who purchased electron tubes (1) encompassed in the VASCO agreement, (2) related to the dud tube collection program of the defendants or (3) related to acquisitions arising out of VASCO between February 26, 1986 to May 13, 1999. The suit seeks treble damages alleged to be in excess of $100, injunctive relief and attorneys' fees. The litigation has been transferred to the U. S. District Court for the Northern District of Illinois, Eastern Division as cause No. 90C6400, and is in the discovery stage. The Company is defending itself against this action. It is not possible at this time to predict the outcome of this legal action. Note I -- Selected Quarterly Financial Data (Unaudited) Summarized quarterly financial data for 2000 and 1999 follow. There were no material fourth quarter adjustments in 2000. The fourth quarter of fiscal 1999 includes a $500 provision for bad debts in Latin America which reduced net income by $305 or $.02 per share. First Second Third Fourth -------- -------- -------- --------- 2000: Net sales $ 95,564 $ 97,578 $ 98,874 $ 115,162 Gross margin 25,668 26,561 25,780 29,923 Net income 2,701 3,269 2,528 4,606 Net income per share: Basic $ .21 $ .26 $ .20 $ .36 Dilutive $ .21 $ .26 $ .20 $ .32 1999: Net sales $ 76,038 $ 82,232 $ 77,092 $ 85,579 Gross margin 21,712 23,262 21,388 23,251 Net income 2,501 3,279 693 1,879 Net income per share: Basic $ .17 $ .23 $ .05 $ .15 Dilutive $ .17 $ .23 $ .05 $ .15 (27) Report of Independent Auditors Stockholders and Directors Richardson Electronics, Ltd. LaFox, Illinois We have audited the accompanying consolidated balance sheets of Richardson Electronics, Ltd. and subsidiaries as of May 31, 2000 and 1999, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three years in the period ended May 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Richardson Electronics, Ltd. and subsidiaries at May 31, 2000 and 1999, and the consolidated results of their operations and cash flows for each of the three years in the period ended May 31, 2000, in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP Chicago, Illinois July 18, 2000, except for information in Note C, as to which the date is July 28,2000 (28) Officers and Directors Corporate Officers Edward J. Richardson Chairman of the Board and Chief Executive Officer Bruce W. Johnson President and Chief Operating Officer Pierluigi Calderone Vice President and Director of European Operations Kevin M. Connor Vice President of Sales, RF & Wireless Communications Group Flint Cooper Executive Vice President and General Manager, Security Systems Division Lawrence T. Duneske Vice President, Worldwide Logistics William J. Garry Senior Vice President, Finance and Chief Financial Officer Joseph C. Grill Senior Vice President, Human Resources Robert J. Heise Vice President and General Manager, Display Systems Group Gregory J. Peloquin Vice President and General Manager, RF & Wireless Communications Group Kathleen M. McNally Senior Vice President, Marketing Operations Murray J. Kennedy Vice President and General Manager, Industrial Power Group Kevin C. Oakley Vice President and General Manager, Medicaly Systems Group Robert Prince Executive Vice President, Worldwide Sales Kevin F. Reilly Senior Vice President and Chief Information Officer William G. Seils Senior Vice President, General Counsel and Corporate Secretary Ronald G. Ware Treasurer and Assistant Secretary Board of Directors Edward J. Richardson (1) Arnold R. Allen Consultant Jacques Bouyer (3,4,6) Consultant John Peterson, (2,6) Managing Director, Tucker Anthony Cleary Gull William J. Garry Scott Hodes (2,3,5) Partner, Law Firm of Ross & Hardies Bruce W. Johnson (1) Ad Ketelaars (6) CEO, Comsys Holding B.V. Harold L. Purkey (2) President, Forum Capital Markets Samuel Rubinovitz (1,3,4,5,6) Consultant and Chairman of the Board, LTV Corporation (1) Executive Committee (2) Audit Committee (3) Compensation Committee (4) Stock Option Committee (5) Executive Oversight Committee (6) Strategic Planning Committee (29) Stockholder Information Corporate Office Richardson Electronics, Ltd. 40W267 Keslinger Road P.O. Box 393 LaFox, Illinois 60147-0393 (630) 208-2200 Annual Meeting We encourage stockholders to attend the annual meeting scheduled for Tuesday, October 3, 2000 at 3:15 p.m. at the Company's corporate office. Further details are available in your proxy materials. Transfer Agent and Registrar Continental Stock Transfer Company 2 Broadway, 19th Floor New York, NY 10004 Independent Auditors Ernst & Young LLP 111 North Canal Street Chicago, Illinois 60606 Brokerage Reports Barrington Research McDonald & Company Securities, Inc. Stifel, Nicolaus & Company, Inc. Tucker Anthony Cleary Gull Market Makers Barrington Research William Blair & Co. Forum Capital Markets McDonald & Company Securities, Inc. Smith Barney Shearson Stifel, Nicolaus & Company, Inc. Tucker Anthony Cleary Gull Wechsler & Krumholz, Inc. Form 10K and Other Information A copy of the Company's Annual Report on Form 10K, filed with the Securities and Exchange Commission is available without charge upon request. All inquiries should be addressed to the Investor Relations Department, Richardson Electronics, Ltd., 40W267 Keslinger Road, P.O. Box 393, LaFox, Illinois 60147- 0393. Press releases and other information can be found on the Internet at the Company's home page at http://www.rell.com. Market Price of Common Stock The Common Stock is traded on the NASDAQ National Market System under the symbol "RELL".The number of stockholders of record of Common Stock and Class B Common Stock at May 31, 2000 was 689 and 20, respectively. The Company believes there are approximately an additional 1,300 holders who own shares of the Company's Common Stock in street name. The quarterly market price ranges of the Company's common stock were as follows: 2000 1999 ----------------- ----------------- Fiscal Quarters High Low High Low -------- -------- -------- -------- First 7 15/16 5 25/32 14 7 1/2 Second 9 1/16 6 5/8 8 3/4 6 7/16 Third 11 7/16 6 5/16 10 5 1/4 Fourth 13 5/8 10 6 7/8 4 7/8 (30) Richardson Electronics, Ltd. and Subsidiaries Schedule II - Valuation and Qualifying Accounts (in thousands)
COL. A COL. B COL. C COL. D COL. E ADDITIONS ------------------------------ ---------- ------------------------ --------- ---------- (1) (2) Balance Charged Charged to Balance at to Costs Other at Beginning and Accounts- Deductions- End of DESCRIPTION of Period Expenses Describe Describe Period ------------------------------ ---------- ---------- ---------- ---------- ---------- Year ended May 31, 2000: Allowance for sales returns and doubtful accounts $ 2,584 $1,461 $ - $1,054 $ 2,991 Other reserves $ 1,236 $ 12 $ - $ 219 $ 1,029 Year ended May 31, 1999: Allowance for sales returns and doubtful accounts $ 2,230 $ 934 $ - $ 580 $ 2,584 Other reserves $ 1,362 $ 46 $ - $ 172 $ 1,236 Year ended May 31, 1998: Allowance for sales returns and doubtful accounts $ 2,102 $ 431 $ - $ 303 $ 2,230 Other reserves $ 1,956 $ 41 $ - $ 635 $ 1,362 (F1) Uncollectible amounts written off, net of recoveries and foreign currency translation. (F2) Provision to increase EPA groundwater remediation reserve (F3) Expenditures made for reserved items