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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT
ON FORM 10K
Pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended Commission file number
February 28, 1998 1-8798
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Nu Horizons Electronics Corp.
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(Exact name of registrant as specified in its charter)
Delaware 11-2621097
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
70 Maxess Road, Melville, New York 11747
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(Address of principal executive offices) (Zip Code)
(516) 396-5000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
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(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock Par Value $.0066 Per Share NASDAQ National Market System
- --------------------------------------- ------------------------------------
- --------------------------------------- ------------------------------------
(Title of class)
Indicate by check mark whether the registrant; (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 1-K or any amendment to this
Form 10K [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of May 1, 1998.
Common Stock Par Value $.0066 8,753,076
- ------------------------------------- -----------------------------------
Class Outstanding Shares
Aggregate Market Value of Non-Affiliate Stock at May 1, 1998 approximately
$59,100,000
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NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I:
ITEM 1. Business Pages 3 - 7
ITEM 2. Properties Pages 7 8
ITEM 3. Legal Proceedings Page 8
ITEM 4. Submission of Matters to a Vote of Security Holders Page 8
PART II:
ITEM 5. Market for the Registrant's Common Equity and Related
Stockholder Matters Page 8
ITEM 6. Selected Financial Data Page 9
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations Pages 10 13
ITEM 8. Financial Statements and Supplementary Data Pages F1 F18
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures Page 14
PART III:
ITEM 10. Directors and Executive Officers of the Company Pages 14 15
ITEM 11. Executive Compensation Pages 16 25
ITEM 12. Security Ownership of Certain Beneficial Owners and Management Page 26
ITEM 13. Certain Relationships and Related Transactions Page 26
PART IV:
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Pages 27 34
Signatures Page 35
Exhibit Index
Page 2
PART I.
ITEM 1. BUSINESS
GENERAL:
Nu Horizons Electronics Corp. (the "Company") and its wholly-owned
subsidiaries, NIC Components Corp. ("NIC") and Nu Horizons/Merit
Electronics Corp. ("NUM"), are engaged in the distribution of high
technology active and passive electronic components. Nu Horizons
International Corp. ("International"), another wholly-owned subsidiary,
is an export distributor of electronic components. Nu Visions
Manufacturing, Inc. ("NUV" or "Nu Visions") located in Springfield,
Massachusetts, another wholly-owned subsidiary of the Company, is a
contract assembler of circuit boards and related electromechanical
devices for various OEMs. All references herein to the Company shall,
unless the context otherwise requires, be deemed to refer to the
Company and its subsidiaries.
In March 1998, subsequent to the fiscal year end, the Company formed
another wholly-owned subsidiary, NIC Eurotech, Ltd., which then began
foreign operations in the United Kingdom.
Active components distributed by the Company, principally to original
equipment manufacturers (OEMs) in the United States, include mainly
commercial semiconductor products such as memory chips,
microprocessors, digital and linear circuits, microwave, RF and
fiberoptic components, transistors and diodes. Passive components
distributed by NIC, principally to OEMs and other distributors
nationally, consist of a high technology line of chip and leaded
components including capacitors, resistors and related networks.
The active and passive components distributed by the Company are
utilized by the electronics industry and other industries in the
manufacture of sophisticated electronic products including: industrial
instrumentation, computers and peripheral equipment, consumer
electronics, telephone and telecommunications equipment, satellite
communications equipment, cellular communications equipment, medical
equipment, automotive electronics, and audio and video electronic
equipment.
Manufacturers of electronic components augment their marketing
programs through the use of independent distributors and contract
assemblers such as the Company, upon which the Company believes they
rely to a considerable extent to market their products. Distributors
and assemblers, such as the Company, offer their customers the
convenience of diverse inventories and rapid delivery, design and
technical assistance, and the availability of product in smaller
quantities than generally available from manufacturers. Generally,
companies engaged in the distribution of active and passive electronic
components, such as the Company, are required to maintain a relatively
significant investment in inventories and accounts receivable. To meet
these requirements, the Company, and other companies in the industry,
typically depend on internally generated funds as well as external
borrowings.
Management's policy is to manage, maintain and control all
inventories from its principal headquarters and stocking facility on
Long Island, New York and stocking facility in San Jose, California. As
additional franchise line opportunities become available to the
Company, the need for branch level inventories may be necessary and
desirable, in order to better serve the specific needs of local
markets.
Page 3
ITEM 1. BUSINESS (Continued):
Semiconductor Products (Active Components):
The Company is a distributor of a broad range of semiconductor
products to commercial and military OEM's principally in the United
States. The Company is a franchised distributor of active components
for approximately thirty product lines. Significant franchised product
lines include Allegro, Cirrus Logic, Crystal, Elantec, Exar, Maxim
Integrated Products, Quality Semiconductor, SGS-Thomson
Microelectronics, Sun Microsystems, TDK Semiconductor, Toshiba and
Xilinx.
The Company's franchise agreements authorize it to sell all or part
of the product line of a manufacturer on a non-exclusive basis. Under
these agreements, each manufacturer will grant credits for any
subsequent price reduction by such manufacturer and inventory return
privileges whereby the Company can return to each such manufacturer for
credit or exchange a percentage ranging from 5% to 20% of the inventory
purchased from said manufacturer during a semi-annual period. The
franchise agreements generally may be cancelled by either party upon
written notice. The Company anticipates, in the future, entering into
additional franchise agreements and increasing its inventory levels in
accordance with business demands.
Passive Components and Relationship with Nippon:
NIC has been the exclusive outlet in North America for Nippon
Industries Co. Ltd.'s (Japan) brand of passive components and does not
anticipate any change in this relationship. While the Company does not
have a written agreement with Nippon in this regard, it believes that a
formal written agreement is not material to its ongoing business
relationship with Nippon.
Due to certain market situations, NIC, with Nippon's assent, has also
established several manufacturing associations with U.S. and Taiwan
based companies. NIC intends to continue to give Nippon priority,
however, in acquiring its products whenever the technology and pricing
are commensurate with the North American market's requirements.
Contract Assembly:
As discussed above, the Company's core business is the distribution
of active components to OEM's and passive components to OEM's and
distributors nationally in the United States.
Those components are then placed on printed circuit boards by the
OEM's themselves or are contracted for placement to outside contract
assembly companies (domestically or offshore). The Company believes
that the latter outside contract assembly is becoming more prevalent
nationally, especially among small to midsize OEM's.
With a view towards maximizing the Company's current customer base as
well as offering new customers additional services, the Company decided
that contract circuit board assembly was a natural extension to its
business since 80% of the components found on most printed circuit
boards can be provided through the Company's active and NIC's passive
products.
Page 4
ITEM 1. BUSINESS (Continued):
Contract Assembly (continued):
Nu Visions provides both surface mount and through-hole circuit board
assembly services to the aforementioned OEMs. In order to expand and
enhance this segment of the business, the Company has acquired
approximately $2,500,000 of automated circuit board assembly equipment
and is in the process of tripling the size of Nu Vision's facility to
45,000 square feet in anticipation of continued growth.
Sales and Marketing:
Management's strategy for long-term success has been to focus the
Company's sales and marketing efforts towards the following industry
segments: industrial, telecom/datacom, medical instrumentation,
microwave and RF, fiberoptic, consumer electronics, security and
protection devices, office equipment, computers and computer
peripherals, factory automation and robotics, in each case both
domestically and abroad. In order to help achieve these goals, the
Company may enter into new franchise agreements for a broad base of
commodity semiconductor products including those used in the key niche
industries referred to above.
As of February 28, 1998, the Company had approximately 13,000
customers. All sales are made through customers' purchase orders.
Semiconductors are sold primarily via telephone by the Company's in-
house staff of approximately 90 salespersons, and by a field sales
force of approximately 110 salespersons. The Company maintains branch
sales facilities located as follows:
EAST COAST
----------
Massachusetts Boston
New York Melville (Long Island) and Rochester
New Jersey Mt. Laurel (Philadelphia) and Pine Brook
Ohio Cleveland
Maryland Columbia
North Carolina Raleigh
Georgia Atlanta
Alabama Huntsville
Florida Ft. Lauderdale and Orlando
MIDWEST
-------
Arizona Phoenix
Illinois - Chicago
Minnesota Minneapolis
Texas Austin and Dallas
WEST COAST
----------
California Irvine, Los Angeles, San Diego and San Jose
NIC's passive components are marketed through the services of a
national network of approximately 20 independent sales representative
organizations, employing over 200 salespersons, as well as through
NIC's in-house sales and engineering personnel. The independent
representative organizations do not represent competing product lines
but sell other related products. Commissions to such organizations are
generally equal to 5% of all sales in a representative's exclusive
territory.
Page 5
ITEM 1. BUSINESS (Continued):
Sales and Marketing (continued):
NIC has developed a national network of approximately 75 regional
distributor locations, which market passive components on a non-
exclusive basis. Approximately 35 of the regional distributors have
entered into agreements with NIC whereby they are required to purchase
from NIC a prescribed initial inventory. These distributors are
protected by NIC against price reductions and are granted certain
inventory return and other privileges. Due to the efforts of NIC and
its distributors, NIC's passive components have been tested and
"designed in" as a prime source of qualified product by over 7,000
OEM's in the United States.
Nu Visions' contract manufacturing facilities are marketed through
the services of several East Coast independent sales representatives,
as well as the Company's field sales force.
No single customer accounted for more than 2% of the Company's
consolidated sales for the year ended February 28, 1998. The Company's
sales practice is to require payment within thirty days of delivery.
Source of Supply:
The Company inventories an extensive stock of active and passive
components, however, if the Company's customers order products for
which the Company does not maintain inventory, the Company's marketing
strategy is to obtain such products from its franchise manufacturers,
or, if a product is unobtainable, to identify and recommend
satisfactory interchangeable alternative components. For this purpose,
the Company devotes considerable efforts to familiarizing itself with
component product movement throughout the industry, as well as to
constant monitoring of its own inventories.
As of February 28, 1998, there was one manufacturer that represented
more than 10% of the Company's inventory on a consolidated basis. That
supplier accounted for 20% of total inventory. Electronic components
distributed by the Company generally are presently readily available;
however, from time to time the electronics industry has experienced
shortages or surplus of certain electronic products.
For the year ended February 28, 1998, the Company purchased inventory
from one supplier that was in excess of 10% of the Company's total
purchases. Purchases from this supplier aggregated approximately
$18,872,000 for the fiscal year.
Competition and Regulation:
The Company competes with many companies that distribute
semiconductor and passive electronic components and, to a lesser
extent, companies which manufacture such products and sell them
directly to OEM's and other distributors. Many of these companies have
substantially greater assets and possess greater financial and
personnel resources than those of the Company. In addition, certain of
these companies possess independent franchise agreements to carry
semiconductor product lines which the Company does not carry, but which
it may desire to have. Competition is based primarily upon inventory
availability, quality of service, knowledge of product and price. The
Company believes that the distribution of passive electronic components
under its own label is a competitive advantage.
Page 6
ITEM 1. BUSINESS (Continued):
Competition and Regulation (continued):
The Company's competitive ability to price its imported active and
passive components could be adversely affected by increases in tariffs,
duties, changes in the United States' trade treaties with Japan, Taiwan
or other foreign countries, transportation strikes and the adoption of
Federal laws containing import restrictions. In addition, the cost of
the Company's imports could be subject to governmental controls and
international currency fluctuations. Because imports are paid for with
U.S. dollars, the decline in value of United States currency as against
foreign currencies would cause increases in the dollar prices of the
Company's imports from Japan and other foreign countries. Although the
Company has not experienced any material adverse effect to date in its
ability to compete or maintain its profit margins, as of result of any
of the foregoing factors, no assurance can be given that such factors
will not have a material adverse effect in the future.
Backlog:
The Company defines backlog as orders, believed to be firm, received
from customers and scheduled for shipment, no later than 60 days for
active components and no later than 90 days for passive components from
the date of the order. As of May 1, 1998, the Company's backlog was
approximately $20,000,000 as compared to a backlog of approximately
$24,000,000 at May 1, 1997.
Employees:
As of February 28, 1998, the Company employed approximately 488
persons: 10 in management, 258 in sales and sales support, 30 in
product and purchasing, 17 in accounting and finance, 10 in MIS, 31 in
operations, 88 in manufacturing, and 44 in quality control, shipping,
receiving and warehousing. The Company believes that its employee
relations are satisfactory.
ITEM 2. PROPERTIES
In December 1996, the Company leased an approximately 80,000 square
foot facility in Melville, Long Island, New York to serve as its
executive offices and main distribution center. In June 1997, the
Company completed moving its executive offices and distribution
operations. The lease term is from December 17, 1996, to December 16,
2008 at an annual base rental of $601,290 and provision for a 4% annual
escalation in each of the last ten years of the term.
The Amityville facility, which served as corporate headquarters until
April 1997 was sold in August 1997.
The Company leases approximately 14,400 square feet of manufacturing
and office space in Springfield, Massachusetts for its Nu Visions
subsidiary. The lease term is from February 17, 1992 to February 16,
2002 at an annual base rental of $100,850 subject to annual consumer
price index increases not to exceed 2% annually.
Page 7
ITEM 2. PROPERTIES (Continued):
On May 1, 1996, the Company leased approximately 25,000 square feet
of warehouse and office space in San Jose, California for its Nu
Horizons/Merit subsidiary. This facility serves as the Company's West
Coast regional sales and distribution headquarters. The lease term is
from May 1, 1996 to April 30, 2001 at an annual base rental of
$225,000.
The Company also leases space for nineteen (19) branch sales offices
which range in size from 1,000 square feet to 5,000 square feet, with
lease terms that expire between September 1996 and January 2002. Annual
base rentals range from $11,400 to $63,400 with aggregate base rentals
approximating $653,000.
ITEM 3. LEGAL PROCEEDINGS:
No material legal proceeding is pending to which the Company is a
party or to which any of its property is or may be subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters were submitted during the fourth quarter of the fiscal
year ended February 28, 1998 to a vote of security holders through the
solicitation of proxies or otherwise.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:
a) The Company's common stock is traded on the NASDAQ National Market
System under the symbol "NUHC". The following table sets forth,
for the periods indicated, the high and low closing prices for the
Company's common stock, as reported by the NASDAQ National Market
System.
FISCAL YEAR 1997: HIGH LOW
---- ---
First Quarter $17.25 $12.63
Second Quarter 14.75 7.25
Third Quarter 11.13 7.88
Fourth Quarter 10.00 7.88
FISCAL YEAR 1998:
First Quarter 9.50 6.75
Second Quarter 9.00 7.25
Third Quarter 9.25 6.75
Fourth Quarter 7.17 5.50
FISCAL YEAR 1999:
First Quarter (Through May 1, 1998) 7.09 6.12
b) As of May 1, 1998, the Company's common stock was owned by
approximately 4,500 holders of record.
c) The Company has never paid a cash dividend on its common stock. In
addition, the Company's prior revolving credit line agreement
prohibited, without the bank's consent, the payment of cash
dividends. The Company's existing revolving credit line agreement
only permits dividends of up to 25% of the Company's consolidated
net income.
Page 8
ITEM 6. SELECTED FINANCIAL DATA:
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 1998 28, 1997 29, 1996 28, 1995 28, 1994
-------- -------- -------- -------- --------
INCOME STATEMENT
DATA:
Net Sales $233,325,408 $216,612,707 $202,803,184 $130,251,554 $92,418,038
Gross profit on
sales 50,794,325 48,488,124 48,201,148 30,913,305 24,950,478
Gross profit
percentage 21.8% 22.4% 23.8% 23.7% 27.0%
Income before
provision for
income taxes 8,947,537 11,921,256 15,799,592 7,444,147 8,549,534
Net income 5,297,991 7,073,560 9,396,301 4,421,823 5,044,225
Earnings per
common share:
Basic $ .61 $ .81 $ 1.19 $ .57 $ .65
Diluted $ .52 $ .69 $ .97 $ .52 $ .65
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 1998 28, 1997 29, 1996 28, 1995 28, 1994
-------- -------- -------- -------- --------
BALANCE SHEET
DATA:
Working capital $75,217,607 $51,941,472 $57,954,434 $36,328,941 $23,792,512
Total assets 99,641,428 74,783,314 75,459,586 51,972,606 37,448,040
Long-term debt 32,790,395 15,523,483 27,094,030 20,580,613 9,339,195
Shareholders'
equity 51,542,045 46,950,735 37,617,703 22,541,916 18,051,985
Page 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
Introduction:
Nu Horizons Electronics Corp. (the "Company") and its wholly-owned
subsidiaries, Nu Horizons/Merit Electronics Corp. ("NUM"), NIC
Components Corp. ("NIC") and Nu Horizons International Electronics
Corp. ("International"), are engaged in the distribution of high
technology active and passive electronic components to a wide variety
of original equipment manufacturers ("OEM's") of electronic products.
Active components distributed by the Company include semiconductor
products such as memory chips, microprocessors, digital and linear
circuits, microwave/RF and fiberoptic components, transistors and
diodes. Passive components distributed by NIC, principally to OEM's and
other distributors nationally, consist of a high technology line of
chip and leaded components, including capacitors, resistors and related
networks.
Nu Visions Manufacturing, Inc. ("NUV" or "Nu Visions") located in
Springfield, Massachusetts, another wholly-owned subsidiary of the
Company, is a contract assembler of circuit boards, harnesses and
related electromechanical devices for various OEM's.
In March 1998, subsequent to the fiscal year end, the Company formed
another wholly-owned subsidiary, NIC Eurotech, Ltd., which then began
foreign operations in the United Kingdom.
The financial information presented herein includes: (i) Balance sheets
as of February 28, 1998, and February 28, 1997; (ii) Statements of
income for the twelve month periods ended February 28, 1998, February
28, 1997 and February 29, 1996; (iii) Statements of cash flows for the
twelve month periods ended February 28, 1998, February 28, 1997 and
February 29, 1996; and (iv) Consolidated changes in shareholders'
equity for the twelve month periods ended February 28, 1998, February
28, 1997 and February 29, 1996.
Fiscal Year 1998 versus 1997
Results of Operations:
Net sales for the year ended February 28, 1998 aggregated $233,325,408
as compared to $216,612,707 for the year ended February 28, 1997, an
increase of 7.7%. Management attributes this moderate increase in sales
for the period entirely to the core semiconductor distribution business
which experienced excess inventory levels at the semiconductor
manufacturing (supplier) level evidenced by reduced unit pricing in
spite of substantial increases in unit demand resulting in only
moderate increases in sales dollar volume. Management believes that
this situation is temporary and is now in the process of correction;
however, no assurance can be given in this regard.
Gross profit margin as a percentage of net sales was approximately
21.8% for the year ended February 28, 1998 as compared to 22.4% for the
year ended February 28, 1997. Management attributes this lower profit
margin primarily to a general downward correction of selling prices in
the marketplace, for both semiconductors and passive components, during
the period and a greater volume of larger orders at lower gross profit
margins. Although the Company expects that these conditions will not
continue, as long as current market trends prevail, no assurances can
be given in this regard.
Page 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued):
Fiscal Year 1998 versus 1997 (Continued)
Results of Operations (continued):
Operating expenses increased by $5,259,512 to $40,133,422 for the year
ended February 28, 1998 from $34,873,910 for the year ended February
28, 1997, an increase of approximately 15.1%. The dollar increase in
operating expenses was due to increases in the following expense
categories: Approximately $3,328,000 or approximately 63.3% of the
increases were for personnel related costs commissions, salaries,
travel and fringe benefits. During fiscal 1998 the Company decided to
continue to pursue a policy of upgrading and enlarging its sales and
sales support staff to support anticipated future growth in the near as
well as more distant future. Increased sales levels in the second,
third and fourth quarters of fiscal 1997 did not meet expectations. The
Company continues to believe in this strategy for long-term growth and
expects market conditions to undergo a correction in the near future
although no assurances can be given in this regard. The remaining
increase of approximately $1,931,000 or approximately 36.7% of the
total increment is a result of increases in various other operating
expenses primarily due to increased overhead from the Company's new
corporate headquarters and distribution facility.
Interest expense increased by $22,071 from $1,701,092 for the year
ended February 28, 1997 to $1,723,163 for the year ended February 28,
1998. This relative stability was primarily due to the interest on
higher average levels of bank debt being offset by more favorable
interest rates.
INTEREST COSTS
FOR THE FISCAL
YEARS ENDED
---------------------------------
February February
28, 1998 28, 1997
-------------- --------------
Revolving Bank Credit $1,140,796 $1,116,340
Sub. Convert. Notes 582,367 584,752
Total Interest Expense $1,723,163 $1,701,092
============== ==============
Net income for the year ended February 28, 1998, was $5,297,991 or $.52
per share, diluted, as compared to $7,073,560 or $.69 per share
diluted, for the year ended February 28, 1997. The decrease in earnings
is primarily due to increased operating expenses and the lack of
commensurate increased sales volume.
Results of Operations:
Fiscal Year 1997 versus 1996
Net sales for the year ended February 28, 1997 aggregated $216,612,707
as compared to $202,803,184 for the year ended February 29, 1996, an
increase of 6.8%. Management attributes this moderate increase in sales
for the period entirely to the core semiconductor distribution business
which experienced excess inventory levels at the semiconductor
manufacturing (supplier) level which resulted in reduced unit pricing
and lower overall sales volume.
Gross profit margin as a percentage of net sales was approximately
22.4% for the year ended February 28, 1997 as compared to 23.8% for the
year ended February 29, 1996. Management attributes this lower profit
margin primarily to a general downward correction of selling prices in
the marketplace, for both semiconductors and passive components, during
the period and a greater volume of larger orders at lower gross profit
margins.
Page 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
Fiscal Year 1997 versus 1996 (Continued)
Results of Operations (continued):
Operating expenses increased by $4,496,530 to $34,873,910 for the year
ended February 28, 1997 from $30,377,380 for the year ended February
29, 1996, an increase of approximately 14.8%. The dollar increase in
operating expenses was due to increases in the following expense
categories: Approximately $3,740,000 or approximately 83.2% of the
increases were for personnel related costs commissions, salaries,
travel and fringe benefits. The remaining increase of approximately
$756,000 or approximately 16.8% of the total increment is a result of
increases in various other operating expenses. Toward the latter part
of fiscal 1996 and early in fiscal 1997, the Company decided to pursue
a policy of upgrading and enlarging its sales and sales support staff
to support anticipated future growth in the near as well as more
distant future. Increased sales levels in the second, third and fourth
quarters of fiscal 1997 did not meet expectations.
Interest expense decreased by $325,625 from $2,026,717 for the year
ended February 29, 1996 to $1,701,092 for the year ended February 28,
1997. This decrease was primarily due to the interest on higher average
levels of bank debt being more than offset by the lower amount of
outstanding subordinated convertible debt (see Note 7 to the
Consolidated Financial Statements).
INTEREST COSTS
FOR THE FISCAL
YEAR ENDED
February February
28, 1997 29, 1996
------------------------------
Revolving Bank Credit $1,116,340 $ 916,226
Sub. Convert. Notes 584,752 1,110,491
Total Interest Expense $1,701,092 $2,026,717
==============================
Net income for the year ended February 28, 1997 was $7,073,560 or $.69
per share, diluted, as compared to $9,396,301 or $.97 per share
diluted, for the year ended February 29, 1996. The decrease in earnings
is primarily due to increased operating expenses and the lack of
commensurate increased sales volume.
Liquidity and Capital Resources:
Fiscal Year 1998 versus 1997
The Company ended its 1998 fiscal year with working capital and cash
aggregating approximately $75,218,000 and $4,334,000, respectively at
February 28, 1998 as compared to approximately $51,941,000 and $946,000
respectively, at February 28, 1997. The Company's current ratio at
February 28, 1998, was 5.9:1. The Company believes that its financial
position at February 28, 1998, will enable it to take advantage of any
new opportunities that may arise.
Page 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued):
Fiscal Year 1998 versus 1997 (Continued)
Liquidity and Capital Resources (continued):
On May 23, 1997, the Company entered into a new unsecured revolving
line of credit, which currently provides for maximum borrowings of
$35,000,000 through May 23, 2001 with two banks. At February 28, 1998,
$25,300,000 was outstanding under this line of credit as compared to
$8,000,000 at February 28, 1997.
In a private placement completed on August 31, 1994, the Company issued
$15 million principal amount of Subordinated Convertible Notes, which
are due in $5,000,000 increments on August 31, 2000, 2001 and 2002. The
notes are subordinate in right of payment to all existing and future
senior indebtedness of the Company. The notes bear interest at 8.25%,
payable quarterly on November 15, February 15, May 15 and August 15.
The notes are convertible into shares of common stock at a conversion
price of $9.00 per share. The cost of issuing these notes was $521,565
and was amortized over three years. As of February 28, 1998, $7,941,000
of the notes have been converted into 882,333 shares of common stock
and $7,059,000 principal amount of subordinated convertible notes
remained outstanding and are due in increments of $2,353,000 on August
31, 2000, 2001 and 2002. No assurance can be given that the notes will
be converted or that the shares of common stock underlying the notes
will be sold by the holders thereof.
The Company anticipates that its resources provided by its cash flow
from operations and its bank lines of credit will be sufficient to meet
its financing requirements for at least the next twelve-month period.
Impact of Year 2000 Issue:
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could potentially result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices, or engage
in other similar normal business activities. The Company has ensured
that its software is already year 2000 compliant, and as such this
issue is not expected to have a material effect on the operations of
the Company. Nevertheless, the Company cannot predict the effect of the
year 2000 problem on the vendors, customers and other entities with
which the Company transacts business, or with whose products the
Company's products interact and there can be no assurance that the
effect of the year 2000 issue on such entities will not adversely
effect the Company's operations.
Inflationary Impact:
Since the inception of operations, inflation has not significantly
affected the operating results of the Company. However, inflation and
changing interest rates have had a significant effect on the economy in
general and therefore could affect the operating results of the Company
in the future.
Other:
Except for historical information contained herein, the matters set
forth above are forward-looking statements that involve certain risks
and uncertainties that could case actual results to differ from those
in the forward-looking statements. Potential risks and uncertainties
include such factors as the level of business and consumer spending for
electronic products, the amount of sales of the Company's products, the
competitive environment within the electronics industry, the ability of
the Company to continue to expand its operations, the level of costs
incurred in connection with the Company's expansion efforts, the
economic conditions in the semiconductor industry and the financial
strength of the Company's customers and suppliers. Investors are also
directed to consider other risks and uncertainties discussed in
documents filed by the Company with the Securities and Exchange
Commission.
Page 13
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
To The Board of Directors
Nu Horizons Electronics Corp.
Melville, New York
We have audited the accompanying consolidated financial statements of Nu
Horizons Electronics Corp. and subsidiaries as of February 28, 1998 and 1997,
and the consolidated statements of income, changes in shareholders' equity and
cash flows for the three years in the period ended February 28, 1998. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements, referred to the
above, present fairly in all material respects, the financial position of Nu
Horizons Electronics Corp. and subsidiaries at February 28, 1998 and February
28, 1997, and the results of their operations and their cash flows for each of
the three years in the period ended February 28, 1998 in conformity with
generally accepted accounting principles.
/s/ LAZAR LEVINE & FELIX LLP
----------------------------
LAZAR LEVINE & FELIX LLP
New York, New York
May 18, 1998
Page F-1
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
-ASSETS- February February
CURRENT ASSETS: 28, 1998 28, 1997
----------- -----------
Cash $ 4,333,669 $ 946,084
Accounts receivable-net of allowance for doubtful
Accounts of $2,362,722 and $2,192,079
For 1998 and 1997, respectively 37,351,029 30,636,645
Inventories 44,004,890 29,764,570
Prepaid expenses and other current assets 4,837,007 2,903,269
----------- -----------
TOTAL CURRENT ASSETS 90,526,595 64,250,568
PROPERTY, PLANT AND EQUIPMENT NET
(Notes 3 and 6) 6,359,775 7,550,356
OTHER ASSETS
Costs in excess of net assets acquired-net 1,752,332 1,909,256
Other assets (Note 4) 1,002,726 1,073,134
----------- -----------
$99,641,428 $74,783,314
=========== ===========
-LIABILITIES AND SHAREHOLDERS' EQUITY-
------------------------------------
CURRENT LIABILITIES:
Accounts payable $12,112,365 $ 7,931,500
Accrued expenses 3,196,623 4,186,802
Current portion of long-term debt (Note 6) - 190,794
----------- -----------
TOTAL CURRENT LIABILITIES 15,308,988 12,309,096
----------- -----------
LONG-TERM LIABILITIES:
Deferred income taxes (Note 9) 431,395 222,148
Revolving credit line (Notes 5) 25,300,000 8,000,000
Long-term debt (Note 6) - 242,335
Subordinated convertible notes (Note 7) 7,059,000 7,059,000
----------- -----------
TOTAL LONG-TERM LIABILITIES 32,790,395 15,523,483
----------- -----------
COMMITMENTS AND CONTINGENCIES
(Notes 5, 10, 11 and 12)
SHAREHOLDERS' EQUITY (Note 8):
Preferred stock, $1 par value, 1,000,000
Shares authorized; none issued or outstanding
Common stock, $.0066 par value, 20,000,000
Shares authorized; 8,753,076 and 8,732,299
shares issued and outstanding for 1998 and 1997,
respectively 57,770 57,633
Additional paid-in capital 19,042,230 18,938,984
Retained earnings 33,532,009 28,234,018
----------- -----------
52,632,009 47,230,635
Less: loan to ESOP (Note 10) 1,089,964 279,900
51,542,045 46,950,735
----------- -----------
$99,641,428 $74,783,314
=========== ===========
See notes to consolidated financial statements.
Page F-2
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEAR ENDED
---------------------------------------------------------------------
FEBRUARY FEBRUARY FEBRUARY
28, 1998 28, 1997 29, 1996
------------------- ------------------ ------------------
NET SALES $233,325,408 $216,612,707 $202,803,184
------------------- ------------------ ------------------
COSTS AND EXPENSES:
Cost of sales (Note 12) 182,531,083 168,124,583 154,602,036
Operating expenses 40,133,422 34,873,910 30,377,380
Interest expense 1,723,163 1,701,092 2,026,717
Interest income (9,797) (8,134) (2,541)
224,377,871 204,691,451 187,003,592
------------------- ------------------ ------------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 8,947,537 11,921,256 15,799,592
Provision for income taxes (Note 9) 3,649,546 4,847,696 6,403,291
------------------- ------------------ ------------------
NET INCOME $ 5,297,991 $ 7,073,560 $ 9,396,301
=================== ================== ==================
EARNINGS PER SHARE (Note 2i):
Basic $ .61 $ .81 $ 1.19
=================== ================== ==================
Diluted $ .52 $ .69 $ .97
=================== ================== ==================
See notes to consolidated financial statements.
Page F-3
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER S' EQUITY
-----------------------------------------------------------
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED LOAN TO SHAREHOLDERS'
SHARES STOCK CAPITAL EARNINGS ESOP EQUITY
------------ --------- ------------- ------------- ------------- --------------
Balance at February 28, 1995 7,732,051 $51,032 $10,726,727 $11,764,157 $ - $22,541,916
Exercise of stock options 24,420 161 99,175 - - 99,336
Conversion of subordinated
convertible notes 666,666 4,400 5,995,600 - - 6,000,000
Loan to ESOP - - - - (559,800) (559,800)
Repayment from ESOP - - - - 139,950 139,950
Net income - - - 9,396,301 - 9,396,301
------------ --------- ------------- ------------- ------------- --------------
Balance at February 29, 1996 8,423,137 55,593 16,821,502 21,160,458 (419,850) 37,617,703
Exercise of stock options 93,495 617 177,905 - - 178,522
Conversion of subordinated
convertible notes 215,667 1,423 1,939,577 - - 1,941,000
Repayment from ESOP - - - - 139,950 139,950
Net income - - - 7,073,560 - 7,073,560
------------ --------- ------------- ------------- ------------- --------------
Balance at February 28, 1997 8,732,299 57,633 18,938,984 28,234,018 (279,900) 46,950,735
Exercise of stock options 20,777 137 103,246 - - 103,383
Loan to ESOP - - - - (950,014) (950,014)
Repayment from ESOP - - - - 139,950 139,950
Net income - - - 5,297,991 - 5,297,991
------------ --------- ------------- ------------- ------------- --------------
Balance at February 28, 1998 8,753,076 $57,770 $19,042,230 $33,532,009 $(1,089,964) $51,542,045
============ ========= ============= ============= ============= ==============
See notes to consolidated financial statements
Page F-4
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEAR ENDED
-----------------------------------------------------------------------
FEBRUARY FEBRUARY FEBRUARY
28, 1998 28, 1997 29, 1996
------------------- ------------------- -------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS:
Cash flows from operating activities:
Cash received from customers $ 226,296,024 $ 215,279,744 $ 192,949,945
Cash paid to suppliers and employees (232,653,486) (197,159,875) (196,045,525)
Interest received 9,797 8,134 2,541
Interest paid (1,723,163) (1,701,092) (2,026,717)
Income taxes paid (4,511,763) (1,677,850) (6,034,790)
------------------- ------------------- -------------------
Net cash provided (used) by
operating activities (12,582,591) 14,749,061 (11,154,546)
------------------- ------------------- -------------------
Cash flows from investing activities:
Capital expenditures (1,176,904) (4,936,512) (1,055,558)
Purchase of stock for ESOP (950,014) - (559,800)
Proceeds from sale of building 1,126,840 - -
------------------- ------------------- -------------------
Net cash (used) by investing
activities (1,000,078) (4,936,512) (1,615,358)
------------------- ------------------- -------------------
Cash flows from financing activities:
Borrowings under revolving credit line 51,650,000 21,150,000 65,000,000
Repayments under revolving credit line (34,350,000) (30,450,000) (52,100,000)
Principal payments of long-term debt (433,129) (619,254) (413,884)
Proceeds from exercise of employee
stock options 103,383 178,522 99,336
Proceeds from long-term debt - - 559,800
------------------- ------------------- -------------------
Net cash provided by (used in)
financing activities 16,970,254 (9,740,732) 13,145,252
------------------- ------------------- -------------------
Net increase in cash and cash equivalents 3,387,585 71,817 375,348
Cash and cash equivalents, beginning of year 946,084 874,267 498,919
------------------- ------------------- -------------------
Cash and cash equivalents, end of year $ 4,333,669 $ 946,084 $ 874,267
=================== =================== ===================
See notes to consolidated financial statements.
Page F-5
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
FOR THE YEAR ENDED
------------------------------------------------------------------
FEBRUARY FEBRUARY FEBRUARY
28, 1998 28, 1997 29, 1996
---------------- ------------------- ------------------
RECONCILIATION OF NET INCOME TO
NET CASH FROM OPERATING
ACTIVITIES:
Net income $ 5,297,991 $ 7,073,560 $ 9,396,301
---------------- ------------------- ------------------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 1,488,057 1,238,967 1,169,816
Bad debts 315,000 701,500 635,000
Contribution to ESOP (compensation) 139,950 139,950 139,950
Loss on sale of building 60,871 - -
Changes in assets and liabilities:
(Increase) in accounts receivable (7,029,384) (1,332,963) (9,853,239)
(Increase) decrease in inventories (14,240,320) 7,044,345 (14,553,370)
(Increase) decrease in prepaid
expenses and other current assets (1,933,738) (1,889,346) 623,688
(Increase) in other assets (80,951) (77,902) (77,969)
Increase in accounts payable
and accrued expenses 3,190,686 1,964,667 1,666,050
Increase (decrease) in income taxes - (220,288) 212,545
(Decrease) in other current liabilities - - (43,686)
(Decrease) increase in deferred taxes 209,247 106,571 (469,632)
Total adjustments (17,880,582) 7,675,501 (20,550,847)
---------------- ------------------- ------------------
Net cash provided (used) by operating activities $(12,582,591) $14,749,061 $(11,154,546)
================ =================== ==================
NON-CASH FINANCING ACTIVITIES:
During the year ended February 29, 1996, the subordinated debt-holder
(see Note 7) converted $6,000,000 of debt into 666,666 shares of the Company's
common stock.
During the year ended February 28, 1997, the subordinated debt-holder
(see Note 7) converted $1,941,000 of debt into 215,667 shares of the Company's
common stock.
See notes to consolidated financial statements.
Page F-6
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 1998
-----------------------------------
1. ORGANIZATION:
Nu Horizons Electronics Corp. and its subsidiaries, NIC Components Corp.,
and Nu Horizons International Corp., were incorporated in the State of New
York on October 22, 1982, November 8, 1982, and December 8, 1986,
respectively. Nu Visions Manufacturing, Inc. was incorporated in the State
of Massachusetts on August 9, 1991. On April 15, 1987, Nu Horizons
Electronics Corp. was reincorporated in the State of Delaware. On April 18,
1994, Nu Horizons/Merit Electronics Corp. was incorporated in the State of
Delaware, for the express purpose of acquiring the business of Merit
Electronics Corp. All companies are wholesale distributors throughout the
United States or export distributors of electronic components, except for Nu
Visions Manufacturing, which is a contract assembler of circuit boards and
various electromechanical devices.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation:
The consolidated financial statements include the accounts of Nu
Horizons Electronics Corp., (the "Company") and its wholly-owned
subsidiaries, NIC Components Corp. ("NIC"), Nu Horizons/Merit
Electronics Corp. ("NUM"), Nu Visions Manufacturing, Inc. ("NUV") and Nu
Horizons International Corp. ("International"). All material
intercompany balances and transactions have been eliminated.
b. Use of Estimates:
In preparing financial statements, in accordance with generally accepted
accounting principles, management makes certain estimates and
assumptions, where applicable, that affect the reported amounts of
assets, liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements, as well as reported amounts of
revenues and expenses during the reporting period. While actual results
could differ from those estimates, management does not expect such
variances, if any, to have a material effect on the financial
statements.
c. Concentration of Credit Risk/Fair Value:
Financial instruments that potentially subject the Company to
concentrations of credit risk consists principally of cash and accounts
receivable.
The Company maintains, at times, deposits in federally insured financial
institutions in excess of federally insured limits. Management attempts
to monitor the soundness of the financial institution and believes the
Company's risk is negligible.
Concentrations with regard to accounts receivable are limited due to the
Company's large customer base.
The carrying amounts of cash, accounts receivable, accounts payable and
accrued expenses approximate fair value due to the short-term nature of
these items. The carrying amount of long-term debt also approximates
fair value since the interest rates on these instruments approximate
market interest rates.
d. Inventories:
Inventories, which consist primarily of goods held for resale, are
stated at the lower of cost (first-in, first-out method) or market.
Page F-7
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 1998 (CONTINUED)
-----------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
e. Depreciation:
Depreciation is provided using the straight-line method as follows:
Office equipment 5 years
Furniture and fixtures 5 - 12 years
Computer equipment 5 years
Leasehold improvements are amortized over the term of the lease.
Maintenance and repairs are charged to operations and major
improvements are capitalized. Upon retirement, sale or other
disposition, the associated cost and accumulated depreciation are
eliminated from the accounts and any resulting gain or loss is
included in operations.
f. Income Taxes:
The Company has elected to file a consolidated federal income tax
return with its subsidiaries. The Company utilizes Financial
Accounting Standards Board Statement No. 109 (SFAS 109) "Accounting
for Income Taxes". SFAS 109 requires use of the asset and liability
approach of providing for income taxes. Deferred income taxes are
provided for on the timing differences for certain items which are
treated differently for tax and financial reporting purposes. These
items include depreciation of fixed assets, inventory capitalization
valuations and the recognition of bad debt expense.
International has elected under Section 995 of the Internal Revenue
Code to be taxed as an "Interest Charge Disc". Based upon these rules,
income taxes are paid when International distributes its income to the
parent company. Until distributions are made, the parent company pays
interest only on the deferred tax liabilities. International's untaxed
income at February 28, 1998 approximates $3,000,000.
g. Goodwill:
Costs in excess of net assets acquired are being amortized on a
straight-line basis over fifteen years. As of February 28, 1998 and
1997, accumulated amortization of goodwill aggregated $601,542 and
$444,618, respectively.
The Company periodically reviews the valuation and amortization of
goodwill to determine possible impairment by comparing the carrying
value to the undiscounted future cash flows of the related assets, in
accordance with Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-lived Assets and for Long-
lived Assets to be Disposed of.
h. Cash and Cash Equivalents:
For purposes of the statements of cash flows, the Company considers
all highly liquid investments purchased with a remaining maturity of
three months or less to be cash equivalents.
Page F-8
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 1998 (CONTINUED)
-----------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
i. Earnings Per Common Share:
Basic and diluted earnings per share have been computed in accordance
with the adoption of SFAS No. 128. In addition, prior period per share
data has been restated in accordance with SFAS No. 128.
The following average shares were used for the computation of basic
and diluted earnings per share:
1998 1997 1996
--------------- --------------- ---------------
Basic 8,753,076 8,732,299 7,903,839
Diluted 10,898,859 10,818,859 10,410,699
j. Reclassifications:
Certain prior year information has been reclassified to conform to the
current year's reporting presentation.
k. Stock-Based Compensation:
SFAS No. 123 "Accounting for Stock Based Compensation", effective
January 1, 1996, requires the Company to either record compensation
expense or to provide additional disclosures with respect to stock
awards and stock option grants made after December 31, 1994. The
accompanying Notes to Consolidated Financial Statements include the
disclosures required by SFAS No. 123. No compensation expense is
recognized pursuant to the Company's stock option plans under SFAS No.
123 which is consistent with prior treatment under APB No. 25.
l. Advertising and Promotion Costs:
Advertising and promotion costs, which are included in general and
administrative expenses, are expensed as incurred. For the three years
ended February 28, 1998, such costs aggregated $774,000, $616,000 and
$615,000, respectively.
m. New Accounting Pronouncements:
SFAS 130 "Reporting Comprehensive Income" is effective for years
beginning after December 15, 1997 and early adoption is permitted.
This statement prescribes standards for reporting comprehensive income
and its components. Since the Company currently does not have any
items of other comprehensive income, a statement of comprehensive
income is not required.
SFAS 131 "Disclosures About Segments of an Enterprise and Related
Information", is effective for years beginning after December 15, 1997
and early adoption is encouraged. The Company will adopt this standard
in the next fiscal year.
See also Earnings Per Share, above.
Page F-9
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 1998 (CONTINUED)
-----------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
n. Impact of the Year 2000 Issue:
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
of the Company's computer programs that has date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year
2000. This could potentially result in a system failure or
miscalculations causing disruptions of operations including among
other things, a temporary inability to process transactions, send
invoices, or engage in other similar normal business activities. The
Company has ensured that its software is already year 2000 compliant,
and as such this issue is not expected to have a material effect on
the operations of the Company.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment which is reflected at cost, consists of
the following:
1998 1997
----------- -----------
Land $ - $ 266,301
Building and improvements - 1,747,930
Furniture, fixtures and office
equipment 6,290,449 5,791,946
Computer equipment 3,016,739 2,476,185
Assets held under capitalized leases 919,834 919,834
Leasehold improvements 1,254,364 984,146
----------- -----------
11,481,386 12,186,342
Less: accumulated depreciation
and amortization 5,121,611 4,635,986
----------- -----------
$ 6,359,775 $ 7,550,356
=========== ===========
Depreciation expense including depreciation of capitalized leases for the
years ended February 28, 1998, February 28, 1997 and February 29, 1996
aggregated $1,331,133, $825,960 and $756,808, respectively.
During the current fiscal year the Company completed the sale of the land
and building that served as its prior corporate headquarters.
4. OTHER ASSETS:
Other assets as of February 28, 1998 and February 28, 1997 consists of the
following:
1998 1997
---------- ----------
Net cash surrender value life insurance $ 937,878 $ 869,473
Debt issue costs net (Note 7) - 151,359
Other 64,848 52,302
----------
$1,002,726 $1,073,134
========== ==========
Page F-10
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 1998 (CONTINUED)
-----------------------------------------------
5. REVOLVING CREDIT LINE:
On May 23, 1997 the Company entered into a new unsecured revolving line of
credit with two banks, which currently provides for maximum borrowings of
$35,000,000 at either (i) the lead bank's prime rate or (ii) LIBOR plus 57.5
to 112.5 basis points depending on the ratio of the Company's debt to its
earnings before interest, taxes, depreciation and amortization, at the
option of the Company through May 23, 2001. Direct borrowings under lines of
credit were $25,300,000 and $8,000,000 at February 28, 1998 and February 28,
1997, respectively. The credit agreement contains various covenants
including certain restrictions on the payment of cash dividends without the
bank's consent. As of the end of the fiscal year, the Company met all of the
required covenants.
6. LONG-TERM DEBT:
Long-term debt consists of the following:
1998 1997
---------- --------
Term loan payable to bank, due in monthly
installments of $9,321 plus interest at
the bank's prime rate to March 31, 2000 $ - $354,182
Various capitalized equipment leases,
interest rates ranging from
6.78% to 8.38%, maturing in 1997 and 1998. - 78,947
---------- ---------
433,129
Less: current portion - 190,794
---------- ---------
$ - $242,335
========== =========
The term loan payable was secured by a pledge of the shares of the common
stock of the Company purchased with the proceeds of the loans (See Note 10).
Other equipment loans were secured by the specific equipment acquired.
Page F-11
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 1998 (CONTINUED)
-----------------------------------------------
7. SUBORDINATED CONVERTIBLE NOTES:
In a private placement completed on August 31, 1994, the Company issued $15
million principal amount of Subordinated Convertible Notes, which are due in
$5,000,000 increments on August 31, 2000, 2001 and 2002. The notes are
subordinate in right of payment to all existing and future senior
indebtedness of the Company. The notes bear interest at 8.25%, payable
quarterly on November 15, February 15, May 15, and August 15. The notes are
convertible into shares of common stock at a conversion price of $9.00 per
share. The cost of issuing these notes was $521,565 and was amortized over
three years.
As of February 28, 1998, $7,941,000 of the notes had been converted into
882,333 shares of common stock and $7,059,000 principal amount of
subordinated convertible notes remained outstanding which are due in
increments of $2,353,000 on August 31, 2000, 2001 and 2002.
8. STOCK OPTIONS:
Stock options granted to date under the Company's Key Employees Stock
Incentive Plan and the 1994 Stock Option Plan generally expire five years
after date of grant and become exercisable in four equal annual installments
commencing one year from date of grant. Stock options granted under the
Company's Outside Director Stock Option Plan expire ten years after the date
of grant and become exercisable in three equal annual installments on the
date of grant and the succeeding two anniversaries thereof.
A summary of options granted and related information for the three years
ended February 28, 1998 is as follows:
Weighted Average
Options Exercise Price
------------- ----------------
Outstanding, February 28, 1995 717,415 $ 6.46
Granted 323,000 9.33
Exercised (24,420) 4.07
Cancelled (23,023) 2.86
--------------
Outstanding, February 28, 1996 992,972 7.54
Weighted average fair value of options granted during the year $ 4.50
======
Granted 471,500 8.56
Exercised (93,495) 1.91
Canceled (68,750) 10.36
--------------
Outstanding, February 28, 1997 1,302,227 8.16
Weighted average fair value of options granted during the year $ 4.39
======
Granted 118,500 8.30
Exercised (20,777) 4.98
Canceled (38,500) 10.14
--------------
Outstanding, February 28, 1998 1,361,450 8.20
==============
Weighted average fair value of options granted during the year $ 3.13
======
Options exercisable:
February 29, 1996 159,945 7.35
February 28, 1997 381,377 7.86
February 28, 1998 673,825 7.52
Page F-12
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 1998 (CONTINUED)
-----------------------------------------------
8. STOCK OPTIONS (continued):
Exercise prices for options outstanding as of February 28, 1998 ranged from
$5.41 to $14.83. The weighted-average remaining contractual life of these
options is approximately 5 years. Outstanding options at February 28, 1998
are held by 44 individuals.
The Company applies APB 25 and related Interpretations in accounting for the
Option Plans. Accordingly, no compensation cost has been recognized for its
Option Plans. Had compensation cost for the Option Plans been determined
using the fair value based method, as defined in SFAS 123, the Company's net
earnings and earnings per share would have been adjusted to the pro forma
amounts indicated below:
1998 1997 1996
---------- ---------- ----------
Net earnings:
As reported $5,297,991 $7,073,560 $9,396,301
Pro forma 4,827,590 7,051,451 7,996,865
Basic earnings per share:
As reported $ .61 $ .81 $ 1.19
Pro forma .55 .81 1.01
Diluted earnings per share:
As reported $ .52 $ .69 $ .97
Pro forma .47 .68 .83
The fair value of each option grant was estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions for 1998, 1997 and 1996, respectively: expected
volatility of 45.8%, 48.3% and 39.8%, respectively; risk free interest rate
of 6.1%, 6.5% and 6.5% for 1998, 1997 and 1996, respectively; and expected
lives of 1 to 5 years.
The effects of applying SFAS 123 in the above pro forma disclosures are not
indicative of future amounts, as they do not include the effects of awards
granted prior to 1995. Additionally, future amounts are likely to be
affected by the number of grants awarded since additional awards are
generally expected to be made at varying amounts.
9. INCOME TAXES:
The provision for income taxes is comprised of the following:
February February February
28, 1998 28, 1997 29, 1996
---------- ---------- ----------
Current:
Federal $3,103,097 $4,213,767 $5,082,876
State and Local 655,559 900,193 1,107,016
Deferred:
Federal (74,103) (221,867) 178,923
State (35,007) (44,397) 34,476
---------- ----------
$3,649,546 $4,847,696 $6,403,291
========== ========== ==========
Page F-13
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 1998 (CONTINUED)
-----------------------------------------------
9. INCOME TAXES (continued):
The components of the net deferred income tax liability, pursuant to SFAS
109, as of February 28, 1998 and February 28, 1997 are as follows:
1998 1997
------------ ------------
Deferred Tax Assets:
Accounts Receivable $ 708,610 $ 679,600
Inventory 100,300 162,400
----------- -----------
Total Deferred Tax Assets 808,910 842,000
----------- -----------
Deferred Tax Liabilities
Fixed Assets (184,500) (112,148)
Income of Interest Charge DISC (1,055,805) (952,000)
Total Deferred Tax Liabilities (1,240,305) (1,064,148)
----------- -----------
Net Deferred Tax Liabilities $ (431,395) $ (222,148)
=========== ===========
The following is a reconciliation of the maximum statutory federal tax rate
to the Company's effective tax rate:
1998 1997 1996
--------- --------- -----------
Statutory rate 35.0% 35.0% 35.0%
State and local taxes 7.1 7.0 6.5
Other (1.3) (1.3) (1.0)
----- ----- -----
Effective tax rate 40.8% 40.7% 40.5%
===== ===== =====
10. EMPLOYEE BENEFIT PLANS:
On January 13, 1987, the Company's Board of Directors approved the
termination of the Company's pension plan and approved the adoption of an
employee stock ownership plan (ESOP) to replace the terminated pension plan.
The ESOP covers all eligible employees and contributions are determined by
the Board of Directors. The ESOP purchases shares of the Company's common
stock using loan proceeds. As the loan is repaid, a pro rata amount of
common stock is released for allocation to eligible employees. The Company
makes cash contributions to the ESOP to meet its obligations. Contributions
to the ESOP for the three years ended February 28, 1998 aggregated $139,950
for each year.
On October 31, 1997, the Company, on behalf of the ESOP, entered into an
additional credit agreement with a bank which provides for a $3,000,000
revolving line of credit at the bank's prime rate until October 31, 2001.
Direct borrowings under this line of credit are payable in forty-eight equal
monthly installments commencing with the fiscal period subsequent to such
borrowings. At February 28, 1998, there were no direct borrowings
outstanding under the ESOP line of credit.
In January 1991, the Company also established a 401-K profit sharing plan to
cover all eligible employees. The Company's contributions to the plan are
discretionary, but may not exceed 1% of compensation. Contributions to the
plan for the three years ended February 28, 1998 were $220,403, $111,585 and
$90,243, respectively.
Page F-14
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 1998 (CONTINUED)
-----------------------------------------------
11. COMMITMENTS:
(a) On September 13, 1996, the Company signed employment contracts (the
"Contracts"), as amended, with three of its senior executives for a
continually renewing five year term. The Contracts specify a base
salary of $226,545 for each officer, which shall be increased each
year by the change in the consumer price index, and also entitle each
of the officers to an annual bonus equal to 3.33% (10% in the
aggregate) of the Company's consolidated earnings before income taxes.
Benefits are also payable upon the occurrence of either a change in
control of the Company, as defined, or the termination of the
officer's employment, as defined. The Contracts also provide for
certain payments of the executives' salaries, performance bonuses and
other benefits in event of death or disability of the officer for the
balance of the period covered by the agreement.
(b) In December 1996, the Company leased an approximately 80,000 square
foot facility in Melville, Long Island, New York to serve as its
executive offices and main distribution center. In mid- 1997, the
Company moved its executive offices and distribution operation to the
facility. The lease term is from December 17, 1996 to December 16,
2008 at an annual base rental of $601,290 and provision for a 4%
annual escalation in each of the last ten years of the term. The
Company also leases certain other office, warehouse and other
properties which leases include various escalation clauses, renewal
options, etc. Aggregate minimum rental commitments under noncancelable
operating leases are as follows:
Fiscal 1999 $1,601,614
Fiscal 2000 1,502,220
Fiscal 2001 1,342,167
Fiscal 2002 935,134
Fiscal 2003 683,296
Thereafter 4,243,090
Rent expense was $1,459,325, $712,548, and $587,079 for each of the
prior three years in the period ending February 28, 1998.
(c) The Company has signed a four-year consulting agreement with the
former owner of Merit Electonics that commenced on April 29, 1994 and
terminates on April 28, 1998. The agreement provides for the
consultant to perform advisory services to Nu Horizons/Merit and to
receive consulting fees of approximately $665,000 per annum.
12. MAJOR SUPPLIERS:
For the year ended February 28, 1998, the Company purchased inventory from
one supplier that was in excess of 10% of the Company's total purchases.
Purchases from this supplier aggregated approximately $18,872,000.
For the year ended February 28, 1997, the Company purchased inventory from
one supplier that was in excess of 10% of the Company's total purchases.
Purchases from this supplier aggregated approximately $21,385,000.
For the year ended February 29, 1996, the Company purchased inventory from
two suppliers that were in excess of 10% of the Company's total purchases.
Purchases from these suppliers aggregated approximately $33,505,000.
Page F-15
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 1998 (CONTINUED)
-----------------------------------------------
13. BUSINESS SEGMENT INFORMATION:
The Company's operations have been classified into two business segments:
Electronic component distribution and industrial contract manufacturing. The
component distribution segment includes the resale of active and passive
components to various original equipment manufacturers and distributors. The
industrial contract-manufacturing segment consists of a subsidiary, which
provides electronic circuit board and harness assembly services to original
equipment manufacturers. This segment began operations in September 1991.
Summarized financial information by business segment for fiscal 1998 and
1997 is as follows:
1998 1997
- -----------------------------------------------------------------------------
Net sales:
Electronic Component Distribution $221,217,251 $206,417,667
Industrial Contract Manufacturing 12,108,157 10,195,040
- -----------------------------------------------------------------------------
$233,325,408 $216,612,707
Operating income (loss):
Electronic Component Distribution $ 9,430,055 $ 13,019,791
Industrial Contract Manufacturing 1,230,848 594,423
- -----------------------------------------------------------------------------
$ 10,660,903 $ 13,614,214
- -----------------------------------------------------------------------------
Total assets:
Electronic Component Distribution $ 95,519,254 $ 70,577,102
Industrial Contract Manufacturing 4,122,174 4,206,212
- -----------------------------------------------------------------------------
$ 99,641,428 $ 74,783,314
- -----------------------------------------------------------------------------
Depreciation and amortization:
Electronic Component Distribution $ 1,201,732 $ 978,684
Industrial Contract Manufacturing 286,325 260,283
- -----------------------------------------------------------------------------
$ 1,488,057 $ 1,238,967
- -----------------------------------------------------------------------------
Capital expenditures (including capital leases):
Electronic Component Distribution $ 983,419 $ 4,566,196
Industrial Contract Manufacturing 193,485 370,316
- -----------------------------------------------------------------------------
$ 1,176,904 $ 4,936,512
- -----------------------------------------------------------------------------
Page F-16
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 1998 (CONTINUED)
-----------------------------------------------
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
THREE MONTH PERIOD ENDED
-------------------------------------------------
FEBRUARY NOVEMBER AUGUST MAY
28,1998 30, 1997 31, 1997 31, 1997
----------- ----------- ----------- -----------
NET SALES $62,347,646 $60,013,458 $56,798,598 $54,165,706
----------- ----------- ----------- -----------
COST OF SALES 48,671,746 47,065,156 44,570,929 42,223,252
----------- ----------- ----------- -----------
OPERATING AND
INTEREST EXPENSES 11,284,786 10,754,379 10,382,809 9,424,814
----------- ----------- ----------- -----------
PROVISION FOR
INCOME TAXES 972,310 888,540 773,444 1,015,252
----------- ----------- ----------- -----------
NET INCOME $ 1,418,804 $ 1,305,383 $ 1,071,416 $ 1,502,388
=========== =========== =========== ===========
BASIC EARNINGS
PER SHARE $.16 $.15 $.12 $.17
=========== =========== =========== ===========
WEIGHTED AVERAGE
NUMBER OF COMMON
AND COMMON
EQUIVALENT SHARES
OUTSTANDING 8,753,076 8,753,076 8,746,826 8,739,326
=========== =========== =========== ===========
THREE MONTH PERIOD ENDED
FEBRUARY NOVEMBER AUGUST MAY
28,1997 30, 1996 31, 1996 31, 1996
----------- ----------- ----------- -----------
NET SALES $54,198,484 $53,958,639 $50,783,044 $57,672,540
----------- ----------- ----------- -----------
COST OF SALES 42,071,313 41,894,971 39,411,875 44,746,424
----------- ----------- ----------- -----------
OPERATING AND
INTEREST EXPENSES 9,517,539 9,138,969 9,103,283 8,807,077
----------- ----------- ----------- -----------
PROVISION FOR
INCOME TAXES 1,084,131 1,182,805 916,658 1,664,102
----------- ----------- ----------- -----------
NET INCOME $ 1,525,501 $ 1,741,894 $ 1,351,228 $ 2,454,937
=========== =========== =========== ===========
BASIC EARNINGS
PER SHARE $.17 $.20 $.15 $.29
=========== =========== =========== ===========
WEIGHTED AVERAGE
NUMBER OF COMMON
AND COMMON
EQUIVALENT SHARES
OUTSTANDING 8,732,299 8,732,299 8,732,299 8,423,137
=========== =========== =========== ===========
Page F-17
REPORT OF MANAGEMENT
The management of Nu Horizons Electronics Corp. is responsible for the
preparation of the consolidated financial statements in accordance with
generally accepted accounting principles and for the integrity and objectivity
of all the financial data included in this annual report. In preparing the
financial statements, management makes informed judgments and estimates as to
the expected effects of events and transactions currently being reported.
To meet this responsibility, the Company maintains a system of internal
accounting controls to provide reasonable assurance that assets are safeguarded,
and that transactions are properly executed and recorded. The system includes
policies and procedures, and reviews by officers of the Company.
The Board of Directors, through its Audit Committee, is responsible for
determining that management fulfills its responsibility with respect to the
Company's financial statements and the system of internal accounting controls.
The Audit Committee is composed solely of outside directors. The Committee
meets periodically and, when appropriate, separately with representatives of the
independent accountants and officers of the Company to monitor the activities of
each.
Lazar Levine & Felix LLP, the independent accountants, have been selected by the
Board of Directors to examine the Company's financial statements. Their report
appears herein.
BY: /s/ PAUL DURANDO BY: /s/ ARTHUR NADATA
-------------------------------- -----------------------------
Paul Durando Arthur Nadata
Vice President, Finance and President and
Treasurer Chief Executive Officer
Page F-18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES:
The Company had no disagreements on accounting or financial
disclosure matters with its accountants, nor did it change accountants,
during the three year period ending February 28, 1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY:
NAME AGE POSITION
---- --- --------
Irving Lubman 59 Chief Operating Officer and Chairman
of the Board
Arthur Nadata 52 President, Chief Executive Officer
and Director
Richard S. Schuster 49 Vice-President, Secretary and
Director
Paul Durando 54 Vice President Finance, Treasurer
and Director
Harvey R. Blau 62 Director
Herbert M. Gardner 58 Director
Dominic A. Polimeni 51 Director
The Company's Certificate of Incorporation provides for a Board of
Directors consisting of not less than three nor more than eleven
directors, classified into three classes as nearly equal in number as
possible, whose terms of office expire in successive years. The
following table sets forth the directors of the Company.
Class I