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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT
ON FORM 10-K
Pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended Commission file number
February 28, 2002 1-8798
- ----------------------------------------- ------------------------------------
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)
(631) 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, 2001.
Common Stock - Par Value $.0066 16,609,005
- ----------------------------------------- ------------------------------------
Class Outstanding Shares
Aggregate Market Value of Non-Affiliate Stock at May 1, 2002 - approximately
$157,287,277
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NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I:
ITEM 1. Business Pages 3 - 6
ITEM 2. Properties Pages 7
ITEM 3. Legal Proceedings Page 7
ITEM 4. Submission of Matters to a Vote of Security Holders Page 7
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 - 14
ITEM 7A Market and Other Business Risks Page 14
ITEM 8. Financial Statements and Supplementary Data Pages F1 - F19
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures Page 15
PART III:
ITEM 10. Directors and Executive Officers of the Company Pages 15 - 16
ITEM 11. Executive Compensation Pages 17 - 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 30
Exhibit Index
Page 2
PART I.
ITEM 1. BUSINESS
GENERAL:
Except for historical information contained herein, the matters set
forth herein are forward-looking statements that involve certain risks
and uncertainties that could cause 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.
Nu Horizons Electronics Corp. (the "Company") and its wholly
owned subsidiaries, NIC Components Corp. ("NIC"), Titan Logistics
Corp. ("Titan"), Nu Horizons Eurotech Ltd. ("NUE"), and its majority
owned subsidiaries NIC Components Asia PTE. LTD. ("NIA"), NIC Eurotech
Ltd. ("NIE") and Nu Horizons Asia PTE. LTD. ("NUA") 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.
NUV Inc. ("NUV" or "Nu Visions"), is currently an inactive wholly
owned subsidiary of the Company, and was a contract assembler of
circuit boards and related electromechanical devices for various
original equipment manufacturers, or OEMs, until the sale of its
assets on August 23, 2001.
All references herein to the Company shall, unless the context
otherwise requires, be deemed to refer to the Company and its
subsidiaries.
Active components distributed by the Company, principally to OEMs
in the United States, include mainly commercial semiconductor products
such as memory chips, microprocessors, digital and linear circuits,
microwave, RF and fiber-optic 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.
Page 3
ITEM 1. BUSINESS (Continued):
Management's policy is to manage, maintain and control the bulk
of its inventories from its principal headquarters and stocking
facility in Melville, 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.
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, Elantec, Exar, Hitachi Semiconductor,
Integrated Circuit Systems, Intersil Corporation, Marvel, Pericom, ST
Microelectronics, Sun Microsystems, TDK Semiconductor, Vitesse
Semiconductor and Xilinx among others.
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 generally 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) ("Nippon") brand of passive components
with a license for the use of the Nippon brand. The Company has a
License Agreement with Nippon dated as of September 1, 2000 under
which the Company has been granted an exclusive license to use the
Nippon brand in the United States, Mexico, Central and South America
and the Caribbean. The License Agreement has an initial term of ten
years and automatically renews for successive one year periods unless
the Company or Nippon terminates the License Agreement 90 days prior
to the end of the initial or any renewal term.
Due to certain market situations, NIC, with Nippon's assent, has
also established several manufacturing associations with U.S. and
Taiwan based manufacturers to supply NIC with a portion of its product
requirements under the NIC brand. NIC intends to continue to give
Nippon priority, however, in acquiring Nippon's products whenever
Nippon's technology and pricing are commensurate market requirements.
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, both domestically and abroad: industrial, telecom/datacom,
medical instrumentation, microwave and RF, fiber-optic, consumer
electronics, security and protection devices, office equipment,
computers and computer peripherals, factory automation and robotics.
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, 2002, the Company had approximately 15,000
customers. All sales are made through customers' purchase orders.
Semiconductors are sold primarily via telephone by the Company's
in-house staff of approximately 80 salespersons, and by a field sales
force of approximately 100 salespersons. The Company maintains branch
sales facilities located as follows:
Page 4
ITEM 1. BUSINESS (Continued):
Sales and Marketing (continued):
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, Orlando and Tampa
MIDWEST WEST COAST
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Arizona - Phoenix California - Irvine, Los Angeles,
Colorado - Denver Sacramento, San Diego and San Jose
Illinois - Chicago Oregon - Portland
Minnesota - Minneapolis Washington - Redmond
Texas - Austin and Dallas
CANADA ASIA EUROPE
------ ---- ------
Montreal Singapore Buckingham, England
Ottowa
Toronto
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
generally range from 2 to 3% of all sales in a representative's
exclusive territory.
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
OEMs in the United States.
No single customer accounted for more than 3% of the Company's
consolidated sales for the year ended February 28, 2002. 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.
Page 5
ITEM 1. BUSINESS (Continued):
Source of Supply (continued):
As of February 28, 2002, there were three manufacturers that
represented more than 10% of the Company's inventory on a consolidated
basis. Those suppliers accounted for approximately $45,577,000 of
total inventory. Electronic components distributed by the Company
generally are presently readily available; however, from time to time
the electronics industry has experienced a shortage or surplus of
certain electronic products.
For the year ended February 28, 2002, the Company purchased
inventory from two suppliers that was in excess of 10% of the
Company's total purchases. Purchases from these suppliers were
approximately $34,906,000 and $40,457,000 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 that manufacture such products and sell them
directly to OEMs 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.
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 a 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, 2002, the
Company's backlog was approximately $36,685,000 as compared to a
backlog of approximately $46,973,000 at May 1, 2001.
Employees:
As of February 28, 2002, the Company employed approximately 471
persons: 12 in management, 327 in sales and sales support, 24 in
product and purchasing, 26 in finance, accounting and human resources,
19 in MIS, 25 in operations and 38 in quality control, shipping,
receiving and warehousing. The Company believes that its employee
relations are satisfactory.
Page 6
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. The lease term is
from December 17, 1996, to December 16, 2008 at an annual base rental
of $601,290 and provides for a 4% annual escalation in each of the
last ten years of the term.
On May 1, 1996, the Company leased approximately 25,000 square
feet of warehouse and office space for its San Jose, California
operation. This facility serves as the Company's West Coast regional
sales and distribution headquarters. The lease term is from May 1,
2001 to April 30, 2006 at an annual base rental of $540,000.
On August 1, 2000, the Company leased approximately 10,000 square
feet of office space in Melville, Long Island, New York to serve as
the executive offices of it's NIC Components subsidiary. The lease
term is from April 1, 2001 to December 31, 2008 at an annual base
rental of $285,700 and provides for a 4% annual escalation in each
subsequent year of the lease.
The Company also leases space for thirty-two (32) branch sales
offices, which range in size from 1,000 square feet to 9,300 square
feet, with lease terms that expire between July 2002 and June 2008.
Annual base rentals range from $21,600 to $199,400 with aggregate base
rentals approximating $1,530,000. The Company believes it can obtain
extensions of the leases scheduled to expire in fiscal 2003 on
substantially similar terms to those currently in effect.
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, 2002 to a vote of security holders through the
solicitation of proxies or otherwise.
Page 7
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 adjusted for a 3-for-2 stock split
declared on September 11, 2000, as reported by the NASDAQ National
Market System.
FISCAL YEAR 2001: HIGH LOW
---- ---
First Quarter $16.50 $ 9.25
Second Quarter 22.68 10.67
Third Quarter 21.25 7.88
Fourth Quarter 13.37 6.56
FISCAL YEAR 2002:
First Quarter $12.51 $ 8.98
Second Quarter 11.23 8.39
Third Quarter 9.22 7.75
Fourth Quarter 10.92 8.50
FISCAL YEAR 2003:
First Quarter (Through May 1, 2002) $10.00 $ 8.35
b) As of May 1, 2002, the Company's common stock was owned by
approximately 400 holders of record and 9,500 beneficial holders.
c) The Company has never paid a cash dividend on its common stock. The
Company's current revolving credit line agreement 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, 2002 28, 2001 29, 2000 28, 1999 28, 1998
-------- -------- -------- -------- --------
INCOME STATEMENT
DATA:
Continuing
Operations
Net sales $281,912,508 $634,009,953 $364,069,562 $243,514,672 $221,217,251
Gross profit on
sales 60,222,426 139,502,597 76,456,311 53,016,248 48,028,412
Gross profit
percentage 21.4% 22.0% 21.0% 21.8% 21.7%
Net income (loss)
before provision
for income taxes
and minority
interests (2,797,157) 58,515,268 20,694,140 7,668,406 8,088,372
Net income (loss) (2,762,566) 33,561,085 11,903,786 4,608,127 4,743,948
Net income (loss)
from discontinued
operations 4,982,242 1,791,000 (205,000) (63,296) 554,043
Total net income $ 2,219,676 $ 35,352,085 $ 11,698,786 $ 4,544,831 $ 5,297,991
Earnings per common
share:
Basic $ .13 $ 2.18 $ .87 $ .35 $ .41
Diluted $ .13 $ 1.99 $ .67 $ .29 $ .35
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 2002 28, 2001 29, 2000 28, 1999 28, 1998
-------- -------- -------- -------- --------
BALANCE SHEET
DATA:
Working capital $120,790,159 $201,732,737 $106,903,383 $71,343,379 $ 77,046,418
Total assets 151,318,461 247,830,999 136,625,266 94,340,725 95,580,832
Long-term debt 2,731,598 85,181,496 38,307,319 22,377,852 32,790,395
Shareholders'
equity 126,473,177 124,361,211 75,461,183 56,337,068 51,542,045
Page 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
Introduction:
Nu Horizons Electronics Corp. and its wholly owned subsidiaries, NIC
Components Corp. ("NIC"), Nu Horizons Eurotech Limited ("NUE"), Titan
Logistics Corp. ("TITAN") and Nu Horizons International Electronics
Corp. ("International") and its majority owned subsidiaries NIC
Components Asia PTE. LTD. ("NIA"), NIC Eurotech Limited ("NIE") and Nu
Horizons Asia PTE. LTD. ("NUA") are engaged in the distribution of high
technology active and passive electronic components to a wide variety of
original equipment manufacturers ("OEMs") of electronic products. Active
components distributed by the Company include semiconductor products
such as memory chips, microprocessors, digital and linear circuits,
microwave, RF and fiber-optic 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.
All references in this report to "the Company," "we," "our" and "us" are
to Nu Horizons Electronics Corp. and its subsidiaries.
As of August 23, 2001 the Company sold the assets of Nu Visions
Manufacturing Inc. ("Nu Visions"), a wholly owned subsidiary of the
Company, which was a contract assembler of circuit boards and related
electromechanical devices for various OEM's.
The financial information presented herein includes: (i) Balance sheets
as of February 28, 2002, and February 28, 2001; (ii) Statements of
income for the twelve month periods ended February 28, 2002, February
28, 2001 and February 29, 2000; (iii) Statements of cash flows for the
twelve month periods ended February 28, 2002, February 28, 2001 and
February 29, 2000; and (iv) Consolidated changes in shareholders' equity
for the twelve month periods ended February 28, 2002, February 28, 2001
and February 29, 2000.
Critical Accounting Policies and Estimates
------------------------------------------
The Company's financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the
Company to make significant estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. The Company
evaluates its estimates, including those related to bad debts,
inventories, intangible assets, income taxes and contingencies and
litigation, on an ongoing basis. The Company bases its estimates on
historical experience and on various other assumptions that are believed
to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting policies, among
others, involve the more significant judgments and estimates used in the
preparation of its consolidated financial statements:
- The Company recognizes revenue in accordance with SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). Under SAB 101, revenue is recognized when the title and risk of
loss have passed to the customer, there is persuasive evidence of an
arrangement, delivery has occurred or services have been rendered, the
sales price is determinable and collectibility is reasonably assured.
The Company recognizes revenues at time of shipment of its products and
sales are recorded net of discounts and returns.
- The Company maintains allowances for doubtful accounts for estimated
bad debts. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their inability to make
payments, additional allowances might be required.
- Inventories are recorded at the lower of cost or market. Write-downs
of inventories to market value are based upon product franchise
agreements governing price protection, stock rotation and obsolescence,
as
Page 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued):
well as assumptions about future demand and market conditions. If
assumptions about future demand/or actual market conditions are less
favorable than those projected by management, additional write-downs of
inventories could be required.
Fiscal Year 2002 versus 2001
----------------------------
Results of Continuing Operations:
---------------------------------
Net sales for the year ended February 28, 2002 aggregated $281,913,000
as compared to $634,010,000 for the year ended February 28, 2001, a
decrease of $352,097,000 or approximately 56%. Management attributes
this decrease in sales for the period to the core semiconductor and
passive component distribution business, which experienced substantially
decreased demand. Toward the latter part of the fourth quarter of our
prior fiscal year, we and the market place overall began to experience a
significant decline in demand for electronic components. This reduced
demand has continued throughout fiscal 2002. Management believes and
expects that the current slowdown has stabilized but will extend at
least through the first half of fiscal 2003. As a result, we expect
revenues to continue to range from flat to a moderate upside potential
through the first three quarters of fiscal 2003.
Gross profit margin as a percentage of net sales was 21.4% for the year
ended February 28, 2002 as compared to 22.0% for the year ended February
28, 2001. It should also be noted that the gross profit margin for the
fourth quarter of the current year was 20.1%. This continuing decrease
in gross margin reflects decreasing prices due to increased competitive
pressures resulting from the industry wide decline in demand coupled
with an oversupply of product in the marketplace. As a result management
believes that there could be some continued margin pressure in the first
half of fiscal 2003, with a return to relative margin stability in the
second half of fiscal 2003, however, no assurances can be given in this
regard.
Operating expenses decreased by $15,747,000 to $60,378,000 for the year
ended February 28, 2002 from $76,125,000 for the year ended February 28,
2001, a decrease of approximately 21%. The dollar decrease in operating
expenses was due to decreases in the following expense categories:
approximately $11,290,000 or approximately 72% of the decrease was for
personnel related costs - commissions, salaries, travel and fringe
benefits. The remaining decrease of approximately $4,457,000 or
approximately 28% of the total is a result of decreases in various other
general and administrative expenses. Operating expenses as a percentage
of sales, however, increased to 21.4% of sales as compared to 12.0% for
the prior year. The sharp reduction in sales has resulted in higher
operating expenses as a percentage of sales and a loss of the economies
of scale the Company enjoyed in its prior fiscal year. Management has
decided to endure this higher rate of operating expenses in order to be
prepared for what we believe will be an inevitable rebound for the
industry, although no assurances can be given as to the timing or size
of any rebound.
Interest expense decreased by $3,345,000 from $4,862,000 for the year
ended February 28, 2001 to $1,517,000 for the year ended February 28,
2002. This decrease was primarily due to the lower average levels of
bank debt during the year resulting from the decrease in the Company's
inventory and accounts receivable levels required to support reduced
sales activity, repayment of indebtedness with the proceeds of the sale
of the Nu Visions Manufacturing (NUV) subsidiary and substantially lower
interest rates overall.
Page 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued):
Net loss from continuing operations for the year ended February 28, 2002
was $2,763,000 or $ .17 per basic and$.16 per diluted share, as compared
to income of $33,561,000 or $2.07 per basic share and $1.89 per diluted
share, for the year ended February 28, 2001. Management attributes
$1,638,000 of the loss for fiscal 2002 to reduced sales volumes,
resulting in a greater decrease in gross profit margin dollars than in
operating expenses. The remaining loss of $1,125,000, is attributable to
a one-time charge for the impairment of the value of goodwill, which had
previously been amortized over a fifteen-year period.
Discontinued Operations:
------------------------
On August 23, 2001, the Company completed the sale of the assets of its
contract-manufacturing subsidiary, Nu Visions. The selling price was
paid with a $2,000,000 Subordinated Note and $29,563,000 in cash.
Net income from the discontinued operation for the year ended February
28, 2002 was $799,000 or $.05 per basic and diluted share as compared to
$1,791,000 or $.11 per basic share and $.10 per diluted share the year
before. The net gain on the sale of the subsidiary resulted in an after
tax profit of $4,184,000 or $.25 per basic share and $.24 per diluted
share for the current year. This resulted in total net income from the
discontinued operation for the year ended February 28, 2002 of
$4,982,000 or $.30 per basic share and $.29 per diluted share as
compared to $1,791,000 or $.11 per basic share and $.10 per diluted in
the prior year.
Combined Net Income:
--------------------
Net income from both continuing and discontinued operations combined for
the year ended February 28, 2002 was $2,220,000 or $.13 per diluted
share as compared to $35,352,000 or $1.99 per diluted share the year
before.
Fiscal Year 2001 versus 2000
----------------------------
Results of Continuing Operations:
---------------------------------
Net sales for the year ended February 28, 2001 aggregated $634,010,000
as compared to $364,070,000 for the year ended February 29, 2000, an
increase of approximately 74%. Management attributes this increase in
sales for the period to the core semiconductor and passive component
distribution business, which experienced substantially increased demand.
Management believes that the ability to generate greater market
penetration to a larger account base coupled with an increased focus on
fewer product lines, contributed to the substantial increase in sales
performance. Toward the latter part of the fourth quarter of fiscal 2001
we and the market place overall began to experience a significant
decline in demand for electronic components.
Gross profit margin as a percentage of net sales was 22.0% for the year
ended February 28, 2001 as compared to 21.0% for the year ended February
29, 2000. This increase in gross margin percentage compared to the prior
period resulted from tightened inventory availability at the supplier
level coupled with continued strong customer demand through the third
quarter.
Operating expenses increased by $22,497,000 to $76,125,000 for the year
ended February 28, 2001 from $53,628,000 for the year ended February 29,
2000, an increase of approximately 42%. The dollar increase in operating
expenses was due to increases in the following expense categories:
Approximately $15,073,000 or approximately 67% of the increases were for
personnel related costs - commissions, salaries, travel and fringe
benefits. The remaining increase of approximately $7,424,000 or
approximately 33% of the total increment is a result of increases in
various other operating expenses including, but not limited to, freight
out, rent, telephone, computer expenses and various general and
administrative expenses. While operating expenses, expressed in dollars,
for fiscal 2001 increased approximately 42% over fiscal 2000, those same
expenses, as a percentage of sales dollars, decreased from 14.7% for the
prior year to
Page 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued):
12.0% for the fiscal 2001 year. Management was encouraged by the fact
that sales volume increased at a greater rate than operating expenses,
which it believed provided the economies of scale that were required to
produce an enhanced bottom line performance.
Interest expense increased by $2,727,000 from $2,135,000 for the year
ended February 29, 2000 to $4,862,000 for the year ended February 28,
2001. This increase was primarily due to the higher average levels of
bank debt during the year resulting from an increase in the Company's
inventories and accounts receivable levels needed to support increased
sales activity coupled with higher interest rates overall.
INTEREST COSTS
FOR THE FISCAL
YEAR ENDED
February February
28, 2001 29, 2000
------------------------------
Revolving Bank Credit $4,862,000 $1,575,000
Sub. Convert. Notes 0 560,000
------------------------------
Total Interest Expense $4,862,000 $2,135,000
=============================
Discontinued Operations:
-----------------------
On August 23, 2001, the Company completed the sale of the assets of its
contract-manufacturing subsidiary, Nu Visions. The selling price was
paid with a $2,000,000 Subordinated Note and $29,563,000 in cash.
Net income from discontinued operations was $1,791,000 or $.11 per
diluted share, for the year ended February 28, 2001. For the year ended
February 29, 2000, there was a net loss from discontinued operations of
$205,000, or $.01 per basic and diluted share.
Combined Net Income:
--------------------
Net income for the year ended February 28, 2001 (from both continuing
and discontinued operations) was $35,352,000 or $1.99 per share diluted,
as compared to $11,699,000 or $.67 per share diluted, for the year ended
February 29, 2000. Management attributes the increase in earnings to
increased sales volume net of higher operating expenses for the year
ended in 2001 as compared to 2000.
Liquidity and Capital Resources:
--------------------------------
Fiscal Year 2002 versus 2001
----------------------------
The Company ended its 2002 fiscal year with working capital and cash
aggregating approximately $120,790,000 and $2,690,000, respectively, as
compared to approximately $201,732,000 and $558,000 respectively, at
February 28, 2001. The Company's current ratio at February 28, 2002, was
6.8:1 as compared to 6.4:1 at February 28, 2001. The Company believes
that its financial position at February 28, 2002, will enable it to take
advantage of any new opportunities that may arise.
On October 18, 2000, the Company entered into a new unsecured revolving
line of credit with six banks, which currently provides for maximum
borrowings of $120,000,000 at either (i) the lead bank's prime rate or
(ii) LIBOR plus 87.5 to 147.5 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 October 18, 2004.
Borrowings under this line of credit decreased from $85,000,000 at
February 28, 2001 to $2,500,000 at February 28, 2002. The primary reason
for the decrease was lower borrowings needed due to reductions in
inventories and receivables as a result of the significant decline in
sales and repayment of amounts outstanding under the line of credit from
the proceeds of the sale of the Nu Visions Manufacturing subsidiary. The
Company does not expect a fluctuation in interest rates to have a
material effect on its financial results.
Page 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued):
The Company has contacted the lead bank under its loan agreement to
discuss an amendment to the current loan agreement to address the
Company's reduced need for credit and to amend certain of the financial
covenants contained therein. The Company is currently in full
compliance with all of the covenants contained in its loan agreement.
However, the Company believes that there is a risk that, due to the
overall decline in sales in the electronic components market, without
an amendment to the loan agreement, commencing in August 2002, the
Company may violate the covenant related to EBITDA (Earnings Before
Interest, Taxes, Depreciation and Amortization). The lead bank has
advised the Company that all of the lenders under the Company's loan
agreement are willing to enter into an amendment to the loan agreement
that would enable the Company to remain in compliance with all
covenants, as revised, for the foreseeable future. There can be no
assurances that the Company and its lenders will actually enter into
such an agreement.
The Company anticipates that its resources provided by its cash flow
from operations and its bank lines of credit, as amended, will be
sufficient to meet its financing requirements for at least the next
twelve-month period.
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.
Forward Looking Statement Disclaimer:
-------------------------------------
Except for historical information contained herein, the matters set
forth above may be forward-looking statements that involve certain
risks and uncertainties that could cause 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 amounts of sales of the
Company's products, the competitive environment within the electronic
industry, the ability of the Company to continue to expand its
operations and the level of costs incurred in connection therewith,
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.
ITEM 7A. MARKET AND OTHER BUSINESS RISKS:
The Company's credit facility bears interest based on interest rates
tied to the prime or LIBOR rate, either of which may fluctuate over
time based on economic conditions. As a result, the Company is subject
to market risk for changes in interest rates and could be subjected to
increased or decreased interest payments if market rates fluctuate. If
market rates increase, the impact could have a material adverse effect
on the Company's financial results.
The Company has several foreign subsidiaries and acquires certain
inventory from foreign suppliers and as such, faces risk due to adverse
movements in foreign currency exchange rates. These risks could have a
material impact on the Company's financial results in future periods.
The electronic component industry is cyclical which can cause
significant fluctuations in sales, gross margins and profits, from year
to year. For example, during calendar 2001, the industry experienced a
severe decline in the demand for electronic components, which caused
sales to decrease by 56%. The prior year reflected a 74% increase in
net sales. It is difficult to predict the timing of the changing cycles
in the electronic component industry.
Page 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
To The Board of Directors and Shareholders
Nu Horizons Electronics Corp.
Melville, New York
We have audited the accompanying consolidated balance sheets of Nu
Horizons Electronics Corp. and subsidiaries as of February 28, 2002 and February
28, 2001, and the consolidated statements of income, changes in shareholders'
equity and cash flows for the three years in the period ended February 28, 2002.
Our audits also included the financial statement schedule listed in the index at
Item 14(a). 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 auditing standards generally
accepted in the United States of America. 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
above, present fairly in all material respects, the financial position of Nu
Horizons Electronics Corp. and subsidiaries at February 28, 2002 and February
28, 2001, and the results of their operations and their cash flows for each of
the three years in the period ended February 28, 2002 in conformity with
accounting principles generally accepted in the United States of America.
/s/ LAZAR LEVINE & FELIX LLP
----------------------------
LAZAR LEVINE & FELIX LLP
New York, New York
May 3, 2002
Page F-1
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
-ASSETS-
------
February February
CURRENT ASSETS: 28, 2002 28, 2001
----------------------------
Cash $ 2,689,978 $ 558,176
Accounts receivable - net of allowance for doubtful accounts
of $4,445,901 and $5,590,675 for 2002 and 2001, respectively 40,018,469 87,250,544
Inventories 95,076,198 119,005,965
Prepaid expenses and other current assets 3,726,568 7,717,332
Net assets of discontinued subsidiary -- 24,397,341
----------------------------
TOTAL CURRENT ASSETS 141,511,213 238,929,358
PROPERTY, PLANT AND EQUIPMENT - NET 6,145,476 6,018,619
OTHER ASSETS:
Costs in excess of net assets acquired - net of amortization -- 1,281,560
Subordinated note receivable 2,000,000 --
Other assets 1,661,772 1,601,462
----------------------------
$151,318,461 $247,830,999
============================
-LIABILITIES AND SHAREHOLDERS' EQUITY-
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 13,637,730 $ 29,418,411
Accrued expenses 7,083,324 7,778,210
----------------------------
TOTAL CURRENT LIABILITIES 20,721,054 37,196,621
----------------------------
LONG-TERM LIABILITIES:
Deferred income taxes 231,598 181,496
Revolving credit line 2,500,000 85,000,000
----------------------------
TOTAL LONG-TERM LIABILITIES 2,731,598 85,181,496
----------------------------
MINORITY INTERESTS 1,392,632 1,091,671
----------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value, 1,000,000 shares authorized; none
issued or outstanding -- --
Common stock, $.0066 par value, 20,000,000 shares authorized;
16,609,005 and 16,501,840 shares issued and outstanding for 2002
and 2001, respectively 109,619 108,912
Additional paid-in capital 42,600,827 41,798,615
Retained earnings 84,010,397 81,790,721
Other accumulated comprehensive income (loss) (247,666) 821,807
----------------------------
126,473,177 124,520,055
Less: loan to ESOP -- 158,844
----------------------------
TOTAL SHAREHOLDERS' EQUITY 126,473,177 124,361,211
----------------------------
$151,318,461 $247,830,999
============================
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, 2002 28, 2001 29, 2000
------------ ------------ ------------
NET SALES $281,912,508 $634,009,953 $364,069,562
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 221,690,082 494,507,356 287,613,251
Operating expenses 60,377,685 76,125,482 53,627,525
Impairment of goodwill 1,124,636 -- --
Interest expense 1,517,262 4,861,847 2,134,646
------------ ------------ ------------
284,709,665 575,494,685 343,375,422
------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTERESTS (2,797,157) 58,515,268 20,694,140
Provision (credit) for income taxes (503,742) 24,110,598 8,647,909
------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTERESTS (2,293,415) 34,404,670 12,046,231
Minority interest in earnings of subsidiary 469,151 843,585 142,445
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (2,762,566) 33,561,085 11,903,786
------------ ------------ ------------
DISCONTINUED OPERATIONS:
Income (loss) from operations of contract manufacturing
subsidiary disposed of - net of income taxes 798,735 1,791,000 (205,000)
Gain on sale of contract manufacturing subsidiary - net
of income taxes 4,183,507 -- --
------------ ------------ ------------
4,982,242 1,791,000 (205,000)
------------ ------------ ------------
NET INCOME $ 2,219,676 $ 35,352,085 $ 11,698,786
============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE - BASIC:
Continuing operations $ (.17) $ 2.07 $ .88
Discontinued operations .30 .11 (.01)
------------ ------------ ------------
$ .13 $ 2.18 $ .87
============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE-
DILUTED:
Continuing operations $ (.16) $ 1.89 $ .68
Discontinued operations .29 .10 (.01)
------------ ------------ ------------
$ .13 $ 1.99 $ .67
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic 16,574,911 16,213,084 13,511,545
Diluted 17,430,332 17,746,075 17,547,789
See notes to consolidated financial statements
Page F-3
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE LOAN TO SHAREHOLDERS'
SHARES STOCK CAPITAL EARNINGS INCOME ESOP EQUITY
---------- -------- ------------ ------------ ------------- ------------ -------------
Balance at February 28, 1999 8,753,076 $ 57,770 $ 19,042,230 $ 38,076,840 $ - $ (839,772) $ 56,337,068
Stock dividend distributed 437,638 2,888 3,334,102 (3,336,990) - - -
Exercise of stock options 4,388 29 25,844 - - - 25,873
Conversion of subordinated
convertible notes 823,550 5,435 7,053,565 - - - 7,059,000
Repayment from ESOP - - - - - 340,456 340,456
Net income - - - 11,698,786 - - 11,698,786
---------- -------- ------------ ------------ ------------- ------------ -------------
Balance at February 29, 2000 10,018,652 66,122 29,455,741 46,438,636 - (499,316) 75,461,183
Three-for-two stock split 5,437,364 35,887 (35,887) - - - -
Exercise of stock options 1,045,824 6,903 7,310,016 - - - 7,316,919
Income tax benefit from stock
options exercised - - 5,068,745 - - - 5,068,745
Repayment from ESOP - - - - - 340,472 340,472
Foreign currency translation - - - - 821,807 - 821,807
Net income - - - 35,352,085 - - 35,352,085
---------- -------- ------------ ------------ ------------- ------------ -------------
Balance at February 28, 2001 16,501,840 108,912 41,798,615 81,790,721 821,807 (158,844) 124,361,211
Exercise of stock options 107,165 707 490,616 - - - 491,323
Income tax benefit from stock
options exercised - - 311,596 - - - 311,596
Repayment from ESOP - - - - - 158,844 158,844
Foreign currency translation - - - - (1,069,473) - (1,069,473)
Net income - - - 2,219,676 - - 2,219,676
---------- -------- ------------ ------------ ------------- ------------ -------------
Balance at February 28, 2002 16,609,005 $109,619 $ 42,600,827 $ 84,010,397 $ (247,666) $ - $ 126,473,177
========== ======== ============ ============ ============= ============ =============
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, 2002 28, 2001 29, 2000
--------------- ----------------- ---------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS:
Cash flows from operating activities:
Cash received from customers $ 358,499,244 $ 637,588,990 $ 355,352,590
Cash paid to suppliers and employees (275,441,710) (659,196,422) (368,622,165)
Interest paid (1,517,262) (5,559,847) (2,837,646)
Income taxes paid (2,987,904) (29,847,868) (4,134,402)
--------------- ----------------- ---------------
Net cash provided (used) by operating activities 78,552,368 (57,015,147) (20,241,623)
--------------- ----------------- ---------------
Cash flows from investing activities:
Capital expenditures (1,393,184) (4,330,953) (1,691,765)
Proceeds from sale of subsidiary 29,563,000 - -
Net assets of subsidiary sold (18,217,706) - -
Expenses related to sale of subsidiary (3,606,122) - -
--------------- ----------------- ---------------
Net cash provided (used) by investing activities 6,345,988 (4,330,953) (1,691,765)
--------------- ----------------- ---------------
Cash flows from financing activities:
Borrowings under revolving credit line 81,300,000 210,775,000 95,785,000
Repayments under revolving credit line (163,800,000) (163,575,000) (72,885,000)
Proceeds from exercise of stock options 802,919 12,385,664 25,873
--------------- ----------------- ---------------
Net cash provided (used) by financing activities (81,697,081) 59,585,664 22,925,873
--------------- ----------------- ---------------
Effect of exchange rate changes (1,069,473) 821,807 -
--------------- ----------------- ---------------
Net increase (decrease) in cash and cash equivalents 2,131,802 (938,629) 992,485
Cash and cash equivalents, beginning of year 558,176 1,496,805 504,320
--------------- ----------------- ---------------
Cash and cash equivalents, end of year $ 2,689,978 $ 558,176 $ 1,496,805
=============== ================= ===============
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, 2002 28, 2001 29, 2000
-------------- ---------------- ----------------
RECONCILIATION OF NET INCOME TO NET
CASH FROM OPERATING ACTIVITIES
NET INCOME $ 2,219,676 $ 35,352,085 $ 11,698,786
Adjustments:
Gain on sale of subsidiary (4,183,507) - -
Depreciation and amortization 1,416,235 2,007,864 1,660,345
Impairment of goodwill 1,124,636 - -
Contribution to ESOP (compensation) 158,844 340,472 340,456
Bad debt provision 86,982 2,793,468 1,097,338
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 54,850,081 (33,039,963) (23,885,972)
Decrease (increase) in inventories 40,047,471 (65,579,273) (24,430,502)
Decrease (increase) in prepaid expenses
and other current assets 4,230,329 (5,907,296) 537,537
(Increase) in other assets (2,045,742) (404,463) (72,746)
(Decrease) increase in accounts payable
and accrued expenses (19,703,700) 10,528,757 8,852,022
Increase (decrease) in income taxes 50,102 (3,949,071) 3,711,715
Increase in minority interest 300,961 842,273 249,398
-------------- ---------------- ----------------
Net cash provided (used) by operating activities $ 78,552,368 $ (57,015,147) $ (20,241,623)
============== ================ ================
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, 2002
-----------------------------------
1. ORGANIZATION:
Nu Horizons Electronics Corp. and its subsidiaries, (both wholly and
majority owned) are wholesale and export distributors of semiconductor
and passive electronic components throughout the United States, Asia
and Europe.
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 International
Corp. ("International"), Nu Horizons Eurotech ("NUE"), and Titan
Logistics Corp. ("Titan") and its majority owned subsidiaries, NIC
Eurotech Limited ("NIE"), Nu Horizons Asia PTE. LTD. ("NUA") and NIC
Components Asia PTE. LTD ("NIA"). All material intercompany balances
and transactions have been eliminated. See also Note 3.
b. Use of Estimates:
In preparing financial statements, in accordance with accounting
principles generally accepted in the United States of America,
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 consist 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. 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-7
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 2002
-----------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
e. Inventories:
Inventories, which consist primarily of goods held for resale, are
stated at the lower of cost (first-in, first-out method) or market.
f. 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.
g. Goodwill:
Costs in excess of net assets acquired are amortized on a
straight-line basis over fifteen years. As of the end of fiscal 2002
and 2001, accumulated amortization of goodwill aggregated $1,229,238
and $1,072,314, 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." As a result of this review, the
Company identified certain conditions as indicators of asset
impairment and accordingly, recognized full impairment of the
remaining goodwill, recording a one-time charge of $1,124,636, as of
February 28, 2002.
h. Income Taxes:
The Company has elected to file a consolidated federal income tax
return with its domestic subsidiaries. The Company utilizes SFAS 109
"Accounting for Income Taxes", which 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, 2002 approximates $2,500,000.
Page F-8
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 2002
-----------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
i. Revenue Recognition/Shipping and Handling Costs:
Revenue is recognized when products are shipped to customers in
accordance with SEC Staff Accounting Bulletin No. 101, ("Revenue
Recognition in Financial Statements"). Amounts related to shipping and
handling that are billed to customers as part of sales transactions
are reflected as a reduction of operating expenses and aggregated
$130,328, $279,181 and $203,819 for the fiscal years ended 2002, 2001
and 2000, respectively. Shipping and handling costs incurred by the
Company, are included in costs of sales and aggregated $1,042,052,
$2,454,242, and $1,313,014 for the fiscal years ended 2002, 2001 and
2000, respectively.
j. Advertising and Promotion Costs:
Advertising and promotion costs, which are included in general and
administrative expenses, are expensed as incurred. For the fiscal
years ended 2002, 2001 and 2000, such costs aggregated $424,490,
$1,295,465 and $662,646 respectively.
k. Earnings Per Common Share:
Basic and diluted earnings per share have been computed in accordance
SFAS No. 128. The number of average shares for each period has been
adjusted to reflect the 3-for-2 stock split in October, 2000.
l. Stock-Based Compensation:
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations, in accounting for employee stock options. 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. Compensation expense related to stock options granted to
non-employees is accounted for under SFAS No. 123 "Accounting for
Stock Based Compensation", whereby compensation expense is recognized
over the vesting period based on the fair value of the options on the
date of grant.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation" (FIN 44). FIN 44 provides guidance for issues
arising in applying APB Opinion No. 25. FIN 44 applies specifically to
new awards, exchanges of awards in a business combination,
modification to outstanding awards, and changes in grantee status that
occur on or after July 1, 2000, except for the provisions related to
repricings and the definition of an employee which apply to awards
issued after December 15, 1998. Application of FIN 44 did not have a
material effect on the Company's financial reporting.
Page F-9
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 2002
-----------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
m. Foreign Currency Translation/Other Comprehensive Income:
Assets and liabilities of the Company's foreign subsidiaries are
translated at current exchange rates, while income and expenses are
translated at average rates for the period. Translation gains and
losses are reported as a component of accumulated other comprehensive
income on the statement of shareholders' equity in accordance with
SFAS No. 130. "Reporting Comprehensive Income".
n. Reclassifications:
Certain prior years information has been reclassified to conform to
the current year's reporting presentation.
o. New Accounting Pronouncements:
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations", effective for fiscal years beginning after
December 15, 2001. Under SFAS 141, the pooling of interests method of
accounting is no longer allowed for business combinations. The Company
does not believe that the effect of the adoption of this statement
will have a material impact on its financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." On March 1, 2002, the company adopted this
statement, which among other things, eliminates the amortization of
goodwill and requires annual tests for determining impairment of
goodwill. The company had previously written off all of its remaining
goodwill and as such, the adoption of this statement will not have an
impact on its financial statements. Management of the Company has
determined that prior year pro forma information regarding
amortization of goodwill is not material to these financial
statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses the financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the related asset retirement costs. SFAS No. 143
requires that the fair value of a liability for an asset retirement
obligation be recorded in the period incurred and the related asset
retirement costs be capitalized. The Company is required to adopt this
statement in the first quarter of fiscal 2003 and has not yet
completed its evaluation of the effect, if any, on its consolidated
financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
the financial accounting and reporting for the impairment or disposal
of long-lived assets, including business segments accounted for as
discontinued operations. The Company is required to adopt this
statement in the first quarter of fiscal 2003 and has not yet
completed its analysis to determine the effect, if any, on its
consolidated financial position and results of operations.
Page F-10
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 2002
-----------------------------------
3. SALE OF SUBSIDIARY:
On August 23, 2001, the Company completed the sale of the assets of its
contract-manufacturing subsidiary, Nu Visions Manufacturing, Inc. ("Nu
Visions"). The selling price of $31,563,000 consisted of $2,000,000 in
a subordinated note (see below) and $29,563,000 in cash.
Operating results of Nu Visions were as follows:
2002 2001 2000
------------------ --------------- ----------------
Net sales $21,736,655 $36,620,000 $15,169,000
Income (loss) before income taxes 1,331,226 3,036,000 (325,000)
Income tax provision (benefit) 798,735 1,791,000 (205,000)
Pursuant to the sale of this subsidiary, the Company received a
$2,000,000 Junior Subordinated Note, dated August 23, 2001 and issued
by the buyer as part of the purchase price. The note has a maturity
date of May 14, 2007 and is subordinate in right of payment to all
existing and future indebtedness of the issuer. The note bears interest
from the issue date, on the principal amount, to, and including the
maturity date, at a rate of 8% per annum. Interest shall be payable on
the maturity date and shall compound quarterly as of each anniversary
of the issue date. Prepayment of the note and interest accrued is
permitted if and when certain conditions in the subordination agreement
have been met.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment which is reflected at cost, consists of
the following:
2002 2001
------------ ------------
Furniture, fixtures and equipment $ 7,755,003 $ 7,200,192
Computer equipment 5,405,976 4,709,830
Leasehold improvements 1,254,364 1,126,667
------------ ------------
14,415,343 13,036,689
Less: accumulated depreciation and amortization 8,269,867 7,018,070
------------ ------------
$ 6,145,476 $ 6,018,619
============ ============
Depreciation expense for the years ended February 28, 2002, February
28, 2001 and February 29, 2000 aggregated $1,259,248, $1,131,169,and
$1,050,635 respectively.
5. OTHER ASSETS:
Other assets consists of the following:
2002 2001
------------ ------------
Net cash surrender value - life insurance $1,218,691 $1,155,155
Other 443,081 446,307
------------ ------------
$1,661,772 $1,601,462
============ ============
Page F-11
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 2002
-----------------------------------
6. REVOLVING CREDIT LINE:
On October 18, 2000, the Company entered into a new unsecured revolving
line of credit with six banks, which currently provides for maximum
borrowings of $120,000,000 at either (i) the lead bank's prime rate or
(ii) LIBOR plus 87.5 to 147.5 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 October 18,
2004. Direct borrowings under the line of credit were $2,500,000 and
$85,000,000 at February 28, 2002 and 2001, respectively. As of the end
of the fiscal years, the Company had met all of the required covenants.
7. CAPITAL STOCK AND STOCK OPTIONS:
On September 13, 2000, the Company's Board of Directors declared a
three-for -two stock split of the Company's common stock, to be
distributed on October 23, 2000, to all holders of record at the close
of business on October 2, 2000. As a result of the stock split,
5,437,364 shares were distributed. All shares and per share data for
all periods presented have been restated to reflect this stock split.
On September 23, 1999, the Board of Directors approved a 5% stock
dividend payable on November 4, 1999 to shareholders of record on
November 19, 1999. As a result of the stock dividend, 437,638 shares
were distributed, common stock was increased by $2,888, additional paid
in capital was increased by $ 3,334,102 and retained earnings was
decreased by $3,336,990.
Stock options granted to date under the Company's 1994 Stock Option
Plan generally expire five years after date of grant and become
exercisable in four equal annual installments, respectively, commencing
one year from date of grant. Stock options granted to date under each
of the Company's 1998 and 2000 Stock Option Plans generally expire ten
years after the date of grant and become exercisable in two equal
annual installments commencing one year from date of grant. To date, no
options have been granted under the Company's 2000 Key Employee Stock
Option Plan. Stock options granted under the Company's Outside Director
Stock Option Plan and 2000 Outside Directors' 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.
Page F-12
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 2002
-----------------------------------
7. CAPITAL STOCK AND STOCK OPTIONS (Continued):
A summary of options granted and related information for the three
years ended February 28, 2002 is as follows:
-----------------------------------------------------------------------------------------------------
Weighted Average
Options Exercise Price
------- --------------
Outstanding, February 28, 1999 1,734,450 $ 8.20
Stock dividend (5%) 98,698 -
Granted 833,950 6.27
Exercised (4,388) 5.90
Cancelled (595,500) 7.69
------------
Outstanding, February 29, 2000 2,067,210 3.02
Weighted average fair value of options granted during the year $ 3.20
======
Stock split (3-for-2) 762,063 $ -
Granted 479,750 14.62
Exercised (1,045,824) 7.00
Cancelled (14,420) 4.70
------------
Outstanding February 28, 2001 2,248,779 5.88
Weighted average fair value of options granted during the year $ 8.15
======
Granted 99,000 $10.00
Exercised (103,304) 4.77
Cancelled (43,763) 8.46
------------
Outstanding February 28, 2002 2,200,712 6.07
============
Weighted average fair value of options granted during the year $ 9.99
======
Options exercisable at the end of each fiscal year:
February 29, 2000 1,328,770 $ 5.07
February 28, 2001 996,890 4.35
February 28, 2002 1,818,621 5.04
Exercise prices for options outstanding as of February 28, 2002 ranged
from $2.93 to $18.33. The weighted-average remaining contractual life
of these options is approximately 5 years. Outstanding options at
February 28, 2002 are held by approximately 70 individuals.
Page F-13
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 2002
-----------------------------------
7. CAPITAL STOCK AND STOCK OPTIONS (Continued):
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:
2002 2001 2000
------------------- ------------------- -------------------
Net earnings:
As reported $2,219,676 $35,352,085 $11,698,786
Pro forma 1,230,375 34,344,329 11,004,402
Basic earnings per share:
As reported $ .13 $ 2.18 $ 0.87
Pro forma $ .07 $ 2.12 $ 0.81
Diluted earnings per share:
As reported $ .13 $ 1.99 $ 0.67
Pro forma $ .07 $ 1.94 $ 0.63
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 the fiscal years ended 2002, 2001 and
2000, respectively: expected volatility of 38.9%, 49.8%, and 51.7%,
respectively; risk free interest rate of 4.9%, 5.5%, and 5.9%,
respectively; and expected lives of 1 to 10 years.
The effects of applying SFAS 123 in the above pro forma disclosures are
not indicative of future amounts, as they are likely to be affected by
the number of grants awarded since additional awards are generally
expected to be made at varying amounts.
8. MINORITY INTERESTS IN SUBSIDIARY:
Minority interests represents the liability related to the 30% minority
interest in NIC Components Asia PTE. LTD., the 20% minority interest in
NIC Eurotech Limited and the 10% minority interest in Nu Horizons Asia
PTE. LTD.
9. INCOME TAXES:
The provision for income taxes from continuing operations is comprised
of the following:
2002 2001 2000
---------------- ----------------- -----------------
Current:
Federal $(256,833) $17,127,570 $6,733,018
State and local (60,907) 4,194,653 1,826,424
Foreign 267,956 1,022,644 -
Deferred:
Federal (341,362) 1,390,836 69,889
State (112,596) 374,895 18,578
---------------- ----------------- -----------------
$(503,742) $24,110,598 $8,647,909
================ ================= =================
Page F-14
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 2002
-----------------------------------
9. INCOME TAXES (Continued):
The tax benefits associated with the disqualifying disposition of stock
acquired with incentive stock options reduced taxes currently payable
as shown above by $311,596 for 2002 and $5,068,745 for 2001. Such
benefits are credited to additional paid-in capital.
The components of the net deferred income tax liability, pursuant to
SFAS 109, are as follows:
2002 2001
--------------- ----------------
Deferred tax assets:
Accounts receivable $ 1,552,706 $ 2,139,409
Inventory 94,482 289,416
Goodwill 139,812 -
--------------- ----------------
Total deferred tax assets 1,787,000 2,428,825
--------------- ----------------
Deferred tax liabilities:
Fixed assets (1,248,636) (1,680,000)
Income of Interest Charge DISC (769,962) (930,321)
--------------- ----------------
Total deferred tax liabilities (2,018,598) (2,610,321)
--------------- ----------------
Net deferred tax liabilities $ (231,598) $ (181,496)
=============== ================
The following is a reconciliation of the maximum statutory federal tax
rate to the Company's effective tax rate:
2002 2001 2000
------------------- ------------------- -------------------
Statutory rate (34.0)% 34.0% 34.0%
State and local taxes (7.8) 8.6 8.9
Foreign and other 23.8 (1.4) (1.1)
----- ---- ----
Effective tax rate (18.0)% 41.2% 41.8%
===== ==== ====
10. EMPLOYEE BENEFIT PLANS:
On January 13, 1987, the Company's Board of Directors approved the
adoption of an employee stock ownership plan (ESOP). 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, 2002
aggregated $158,844 for 2002, $340,472 for 2001 and $340,456 for 2000.
At February 28, 2002 the ESOP owned 550,789 shares of the Company's
common stock at an average price of approximately $1.71 per share.
Page F-15
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 2002
-----------------------------------
10. EMPLOYEE BENEFIT PLANS (Continued):
On October 28, 1999, 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 28, 2003. 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, 2002 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, 2002
were $145,947, $117,968 and $115,401, respectively.
11. COMMITMENTS AND CONTINGENCIES:
Leases:
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 specified 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 two of the
three officers to an annual bonus equal to 3.33% and the third officer
to 2.33% (9% 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.
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 provides 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, and other
provisions. Aggregate minimum rental commitments under noncancelable
operating leases are as follows:
Fiscal 2003 $3,145,665
Fiscal 2004 2,863,775
Fiscal 2005 2,633,861
Fiscal 2006 2,173,577
Fiscal 2007 1,179,215
Thereafter 1,914,015
Rent expense was $2,956,569, $2,464,878, and $2,175,834 for each of the
three years in the period ending February 28, 2002.
Litigation:
At times the company is involved in various lawsuits incidental to its
business. At February 28, 2002, management does not believe that any
matter is material to its financial statements.
Page F-16
NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED FEBRUARY 28, 2002
-----------------------------------
12. MAJOR SUPPLIERS:
For the year ended February 28, 2002, the Company purchased inventory
from two suppliers that was in excess of 10% of the Company's total
purchases. Purchases from these suppliers were approximately
$34,906,000 and $40,457,000 for the fiscal year.
For the year ended February 28, 2001, the Company purchased inventory
from two suppliers that was in excess of 10% of the Company's total
purchases. Purchases from these suppliers were approximately
$86,997,000 and $86,317,000 for the fiscal year.
For the year ended February 29, 2000 the Company purchased inventory
from two suppliers that was in excess of 10% of the Company's total
purchases. Purchases from these suppliers were approximately
$49,816,000 and $57,230,000 for the fiscal year.
13. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION:
Since the sale of the Company's contract manufacturing subsidiary,
management believes that the Company is once again operating in a
single business segment, distribution of electronic components, in
accordance with the rules of SFAF No. 131 ("Disclosure About Segments
of an Enterprise and Related Information").
Inasmuch as the Company's business is primarily conducted in the United
States, operations are also carried out overseas through our foreign
subsidiaries in different geographic areas.
Revenues, by geographic area, for the fiscal years are as follows:
2002 2001 2000
------------------- ------------------- -------------------
Americas $248,668,150 $584,751,399 $345,831,844
Europe 16,640,422 31,227,496 14,655,234
Asia/Pacific 16,603,936 18,031,058 3,582,484
------------------- ------------------- -------------------
$281,912,508 $634,009,953 $364,069,562
------------------- ------------------- -------------------
Total assets, by geographic area, at the end of the fiscal years are as
follows:
2002 2001 2000
------------------- ------------------- -------------------
Americas $132,283,894 $223,830,846 $121,409,125
Europe 9,897,388 13,909,529 10,887,524
Asia/Pacific 9,137,179 10,090,624 4,328,617