Item 1. Business.
The registrant is a distributor mainly of electronic components produced by a large number of manufacturers. The items sold by the registrant consist principally of semiconductors, electromechanical de- vices (principally relays and electronic hardware), passive components and computer products. During the 1994, 1995 and 1996 fiscal years, the approximate percentage of registrant's gross sales volume represented by semiconductors, by electromechanical devices, by passive components and by computer products was as follows:
Electromechanical Passive Computer Semiconductors Devices Components Products -------------- ----------------- ---------- --------
1996 67% 6% 20% 7% 1995 68% 5% 19% 8% 1994 68% 7% 17% 8%
The registrant's sales are made to more than 12,000 customers, located principally in the United States, Canada and Western Europe. During 1996 no customer accounted for more than 2% of the sales volume of the registrant. During 1996 approximately 94% of registrant's gross sales volume was represented by sales to customers in the United States, and approximately 6% by export sales from the United States to customers in Western Europe and North America. The registrant has not encountered significantly greater risks in connection with its foreign sales as compared with its domestic sales.
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The registrant's business is highly competitive in all of the principal markets in which the registrant sells its products. The registrant is in competition with other similar firms, and, to some extent, with its own suppliers who sell direct to consumers, industrial customers and institutional users; and many of the registrant's competitors have greater financial resources than the registrant. The methods of competition relate principally to price of products and availability of particular items at the time ordered by customers.
In order to compete effectively and to meet delivery requirements of customers, the registrant carries significant amounts in inventory of a large number of items, principally in the categories referred to above. Collections on most of the registrant's sales have averaged approximately 53 days during the course of the 1996 fiscal year.
The registrant purchases its products from a large number of suppliers, principally under franchise arrangements which, for the most part, may be cancelled by either party upon 30 days' notice, subject to the terms and conditions of the particular agreements. These franchise arrangements are an important factor in the registrant's business, and cancellation of a franchise by a major supplier could adversely affect the registrant's business unless replaced by a comparable arrangement. During the 1996 fiscal year, products purchased from the registrant's three largest suppliers accounted for approximately 13%, 9% and 7%, respectively, of the registrant's total sales volume.
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The registrant's backlog of unfilled orders at September 30, 1996 was approximately $71,300,000 as compared to approximately $71,300,000 at September 30, 1995.
The registrant has approximately 520 employees.
The following table sets forth the approximate amount of the registrant's export sales for the 1994, 1995 and 1996 fiscal years.
1994 1995 1996 ---- ---- ----
$12,500,000 $16,300,000 $17,600,000
Under the terms of an Agreement and Plan of Merger (the "Merger Agreement") dated as of November 26, 1996, the registrant will be acquired by ME Acquisition, Inc. ("ME"), a wholly owned subsidiary of Bell Industries, Inc. ("Bell") through a tender offer to registrant's shareholders for $14.77 per share in cash (or approximately $100 million for all of the outstanding shares of the registrant) to be followed by a merger of ME into registrant as hereinafter set forth (the "Merger"). Bell (a California corporation with headquarters based in Los Angeles, California) is primarily a national distributor of electronic components; and in addition Bell distributes graphics and electronic imaging and recreational related products. According to information provided by Bell, for the four quarters ended September 30, 1996, Bell had sales of $611 million and net income of $16.1 million.
Pursuant to the Merger Agreement, ME has made a tender offer (the "Tender Offer") to purchase all outstanding shares of common stock of
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the registrant. Mr. Herbert S. Davidson (who is the beneficial owner of approximately 55.2% of the outstanding common stock of the registrant) is a party to a tender agreement pursuant to which Mr. Davidson is required to tender his shares into the Tender Offer and vote his shares in favor of the merger. In addition to customary conditions, the Tender Offer is subject to, among other things, (i) receipt of financing by Bell, and (ii) there being validly tendered and not withdrawn prior to expiration of the Tender Offer at least two-thirds of the outstanding common stock of the registrant. Early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act has been granted by regulatory authorities. The Tender Offer is scheduled to expire on January 7, 1997 unless extended pursuant to the terms of the Merger Agreement. Subsequent to consummation of the Tender Offer, ME will be merged into the registrant as provided in the Merger Agreement, with the registrant being the surviving entity. Upon consummation of the Merger, Bell will be the owner of all outstanding shares of the registrant. In addition to customary conditions, the Merger is subject, among other things, to consummation of the Tender Offer and, in the event that ME owns less than 90% of the registrant's outstanding shares, approval by registrant's shareholders.
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Item 2.
Item 2. Properties.
The registrant owns land and a building in Farmingdale, New York. This building contains approximately 80,000 square feet of space which are used for executive and sales offices and as an assembly, warehousing and shipping center. In addition, the registrant, as of December 16, 1996, leased approximately 125,000 square feet of space at various locations as set forth below:
Approximate Expiration Square Date of Location Function Footage Lease -------- -------- ------- -----
Columbia, Maryland Sales Office 2,200 August 31, 1998
Wilmington, Massachusetts Sales Office 4,900 February 28, 2000
Cleveland, Ohio Sales Office 1,900 July 31, 1998
Mount Laurel Township, New Jersey Sales Office 2,600 October 31, 1999
Parsippany, New Jersey Sales Office 1,900 July 31, 1997 (1)
Orlando, Florida Sales Office 2,700 April 30, 1997
Kansas City, Kansas Sales Office 1,400 September 30, 1999
Milford, Connecticut Sales Office 2,100 March 31, 1997
Atlanta, Georgia Sales Office 2,400 March 31, 1997
- ---------- (1) Renewable at the option of the registrant for three successive one- year periods.
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Approximate Expiration Square Date of Location Function Footage Lease -------- -------- ------- -----
Pittsford, New York Sales Office 2,200 June 30, 1999
Palatine, Illinois Sales Office 2,800 November 30, 1999
Austin, Texas Sales Office 1,700 March 31, 1997
Dallas, Texas Sales Office 2,200 October 31, 1997
Salt Lake City, Utah Sales Office 3,000 February 28, 2001 (2)
Toronto, Canada Sales Office 2,800 November 30, 1999
Montreal, Canada Sales Office 1,100 August 31, 1998
Canovanas, Assembly, Warehousing Puerto Rico and Shipping Center 11,400 June 30, 1998
Thousand Oaks, California Sales Office 2,900 April 30, 1997 (3)
Irvine, California Sales Office 3,000 September 19, 1997
San Jose, Marketing and California Administrative Office 1,900 December 23, 1996
San Jose, California Sales Office 3,900 February 29, 2000
Houston, Texas Sales Office 2,600 January 31, 2001
Raleigh, North Carolina Sales Office 1,100 Month to Month
- ---------- (2) Renewable at the option of the registrant for a term of five years.
(3) Renewable at the option of the registrant for a term of two years.
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Approximate Expiration Square Date of Location Function Footage Lease -------- -------- ------- -----
San Diego, California Sales Office 4,000 September 30, 1999
Westminster, Colorado Sales Office 2,100 October 14, 2000 (4)
Huntsville, Alabama Sales Office 3,000 October 31, 1998 (1)
Indianapolis, Indiana Sales Office 1,700 February 28, 1998 (5)
Beaverton, Oregon Sales Office 2,300 December 31, 1999
Edgewood, Assembly and New York Administrative Office 4,300 March 31, 2001
Las Vegas, Nevada Warehouse 38,400 March 31, 2001
Vancouver, British Columbia Sales Office 1,800 January 5, 2001 (6)
Phoenix, Arizona Sales Office 2,600 June 30, 1999 (4)
- ---------- (1) Renewable at the option of the registrant for three successive one- year periods.
(4) Renewable at the option of the registrant for a term of three years.
(5) Renewable at the option of the registrant for two successive three- year terms.
(6) Renewable at the option of the registrant for two successive two- year terms.
Item 3.
Item 3. Legal Proceedings.
There is no information required to be reported under this Item.
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Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
(i) Annual Meeting
(a) The registrant's annual meeting was held on July 17, 1996.
(b) The following persons (being all of the directors of the registrant) were elected as directors at the annual meeting: Herbert S. Davidson, Robert Davidoff, Richard Hyman, Herschel M. Weinberg and Leonard Gardner.
(c) The only matter voted upon at the registrant's annual meeting was the election of directors. The following shares were voted in favor of the election of each of the following directors: Herbert S. Davidson - 6,201,955, Robert Davidoff and Leonard Gardner - 6,202,355, Richard Hyman - 6,200,355 and Herschel M. Weinberg - 6,199,555. Of the 6,215,055 shares present in person or represented by proxy at the meeting, the votes of 13,100 shares were withheld or not voted in respect of the election of Herbert S. Davidson, the votes of 12,700 shares were withheld or not voted in respect of the election of Robert Davidoff and Leonard Gardner, the votes of 14,700 shares were withheld or not voted in respect of the election of Richard Hyman and the votes of 15,500 shares were withheld or not voted in respect of the election of Herschel M. Weinberg. A total of 558,121 of the registrant's outstanding shares were not present in person or represented by proxy at the meeting.
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PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) The registrant's common stock is traded in the Nasdaq market. The following table sets forth the range of high and low sales prices for such stock for each quarterly period during the 1995 and 1996 fiscal years. Prices in the table below have been adjusted to reflect the 2 for 1 stock split effected in the form of a 100% stock dividend effective October 19, 1995.
1995 1996 ---- ---- Low High Low High --- ---- --- ---- 1st Quarter 6.00 7.50 9.75 15.50 2nd Quarter 6.00 8.25 8.63 11.88 3rd Quarter 6.13 14.50 9.00 13.50 4th Quarter 11.13 17.25 9.75 12.75
(b) As of June 10, 1996, this being the record date in connection with the registrant's annual meeting of shareholders held on July 17, 1996, there were approximately 166 record holders. Taking into account participants in security position listings of the registrant's common stock and requests by brokerage houses and other nominees for proxy material to be forwarded to their principals (and expense reimbursement in connection with such forwarding), the registrant estimates that on said record date there were approximately 1,405 beneficial holders of its common stock.
(c) The registrant has not declared any dividends during the last two years.
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The registrant is a .party to a Credit Agreement (the "Credit Agreement") with Fleet Bank, N.A., First Union National Bank and European American Bank (the "Banks"). Under the provisions of the Credit Agreement, the registrant is not permitted to declare or pay dividends, or make other distributions upon the registrant's stock (with certain exceptions, including stock dividends, set forth in the Credit Agreement) so long as the Credit Agreement remains in effect or any amount is owing to the Banks under the Credit Agreement or in connection with the Transactions thereunder.
Item 6.
Item 6. Selected Financial Data.
(In Thousands Except Per Share Data)
*Number of shares outstanding and income per share were restated to reflect a 2 for 1 split effected in the form of a 100% stock dividend effective October 19, 1995 and a 2 for 1 split effected in the form of a 100% stock dividend effective September 23, 1994 and a 2 for 1 split effected in the form of a 100% stock dividend effective June 14, 1993.
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Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Liquidity and Capital Resources
The registrant relies upon cash flow provided from opera-tions and bank financing to provide the cash flow necessary for its busi-ness operations. On August 29, 1996, the registrant entered into an unsecured revolving credit agreement with three banks which provides for maximum outstanding borrowings of $70,000,000 and extends the maturity date through August 29, 2001. This agreement replaced the existing unsecured revolving credit agreement, as amended, for maximum borrowings of $50,000,000 which was due December 31, 1998. Maximum borrowings under the new agreement are based upon the sum of eligible inventory (the lesser of 50% of inventory or $30,000,000) and 90% of eligible accounts receivable.
The registrant does not currently have or anticipate having material commitments for capital expenditures. Working capital at September 30, 1996 amounted to $79,200,000 versus $65,700,000 at September 30, 1995. At September 30, 1996, liabilities to net worth ratio (leverage) was 1.19 times the registrant's tangible net worth at September 30, 1996, compared to 1.52 times at September 30, 1995. The decline in the leverage ratio is principally due to the registrant's net income of $8,600,000 and the reduction in liabilities of $2,200,000.
The registrant believes that its cash flow requirements for fiscal 1997 will be met by its operating results and the use of its bank credit facility.
Results of Operations
Net sales amounted to $275,399,000 for the fiscal year ended September 30, 1996 compared to $239,519,000 for the preceding year, an
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increase of $35,880,000. This increase in sales volume of 15% resulted primarily from improvement in customer demand across many of the registrant's product lines, higher sales from the registrant's newer locations and increased sales productivity on the part of the registrant's employees. Sales for fiscal 1995 increased by $57,675,000 to $239,519,000, an increase of 32%. The increase in sales volume resulted from solid improvements in customer demand for the registrant's products and increased sales from the registrant's newer locations. Gross profit was $60,611,000 (22.0% of sales) for fiscal 1996, $56,062,000 (23.4% of sales) for fiscal 1995 and $41,765,000 (23.0% of sales) for fiscal 1994. The gross profit rate decrease of 1.4% for fiscal 1996 was due to economic conditions experienced in the industry, reflected in a sharp decline in selling prices and gross margins of memory products.
Selling, general and administrative expenses amounted to $43,986,000 (16.0% of sales) for fiscal 1996, $39,292,000 (16.4% of sales) for fiscal 1995 and $31,000,000 (17.0% of sales) for fiscal 1994. The continuing decline in selling, general and administrative expenses as a percentage of sales is attributable to continuing productivity gains by the registrant's employees.
Interest expense amounted $2,587,000 (0.9% of sales for fiscal 1996, $1,816,000 (0.8% of sales) for fiscal 1995 and $1,111,000 (0.6% of sales) for fiscal 1994. The increases in interest expense are primarily due to increased borrowing resulting from increased average levels of inventory and accounts receivable.
Income taxes amounted to $5,425,000 (38.6% of pre-tax income) for fiscal 1996, $5,638,000 (37.7% of pre-tax income) for fiscal 1995 and
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$3,460,000 (35.8% of pre-tax income) for fiscal 1994. These tax rates differ from the statutory federal income tax rate of 34% because of the impact of operating profits of a subsidiary in a United States territory which are taxed at a tax rate which is lower than the statutory federal income tax rate, and the effect of state and local income and franchise taxes.
Net income for the year ended September 30, 1996 amounted to $8,613,000 compared to $9,316,000 for fiscal 1995 and $6,193,000 for fiscal 1994, as a result of the above factors.
Item 8.
Item 8. Financial Statements and Supplementary Data.
There are hereby incorporated by reference the Financial Statements and accompanying Notes together with the report of Grant Thornton LLP, Independent Certified Public Accountants, appearing elsewhere in this Annual Report on Form 10-K.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There is no information required to be reported under this Item.
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PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 10 with respect to directors and executive officers appears in the Information Statement pursuant to Section 14(f) of the Securities Exchange Act of 1934 (the "Exchange Act") filed as Schedule A to Schedule 14D-9 of the registrant dated December 4, 1996 under the heading in said Information Statement "Present Directors and Executive Officers" and is hereby incorporated by reference. A copy of said Information Statement is filed as Exhibit 99 to this 10-K Report.
Item 11.
Item 11. Executive Compensation.
The information required by Item 11 with respect to executive compensation appears in the Information Statement pursuant to Section 14(f) of the Exchange Act filed as Schedule A to Schedule 14D-9 of the registrant dated December 4, 1996 under the heading in said Information Statement "Executive Compensation" and is hereby incorporated by reference. A copy of said Information Statement is filed as Exhibit 99 to this 10-K Report.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 with respect to security ownership of certain beneficial owners and management appears in the Information Statement pursuant to Section 14(f) of the Exchange Act filed as Schedule A to Schedule 14D-9 of the registrant dated December 4, 1996 under the heading in said Information Statement "Security Ownership of Management and Principal Stockholder" and is hereby incorporated by reference. A copy of said Information Statement is filed as Exhibit 99 to this 10-K Report.
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Item 13.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 with respect to certain relationships and related transactions appears in the Information Statement pursuant to Section 14(f) of the Exchange Act filed as Schedule A to Schedule 14D-9 of the registrant dated December 4, 1996 under the heading in said Information Statement "Present Directors and Executive Officers" and is hereby incorporated by reference. A copy of said Information Statement is filed as Exhibit 99 to this 10-K Report.
SUPERCOPY FINANCIAL STATEMENTS AND NOTES FROM AUDITORS' REPORT FOR FINAL
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Report on Form 8-K.
(a) 1. Financial Statements
Included in Part II of this report:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets at September 30, 1996 and 1995
Consolidated Statements of Income for the years ended September 30, 1996, 1995 and 1994
Consolidated Statement of Changes in Stockholders' Equity for the years ended September 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended September 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules
Included in Part IV of this report:
Report of Independent Certified Public Accountants on Financial Statement Schedule
For the years ended September 30, 1996, 1995 and 1994:
Schedule II - Valuation and Qualifying Accounts
Other Schedules are omitted because of absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.
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(a) 3. Exhibits. The Exhibit Index, which follows the signature page and Financial Statement Schedules of this Annual Report on Form 10-K, is incorporated herein by reference.
(b) No reports on Form 8-K were filed by registrant during the last quarter of its 1996 fiscal year.
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Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders Milgray Electronics, Inc.
We have audited the accompanying consolidated balance sheets of Milgray Electronics, Inc. and Subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended September 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Milgray Electronics, Inc. and Subsidiaries as of September 30, 1996 and 1995, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Melville, New York October 24, 1996
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Milgray Electronics, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30,
ASSETS 1996 1995 -------- -------
CURRENT ASSETS Cash and cash equivalents $ 1,787 $ 1,909 Accounts receivable, net of allowance for doubtful accounts of $1,277 in 1996 and $1,066 in 1995 37,510 39,105 Inventories 55,419 48,525 Prepaid expenses and sundry receivables 713 459 Income taxes refundable 634 Deferred income taxes 593 618 -------- -------
Total current assets 96,656 90,616
PROPERTY, PLANT AND EQUIPMENT - AT COST, NET 3,783 3,347
OTHER ASSETS Security deposits and sundry 302 383 -------- -------
$100,741 $94,346 ======== =======
The accompanying notes are an integral part of these statements.
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Milgray Electronics, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (continued)
September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 -------- -------
CURRENT LIABILITIES Accounts payable $ 13,953 $19,280 Accrued expenses and sundry liabilities Accrued payroll 1,729 1,841 Other 1,504 2,697 Income taxes payable 265 1,088 Current maturities of long-term debt 36 50 -------- -------
Total current liabilities 17,487 24,956
LONG-TERM DEBT 36,887 31,633
DEFERRED INCOME TAXES 327 330
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY Common stock, par value $.25 per share; authorized, 60,000,000 shares; issued, 6,816,902 shares 1,704 1,704 Retained earnings 44,406 35,793 -------- -------
46,110 37,497
Less treasury stock - at cost (43,726 shares) 70 70 -------- -------
46,040 37,427 -------- -------
$100,741 $94,346 ======== =======
The accompanying notes are an integral part of these statements.
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Milgray Electronics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Year ended September 30, (in thousands, except per share data)
1996 1995 1994 ---------- ---------- ----------
Net sales $ 275,399 $ 239,519 $ 181,844 ---------- ---------- ----------
Costs and expenses Cost of sales 214,788 183,457 140,079 Selling, general and administrative 43,986 39,292 31,001 Interest 2,587 1,816 1,111 ---------- ---------- ----------
261,361 224,565 172,191 ---------- ---------- ----------
Income before income taxes 14,038 14,954 9,653
Income tax provision 5,425 5,638 3,460 ---------- ---------- ----------
NET INCOME $ 8,613 $ 9,316 $ 6,193 ========== ========== ==========
Net income per share $ 1.27 $ 1.38 $ .93 ========== ========== ==========
Common shares and equivalents outstanding 6,773,176 6,752,056 6,695,170 ========== ========== ==========
The accompanying notes are an integral part of these statements.
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Milgray Electronics, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended September 30, 1996, 1995 and 1994 (dollars in thousands)
The accompanying notes are an integral part of this statement.
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Milgray Electronics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30, (in thousands)
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Milgray Electronics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year ended September 30, (in thousands)
The accompanying notes are an integral part of these statements.
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Milgray Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE A - GENERAL AND SUMMARY OF ACCOUNTING POLICIES
Milgray Electronics, Inc. and Subsidiaries (the "Company") distributes electronic components produced by a large number of manufacturers. The Company's sales are made to customers mainly in the electronic, defense and computer industries located principally in the United States, Canada and Western Europe.
A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows:
1. Principles of Consolidation
The consolidated financial statements include the accounts of Milgray Electronics, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
2. Revenue Recognition
The Company recognizes revenue as products are shipped.
3. Inventories
Inventories, consisting primarily of merchandise purchased for resale, have been valued at the lower of cost or market, on the moving average cost method.
4. Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation of furniture, fixtures, equipment and computer equipment is computed for financial reporting and tax purposes on the straight-line and accelerated basis over the estimated useful lives of the assets which are 5 to 10 years for furniture, fixtures and equipment and 5 to 7 years for computer equipment. The building and improvements are being depreciated on a straight-line basis over 40 years for financial reporting purposes and 15 to 32 years for tax purposes. Leasehold improvements are amortized over the lesser of the useful life of the asset or the term of the lease without regard to renewal options.
5. Income Taxes
Deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities and loss carryforwards and tax credit carryforwards for which income tax benefits are expected to be realized in future years. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that all or some portion of such deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
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Milgray Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1996, 1995 and 1994
NOTE A (continued)
6. Net Income Per Share
The computation of net income per share of common stock is based upon the weighted average number of common shares outstanding during the period plus (in periods in which they have a dilutive effect) common stock equivalents representing shares issuable upon the assumed exercise of stock options. In 1996, no stock options were outstanding (see Note G) and in 1995 and 1994, stock options were not considered in the computation of net income per sharse since their inclusion would not be materially dilutive.
7. Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is limited due to the large number of customers comprising the Company's customer base, and their dispersion across many geographical regions. At September 30, 1996, 1995 and 1994, the Company had no significant concentration of credit risk.
8. Cash and Cash Equivalents
The Company includes checks which have not been paid by its disbursing banks as cash in bank and as accounts payable. The amount of checks that have not been paid by the Company's disbursing banks was approximately $3,169,000 and $2,207,000 as of September 30, 1996 and 1995, respectively.
Cash equivalents include all highly liquid instruments purchased with an original maturity of three months or less.
9. Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at year-end and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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Milgray Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1996, 1995 and 1994
NOTE A (continued)
10. Reclassifications
Certain amounts in the 1995 consolidated financial statements were reclassified to conform to the 1996 presentation.
NOTE B - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
September 30, --------------------- 1996 1995 ------ ------ ---(in thousands)----
Land $ 206 $ 206 Building and improvements 2,049 2,040 Furniture, fixtures and equipment 2,223 1,684 Computer equipment 1,940 1,632 Leasehold improvements 90 31 ------ ------
6,508 5,593 Less accumulated depreciation and amortization 2,725 2,246 ------ ------
$3,783 $3,347 ====== ======
NOTE C - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Fair Value of Financial Instruments," requires disclosure of the estimated fair value of an entity's financial instrument assets and liabilities. The Company's principal financial instrument consists of its revolving credit agreement with banks. The Company believes that the carrying amount of such debt approximates the fair value as the variable interest rates approximate the current prevailing interest rate.
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Milgray Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1996, 1995 and 1994
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following:
September 30, --------------------- 1996 1995 ------- ------- ---(in thousands)----
Bank loan (a) $36,850 $31,625 Equipment loans, collateralized and due through November 1998 73 58 ------- -------
36,923 31,683
Less current maturities 36 50 ------- -------
$36,887 $31,633 ======= =======
(a) On August 29, 1996, the Company entered into a new unsecured revolving credit agreement with three banks which provides for maximum outstanding borrowings of $70,000,000 and extends the maturity date through August 29, 2001. This agreement replaced the then existing unsecured revolving credit agreement, as amended, for maximum borrowings of $50,000,000 which was due December 31, 1998. Maximum borrowings under the new agreement are based upon the sum of eligible inventory (the lesser of 50% of inventory or $30,000,000) and 90% of eligible accounts receivable. The credit agreement provides for a commitment fee of .1875% per annum on the daily unused portion of the facility, payable quarterly. The credit agreement contains various restrictions and conditions; the most restrictive of these requires that the Company maintain certain liabilities to net worth, inventory, interest, and current ratios and tangible net worth. The agreement also restricts the payment of dividends. The rate of interest payable under the new agreement is, at the Company's option, a function of the prime rate, Eurodollar rate and the Banker's Acceptance Rates, as defined.
Long-term debt matures as follows (in thousands):
1997 $ 36 1998 30 1999 7 2000 -- 2001 36,850 ------
$36,923 =======
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Milgray Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1996, 1995 and 1994
NOTE E - INCOME TAXES
The income tax provision (benefit) consists of the following:
September 30, -------------------------------------- 1996 1995 1994 ------ ------- ------ -----------(in thousands)------------- Current Federal $4,270 $ 4,678 $2,815 State and local 899 908 556 Foreign 93 126 15 U.S. Territory 141 225 28 ------ ------- ------
5,403 5,937 3,414
Deferred 22 (299) 46 ------ ------- ------
$5,425 $ 5,638 $3,460 ====== ======= ======
A reconciliation of income taxes computed at the Federal statutory rate and the effective income tax rate is as follows:
September 30, -------------------------- 1996 1995 1994 ---- ---- ----
Income taxes at statutory rate 35.0% 35.0% 34.0% State and local income taxes (net of Federal income tax benefit) 4.2 4.0 3.8 Exemption from United States territory income taxes (0.5) (0.7) (2.1) Other (0.1) (0.6) 0.1 ---- ---- ----
Effective income tax rate 38.6% 37.7% 35.8% ==== ==== ====
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Milgray Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1996, 1995 and 1994
NOTE E (continued)
Foreign withholding taxes of 5% have been provided on undistributed earnings of a U.S. territory subsidiary of approximately $1,362,000, $1,377,000, and $1,521,000 for the years ended September 30, 1996, 1995 and 1994, respectively. These earnings are considered to be permanently reinvested. If the earnings were not considered permanently reinvested, approximately $67,000, $68,000 and $76,000 of deferred income taxes would have been provided for in the years ended September 30, 1996, 1995 and 1994, respectively.
The components of the Company's deferred tax assets and liabilities are summarized below:
September 30, ----------------- 1996 1995 ---- ---- -(in thousands)--
Deferred tax assets Allowance for doubtful accounts $434 $362 Bonus accrued 85 85 401(k) contribution accrued 105 235 Other 34 34 ---- ----
Gross deferred tax assets 658 716 ---- ----
Deferred tax liabilities Depreciation 361 364 Other receivable 43 Other 31 21 ---- ----
Gross deferred tax liabilities 392 428 ---- ----
Net deferred tax assets $266 $288 ==== ====
The above amounts are presented in the consolidated balance sheets as of September 30, 1996 and 1995 as $593,000 and $618,000, respectively, of current deferred tax assets and $327,000 and $330,000, respectively, of noncurrent deferred tax liabilities.
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Milgray Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1996, 1995 and 1994
NOTE F - COMMON STOCK
On July 19, 1995, the Company's Board of Directors authorized a two-for-one stock split in the form of a 100% stock dividend payable on October 19, 1995 to stockholders of record on September 28, 1995. On August 9, 1994, the Company's Board of Directors authorized a two-for-one stock split in the form of a 100% stock dividend payable on September 23, 1994 to stockholders of record on August 30, 1994. The par value of the new shares issued totalled $847,000 and $419,000 for the 1995 and 1994 stock splits, respectively. In 1995, the par value was transferred to the common stock account from capital in excess of par value in an amount equal to the balance existing at the time of the stock split of $835,000, and from retained earnings for the remaining par value of $12,000. In 1994, the entire par value was transferred to the common stock account from capital in excess of par value. All references in the financial statements to average number of shares outstanding, per share amounts and stock option plan data for prior periods presented have been restated to reflect the stock splits.
On September 20, 1995, the Company's stockholders approved the increase of the authorized number of shares of the Company's common stock from 4,000,000 to 60,000,000 shares.
NOTE G - COMMITMENTS AND CONTINGENCIES
1. At September 30, 1996, the Company was obligated under operating leases for real property for varying periods expiring through the year 2001. The approximate future minimum annual rental payments under operating leases are approximately as follows:
(in thousands) 1997 $ 984 1998 793 1999 699 2000 426 2001 160 ------
$ 3,062 =======
In addition, certain of the lease arrangements require the Company to pay increases in certain expenses such as real estate taxes and other operating expenses.
Total rental expense for real property charged to operations for the year ended September 30, 1996, 1995 and 1994, was approximately $1,060,000, $861,000, and $692,000, respectively.
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Milgray Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1996, 1995 and 1994
NOTE G (continued)
2. The Company had a qualified incentive stock option plan for key employees. This plan provided for the grant of options to purchase up to 600,000 shares of the Company's common stock upon terms and conditions (including price, exercise date and number of shares) determined by the Board of Directors. The option price was not less than the fair market value of the stock on the date that the option was granted. The plan expired on October 17, 1993. No options were outstanding as of September 30, 1995.
A summary of the option transactions for the years ended September 30, 1995 and 1994 is as follows:
September 30, 1995 1994 ------- -------- Options outstanding at beginning of period 64,000 172,000 Exercised (64,000) (108,000) ------- --------
Options outstanding at end of period (all exercisable) -- 64,000 ======= ========
Exercise price of outstanding options $1.235 to $2.19
Exercise price of options exercised $1.235 to $1.235 to during the period $2.19 $2.19
3. During 1984, the Company established a noncontributory profit-sharing plan for all eligible domestic employees. No contribution was made during the years ended September 30, 1996, 1995 and 1994. Contributions to the plan were at the discretion of the Board of Directors. On January 4, 1995, the Company merged the plan with the Milgray Electronics, Inc. Profit Sharing and 401(k) Savings Plan.
4. During 1989, the Company established a 401(k) plan for all eligible domestic employees. The Company may contribute to the plan from its current or accumulated net profits as determined by the Board of Directors. On January 4, 1995, the Company merged the plan with the Milgray Electronics, Inc. Profit Sharing and 401(k) Savings Plan. The Company made contributions of approximately $360,000, $350,000 and $180,000 during the years ended September 30, 1996, 1995 and 1994, respectively.
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Milgray Electronics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1996, 1995 and 1994
NOTE H - SUBSEQUENT EVENT (UNAUDITED)
On November 27, 1996, the Company and Bell Industries, Inc. ("Bell") announced that they have signed a merger agreement for Bell to acquire the Company for $14.77 per share in cash, or approximately $100 million. Bell, based in Los Angeles, California, distributes products for the electronic, computer, graphic and other industrial markets in the United States. Bell's common stock (ticker symbol Bl) is listed on the New York and Pacific Stock Exchanges. Bell reported sales of $611 million and net income of $16.1 million, or $2.13 per share, for the four quarters ended September 30, 1996.
The merger agreement is subject to customary closing conditions, including the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and the receipt of financing by Bell. Bell has initiated a cash tender offer for the Company's shares and those of the Company's majority shareholder. The tender will be subject to customary conditions, including the tender of at least 66-2/3 percent of the Company's outstanding shares. The tender offer will be followed by a second-step cash merger at the same price. Bell expects to complete the acquisition in early 1997.
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S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MILGRAY ELECTRONICS, INC. ---------------------------------------- (Registrant)
Date: December 23, 1996 By /s/ H.S. Davidson ------------------------- ------------------------------------- Herbert S. Davidson, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: December 23, 1996 By /s/ H.S. Davidson ------------------------- ------------------------------------- Herbert S. Davidson, President and Director (Principal Executive Officer)
Date: December 23, 1996 By /s/ John Tortorici ------------------------- ------------------------------------- John Tortorici, Vice President-Finance (Principal Financial Officer)
Date: December 23, 1996 By /s/ Elio Carlino ------------------------- ------------------------------------- Elio Carlino, Controller (Principal Accounting Officer)
Date: December 23, 1996 By /s/ Richard Hyman ------------------------- ------------------------------------- Richard Hyman, Executive Vice President, Vice President-Sales/Marketing and Director
Date: December 23, 1996 By /s/ Herschel M. Weinberg ------------------------- ------------------------------------- Herschel M. Weinberg, Secretary and Director
Date: December 23, 1996 By /s/ Robert Davidoff ------------------------- ------------------------------------- Robert Davidoff, Director
Date: December 23, 1996 By /s/ Leonard Gardner ------------------------- ------------------------------------- Leonard Gardner, Director
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Item 14. Exhibits and Financial Statement Schedules
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
Board of Directors and Stockholders Milgray Electronics, Inc.
In connection with our audits of the consolidated financial statements of Milgray Electronics, Inc. and Subsidiaries referred to in our report dated October 24, 1996, we have also audited Schedule II for each of the three years in the period ended September 30, 1996. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Melville, New York October 24, 1996
S-1
Milgray Electronics, Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended September 30, 1996, 1995 and 1994
(a) Accounts written off, net of recoveries.
S-2
EXHIBIT INDEX
3(i)(a) - Restated Certificate of Incorporation of the registrant, incorporated by reference to Exhibit 3(a) of Form 10-K of the registrant for the fiscal year ended December 31, 1980 (File No. 2-18979).
3(i)(b) - Certificate of Change of registrant dated December 20, 1983, incorporated by reference to Exhibit 3(i)(b) of Form 10-K of the registrant for the fiscal year ended December 31, 1983 (File No. 0-10611).
3(i)(c) - Certificate of Amendment of Certificate of Incorporation of the registrant relating to increase of authorized capital stock to $1,000,000 and number of authorized shares to 4,000,000 shares, incorporated by reference to Exhibit 3(i)(c) of Form 10-K of the registrant for the fiscal year ended December 31, 1984 (File No. 0-10611).
3(i)(d) - Certificate of Amendment of Certificate of Incorporation of the registrant relating to limiting the liability of directors, incorporated by reference to Exhibit 3(i)(d) of Form 10-K of the registrant for the fiscal year ended December 31, 1987 (File No. 0-10611).
3(i)(e) - Certificate of Amendment of Certificate of Incorporation of the registrant relating to increase of authorized capital stock to $15,000,000 and number of authorized shares to 60,000,000 shares, incorporated by reference to Exhibit 3(i)(e) of Form 10-K of the registrant for the fiscal year ended September 30, 1995 (File No. 0-10611).
3(i)(f) - Composite Certificate of Incorporation, as Amended, of the registrant, incorporated by reference to Exhibit 3(i)(f) of Form 10-K of the registrant for the fiscal year ended September 30, 1995 (File No. 0-10611).
3(ii) - By-laws of the registrant (incorporating amendment of Article IX, Section 1 of the By-laws regarding indemnification).
4(i) - Credit Agreement dated as of August 29, 1996 (the "Credit Agreement") among registrant, the Guarantors named therein, Fleet Bank, N.A., First Union National Bank and European American Bank.
10(i) - Agreement and Plan of Merger among Bell Industries, Inc., ME Acquisition, Inc. and registrant, dated as of November 26, 1996, incorporated by reference to Exhibit (c)(1) to Schedule 14D-9 of registrant dated December 4, 1996 (File No. 005-33857).
18 - Letter dated February 4, 1988 from Grant Thornton LLP to registrant relating to newly adopted accounting principle, incorporated by reference to Exhibit 18 of Form 10-K of the registrant for the fiscal year ended December 31, 1987 (File No. 0-10611).
22 - Subsidiaries of the registrant.
23(ii) - Consent by Grant Thornton LLP to incorporation by reference of their reports and accompanying consolidated financial statements and schedules included in this 10-K Report, in registrant's registration statements on Forms S-8 -- File No. 33-59986 and File No. 33-66652.
27 - Financial Data Schedule.
99 - Information Statement of registrant pursuant to Section 14(f) of the Securities Exchange Act of 1934 and Rule 14f-1 thereof (Schedule A to Schedule 14D-9 of registrant dated December 4, 1996 filed herewith).