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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-23426
REPTRON ELECTRONICS, INC.
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(Exact name of registrant as specified in its charter)
Florida 38-2081116
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(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
14401 McCormick Drive, Tampa, Florida 33626
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 854-2351
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.01 par value None
6 3/4 Convertible Subordinated Notes, due 2004 None
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 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of shares of the registrant's common stock held by
non-affiliates of the registrant as of March 25, 2002 was approximately
$20,920,059.
The number of shares of the registrant's common stock issued and outstanding as
of March 25, 2002 was 6,417,196.
Documents Incorporated by Reference:
Parts of Reptron's definitive proxy statement for the Annual Meeting of
Reptron's Shareholders to be held on June 24, 2002 are incorporated by reference
into Part III of this Form.
REPTRON ELECTRONICS, INC.
FORM 10-K
Fiscal Year ended December 31, 2001
Item Number in PART I Page
Form 10-K ----
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1. Business.............................................................................. 3
2. Properties............................................................................ 14
3. Legal Proceedings..................................................................... 14
4. Submission of Matters to a Vote of Security Holders................................... 14
PART II
5. Market for the Registrant's Common Stock and
Related Stockholder Matters........................................................... 15
6. Selected Financial Data............................................................... 16
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................... 17
7a. Quantitative and Qualitative Disclosures about Market Risk............................ 22
8. Financial Statements and Supplementary Data........................................... 22
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................................................ 22
PART III
10. Directors and Executive Officers of the Registrant.................................... 23
11. Executive Compensation................................................................ 23
12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters........................................ 23
13. Certain Relationships and Related Transactions........................................ 23
PART IV
14. Exhibits, Financial Statements, Schedules
and Reports on Form 8-K............................................................... 24
2
PART I
References to "Reptron", "the Company", "we", "us" and "our" refer to
Reptron Electronics, Inc., and its subsidiaries, unless the context otherwise
requires. This document contains certain forward-looking statements that involve
a number of risks and uncertainties. Such forward-looking statements are within
the meaning of that term in Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended.
Factors that could cause actual results to differ materially include the
following: business conditions and growth in Reptron's industry and in the
general economy; competitive factors; risks due to shifts in market demand; the
ability of Reptron to complete acquisitions; and the risk factors listed from
time to time in Reptron's reports filed with the Securities and Exchange
Commission as well as assumptions regarding the foregoing. The words "believe",
"plans", "estimate", "expect", "intend", "anticipate", and similar expressions
and variations thereof identify certain of such forward-looking statements,
which speak only as of the dates on which they were made. Reptron undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, or otherwise. Readers are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those indicated in the forward-looking statements as a
result of various factors. Readers are cautioned not to place undue reliance on
these forward-looking statements.
Item 1. Business
General
We are a leading electronics manufacturing supply chain services company
providing demand creation distribution of electronic components, custom
logistics and supply chain management services, engineering services, display
integration services and electronic manufacturing services through its two
business segments, Electronic Component Distribution ("ECD") and Electronic
Manufacturing Services ("EMS"). The ECD segment is comprised of Reptron
Distribution and Reptron Computer Products. The EMS segment is comprised of
Reptron Manufacturing Services and Reptron Display and Systems Integration.
These business units, although operated independently, are complementary,
enabling Reptron to provide customers with a wide range of products and
value-added services, as well as a single source for product, material
logistics, engineering, assembly and test requirements. Reptron believes that
its approach of total customer solutions serving the supply chain needs of its
customers distinguishes it in the electronics industry, provides a high level of
value to its customer base and enables it to maintain long term relationships
with an increasing number of its customers.
Reptron was incorporated under the laws of Michigan in 1973 and
reincorporated under the laws of Florida in 1993. Reptron's principal executive
offices are located at 14401 McCormick Drive, Tampa, Florida 33626, and its
telephone number is (813) 854-2351.
The Electronic Component Distribution and Electronic Manufacturing Services
Industry
Electronic Component Distribution. Most manufacturers of electronic
components rely on independent distributors, such as Reptron, to extend their
marketing operations. As a stocking, marketing and financial intermediary, a
distributor relieves the manufacturer of part of the costs associated with the
stocking and selling of its products, including otherwise potentially sizeable
investments in inventories, accounts receivable and personnel. At the same time,
the distributor offers to a broad range of customers the convenience of diverse
inventory, flexible deliveries and a wide range of value-added services to help
manage material procurement requirements. Manufacturers have historically viewed
their distributors as essential extensions of their marketing organizations and
by customers who recognize the value that distributors add to the total material
procurement process.
In recent years, two important trends have developed in the U.S. electronic
component distribution industry. First, manufacturers of electronic components
are reducing the number of distributors who are authorized to sell their
products. Consequently, the reduced number of authorized distributors must be
able to service the market historically addressed by the previous and larger
pool of distributors. This trend is the result of the need for original
electronic component manufacturers to reduce their operating costs. Engaging a
smaller number of distributors allows the manufacturer to reduce support staff.
3
A second trend in the industry is the increasing percentage of distribution
sales associated with value-added services. This trend is the result of original
equipment manufacturers' ("OEMs") need to reduce their operating costs. By
interacting with distributors through the use of in-plant stores, automated
inventory replenishment systems utilizing traditional electronic data
interchange ("EDI") or the emerging e-commerce technology and outsourcing of
product assembly, among other actions, OEMs may reduce their total material
acquisition cost. The distributor assumes a larger role in the management of the
supply chain in these types of engagements.
Electronics Manufacturing Services. The EMS industry has experienced rapid
changes over the past several years as an increasing number of OEMs have chosen
to outsource printed circuit board assemblies and display product integration
and assembly to electronics manufacturing specialists such as Reptron
Manufacturing Services and Reptron Display and System Integration. Factors
driving OEMs to favor outsourcing to electronics manufacturing specialists
include:
. Reduced Time to Market. Because of the intense competitive pressures
and rapidly progressing technology in the electronics industry, OEMs
are faced with increasingly short product life-cycles and therefore
have a growing need to reduce the time required to bring a product to
market. OEMs can reduce their time to market by using an electronics
manufacturer's established manufacturing expertise and infrastructure.
. Minimized Capital Investment. As electronic products have become more
technologically advanced, the manufacturing process has become
increasingly automated and highly intricate, and manufacturers have
had to invest in new capital equipment at an accelerated rate. By
outsourcing to electronics manufacturing specialists, OEMs are able to
lower their investment in inventory, facilities and equipment, thereby
enabling them to allocate capital to other activities such as sales
and marketing and research and development.
. Focused Resources. Because the electronics industry is experiencing
greater levels of competition and more rapid technological change,
many OEMs increasingly seek to focus their resources on activities and
technologies that add greater value. By offering turnkey manufacturing
services and comprehensive electronic assembly, electronics
manufacturing specialists permit OEMs to focus on their core business
activities, such as product development, marketing and distribution.
. Access to Leading Edge Manufacturing Technology. Electronic products
and electronics manufacturing technology have become increasingly
sophisticated and complex. OEMs desire to work with electronics
manufacturing specialists in order to gain access to their
technological expertise in process development and control.
. Improved Inventory Management and Purchasing Power. Electronics
industry OEMs are faced with increasing difficulties in planning,
procuring and managing their inventories efficiently due to frequent
design changes, short product life-cycles, large investments in
electronic components, component price fluctuations and the need to
achieve economies of scale in materials procurement. Electronics
manufacturing specialists are able to manage both procurement and
inventory, and have demonstrated proficiency in purchasing components
at improved pricing.
Strategy
Reptron's principal business objective is to expand its presence as a
leading electronics supply chain services company. In order to implement its
objective, Reptron has formulated a strategy based upon the following key
elements:
. Continue to Leverage Complementary Businesses. Reptron operates as an
electronics supply chain services company that provides value-added
distribution of electronic components and targeted electronics
manufacturing services. Reptron Distribution emphasizes its
value-added services as a method to lower the customer's total
material acquisition costs. Reptron Manufacturing Services provides
turnkey manufacturing, including materials management, board assembly
and post-production testing. Reptron Display and System Integration
provides design engineering and systems integration of display
solutions, including turnkey manufacturing and testing. These three
business units, although operated independently, are complementary,
enabling Reptron to provide customers with a wide range of products
and value-added services, as well as a single source for product,
material, logistics, engineering, assembly and test requirements.
4
. Increase Sales from Value-Added Services. Reptron seeks to enhance
sales by providing total customer solutions through its value-added
services. Reptron has developed a comprehensive value-added service
offering which includes inventory control programs (e.g., bonded,
consigned, just-in-time), in-plant stores, automated inventory
replenishment systems utilizing EDI and other e-commerce technology,
custom supply chain logistics services, component programming, custom
display solutions and electronics manufacturing. These value-added
programs allow the OEMs to reduce their total acquisition costs for
materials. An increasing percentage of industry sales are being
generated from value-added engagements and management believes Reptron
is well positioned to capitalize on this trend. In 2001, approximately
32% of Reptron Distribution sales were generated through value-added
services.
. Target Manufacturing Customers in Specific Market Segments. Reptron
Manufacturing Services follows a well-defined strategy in its EMS
business. Reptron Manufacturing Services focuses on complex assemblies
in low-to-medium volumes for commercial and industrial customers.
Additionally, Reptron Manufacturing Services seeks customers that will
utilize its ability to assemble customers' products by integrating
printed circuit board assemblies into other elements of the customers'
products (sometimes referred to as total "box build"). Reptron
Manufacturing Services also seeks customer relationships in which
Reptron Manufacturing Services is the primary source and avoids
engagements requiring an overflow supplier. Reptron Manufacturing
Services targets customers in a variety of industries to establish
diversity among the customers and industries served.
. Leverage Investments Made in its Manufacturing Facilities. Reptron has
invested in facilities that will allow it to expand its business.
Reptron believes its manufacturing facilities can accommodate
approximately $300 million in annual contract manufacturing net sales
based on the types of business currently transacted by Reptron
Manufacturing Services. Reptron Manufacturing Services' 2001 combined
sales totaled approximately $171 million. Consequently, Reptron
believes there is adequate capacity to support future sales growth.
. Expand Through Business Combinations and Internal Growth. Reptron
seeks to expand its operations by further enhancing its supply chain
services offerings. Further, Reptron believes that significant
opportunities exist to expand its operations into geographic areas
that it currently does not serve and to increase its presence in
existing markets. This expansion of services and presence can be
attained through business combinations, by opening new sales offices
or by creating new business operations.
Certain Considerations
Credit Agreement. Five lenders have made available to us a $75 million
revolving credit facility (the "Credit Agreement") through January 8, 2004.
Borrowings under the Credit Agreement are Collateralized by all inventory,
accounts receivable, equipment and general intangibles. The Credit Agreement
limits the amount of capital expenditures and prohibits the payment of dividends
thereby restricting the distribution of retained earnings. Prior to the end of
the fiscal year, we anticipated that at December 31, 2001 we would not be in
compliance with the fixed charge coverage ratio covenant provided for in the
Credit Agreement. Consequently, prior to year end, we and our lenders reached an
agreement to amend the Credit Agreement to be effective as of December 31, 2001.
The amendment was to provide for removal of the fixed charge coverage ratio
covenant for only the period ending December 31, 2001 and was to add future
quarterly earnings requirements. The amendment was signed on February 20, 2002
and by its terms was effective December 31, 2001. Amounts outstanding under the
Credit Agreement as of December 31, 2001 were approximately $50.6 million.
Management believes that we will not be in compliance with the earnings
requirement contained in the Credit Agreement, as amended, for at least the
first quarter of 2002. Management has historically been able to obtain waivers
for non-compliance of Credit Agreement covenants and believes that we will
receive the necessary waiver for the first quarter of 2002 and future additional
waivers when and if needed. Over the last 12 months we have experienced declines
in sales and profitability and, therefore, we cannot assure you that we will be
able to comply with these financial covenants in the future or that we will
receive waivers from our lenders for non-compliance with these covenants. If our
lenders were to terminate the Credit Agreement, for any reason, the elimination
of that source of liquidity would have a material adverse effect on our business
and financial condition.
6 3/4% Convertible Subordinated Notes. We currently have approximately
$76.3 million of 6 3/4% Convertible Subordinated Notes Due on August 1, 2004
(the "Convertible Notes"). The holders of the Convertible Notes have the right
to convert any portion of the principal amount of the outstanding Convertible
Notes, at the date of conversion, into shares of our common stock at any time
prior to the close of business on August 1, 2004, at a conversion rate of
35.0877 shares of common stock per $1,000 principal amount of the Convertible
Notes (equivalent to a conversion price of approximately $28.50 per share).
There is no requirement that the holders of the Convertible Notes convert on or
before August 1, 2004. To the extent that the Convertible Notes are not
converted into our common stock on or before August 1, 2004, we will be required
to repay the indebtedness or make other arrangements to refinance the
indebtedness evidenced by the Convertible Notes. We cannot assure you that the
Convertible Notes will be converted into our common stock, or that we will be
able to repay or refinance the Convertible Notes upon their maturity. If we fail
to repay or refinance the Convertible Notes on or before August 1, 2004, it will
result in a default of the Convertible Notes, which would have a material
adverse effect on our business and financial condition.
5
The holders of the Convertible Notes have the right to make demand for
payment under the following events:
. failure to pay the principal or redemption price of the Convertible
Notes when due, whether or not such payment is prohibited by the
subordination provisions of the Indenture;
. failure to pay any interest on the Convertible Notes when due,
continuing for 30 days, whether or not such payment is prohibited by
the subordination provisions of the Indenture;
. default in our obligation to provide a notice of a "change in control"
as provided in the Indenture;
. upon a "change of control" as provided in the Indenture;
. failure to perform any other covenant of Reptron in the Indenture,
continuing for 60 days after written notice as provided in the
Indenture;
. any indebtedness for money borrowed by us in an aggregate principal
amount in excess of $5,000,000 is not paid at final maturity or upon
acceleration thereof and such default in payment or acceleration is
not cured or rescinded within 30 days after written notice as provided
in the Indenture; and
. certain events of bankruptcy, insolvency or reorganization.
Current adverse economic environment. During 2001, the United States
economy declined into recession. Many companies in the electronics industry
began experiencing significant contraction due to adverse market conditions,
during 2001. We believe that these two conditions, among others, caused the most
severe annual decline the industry has ever experienced. We have continued cost
cutting measures, initiated in 2001, that were directed at addressing these
market conditions. There can be no assurance, however, that these cost cutting
measures will be effective or adequate to compensate for the significant
reductions in our sales and earnings. If current economic conditions continue
for an extended period of time, we believe that this will have a material
adverse effect on our operating results and financial condition.
Dependence upon Key Vendors. Many of the components distributed by Reptron
Distribution are currently manufactured by a relatively small number of
independent vendors. Four vendors collectively accounted for approximately 43%
and 41% of Reptron Distribution's net sales in 2001 and 2000, respectively (26%
and 25% of Reptron's total 2001 and 2000 net sales, respectively). Reptron does
not have long-term distribution contracts with its vendors. These contracts are
non-exclusive and typically are cancelable upon 30 to 90 days written notice.
Additionally, our management believes that vendors are consolidating their
distribution relationships. We believe that our future success will depend, in
large part, on maintaining our existing vendor relationships. The loss of, or
significant disruptions in the relationship with, one or more of Reptron's
principal vendors could have a material adverse effect on Reptron's future
operating results. See "Reptron Distribution - Vendors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Customer Concentration and Other Factors Affecting Operating Results.
Reptron's business units have certain customers that account for a significant
part of their respective net sales. Reptron Distribution's ten largest customers
collectively represented 32% and 27% of its net sales in 2001 and in 2000 (19%
and 16% of Reptron's total net sales in 2001 and 2000, respectively). Reptron
Manufacturing Services' three largest customers accounted for approximately 17%,
10% and 6% of its net sales in 2001, respectively, and 16%, 9% and 8% of its net
sales in 2000, respectively, (7%, 4% and 3% of Reptron's total net sales in
2001, respectively, and 6%, 4% and 3% of Reptron's total net sales in 2000,
respectively). The loss of one or more of these major customers, or a reduction
in their level of purchasing, could have a material adverse effect on Reptron's
business, results of operations and financial condition. Reptron Manufacturing
Services' operating results are affected by a number of factors, including fixed
plant utilization, price competition, ability to keep pace with technological
developments, the degree of automation that can be used in an assembly process,
efficiencies that can be achieved by managing inventories and fixed assets, the
timing of orders from major customers, the timing of capital expenditures in
anticipation of increased sales, incurring substantial start-up costs on new
assemblies, customer product delivery requirements and costs and shortages of
components and labor. In addition, because of the limited number of Reptron
Manufacturing Services' customers and the corresponding concentration of its
accounts receivable, the insolvency or other inability or unwillingness of its
customers to pay for manufacturing services could have a material adverse effect
on Reptron's operating results. See - "Reptron Distribution - Marketing and
Customers" and "Reptron Manufacturing Services - Marketing and Customers."
6
The Volume and Timing of Customer Sales May Vary- Reptron Distribution. The
results for Reptron Distribution may vary widely based upon customer demand and
general economic conditions. Consistent with historical periods of economic
downturn in the electronics industry (including the current economic downturn),
in 2001 Reptron Distribution experienced a significant reduction in orders and
increases in order cancellations and requests for delayed deliveries as well as
increases in instances of customers being unable to pay for product. There can
be no assurance that Reptron Distribution's contractual arrangements will
adequately compensate it for the loss of sales due to these factors. Sustained
economic downturn in the electronics industry will result in a material adverse
effect on Reptron Distribution's operating results and financial condition.
The Volume and Timing of Customer Sales May Vary - Reptron Manufacturing
Services. The volume and timing of purchase orders placed by Reptron
Manufacturing Services' customers are affected by a number of factors, including
variation in demand for customers' products, customer attempts to manage
inventory, changes in product design or specifications and changes in the
customers' manufacturing strategies. Reptron Manufacturing Services typically
does not obtain long-term purchase orders or commitments but instead works with
its customers to develop nonbinding forecasts of future requirements. Based on
such nonbinding forecasts, Reptron Manufacturing Services makes commitments
regarding the level of business that it will seek and accept, the timing of
production schedules and the levels and utilization of personnel and other
resources. A variety of conditions, both specific to each individual customer
and generally affecting each customer's industry, may cause customers to cancel,
reduce or delay orders that were either previously made or anticipated.
Generally, customers may cancel, reduce or delay purchase orders and commitments
without penalty, except for payment for services rendered or product completed
and, in certain circumstances, payment for materials purchased and charges
associated with such cancellation, reduction or delay. Significant or numerous
cancellations, reductions or delays in orders by customers, or any inability by
customers to pay for services provided by us or to pay for components and
materials purchased by us on such customers' behalf, could have a material
adverse effect on our operating results.
Competition; Effects on Gross Margin. We face substantial competition. We
believe that many of our competitors have international operations and
significantly greater manufacturing, financial, marketing and research and
development resources and broader name recognition. Reptron Distribution faces
competition from hundreds of electronic component distributors of various sizes,
locations and market focuses (e.g., military, commercial, consumer) and competes
principally on the basis of product selection, reputation and customer service.
We believe that vendor representation and product diversity create segmentation
among distributors. Reptron Distribution has several primary competitors that
carry similar lines. Reptron Manufacturing Services and Reptron Display and
System Integration compete in a highly fragmented market composed of a diverse
group of EMS providers. Reptron believes that the key competitive factors in its
markets are manufacturing flexibility, price, manufacturing quality, advanced
manufacturing technology and reliable delivery. Additionally, Reptron
Manufacturing Services faces the potential risk that its customers may elect to
produce their products internally, thereby eliminating manufacturing
opportunities for Reptron Manufacturing Services. There can be no assurance that
Reptron will be able to continue to compete effectively with existing or
potential competitors. In addition, we believe that gross margins in the
businesses in which Reptron competes have experienced substantial fluctuation
depending upon market forces. See " - Competition."
Availability of Components. We rely on third-party suppliers for electronic
components. We believe that component shortages may have a material adverse
effect on Reptron's ability to service its customers. At various times, there
have been shortages of components in the electronics industry and from time to
time the supply of certain electronic components is subject to limited
allocations. If shortages of components should occur, we expect that we may be
forced to delay shipment or to purchase components at higher prices (that may
not be able to be passed on to our customers), which may have a material adverse
effect on customer demand, our ability to service customer needs or our gross
margins. We believe that any of these events could have a material adverse
effect on our operating results.
Dependence Upon Key Personnel. The success of Reptron to date has been
largely dependent upon the efforts and abilities of Reptron's key managerial and
technical employees. The loss of the services of certain of these key employees
or an inability to attract or retain qualified employees could have a material
adverse effect on Reptron.
7
Volatility of Component Pricing. Reptron Distribution sells a significant
amount of commodity-type components that have historically experienced volatile
pricing. These components include dynamic random access memory ("DRAM") and
static random access memory ("SRAM") products. If market pricing for these
components decreases significantly, Reptron may experience periods when its
investment in component inventory exceeds the market price of such components.
Such market conditions could have a negative impact on sales and gross profit
margins. Most of the components sold through the Reptron Computer Products
division are not supplied under distribution agreements and consequently, this
inventory is not subject to those contractual protections afforded under
standard distribution agreements. See "- Reptron Distribution - Vendors."
Reptron Distribution
We were founded in 1973 in Detroit, Michigan as a distributor of electronic
components. Reptron Distribution now operates from a network of sales offices,
outside sales personnel and in-house telemarketing sales, which management
believes collectively addresses most of the total available electronic
components market in the United States as well as selected international
markets.
Products. Reptron Distribution represents over 30 vendor lines and
distributes more than 45,000 separate items. The products that Reptron
distributes can be broadly divided into three main groups: semiconductors,
passive products and electromechanical components.
Semiconductors accounted for approximately 83% and 68% of Reptron
Distribution's net sales in 2001 and 2000, respectively. Reptron Distribution's
product offering includes application specific integrated circuits ("ASICs"),
flat panel displays, a variety of memory devices (i.e.., dynamic, static,
programmable) and microprocessors and controllers produced by over 22 vendors.
Reptron represents a number of leading semiconductor manufacturers, including
Hitachi, Sharp, OKI and Samsung. Passive products and electromechanical
components accounted for the remaining 17% and 32% of net sales of Reptron
Distribution in 2001 and 2000, respectively. Among these components are
capacitors, resistors, relays, power supplies and connectors manufactured by
over 12 vendors, such as Astec, Vishay, Lambda and Seiko MPD. Reptron
Distribution's largest four vendor lines collectively represented 43% and 41% of
Reptron Distribution's net sales in 2001 and 2000, respectively (26% and 25% of
Reptron's total net sales in 2001 and 2000, respectively). See "Certain
Considerations-Dependence Upon Key Vendors."
Reptron's Computer Product unit is devoted primarily to selling memory
modules. This business unit employs a separate sales and support staff that
focuses on a different market niche and customer base than is serviced by
Reptron Distribution. This unit sells primarily to computer integrators, retail
stores, internet retailing and value-added resellers. Sales are generally
characterized by higher volumes, lower gross profit margins and lower selling,
general and administrative expenses than other electronic component sales
generated by Reptron Distribution. Sales from Reptron Computer Products
accounted for 15% and 8% of Reptron Distribution's net sales in 2001 and 2000,
respectively (9% and 5% of Reptron's total net sales in 2001 and 2000,
respectively).
Services. Reptron Distribution sells to over 7,000 customers representing
diverse industries including: robotics, telecommunications, computers and
computer peripherals, consumer electronics, healthcare, industrial controls and
contract manufacturing. Services provided to these customers include component
sales, inventory replenishment programs, in-plant stores, component programming,
EDI, and other internet based communications. During 2001 and 2000,
approximately 32% and 34%, respectively, of Reptron Distribution's net sales
were generated through these value-added services. Reptron believes that an
increasing percentage of Reptron Distribution's net sales will be generated
through its value-added services as customers continue to search for ways to
reduce costs. Reptron has invested significantly in information technology and
support staff to help increase net sales from value-added services. For its
vendors, Reptron Distribution has developed product promotion and customer
identification programs that help vendors build recognition of individual
products and target and market to specific types of customers.
Vendors. In selecting vendors to represent, Reptron Distribution considers
numerous factors, including product demand, availability and compatibility with
existing product lines. Reptron Distribution has non-exclusive, geographically
limited agreements with its franchised vendors for the sale of their products,
which we believe is customary in the industry. Reptron Distribution's agreements
with vendors do not restrict us from selling similar products manufactured by
our vendors' competitors, and typically allow termination by either party upon
30 to 90 days notice.
8
Reptron Distribution's franchised vendors generally protect Reptron against
potential write-downs of inventories based upon vendors' price reductions or
technological changes. Under the terms of most of Reptron Distribution's
franchised distributor agreements, if we comply with certain conditions, the
vendor is required, pursuant to price protection privileges, to credit us for
decreases in inventory value resulting from reductions in the vendor's list
prices of the items. In addition, under the stock rotation terms of Reptron
Distribution's franchised distributor agreements, we have the right to return to
the vendor for credit against current obligations or future orders a specified
portion of those inventory items purchased within a designated period. A vendor
that elects to terminate a distributor agreement is generally required to
purchase from us the total amount of its products carried in our inventory, less
a restocking charge. We believe that our distributor agreements are on terms and
conditions consistent with industry standards. Reptron Distribution will, as
well, purchase inventory from non-franchise vendors, which inventory is not
subject to price protection and stock rotation privileges. Most of the
components sold through the Computer Products division are not supplied under
distribution agreements with our vendors, and consequently, this inventory is
not subject to the price protection and stock rotation privileges.
Marketing and Customers. Reptron Distribution has developed a focused sales
strategy. Large key accounts are identified in each market and field sales
personnel are assigned to serve these accounts directly. All other customers in
each market are served by a corporate sales team which operates from our
corporate headquarters. The corporate sales team also services customers in
regions of the country where we do not have dedicated sales personnel.
Reptron Distribution has approximately 7,000 customers located throughout
the United States. Reptron Distribution's customers are in diverse industries,
including robotics, telecommunications, computers and computer peripherals,
consumer electronics, healthcare, industrial controls and contract
manufacturing.
Property and Offices. Reptron owned a 77,500 square-foot facility in Tampa,
Florida, which houses centralized division support personnel, the corporate
sales team, management staff and executive offices for Reptron Distribution. In
December 2001, we sold this facility and currently sublease that portion of the
building we occupy. During 2002, Reptron plans on moving into a 150,000 square
foot facility that it owns, and which is located near its current 77,500
square-foot headquarters building. Reptron leases a 71,500 square foot
distribution center in Reno, Nevada. Substantially all of Reptron Distribution's
shipments originate from the Reno facility. Reptron leases 18 office suites
serving as sales offices for Reptron Distribution. These offices average
approximately 2,000 square feet in size and contain a small space for
warehousing of inventory and sales materials. Lease terms on these facilities
range from three to five years and expire at various dates through August 2004.
One of these facilities, located in the Detroit area, is owned by our chief
executive officer. The table below shows the metropolitan location of each sales
office:
Office
------
Atlanta, Georgia
Baltimore, Maryland
Boston, Massachusetts
Chicago, Illinois
Cleveland, Ohio
Dallas, Texas
Detroit, Michigan
Hauppauge (Long Island), New York
Huntsville, Alabama
Irvine, California
Minneapolis, Minnesota
Philadelphia, Pennsylvania
Portland, Oregon
Robinson Point, Singapore
Salem, New Hampshire
San Diego, California
San Jose, California
Tampa, Florida
Toronto, Canada
9
Additionally, we have outside sales personnel serving customers in the following
metropolitan locations:
Austin, Texas
Dayton, Ohio
Ft. Lauderdale, Florida
Guadalajara, Mexico
Hartford, Connecticut
Los Angeles, California
Raleigh, North Carolina
Rochester, New York
Sacramento, California
Seattle, Washington
Reptron Manufacturing Services
We entered into the electronics manufacturing services business through an
acquisition in 1986. Reptron Manufacturing Services' net sales have grown from
approximately $83.0 million in 1995 to $171.4 million in 2001.
Manufacturing Operations. Reptron Manufacturing Services provides turnkey
manufacturing services, including the purchase of customer-specified components
from its extensive network of component suppliers (including Reptron
Distribution), assembly of components on printed circuit boards and performance
of post-production testing. In addition, total box build assembly generated
approximately 20% of Reptron Manufacturing Services' net sales in 2000 and 2001.
Reptron Manufacturing Services attempts to perform as much of a given
manufacturing process as is feasible and generally does not perform labor-only,
consignment assembly functions unless management believes that such engagements
may provide a direct route to turnkey contracts.
Reptron Manufacturing Services provides design-for-manufacturability
engineering services as well as surface mount technology ("SMT") conversion, pin
through hole ("PTH") interconnection technologies and printed circuit board
layout services for existing products. Reptron Manufacturing Services also
provides test process design capabilities that include the design and
development of test fixtures and procedures and software for both in-circuit
tests and functional tests of circuit boards, components and products.
Reptron Manufacturing Services is able to efficiently manage its materials
procurement and inventory management functions. The inherent scheduling and
procurement challenges in low-to-medium volume production of a large number of
different circuit board assemblies requires a high level of expertise in
material procurement. Reptron Manufacturing Services obtains its electronic
components from a wide variety of manufacturers and distributors, some of which
are procured through Reptron Distribution.
Marketing and Customers. Reptron Manufacturing Services follows a
well-defined marketing strategy, which includes the following key elements:
. Target Customers Requiring Complex Printed Circuit Board Assemblies.
Reptron Manufacturing Services focuses on complex assemblies in
low-to-medium volumes for customers primarily in the
telecommunications, healthcare, industrial/instrumentation, banking
and office products industries. Reptron Manufacturing Services does
not manufacture high volume printed circuit board assemblies for the
personal computer, consumer products or automotive industries. Reptron
Manufacturing Services targets customers requiring a high number of
different circuit board assemblies, thereby seeking to minimize its
exposure to any one product made for a specific customer. Reptron
Manufacturing Services focuses on the low-to-medium volume batch
business because of its reduced volatility. Reptron Manufacturing
Services gains access to a significant number of these kinds of
customers through its relationship with Reptron Distribution and the
efforts of its direct sales force. Additionally, Reptron Manufacturing
Services expands its market and customer development through its
independent sales representatives.
10
. Target Customer Relationships where Reptron Manufacturing Services is
the Primary Source. Reptron Manufacturing Services seeks engagements
with customers that have decided to strategically outsource
substantially all circuit board assembly. Consequently, Reptron
Manufacturing Services markets its services as a "partnership" with
the customer and encourages the customer to view Reptron Manufacturing
Services as an extension of its own manufacturing capabilities.
Reptron Manufacturing Services attempts to avoid relationships where
Reptron Manufacturing Services is used as an overflow supplier to
manage volume requirements.
. Maintain a Diverse Customer and Industry Base. Reptron Manufacturing
Services targets customers primarily in the telecommunications,
medical, industrial/instrumentation, banking and office products
industries and seeks to maintain a diversity of customers among these
industries and within each industry. In addition, Reptron
Manufacturing Services believes that the industries that it targets
make products that generally have longer life cycles, more stable
demand and less price pressure compared to consumer oriented products.
Nevertheless, Reptron Manufacturing Services' customers from time to
time, experience downturns in their respective businesses resulting in
fluctuations in demand for Reptron Manufacturing Services' services.
See "- Certain Considerations - The Volume and Timing of Customer
Sales May Vary."
Our marketing cycle for customers meeting these criteria typically spans
six-to-twelve months. Additionally, the start-up phase for an engagement may run
an additional six months. Typically, during this phase, significant investments
are made by Reptron Manufacturing Services and the customer to successfully
launch a high number of different, complex circuit board assemblies. Reptron
Manufacturing Services works closely with its customers in all phases of design,
start-up and production, and through this cooperative effort develops a close
working relationship with the customer. These relationships, and the investments
made both in time and financial resources by the customer and Reptron
Manufacturing Services, management believes, promotes long-term customer
loyalty. Reptron Manufacturing Services utilizes a broad marketing approach
which includes the Reptron Distribution sales force, manufacturers' sales
representatives and a direct sales force.
Reptron Manufacturing Services seeks to maintain diversity within its
customer base and industries served. During 2001, Reptron Manufacturing
Services' largest three customers represented 17%, 10% and 6%, respectively of
Reptron Manufacturing Services' 2001 net sales (7%, 4% and 3%, respectively of
total Reptron net sales). During 2000, Reptron Manufacturing Services' largest
three customers represented 16%, 9% and 8%, respectively of Reptron
Manufacturing Services' 2000 net sales (6%, 4% and 3%, respectively of total
Reptron net sales). The following table sets forth the principal industries and
the percentage of Reptron Manufacturing Services sales derived from various
industries for 2001 and 2000.
2001 2000
---------- ----------
Industry % of Sales % of Sales
- --------------------------------------------------------------------------------
Medical 22% 24%
Semiconductor Equipment 14% 24%
Industrial/Instrumentation 18% 16%
Telecommunications 15% 14%
Banking 21% 13%
Other 10% 9%
Manufacturing Facilities. Reptron Manufacturing Services operates three
plants. These manufacturing facilities are equipped with advanced SMT assembly
equipment and PTH insertion equipment. The Gaylord, Michigan 80,000 square foot
manufacturing facility is owned by us and was constructed in 1988. The Tampa,
Florida 150,000 square foot manufacturing and warehouse facility is owned by us
and was completed in the first quarter of 1997. Reptron Manufacturing Services
leases six buildings in Hibbing, Minnesota, which total 127,000 square feet.
These buildings are owned in part by four individuals on Reptron Manufacturing's
senior management team. Reptron Manufacturing Services has a variety of
automated and manual test equipment capable of performing in-circuit and
functional testing, as well as a skilled staff of technicians who perform
customer-specific or product-specific testing requirements.
The Hibbing, Minnesota manufacturing plant accounted for approximately 38%
of Reptron Manufacturing Services' 2001 net sales, with the Tampa, Florida plant
totaling approximately 34% of 2001 net sales, and the Gaylord, Michigan
manufacturing plant totaling approximately 28% of 2001 net sales.
11
On October 27, 1999, Reptron completed its acquisition of Applied
Instruments, of Fremont, California and re-branded the operations Reptron
Display and System Integration in 2000. Founded in 1987, Reptron Display and
System Integration provides display design engineering, video display solutions
(both cathode ray tube and flat panel technology) and system integration of
custom turnkey industrial computer based products, systems integration and
turnkey manufacturing services to its OEM customers. Reptron Display and System
Integration operates from a 40,000 square foot facility in Fremont, California,
and has approximately 50 employees. The unit generated approximately $9.3
million and $18.3 million in net sales in 2001 and 2000, respectively.
Competition
We face substantial competition. Many of our competitors in each division
have international operations and significantly greater manufacturing,
financial, marketing and research and development resources and broader name
recognition than we do. Reptron Distribution faces competition from hundreds of
electronic component distributors of various sizes, locations and market focuses
(e.g. military, commercial, consumer) and competes principally on the basis of
product selection and value-added customer service. Vendor representation and
product diversity create segmentation among distributors. Reptron Distribution
has several primary competitors that carry similar significant Asian
semiconductor vendors, as well as competitors who manufacture electronic
components domestically. Reptron Distribution attempts to differentiate itself
from these competitors through its wide offering of value-added services,
including electronics manufacturing services through Reptron Manufacturing
Services and Reptron Display and System Integration.
Reptron Manufacturing Services competes in a highly fragmented market
composed of a diverse group of EMS providers. Reptron Manufacturing Services
believes that the key competitive factors in its markets are manufacturing
flexibility, price, manufacturing quality, advanced manufacturing technology and
reliable delivery. Many EMS providers operate high-volume facilities and focus
on target markets, such as the computer industry, that Reptron Manufacturing
Services does not seek to serve. Reptron Manufacturing Services considers its
key competitive advantages to include its expertise in low-to-medium volume,
flexible batch processing, its provision of value-added services and its
material management techniques. We believe that Reptron Manufacturing Services'
expertise in flexible, batch processing differentiates it from its high-volume
competitors because of the relative complexity of economically fulfilling a
large number of batch contracts. We also believe that by focusing on
low-to-medium volume production runs, by manufacturing products using Reptron
Distribution's product line and by leveraging Reptron Distribution's sales force
and customer base, Reptron Manufacturing Services competes effectively. See
- -"Certain Considerations--Competition; Effects on Gross Margin."
Reptron Display and System Integration competes in a highly fragmented
market composed of a diverse group of display integration and electronic
component distributors that have strategic alliances with display integration
companies. We believe that market reputation combined with a high degree of
technical competency, has allowed Reptron Display and System Integration to
compete effectively in the marketplace.
Management Information Systems
We have made significant investments in computer hardware, software and
management information system ("MIS") personnel. The Reptron Distribution,
Reptron Manufacturing Services and Reptron Display and System Integration's MIS
departments collectively employ approximately 40 individuals who are responsible
for hardware upgrades, maintenance of current software and related databases and
augmenting software packages with custom programming. We currently maintain an
internet web page that provides a wide variety of information, as well as, links
to vendors and customers. Our expanded use of web based technologies include
enhanced e-mail and interactive use of the our intranet for data warehouse
applications such as quality documentation, human resources documentation, MIS
systems documentation and interactive corporate forms. We operate within Reptron
Distribution and Reptron Manufacturing Services with UNIX-based software
packages written in a fourth generation language.
The UNIX-based software packages used by Reptron Distribution and Reptron
Manufacturing Services may be operated on a variety of hardware platforms.
Therefore, neither division is restricted to the use of computer hardware from
any one supplier and do not have the constraints associated with proprietary
hardware or software.
12
Reptron Distribution operates an integrated distribution software package
that has been greatly enhanced with custom programming. This system allows
management to direct the entire Reptron Distribution operation by connecting all
sales offices to the corporate headquarters.
Reptron Manufacturing Services operates an integrated MRP II package which
has also been greatly enhanced by its MIS staff through custom programming. This
system is used to operate and integrate Reptron Manufacturing Services'
manufacturing plants with central administrative functions.
Reptron Display and System Integration operates on a newly acquired
integrated software package, MAS90. This client-server software has minimal
hardware performance requirements and interfaces with a number of database
formats, allowing the flexibility of utilizing third-party reporting tools.
Employees
As of February 26, 2002, we employed 1,532 persons, of whom 321 were
dedicated to Reptron Distribution, 1,139 were dedicated to Reptron Manufacturing
Services, 51 were dedicated to Reptron Display and System Integration and 21
were corporate employees. Hourly employees at the manufacturing plant in
Hibbing, Minnesota are covered under a collective bargaining agreement with the
International Brotherhood of Electrical Workers. The current term of the
collective bargaining agreement expires in September 2006.
13
Item 2. Properties
We occupy a number of facilities located throughout the United States.
Currently, we operate four manufacturing facilities, 18 sales offices, one main
warehouse and a corporate headquarters facility.
Owned facilities. We own a 150,000 square foot facility located in Tampa,
Florida which the Tampa Reptron Manufacturing Services plant and administrative
offices occupy. We also own a 80,000 square foot Reptron Manufacturing Services
facility in Gaylord, Michigan.
Leased facilities. During 2001, we sold our corporate headquarters facility
located at 14401 McCormick Drive, Tampa, Florida and leased back 26,000 square
feet. We are currently renovating a portion of our 150,000 square foot facility
located in Tampa, Florida to accommodate our corporate personnel, management
staff and executive offices for Reptron Distribution. The Tampa sales office and
corporate sales operations for Reptron Distribution will also be located in
these renovated offices. We lease 18 office suites serving as sales offices for
Reptron Distribution. These offices average approximately 2,000 square feet in
size and contain a small space for warehousing inventory and sales materials.
Lease terms on these offices range from three to five years and expire at
various dates through August 2004. Additionally, in November 2000 we entered
into a lease for a warehouse facility in Reno, Nevada that is approximately
71,000 square feet for Reptron Distribution. The lease terms on the facility
expire in December 2010. The warehouse and distribution operations were fully
transferred to the Nevada facility in the first half of 2001.
We also lease a total of 127,000 square feet of manufacturing and
administrative offices for the Reptron Manufacturing Services operation in
Hibbing, Minnesota. The lease on the buildings expires in December 2002.
We also lease a total of 40,000 square feet of manufacturing and
administrative offices for the Reptron Display and System Integration operation
in Fremont, California. The lease on the buildings expires in July 2004.
Item 3. Legal Proceedings
We are one of ninety-one defendants in a patent infringement action
commenced in April 2000, in the United States District Court for the District of
Arizona, by the Lemelson Medical, Education & Research Foundation, Limited
Partnership ("Lemelson"). Lemelson alleges that we and the other co-defendants
have infringed various patents that purportedly cover the use of "machine
vision" and "bar code" scanning equipment. Lemelson has asserted similar claims
against other companies in our industry, as well as against companies in other
industries. We understand that Lemelson has entered into licenses with others,
for the patents alleged to be infringed by us. If our defenses of the alleged
claims prove unsuccessful, we cannot ensure that we will be offered a license of
the Lemelson patents. Based on our understanding of the terms that Lemelson has
made available to other licensees, if such a license is negotiated, we believe
that obtaining a license from Lemelson under the same or similar terms would not
have a material adverse effect on our results of operations or financial
condition. However, if a license is effectuated, we cannot ensure that its
terms, or the ultimate resolution of this matter, will not have a material
adverse effect on our operating results or financial condition.
We are, from time to time, involved in litigation relating to claims
arising out of our operations in the ordinary course of business. We believe
that none of these claims, which were outstanding as of December 31, 2001,
should have a material adverse impact on our financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our shareholders during the fourth
quarter of the fiscal year ending December 31, 2001.
14
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
Our common stock is traded on The NASDAQ National Market System under the
symbol "REPT". The following table sets forth, for the periods indicated, the
high and low close prices of our common stock as reported by the NASDAQ National
Market System:
Fiscal 2000 High Low
- ----------- ------- ------
First Quarter $11.36 $ 7.63
Second Quarter $13.13 $ 9.00
Third Quarter $17.00 $11.69
Fourth Quarter $15.19 $ 5.59
Fiscal 2001 High Low
- ----------- ------- -------
First Quarter $ 11.75 $5.69
Second Quarter $ 8.20 $4.02
Third Quarter $ 6.70 $2.60
Fourth Quarter $ 4.10 $2.41
Fiscal 2002 High Low
- ----------- ------- -------
First Quarter (through March 25, 2002) $5.00 $3.00
On March 25, 2002, the last sale price of our common stock, as reported by
The NASDAQ National Market System was $3.26 per share.
As of March 25, 2002, there were approximately 100 holders of record of our
common stock and approximately 1,500 beneficial shareholders.
We have never declared or paid dividends on our common stock. We do not
intend, for the foreseeable future, to declare or pay any cash dividends and
intend to retain earnings, if any, for the future operation and expansion of our
business. Our current line of credit prohibits the payment of dividends.
15
Item 6. Selected Financial Data
The following table summarizes selected financial data of Reptron and
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein.
Year Ended December 31,
--------------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- ----------
(In thousands except share and per share data)
Operating Statement Data:
Net sales - Electronic Component Distribution ........ $ 187,267 $ 156,507 $ 198,132 $ 345,906 $ 227,259
Net sales - Electronic Manufacturing Services ........ 116,644 146,282 161,085 230,553 171,388
---------- ---------- ---------- ---------- ----------
Total net sales ............................... $ 303,911 $ 302,789 $ 359,217 $ 576,459 $ 398,647
========== ========== ========== ========== ==========
Gross profit - Electronic Component Distribution/1/ $ 35,375 $ 25,081 $ 34,525 $ 63,027 $ 31,174
Gross profit - Electronic Manufacturing Services/2/ 18,780 12,847 17,249 30,535 14,981
---------- ---------- ---------- ---------- ----------
Total gross profit ............................ 54,155 37,928 51,774 93,562 46,155
Selling, general and administrative expenses ......... 38,154 51,206 55,902 71,543 66,685
---------- ---------- ---------- ---------- ----------
Operating income (loss) ....................... 16,001 (13,278) (4,128) 22,019 (20,530)
Interest expense, net ................................ 6,184 8,339 8,582 11,425 10,754
---------- ---------- ---------- ---------- ----------
Earnings (loss) before income taxes ........... 9,817 (21,617) (12,710) 10,594 (31,284)
Income tax provision (benefit)/3/..................... 3,677 (8,470) (4,703) 4,903 (9,460)
---------- ---------- ---------- ---------- ----------
Net earnings (loss) before extraordinary item 6,140 (13,147) (8,007) 5,691 (21,824)
Extraordinary gain on extinguishment of debt, net -- -- 12,776 -- --
---------- ---------- ---------- ---------- ----------
Net earnings (loss) ........................... $ 6,140 $ (13,147) $ 4,769 $ 5,691 $ (21,824)
========== ========== ========== ========== ==========
Net earnings (loss) per common share - basic ......... $ 1.01 $ (2.15) $ 0.78 $ 0 .91 $ (3.42)
========== ========== ========== ========== ==========
Weighted average Common Stock shares
Outstanding - basic .............................. 6,077,084 6,118,023 6,151,563 6,252,938 6,389,474
========== ========== ========== ========== ==========
Net earnings (loss) per common share - diluted ....... $ 0.98 $ (2.15) $ 0.78 $ 0.83 $ (3.42)
========== ========== ========== ========== ==========
Weighted average Common Stock equivalent
shares outstanding - diluted ..................... 6,247,050 6,118,023 6,151,563 6,836,911 6,389,474
========== ========== ========== ========== ==========
December 31,
----------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
Balance Sheet Data:
Working capital ......................... ............ $137,572 $101,829 $ 95,677 $146,708 $100,972
Total assets ............................ ............ 222,514 210,083 215,853 294,606 199,395
Long-term obligations - including current
portion .............................. ............ 133,693 133,163 119,797 162,461 132,704
Shareholders' equity .................... ............ 54,975 42,126 46,960 53,775 32,172
/(1)/ Net of inventory writedown of $10.0 million in the second quarter of 2001.
/(2)/ Net of inventory writedown of $2.0 million in the second quarter of 2001.
/(3)/ Net of deferred tax benefit reserve of $2.2 million recorded in 2001.
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This document contains certain forward-looking statements that involve a
number of risks and uncertainties. Such forward-looking statements are within
the meaning of that term in Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended.
Factors that could cause actual results to differ materially include the
following: business conditions and growth in Reptron's industry and in the
general economy; competitive factors; risks due to shifts in market demand; the
ability of Reptron to complete acquisitions; and the risk factors listed from
time to time in Reptron's reports filed with the Securities and Exchange
Commission as well as assumptions regarding the foregoing. The words "believe",
"plans", "estimate", "expect", "intend", "anticipate", and similar expressions
and variations thereof identify certain of such forward-looking statements,
which speak only as of the dates on which they were made. Reptron undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, or otherwise. Readers are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those indicated in the forward-looking statements as a
result of various factors. Readers are cautioned not to place undue reliance on
these forward-looking statements.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this report.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of Reptron's net sales represented by each line item presented, except for
Reptron Distribution and Electronic Manufacturing Services gross profit, which
is presented as a percentage of net sales of the respective segments:
Year ended December 31,
-----------------------
1999 2000 2001
----- ----- -----
Net sales - Electronic Component Distribution 55.2% 60.0% 57.0%
Net sales - Electronic Manufacturing Services 44.8 40.0 43.0
----- ----- -----
Total net sales ................................... 100.0% 100.0% 100.0%
===== ===== =====
Gross profit - Electronic Component Distribution/1/ 17.4% 18.2% 13.7%
===== ===== =====
Gross profit - Electronic Manufacturing Services/2/ 10.7% 13.2% 8.7%
===== ===== =====
Total gross profit ................................ 14.4% 16.2% 11.6%
Selling, general and administrative expenses ............. 15.5 12.4 16.7
----- ----- -----
Operating income (loss) .................................. (1.1) 3.8 (5.1)
Interest expense, net .................................... 2.4 2.0 2.7
----- ----- -----
Earnings (loss) before income taxes ...................... (3.5)% 1.8% (7.8)%
Income tax provision (benefit)/3/......................... (1.3) 0.8 (2.4)
----- ----- -----
Net earnings (loss) before extraordinary item ............ (2.2)% 1.0% (5.4)%
Extraordinary gain on extinguishment of debt, net of tax 3.5% --% --
----- ----- -----
Net earnings (loss) ............................... 1.3% 1.0% (5.4)%
===== ===== =====
/(1)/ 18.1% excluding a $10.0 million inventory writedown in the second quarter
of 2001.
/(2)/ 9.9% excluding a $2.0 million inventory writedown in the second quarter of
2001.
/(3)/ (2.9)% excluding a $2.2 million deferred tax benefit reserve recorded in
2001.
17
2001 Compared to 2000
Net Sales. Total net sales decreased $177.8 million, or 30.9%, from $576.5
million in 2000 to $398.6 million in 2001.
ECD total net sales decreased $118.6 million, or 34.3%, from $345.9 million
in 2000 to $227.3 million in 2001. Management believes that this decrease
resulted primarily from a significant industry-wide slowdown in the sales volume
and price reductions of electronic components in the United States. Sales of
semiconductors, passive components and electromechanical components accounted
for 83%, 7% and 10%, respectively, of 2001 ECD net sales compared to 67%, 24%
and 9%, respectively, of 2000 ECD net sales. Sales generated from the top four
ECD vendors accounted for approximately $102 million, or 43% of 2001 ECD net
sales, as compared with approximately $147 million or 41% of 2000 ECD net sales.
EMS net sales decreased $59.2 million, or 25.7%, from $230.6 million in
2000 to $171.4 million in 2001. This decrease is primarily attributable to
decreased demand within the semiconductor equipment and telecommunications
customer base of EMS. The three largest EMS customers accounted for
approximately 17%, 10% and 6%, respectively, of 2001 EMS net sales (7%, 4% and
3%, respectively, of total Reptron 2001 net sales) as compared to 16%, 9% and
8%, respectively, of 2000 EMS net sales (6%, 4% and 3%, respectively, of total
Reptron 2000 net sales).
Gross Profit. Total gross profit decreased $47.4 million or 50.7%, from
$93.6 million in 2000 to $46.2 million in 2001. During the second quarter of
2001, we recorded a non-cash inventory writedown charge of $12.0 million which
is included in cost of sales. As a result of this charge, gross margin decreased
from 14.6% to 11.6% in 2001 as compared to 16.2% in 2000. The remaining decrease
in gross profit is primarily attributable to the overall decline in business as
a result of general economic conditions.
ECD gross profit decreased $31.9 million, or 50.5%, from $63.0 million in
2000 to $31.2 million in 2001. During the second quarter of 2001, the ECD
segment recorded a non-cash inventory writedown charge of $10.0 million to
reflect the rapid decline in market pricing for electronic components and as a
result of distributor supplier lines terminated by Reptron. This charge is
included in cost of sales and caused gross margin to decline from 18.1% to 13.7%
in 2001. ECD gross margin was 18.2% in 2000. The decrease in gross profit
dollars, excluding the effect of the inventory charge, is due to a decrease in
sales experienced in 2001 as compared to 2000.
EMS gross profit decreased $15.6 million, or 50.9%, from $30.5 million in
2000 to $15.0 million in 2001. During the second quarter of 2001, the EMS
segment recorded a non-cash inventory writedown charge of $2.0 million as a
result of excess components due to significant reductions in customer demands
and decline in pricing of electronic components. This charge is included in cost
of sales and caused gross margin to decline from 9.9% to 8.7% in 2001 as
compared to 13.2% in 2000. The decrease in gross profit and gross margin from
prior periods is primarily attributable to the under-absorption of fixed costs
in the manufacturing process as a result of the significant reduction of sales
orders in 2001 versus 2000.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses decreased $4.9 million, or 6.8%, from $71.5 million 2000
to $66.7 million ($67.8 million excluding a $1.1 million gain on the sale of
assets in the fourth quarter of 2001) in 2001. These expenses, as a percentage
of net sales, increased from 12.4% in 2000 to 16.7% in 2001. The remaining
decrease in selling, general and administrative expenses is primarily
attributable to cost cutting measures implemented in 2001. Our overall employee
base declined from 2,142 in 2000 to 1,532 in 2001, a 28.5% reduction in
workforce.
Interest Expense. Net interest expense decreased $0.7 million, or 5.9%,
from $11.4 million in 2000 to $10.8 million in 2001. This decrease in net
interest expense is the result of the combination of an increase in average
outstanding debt of $7.9 million from $141.1 million in 2000 to $149.0 million
in 2001, and a decrease in average interest rates from 8.1% in 2000 to 7.2% in
2001.
18
2000 Compared to 1999
Net Sales. Total net sales increased $217.3 million, or 60.5%, from $359.2
million in 1999 to $576.5 million in 2000.
ECD total net sales increased $147.8 million, or 74.6%, from $198.1 million
in 1999 to $345.9 million in 2000. This increase resulted primarily from
improved market conditions for the sale of electronic components in the United
States. Additionally, we made significant investments in personnel and
infrastructure, which has aided in sales volume growth. Sales of semiconductors,
passive components and electromechanical components accounted for 68%, 24% and
8%, respectively, of 2000 ECD net sales compared to 67%, 24% and 9%,
respectively, of 1999 ECD net sales. Sales generated from the top four ECD
vendors accounted for approximately $147 million, or 41% of 2000 ECD net sales,
as compared with approximately $68.0 million or 34% of 1999 ECD net sales.
EMS net sales increased $69.5 million, or 43.1%, from $161.1 million in
1999 to $230.6 million in 2000. After adjusting for net sales of Reptron Display
and System Integration, acquired in October, 1999, 2000 net sales increased
$53.5 million or 33.6% as compared with 1999 net sales. This increase was
primarily attributable to increased demands from within the existing customer
base of EMS. The three largest EMS customers accounted for approximately 16%, 9%
and 8%, respectively, of 2000 EMS net sales (6%, 4% and 3%, respectively, of our
total 2000 net sales) as compared to 11%, 8% and 7%, respectively, of 1999 EMS
net sales (5%, 3% and 3%, respectively, of our total 1999 net sales). Sales from
the Hibbing, Minnesota; Tampa, Florida; Gaylord, Michigan and Fremont,
California manufacturing facilities accounted for approximately 37%, 32%, 23%
and 8% respectively, of EMS 2000 net sales as compared with 26%, 30%, 43% and
1%, respectively, of EMS 1999 net sales.
Gross Profit. Total gross profit increased $41.8 million or 80.7%, from
$51.8 million in 1999 to $93.6 million in 2000. The gross margin increased from
14.4% in 1999 to 16.2% in 2000.
ECD gross profit increased $28.5 million, or 82.6%, from $34.5 million in
1999 to $63.0 million in 2000. ECD gross margin increased from 17.4% in 1999 to
18.2% in 2000. This increase in gross margin was due primarily to improved
selling and pricing practices and stronger electronic component market
conditions experienced in 2000 as compared with market conditions in 1999.
EMS gross profit increased $13.3 million, or 77.0%, from $17.2 million in
1999 to $30.5 million in 2000 and its gross margin increased from 10.7% in 1999
to 13.2% in 2000. This increase in gross margin was primarily attributable to
the improvements in asset utilization and manufacturing processes. Additionally,
the Fremont plant generated higher gross margins than the other EMS facilities
in 2000.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased $15.6 million, or 28.0%, from $55.9 million
1999 to $71.5 million in 2000. Selling, general and administrative expenses of
Reptron Display and System Integration were approximately $3.7 million. After
adjusting for the effects of Reptron Display and System Integration, the
increase in selling, general and administrative expenses was primarily
attributable to increased variable expenses associated with increased sales
volumes. These expenses, as a percentage of net sales, decreased from 15.6% in
1999 to 12.4% in 2000.
Interest Expense. Net interest expense increased $2.8 million, or 33.1%,
from $8.6 million in 1999 to $11.4 million in 2000. This increase in net
interest expense resulted primarily from an increase in average outstanding debt
of $16.1 million from $126.5 million, during 1999 to $142.6 million during 2000.
In addition, our overall average interest rate increased from 6.8% during 1999
to 8.0% during 2000.
Currency Fluctuation
Reptron pays for its purchases from foreign sources, including Asian
manufacturers, in United States dollars, which reduces the adverse effects of
currency fluctuations. Reptron has not experienced substantial adverse effects
from currency fluctuations to date.
19
Liquidity and Capital Resources
Reptron primarily finances its operations through subordinated notes, bank
credit lines, capital equipment leases, and short-term financing through
supplier credit lines.
Net cash used in or provided by operating activities has historically been
provided by net income (loss) levels combined with fluctuations in inventory,
accounts receivable and accounts payable. Operating activities for 2001 provided
cash of approximately $30.7 million. This increase in cash flow resulted
primarily from decreases in accounts receivables of $47.3 million and
inventories of $37.1 million, excluding a non-cash inventory writedown of $12.0
million in the second quarter of 2001. These items were partially offset by
decreases in accounts payable of $38.3 million and accrued expenses of $4.3
million. Days sales in accounts receivable were approximately 60 days at
December 31, 2001 compared to 53 days at December 31, 2000. Annualized inventory
turns for 2001 were 3.7 times compared to 4.5 times for 2000.
Capital expenditures totaled approximately $4.4 million in 2001. These
capital expenditures were primarily for the acquisition of manufacturing
equipment. These purchases were funded by the working capital line of credit.
Five lenders have made available to Reptron a $75 million revolving credit
facility (the "Credit Agreement") through January 8, 2004. Borrowings under the
Credit Agreement are collateralized by all inventory, accounts receivable,
equipment and general intangibles. The Credit Agreement limits the amount of
capital expenditures and prohibits the payment of dividends thereby restricting
the distribution of retained earnings. The Credit Agreement provides for, upon
notice to the lender, advancement of funds pursuant to either a Domestic Rate
Loan (variable at the prime rate, 4.75% at December 31, 2001) or a Eurodollar
Rate loan based on the London Interbank Offered Rate ("LIBOR") plus an indexed
spread (4.8% at December 31, 2001). Upon notice to the lenders, advances may be
converted from one type of loan to the other. As of December 31, 2001, we were
able to borrow the full credit facility based on the borrowing advance formulas
provided for in the Credit Agreement, as amended. Prior to the end of the fiscal
year, we anticipated that at December 31, 2001 we would not be in compliance
with the fixed charge coverage ratio covenant provided for in the Credit
Agreement. Consequently, prior to year end, we and our lenders reached an
agreement to amend the Credit Agreement to be effective as of December 31, 2001.
The amendment was to provide for removal of the fixed charge coverage ratio
covenant for only the period ending December 31, 2001 and was to add future
quarterly earnings requirements. The amendment was signed on February 20, 2002
and by its terms was effective December 31, 2001. Amounts outstanding under the
Credit Agreement as of December 31, 2001 were approximately $50.6 million.
Management believes that we will not be in compliance with the earnings
requirement contained in the Credit Agreement, as amended, for at least the
first quarter of 2002. Management has historically been able to obtain waivers
for non-compliance of Credit Agreement covenants and believes that we will
receive the necessary waiver for the first quarter of 2002 and future additional
waivers when and if needed. There can be no assurance that we will be able to
comply with these financial covenants in the future or that we will receive
waivers from our lenders for non-compliance with these covenants. The
elimination of the liquidity provided by the Credit Agreement would have a
material adverse effect on our business and financial condition.
Management believes that available credit facilities will be sufficient to
meet our capital expenditures and working capital needs of our operations as
presently conducted. However, future liquidity and cash requirements will depend
on a wide range of factors, including the level of business in existing
operations, expansion of facilities and possible acquisitions. In particular,
management is considering various alternatives related to the payment of
approximately $76.3 million of our Convertible Notes, which will become due in
August 2004. If the Convertible Notes are not converted into our common stock we
will be required to repay the indebtedness or make other arrangements to
refinance the Convertible Notes. If we fail to do so, it will result in a
default of the Convertible Notes, which would have a material adverse effect on
our business. While there can be no assurance that such financing will be
available in amounts and on acceptable terms, management believes that such
financing would likely be available on acceptable terms.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS
142, Goodwill and Intangible Assets. SFAS 141 is effective for all business
combinations completed after June 30, 2001. SFAS 142 is effective for the year
beginning January 1, 2002, however, certain provisions of that Statement apply
to goodwill and other intangible assets acquired between July 1, 2001 and the
effective date of SFAS 142.
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to all entities. It
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees. This
Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002.
20
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets To Be Disposed Of. The provisions of the statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001.
We have engaged a third party valuation consultant to assist in evaluating the
impact of the adoption of these standards but have not yet determined the full
effect of these recent accounting pronouncements on our financial position and
results of operations. However, beginning January 1, 2002, we will no longer
amortize the excess of cost over net assets acquired. This amortization expense
was approximately $1.4 million in 2001.
21
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
While Reptron had no holdings of derivative financial or commodity
instruments at December 31, 2001, we are exposed to financial market risks,
including changes in interest rates. Approximately 60% of interest bearing
borrowings have a fixed interest rate. However, borrowings under the working
capital Credit Facility bears interest at a variable rate based on the prime
rate or the LIBOR. Based on the average floating rate borrowings outstanding
throughout 2001, a 90 basis point change in the interest rates would have caused
Reptron's interest expense, net of the income tax effect, to change by
approximately $675,000. Reptron believes that this amount is not significant to
the 2001 results of operations.
Item 8. Financial Statements and Supplementary Data
The financial statements required by this Item are contained in pages F-1
through F-21 of this Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
22
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by this Item is incorporated by reference to the
definitive proxy statement to be filed by Reptron for the Annual Meeting of
Shareholders to be held June 24, 2002.
Item 11. Executive Compensation
Information required by this Item is incorporated by reference to the
definitive proxy statement to be filed by Reptron for the Annual Meeting of
Shareholders to be held June 24, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information required by this Item is incorporated by reference to the
definitive proxy statement to be filed by Reptron for the Annual Meeting of
Shareholders to be held June 24, 2002.
Item 13. Certain Relationships and Related Transactions
Information required by this Item is incorporated by reference to the
definitive proxy statement to be filed by Reptron for the Annual Meeting of
Shareholders to be held June 24, 2002.
23
PART IV
Item 14. Exhibits, Financial Statements, Schedule, and Reports on Form 8-K
(a) The following documents are filed as part of the report:
1. and 2. The financial statements and schedule filed as part of this
report are listed separately in the Index to Financial Statements and
Schedules beginning on page F-1 of this report.
3. For Exhibits see Item 14(c), below.
(b) No reports on Form 8-K have been filed during the period ended December
31, 2001, by Reptron.
(c) List of Exhibits:
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation (1)
3.1(a) Articles of Amendment to the Articles of Incorporation (5)
3.2 Bylaws (1)
4.1 Specimen Certificate for the Common Stock of Registrant (1)
4.2 Form of Indenture (4)
4.3 Form of Convertible Subordinated Note (included in Exhibit 4.2)
4.4 See Items 10.8 to 10.13
10.1 Reptron Electronics, Inc. Employee Profit Sharing Plan (1)
10.2 Reptron Electronics, Inc. Amended and Restated Incentive Stock Option Plan (2)
10.3 Reptron Electronics, Inc. Non-Employee Director Stock Option Plan (2)
10.4 Reptron Electronics, Inc. 401(k) Retirement Savings Plan (3)
10.5 Employment Agreement between Michael L. Musto and Reptron Electronics, Inc., dated June 5, 1998 (7)
10.6 Employment Agreement between Paul Plante and Reptron Electronics, Inc., dated January 5, 1999
(13)
10.7 Employment Agreement between Jack Killoren and Reptron Electronics, Inc., dated January 14, 1999
(9)
10.8 Revolving Credit Facility and Security Agreement between PNC Bank, National Association and
Reptron Electronics, Inc., dated January 8, 1999 (8)
10.9 Revolving Credit and Security Agreement First Amendment between PNC Bank, National Association and
Reptron Electronics, Inc., dated November 10, 1999 (11)
10.10 Revolving Credit and Security Agreement Second Amendment between PNC Bank, National Association
and Reptron, dated February 28, 2000 (11)
10.11 Revolving Credit and Security Agreement Third Amendment between PNC Bank, National Association and
Reptron Electronics, Inc., dated May 5, 2000
10.12 Revolving Credit and Security Agreement Fourth Amendment between PNC Bank, National Association
and Reptron Electronics, Inc., dated July 20, 2000 (13)
24
Exhibit No. Description
- ----------- -----------
10.13 Revolving Credit and Security Agreement Fifth Amendment between PNC Bank, National Association and
Reptron Electronics, Inc., dated September 27, 2001 (14)
10.14 Revolving Credit and Security Agreement Sixth Amendment between PNC Bank, National Association and
Reptron Electronics, Inc., dated December 31, 2001
10.15 Distributor Contract between the Electronic Components Division of Seiko Instruments U.S.A., Inc.
and Reptron Electronics, Inc., dated February 11, 1998 (6)
10.16 Distributor Contract between Micro Printer Division of Seiko Instruments U.S.A., Inc. and Reptron
Electronics, Inc., dated February 4, 1998 (6)
10.17 Distributor Agreement between Samsung Semiconductor, Inc. and Reptron Electronics, Inc., dated
June 1, 1998 (8)
10.18 Distributor Agreement between Samsung Display Devices Inc. and Reptron Electronics, Inc., dated
June 24, 1999 (10)
10.19 Commercial Mortgage Agreement between General Electric Capital Business Asset Funding Corporation
and Reptron Electronics, Inc. dated February 29, 2000 (12)
23.1 Consent of Grant Thornton LLP
24.1 Power of Attorney (See Signature Page)
- ----------
(1) Filed with Reptron's Registration Statement on Form S-1, dated February 8,
1994 (File No. 33-75040).
(2) Filed with Reptron's Registration Statement on Form S-8, dated December 22,
1994 (File No. 33-87854)
(3) Filed with Reptron's Registration Statement on Form S-8, dated June 6, 1997
(File No. 333-28727)
(4) Filed with Reptron's Amendment No. 1 to Registration Statement on Form S-3,
dated August 4, 1997 (File No. 333-31605)
(5) Filed with Reptron's Form 10-Q for the quarter ended June 30, 1997
(6) Filed with Reptron's Form 10-K for the year ended December 31, 1997
(7) Filed with the Company's Form 10-Q for the quarter ended June 30, 1998
(8) Filed with Reptron's Form 10-K for the year ended December 31, 1998
(9) Filed with Reptron's Form 10-Q for the quarter ended March 31, 1999
(10) Filed with Reptron's Form 10-Q for the quarter ended September 30, 1999
(11) Filed with Reptron's Form 10-K for the year ended December 31, 1999
(12) Filed with Reptron's Form 10-Q for the quarter ended March 31, 2000
(13) Filed with Reptron's Form 10-K for the Year Ended December 31, 2000
(14) Filed with Reptron's Form 10-Q for the quarter ended September 30, 2001
25
SIGNATURES
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, thereto duly authorized, in the City of Tampa,
State of Florida, on March 30, 2002.
REPTRON ELECTRONICS, INC.
By: /s/ Michael L. Musto
------------------------
Michael L. Musto,
Chief Executive Officer
Power of Attorney
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated. Each person whose signature appears below constitutes and
appoints Paul J. Plante, his true and lawful attorney-in-fact and agent, with
full power of substitution and revocation, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this report
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, may lawfully do or cause to be
done by virtue hereof.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Michael L. Musto Chief Executive Officer, and Director March 30, 2002
- ----------------------------------- (Principal Executive Officer)
Michael L. Musto
/s/ Paul J. Plante President, Chief Operating Officer, March 30, 2002
- ----------------------------------- Principal Accounting Officer and
Paul J. Plante Director
/s/ Leigh A. Lane Secretary and Director March 30, 2002
- -----------------------------------
Leigh A. Lane
/s/ William L. Elson Director March 30, 2002
- -----------------------------------
William L. Elson
/s/ John J. Mitcham Director March 30, 2002
- -----------------------------------
John J. Mitcham
/s/ Vincent Addonisio Director March 30, 2002
- -----------------------------------
Vincent Addonisio
/s/ William U. Parfet Director March 30, 2002
- -----------------------------------
William U. Parfet
26
REPTRON ELECTRONICS, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2000 and 2001 F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 2000 and 2001 F-4
Consolidated Statement of Shareholders' Equity for the years
ended December 31, 1999, 2000 and 2001 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 2000 and 2001 F-6
Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON SCHEDULE F-20
Schedule II -- Valuation and Qualifying Accounts for
the years ended December 31, 1999, 2000 and 2001 F-21
Report Of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Reptron Electronics, Inc.
We have audited the accompanying consolidated balance sheets of Reptron
Electronics, Inc. and its wholly owned subsidiaries as of December 31, 2000 and
2001, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of Reptron's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Reptron
Electronics, Inc. and subsidiaries as of December 31, 2000 and 2001, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Tampa, Florida
February 1, 2002
F-2
REPTRON ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
-------------------
2000 2001
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 188 $ 197
Accounts receivable - trade, net 100,311 53,018
Inventories, net 124,695 75,633
Prepaid expenses and other 2,298 1,995
Income taxes receivable -- 5,900
Deferred tax benefit 62 --
-------- --------
Total current assets 227,554 136,743
PROPERTY, PLANT AND EQUIPMENT - AT COST, NET 33,051 27,133
EXCESS OF COST OVER NET ASSETS ACQUIRED(GOODWILL), NET 31,473 30,073
DEFERRED INCOME TAX -- 3,551
OTHER ASSETS 2,528 1,895
-------- --------
$294,606 $199,395
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 65,199 $ 26,873
Current portion of long-term obligations 2,476 1,252
Accrued expenses 11,941 7,646
Income taxes payable 1,230 --
-------- --------
Total current liabilities 80,846 35,771
NOTE PAYABLE TO BANK 77,409 50,596
LONG-TERM OBLIGATIONS, less current portion 82,576 80,856
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Preferred Stock - authorized 15,000,000 shares
of $.10 par value; no shares issued -- --
Common Stock - authorized 50,000,000 shares
of $.01 par value; issued and outstanding,
6,359,257 and 6,397,196 shares, respectively 64 64
Additional paid-in capital 22,862 23,083
Retained earnings 30,849 9,025
-------- --------
53,775 32,172
-------- --------
$294,606 $199,395
======== ========
The accompanying notes are an integral part of these statements.
F-3
REPTRON ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Year Ended December 31,
-------------------------------------
1999 2000 2001
---------- ---------- ----------
Net sales $ 359,219 $ 576,459 $ 398,647
Cost of goods sold 307,443 482,897 352,492
---------- ---------- ----------
Gross profit 51,774 93,562 46,155
Selling, general and administrative expenses 55,902 71,543 66,685
---------- ---------- ----------
Operating income (loss) (4,128) 22,019 (20,530)
Interest expense, net 8,582 11,425 10,754
---------- ---------- ----------
Earnings (loss) before income taxes (12,710) 10,594 (31,284)
Income tax provision (benefit) (4,703) 4,903 (9,460)
---------- ---------- ----------
Net earnings (loss) before extraordinary item (8,007) 5,691 (21,824)
Extraordinary gain on extinguishment of debt, net of tax of $8,518 12,776 -- --
---------- ---------- ----------
Net earnings (loss) $ 4,769 $ 5,691 $ (21,824)
========== ========== ==========
Net earnings (loss) per common share - basic:
Earnings (loss) before extraordinary item $ (1.30) $ .91 $ (3.42)
Extraordinary gain 2.08 -- --
---------- ---------- ----------
Net earnings (loss) per common share - basic $ .78 $ .91 $ (3.42)
========== ========== ==========
Weighted average Common Stock shares
outstanding - basic 6,151,563 6,252,938 6,389,474
========== ========== ==========
Net earnings (loss) per common share - diluted:
Earnings (loss) before extraordinary item $ (1.30) $ .83 $ (3.42)
Extraordinary gain 2.08 -- --
---------- ---------- ----------
Net earnings (loss) per common share - diluted $ .78 $ .83 $ (3.42)
========== ========== ==========
Weighted average Common Stock equivalent shares
outstanding - diluted 6,151,563 6,836,911 6,389,474
========== ========== ==========
The accompanying notes are an integral part of these statements.
F-4
REPTRON ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
Total Additional
Shares Par Paid-In Retained Shareholders'
Outstanding Value Capital Earnings Equity
----------- ----- ---------- -------- -------------
Balance at January 1, 1999 6,147,119 $61 $21,676 $ 20,389 $ 42,126
Exercise of stock options 20,000 1 64 -- 65
Net earnings -- -- -- 4,769 4,769
--------- --- ------- -------- --------
Balance at December 31, 1999 6,167,119 62 21,740 25,158 46,960
Exercise of stock options 192,138 2 1,122 -- 1,124
Net earnings -- -- -- 5,691 5,691
--------- --- ------- -------- --------
Balance at December 31, 2000 6,359,257 64 22,862 30,849 53,775
Exercise of stock options 37,939 -- 221 -- 221
Net loss -- -- -- (21,824) (21,824)
--------- --- ------- -------- --------
Balance at December 31, 2001 6,397,196 $64 $23,083 $ 9,025 $ 32,172
========= === ======= ======== ========
The accompanying notes are an integral part of this statement.
F-5
REPTRON ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
--------------------------------
1999 2000 2001
-------- -------- --------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net earnings (loss) $ 4,769 $ 5,691 $(21,824)
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 10,694 10,568 10,339
Extraordinary gain (12,776) -- --
Gain on sale of assets -- (530) (1,111)
Deferred income taxes (6,219) (582) (3,489)
Change in assets and liabilities (net of effect of acquisition):
Accounts receivable - trade (11,115) (37,557) 47,293
Inventories 10,831 (42,142) 49,062
Prepaid expenses and other current assets 7,212 (180) 303
Other assets (329) (419) (79)
Accounts payable - trade 15,662 23,137 (38,326)
Accrued expenses (3,657) 3,627 (4,295)
Deferred revenue (70) -- --
Income taxes payable/receivable 966 784 (7,130)
-------- -------- --------
Net cash provided by (used in) operating activities (5,694) (37,603) 30,743
Cash flows from investing activities:
Net cash paid for acquisitions (8,075) -- --
Purchases of property, plant and equipment (3,921) (8,339) (4,448)
Proceeds from the sale of property, plant and equipment 101 2,234 3,250
-------- -------- --------
Net cash used in investing activities (11,895) (6,105) (1,198)
Cash flows from financing activities:
Net proceeds (payments) on note payable to bank 37,413 39,996 (26,813)
Proceeds from long-term obligations 48 6,015 --
Payments on long-term obligations (29,894) (3,347) (2,944)
Proceeds from exercise of stock options 65 1,124 221
-------- -------- --------
Net cash provided by (used in) financing activities 7,632 43,788 (29,536)
Net increase (decrease) in cash and cash equivalents (9,957) 80 9
Cash and cash equivalents at beginning of period 10,065 108 188
-------- -------- --------
Cash and cash equivalents at end of period $ 108 $ 188 $ 197
======== ======== ========
The accompanying notes are an integral part of these statements.
F-6
REPTRON ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reptron Electronics, Inc. ("Reptron") is a leading electronics manufacturing
supply chain services company operating as a national distributor of electronic
components, a contract manufacturer of electronic products and a display
solution provider. Our Electronic Component Distribution ("ECD") customers are
in diverse industries including robotics, telecommunications, computers and
computer peripherals, consumer electronics, healthcare, industrial controls and
contract manufacturing. Our Electronic Manufacturing Services ("EMS") segment
manufactures electronic products according to customer design, primarily for
customers in the telecommunications, healthcare, industrial/instrumentation,
banking and office products industries. As a display solution provider, we
provide display design engineering, systems integration and turnkey
manufacturing services.
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
1. Principles of Consolidation
---------------------------
The financial statements include the accounts of Reptron Electronics, Inc. and
its wholly-owned subsidiaries. All significant inter-company balances and
transactions have been eliminated.
2. Cash Equivalents
----------------
For purposes of the statement of cash flows, Reptron considers all highly liquid
debt instruments purchased with a maturity of three months or less to be cash
equivalents.
3. Inventories
-----------
Inventories are stated at the lower of cost or market. For EMS, cost is
determined using the first-in, first-out method (FIFO). ECD uses the average
cost method to measure cost, which approximates FIFO.
4. Property, Plant and Equipment
-----------------------------
Depreciation is provided for, using the straight-line method, in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives (buildings 39 1/2 years, most other asset categories 5
years). Leasehold improvements are amortized using the straight-line method over
the lives of the respective leases or the service lives of the improvements,
whichever is shorter. Leased equipment under capital leases is amortized using
the straight-line method over the lives of the respective leases or over the
service lives of the assets for those leases which substantially transfer
ownership. Accelerated methods are used for tax depreciation.
5. Excess of Cost Over Net Assets Acquired (Goodwill)
--------------------------------------------------
The excess of cost over net assets acquired is amortized over a twenty or thirty
year period, as applicable, using the straight-line method. Excess of cost over
net assets acquired was approximately $35,029,000 less accumulated amortization
which totaled approximately $3,556,000 and $4,956,000 at December 31, 2000 and
2001, respectively.
6. Impairment of Assets
--------------------
Reptron's policy is to periodically review and evaluate whether there has been a
permanent impairment in the value of long-lived assets, certain identifiable
intangibles and goodwill. Factors considered in the valuation include current
operating results, trends and anticipated undiscounted future cash flows. An
impairment loss is recognized to the extent that the sum of discounted estimated
future cash flows (using the Company's incremental borrowing rate over a period
of less than 30 years) that is expected to result from the use of the asset is
less than the carrying value. There have been no impairment losses in 1999, 2000
or 2001.
F-7
REPTRON ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 2000 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
7. Income Taxes
------------
Reptron accounts for income taxes on the liability method, as provided by
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting For
Income Taxes." Under the liability method specified by SFAS 109, deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in deferred tax assets and
liabilities.
8. Earnings Per Common Share
-------------------------
Earnings per share are computed using the basic and diluted calculations, as
provided by SFAS No. 128 "Earnings per Share". SFAS No. 128 eliminates primary
and fully diluted earnings per share and requires presentation of basic and
diluted earnings per share together with disclosure of how the per share amounts
were computed.
9. Use of Estimates
----------------
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
10. Stock Based Compensation
------------------------
Reptron presents the disclosure provisions of SFAS No. 123 "Accounting for Stock
Based Compensation" as it relates to stock options granted to employees. As
permitted by SFAS No. 123, Reptron applies Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees" and related interpretations in
measuring compensation for stock options issued.
11. Revenue Recognition
-------------------
Revenues are recognized upon shipment of product, at which time title to goods
has transferred to the buyer. The Company performs periodic credit evaluations
of its customers' financial condition and does not require collateral on its
accounts receivable. Credit losses are provided for in the financial statements
and consistently have been within management's expectations. Accounts receivable
are presented net of an allowance for doubtful accounts of $1,574,000 and
$1,000,000 in 2000 and 2001, respectively. The Company incurred $514,000,
$1,222,000, and $1,562,000 of bad debt expense during 1999, 2000, and 2001,
respectively.
12. Recent Accounting Pronouncements
--------------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS
142, Goodwill and Intangible Assets. SFAS 141 is effective for all business
combinations completed after June 30, 2001. SFAS 142 is effective for the year
beginning January 1, 2002, however, certain provisions of that Statement apply
to goodwill and other intangible assets acquired between July 1, 2001 and the
effective date of SFAS 142.
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to all entities. It
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees. This
Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002.
F-8
REPTRON ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 2000 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets To Be Disposed Of. The provisions of the statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001.
The Company has engaged a third party valuation consultant to assist in
evaluating the impact of the adoption of these standards and has not yet
determined the full effect of adoption on its financial position and results of
operations. However, beginning January 1, 2002, the Company will no longer
amortize the excess of cost over net assets acquired. This amortization expense
was approximately $1.4 million in 2001.
13. Reclassifications
-----------------
Certain reclassifications have been made to conform to the 2001 presentation.
NOTE B - STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information (in thousands):
Year Ended December 31
--------------------------------
1999 2000 2001
------ ------- -------
Cash paid during the year for:
Interest $9,207 $11,098 $11,131
Income taxes $1,090 $ 4,662 $ 1,178
Reptron incurred approximately $264,000, and $2,000,000 of obligations under
capital leases for the acquisition of equipment during 1999 and 2000,
respectively. No capital lease obligations were incurred in 2001.
On October 27, 1999 Reptron completed the acquisition of Applied Instruments
("Applied"). At closing, the assets were recorded at approximately $9.4 million,
consisting of the sum of a cash payment of $7.5 million, acquisition costs, and
among the assumption of stated liabilities, $1.4 million of bank debt. Reptron
allocated approximately $6.4 million of the purchase price to goodwill. See Note
K.
NOTE C - INVENTORIES
Inventories consist of the following (in thousands):
December 31,
----------------------
2000 2001
-------- --------
Electronic Component Distribution:
Inventories $ 87,284 $44,509
Electronic Manufacturing Services:
Work in process 13,101 9,326
Raw materials 27,082 24,632
Less reserve for excess and obsolete inventory (2,772) (2,834)
-------- -------
$124,695 $75,633
======== =======
During 2001, the Company recorded a $12 million charge to writedown inventories
to the lower of cost or market. This writedown was necessitated by a significant
decline in component pricing, excess components due to significant reductions in
EMS customer demands, and vendor line terminations.
F-9
REPTRON ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 2000 and 2001
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
December 31,
---------------------
2000 2001
-------- --------
Land and buildings $ 14,873 $ 12,022
Furniture, fixtures and equipment 50,915 51,842
Leasehold improvements 3,351 4,338
-------- --------
69,139 68,202
Less accumulated depreciation and amortization (36,088) (41,069)
-------- --------
$ 33,051 $ 27,133
======== ========
NOTE E - NOTE PAYABLE TO BANK
Reptron is party to an amended and restated revolving credit agreement ("Credit
Agreement") dated January 8, 1999. Five lenders have made available to the
Company a $75 million revolving credit facility through January 8, 2004.
Borrowings under the Credit Agreement are collateralized by all inventory,
accounts receivable, equipment and general intangibles. The Credit Agreement
limits the amount of capital expenditures and prohibits the payment of dividends
thereby restricting the distribution of retained earnings. The Credit Agreement
provides for, upon notice to the lender, advancement of funds pursuant to either
a Domestic Rate Loan (variable at the prime rate, 4.75% at December 31, 2001) or
a Eurodollar Rate loan based on the LIBOR rate plus an indexed spread (4.8% at
December 31, 2001). Upon notice to the lenders, advances may be converted from
one type of loan to the other. Prior to the end of the fiscal year, the Company
anticipated that at December 31, 2001 it would not be in compliance with the
fixed charge coverage ratio covenant provided for in the Credit Agreement.
Consequently, prior to year end, the Company and its lenders reached an
agreement to amend the Credit Agreement to be effective as of December 31, 2001.
The amendment was to provide for removal of the fixed charge coverage ratio
covenant for only the period ending December 31, 2001 and was to add quarterly
earnings requirements. The amendment was signed on February 20, 2002 and by its
terms was effective December 31, 2001. Amounts outstanding under the Credit
Agreement as of December 31, 2001 were approximately $50.6 million. Management
believes that the Company will not be in compliance with the earnings
requirement contained in the Credit Agreement, as amended, for at least the
first quarter of 2002. Management has historically been able to obtain waivers
for non-compliance of Credit Agreement covenants and believes that it will
receive the necessary waiver for the first quarter of 2002 and future additional
waivers when and if needed. Accordingly, the note payable has been classified as
a non-current obligation. There can be no assurance that the Company will be in
compliance with, or be able to obtain waivers of non-compliance with the revised
covenants for 2002.
NOTE F - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31 (in thousands):
2000 2001
------- -------
Convertible subordinated notes, due August, 2004, with semi-annual
interest installments at a rate of 6.75% $76,315 $76,315
Notes payable collateralized by the Tampa manufacturing facility,
due in monthly principal and interest installments of $39.6,
through March, 2015, at an interest rate of 8.6% 3,887 3,740
Capitalized lease obligations
for equipment, due in monthly principal and interest
payments through 2003 3,688 1,731
Others 1,162 322
------- -------
85,052 82,108
Less current maturities 2,476 1,252
------- -------
$82,576 $80,856
======= =======
F-10
REPTRON ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 2000 and 2001
NOTE F - LONG-TERM OBLIGATIONS - Continued
The $76.3 million 6 3/4% Convertible Subordinated Notes (the "Notes")
outstanding as of December 31, 2000 and 2001 pay interest semi-annually on
February 1 and August 1. At the option of the holder, the Notes are convertible
into shares of Reptron Common Stock at a rate of 35.0877 shares per $1,000 of
principal. If the Notes are not converted into Reptron Common Stock the Company
will be required to repay the indebtedness or make other arrangements to
refinance the Notes. If the Company fails to do so, it will result in a default
of the Notes, which would have a material adverse effect on the Company.
At December 31, 2001, aggregate maturities of long-term obligations are as
follows (in thousands):
Year ending December 31,
------------------------
2002 $ 1,252
2003 977
2004 76,531
2005 236
2006 254
Thereafter 2,858
-------
$82,108
=======
At December 31, 2001, the net book value of equipment under capital leases is
approximately $1,968,000. The related capital lease obligations are included
with long-term obligations.
Interest payable was $2,714,000 and $2,337,000 at December 31, 2000 and 2001,
respectively. Interest payable consists primarily of accrued interest on the
convertible subordinated notes due 2004 which have interest payment dates of
February 1 and August 1. Accrued interest on these notes was $2,159,000 at
December 31, 2000 and 2001.
NOTE G - INCOME TAXES
The income tax provision (benefit) for the years ended December 31, 1999, 2000
and 2001, respectively, is as follows (in thousands):
December 31,
----------------------------------------
1999 2000 2001
------ ------ -------
Current $1,303 $5,485 $(5,971)
Deferred 2,512 (582) (3,489)
------ ------ -------
$3,815 $4,903 $(9,460)
====== ====== =======
Reptron's effective tax rate differs from the statutory U. S. federal income tax
rate as a result of the following:
Year Ended December 31,
-----------------------
1999 2000 2001
---- ---- -----
Statutory federal tax rate 34.0% 34.0% 34.0%
State income taxes of approximately 7.6%, 8.5% and 7.4%
in 1999, 2000, and 2001, net of federal tax benefit 5.0 5.6 5.0
Meals and entertainment 2.6 2.9 (0.6)
Non-deductible goodwill 3.3 2.7 (0.9)
Other (0.5) 1.1 (0.3)
Deferred tax valuation allowance 0.0 0.0 (7.0)
---- ---- ----
Effective tax rate 44.4% 46.3% 30.2%
==== ==== ====
F-11
REPTRON ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 2000 and 2001
NOTE G - INCOME TAXES - Continued
Deferred income tax assets and liabilities resulting from differences between
accounting for financial statement purposes and tax purposes pursuant to SFAS
No. 109, are summarized as follows (in thousands):
December 31
----------------
2000 2001
------ -------
Deferred tax assets
Net operating loss carryforward $ 58 $ 3,579
AMT and other tax credit carryforward -- 1,647
Inventory reserves 1,109 1,454
Accrued expenses 180 98
Accrued vacation 198 116
Allowance for bad debts 629 400
Other 67 141
------ -------
2,241 7,435
------ -------
Deferred tax liabilities
Depreciation 1,952 1,369
Excess of cost over net assets acquired 213 304
Other 14 11
------ -------
2,179 1,684
------ -------
Net deferred tax asset (liability) 62 5,751
Less: valuation allowance -- (2,200)
------ -------
$ 62 $ 3,551
====== =======
Reptron has net operating loss carryforwards of approximately $7.7 million for
Federal and $28.5 million for state income tax purposes, which expire in the
years 2018 through 2021. Realization of the tax loss and credit carryforwards is
contingent upon future taxable earnings in the appropriate jurisdictions.
Valuation allowances have been recorded in 2001 for deferred tax assets which
may not be realized. Each carryforward item is reviewed for expected
utilization, using a "more likely than not" approach, based on the character of
the carryforward item (credit, loss, etc.), the associated taxing jurisdiction
(federal or state), the relevant history for the particular item, the applicable
expiration dates, and identified actions under the control of the Company in
realizing the associated carryforward benefits. The Company assesses the
available positive and negative evidence surrounding the recoverability of the
deferred tax assets and applies its judgement in estimating the amount of
valuation allowance necessary under the circumstances. The Company continues to
assess and evaluate strategies that will enable the carryforward, or a greater
portion thereof, to be utilized, and will reduce the valuation allowance
appropriately for each item at such time when it is determined that the "more
likely than not" criterion is satisfied.
NOTE H - COMMITMENTS AND CONTINGENCIES
Operating Leases
- ----------------
Reptron has operating leases for facilities and certain machinery and equipment
which expire at various dates through 2006. Certain leases provide for payment
by Reptron of any increases in property taxes and insurance over a base amount
and others provide for payment of all property taxes and insurance by Reptron.
See Note L for lease with related parties.
F-12
REPTRON ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 2000 and 2001
NOTE H - COMMITMENTS AND CONTINGENCIES - Continued
Future minimum payments, by year and in the aggregate, under noncancellable
operating leases consist of the following at December 31, 2001 (in thousands):
Year ending December 31,
- ------------------------
2002 $2,646
2003 2,030
2004 1,436
2005 913
2006 505
Thereafter 1,224
Total rent expense for the years ended December 31, 1999, 2000 and 2001 was
approximately, $1,737,000, $1,878,000, and $3,021,000, respectively.
Litigation
- ----------
Reptron is one of ninety-one defendants in a patent infringement action
commenced by the Lemelson Medical, Education & Research Foundation, Limited
Partnership ("Lemelson"). Lemelson alleges that Reptron and the other
co-defendants have infringed various patents that purportedly cover the use of
"machine vision" and "bar code" scanning equipment. Lemelson has asserted
similar claims against other companies in Reptron's industry, as well as against
companies in other industries. Reptron understands that Lemelson has entered
into licenses of the patents alleged to be infringed with others. If Reptron's
defenses of the alleged claims prove unsuccessful, Reptron cannot assure that it
will be offered a license of the Lemelson patents. Based on Reptron's
understanding of the terms that Lemelson has made available to other licensees,
if such a license is negotiated, Reptron believes that obtaining a license from
Lemelson under the same or similar terms would not have a material adverse
effect on its results of operations or financial condition. However, if a
license is effectuated, Reptron cannot assure that its terms, or the ultimate
resolution of this matter, will not have a material adverse effect on Reptron's
operating results or financial condition.
Reptron is, from time to time, involved in litigation relating to claims arising
out of its operations in the ordinary course of business. Reptron believes that
none of these claims, which were outstanding as of December 31, 2001, should
have a material adverse impact on its financial condition or results of
operations.
NOTE I - SHAREHOLDERS' EQUITY
The Board of Directors is authorized, without further shareholder action, to
divide any or all shares of the authorized Preferred Stock into series and to
fix and determine the designations, preferences, relative rights,
qualifications, limitations or restrictions thereon, of any series so
established, including voting powers, dividend rights, liquidation preferences,
redemption rights and conversion privileges. The Board of Directors has not
authorized any issuance of Preferred Stock and there are no plans, agreements,
or understandings for the authorization or issuance of any shares of Preferred
Stock.
F-13
REPTRON ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 2000 and 2001
NOTE J - EMPLOYEE BENEFITS
Stock Option Plans
- ------------------
Reptron's Incentive Stock Option Plan (the "ISO Plan") was adopted in November,
1993 to provide for the grant to employees of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code. A total of 2,000,000 shares
of Common Stock has been reserved for issuance under the ISO Plan. In May 2001,
Reptron's shareholders approved the establishment of the Reptron 2002 Incentive
Stock Option Plan (the "2002 Plan"). The 2002 Plan has essentially the same
terms and conditions and is administered identically to the ISO Plan. A total of
1,000,000 shares of Common Stock has been reserved for issuance under the 2002
Plan. Reptron also offers a Director's Stock Option Plan (the "DSO Plan") that
has a total of 450,000 shares of Common Stock reserved for issuance under this
plan. Both the ISO Plan and DSO Plan is intended to provide incentives to
directors, officers, and other key employees and to enhance Reptron's ability to
attract and retain qualified employees. Stock options are granted for the
purchase of Common Stock at a price not less than the fair market value on the
date of grant.
The following table summarizes the activity in Common Stock subject to options
for the three years ended December 31, 2001:
Range Weighted Weighted
of Average Average
Exercise Exercise Remaining
Shares Price Price Contractual Life
--------- ------------- -------- ----------------
(In Years)
Outstanding at December 31, 1998 1,142,339 $4.38 - 9.13 $5.95 8.6
Granted 174,750 $2.94 - 6.00 $3.56
Exercised (20,000) $ 3.19 $3.19
Forfeited (101,876) $3.55 - 6.00 $5.83
---------
Outstanding at December 31, 1999 1,195,213 $2.94 - 9.13 $5.65 7.8
Granted 228,257 $8.00 - 15.97 $8.36
Exercised (192,138) $3.10 - 11.10 $5.85
Forfeited (78,708) $3.55 - 11.59 $6.48
---------
Outstanding at December 31, 2000 1,152,624 $2.94 - 15.97 $6.14 7.4
Granted 429,249 $4.30 - 10.84 $7.84
Exercised (37,939) $5.85 - 11.13 $5.82
Forfeited (118,503) $3.19 - 10.56 $6.16
---------
Outstanding at December 31, 2001 1,425,431 $2.94 - 15.97 $6.63 7.0
=========
The following table summarizes information about Common Stock options
outstanding at December 31, 2001:
Options Outstanding Options Exercisable
- ----------------------------------------------------------- ----------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/01 Contractual Life Price at 12/31/01 Price
- --------------- ----------- ---------------- -------- ----------- --------
(In Years)
$2.94 - 3.66 99,313 7.4 $ 3.29 71,691 $ 3.25
$4.23 - 5.89 44,450 4.9 $ 5.04 32,201 $ 5.00
$6.00 - 6.00 761,668 6.0 $ 6.00 639,591 $ 6.00
$6.09 - 8.56 452,000 8.8 $ 7.85 27,907 $ 8.01
$8.57 - 15.97 68,000 8.0 $11.43 28,626 $11.33
--------- -------
1,425,431 7.0 $ 6.63 800,016 $ 5.98
========= =======
F-14
REPTRON ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 2000 and 2001
NOTE J - EMPLOYEE BENEFITS - Continued
At December 31, 1999 and 2000, exercisable shares totaled 459,305 and 559,055 at
weighted average exercise prices of $5.72 and $5.88, respectively.
The duration of options granted under the ISO Plan is ten years from the date of
grant, or such other date as determined by the Board of Directors. In general,
the options must be exercised while employed by Reptron or 90 days thereafter.
The options may be exercised in four equal annual increments, cumulatively,
beginning one year after the date of grant, and all such options may be
exercised in full four years after the date of grant. The options are
non-transferable other than by will or by the laws of descent and distribution.
Reptron has adopted the disclosure provisions of SFAS No. 123, as it relates to
employee awards. APB No. 25 is applied in accounting for Reptron's plans.
Accordingly, no compensation expense is recognized related to the stock based
compensation plans. The pro forma net earnings (loss) and net earnings (loss)
per common share, if Reptron had elected to account for its plans consistent
with the methodology prescribed by SFAS No. 123, are as follows:
1999 2000 2001
------ ------ --------
(in thousands except per share data)
---------------------------------
Net earnings (loss):
As reported $4,769 $5,691 $(21,824)
Pro forma $3,879 $4,929 $(22,655)
Net earnings (loss) per common share - basic:
As reported $ 0.78 $ 0.91 $ (3.42)
Pro forma $ 0.63 $ 0.79 $ (3.55)
Net earnings (loss) per common share - diluted:
As reported $ 0.78 $ 0.83 $ (3.42)
Pro forma $ 0.63 $ 0.72 $ (3.55)
The fair value of each option grant is estimated on the date of grant using the
Binomial options pricing model with the following weighted average assumptions
used for grants in 1999, 2000 and 2001, respectively, no dividend yields for all
years; expected volatility of 53.7%, 54.1% and 50.0%; risk free interest rates
of approximately 5.7%, 5.0% and 5.0%; and expected lives of 3.8, 3.9 and 4.0
years. The weighted average fair value of options granted in 1999, 2000 and 2001
are $1.63, $3.59 and $3.39, respectively.
401(k) Plans
- ------------
In 1993, Reptron established a deferred compensation plan (the "Plan") under
section 401(a) of the Code. Substantially all of the officers and employees of
Reptron are eligible to participate in the Plan. Employees are eligible to
participate in the Plan after ninety days of service and after attaining age 18.
At its discretion, Reptron may make matching contributions to the Plan.
Employees are always vested in their contributions and are fully vested in the
employer contributions after five years of service. Reptron contributed
approximately $109,000, $242,000 and $260,000 to the Plan in 1999, 2000 and
2001, respectively.
Hibbing Electronics Corporation's ("Hibbing") employees are eligible to
participate in Hibbing's voluntary retirement savings plan upon completion of
six months of qualified service. Employee contributions up to 4% of wages, as
defined, are partially matched by the Company. Reptron contributed approximately
$59,000 during 1999.
Applied employees are eligible to participate in Applied's voluntary retirement
savings plan upon completion of six months of qualified service. There were no
employer contributions for 1999.
F-15
REPTRON ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 2000 and 2001
NOTE J - EMPLOYEE BENEFITS - Continued
On January 1, 2000, the Company merged the 40l(k) Plans of Hibbing Electronics
and Applied Instruments LLC into the amended Reptron Electronics, Inc 401(k)
Retirement Savings Plan. The amended plan allows for participation of employees
after 90 days of service and after attaining the age of 18. At its discretion,
Reptron may make matching contributions to the Plan. Employees are always vested
in their contributions and are fully vested in the employer contributions after
five years of service. Participants enrolled in the Hibbing Electronics
Corporation Plan prior to January 1, 2000 are fully vested after four years of
service.
NOTE K - ACQUISITIONS
On October 27, 1999 Reptron completed the acquisition of Applied Instruments
("Applied"). At closing, the assets were recorded at approximately $9.4 million,
consisting of the sum of a cash payment of $7.5 million, acquisition costs, and
among the assumption of stated liabilities, $1.4 million of bank debt. Reptron
allocated approximately $6.4 million of the purchase price to goodwill. Reptron
allocated approximately $4.0 million of the purchase to tangible assets. In
addition, Reptron assumed certain building and equipment lease obligations.
Management has determined that the goodwill associated with this transaction
will be amortized over a 20 year life. The results of operations of Applied
Instruments have been reflected in Reptron's results of operations beginning
immediately subsequent to the acquisition date of October 27, 1999. Under the
terms of the purchase agreement and based on the results of operations during
the fiscal year 2000, the sellers earned an additional $2,247,000. This
additional consideration was added to goodwill as of December 31, 2000. No
additional payment was earned in fiscal year 2001. Additional purchase
consideration may be earned during 2002 based upon Applied Instruments
performance. The remaining installment cannot exceed $3.5 million.
NOTE L - RELATED PARTY TRANSACTIONS
A director of Reptron serves as its general counsel and received approximately
$200,000, $174,000 and $190,000 for services rendered during 1999, 2000 and
2001, respectively.
Reptron leases one of its distribution sales offices (Detroit, Michigan) from
the CEO of Reptron. The building includes office and warehouse space and totals
approximately 10,000 square feet. Rent expenses on this facility totaled $72,000
in 1999, 2000 and 2001, which management believes to be comparable to the rent
that would be paid to an unrelated party. The lease expires in November 2003.
Reptron also leases a total of 127,000 square feet of manufacturing and
administrative offices for the Hibbing, Minnesota manufacturing operation. These
properties are owned, in part, by four individuals on the senior management team
of that facility. Rent expense on these properties totaled $478,000, $514,000,
and $484,000 for the years ended December 31, 1999, 2000, and 2001,
respectively, which management believes to be comparable to the rent that would
be paid to an unrelated party.
During 1999, Reptron's CEO beneficially acquired a portion of Reptron's
convertible subordinated 6.75% notes with a face value of $8.0 million. Interest
on these notes was approximately $359,000 in 1999 and approximately $540,000 in
2000 and 2001. Also in 1999, Reptron's President and COO beneficially acquired a
portion of Reptron's convertible subordinated 6.75% notes with a face value of
$117,000. Interest on these notes was approximately $3,000 in 1999 and
approximately $8,000 in 2000 and 2001.
The Company occasionally leases an airplane from a company controlled by
Reptron's CEO. The lease is based on a per hour use charge. Payments for the use
of the airplane were $12,000, $33,000 and $68,000 during 1999, 2000, and 2001,
respectively.
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 2001, the carrying amount of cash, accounts receivable, accounts
payable and accrued expenses approximate fair value because of the short-term
maturities of these items.
The fair market value of Reptron's convertible subordinated 6.75% notes is
$41,973,000, based on the average of the bid and ask prices of the notes on
December 31, 2001. The carrying amounts of all other current and long-term
portions of notes payable, and long-term obligations approximate fair market
value since the interest rates on most of these instruments change with market
interest rates.
F-16
REPTRON ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 2000 and 2001
NOTE N - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net earnings
(loss) per common share:
1999 2000 2001
---------- ---------- -----------
Numerator:
Net earnings (loss) (in thousands) $ 4,769 $ 5,691 $ (21,824)
========== ========== ===========
Denominator:
For basic earnings (loss) per share -
Weighted average shares 6,151,563 6,252,938 6,389,474
Effect of dilutive securities:
Employee stock options -- 583,973 --
---------- ---------- -----------
For diluted earnings (loss) per share 6,153,563 6,836,911 6,389,474
========== ========== ===========
Net earnings (loss) per common share - basic $ .78 $ .91 $ (3.42)
========== ========== ===========
Net earnings (loss) per common share - diluted $ .78 $ .83 $ (3.42)
========== ========== ===========
In 1999 and 2001 all options have been excluded from the computation of diluted
earnings per share because the options' exercise price exceeded the average
market price of the common stock, therefore, the effect on earnings per share
would be anti-dilutive.
The convertible notes (See Note F) were not included in the computation of
diluted earnings per share for all years due to the conversion price of $28.50
exceeding the average market price of the common stock and, therefore, the
effect would be anti-dilutive.
F-17
REPTRON ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 2000 and 2001
NOTE O - FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Reptron has two material industry segments: Electronic Component Distribution
and Electronic Manufacturing Services. Electronic Component Distribution
purchases a wide variety of electronic components, including semiconductors,
passive products and electromechanical components, for distribution to
manufacturers and wholesalers throughout the United States. Electronic
Manufacturing Services manufactures electronic products (including display
solutions) according to customer design for a select number of customers
throughout the country representing a diverse range of industries. Intersegment
sales include a margin, based on market pricing, which is eliminated in
consolidation.
The following table shows net sales, operating income, identifiable assets,
depreciation and amortization expense and capital expenditures as of and for the
years ended 1999, 2000 and 2001.
Year Ended December 31,
------------------------------------
1999 2000 2001
-------- -------------- --------
(in thousands)
------------------------------------
Net sales
Unaffiliated customers
Electronic Component Distribution $198,132 $345,906 $227,259
Electronic Manufacturing Services 161,085 230,553 171,388
-------- -------- --------
359,217 576,459 398,647
Intersegment sales 6,779 8,718 10,007
-------- -------- --------
$365,996 $585,177 $408,654
======== ======== ========
Operating income (loss)
Electronic Component Distribution $ (3,884) $ 14,929 $(14,570)
Electronic Manufacturing Services (244) 7,090 (5,960)
-------- -------- --------
$ (4,128) $ 22,019 $(20,530)
======== ======== ========
Identifiable assets
Electronic Component Distribution $ 55,587 $152,341 $ 73,806
Electronic Manufacturing Services 154,874 140,539 113,965
-------- -------- --------
210,461 292,880 187,771
Corporate 5,392 1,726 11,624
-------- -------- --------
$215,853 $294,606 $199,395
======== ======== ========
Capital expenditures (including capital leases)
Electronic Component Distribution $ 1,222 $ 1,282 $ 1,850
Electronic Manufacturing Services 2,898 8,882 2,513
-------- -------- --------
4,120 10,164 4,363
Corporate 65 175 85
-------- -------- --------
$ 4,185 $ 10,339 $ 4,448
======== ======== ========
Depreciation and amortization
Electronic Component Distribution $ 1,825 $ 1,933 $ 1,782
Electronic Manufacturing Services 8,086 7,916 7,761
-------- -------- --------
9,911 9,849 9,543
Corporate 783 719 796
-------- -------- --------
$ 10,691 $ 10,568 $ 10,339
======== ======== ========
Net interest expense is not reflected in the industry segment information,
presented above, as it is not taken into consideration in management's analysis
of segment performance.
F-18
REPTRON ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 2000 and 2001
NOTE P - SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the
quarterly periods of 2000 and 2001, (in thousands except per share data):
Three Months Ended
------------------------------------------------
2001 March 31 June 30 September 30 December 31
---- -------- -------- ------------ -----------
Net sales $134,230 $ 99,327 $ 84,913 $ 80,177
Gross profit 21,627 2,264 12,038 10,226
Operating income 2,878 (16,322) (3,228) (3,858)
Net earnings (270) (11,852) (3,674) (6,028)
Net earnings per common share - basic $ (0.04) $ (1.85) $ (0.57) $ (0.94)
Net earnings per common share - diluted $ (0.04) $ (1.85) $ (0.57) $ (0.94)
2000
----
Net sales $122,993 $140,880 $152,653 $159,933
Gross profit 19,699 23,683 25,040 25,140
Operating income 3,125 5,316 6,591 6,987
Net earnings 388 1,382 1,893 2,028
Net earnings per common share - basic $ 0.06 $ 0.22 $ 0.30 $ 0.33
Net earnings per common share - diluted $ 0.06 $ 0.20 $ 0.27 $ 0.30
F-19
Report Of Independent Certified Public Accountants On Schedule
--------------------------------------------------------------
Board of Directors
Reptron Electronics, Inc.
In connection with our audit of the consolidated financial statements of Reptron
Electronics, Inc., referred to in our report dated February 1, 2002, which is
included in this Annual Report on SEC Form 10-K for the year ended December 31,
2001, we have also audited Schedule II for each of the three years in the period
then ended. In our opinion, this schedule presents fairly, in all material
respects, the information required to be set forth therein.
/s/ GRANT THORNTON LLP
Tampa, Florida
February 1, 2002
F-20
SCHEDULE II
REPTRON ELECTRONICS, INC.
Valuation and Qualifying Accounts
For the Years Ended December 31, 1999, 2000, and 2001
(in thousands)
Column A Column B Column C Column D Column E
-------- ---------- ---------- ------------ --------
Balance at Charged to Accounts Balance
Beginning Costs and Written Off, at End
Description of Year Expenses Net of Year
----------- ---------- ---------- ------------ --------
Allowance for Doubtful Accounts
Year Ended December 31, 1999 $ 483 $ 514 $ (388) $ 609
Year Ended December 31, 2000 $ 609 $ 1,222 $ (257) $1,574
Year Ended December 31, 2001 $1,574 $ 1,562 $(2,136) $1,000
Deferred Tax Asset Valuation Allowance
Year Ended December 31, 1999 $ -- $ -- $ -- $ --
Year Ended December 31, 2000 $ -- $ -- $ -- $ --
Year Ended December 31, 2001 $ -- $ 2,200 $ -- $2,200
Reserve for Excess and Obsolete Inventory
Year Ended December 31, 1999 $1,948 $ -- $ 318 $1,630
Year Ended December 31, 2000 $1,630 $ 2,337 $ 1,195 $2,772
Year Ended December 31, 2001 $2,772 $14,397 $14,335 $2,834
F-21
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
10.11 Revolving Credit and Security Agreement Third Amendment
between PNC Bank, National Association and Reptron
Electronics, Inc., dated May 5, 2000
10.14 Revolving Credit and Security Agreement Sixth Amendment
between PNC Bank, National Association and Reptron
Electronics, Inc., dated December 31, 2001
23.1 Consent of Grant Thornton LLP