BEL FUSE INC /NJ - Annual Report: 2004 (Form 10-K)
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
| x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the Fiscal Year Ended December 31, 2004 |
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the transition period from _______ to _______ |
Commission
File Number 0-11676
BEL FUSE
INC.
(Exact
name of registrant as specified in its charter)
|
New
Jersey |
22-1463699 |
|
(State
or other jurisdiction of |
(I.R.S.
Employer |
|
incorporation
or organization) |
Identification
No.) |
206 Van
Vorst Street, Jersey City, New Jersey 07302
(201)
432-0463
(Address
and telephone number, including area code, of registrant's principal executive
office)
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Class A
Common Stock, $.10 par value; Class B Common Stock, $.10 par value
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 o
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. o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Securities Exchange Act of 1934) Yes x No o
The
aggregate market value of the voting and non-voting common equity of the
registrant held by non-affiliates (for this purpose, persons and entities other
than executive officers, directors, and 5% or more shareholders) of the
registrant, as of the last business day of the registrant's most recently
completed second fiscal quarter (June 30, 2004), was $417,928,000.
Number of
shares of Common Stock outstanding as of March 1, 2005: 2,702,677 Class A Common
Stock; 8,660,589 Class B Common Stock
Documents
incorporated by reference:
Bel Fuse
Inc.'s Definitive Proxy Statement for the 2005 Annual Meeting of Stockholders is
incorporated by reference into Part III.
|
BEL
FUSE INC. | |||
|
INDEX | |||
|
Forward
Looking Information |
Page | ||
|
Part
I |
|||
|
Item
1. |
Business |
1 | |
|
Item
2. |
Properties |
16 | |
|
Item
3. |
Legal
Proceedings |
18 | |
|
Item
4. |
Submission
of Matters to a Vote of Security Holders |
18 | |
|
Part
II |
|||
|
Item
5. |
Market
for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases
of Equity Securities |
19 | |
|
Item
6. |
Selected
Financial Data |
21 | |
|
Item
7. |
Management's
Discussion and Analysis of Financial Condition
and Results of Operations |
23 | |
|
Item
7A. |
Quantitative
and Qualitative Disclosures About Market
Risk |
41 | |
|
Item
8. |
Financial
Statements and Supplementary Data |
41 | |
|
Item
9. |
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure |
43 | |
|
Item
9A. |
Controls
and Procedures |
43 | |
|
Item
9B. |
Other
Information |
44 | |
|
Part
III |
|||
|
Item
10. |
Directors
and Executive Officers of the Registrant |
44 | |
|
Item
11. |
Executive
Compensation |
44 | |
|
Item
12. |
Security
Ownership of Certain Beneficial Owners and
Management |
44 | |
|
Part
III (Con't) |
|||
|
Item
13. |
Certain
Relationships and Related Transactions |
44 | |
|
Item
14. |
Principal
Accounting Fees and Services |
44 | |
|
Part
IV |
|||
|
Item
15. |
Exhibits,
Financial Statement Schedules |
45 | |
|
Signatures |
48 | ||
|
*Page
F-1 follows page 42 |
|||
FORWARD
LOOKING INFORMATION
The
Company’s quarterly and annual operating results are affected by a wide variety
of factors that could materially and adversely affect revenues and
profitability, including the risk factors described in this Company's Annual
Report on Form 10-K. As a result of these and other factors, the Company may
experience material fluctuations in future operating results on a quarterly or
annual basis, which could materially and adversely affect its business,
financial condition, operating results, and stock prices. Furthermore, this
document and other documents filed by the Company with the Securities and
Exchange Commission (the “SEC”) contain certain forward-looking statements under
the Private Securities Litigation Reform Act of 1995 (“Forward-Looking
Statements”) with respect to the business of the Company. These Forward-Looking
Statements are subject to certain risks and uncertainties, including those
mentioned above, and those detailed in Item 1 of this Annual Report on Form
10-K, which could cause actual results to differ materially from these
Forward-Looking Statements. The Company undertakes no obligation to publicly
release the results of any revisions to these Forward-Looking Statements which
may be necessary to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. An investment in the Company
involves various risks, including those mentioned above and those which are
detailed from time to time in the Company’s SEC filings.
PART
I
Item 1.
Business
General
Bel Fuse
Inc. ("Bel" or the "Company") is a leading producer of electronic products that
help make global connectivity a reality. The Company designs, manufactures and
markets a broad array of magnetics, modules, circuit protection devices and
interconnect products. While these products are deployed primarily in the
computer, networking and telecommunication industries, Bel’s ever-expanding
portfolio of products also finds application in the automotive, medical and
consumer electronics markets. These products are designed to protect, regulate,
connect, isolate or manage a variety of electronic circuits.
With over
50 years in the electronics industry, Bel has reliably demonstrated the ability
to succeed in a variety of product areas across multiple industries. Founded in
1949, the Company has a strong track record of technical innovation working with
the engineering communities of market leaders. Bel has consistently proven
itself a valuable supplier to the foremost companies in its chosen industries by
developing cost-effective solutions for the challenges of new product
development. By combining our strength in product design with our own
specially-designed manufacturing facilities, Bel has established itself as a
formidable competitor on a global basis.
-1-
The
Company, which is organized under New Jersey law, operates in one industry with
three geographic reporting segments as defined in Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information". Bel’s principal executive offices are located at 206 Van
Vorst Street, Jersey City, New Jersey 07302; (201) 432-0463. The Company also
operates facilities in North America, Europe and the Far East and trades on the
NASDAQ (BELFA and BELFB). For information regarding Bel's three geographic
reporting units, see Note 11 of the Notes to Consolidated Financial
Statements.
The terms
“Company” and “Bel” as used in this Annual Report on Form 10-K refers to Bel
Fuse Inc. and its consolidated subsidiaries unless otherwise
specified.
Product
Groups
Magnetics
| § |
Discrete
components |
| § |
Power
transformers |
| § |
MagJack®
integrated connector modules |
The
Company, a leading producer of discrete magnetics, markets an extensive line of
products (transformers, filters, common mode chokes and delay lines) used in
networking, telecommunications and broadband applications. These magnetic
devices condition, filter and isolate the signal as it travels through network
equipment helping to ensure accurate data and/or voice transmission. Bel’s
magnetic components are also used in the automotive and consumer products
markets.
Power
transformer products include standard and custom designs that have been added to
the Company’s product mix as a result of the Company's Signal Transformer
acquisition in 2003. Manufactured for use in alarm, security and medical
products, these devices are designed to comply with international safety
standards governing transformers, including UL, CSA, IEC, TUV and VDE.
Marketed
under the brand MagJack®, Bel's connectors with integrated magnetics provide the
signal conditioning, electromagnetic interference suppression and signal
isolation previously performed by multiple, discrete magnetics.
Modules
| § |
Power
conversion modules |
| § |
Integrated
analog front end modules |
| § |
Custom
modules |
Bel’s
Power conversion products include standard and custom non-isolated dc-dc
converters designed specifically to power low voltage silicon devices. The need
for converting one dc voltage to another voltage is growing rapidly as the
developers of integrated circuits commonly adjust the supply voltage as a means
of optimizing device performance. These dc-dc converters are used in data
networking equipment, distributed power architecture, and telecommunication
devices, as well as computers and peripherals.
-2-
The
Company develops IC-compatible, integrated front end modules for
broadband and telecommunication applications. These modules, including products
acquired in the Company's APC acquisition in 2003, can eliminate the need for
several discrete components by providing the same functionality in a single,
compact device.
The
Company continues to pursue market opportunities, such as those in the
automotive industry, where it can supply customized value-added modules to
customers requiring integrated products that combine one or more of the
Company's capabilities in surface mount assembly, automatic winding, hybrid
fabrication and component encapsulation.
Circuit
Protection
| § |
Miniature
fuses |
| § |
Micro
fuses |
| § |
Surface
mount fuses |
The
Company’s circuit protection products include board level fuse designs
(miniature, micro and surface mount fuses) designed for the global electronic
and telecommunication markets. Fuses prevent currents in an electrical circuit
from exceeding certain predetermined levels, acting as a safety valve to protect
expensive components from damage by cutting off high currents before they can
generate enough heat to cause smoke or fire.
While the
Company continues to manufacture traditional fuse types, its surface mount chip
fuses are in high demand for use in space-critical applications such as mobile
phones and computers. Like the majority of Bel’s fuse products, the chip fuses
comply with RoHS standards for the elimination of lead and other hazardous
materials.
The
Company’s circuit protection devices are used extensively in products such as
televisions, consumer electronics, power supplies, computers, telephones and
networking equipment.
Interconnect
| § |
Passive
jacks |
| § |
Plugs |
| § |
Cable
assemblies |
Through
the Company's Stewart Connector acquisition in 2003, the Company has added a
comprehensive line of modular connectors, including RJ45 and RJ11 passive jacks,
plugs and cable assemblies. Passive jacks serve primarily as the connectivity
device in networking equipment such as routers, hubs, switches and patch panels.
Modular plugs and cable assemblies are utilized within the structured cabling
system, often referred to as premise wiring. The Company’s connector products
are designed to meet all major performance standards including newly released
Category 6 compliant products targeted to next generation network standards for
Gigabit Ethernet and 10Gigabit Ethernet.
-3-
The
following table describes, for each of Bel's product groups, the principal
functions and applications associated with such product groups.
|
Product
Group |
Function |
Application | |
|
Magnetics |
|||
|
Discrete
Components |
Condition,
filter and isolate the electronic
signal
to ensure accurate data and/or voice transmission. |
Network
switches, routers, hubs and PCs used in 10/100Base-TX, Gigabit, Voice over
the Internet Protocol (”VoIP"), home networking and cable modem
applications. | |
|
Power
Transformers |
Safety
isolation and distribution. |
Power
supplies, alarm, fire detection and security systems, HVAC, lighting and
medical equipment. | |
|
MagJack®
Integrated Connector Modules |
Condition,
filter and isolate an electronic
signal
to ensure accurate data and/or voice transmission and to provide RJ45 and
USB connectivity |
Network
switches, routers, hubs and PCs used in 10/100Base-TX, Gigabit, and VoIP.
| |
|
Modules |
|||
|
Power
Conversion Modules
(DC-DC
Converters) |
Convert
DC voltage level to other DC level as required to meet the power needs of
low voltage silicon devices |
Networking
equipment, distributed power architecture, telecom devices, computers and
peripherals. | |
|
Integrated
Analog Front End Modules |
Condition,
filter and isolate the electronic
signal
to ensure accurate data and/or voice transmission. |
Broadband
and telecom equipment supporting ISDN, T1/E1, xDSL technologies.
| |
|
Custom
Modules |
Integrate
several discrete devices to provide customized, space-saving
solution. |
Automotive
products. | |
|
Circuit
Protection |
|||
|
Miniature
Fuses |
Protects
devices by preventing current in an electrical circuit from exceeding
acceptable levels. |
Power
supplies, electronic ballasts and consumer electronics. | |
|
Micro
Fuses |
Protects
devices by preventing current in an electrical circuit from exceeding
acceptable levels. |
Cellular
phone chargers, consumer electronics, power supplies and set top
boxes. | |
|
Surface
Mount Fuses |
Protects
devices by preventing current in an electrical circuit from exceeding
acceptable levels. |
Cellular
phones, mobile computers, IC and battery protection, power supplies and
telecom line cards. | |
|
Interconnect |
|||
|
Passive
Jacks |
RJ45
and RJ11 connectivity for
data
and/or voice transmission. |
Network
routers, hubs, switches and patch panels deployed in Category 5, 5e and 6
cable systems. | |
|
Plugs |
RJ45
and RJ11 connectivity for
data
and/or voice transmission. |
Network
routers, hubs, switches and patch panels deployed in Category 5, 5e and 6
cable systems. | |
|
Cable
Assemblies |
RJ45
and RJ11 connectivity for
data
and voice transmission. |
Structured
Category 5, 5e and 6 cabling systems (premise
wiring). | |
-4-
Acquisitions
Acquisitions
have played a critical role in the growth of Bel and the expansion of both its
product portfolio and its customer base. Furthermore, acquisitions continue to
be a key element in the Company’s growth strategy. The Company frequently
evaluates possible acquisition targets that would provide an expanded product
and technology base that will allow the Company to further penetrate its
strategic customers and/or an opportunity to reduce overall operating expense as
a percentage of revenue. Bel also looks at whether the targets are positioned to
take advantage of the Company's low cost manufacturing facilities; and whether a
cultural fit will allow the acquired company to be integrated smoothly and
efficiently.
On March
22, 2005, the Company completed the acquisition of Galaxy Power Inc. ("Galaxy")
for approximately $18 million in cash and the assumption of approximately $2.0
million in liabilities. Galaxy is a leading designer and manufacturer of
high-density dc-dc converters for distributed power and telecommunication
applications. The Company believes that by merging Galaxy into its existing Bel
Power Products division, it broadens the range of on-board power solutions it
can offer its customers. The Company has substantial experience with
non-isolated converters, while Galaxy has a strong track record in the
development of high-density isolated converters. The Company believes that the
combined portfolio will enable it to be a leader in the power
industry.
This
acquisition will be accounted for using the purchase method of accounting and,
accordingly the results of operations of Galaxy will be included in the
Company's financial statements from the date of closing.
On March
22, 2003, the Company acquired certain assets, subject to certain liabilities,
and common shares of certain entities comprising the Passive Components Group of
Insilco Technologies, Inc. ("Insilco") for $37.0 million (including cash
acquired of $799,000) in cash, including transaction costs of approximately $1.4
million. This acquisition included the Stewart Connector Systems Group
(“Stewart”), InNet Technologies (“InNet”) and the Signal Transformer Group
(“Signal Transformer”). The purchase price has been allocated to both tangible
and intangible assets and liabilities based on estimated fair values after
considering various independent formal appraisals. Approximately $1.6 million of
identifiable intangible assets (patents) arose from this transaction; such
intangible assets will be amortized on a straight line basis over a period of
five years. In addition, $2.9 million has been attributed to goodwill. Patents
having a carrying value of $1.6 million and goodwill of $.8 million have been
included in the Company's Asia reporting unit. Goodwill of $1.5 million and $.6
million has been included in the Company's North America and European reporting
units, respectively.
-5-
The
Company believes that the purchase of Insilco's Passive Components Group was a
logical strategic fit with Bel's existing products and markets. With the
increased diversification of its product line, the Company believes it has
become a more attractive supplier to current customers seeking a greater variety
of products.
Both Bel
and the acquired InNet/Stewart Group were leaders in the Integrated Connector
Module ("ICM") market with their respective MagJack product offerings.
Consolidating the engineering, manufacturing and sales capabilities of Bel and
Stewart has strengthened the Company’s leadership in this important market. The
Company's expertise in electrical engineering and high-volume, low-cost
manufacturing complements Stewart's strengths in mechanical design and
engineering. The San Diego based InNet group was dissolved into Bel’s existing
San Diego operations.
The
Signal Transformer Group acquisition resulted in a new product line of 60Hz
power transformers for Bel and produced many new customers. The Company is
seeking to capitalize on Signal Transformer’s broad base of customers with Bel’s
expanded product offering.
Effective
January 2, 2003, the Company entered into an asset purchase agreement with
Advanced Power Components plc ("APC") to purchase the communication products
division of APC for $5.5 million in cash plus the assumption of certain
liabilities. The Company will be required to make contingent payments equal to
5% of sales (as defined) in excess of $5.5 million per year for the years 2003
and 2004. No contingent purchase price payment amounts were due for 2003 or
2004. The purchase price has been allocated to both tangible and intangible
assets and liabilities based on estimated fair values. Goodwill of approximately
$2.1 million has been included in the Company's Asia reporting
segment.
There was
no in-process research and development acquired as part of the Insilco Passive
Components Group and APC acquisitions.
These
transactions were accounted for using the purchase method of accounting and,
accordingly, the results of operations of the Passive Components Group of
Insilco have been included in the Company's financial statements from March 22,
2003 and the results of operations of APC have been included in the Company's
financial statements from January 2, 2003.
The
following unaudited pro forma summary results of operations assume that the
Passive Components Group of Insilco and APC had been acquired as of January 1,
2002 (in thousands, except per share data):
|
Year
Ended |
|||||||
|
December
31, |
|||||||
|
2003 |
2002 |
||||||
|
Net
sales |
$ |
174,211 |
$ |
167,089 |
|||
|
Net
earnings (loss) |
14,553
|
(2,614 |
) | ||||
|
Earnings
(loss) per share - diluted |
1.30
|
(0.24 |
) | ||||
-6-
The
information above is not necessarily indicative of the results of operations
that would have occurred if the acquisitions had been consummated as of January
1, 2002. Such information should not be construed as a representation of the
future results of operations of the Company.
A
condensed balance sheet of the major assets and liabilities of the Passive
Components Group of Insilco and APC at the acquisition dates is as
follows:
|
Cash |
$ |
799,000 |
||
|
Accounts
receivable |
14,764,000
|
|||
|
Inventories |
15,613,000
|
|||
|
Prepaid
expenses |
327,000
|
|||
|
Property,
plant and |
||||
|
equipment |
11,049,000
|
|||
|
Other
assets |
244,000
|
|||
|
Goodwill |
5,062,000
|
|||
|
Intangible
assets |
1,600,000
|
|||
|
Accounts
payable |
(2,748,000 |
) | ||
|
Accrued
expenses |
(3,540,000 |
) | ||
|
Income
taxes payable |
566,000
|
|||
Deferred
income taxes payable |
(421,000 |
) | ||
Net
assets acquired |
$ |
43,315,000 |
||
Sales and
Marketing
The
Company sells its products to customers throughout North America, Western Europe
and the Far East. Sales are made through one of three channels: direct strategic
account managers, independent sales representative organizations or authorized
distributors. Bel's strategic account managers are assigned to handle major
accounts requiring global coordination.
Independent
sales representatives and authorized distributors are overseen by the Company's
sales management personnel located throughout the world. As of December 31,
2004, the Company had a sales and support staff of 50 persons that supported a
network of 86 sales representative organizations and non-exclusive distributors.
The Company has written agreements with all of its sales representative
organizations and
major distributors. These written agreements, terminable on short notice by
either party, are standard in the industry.
Sales
support functions have also been established and located in Bel international
facilities to provide timely, efficient support for customers. This supplemental
level of service, in addition to first-line sales support, enables the Company
to be more responsive to customers needs on a global level. The Company’s
marketing capabilities include product management which drives new product
development, application engineering for technical support and marketing
communications. Product marketing managers facilitate technical partnerships for
engineering development of IC-compatible components and modules.
-7-
Research
and Development
The
Company’s engineering groups are strategically located around the world to
facilitate communication with and access to customers’ engineering personnel.
This collaborative approach enables partnerships with customers for technical
development efforts. On occasion, Bel executes non-disclosure agreements with
customers to help develop proprietary, next generation products destined for
rapid deployment.
The
Company also sponsors membership in technical organizations that allow Bel’s
engineers to participate in developing standards for emerging technologies. It
is management’s opinion that this participation is critical in establishing
credibility and a reputable level of expertise in the marketplace, as well as
positioning the Company as an industry leader in new product
development.
Research
and development costs are expensed as incurred, and are included in cost of
sales. Generally all research and development is performed internally for the
benefit of the Company. Research and development costs include salaries,
building maintenance and utilities, rents, materials, administration costs and
miscellaneous other items. Research and development expenses for the years ended
December 31, 2004, 2003 and 2002 amounted to $7.3 million, $8.4 million and $6.6
million, respectively. The decrease for the year ended December 31, 2004 is
principally attributed to the closure of the Company's Indiana research facility
in 2003 and lower research and development costs in the Far East as many
research and development jobs were moved by the Company from Hong Kong to China
and several positions were eliminated.
Competition
The
Company operates in a variety of markets all of which are highly competitive.
There are numerous independent companies and divisions of major companies that
manufacture products that are competitive with one or more of Bel’s products. It
is management’s opinion that Bel’s expanded product portfolio helps to
differentiate the Company in these markets and, as a result, reduces the
possibility of any single direct competitor operating across all product groups.
The
Company's ability to compete is dependent upon several factors including product
performance, quality, reliability, depth of product line, customer service,
technological innovation, design, delivery time and price. Overall financial
stability and global presence also play a significant role and give Bel a
favorable position in relation to many of its competitors. Management intends to
maintain a strong competitive posture in the Company's markets by continued
expansion of the Company’s product lines and ongoing investment in research,
development and manufacturing resources.
-8-
Employees
As of
December 31, 2004, the Company had 1,969 full-time employees. The Company
employed 562 people in its North American facilities, 1,373 people in its Asian
facilities and 34 people in its European facilities, excluding workers supplied
by independent contractors. The Company's manufacturing facility in New York is
represented by a labor union. The Company believes that its relations with
employees are satisfactory.
Suppliers
The
Company has multiple suppliers for most of the raw materials that it purchases.
Where possible, the Company has contractual agreements with suppliers to assure
a continuing supply of critical components.
With
respect to those items which are purchased from single sources, the Company
believes that comparable items would be available in the event that there were a
termination of the Company's existing business relationships with any such
supplier. While such a termination could produce a disruption in production, the
Company believes that the termination of business with any one of its suppliers
would not have a material adverse effect on its long-term operations. Actual
experience could differ materially from this belief as a result of a number of
factors, including the time required to locate an alternative supplier, and the
nature of the demand for the Company’s products. In the past, the Company has
experienced shortages in certain raw materials, such as capacitors and ferrites,
when these materials were in great demand. Even though the Company may have more
than one supplier for certain materials, it is possible that these materials may
not be available to the Company in sufficient quantities or at the times desired
by the Company.
Backlog
The
Company manufactures products against firm orders and projected usage by
customers. Cancellation and return arrangements are either negotiated by the
Company on a transactional basis or contractually determined. The Company's
backlog of orders as of February 28, 2005 was approximately $43.7 million, as
compared with a backlog of $30.1 million as of February 29, 2004 . Management
expects that all of the Company's backlog as of February 28, 2005 will be
shipped by December 31, 2005. Such expectation constitutes a Forward-Looking
Statement. Factors that could cause the Company to fail to ship all such orders
by year-end include unanticipated supply difficulties, changes in customer
demand and new customer designs. The Company's major customers have negotiated
reduced lead times on purchase orders and have implemented consignment inventory
programs with the goal of reducing their inventories. Accordingly, backlog may
no longer be a reliable indicator of the timing of future sales. See "Risk
Factors - Our backlog figures may not be reliable indicators."
-9-
Intellectual
Property
The
Company has been granted a number of U.S. patents and has additional U.S. patent
applications pending relating to its products. While the Company believes that
the issued patents are defendable and that the pending patent applications
relate to patentable inventions, there can be no assurance that a patent will be
obtained from the applications or that its existing patents can be successfully
defended. It is management's opinion that the successful continuation and
operation of the Company's business does not depend upon the ownership of
patents or the granting of pending patent applications, but upon the innovative
skills, technical competence and marketing and managerial abilities of its
personnel. The patents have a life of seventeen years from the date of issue or
twenty years from filing of patent applications. The Company's existing patents
expire on various dates from March 11, 2006 to February 15, 2021.
The
Company utilizes U.S. registered trademarks to identify various products that it
manufactures. The trademarks survive as long as they are in use and the
registrations of these trademarks are renewed.
Available
Information
The
Company maintains a website at www.belfuse.com where it
makes available the proxy statements, press releases and reports on Form 4, 8-K,
10-K and 10-Q that it and its insiders file with the SEC. These forms are made
available as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC. Press releases are also
issued via electronic transmission to provide access to the Company’s financial
and product news. In addition, the Company provides notification of and access
to voice and Internet broadcasts of its quarterly and annual results.
Risk
Factors
An
investment in our common stock involves a high degree of risk. Investors should
carefully consider the risks described below, together with all other
information contained in this Annual Report before making investment decisions
with respect to our common stock.
We
do business in a very difficult economic environment.
We and
others in the electronic component industry have for the past several years
experienced a decline in product demand on a global basis, resulting in order
cancellations and deferrals, and introduction of fewer new products. This
decline is primarily attributable to a slowing of growth in the internet and
broadband markets . This slowdown may continue and may become more pronounced.
The current economic environment, as well as recessionary trends in the global
economy, makes it more difficult for us to predict our future sales, which also
makes it more difficult to manage our operations, and could materially and
adversely impact our results of operations.
-10-
We
do business in a highly competitive industry
Our
business is highly competitive worldwide, with relatively low barriers to
competitive entry. We compete principally on the basis of product performance,
quality, reliability, depth of product line, customer service, technological
innovation, design, delivery time and price. The electronic components industry
has become increasingly concentrated and globalized in recent years and our
major competitors, some of which are larger than us, have significant financial
resources and technological capabilities.
Our
backlog figures may not be reliable indicators.
Many of
the orders that comprise our backlog may be canceled by customers without
penalty. Customers may on occasion double and triple order components from
multiple sources to ensure timely delivery when backlog is particularly long.
Customers often cancel orders when business is weak and inventories are
excessive. Therefore, we cannot be certain that the amount of our backlog equals
or exceeds the level of orders that will ultimately be delivered. Our results of
operations could be adversely impacted if customers cancel a material portion of
orders in our backlog.
There
are substantial pressures on us to lower our prices.
The
average selling prices for our products tend to decrease rapidly over their life
cycle, and customers are increasing pressure on suppliers to lower prices. Our
profits will suffer if we are not able to reduce our costs of production or
induce technological innovations as sales prices decline.
We
are dependent on our ability to develop new products.
Our
future operating results are dependent, in part, on our ability to develop,
produce and market new and more technologically advanced products. There are
numerous risks inherent in this process, including the risks that we will be
unable to anticipate the direction of technological change or that we will be
unable to timely develop and bring to market new products and applications to
meet customers’ changing needs.
Our
acquisitions may not produce the anticipated results.
A
significant portion of our recent growth is from acquisitions. We cannot assure
you that we will identify or successfully complete transactions with suitable
acquisition candidates in the future. We also cannot assure you that
acquisitions we complete will be successful. If an acquired business fails to
operate as anticipated or cannot be successfully integrated with our other
businesses, our results of operations, enterprise value, market value and
prospects could all be materially and adversely affected.
If our
acquisitions fail to perform up to our expectations, or as the value of goodwill
decreases, we could be required to record a loss from the impairment of assets.
Integration of new acquisitions into our consolidated operations may result in
lower average operating results for the group as a whole.
-11-
Our
strategy also focuses on the reduction of selling, general and administrative
expenses through the integration or elimination of redundant sales offices and
administrative functions at acquired companies. Our inability to achieve these
goals could have a material and adverse effect on our results of
operations.
We intend
to continue to seek additional acquisition candidates, although we cannot
predict when or if we will make any additional acquisitions, and what the impact
of any such acquisitions may have on our financial performance. If we were to
undertake a substantial acquisition for cash, the acquisition would likely need
to be financed in part through bank borrowings or the issuance of public or
private debt or equity. If we borrow money to finance acquisitions, this would
likely decrease our ratio of earnings to fixed charges and adversely affect
other leverage criteria and could result in the imposition of material
restrictive covenants. Under our existing credit facility, we are required to
obtain our lenders’ consent for certain additional debt financing, to comply
with other covenants including the application of specific financial ratios, and
may be restricted from paying cash dividends on our capital stock. We cannot
assure you that the necessary acquisition financing would be available to us on
acceptable terms, or at all, when required.
We
may be impacted by our competitors' overcapacity.
Any drop
in demand or increase in supply of our products due to the overcapacity of our
competitors could cause a dramatic drop in our average sales prices causing a
decrease in our gross margins.
We
are exposed to weaknesses in international markets, including the weaknesses
associated with medical epidemics, and other risks inherent in foreign
trade.
We have
operations in seven countries around the world outside the United States, and
approximately 65 % of our revenues during 2004 were derived from sales to
customers outside the United States. Some of the countries in which we operate
have in the past experienced and may continue to experience political, economic,
medical epidemic and military instability or unrest. These conditions could have
a material and adverse impact on our ability to operate in these regions and,
depending on the extent and severity of these conditions, could materially and
adversely affect our overall financial condition and operating results. In
particular, current medical epidemic conditions in the Far East could materially
and adversely affect our business operations there and elsewhere.
Although
our operations have traditionally been largely transacted in U.S. dollars or
U.S. dollar linked currencies, recent world financial instability and recent
acquisitions in the Dominican Republic, Mexico, Germany, the United Kingdom,
Hong Kong and The People's Republic of China (“PRC”) may cause additional
foreign currency risks.
Other
risks inherent in doing trade internationally include: expropriation and
nationalization, trade restrictions, transportation delays, and changes in
United States laws that may inhibit or restrict our ability to manufacture in or
sell to any particular country. For information regarding risks associated with
our presence in Hong Kong and Macau, see "Item 2 - Properties" of this Annual
Report on Form 10-K.
-12-
While we
have benefited from favorable tax treatment in many of the countries where we
operate, the benefits we currently enjoy could change if laws or rules in the
United States or those foreign jurisdictions change, incentives are changed or
revoked, or we are unable to renew current incentives.
We
may experience labor unrest.
As we
implement transfers of certain of our operations, we may experience strikes or
other types of labor unrest as a result of lay-offs or termination of employees
in higher labor cost countries.
We
rely upon our ability to procure high quality raw materials at cost-effective
prices.
Our
results of operations may be adversely impacted by difficulties in obtaining raw
materials, supplies, power, natural resources and any other items needed for the
production of our products, as well as by the effects of quality deviations in
raw materials and the effects of significant fluctuations in the prices on
existing inventories and purchase commitments for these materials.
As
product life cycles shorten and during periods of market slowdowns, the risk of
material obsolescence increases and this may adversely impact our financial
results.
Our
results of operations may be materially and adversely impacted by environmental
and other regulations.
Our
manufacturing operations, products and/or product packaging are subject to
environmental laws and regulations governing air emissions, wastewater
discharges, the handling, disposal and remediation of hazardous substances,
wastes and certain chemicals used or generated in our manufacturing processes,
employee health and safety labeling or other notifications with respect to the
content or other aspects of our processes, products or packaging, restrictions
on the use of certain materials in or on design aspects of our products or
product packaging and responsibility for disposal of products or product
packaging. More stringent environmental regulations may be enacted in the
future, and we cannot presently determine the modifications, if any, in our
operations that any such future regulations might require, or the cost of
compliance with these regulations.
Our
results may vary substantially from period to period.
Our
revenues and expenses may vary significantly from one accounting period to
another accounting period due to a variety of factors, including customers'
buying decisions, our product mix and general market and economic conditions.
Such variations could significantly impact our stock price.
-13-
Due
to the dynamic nature of our industry, changes in the market, including the
recent contraction, may result in a material reduction in the demand for our
products.
The
Company and others in the electronic component industry have, for the past
several years, experienced an overall decline in product demand on a global
basis resulting in order cancellations and deferrals. This decline has been
primarily attributable to a slowing of growth in the internet and broadband
markets. While certain indicators have recently shown that economic conditions
are improving, we cannot predict the strength or duration of the recovery. This
complex economic environment makes it more difficult for us to predict our
future sales, which also makes it more difficult to manage our operations, and
could materially and adversely impact our results of operations.
Reduced
prices for our products resulting from increased competition and/or excess
capacity in the industry may adversely affect
profitability.
The
average selling prices for our products tend to decrease rapidly over their life
cycle, and customers are increasing pressure on suppliers to lower prices. In
addition, increased competition from low cost suppliers around the world has put
further pressures on pricing. The Company continually strives to lower its
costs, negotiate better pricing for components and raw materials and improve our
operating efficiencies. Profit margins will be materially and adversely impacted
if we are not able to reduce our costs of production or introduce technological
innovations as sales prices decline.
A
shortage of availability or an increase in the cost of raw materials and
components may negatively impact profit margins.
Our
results of operations may be adversely impacted by difficulties in obtaining raw
materials, supplies, power, natural resources and any other items needed for the
production of our products, as well as by the effects of quality deviations in
raw materials. Many of these materials and components are produced by a limited
number of suppliers and may be constrained by supplier capacity.
Our
results of operations may be adversely impacted by difficulties in obtaining raw
materials, supplies, power, natural resources and any other items needed for the
production of our products, as well as by the effects of quality deviations in
raw materials and the effects of significant fluctuations in the prices on
existing inventories and purchase commitments for these materials.
Rapid
shifts in demand for various products may cause some of our inventory of raw
materials, components or finished goods to become obsolete.
The life
cycles and demand for our products are directly linked to the life cycles and
demand for the end products into which they are designed. Rapid shifts in the
life cycles or demand for these end products due to technological shifts,
economic conditions or other market trends may result in material amounts of
inventory of either raw materials or finished goods becoming obsolete. While the
Company works diligently to manage inventory levels, rapid shifts in demand may
result in obsolete or excess inventory and impact financial
results.
-14-
A
loss of the services of the Company’s executive officers or other skilled
employees could negatively impact our operations and
results.
The
success of the Company’s operations is largely dependent upon the performance of
its executive officers, managers, engineers and sales people. Many of these
individuals have a significant number of years of experience within the Company
and/or the industries in which we compete and would be extremely difficult to
replace. The loss of the services of any of these employees may materially and
adversely impact our results of operations if we are unable to replace them in a
timely manner.
Our
stock price, like that of many technology companies, has been and may continue
to be volatile.
The
market price of our common stock may fluctuate as a result of variations in our
quarterly operating results and other factors beyond our control. These
fluctuations may be exaggerated if the trading volume of our common stock is
low. In addition, the market price of our common stock may rise and fall in
response to a variety of factors, including:
| · |
announcements
of technological or competitive
developments; |
| · |
acquisitions
or strategic alliances by us or our
competitors; |
| · |
the
gain or loss of a significant customer or
order; |
| · |
changes
in estimates of our financial performance or changes in recommendations by
securities analysts regarding us or our industry;
or |
| · |
general
market or economic conditions. |
In
addition, equity securities of many technology companies have experienced
significant price and volume fluctuations. These price and volume fluctuations
often have been unrelated to the operating performance of the affected
companies.
Our
intellectual property rights may not be adequately protected under the current
state of the law.
We cannot
assure you we will be successful in protecting our intellectual property through
patent or other laws. As a result, other companies may be able to develop and
market similar products which could materially adversely affect our
business.
-15-
We may be
sued by third parties for alleged infringement of their proprietary rights and
we may incur defense costs and possibly royalty obligations or lose the right to
use technology important to our business.
From time
to time, we receive claims by third parties asserting that our products violate
their intellectual property rights. Any intellectual property claims, with or
without merit, could be time consuming and expensive to litigate or settle and
could divert management attention from administering our business. A third party
asserting infringement claims against us or our customers with respect to our
current or future products may materially adversely affect us by, for example,
causing us to enter into costly royalty arrangements or forcing us to incur
settlement or litigation costs.
Item
2. Properties
The
Company is headquartered in Jersey City, New Jersey where it currently owns
62,000 square feet of office and warehouse space. On July 15, 2004 the Company
entered into an agreement for the sale of land and building of approximately
40,000 square feet located in Jersey City, New Jersey. The Company operates ten
manufacturing facilities in four countries as of December 31, 2004. A 64,000
square foot manufacturing facility was completed in late 2004 in the PRC. An
additional 117,000 square foot manufacturing facility is being constructed in
the PRC to meet customer demand with an estimated completion date of early
2006.
The
following is a list of the locations of the Company's principal manufacturing
facilities at December 31, 2004.
Location |
Approximate
Square
Feet |
Owned/
Leased |
Percentage
Used
for
Manufacturing |
|||||||
|
Donnguan,
People's |
||||||||||
|
Republic
of China |
145,000
|
Leased |
96 |
% | ||||||
|
Zhongshan,
People's |
||||||||||
|
Republic
of China |
242,000
|
Leased |
96 |
% | ||||||
|
Zhongshan,
People's |
||||||||||
|
Republic
of China |
34,000
|
Leased |
96 |
% | ||||||
|
Zhongshan,
People's |
||||||||||
|
Republic
of China |
64,000
|
Owned |
80 |
% | ||||||
|
Hong
Kong |
35,000
|
Owned |
20 |
% | ||||||
|
Macau |
77,000
|
Owned |
58 |
% | ||||||
|
Dominican
Republic |
29,000
|
Leased |
96 |
% | ||||||
|
Cananea,
Mexico |
28,000
|
Leased |
65 |
% | ||||||
|
Inwood,
New York |
35,000
|
Owned |
60 |
% | ||||||
|
Glen
Rock, Pennsylvania |
74,000
|
Owned |
60 |
% | ||||||
|
763,000
|
||||||||||
-16-
In
addition to this manufacturing space, 115,000 square feet of space is used for
engineering, warehousing, sales and administrative support functions at various
locations and 275,000 square feet of space is used for dormitories, canteen and
other employee related facilities in the PRC and the Special Administrative
Regions of Hong Kong and Macau in Asia.
| · |
The
Territory of Hong Kong became a Special Administrative Region (“SAR”) of
The People's Republic of China during 1997. The territory of Macau became
a SAR of The People's Republic of China at the end of 1999. Management
cannot presently predict what future impact, if any, this will have on the
Company or how the political climate in China and the Dominican Republic
will affect its contractual arrangements in China or labor relationships
in the Dominican Republic. A significant portion of the Company's
manufacturing operations and approximately 63% of its identifiable assets
are located in Hong Kong, Macau, and The People's Republic of China.
Accordingly, events resulting from any change in the "Most Favored Nation"
status granted to China by the U.S. could have a material adverse effect
on the Company. |
| · |
Approximately
34% of the 1,153,000 square feet the Company occupies is owned while the
remainder is leased. The Company closed its Texas facility during the
fourth quarter of 2002 and its Indiana facility during the second quarter
of 2003 and relocated some of the employees to California. See Note 15 of
the Notes to the Consolidated Financial Statements for additional
information pertaining to leases . |
-17-
Item
3. Legal
Proceedings
| a) |
The
Company had been a party to an ongoing arbitration proceeding related to
the acquisition of its Telecom business in 1998. The Company believes that
the seller breached the terms of a related Global Procurement Agreement
dated October 2, 1998 and was seeking damages related thereto. During
2004, the Company and the seller settled the matter. The settlement
resulted in a payment to the Company and an unconditional release by the
seller of all counterclaims against the Company. The net gain of
$2,935,000 from the settlement of the lawsuit is included in the Company's
consolidated statement of operations for the year ended December 31, 2004.
|
| b) |
The
Company is a defendant in a lawsuit, captioned Murata Manufacturing
Company, Ltd. v. Bel Fuse Inc. et al and brought in Illinois Federal
District Court. Plaintiff claims that its patent covers all of the
Company's modular jack products. That party had previously advised the
Company that it was willing to grant a non-exclusive license to the
Company under the patent for a 3% royalty on all future gross sales of ICM
products; payments of a lump sum of 3% of past sales including sales of
applicable Insilco products; an annual minimum royalty of $500,000;
payment of all attorney fees; and marking of all licensed ICM's with the
third party's patent number. The Company is subject to another lawsuit,
captioned Regal Electronics, Inc. v. Bel Fuse Inc. and brought in
California Federal District Court. Plaintiff claims that its patent covers
certain of the Company's modular jack products. That party had previously
advised the Company that it was willing to grant a non transferable
license to the Company for an up front fee of $500,000 plus a 6% royalty
on future sales. The Company believes that none of its products are
covered by these patents and intends to vigorously defend its position and
no accrual has been provided in the accompanying consolidated financial
statements. The Company cannot predict the outcome of these matters;
however, management believes that the ultimate resolution of these matters
will not have a material impact on the Company's consolidated financial
condition or results of operations. This statement constitutes a forward
looking statement under the Private Securities Litigation Reform Act of
1995. Actual results of such legal proceedings could differ materially
from the Company's stated belief due to risks and uncertainties inherent
in litigated proceedings. |
The
Company is not a party to any other legal proceeding, the adverse outcome of
which is expected to have a material adverse effect on the Company's
consolidated 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 the Company's shareholders during the fourth
quarter of 2004.
-18-
PART
II
| Item 5. | Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities |
(a) Market
Information
On July
9, 1998 the shareholders approved an amendment to the Company's Certificate of
Incorporation authorizing a new voting Class A Common Stock, par value $.10 per
share, and a new non-voting Class B Common Stock, par value $.10 per share
("Class A" and "Class B," respectively), which are traded on the NASDAQ National
Market. The following table sets forth the high and low closing sales price
range (as reported by The Nasdaq Stock Market Inc.) for the Common Stock on
NASDAQ for each quarter during the past two years.
|
Class
A |
Class
A |
Class
B |
Class
B |
||||||||||
|
High |
Low |
High |
Low |
||||||||||
|
Year
Ended December 31, 2003 |
|||||||||||||
|
First
Quarter |
$ |
19.20 |
$ |
15.74 |
$ |
21.97 |
$ |
18.96 |
|||||
|
Second
Quarter |
20.99 |
14.70 |
23.90 |
18.17 |
|||||||||
|
Third
Quarter |
24.70 |
18.50 |
27.64 |
21.11 |
|||||||||
|
Fourth
Quarter |
30.00 |
22.51 |
33.80 |
25.66 |
|||||||||
|
Year
Ended December 31, 2004 |
|||||||||||||
|
First
Quarter |
$ |
34.75 |
$ |
24.24 |
$ |
40.16 |
$ |
28.80 |
|||||
|
Second
Quarter |
36.00 |
24.00 |
42.00 |
29.78 |
|||||||||
|
Third
Quarter |
35.96 |
27.15 |
41.99 |
32.12 |
|||||||||
|
Fourth
Quarter |
31.20 |
24.62 |
36.45 |
30.33 |
|||||||||
The
Common Stock is reported under the symbols BELFA and BELFB in the NASDAQ
National Market.
-19-
(b) Holders
As of
February 28, 2005 there were 214 registered shareholders of the Company's Class
A Common Stock and Class B Common Stock. The Company estimates that there were
1,211 beneficial shareholders of Class A Common Stock and Class B Common Stock
as of February 28, 2005.
(c) Dividends
There are
no contractual restrictions on the Company's ability to pay dividends provided
the Company continues to comply with the financial tests in its credit
agreement. On February 2, 2004, May 2, 2004, August 2, 2004, and November 2,
2004 the Company paid a $.05 per share dividend to all shareholders of record of
Class B Common Stock in the total amount of $422,474, $424,449, $431,470, and
$432,406, respectively. During May, 2004 the Company paid a dividend on Class B
common stock in the amount of $26,860 in connection with a shortfall of prior
payments. On February 2, 2004, May 2, 2004, August 2, 2004, and November 2, 2004
the Company paid a $.04 per share dividend to all shareholders of record of
Class A Common Stock in the total amount of $107,641, $107,641, $107,678, and
$107,694, respectively. On February 3, 2003, April 29, 2003, August 1, 2003, and
November 3, 2003 the Company paid a $.05 per share dividend to all shareholders
of record of Class B Common Stock in the total amount of $411,674, $412,411,
$413,536, and $419,639, respectively. On August 1, 2003 and November 3, 2003 the
Company paid a $.04 per share dividend to all shareholders of record of Class A
Common Stock in the total amount of $106,617 and $107,617, respectively.
On
February 2, 2005 the Company paid a $.04 and $.05 per share dividend to all
shareholders of record at January 15, 2005 of Class A and Class B Common Stock
in the amount of $107,735 and $433,450, respectively. The Company currently
anticipates paying these dividends in the future.
(d) Securities
authorized for issuance under the Equity Compensation Plans
Equity
Compensation Plan Information
| Plan Category |
Number
of securities to be issued
upon exercise of outstanding
options, warrants and
rights |
Weighted
average exercise price of outstanding options, warrants and
rights |
Number
of securities remaining available
for future issuance |
|||||||
|
Equity
compensation plans approved by
security holders |
495,289
|
$ |
23.17 |
941,000
|
||||||
|
Equity
compensation plans not approved
by security holders |
-- |
-- |
-- |
|||||||
|
Totals |
495,289
|
$ |
23.17 |
941,000
|
-20-
| Item 6. | Selected Financial Data |
|
Years
Ended December 31, |
||||||||||||||||
|
2004 |
2003 |
2002 |
2001 |
2000 |
||||||||||||
|
(In
thousands of dollars, except per share data) |
||||||||||||||||
|
Selected
Statements of Operations Data: (a) (b) (c) (d) |
||||||||||||||||
|
Net
sales |
$ |
190,022 |
$ |
158,498 |
$ |
95,528 |
$ |
96,045 |
$ |
145,227 |
||||||
|
Cost
of sales |
132,776
|
113,813
|
72,420
|
89,603
|
88,479
|
|||||||||||
|
Selling,
general and administrative expenses |
31,302
|
26,757
|
22,270
|
21,561
|
23,284
|
|||||||||||
|
Fixed
asset impairment |
1,033
|
-
|
-
|
-
|
-
|
|||||||||||
|
Interest
income - net |
525
|
249
|
940
|
2,411
|
3,912
|
|||||||||||
|
Lawsuit
proceeds |
2,935
|
-
|
-
|
-
|
-
|
|||||||||||
|
Earnings
(loss) before provision (benefit) for income
taxes |
28,371
|
18,177
|
1,778
|
(12,709 |
) |
37,376
|
||||||||||
|
Income
tax provision (benefit) |
3,649
|
4,413
|
1,199
|
(547 |
) |
5,159
|
||||||||||
|
Net
earnings (loss) |
24,722
|
13,764
|
579
|
(12,162 |
) |
32,217
|
||||||||||
|
Earnings
(loss) per common share - basic |
2.19
|
1.25
|
0.05
|
(1.13 |
) |
3.04
|
||||||||||
|
Earnings
(loss) per common share - diluted |
2.15
|
1.24
|
0.05
|
(1.13 |
) |
2.94
|
||||||||||
|
Cash
dividends declared per |
||||||||||||||||
|
Class
A common share |
0.16
|
0.08
|
-
|
-
|
-
|
|||||||||||
|
Cash
dividends declared per |
||||||||||||||||
|
Class
B common share |
0.20
|
0.20
|
0.20
|
0.20
|
0.20
|
|||||||||||
|
As
of December 31, |
||||||||||||||||
|
2004 |
2003 |
2002 |
2001 |
2000 |
||||||||||||
|
(In
thousands of dollars, except per share data and
percentages) |
||||||||||||||||
Selected
Balance Sheet Data and Ratios: |
||||||||||||||||
|
Working
capital |
$ |
127,624 |
$ |
102,370 |
$ |
82,986 |
$ |
83,698 |
$ |
97,720 |
||||||
|
Total
assets |
217,777
|
181,817
|
147,840
|
147,517
|
169,513
|
|||||||||||
|
Long
term debt |
6,500
|
8,500
|
-
|
-
|
-
|
|||||||||||
|
Stockholders'
equity |
178,461
|
146,855
|
130,659
|
129,463
|
141,016
|
|||||||||||
|
Book
value per share |
15.70
|
13.16
|
11.95
|
12.02
|
13.25
|
|||||||||||
|
Return
on average total assets, % |
12.37 |
7.95 |
0.40 |
(7.60 |
) |
21.87
|
||||||||||
|
Return
on average Stockholders' equity, % |
15.20 |
9.93 |
0.44 |
(8.80 |
) |
25.64
|
||||||||||
| (a) |
On
May 11, 2001, the Company acquired 100% of the common stock of E-Power Ltd
("E-Power") and the assets and business of Current Concepts, Inc.
("Current Concepts") for an aggregate of $6,285,000 in cash (including
acquisition expenses). During the year ended December 31, 2004, 2003 and
2002 the Company paid $354,000, $209,000 and $61,000 in contingent
purchase price payments, respectively. The transactions were accounted for
using the purchase method of accounting and, accordingly, the results of
operations of Current Concepts and E-Power have been included in the
Company's financial statements since the date of
acquisition. |
-21-
| (b) |
See
Item 1 for information regarding the acquisition during 2003 of APC and
the Passive Components Group of Insilco. Both of these transactions were
accounted for using the purchase method of accounting and, accordingly,
the results of operations of the Insilco Passive Components Group and APC
have been included in the Company's financial statements since their
respective dates of acquisition. |
| (c) |
Includes
gains of $1,081,000 from the sale of marketable securities in
2000. |
| (d) | See Item 3 for information regarding the settlement of legal proceedings during 2004. |
-22-
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The
following discussion and analysis should be read in conjunction with the
Company’s consolidated financial statements and the notes related thereto. The
discussion of results, causes and trends should not be construed to infer any
conclusion that such results, causes or trends will necessarily continue in the
future.
Critical
Accounting Policies
The
Company’s discussion and analysis of its financial condition and results of
operations are based upon the Company’s consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to product returns, bad debts,
inventories, intangible assets, investments, income taxes and contingencies and
litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Allowance
for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses from the
inability of its customers to make required payments. The Company determines its
reserves by both specific identification of customer accounts where appropriate
and the application of historical loss experience to non-specific accounts. If
the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
-23-
Inventory
The
Company makes purchasing decisions principally based upon firm sales orders from
customers, the availability and pricing of raw materials and projected customer
requirements. Future events that could adversely affect these decisions and
result in significant charges to the Company’s operations include miscalculating
customer requirements, technology changes which render certain raw materials and
finished goods obsolete, loss of customers and/or cancellation of sales orders,
stock rotation with distributors and termination of distribution agreements. The
Company writes down its inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon the aforementioned assumptions. If actual
market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.
When
inventory is written-off, it is never written back up; the cost remains at zero
or the level to which it has been written-down. When inventory that has been
written-off is subsequently used in the manufacturing process, the lower
adjusted cost of the material is charged to cost of sales. During 2001 the
Company wrote down or reserved $12 million of inventory, including non
cancelable purchase commitments. At December 31, 2004, approximately $1.4
million of inventory (at original cost before the write-down or reserve in 2001)
was on hand. During 2003 and 2004 approximately $2.5 million and $7.0 million of
this inventory was scrapped. Management intends to retain the balance of this
inventory for possible use in future orders. Should any of this inventory be
used in the manufacturing process for customer orders, the improved gross profit
will be recognized at the time the completed product is shipped and the sale is
recorded.
The
following is a quarterly schedule of material reintroduced into production since
the initial $12 million charge.
|
Prior
Quarters |
$ |
164,329 |
|||||
|
1st
Quarter |
2002 |
4,538
|
|||||
|
2nd
Quarter |
2002 |
68,098
|
|||||
|
3rd
Quarter |
2002 |
38,914
|
|||||
|
4th
Quarter |
2002 |
271,163
|
|||||
|
1st
Quarter |
2003 |
77,069
|
|||||
|
2nd
Quarter |
2003 |
80,046
|
|||||
|
3rd
Quarter |
2003 |
28,851
|
|||||
|
4th
Quarter |
2003 |
98,263
|
|||||
|
1st
Quarter |
2004 |
31,051
|
|||||
|
2nd
Quarter |
2004 |
78,232
|
|||||
|
3rd
Quarter |
2004 |
72,857
|
|||||
|
4th
Quarter |
2004 |
53,295
|
|||||
$ |
1,066,706 |
||||||
-24-
Acquisitions
Acquisitions
continue to be a key element in the Company's growth strategy. If the Company's
evaluation of a target company misjudges its technology, estimated future sales
and profitability levels, or ability to keep pace with the latest technology,
these factors could impair the value of the investment, which could materially
adversely affect the Company's profitability. The Company recorded a goodwill
impairment charge of $5.2 million in 2002.
Income
Taxes
The
Company files income tax returns in every jurisdiction in which it has reason to
believe it is subject to tax. Historically, the Company has been subject to
examination by various taxing jurisdictions. To date, none of these examinations
has resulted in any material additional tax. Nonetheless, any tax jurisdiction
may contend that a filing position claimed by the Company regarding one or more
of its transactions is contrary to that jurisdiction's laws or
regulations.
Revenue
Recognition
The
Company recognizes revenue in accordance with the guidance contained in SEC
Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements”
(“SAB 104”). Revenue is recognized when title has passed to the customer,
collection of the resulting receivable is deemed probable by management,
persuasive evidence of an arrangement exists and the sale price is fixed and
determinable.
Historically
the Company has been successful in mitigating the risks associated with its
revenue recognition. Some issues relate to product warranty, credit worthiness
of its customers and concentration of sales among a few major
customers.
The
Company is generally obligated to accept returns for defective product or in
instances where the product does not meet the Company’s quality specifications.
If these conditions existed, the Company would be obligated to repair or replace
the defective product or make a cash settlement with the customer. If the
financial conditions of the Company’s customers were to deteriorate, resulting
in an impairment of their ability to make payments, additional allowances for
bad debt may be required which could have a material adverse effect on the
Company’s results of operations and financial condition. The Company has a
significant amount of sales with several major customers. The loss of any one of
these customers could have a material adverse effect on the Company’s results of
operations and financial position.
-25-
Overview
Bel is a
leading producer of electronic products that help make global connectivity a
reality. The Company designs, manufactures and markets a broad array of
magnetic, modules, circuit protection devices and interconnect products. While
these products are deployed primarily in the computer, networking and
telecommunication industries, Bel's expanding portfolio of products also finds
application in the automotive, medical and consumer electronics markets. These
products are designed to protect, regulate, connect, isolate or manage a variety
of electronic circuits.
Bel
operates in the electronic component industry - a highly competitive industry
which has experienced significant declines in product demand in recent years.
Actions taken by customers to reduce future orders and to cancel existing orders
negatively impacted the Company during 2001 and 2002 and could negatively impact
the Company in the future.
In recent
years, profit margins have been favorably impacted due to various cost cutting
measures implemented by the Company. During 2003 the Company continued to move
additional manufacturing and administrative positions from Hong Kong to China,
and new positions to support additional growth were added in China. With
additional volume, the Company was able to benefit from better absorption of
manufacturing overheads, and managed to minimize increases in raw material costs
in markets where costs were rising.
During
2004, sales increased $31.5 million from the acquisition by the Company of
Insilco's Passive Components Group and APC, and internal growth. The Company
acquired the Insilco Group in late March 2003.
In 2004
the Company received proceeds of $2.9 million from the settlement of a lawsuit,
although it also had fixed asset impairment write offs of $1.0 million plus
additional one time and recurring costs associated with the implementation of
Sarbanes-Oxley Section 404 (“Sarbanes-Oxley”) regulations.
During
2004, the provision for income taxes is lower than historical amounts due to the
reversal of accruals from prior periods and the utilization of net operating
loss carryforwards and certain tax credits.
-26-
Results
of Operations
The
following table sets forth, for the past three years, the percentage
relationship to net sales of certain items included in the Company’s
consolidated statements of operations.
|
Percentage
of Net Sales |
||||||||||
|
Years
Ended December 31, |
||||||||||
|
2004 |
2003 |
2002 |
||||||||
|
Net
sales |
100.0
|
% |
100.0
|
% |
100.0
|
% | ||||
|
Cost
of sales |
69.9
|
71.8
|
75.8
|
|||||||
|
Selling,
general and administrative expenses |
16.5
|
16.9
|
23.3
|
|||||||
|
Fixed
asset impairment |
0.5
|
-
|
-
|
|||||||
|
Interest
income - net |
0.3
|
0.2
|
1.0
|
|||||||
|
Lawsuit
proceeds |
1.5
|
-
|
-
|
|||||||
|
Earnings
before provision for income taxes |
14.9
|
11.5
|
1.9
|
|||||||
|
Income
tax provision |
1.9
|
2.8
|
1.3
|
|||||||
|
Net
earnings |
13.0
|
8.7
|
0.6
|
|||||||
The
following table sets forth the year over year percentage increases of certain
items included in the Company's consolidated statements of
operations.
|
Increase
from
Prior
Period |
|||||||
|
2004
compared
with
2003 |
2003
compared
with
2002 |
||||||
|
Net
sales |
19.9
|
% |
65.9
|
% | |||
|
Cost
of sales |
16.7
|
57.2
|
|||||
|
Selling,
general and administrative expenses |
17.0
|
20.2
|
|||||
|
Net
earnings |
79.6
|
2,277.2
|
|||||
-27-
Sales
Net sales
increased 19.9% from $158.5 million during 2003 to $190.0 million during 2004.
The Company attributes a portion of this increase to sales of approximately
$15.2 million from the Insilco Passive Components Group during the first quarter
of 2004, compared to $1.9 million during the first quarter of 2003. The
acquisition took place on March 22, 2003. Additionally, the Company attributes
the increase to strong demand for magnetics sales from Bel’s existing business,
resulting in an increase of $12.9 million in such sales, increased module sales
of $4.6 million and increased circuit protection sales of $2.4 million offset in
part by decreases in interconnect product sales of $1.7 million.
The
significant components of the Company's 2004 sales were from magnetic products
of $129.2 million (as compared with $103.0 million during the year ended
December 31, 2003), circuit protection of $19.8 million (as compared with $17.4
million during the year ended December 31, 2003), interconnect products of $28.2
million (as compared with $29.9 million during the year ended December 31,
2003), and module products of $12.8 million (as compared with $8.2 million
during the year ended December 31, 2003).
Based on
conflicting opinions the Company received from customers and competitors in the
electronics industry pertaining to revenue growth during 2005, the Company can
not predict with any degree of certainty sales revenue for this period. Although
the Company's backlog has been stable, the Company feels that this is not a good
indicator of revenues. This statement represents a Forward Looking Statement,
subject to the risks and uncertainties described in Item 1 of this Annual Report
on Form 10-K . The Company continues to have limited visibility as to future
customer requirements. Actual results could differ materially from this Forward
Looking Statement. The Company had one customer with sales in excess of 10%
(11.6%) of total sales during the year ended 2004. The loss of this customer
could have a material adverse effect on the Company's results of operations,
financial position and cash flows.
The
Company cannot quantify the extent of sales growth arising from unit sales mix
and/or price changes. Given the change in the nature of the products purchased
by customers from period to period, the Company believes that neither unit
changes nor price changes are meaningful. Over the past year, newer and more
sophisticated products with higher unit selling prices have been introduced.
Through the Company's engineering and research effort, the Company has been
successful in adding additional value to existing product lines, which tends to
increase sales prices initially until that generation of products becomes mature
and sales prices experience price degradation. In general, as products become
mature, average selling prices decrease.
Net sales
increased 65.9% from $95.5 million during 2002 to $158.5 million during 2003.
The Company attributes this increase principally to sales of approximately $52.6
million from its two acquisitions in 2003, the Insilco Passive Components Group
and APC, strong demand for MagJack sales from Bel’s existing business, resulting
in an increase of $9.9 million in such sales, and increased fuse sales of $1.2
million offset, in part, by a decrease in sales of the Module product line of
approximately $1.3 million. Sales in 2002 were impacted by a decline in demand
affecting the global electronic industry.
-28-
The
significant components of the Company's 2003 sales were from magnetic products
of $103.0 million (as compared with $71.7 million during 2002), circuit
protection of $17.4 million (as compared with $16.2 million during 2002),
interconnect products of $29.9 million (as compared with $-0- during 2002), and
module sales of $8.2 million (as compared with $7.7 million during
2002).
Cost
of Sales
Bel
generally enters into processing arrangements with five independent third party
contractors in the Far East. Costs are recorded as incurred for all products
manufactured either at the Company's third party contractors or at the Company's
own manufacturing facilities. Such amounts are determined based upon the
estimated stage of production and include labor cost and fringes and related
allocations of factory overhead. The Company manufactures finished goods at its
own manufacturing facilities in Glen Rock, Pennsylvania, Inwood, New York, the
Dominican Republic and Mexico. See "Critical Accounting Policies" above for
information regarding the use of inventories in the manufacturing process that
have been written down in prior years.
Cost of
sales as a percentage of net sales decreased from 71.8 % during the year ended
December 31, 2003 to 69.9 % in 2004. The decrease in the cost of sales
percentage is primarily attributable to a 1.46 % decrease in research and
development as a percentage of sales and a 1.44 % decrease in direct labor and
support as a percentage of sales offset in part by increased raw material costs
of 1.07%. The decrease in research and development expenses as a percentage of
sales is more fully discussed below. The decrease in direct labor and support as
a percentage of sales is primarily attributable to the lower labor costs
associated with the Insilco manufacturing operations and the Company's
relocating direct labor from Hong Kong to China where labor costs are lower. The
increase in raw material costs is principally related to increased manufacturing
of value-added products which has a higher raw material content than the
Company’s other products.
The
acquisition of the Insilco Passive Components Group resulted in additional cost
of sales in the amount of $10.7 million during the first three months of 2004.
The acquisition took place on March 22, 2003.
In 2003
the Company reduced the manufacturing activities of its Fuse department in Hong
Kong and moved those positions to the PRC. In Jersey City, Mexico, Macau and
Europe, the Company reduced headcount.
Included
in cost of sales are research and development expenses of $7.3 million and $8.4
million for the years ended December 31, 2004 and 2003, respectively. The
principal reasons for the decrease in research and development expense are the
closure of the Indiana research facility, and lower research and development
costs in the Far East as many of these jobs were moved by the Company from Hong
Kong to China and several positions were eliminated.
-29-
Cost of
sales as a percentage of net sales decreased from 75.8 % during 2002 to 71.8% in
2003. The decrease in the cost of sales percentage is primarily attributable to
a 2.0% decrease in direct labor as a percentage of sales and a 2.0% decrease in
factory overheads. The decrease in direct labor as a percentage of sales is
primarily attributable to the lower direct labor costs associated with the
Insilco manufacturing operations. The decrease in factory overhead expenses as a
percentage of sales is primarily attributable to the increase in sales and cost
containment measures resulting primarily from the shut down of the Company's
Texas sales, manufacturing and research facility and the Company's Indiana
research facility.
The
acquisition of the Insilco Passive Components Group resulted in additional cost
of sales in the amount of $36.8 million during the year ended December 31, 2003.
Such cost represented 72.6% of net sales of Insilco products during the year
ended December 31, 2003.
Included
in cost of sales are research and development expenses of $8.4 million and $6.6
million for 2003 and 2002, respectively. The increase is principally
attributable to increased research and development expenditures at the Company's
Power Products group facilities and the purchase of the Passive Components Group
of Insilco and APC.
When
inventory that has been written-off is subsequently used in the manufacturing
process, the lower adjusted cost of the material is charged to cost of sales,
resulting in a higher gross margin. During 2004, 2003 and 2002, the value of
inventory that had been written-off and subsequently used in the manufacturing
process approximated $235,000, $284,000 and $383,000, respectively. Gross profit
was not significantly impacted due to comparable deductions in selling prices
that were necessary to be competitive.
The
Company’s cost control measures principally involved the closure of its Texas
sales, manufacturing and research facility during 2002 and its Indiana research
facility, which was closed during the second quarter of 2003. A total of 21
employees were terminated at these locations, plus an additional 5 employees
were terminated at other U.S. locations. This resulted in a labor and fringe
benefit savings of approximately $700,000 during 2002 and $1.3 million annually
thereafter. Approximately 5 employees in Texas were relocated to the Company's
San Diego, California facility. The Company incurred approximately $.8 million
of severance and employee relocation costs during the year ended
2002.
Fixed
Asset Impairment
During
the year ended December 31, 2004 the Company wrote down fixed assets,
principally machinery and equipment, with a net book value of $1,033,000, at its
Far East manufacturing facilities. The Company considered these fixed assets to
be surplus equipment which was replaced by equipment with more advanced
technology.
-30-
Selling,
General and Administrative Expenses
The
percentage relationship of selling, general and administrative expenses to net
sales decreased from 17.0% during the year ended December 31, 2003 to 16.5%
during the year ended December 31, 2004, in part as a result of the Company's
ability to leverage general and administrative expenses over a larger revenue
base. The
Company attributes the $4.5 million increase in the dollar amount of such
expenses primarily to increased selling expenses of approximately $1.5 million
which includes salaries, commissions and related expenses. This increase relates
to increased sales. Other cost increases relate to costs associated with Insilco
operations of approximately $2.0 million which are included for the entire year
2004 as compared with approximately 9 months during 2003. In addition, the
Company incurred a $1.5 million increase in professional fees, principally
related to Sarbanes-Oxley compliance offset in part by $.5 million in reduced
severance, exchange rate losses and the write off of property in Indiana during
2003.
During
2005 the Company will be required to expense share based compensation costs in
accordance with SFAS No. 123(R). This charge will be principally included in
selling, general and administrative expenses. See "New Financial Accounting
Standards" included in Management's Discussion and Analysis of Financial
Condition and Results of Operations for information regarding SFAS No.
123(R).
The
percentage relationship of selling, general and administrative expenses to net
sales decreased from 23.3 % during the year ended December 31, 2002 to 16.9%
during the year ended December 31, 2003, in part as a result of the Company's
ability to leverage general and administrative expenses over a larger revenue
base and an impairment charge of $5.2 million during 2002 in connection with the
write down of goodwill. The Company attributes the $4.5 million increase in the
dollar amount of such expenses primarily to costs associated with the Insilco
and APC operations of approximately $9.0 million, additional salaries and
benefits of $1.0 million, additional professional fees of approximately $1.0
million and a $.3 million write-off of the building in Illinois offset, in part,
by the impairment charge of $5.2 million during 2002 in connection with the
write down of goodwill, reduced selling expenses of approximately $.7 million
and a reduction in accounts receivable reserves of $.6 million. The decrease in
selling expenses is attributable to reduced shipping charges and sales salaries
resulting from the closing of the Texas sales facility.
The
increase in salaries and benefits during 2003 is principally attributable to
bonus, salary and fringe benefit increases; professional fees related to
Sarbanes - Oxley compliance; and the acquisition of the Insilco Passive
Components Group. Reduced sales expenses are principally attributable to reduced
shipping costs and commission expenses.
The
Company anticipates continued increases in professional fees principally
associated with Sarbanes - Oxley compliance. Future increases in salaries and
benefits are more dependent on the future sales growth and profitability of the
Company.
-31-
Interest
Income - net
Interest
income earned on cash and cash equivalents increased by approximately $285,000
during the year ended December 31, 2004 as compared to 2003. The increase is due
primarily to increased earnings on higher cash and cash equivalent
balances.
Interest
income earned on cash and cash equivalents decreased by approximately $462,000
during 2003 compared to 2002. The decrease is due primarily to lower interest
rates earned on cash and cash equivalents and lower cash balances due to the use
of approximately $37 million of cash for the acquisition of Insilco's Passive
Components Group and the communications products division of APC.
Interest
Expense
A $10
million term loan was entered into on March 21, 2003 which was borrowed for the
acquisition of Insilco's Passive Components Group. The loan bears interest at
LIBOR plus 1.25% (4.0% at December 31, 2004) payable quarterly. See Note 9 of
Notes to Consolidated Financial Statements. Interest expense increased by
approximately $10,000 during the year ended December 31, 2004 compared to 2003.
The increase is attributable to higher interest rates charged on the loan for
the entire year during 2004 versus nine months during 2003 offset in part by
principal reductions of $500,000 a quarter during 2004.
During
2003, the Company incurred $228,000 of interest expense which arose from the $10
million loan which was borrowed for the acquisition of Insilco's Passive
Components Group. The Company had no interest expense in 2002.
Lawsuit
Proceeds
During the year ended December 31, 2004
the Company settled an arbitration proceeding related to a 1998 acquisition. The
Company received $2,935,000 (net of $65,000 of related legal expenses incurred
during the year.) See Item 3 of this Annual Report on Form 10-K.
Provision
for Income Taxes
The
provision for income taxes for the year ended December 31, 2004 and December 31,
2003 was $3.6 million and $4.4 million, respectively. The Company experienced
increased earnings before income taxes for the year ended December 31, 2004, as
compared with 2003. The income tax provision is lower than both the statutory
federal income tax rate and the prior year provision primarily due to lower
foreign tax rates, the reversal of accruals no longer required in the amount of
approximately $.4 million, the utilization of certain tax credits amounting to
$.8 million and the utilization of net operating loss carryforwards with a tax
effect of approximately $.1 million, the reduction of deferred taxes previously
provided relative to the planned repatriation of foreign earnings of $6.3
million and the establishment of accruals relative to certain tax matters of
$5.3 million. See Note 8 to Notes to Consolidated Financial
Statements.
-32-
The
provision for income taxes for the year ended December 31, 2003 was $4.4 million
as compared to $1.2 million for the year ended December 31, 2002. The increase
in the provision is due primarily to the Company's increased earnings before
income taxes for the year ended December 31, 2003, as compared with 2002 and a
valuation allowance of approximately $.6 million that was established during
2003 in connection with foreign net operating losses. The income tax provision
is lower than the statutory federal income tax rate primarily due to lower
foreign tax rates.
The
Company conducts manufacturing activities in the Far East. More specifically,
the Company manufactures the majority of its products in the People’s Republic
of China (“PRC”), Hong Kong and Macau and has not been subject to corporate
income tax in the PRC. The Company's activities in Hong Kong have generally
consisted of administration, quality control and accounting, as well as some
limited manufacturing activities. Hong Kong imposes corporate income tax at a
rate of 17.5 percent solely on income sourced to Hong Kong. That is, its tax
system is a territorial one which only seeks to tax activities conducted in Hong
Kong. Since the Bel entity in Hong Kong conducts most of its manufacturing and
quality control activities in the PRC, a portion of this entity’s income is
deemed “offshore” and thus not fully taxable in Hong Kong. Although the
statutory tax rate in Hong Kong is 17.5 percent, the Company generally pays an
effective Hong Kong rate of less than 4 percent.
The
Company also conducts manufacturing operations in Macau. Macau has a statutory
corporate income tax rate of 16 percent. However, the Company, as a result of
investing in a certain location in Macau, was able to obtain a 10-year tax
holiday in Macau, thereby reducing its effective Macau income tax rate from 16
percent to 8 percent. Additionally, the Macau subsidiary utilized approximately
$1.1 million of net operating loss carryforward to offset its taxable income
during the year ended December 31, 2004. The tax holiday in Macau expired in
April 2004. Since most of the Company's operations are conducted in the Far
East, the majority of its profits are sourced in these three Far East
jurisdictions. Accordingly, the profits earned in the U.S. are comparatively
small in relation to its profits reported in the Far East. Therefore, there is
generally a significant difference between the statutory U.S. tax rate and the
Company’s effective tax rate.
Notwithstanding
the above, in 2002 the Company’s effective tax rate exceeded the U.S. statutory
rate. This higher effective tax rate results from a combination of factors. In
2002 the Company’s operating results were close to “break-even.” This fact,
combined with the identification of $.4 million of foreign earnings that may not
be permanently reinvested, as well as the loss in Macau for which the Company
was only able to obtain an 8 percent benefit, resulted in a tax rate in excess
of the statutory rate for 2002.
-33-
The
Company has historically followed a practice of reinvesting a portion of the
earnings of foreign subsidiaries in the expansion of its foreign operations. If
the unrepatriated earnings were distributed to the parent corporation rather
than reinvested in the Far East, such funds would be subject to United States
Federal income taxes. Through December 31, 2004, management has identified a
minimum of approximately $26 million of foreign earnings that will be
repatriated during 2005 and will be eligible for the reduced tax rate of 5.25%
under the American Jobs Creations Act of 2004. See Note 8 of Notes to
Consolidated Financial Statements. As a result of the favorable tax treatment
afforded the repatriation of CFC earnings and management’s decision to
repatriate such funds in 2005, the Company recorded a $6,326,000 tax benefit in
2004 which results from the difference in tax rates between the Act and the tax
rates previously provided on the portion of CFC earnings which were expected to
be repatriated leaving deferred income taxes in the amount of approximately
$1,342,000 recorded in such earnings to be repatriated. In light of the planned
repatriation of CFC earnings in 2005, Management has identified certain domestic
and foreign tax exposures relating to such operations and has used this tax
benefit to cover their estimate of this exposure. Such amount has been included
in Income Taxes Payable in the accompanying balance sheet.
Cost
Control Measures
In light
of the current market in the Company’s industry, the Company continues to review
its operating structures in efforts to control costs. Such measures can be
expected to result in a restructuring of the Company’s operations and the
recognition of related restructuring charges in future periods. During the years
ended December 31, 2004, 2003 and 2002, the Company incurred approximately $.05
million, $.7 million and $.8 million, respectively, of severance costs and does
not anticipate additional severance expenses during 2005.
Inflation
and Foreign Currency Exchange
During
the past two years, the effect of inflation on the Company's profitability was
not material. Historically, fluctuations of the U.S. dollar against other major
currencies have not significantly affected the Company's foreign operations as
most sales have been denominated in U.S. dollars or currencies directly or
indirectly linked to the U.S. dollar. Most significant expenses, including raw
materials, labor and manufacturing expenses, are either incurred in US dollars
or the currencies of the Hong Kong dollar, the Macau Pataca or the Chinese
Renminbi. Commencing with the acquisition of the Passive Components Group, the
Company's European entity has sales transactions which are denominated
principally in Euros and British Pounds. Conversion of these transactions into
U.S. dollars has resulted in currency exchange losses of $54,000 and $236,000
for the years ended December 31, 2004 and 2003, respectively which are included
in selling, general and administrative expense and approximately $1,422,000 and
$1,015,000 for the years ended December 31, 2004 and 2003, respectively, in
unrealized exchange losses relating to the translation of foreign subsidiary
financial statements which are included in other comprehensive income. Any
change in linkage of the U.S. dollar and the Hong Kong dollar, the Chinese
Renminbi or the Macau Pataca could have a material effect on the Company's
consolidated financial position or results of operations.
-34-
Liquidity
and Capital Resources
Historically,
the Company has financed its capital expenditures primarily through cash flows
from operating activities. Currently, due to the recent acquisition of the
Passive Components Group of Insilco Technologies, Inc., the Company has borrowed
money under a secured term loan and has unused lines of credit as described
below. Management believes that the cash flow from operations after payments of
dividends and scheduled repayments of the term loan, combined with its existing
capital base and the Company's available lines of credit, will be sufficient to
fund its operations for the near term. Such statement constitutes a Forward
Looking Statement. Factors which could cause the Company to require additional
capital include, among other things, a softening in the demand for the Company’s
existing products, an inability to respond to customer demand for new products,
potential acquisitions requiring substantial capital, future expansion of the
Company's operations and net losses that would result in net cash being used in
operating, investing and/or financing activities which result in net decreases
in cash and cash equivalents. Net losses may result in the loss of domestic and
foreign credit facilities and preclude the Company from raising debt or equity
financing in the capital markets.
The
Company has one domestic line of credit amounting to $10 million, which was
unused at December 31, 2004. During March 2005, the Company borrowed $8 million
against the line of credit to partially finance the acquisition of Galaxy. The
$10 million line of credit expires on March 21, 2006 and is in addition to the
Company’s $10 million term loan described below. Borrowings under this $10
million line of credit are secured by the same assets, which secure the term
loan described below. The line of credit bears interest at LIBOR plus 1.50
percent.
On March
21, 2003, the Company entered into a $10 million secured term loan. The loan was
used to partially finance the Company's acquisition of Insilco's Passive
Components Group. The loan agreement requires 20 equal quarterly installments of
principal with a final maturity on March 31, 2008 and bears interest at LIBOR
plus 1.25 percent (4.0 % percent at December 31, 2004) payable quarterly. The
loan is collateralized with a first priority security interest in 65% of all the
issued and outstanding shares of the capital stock of certain of the foreign
subsidiaries of Bel Fuse Inc. and all other personal property and certain real
property of Bel Fuse Inc. The Company is required to maintain certain financial
covenants, as defined in the agreement. For the years ended December 31, 2004
and 2003, the Company recorded interest expense of approximately $239,000 and
$228,000, respectively, and was in compliance with all of the covenants
contained in the loan agreement as of December 31, 2004.
The
Company's Hong Kong subsidiary has an unsecured line of credit of approximately
$2 million, which was unused at December 31, 2004. This line of credit expires
on April 30, 2005. Borrowing on this line of credit is guaranteed by the
Company.
For
information regarding further commitments under the Company's operating leases,
see Note 15 of Notes to the Company's Consolidated Financial Statements in this
Annual Report on Form 10-K.
-35-
For
information regarding the Company's 2003 acquisitions of APC and the Insilco
Passive Components Group, see Item 1 of this Annual Report on Form 10-K.
Significant changes in balance sheet amounts between December 31, 2002 and
December 31, 2003 are primarily attributable to the fact that these acquisitions
were reflected in the Company's December 31, 2003 balance sheet and were not
reflected in the Company's December 31, 2002 balance sheet.
On March
22, 2005, the Company completed the acquisition of Galaxy Power Inc. ("Galaxy")
for approximately $18 million in cash and the assumption of approximately $2.0
million in liabilities. Galaxy is a leading designer and manufacturer of
high-density dc-dc converters for distributed power and telecommunication
applications. The Company believes that by merging Galaxy into its existing Bel
Power Products division, it broadens the range of on-board power solutions it
can offer its customers. The Company has substantial experience with
non-isolated converters, while Galaxy has a strong track record in the
development of high-density isolated converters. The Company believes that the
combined portfolio will enable it to be a leader in the power
industry.
This
acquisition will be accounted for using the purchase method of accounting and,
accordingly the results of operations of Galaxy will be included in the
Company's financial statements from the date of closing.
As
previously announced, the Company has acquired a total of 2,037,500 shares of
the common stock of Artesyn Technologies, Inc. at a total purchase price of
$16,331,469. These purchases are reflected on the Company's consolidated
statement of cash flows as purchases of marketable securities and are reflected
on the Company's balance sheet as marketable securities. As of December 31,
2004, the Company has recorded an unrealized gain, net of income taxes, of
approximately $4.0 million. In connection with this transaction the Company is
obligated to pay an investment banker's advisory fee to a third party. As of
December 31, 2004, the Company has accrued a fee in the amount of approximately
$1.0 million. The Company previously requested the opportunity to meet with
Artesyn Technologies' Board and/or management to explore a possible business
combination, but to date Artesyn Technologies has not expressed a willingness to
participate in negotiations.
During
2004, the Company completed construction of a 64,000 square foot manufacturing
facility in Zhongshan City, PRC for approximately $1.0 million.
-36-
The
Company is constructing a 117,000 square foot manufacturing facility in
Zhongshan City, PRC for approximately $2.3 million. As of December 31, 2004, the
Company has paid approximately $426,000 toward the construction. The Company
expects to complete the construction during 2006.
On July
15, 2004, the Company entered into an agreement for the sale of a certain parcel
of land located in Jersey City, New Jersey. The sales agreement is subject to a
due diligence period by the buyer. The seller and buyer are aware that a portion
of the property may be subject to tidelands claims by the State of New Jersey.
The Company has reclassified the asset as held for sale with a net book value of
$696,000 on the Company's consolidated balance sheet at December 31,
2004.
Under the
terms of the E-Power and Current Concepts, Inc. acquisition agreements of May
11, 2001, the Company will be required to make contingent purchase price
payments up to an aggregate of $7.6 million should the acquired companies attain
specified related sales levels. E-Power will be paid $2.0 million in contingent
purchase price payments when sales reach $15.0 million and an additional $4.0
million when sales reach $25.0 million on a cumulative basis through May, 2007.
No payments have been required to date with respect to E-Power. Current Concepts
will be paid 16% of related sales on the first $10.0 million in sales through
May 2007. During the years ended December 31, 2004, 2003 and 2002, the Company
paid approximately $354,000, $209,000 and $61,000, respectively, in contingent
purchase price payments to Current Concepts. The contingent purchase price
payments have been accounted for as additional purchase price and increase other
intangibles when such payment obligations are incurred.
On May 9,
2000, the Board of Directors authorized the repurchase of up to 10% of the
Company’s outstanding common shares from time to time in market or privately
negotiated transactions. As of December 31, 2004, the Company had purchased and
retired 23,600 Class B shares at a cost of approximately $808,000, which reduced
the number of Class B common shares outstanding. No shares were repurchased
during the year ended December 31, 2004.
During
the year ended December 31, 2004, the Company's cash and cash equivalents
increased by approximately $13.7 million, reflecting approximately $32.2 million
provided by operating activities (principally as a result of net income of $24.7
million and depreciation expense of $9.0 million), $6.3 million provided from
the sale of marketable securities and $3.9 million from proceeds from the
exercise of stock options offset by $17.7 million for the purchase of marketable
securities, $6.6 million for the purchase of property, plant and equipment, $2.0
million for loan repayments, $2.2 million for payment of dividends and $.4
million for contingent acquisition payments.
Cash,
marketable securities and cash equivalents and accounts receivable comprised
approximately 58.6% and 51.1% of the Company's total assets at December 31, 2004
and December 31, 2003, respectively. The Company's current ratio (i.e., the
ratio of current assets to current liabilities) was 5.0 to 1 and 6.2 to 1 at
December 31, 2004 and December 31, 2003, respectively.
-37-
The
following table sets forth at December 31, 2004 the amounts of payments due
under specific types of contractual obligations, aggregated by category of
contractual obligation, for the time periods described below.
|
Payments
due by period |
||||||||||||||||
|
Contractual
Obligations |
Total |
Less
than
1
year |
1-3
years |
3-5
years |
More
than
5
years |
|||||||||||
|
Long-term
debt |
$ |
6,500,000 |
$ |
2,000,000 |
$ |
4,000,000 |
$ |
500,000 |
$ |
-- |
||||||
|
Capital
expenditure obligations |
1,874,000
|
1,874,000
|
-- |
|||||||||||||
|
Contingent
purchase price |
||||||||||||||||
|
commitments |
769,000
|
769,000
|
-- |
-- |
-- |
|||||||||||
|
Operating
leases |
1,975,958
|
1,034,110
|
697,877
|
243,971
|
-- |
|||||||||||
|
Raw
material purchase obligations |
18,605,536
|
18,605,536
|
-- |
-- |
-- |
|||||||||||
|
Total |
$ |
29,724,494 |
$ |
24,282,646 |
$ |
4,697,877 |
$ |
743,971 |
$ |
-- |
||||||
The
Company is currently obligated to fund the Company's SERP. As of December 31,
2004 the SERP had an unfunded benefit obligation of approximately $2.6 million.
See Note 12 of the Notes to Consolidated Financial Statements for further
information.
Other
Matters
The
Company believes that it has sufficient cash reserves to fund its foreseeable
working capital needs. It may, however, seek to expand such resources through
bank borrowings, at favorable lending rates, from time to time. Should the
Company pursue additional acquisitions during 2005, the Company may be required
to pursue public or private equity or debt transactions to finance the
acquisitions and to provide working capital to the acquired
companies.
New
Financial Accounting Standards
In
December 2004, the Financial Accounting Standard Board (“FASB”) issued Statement
on Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment"
(revised), that will require compensation costs related to share-based payment
transactions to be recognized in the financial statements. With limited
exceptions, the amount of compensation cost will be measured based on the
grant-date fair value of the equity or liability instruments issued. In
addition, liability awards will be remeasured each reporting period.
Compensation cost will be recognized over the period that an employee provides
service in exchange for the reward. The statement also amends SFAS No. 95,
"Statement of Cash Flows", to require that excess tax benefits be reported as a
financing cash inflow rather than as a reduction of taxes paid. SFAS No. 123(R)
is effective as to the Company as of the beginning of the first interim period
that begins after June 15, 2005. The Company is currently evaluating its
position and will make its determination to account for the compensation costs
either prospectively or retroactively at the time of adoption. The adoption of
SFAS 123(R) is expected to have a material effect on the Company's results of
operations.
-38-
In
December 2004, the FASB staff issued FASB Staff Position ("FSP") FAS 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004" to provide guidance on the application of Statement 109 to
the provision within the American Jobs Creations Act of 2004 (the "Act") that
provides tax relief to U.S. domestic manufacturers. The FSP states that the
manufacturers' deduction provided for under the Act should be accounted for as a
special deduction in accordance with Statement 109 and not as a tax rate
reduction. The FSP is effective upon issuance. The adoption of FAS 109-1 could
have a material effect on the Company's results of operations or financial
position.
In
December 2004, the FASB staff issued FSP No. FAS 109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision Within the
American Jobs Creation Act of 2004" to provide accounting and disclosure
guidance for the repatriation provisions included in the Act. The Act introduced
a special limited-time dividends received deduction on the repatriation of
certain foreign earnings to a U.S. taxpayer as more fully described in Note 8 of
Notes to Consolidated Financial Statements. The FSP is effective upon issuance.
The adoption of FAS 109-2 could have a material effect on the Company's results
of operations and financial position.
In
December 2004, the FASB issued SFAS No. 153 an amendment of APB Opinion No. 29
"Exchanges of Nonmonetary Assets". SFAS No. 153 amends APB Opinion No. 29 by
eliminating the exception under APB No. 29 for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not
expected to have a material effect on the Company's financial position or
results of operations.
In
November, 2004 the FASB issued SFAS No. 151, an amendment to ARB No. 43 chapter
4 "Inventory Costs". SFAS No. 151 requires that abnormal costs of idle facility
expenses, freight, handling costs and wasted material (spoilage) be recognized
as current-period charges. SFAS No. 151 is effective for fiscal years beginning
after June 15, 2005. Adoption of SFAS No. 151 is not expected to have a material
impact on the Company's results of operations or financial
position.
In
December 2003, the FASB issued SFAS No. 132(R), “Employer’s Disclosure about
Pensions and Other Postretirement Benefits" (revised). SFAS No. 132(R) retains
disclosure requirements of the original SFAS No. 132(R) and requires additional
disclosures relating to assets, obligations, cash flows, and net periodic
benefit cost. SFAS No. 132(R) is effective for fiscal years ending after
December 15, 2003, except that certain disclosures are effective for fiscal
years ending after June 15, 2004. Interim period disclosures are effective for
interim periods beginning after December 15, 2003. The adoption of SFAS No.
132(R) did not have a material effect on the Company’s results of operations or
financial position.
-39-
In May
2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150
clarifies the accounting for certain financial instruments with characteristics
of both liabilities and equity and requires that those instruments be classified
as liabilities in statements of financial position. Previously, many of those
financial instruments were classified as equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of the provisions of SFAS No. 150 did not have a material
effect on the Company’s financial position.
In April
2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement is effective for contracts
entered into or modified after September 30, 2003, and for hedging relationships
designated after September 30, 2003. Adoption of this statement did not have a
material impact on the Company's results of operations or financial
position.
In
January 2003, the FASB issued FASB Interpretation ("FIN") No. 46, "Consolidation
of Variable Interest Entities." In December 2003, the FASB issued FIN No. 46(R)
(revised) to address certain FIN No. 46 implementation issues. This
interpretation requires that the assets, liabilities, and results of activities
of a Variable Interest Entity (“VIE”) be consolidated into the financial
statements of the enterprise that has a controlling interest in the VIE. FIN No.
46(R) also requires additional disclosures by primary beneficiaries and other
significant variable interest holders. For entities acquired or created before
February 1, 2003, this interpretation is effective no later than the end of the
first interim or reporting period ending after March 15, 2004, except for those
VIE’s that are considered to be special purpose entities, for which the
effective date is no later than the end of the first interim or annual reporting
period ending after December 15, 2003. For all entities that were acquired
subsequent to January 31, 2003, this interpretation is effective as of the first
interim or annual period ending after December 31, 2003. The adoption of FIN No.
46 did not have a material impact on the Company's results of operations or
financial position.
In
November 2002, the FASB issued FIN No. 45, "Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", and interpretation of FASB Statements No. 5, 57 and 107
and Rescission of FASB Interpretation No. 34. FIN No. 45 clarifies the
requirements of SFAS No. 5, Accounting for Contingencies, relating to the
guarantor’s accounting for, and disclosure of, the issuance of certain types of
guarantees. This interpretation clarifies that a guarantor is required to
recognize, at the inception of certain types of guarantees, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of this Interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor’s fiscal year-end. The
disclosure requirements in this interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Company adopted FIN No. 45 on January 1, 2003. The adoption of FIN No. 45 did
not have a material impact on the Company's results of operations or financial
position.
-40-
In June
2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities." This Statement requires recording costs associated with
exit or disposal activities at their fair values when a liability has been
incurred. Under previous guidance, certain exit costs were accrued upon
management's commitment to an exit plan. The Company adopted SFAS No. 146 on
January 1, 2003. The adoption of SFAS No. 146 did not have a material impact on
the Company's result of operations or financial position.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Fair
Value of Financial Instruments — The following disclosure of the estimated fair
value of financial instruments is made in accordance with the requirements of
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments". The estimated fair values of financial
instruments have been determined by the Company using available market
information and appropriate valuation methodologies.
However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange.
The
Company has not entered into, and does not expect to enter into, financial
instruments for trading or hedging purposes. The Company does not currently
anticipate entering into interest rate swaps and/or similar
instruments.
The
Company's carrying values of cash, marketable securities, accounts receivable,
accounts payable and accrued expenses are a reasonable approximation of their
fair value.
The
Company enters into transactions denominated in U.S. dollars, Hong Kong dollars,
the Macau Pataca, the Chinese Renminbi, Euros and British Pounds. Fluctuations
in the U.S. dollar exchange rate against these currencies could significantly
impact the Company's consolidated results of operations.
The
Company believes that a change in interest rates of 1% or 2% would not have a
material effect on the Company's consolidated statement of operations or balance
sheet.
| Item 8. | Financial Statements and Supplementary Data |
See the
consolidated financial statements listed in the accompanying Index to
Consolidated Financial Statements for the information required by this
item.
-41-
|
BEL
FUSE INC. | ||
|
INDEX | ||
|
Financial
Statements |
Page | |
|
Report
of Independent Registered Public Accounting
Firm |
F-1 | |
|
Consolidated
Balance Sheets as of December 31, 2004 and
2003 |
F-2
- F-3 | |
|
Consolidated
Statements of Operations for Each of the Three Years in the Period
Ended December 31, 2004 |
F-4 | |
|
Consolidated
Statements of Stockholders' Equity for Each of the Three Years in
the Period Ended December 31, 2004 |
F-5
- F-6 | |
|
Consolidated
Statements of Cash Flows for Each of the Three Years in the Period
Ended December 31, 2004 |
F-7
- F-9 | |
|
Notes
to Consolidated Financial Statements |
F-10
- F-37 | |
|
Selected
Quarterly Financial Data - Years Ended December 31, 2004 and 2003
(Unaudited) |
F-38 | |
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Bel Fuse
Inc.
Jersey
City, New Jersey
We have
audited the accompanying consolidated balance sheets of Bel Fuse Inc. and
subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders’ equity and cash flows for
each of the three years in the period ended December 31, 2004. Our audits also
included the financial statement schedule listed in the Index at Item 15. These
financial statements and financial statement schedule are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Bel Fuse Inc. and subsidiaries as of
December 31, 2004 and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2004, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
DELOITTE
& TOUCHE LLP
New York,
New York
March 28,
2005
F-1
|
BEL
FUSE INC. AND SUBSIDIARIES | ||||
|
CONSOLIDATED
BALANCE SHEETS |
|
December
31, |
|||||||
|
2004 |
2003 |
||||||
ASSETS |
|||||||
|
Current
Assets: |
|||||||
|
Cash
and cash equivalents |
$ |
71,197,891 |
$ |
57,461,152 |
|||
|
Marketable
securities |
23,120,028
|
5,038,749
|
|||||
|
Accounts
receivable - less allowance for doubtful accounts of $1,610,000 and
$1,976,000 at |
|||||||
|
December
31, 2004 and 2003, respectively |
33,247,911
|
30,381,613
|
|||||
|
Inventories |
29,101,060
|
26,228,697
|
|||||
|
Prepaid
expenses and other current assets |
2,404,718
|
1,704,475
|
|||||
|
Assets
held for sale |
696,013
|
619,223
|
|||||
|
Deferred
income taxes |
--
|
650,000
|
|||||
|
Total
Current Assets |
159,767,621
|
122,083,909
|
|||||
|
Property,
plant and equipment - net |
41,244,759
|
43,500,563
|
|||||
|
Intangible
assets - net |
2,691,682
|
3,637,985
|
|||||
|
Goodwill |
9,881,854
|
9,881,854
|
|||||
|
Prepaid
pension costs |
1,127,941
|
1,359,414
|
|||||
|
Other
assets |
3,062,714
|
1,352,836
|
|||||
|
TOTAL
ASSETS |
$ |
217,776,571 |
$ |
181,816,561 |
|||
See notes
to consolidated financial statements.
F-2
|
BEL
FUSE INC. AND SUBSIDIARIES | ||||
|
CONSOLIDATED
BALANCE SHEETS |
|
December
31, |
|||||||
|
2004 |
2003 |
||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY |
|||||||
|
Current
Liabilities: |
|||||||
|
Current
portion of long-term debt |
$ |
2,000,000 |
$ |
2,000,000 |
|||
|
Accounts
payable |
8,814,161
|
7,514,860
|
|||||
|
Accrued
expenses |
10,293,576
|
9,442,689
|
|||||
|
Deferred
income taxes |
3,322,000
|
--
|
|||||
|
Income
taxes payable |
7,172,955
|
226,432
|
|||||
|
Dividends
payable |
541,000
|
530,000
|
|||||
|
Total
Current Liabilities |
32,143,692
|
19,713,981
|
|||||
|
Long-term
Liabilities: |
|||||||
|
Minimum
pension obligation |
2,261,583
|
1,983,627
|
|||||
|
Long-term
debt - net of current portion |
4,500,000
|
6,500,000
|
|||||
|
Deferred
income taxes |
410,000
|
6,764,000
|
|||||
|
Total
Long-term Liabilities |
7,171,583
|
15,247,627
|
|||||
|
Total
Liabilities |
39,315,275
|
34,961,608
|
|||||
|
Commitments
and Contingencies |
|||||||
|
Stockholders'
Equity: |
|||||||
|
Preferred
stock, no par value, authorized 1,000,000 shares; none
issued |
--
|
--
|
|||||
|
Class
A common stock, par value $.10 per share - authorized 10,000,000
shares; outstanding |
|||||||
|
2,702,677
and 2,701,663 shares, respectively (net of 1,072,770 treasury
shares) |
270,268
|
270,167
|
|||||
|
Class
B common stock, par value $.10 per share - authorized 30,000,000
shares; outstanding |
|||||||
|
8,660,589and
8,460,692 shares, respectively (net of 3,218,310 treasury
shares) |
866,059
|
846,069
|
|||||
|
Additional
paid-in capital |
21,989,174
|
17,352,448
|
|||||
|
Retained
earnings |
149,949,283
|
127,406,693
|
|||||
|
Cumulative
other comprehensive income |
5,386,512
|
979,576
|
|||||
|
Total
Stockholders' Equity |
178,461,296
|
146,854,953
|
|||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY |
$ |
217,776,571 |
$ |
181,816,561 |
|||
See notes to consolidated financial
statements.
F-3
|
BEL
FUSE INC. AND SUBSIDIARIES | ||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS |
|
Years
Ended December 31, |
||||||||||
|
2004 |
2003 |
2002 |
||||||||
|
|
||||||||||
|
Net
Sales |
$ |
190,021,953 |
$ |
158,497,502 |
$ |
95,527,892 |
||||
|
Costs
and expenses: |
||||||||||
|
Cost
of sales |
132,776,304
|
113,812,860
|
72,420,220
|
|||||||
|
Selling,
general and administrative |
31,301,722
|
26,757,349
|
22,269,733
|
|||||||
|
Fixed
asset impairment |
1,032,786
|
--
|
--
|
|||||||
|
165,110,812
|
140,570,209
|
94,689,953
|
||||||||
|
Income
from operations |
24,911,141
|
17,927,293
|
837,939
|
|||||||
|
Interest
expense |
(238,552 |
) |
(228,459 |
) |
--
|
|||||
|
Interest
income |
763,000
|
477,860
|
940,058
|
|||||||
|
Lawsuit
proceeds |
2,935,000
|
--
|
--
|
|||||||
|
Earnings
before provision for income taxes |
28,370,589
|
18,176,694
|
1,777,997
|
|||||||
|
Income
tax provision |
3,649,000
|
4,413,000
|
1,199,000
|
|||||||
|
Net
earnings |
$ |
24,721,589 |
$ |
13,763,694 |
$ |
578,997 |
||||
|
Earnings
per common share - basic |
$ |
2.19 |
$ |
1.25 |
$ |
0.05 |
||||
|
Earnings
per common share - diluted |
$ |
2.15 |
$ |
1.24 |
$ |
0.05 |
||||
|
Weighted
average common shares outstanding - basic |
11,283,750
|
11,020,916
|
10,907,371
|
|||||||
|
Weighted
average common shares outstanding - diluted |
11,511,095
|
11,133,471
|
11,086,318
|
|||||||
See notes to consolidated financial statements.
F-4
|
BEL
FUSE INC. AND SUBSIDIARIES | ||||||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
Cumulative |
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
| |||||||
|
|
|
|
|
Compre- |
|
|
|
Compre- |
|
|
|
|
|
| ||||||||
|
|
|
|
|
hensive |
|
|
hensive |
|
Class
A |
|
Class
B |
|
Additional |
| ||||||||
|
Income |
Retained
|
Income |
Common |
Common |
Paid-In |
|||||||||||||||||
|
|
|
Total |
|
(loss) |
|
Earnings |
|
(loss) |
|
Stock |
|
Stock |
|
Capital |
||||||||
|
|
||||||||||||||||||||||
|
Balance,
January 1, 2002 |
$ |
129,462,912 |
$ |
116,699,114 |
$ |
12,054 |
$ |
266,464 |
$ |
810,512 |
$ |
11,674,768 |
||||||||||
|
Exercise
of stock options |
1,872,716
|
1,159
|
15,637
|
1,855,920
|
||||||||||||||||||
|
Tax
benefits arising from the disposition of |
||||||||||||||||||||||
|
non-qualified
incentive stock options |
452,000
|
452,000
|
||||||||||||||||||||
|
Cash
dividends on Class B common stock |
(1,645,292 |
) |
(1,645,292 |
) |
||||||||||||||||||
|
Currency
translation adjustment |
(19,186 |
) |
$ |
(19,186 |
) |
(19,186 |
) |
|||||||||||||||
|
Decrease
in marketable securities-net of taxes |
(43,000 |
) |
(43,000 |
) |
(43,000 |
) |
||||||||||||||||
|
Net
income |
578,997
|
578,997
|
578,997
|
|||||||||||||||||||
|
Comprehensive
income |
$ |
516,811 |
||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||
|
Balance,
December 31, 2002 |
130,659,147
|
115,632,819
|
(50,132 |
) |
267,623
|
826,149
|
13,982,688
|
|||||||||||||||
|
Exercise
of stock options |
2,580,224
|
2,544
|
19,920
|
2,557,760
|
||||||||||||||||||
|
Tax
benefits arising from the disposition of |
||||||||||||||||||||||
|
non-qualified
incentive stock options |
812,000
|
812,000
|
||||||||||||||||||||
|
Cash
dividends on Class A common stock |
(322,234 |
) |
(322,234 |
) |
||||||||||||||||||
|
Cash
dividends on Class B common stock |
(1,667,586 |
) |
(1,667,586 |
) |
||||||||||||||||||
|
Currency
translation adjustment - net of taxes |
1,014,808
|
$ |
1,014,808 |
1,014,808
|
||||||||||||||||||
|
Increase
in marketable securities-net of taxes |
14,900
|
14,900
|
14,900
|
|||||||||||||||||||
|
Net
earnings |
13,763,694
|
13,763,694
|
13,763,694
|
|||||||||||||||||||
|
Comprehensive
income |
$ |
14,793,402 |
||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||
|
Balance,
December 31, 2003 |
146,854,953
|
127,406,693
|
979,576
|
270,167
|
846,069
|
17,352,448
|
||||||||||||||||
See notes to consolidated financial statements.
F-5
|
BEL
FUSE INC. AND SUBSIDIARIES | ||||||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY |
|
|
|
Cumulative |
||||||||||||||||||||
|
|
Other |
|||||||||||||||||||||
|
Compre- |
Compre- |
|||||||||||||||||||||
|
hensive |
hensive |
Class
A |
Class
B |
Additional |
||||||||||||||||||
|
Total |
Income
(loss) |
Retained Earnings |
Income
(loss) |
Common Stock |
Common Stock |
Paid-In Capital |
||||||||||||||||
|
Exercise
of stock options |
3,891,266
|
101
|
19,990
|
3,871,175
|
||||||||||||||||||
|
Tax
benefits arising from the disposition of |
||||||||||||||||||||||
|
non-qualified
incentive stock options |
765,551
|
765,551
|
||||||||||||||||||||
|
Cash
dividends on Class A common stock |
(430,707 |
) |
(430,707 |
) |
||||||||||||||||||
|
Cash
dividends on Class B common stock |
(1,748,292 |
) |
(1,748,292 |
) |
||||||||||||||||||
|
Currency
translation adjustment - net of taxes |
386,257
|
$ |
386,257 |
386,257
|
||||||||||||||||||
|
Increase
in marketable securities-net of taxes |
4,020,679
|
4,020,679
|
4,020,679
|
|||||||||||||||||||
|
Net
earnings |
24,721,589
|
24,721,589
|
24,721,589
|
|||||||||||||||||||
|
Comprehensive
income |
$ |
29,128,525 |
||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||
|
Balance,
December 31, 2004 |
$ |
178,461,296 |
$ |
149,949,283 |
$ |
5,386,512 |
$ |
270,268 |
$ |
866,059 |
$ |
21,989,174 |
||||||||||
See notes to consolidated financial
statements.
F-6
|
BEL
FUSE INC. AND SUBSIDIARIES | ||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS |
|
Years
Ended December 31, |
||||||||||
|
2004 |
2003 |
2002 |
||||||||
|
Cash
flows from operating activities: |
||||||||||
|
Net
income |
$ |
24,721,589 |
$ |
13,763,694 |
$ |
578,997 |
||||
|
Adjustments
to reconcile net income to net cash provided by
operating activities: |
||||||||||
|
Depreciation
and amortization |
9,025,364
|
8,374,918
|
5,998,426
|
|||||||
|
Goodwill
impairment |
--
|
--
|
5,200,000
|
|||||||
|
Fixed
asset impairment |
1,032,786
|
364,843
|
8,614
|
|||||||
|
Other |
1,238,000
|
812,000
|
452,000
|
|||||||
|
Deferred
income taxes |
(4,986,000 |
) |
1,591,000
|
405,000
|
||||||
|
Changes
in operating assets and liabilities (net of
acquisitions) |
1,077,010 |
3,759,738
|
(7,554,308 |
) | ||||||
|
Net
Cash Provided by Operating Activities |
32,108,749 |
28,666,193
|
5,088,729
|
|||||||
|
Cash
flows from investing activities: |
||||||||||
|
Purchase
of property, plant and equipment |
(6,578,658 |
) |
(3,119,321 |
) |
(6,477,313 |
) | ||||
|
Purchase
of marketable securities |
(17,723,615 |
) |
(4,953,449 |
) |
(8,824,630 |
) | ||||
|
Deposit
on APC acquisition |
--
|
--
|
(5,500,000 |
) | ||||||
|
Payment
for acquisitions - net of cash acquired |
(353,464 |
) |
(36,277,457 |
) |
(61,411 |
) | ||||
|
Deferred
acquisition costs related to Insilco |
--
|
--
|
(947,121 |
) | ||||||
|
Proceeds
from repayment by contractors |
29,000
|
29,000
|
29,000
|
|||||||
|
Proceeds
from sale of marketable securities |
6,345,595
|
4,904,875
|
6,131,796
|
|||||||
|
Proceeds
from sale of equipment |
--
|
--
|
48,964
|
|||||||
|
Net
Cash Used in Investing Activities |
(18,281,142 |
) |
(39,416,352 |
) |
(15,600,715 |
) | ||||
See notes to consolidated financial statements.
F-7
|
BEL
FUSE INC. AND SUBSIDIARIES | ||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Continued) |
|
Year
Ended December 31, |
||||||||||
|
2004 |
2003 |
2002 |
||||||||
|
Cash
flows from financing activities: |
||||||||||
|
Proceeds
from borrowings |
--
|
10,000,000
|
--
|
|||||||
|
Loan
repayments |
(2,000,000 |
) |
(1,500,000 |
) |
--
|
|||||
|
Proceeds
from exercise of stock options |
3,891,266
|
2,580,224
|
1,872,716
|
|||||||
|
Dividends
paid to common shareholders |
(2,168,258 |
) |
(1,871,494 |
) |
(1,636,723 |
) | ||||
|
Net
Cash Provided By (Used In) Financing
Activities |
(276,992 |
) |
9,208,730
|
235,993
|
||||||
|
Effect
of exchange rate changes on cash |
186,124 |
--
|
--
|
|||||||
|
Net
Increase (decrease) in Cash and Cash
Equivalents |
13,736,739
|
(1,541,429 |
) |
(10,275,993 |
) | |||||
|
Cash
and Cash Equivalents - beginning of year |
57,461,152
|
59,002,581
|
69,278,574
|
|||||||
|
Cash
and Cash Equivalents - end of year |
$ |
71,197,891 |
$ |
57,461,152 |
$ |
59,002,581 |
||||
|
Changes
in operating assets and liabilities (net of acquisitions) consist
of: |
||||||||||
|
(Increase)
decrease in accounts receivable |
$ |
(2,671,513 |
) |
$ |
1,763,149 |
$ |
(7,024,583 |
) | ||
|
(Increase)
decrease in inventories |
(2,774,275 |
) |
2,043,609
|
1,486,350
|
||||||
|
(Increase)
decrease in prepaid expenses and other current
assets |
(700,243 |
) |
(1,187,276 |
) |
50,076
|
|||||
|
Decrease
in prepaid taxes |
--
|
681,887
|
144,972
|
|||||||
|
(Increase)
in other assets |
(738,878 |
) |
(425,880 |
) |
(423,134 |
) | ||||
|
Increase
(decrease) in accounts payable |
1,299,301
|
(295,887 |
) |
475,709
|
||||||
|
Increase
in income taxes payable |
6,946,523
|
792,432
|
--
|
|||||||
|
(Decrease)
increase in accrued expenses |
(283,905 |
) |
387,704
|
(2,263,698 |
) | |||||
$ |
1,077,010 |
$ |
3,759,738 |
$ |
(7,554,308 |
) | ||||
See notes to consolidated financial
statements.
F-8
|
BEL
FUSE INC. AND SUBSIDIARIES | ||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Concluded) |
|
Year
Ended December 31, |
||||||||||
|
2004 |
2003 |
2002 |
||||||||
|
Supplementary
information: |
||||||||||
|
Cash
paid during the year for: |
||||||||||
|
Income
taxes |
$ |
2,128,000 |
$ |
1,031,000 |
$ |
205,000 |
||||
|
Interest |
$ |
239,000 |
$ |
228,000 |
$ |
-- |
||||
|
Details
of acquisitions: |
||||||||||
|
Fair
value of assets acquired (excluding cash of $799,000 in
2003) |
$ |
-- |
$ |
35,853,854 |
||||||
|
Intangibles |
353,464
|
6,870,724
|
||||||||
|
Less:
cash on deposit previous year |
--
|
(6,447,121 |
) |
|||||||
|
Cash
paid for acquisitions |
$ |
353,464 |
$ |
36,277,457 |
||||||
See notes to consolidated financial statements.
F-9
BEL FUSE
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
| 1. | DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Bel Fuse
Inc. and subsidiaries operate in one industry with three geographic reporting
segments and are engaged in the design, manufacture and sale of products used in
local area networking, telecommunication, business equipment and consumer
electronic applications. The Company manages its operations geographically
through its three reporting units: North America, Asia and Europe. Sales are
predominantly in North America, Europe and Asia.
PRINCIPLES
OF CONSOLIDATION - The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries including the businesses acquired since their
respective dates of acquisition. All intercompany transactions and balances have
been eliminated.
USE OF
ESTIMATES - The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CASH
EQUIVALENTS - Cash
equivalents include short-term investments in U.S. treasury bills and commercial
paper with an original maturity of three months or less when purchased. At
December 31, 2004 and December 31, 2003, cash equivalents approximated
$38,355,000 and $25,228,000, respectively.
MARKETABLE
SECURITIES - The
Company classifies its equity securities as "available for sale", and
accordingly, reflects unrealized gains and losses, net of deferred income taxes,
as other comprehensive income.
The fair
values of marketable securities are based on quoted market prices. Realized
gains or losses from the sale of marketable securities are based on the specific
identification method.
F-10
ACQUISITION
EXPENSES - The
Company capitalizes all direct costs associated with proposed acquisitions. If
the proposed acquisitions are consummated, such costs will be included as a
component of the overall cost of the acquisition. Such costs are expensed at
such time as the Company deems the consummation of a proposed acquisition to be
unsuccessful.
FOREIGN
CURRENCY TRANSLATION - The
functional currency for some foreign operations is the local currency. Assets
and liabilities of foreign operations are translated at balance sheet date rates
of exchange and income, expense and cash flow items are translated at the
average exchange rate for the period. Translation adjustments are recorded in
Other Comprehensive Income. The U.S. Dollar is used as the functional currency
for certain foreign operations that conduct their business in U.S. Dollars. A
combination of current and historical exchange rates is used in measuring the
local currency transactions of these subsidiaries and the resulting exchange
adjustments are included in the statement of operations. Current exchange rates
are used for all foreign subsidiaries except for two subsidiaries in the Far
East which use both current and historical exchange rates. Realized foreign
currency losses were $54,000 and $236,000 for the years ended December 31, 2004
and 2003, respectively, and are included in Selling, General and Administrative
expenses in the consolidated statement of operations. During 2002 realized
foreign currency losses were not material.
CONCENTRATION
OF CREDIT RISK - Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of accounts receivable and temporary cash investments.
The Company grants credit to customers that are primarily original equipment
manufacturers and to subcontractors of original equipment manufacturers based on
an evaluation of the customer's financial condition, without requiring
collateral. Exposure to losses on receivables is principally dependent on each
customer's financial condition. The Company controls its exposure to credit risk
through credit approvals, credit limits and monitoring procedures and
establishes allowances for anticipated losses.
The
Company places its temporary cash investments with quality financial
institutions and commercial issuers of short-term paper and, by policy, limits
the amount of credit exposure in any one financial instrument.
INVENTORIES
- Inventories
are stated at the lower of weighted average cost or market.
REVENUE
RECOGNITION -The
Company recognizes revenue in accordance with the guidance contained in SEC
Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements"
("SAB 104"). Revenue is recognized when the product has been delivered and title
and risk of loss has passed to the customer, collection of the resulting
receivable is deemed probable by management, persuasive evidence of an
arrangement exists and the sales price is fixed and determinable. Substantially
all of the Company's shipments are FCA (free carrier) which provides for title
to pass upon delivery to the customer's freight carrier. Some product is shipped
DDP/DDU with title passing when the product arrives at the customer's
dock.
F-11
For
certain customers, the Company provides consigned inventory, either at the
customer’s facility or at a third party warehouse. Sales of consigned inventory
are recorded when the customer withdraws inventory from consignment.
The
Company typically has a twelve-month warranty policy for workmanship defects.
Warranty returns have historically averaged at or below 1% of annual net sales.
The Company establishes warranty reserves when a warranty issue becomes known as
warranty claims have historically been immaterial. No general reserves for
warranties have been established.
The
Company is not contractually obligated to accept returns except for defective
product or in instances where the product does not meet the customer's quality
specifications. However, the Company may permit its customers to return product
for other reasons. In these instances, the Company would generally require a
significant cancellation penalty payment by the customer. The Company estimates
such returns, where applicable, based upon management's evaluation of historical
experience, market acceptance of products produced and known negotiations with
customers. Such estimates are deducted from gross sales and provided for at the
time revenue is recognized.
GOODWILL
AND OTHER INTANGIBLES - In June
2001, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS No. 142”) "Goodwill and Other Intangible
Assets". SFAS No. 142 specifies the financial accounting and reporting for
acquired goodwill and other intangible assets. Goodwill and intangible assets
that have indefinite useful lives are not amortized but rather they are tested
at least annually for impairment unless certain impairment indicators are
identified. This standard was effective for fiscal years beginning after
December 15, 2001. The Company tests goodwill for impairment annually (fourth
quarter), using a fair value approach at the reporting unit level. A reporting
unit is an operating segment or one level below an operating segment for which
discrete financial information is available and reviewed regularly by
management. Assets and liabilities of the Company have been assigned to the
reporting units to the extent that they are employed in or are considered a
liability related to the operations of the reporting unit and were considered in
determining the fair value of the reporting unit.
DEPRECIATION
- Property,
plant and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated primarily using the
declining-balance method for machinery and equipment and the straight-line
method for buildings and improvements over their estimated useful lives.
Property, plant and equipment are reviewed periodically for possible impairment
in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". The Company's impairment review are based on an undiscounted
cash flow analysis of assets at the lowest level for which indefinable cash
flows exist. Impairment occurs when the carrying value of the asset exceeds the
future undiscounted cash flows and the impairment is viewed as other than
temporary. When an impairment is indicated, the future cash flows are then
discounted to determine the estimated fair value of the asset and an impairment
charge is recorded for the difference between the carrying value and the net
present value of future cash flows.
F-12
INCOME
TAXES - The
Company accounts for income taxes using an asset and liability approach under
which deferred income taxes are recognized by applying enacted tax rates
applicable to future years to the differences between the financial statement
carrying amounts and the tax bases of reported assets and
liabilities.
Except
for a portion of foreign earnings, an income tax provision has not been recorded
for U.S. federal income taxes on the undistributed earnings of foreign
subsidiaries as such earnings are intended to be permanently reinvested in those
operations. Such earnings would become taxable upon the sale or liquidation of
these foreign subsidiaries or upon the repatriation of earnings. See Note 8 of
Notes to Consolidated Financial Statements.
The
principal items giving rise to deferred taxes are unrealized gains on marketable
securities available for sale, the use of accelerated depreciation methods for
machinery and equipment, timing differences between book and tax amortization of
intangible assets and goodwill, the assumed repatriation of a portion of foreign
earnings and certain expenses which have been deducted for financial reporting
purposes which are not currently deductible for income tax purposes.
STOCK-OPTION
PLAN - The Company accounts for equity-based compensation issued to
employees in accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees". APB No. 25 requires the use of the
intrinsic value method, which measures compensation cost as the excess, if any,
of the quoted market price of the stock at the measurement date over the amount
an employee must pay to acquire the stock. The Company makes disclosures of pro
forma net earnings and earnings per share as if the fair-value-based method of
accounting had been applied as required by SFAS No. 123, "Accounting for
Stock-Based Compensation".
In
December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123”.
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. It also requires disclosure in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company adopted the
disclosure provisions of SFAS No. 148 beginning with the year ended December 31,
2002. The Company grants stock options with exercise prices at fair market value
at the date of the grant. The Company will continue to account for stock-based
employee compensation under the recognition and measurement principle of APB
Opinion No. 25 and related interpretations through June 30, 2005. Thereafter,
the Company will account for stock based compensation under SFAS No. 123(R). The
Company is currently evaluating its position and will make its determination to
account for the compensation costs either prospectively or retroactively at the
time of adoption.
F-13
The
Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation". Had compensation cost for the Company's stock
option plan been determined based on the fair value at the grant date for awards
in 2003 consistent with the provisions of SFAS No. 123, the Company's net
earnings and earnings per share would have been reduced to the pro forma amounts
indicated below:
|
December
31, |
||||||||||
|
2004 |
2003 |
2002 |
||||||||
|
Net
earnings - as reported |
$ |
24,721,589 |
$ |
13,763,694 |
$ |
578,997 |
||||
|
Deduct:
Total stock-based employee compensation
expense |
||||||||||
|
determined
under fair value based method for all awards, net of
taxes |
1,125,427
|
2,080,375
|
2,155,935
|
|||||||
|
Net
earnings (loss)- pro forma |
$ |
23,596,162 |
$ |
11,683,319 |
$ |
(1,576,938 |
) | |||
|
Earnings
per common share - basic-as reported |
$ |
2.19 |
$ |
1.25 |
$ |
0.05 |
||||
|
Earnings
(loss) per common share - basic-pro forma |
$ |
2.09 |
$ |
1.06 |
$ |
(0.15 |
) | |||
|
Earnings
per common share - diluted-as reported |
$ |
2.15 |
$ |
1.24 |
$ |
0.05 |
||||
|
Earnings
(loss) per common share - diluted-pro forma |
$ |
2.04 |
$ |
1.05 |
$ |
(0.15 |
) | |||
The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2004, 2003 and 2002: dividends yield of .9%, .9%
and .9%, expected volatility of 35%, 54% and 41% for Class B; risk-free interest
rate of 5%, 2% and 5% and expected lives of 5 years. 24,000 Class B options were
granted during the year ended December 31, 2004.
RESEARCH
AND DEVELOPMENT - Research
and development costs are expensed as incurred, and are included in cost of
sales. Generally all research and development is performed internally for the
benefit of the Company. The Company does not perform such activities for others.
Research and development costs include salaries, building maintenance and
utilities, rents, materials, administration costs and miscellaneous other items.
Research and development expenses for the years ended December 31, 2004, 2003
and 2002 amounted to $7.3 million. $8.4 million and $6.6 million,
respectively.
EVALUATION
OF LONG-LIVED ASSETS - The
Company reviews property and equipment for impairment whenever events or changes
in circumstances indicate the carrying value may not be recoverable in
accordance with guidance in SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” If the carrying value of the long-lived asset
exceeds the present value of the related estimated future cash flows, the asset
would be adjusted to its fair value and an impairment loss would be charged to
operations in the period identified.
F-14
EARNINGS
PER SHARE - Basic
earnings per common share are computed by dividing net earnings by the weighted
average number of common shares outstanding during the period. Diluted earnings
per common share are computed by dividing net earnings by the weighted average
number of common shares and potential common shares outstanding during the
period. Potential common shares used in computing diluted earnings per share
relate to stock options and warrants which, if exercised, would have a dilutive
effect on earnings per share.
The
following table includes a reconciliation of shares used in the calculation of
basic and diluted earnings per share:
|
2004 |
2003 |
2002 |
||||||||
|
Weighted
average shares outstanding - basic |
11,283,750
|
11,020,916
|
10,907,371
|
|||||||
|
Dilutive
impact of options outstanding |
227,345
|
112,555
|
178,947
|
|||||||
|
Weighted
average shares oustanding - diluted |
11,511,095
|
11,133,471
|
11,086,318
|
|||||||
During
the years ended December 31, 2004, 2003 and 2002, respectively, 24,000, 209,600,
and 209,100 outstanding options were not included in the foregoing computations
because they were antidilutive.
FAIR
VALUE OF FINANCIAL INSTRUMENTS - For
financial instruments, including cash, accounts receivable, accounts payable and
accrued expenses, it was assumed that the carrying amount approximated fair
value because of the short maturities of such instruments. Interest rates that
are currently available to the Company for issuance of debt with similar terms
and remaining maturities are used to estimate fair value for bank debt. The
carrying amount of bank debt is a reasonable estimate of its fair
value.
RECLASSIFICATIONS
- Certain
reclassifications have been made to prior period amounts to conform to the
current year presentation. See Note 7 of Notes to Consolidated Financial
Statements.
NEW
FINANCIAL ACCOUNTING STANDARDS
In
December 2004, the Financial Accounting Standard Board (“FASB”) issued Statement
on Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment"
(revised), that will require compensation costs related to share-based payment
transactions to be recognized in the financial statements. With limited
exceptions, the amount of compensation cost will be measured based on the
grant-date fair value of the equity or liability instruments issued. In
addition, if granted, liability awards will be remeasured each reporting period.
Compensation cost will be recognized over the period that an employee provides
service in exchange for the reward. The statement also amends SFAS No. 95,
"Statement of Cash Flows", to require that excess tax benefits be reported as a
financing cash inflow rather than as a reduction of taxes paid. SFAS No. 123(R)
is effective as to the Company as of the beginning of the first interim period
that begins after June 15, 2005. The Company is currently evaluating its
position and will make its determination to account for the compensation costs
either prospectively or retroactively at the time of adoption. The adoption of
SFAS 123(R) is expected to have a material effect on the Company's results of
operations.
F-15
In
December 2004, the FASB staff issued FASB Staff Position ("FSP") FAS 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004" to provide guidance on the application of Statement 109 to
the provision within the American Jobs Creations Act of 2004 (the "Act") that
provides tax relief to U.S. domestic manufacturers. The FSP states that the
manufacturers, deduction provided for under the Act should be accounted for as a
special deduction in accordance with Statement 109 and not as a tax rate
reduction. The FSP
is effective upon issuance. The adoption of FAS 109-1 could have a material
effect on the Company's results of operations and financial
position.
In
December 2004, the FASB staff issued FSP FAS 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision Within the American
Jobs Creation Act of 2004" to provide accounting and disclosure guidance for the
repatriation provisions included in the Act. The Act introduced a special
limited-time dividends received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer as more fully described in Note 8 of Notes to
Consolidated Financial Statements. The FSP is effective upon issuance. The
adoption of FAS 109-2 could have a material effect on the Company's results of
operations and financial position.
In
December 2004, the FASB issued SFAS No. 153, an amendment of APB Opinion No. 29
"Exchanges of Nonmonetary Assets". SFAS No. 153 amends APB Opinion No. 29 by
eliminating the exception under APB No. 29 for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not
expected to have a material effect on the Company's financial position or
results of operations.
In
November 2004, the FASB issued SFAS No. 151, an amendment to ARB No. 43 chapter
4 "Inventory Costs". SFAS No. 151 requires that abnormal costs of idle facility
expenses, freight, handling costs and wasted material (spoilage) be recognized
as current-period charges. SFAS No. 151 is effective for fiscal years beginning
after June 15, 2005. Adoption of SFAS No. 151 is not expected to have a material
impact on the Company's results of operations or financial
position.
In
December 2003, the FASB issued SFAS No. 132 (R), “Employer’s Disclosure about
Pensions and Other Postretirement Benefits.” SFAS No. 132(R) retains disclosure
requirements of the original SFAS No. 132 and requires additional disclosures
relating to assets, obligations, cash flows, and net periodic benefit cost. SFAS
No. 132(R) is effective for fiscal years ending after December 15, 2003, except
that certain disclosures are effective for fiscal years ending after June 15,
2004. Interim period disclosures are effective for interim periods beginning
after December 15, 2003. The adoption of SFAS No. 132(R) did not have a material
effect on the Company’s results of operations or financial
position.
F-16
In May
2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150
clarifies the accounting for certain financial instruments with characteristics
of both liabilities and equity and requires that those instruments be classified
as liabilities in statements of financial position. Previously, many of those
financial instruments were classified as equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of the provisions of SFAS No. 150 did not have a material
effect on the Company’s financial position.
In April
2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement is effective for contracts
entered into or modified after September 30, 2003, and for hedging relationships
designated after September 30, 2003. Adoption of this statement did not have a
material impact on the Company's results of operations or financial
position.
In
January 2003, the FASB issued FASB Interpretation ("FIN") No. 46, "Consolidation
of Variable Interest Entities". In December 2003, the FASB issued FIN No. 46
(Revised) (“FIN 46(R)”) to address certain FIN No. 46 implementation issues.
This interpretation requires that the assets, liabilities, and results of
activities of a Variable Interest Entity (“VIE”) be consolidated into the
financial statements of the enterprise that has a controlling interest in the
VIE. FIN No. 46(R) also requires additional disclosures by primary beneficiaries
and other significant variable interest holders. For entities acquired or
created before February 1, 2003, this interpretation is effective no later than
the end of the first interim or reporting period ending after March 15, 2004,
except for those VIE’s that are considered to be special purpose entities, for
which the effective date is no later than the end of the first interim or annual
reporting period ending after December 15, 2003. For all entities that were
acquired subsequent to January 31, 2003, this interpretation is effective as of
the first interim or annual period ending after December 31, 2003. The adoption
of FIN No. 46 did not have a material impact on the Company's results of
operations or financial position.
F-17
In
November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", and interpretation of FASB Statements No.
5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN No. 45 clarifies
the requirements of FASB Statement No. 5, Accounting for Contingencies, relating
to the guarantor’s accounting for, and disclosure of, the issuance of certain
types of guarantees. This interpretation clarifies that a guarantor is required
to recognize, at the inception of certain types of guarantees, a liability for
the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of this Interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor’s fiscal year-end. The
disclosure requirements in this interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Company adopted FIN No. 45 on January 1, 2003. The adoption of FIN No. 45 did
not have a material impact on the Company's results of operations or financial
position.
In June
2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities." This Statement requires recording costs associated with
exit or disposal activities at their fair values when a liability has been
incurred. Under previous guidance, certain exit costs were accrued upon
management's commitment to an exit plan. The Company adopted SFAS No. 146 on
January 1, 2003. The adoption of SFAS No. 146 did not have a material impact on
the Company's result of operations or financial position.
| 2. | ACQUISITIONS |
On March
22, 2003, the Company acquired certain assets (including cash acquired of
$799,000), subject to certain liabilities, and common shares of certain entities
comprising the Passive Components Group of Insilco Technologies, Inc.
("Insilco") for $37.0 million in cash, including transaction costs of
approximately $1.4 million. This acquisition included the Stewart Connector
Systems Group (“Stewart”), InNet Technologies (“InNet”) and the Signal
Transformer Group (“Signal Transformer”). The purchase price has been allocated
to both tangible and intangible assets and liabilities based on estimated fair
values after considering various independent formal appraisals. Approximately
$1.6 million of identifiable intangible assets (patents) arose from this
transaction; such intangible assets are being amortized on a straight line basis
over a period of five years. In addition, $2.9 million has been attributed to
goodwill. Patents having a carrying value of $1.6 million and goodwill of $.8
million have been included in the Company's Asia reporting unit. Goodwill of
$1.5 million and $.6 million has been included in the Company's North America
and European reporting units, respectively.
Effective
January 2, 2003, the Company entered into an asset purchase agreement with
Advanced Power Components plc ("APC") to purchase the communication products
division of APC for $5.5 million in cash plus the assumption of certain
liabilities. The Company was required to make contingent payments equal to 5% of
sales (as defined) in excess of $5.5 million per year for the years 2003 and
2004. No contingent purchase price payment amounts are due as of December 31,
2004. The purchase price has been allocated to both tangible and intangible
assets and liabilities based on estimated fair values. Goodwill of approximately
$2.1 million has been included in the Company's Asia reporting
segment.
F-18
There was
no in-process research and development acquired as part of these
acquisitions.
These
transactions were accounted for using the purchase method of accounting and,
accordingly, the results of operations of Insilco's Passive Components Group
have been included in the Company's financial statements from March 22, 2003 and
the results of operations of APC have been included in the Company's financial
statements from January 2, 2003.
The
following unaudited pro forma summary results of operations assume that both
Insilco's Passive Components Group and APC had been acquired as of January 1,
2002 (in thousands, except per share data):
|
Year
Ended |
|||||||
|
December
31, |
|||||||
|
2003 |
2002 |
||||||
|
Net
sales |
$ |
174,211 |
$ |
167,089 |
|||
|
Net
earnings (loss) |
14,553
|
(2,614 |
) | ||||
|
Earnings
(loss) per share - diluted |
1.30
|
(0.24 |
) | ||||
The
information above is not necessarily indicative of the results of operations
that would have occurred if the acquisitions had been consummated as of January
1, 2002. Such information should not be construed as a representation of the
future results of operations of the Company.
A
condensed balance sheet of the major assets and liabilities of the Passive
Components Group of Insilco and APC at the acquisition dates is as
follows:
|
Cash |
$ |
799,000 |
||
|
Accounts
receivable |
14,764,000
|
|||
|
Inventories |
15,613,000
|
|||
|
Prepaid
expenses |
327,000
|
|||
|
Property,
plant and equipment |
11,049,000
|
|||
|
Other
assets |
244,000
|
|||
|
Goodwill |
5,062,000
|
|||
|
Patents |
1,600,000
|
|||
|
Accounts
payable |
(2,748,000 |
) | ||
|
Accrued
expenses |
(3,540,000 |
) | ||
|
Income
taxes payable |
566,000
|
|||
|
Deferred
income taxes payable |
(421,000 |
) | ||
|
Net
assets acquired |
$ |
43,315,000 |
||
F-19
The
Company acquired the Signal Transformer division of Lucent Technologies in
October 1998. The Company refers to this acquisition and related products as its
Telecom business. Shortly after the acquisition, the acquired tangible and
intangible assets (including goodwill) were allocated to the Company's North
America and Asia segments based on a formal third party appraisal of the portion
of the Telecom business that would reside in each geographic reporting segment.
Accordingly, a portion of the Telecom goodwill is included in each geographic
reporting segment. The goodwill relating to the Company's Power Products
acquisitions of E-Power Ltd. and Current Concepts, Inc., in May, 2001 is
included exclusively in the Company's Asia reporting segment.
| 3. | GOODWILL AND OTHER INTANGIBLES |
Goodwill
represents the excess of the purchase price and related acquisition costs over
the value assigned to the net tangible and other intangible assets with finite
lives acquired in a business acquisition. Prior to January 1, 2002, goodwill had
been amortized on a straight-line basis over 4 to 15 years.
Effective
January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets". Under SFAS No. 142, goodwill and intangible assets deemed to
have indefinite lives are no longer amortized, but are subject to, at a minimum,
an annual impairment test. If the carrying value of goodwill or intangible
assets exceeds its fair market value, an impairment loss would be recorded.
Upon
adoption of SFAS No. 142 on January 1, 2002, the Company completed an impairment
test and, based on the results of a valuation performed, management concluded
that there was no impairment. This conclusion was based on the results of a
discounted projected cash flow model, including an estimate of terminal value
and various other generally accepted valuation methodologies. In 2001, the
electronics industry and more specifically, the Telecom sector overestimated
their future requirements, which resulted in lower revenues and profits for the
Company. By late 2002, management had concluded that a market turnaround was not
likely to occur as had been expected.
In late
2002, management concluded that it needed to revise projected revenue, profit
and cash flows projections in 2003 and beyond based on market conditions.
Management performed the required annual impairment test as of December 31, 2002
based on the same valuation methodology used by the Company upon adopting SFAS
No. 142 and concluded that an impairment charge of $5.2 million was appropriate.
The $5.2 million impairment charge impacted the Company's North America and Asia
geographic reporting units by $2.3 million and $2.9 million, respectively.
Management performed the required annual impairment test as of December 31, 2004
and concluded that there was no impairment in any of its geographic reporting
units.
Other
intangibles include patents, product information, covenants not-to-compete and
supply agreements. Amounts assigned to these intangibles have been determined by
management. Management considered a number of factors in determining the
allocations, including valuations and independent appraisals. Other intangibles
are being amortized over 4 to 10 years. Amortization expense was $1,299,000,
$976,000, and $890,000 for the years ended December 31, 2004, 2003 and, 2002,
respectively.
F-20
Under the
terms of the E-Power and Current Concepts, Inc. acquisition agreements of May
11, 2001, the Company is required to make contingent purchase price payments up
to an aggregate of $7.6 million should the acquired companies attain specified
sales levels. E-Power will be paid $2.0 million in contingent purchase price
payments when sales, as defined, reach $15.0 million and an additional $4.0
million when sales reach $25.0 million on a cumulative basis through May 2007.
No payments have been required through December 31, 2004 with respect to
E-Power. Current Concepts will be paid 16% of sales, as defined, on the first
$10.0 million of sales through May 2007. During the years ended December 31,
2004, 2003 and 2002, the Company paid approximately $354,000, $209,000 and
$61,000, respectively, in contingent purchase price payments to Current
Concepts. The contingent purchase price payments are accounted for as additional
purchase price and increase intangible assets when such payment obligations are
incurred.
The
changes in the carrying value of goodwill classified by geographic reporting
units, net of accumulated amortization, for the years ended December 31, 2004
and 2003 are as follows:
|
Total |
Asia |
North
America |
Europe |
||||||||||
|
Balance,
January 1, 2003 |
$ |
4,819,563 |
$ |
3,396,181 |
$ |
1,423,382 |
$ |
-- |
|||||
|
Goodwill
allocation related to acquisitions |
5,062,291
|
3,011,254
|
1,445,710
|
605,327
|
|||||||||
|
Balance,
December 31, 2003 and 2004 |
$ |
9,881,854 |
$ |
6,407,435 |
$ |
2,869,092 |
$ |
605,327 |
|||||
F-21
The
components of intangible assets other then goodwill by geographic reporting unit
are as follows:
|
December
31, 2004 |
|||||||||||||||||||
|
Total
|
Asia
|
North
America |
|||||||||||||||||
|
Gross
Carrying |
Accumulated
|
Gross
Carrying |
Accumulated
|
Gross
Carrying |
Accumulated
|
||||||||||||||
|
Amount
|
Amortization
|
Amount
|
Amortization
|
Amount
|
Amortization
|
||||||||||||||
|
Patents
and Product Information |
$ |
2,935,000 |
$ |
1,338,765 |
$ |
2,653,000 |
$ |
1,188,654 |
$ |
282,000 |
$ |
150,111 |
|||||||
|
Covenants
not-to-compete |
3,523,516
|
2,428,069
|
3,523,516
|
2,428,069
|
--
|
--
|
|||||||||||||
|
Supply
agreement |
2,660,000
|
2,660,000
|
1,409,800
|
1,409,800
|
1,250,200
|
1,250,200
|
|||||||||||||
$ |
9,118,516 |
$ |
6,426,834 |
$ |
7,586,316 |
$ |
5,026,523 |
$ |
1,532,200 |
$ |
1,400,311 |
||||||||
| December 31, 2003 | |||||||||||||||||||
|
Total
|
Asia
|
North
America |
|||||||||||||||||
|
Gross
Carrying |
Accumulated
|
Gross
Carrying |
Accumulated
|
Gross
Carrying |
Accumulated
|
||||||||||||||
|
Amount
|
Amortization
|
Amount
|
Amortization
|
Amount
|
Amortization
|
||||||||||||||
|
|
|||||||||||||||||||
|
Patents
and Product Information |
$ |
2,935,000 |
$ |
863,591 |
$ |
2,653,000 |
$ |
741,680 |
$ |
282,000 |
$ |
121,911 |
|||||||
|
Covenants
not-to-compete |
3,169,987
|
1,603,411
|
3,169,987
|
1,603,411
|
--
|
--
|
|||||||||||||
|
Supply
agreement |
2,660,000
|
2,660,000
|
1,409,800
|
1,409,800
|
1,250,200
|
1,250,200
|
|||||||||||||
$ |
8,764,987 |
$ |
5,127,002 |
$ |
7,232,787 |
$ |
3,754,891 |
$ |
1,532,200 |
$ |
1,372,111 |
||||||||
F-22
Estimated
amortization expense for intangible assets for the next five years is as
follows:
|
Estimated |
||||
|
Year
Ending |
Amortization |
|||
|
December
31, |
Expense |
|||
|
2005 |
$ |
1,217,000 |
||
|
2006 |
806,000
|
|||
|
2007 |
417,000
|
|||
|
2008 |
153,000
|
|||
|
2009 |
14,000
|
|||
| 4. | MARKETABLE SECURITIES |
The
Company has acquired a total of 2,037,500 shares of the common stock of Artesyn
Technologies, Inc. (“Artesyn”) at a total purchase price of $16,331,469. These
purchases are reflected on the Company's consolidated statement of cash flows as
purchases of marketable securities and are reflected on the Company's
consolidated balance sheet as marketable securities. As of December 31, 2004,
the Company has recorded an unrealized gain, net of income taxes, of
approximately $3,964,000, which is included in other comprehensive income as
stated in the Consolidated Statement of Stockholders' Equity. In connection with
this transaction, the Company is obligated to pay an investment banker's
advisory fee to a third party of 20% of the appreciation in the stock of
Artesyn, or $1 million, whichever is lower. As of December 31, 2004, the Company
has accrued a fee in the amount of approximately $1,000,000. Such amount has
been deferred within other assets. If the proposed acquisition of Artesyn is
consummated, the fee will be capitalized as part of the acquisition costs. Such
amount will be expensed at such time as the Company deems the consummation of
the proposed acquisition to be unsuccessful.
At
December 31, 2004 and 2003, respectively, marketable securities have a cost of
approximately $16,428,000 and $5,138,000, an estimated fair value of
approximately $23,120,000 and $5,039,000 and gross unrealized gains (losses) of
approximately $6,692,000 and $(99,000). Such unrealized gains (losses) are
included in other comprehensive income.
| 5. | INVENTORIES |
The
components of inventories are as follows:
|
December
31, |
December
31, |
||||||
|
2004 |
2003 |
||||||
|
Raw
material |
$ |
15,236,393 |
$ |
12,421,655 |
|||
|
Work
in progress |
1,607,052
|
2,094,474
|
|||||
|
Finished
goods |
12,257,615
|
11,712,568
|
|||||
$ |
29,101,060 |
$ |
26,228,697 |
||||
F-23
| 6. | IMPAIRMENT LOSS AND RESTRUCTURING CHARGES |
Restructuring
Charges
During
the years ended December 31, 2004, 2003 and 2002, the Company incurred
approximately $50,000, $700,000 and $800,000, respectively, of severance costs.
These expenses are included as a component of cost of sales and selling, general
and administrative expenses on the accompanying Consolidated Statements of
Operations.
Fixed
Asset Impairment
During
the year ended December 31, 2004 the Company wrote down fixed assets,
principally machinery and equipment, with a net book value of $1,033,000 at its
Far East manufacturing facilities. The Company considered these fixed assets to
be surplus equipment which was replaced by equipment with more advanced
technology.
| 7. | PROPERTY, PLANT AND EQUIPMENT |
Property,
plant and equipment consist of the following:
|
December
31, |
|||||||
|
2004 |
2003 |
||||||
|
Land
|
$ |
3,274,641 |
$ |
3,274,641 |
|||
|
Buildings
and improvements |
23,858,419
|
22,414,162
|
|||||
|
Machinery
and equipment |
66,945,194
|
63,611,190
|
|||||
|
94,078,254
|
89,299,993
|
||||||
|
Less
accumulated depreciation |
52,833,495
|
45,799,430
|
|||||
$ |
41,244,759 |
$ |
43,500,563 |
||||
Depreciation
expense for the years ended December 31, 2004, 2003, and 2002 was $7,726,000,
$7,400,000, and $5,108,000, respectively.
During
2004, property held for sale was reclassified from property, plant and equipment
in the amount of $696,013 and $619,223, as of December 31, 2004 and 2003,
respectively, to assets held for sale, a current asset on the accompanying
consolidated balance sheets. The Company anticipates disposing of such property
in 2005.
F-24
| 8. | INCOME TAXES |
The
provision (benefit) for income taxes consists of the following:
|
Years
Ended December 31, |
||||||||||
|
2004 |
2003 |
2002 |
||||||||
|
Current: |
||||||||||
|
Federal |
$ |
3,524,000 |
$ |
1,004,000 |
$ |
345,000 |
||||
|
Foreign |
5,234,000
|
1,624,000
|
411,000
|
|||||||
|
State |
(123,000 |
) |
194,000
|
38,000
|
||||||
|
8,635,000
|
2,822,000
|
794,000
|
||||||||
|
Deferred: |
||||||||||
|
Federal
and state |
(1,586,000 |
) |
1,031,000
|
265,000
|
||||||
|
Foreign |
(3,400,000 |
) |
560,000
|
140,000
|
||||||
|
(4,986,000 |
) |
1,591,000
|
405,000
|
|||||||
$ |
3,649,000 |
$ |
4,413,000 |
$ |
1,199,000 |
|||||
A
reconciliation of taxes on income computed at the federal statutory rate to
amounts provided is as follows:
|
Years
Ended December 31, |
||||||||||
|
2004 |
2003 |
2002 |
||||||||
|
Tax
provision computed at the Federal statutory rate of
34% |
$ |
9,646,000 |
$ |
6,180,000 |
$ |
604,000 |
||||
|
Increase
(decrease) in taxes resulting from: |
||||||||||
|
Benefit
relating to tax rate differential on foreign earnings to be repatriated in
2005-net (1) |
(1,017,000 |
) |
-- | -- | ||||||
|
|
|
|||||||||
|
Different
tax rates and permanent differences applicable to foreign
operations |
(3,380,000 |
) |
(2,467,000 |
) |
366,000
|
|||||
|
Utilization
of foreign net operating loss carryforward |
(165,000 |
) |
||||||||
|
Principally
the utilization of research and development tax credits
(federal and state) |
(1,413,000 |
) |
-- | |||||||
|
|
||||||||||
|
Foreign
valuation allowance |
-
|
571,000
|
-
|
|||||||
|
State
(benefit) taxes, net of federal benefit |
(81,000 |
) |
128,000
|
163,000
|
||||||
|
Other,
net |
59,000
|
1,000
|
66,000
|
|||||||
$ |
3,649,000 |
$ |
4,413,000 |
$ |
1,199,000 |
|||||
F-25
(1)Under
the American Jobs Creation Act of 2004 (the "Act"), the Company can elect to
repatriate earnings from controlled foreign corporations ("CFC's") in order to
take advantage of the temporary 85 percent dividends received deduction for cash
dividends in excess of the historical "base-period" average. This would result
in an effective federal tax rate of 5.25%. The election to repatriate these CFC
earnings expires on December 31, 2005 and the dividend proceeds must meet a
number of criteria as outlined in the Act to be eligible for the favorable tax
rate. Management has determined that the Company will repatriate a minimum of
$26 million and possibly as much as $60 million of previously unrepatriated
earnings prior to December 2005. In prior years, the Company provided deferred
taxes of approximately $7,668,000 on a portion of its CFC earnings which
management concluded would likely be repatriated. As a result of the favorable
tax treatment afforded the repatriation of CFC earnings and management’s
decision to repatriate such funds in 2005, the Company recorded a $6,326,000 tax
benefit in 2004 which results from the difference in tax rates between the Act
and the tax rates previously provided on the portion of CFC earnings which were
expected to be repatriated leaving deferred income taxes in the amount of
approximately $1,342,000 recorded in such earnings to be repatriated. In light
of the planned repatriation of CFC earnings in 2005, Management has identified
certain domestic and foreign tax exposures relating to such operations. Such
amount has been included in Income Taxes Payable in the accompanying balance
sheet. Prior to the enactment of the Act, it was management’s intention to
permanently reinvest the majority of the earnings of foreign subsidiaries in the
expansion of its foreign operations. No earnings were repatriated during 2004
and 2003. $643,000 of earnings were repatriated during 2002. Unrepatriated
earnings, upon which U.S. income taxes have not been accrued, approximate $117.0
million at December 31, 2004. Estimated income taxes related to unrepatriated
foreign earnings would approximate $35.4 million under the previous tax law.
The
Company files income tax returns in all jurisdictions in which it has reason to
believe it is subject to tax. Historically, the Company has been subject to
examination by various taxing jurisdictions. To date, none of these examinations
has resulted in any material additional tax. Nonetheless, any tax jurisdiction
may contend that a filing position claimed by the Company regarding one or more
of its transactions is contrary to that jurisdiction's laws or regulations.
F-26
The types
of temporary differences between the tax basis of assets and liabilities and
their financial reporting amounts that give rise to the deferred tax liability
and deferred tax asset and their approximate tax effects are as
follows:
|
December
31, |
|||||||||||||
|
2004 |
2003 |
||||||||||||
|
Temporary |
|
Temporary |
|
||||||||||
|
Difference |
Tax
Effect |
Difference |
Tax
Effect |
||||||||||
|
Deferred
Tax Liabilities-non-current: |
|||||||||||||
|
Depreciation |
$ |
13,371,000 |
$ |
888,000 |
$ |
15,372,000 |
$ |
1,046,000 |
|||||
|
Amortization |
(2,037,000 |
) |
(815,000 |
) |
(4,050,000 |
) |
(1,620,000 |
) | |||||
|
Unremitted
earnings of foreign subsidiaries not |
|||||||||||||
|
permanently
reinvested |
--
|
--
|
25,560,000
|
7,668,000
|
|||||||||
|
Foreign
net operating loss carryforward |
--
|
--
|
(6,674,000 |
) |
(571,000 |
) | |||||||
|
Valuation
reserve |
--
|
--
|
6,674,000
|
571,000
|
|||||||||
|
Other
temporary differences |
843,000
|
337,000
|
(825,000 |
) |
(330,000 |
) | |||||||
$ |
12,177,000 |
$ |
410,000 |
$ |
36,057,000 |
$ |
6,764,000 |
||||||
|
Deferred
Tax Liability - current: |
|||||||||||||
|
Unremitted
earnings of foreign subsidiaries not |
|||||||||||||
|
permanently
reinvested |
$ |
25,560,000 |
$ |
1,342,000 |
|||||||||
|
Unrealized
appreciation/ depreciation in marketable
securities |
6,604,000
|
2,642,000
|
$ |
-- |
$ |
-- |
|||||||
|
Reserves
and accruals |
(1,655,000 |
) |
(662,000 |
) |
--
|
--
|
|||||||
$ |
30,509,000 |
$ |
3,322,000 |
$ |
-- |
$ |
-- |
||||||
|
Deferred
Tax Assets - current: |
|||||||||||||
|
Unrealized
appreciation/ depreciation in marketable
securities |
$ |
-- |
$ |
-- |
$ |
99,000 |
$ |
40,000 |
|||||
|
Reserves
and accruals |
--
|
--
|
1,525,000
|
610,000
|
|||||||||
|
|
$ | -- | $ |
-- |
$ |
1,624,000 |
$ |
650,000 |
|||||
F-27
The
Company was granted a ten year tax holiday in Macau which has an effective tax
rate of 8% , which is 50% of the normal tax rate. Such holiday expired during
2004. During the year ended December 31, 2004.the Company used $1.1 million of
net operating loss carry-forward which resulted in a tax savings of
approximately $165,000. During the years 2003 and 2002 this holiday provided no
benefit to the Company as the entity incurred losses.
The
remaining net operating loss carry-forward of approximately $5.6 million expired
in 2004. Correspondingly, the valuation reserve, which was established for this
net operating loss carryforward, is no longer required.
| 9. | DEBT |
On March
21, 2003, the Company entered into a $10 million secured term loan. The loan was
used to partially finance the Company's acquisition of Insilco's Passive
Components Group. The loan is payable in 20 equal quarterly installments of
principal with a final maturity on March 31, 2008 and currently bears interest
at LIBOR plus 1.25 percent (4.0 percent at December 31, 2004) payable quarterly.
The rate may vary based upon the Company's performance with respect to certain
financial covenants. In addition, the note may be prepaid in certain
circumstances. The loan is collateralized with a first priority security
interest in and lien on 65% of all the issued and outstanding shares of the
capital stock of certain of the foreign subsidiaries of Bel Fuse Inc. and all
other personal property and certain real property of Bel Fuse Inc. The Company
is required to maintain certain financial covenants, as defined in the
agreement. As of December 31, 2004, the Company was in compliance with all
financial covenants. As of December 31, 2004, the balance due on the term loan
was $6.5 million. For the years ended December 31, 2004 and 2003, the Company
recorded interest expense of approximately $239,000, and $228,000,
respectively.
See Note
15 for information on unused credit facilities.
| 10. | ACCRUED EXPENSES |
Accrued
expenses consist of the following:
|
Year
Ended December 31, |
|||||||
|
2004
|
2003
|
||||||
|
Sales
commissions |
$ |
1,431,169 |
$ |
1,378,925 |
|||
|
Investment
banking commissions |
1,000,000
|
--
|
|||||
|
Subcontracting
labor |
1,624,963
|
1,900,189
|
|||||
|
Salaries,
bonuses and |
|||||||
|
related
benefits |
3,480,213
|
3,047,904
|
|||||
|
Other |
2,757,231
|
3,115,671
|
|||||
$ |
10,293,576 |
$ |
9,442,689 |
||||
| 11. | BUSINESS SEGMENT INFORMATION |
The
Company operates in one industry and has three reportable segments. The segments
are geographic and include North America, Asia and Europe. The primary criteria
by which financial performance is evaluated and resources are allocated are
revenues and operating income. The following is a summary of key financial
data:
F-28
|
2004 |
2003 |
2002 |
||||||||
|
Revenue
from unrelated entities and country of Company's
domicile: |
||||||||||
|
North
America |
$ |
67,177,000 |
$ |
51,218,000 |
$ |
26,228,000 |
||||
|
Asia |
109,011,000
|
88,253,000
|
58,632,000
|
|||||||
|
Europe |
13,834,000
|
19,027,000
|
10,668,000
|
|||||||
$ |
190,022,000 |
$ |
158,498,000 |
$ |
95,528,000 |
|||||
|
Total
Revenues: |
||||||||||
|
North
America |
$ |
76,979,000 |
$ |
63,033,000 |
$ |
28,957,000 |
||||
|
Asia
|
132,224,000
|
114,025,000
|
81,907,000
|
|||||||
|
Europe |
15,194,000
|
12,076,000
|
-
|
|||||||
|
Less
intergeographic revenues |
(34,375,000 |
) |
(30,636,000 |
) |
(15,336,000 |
) | ||||
$ |
190,022,000 |
$ |
158,498,000 |
$ |
95,528,000 |
|||||
|
Income
(loss) from Operations: |
||||||||||
|
North
America |
$ |
8,475,000 |
$ |
3,511,000 |
$ |
(90,000 |
) | |||
|
Asia |
15,805,000
|
13,771,000
|
928,000
|
|||||||
|
Europe |
631,000
|
645,000
|
-
|
|||||||
$ |
24,911,000 |
$ |
17,927,000 |
$ |
838,000 |
|||||
|
Identifiable
Assets: |
||||||||||
|
North
America |
$ |
92,515,000 |
$ |
59,182,000 |
||||||
|
Asia |
131,970,000
|
129,452,000
|
||||||||
|
Europe |
3,409,000
|
6,976,000
|
||||||||
|
Less
intergeographic eliminations |
(10,117,000 |
) |
(13,793,000 |
) |
||||||
$ |
217,777,000 |
$ |
181,817,000 |
|||||||
|
Capital
Expenditures: |
||||||||||
|
North
America |
$ |
736,000 |
$ |
829,000 |
$ |
3,395,000 |
||||
|
Asia |
5,557,000
|
1,911,000
|
3,082,000
|
|||||||
|
Europe |
286,000
|
379,000
|
-
|
|||||||
$ |
6,579,000 |
$ |
3,119,000 |
$ |
6,477,000 |
|||||
|
Depreciation
and Amortizaion expense: |
||||||||||
|
North
America (1) |
$ |
1,928,000 |
$ |
1,775,000 |
$ |
858,000 |
||||
|
Asia
(1) |
6,966,000
|
6,399,000
|
5,140,000
|
|||||||
|
Europe |
131,000
|
201,000
|
-
|
|||||||
$ |
9,025,000 |
$ |
8,375,000 |
$ |
5,998,000 |
|||||
(1)
Excludes $5,200,000 of goodwill impairment in 2002. |
||||||||||
F-29
Transfers
between geographic areas include finished products manufactured in foreign
countries which are then transferred to the United States and Europe for sale;
finished goods manufactured in the United States which are transferred to Europe
and Asia for sale; and semi-finished components manufactured in the United
States are sold to Asia for further processing. Income from operations
represents gross profit less operating expenses.
Identifiable
assets are those assets of the Company that are identified with the operations
of each geographic area.
The
territory of Hong Kong became a Special Administrative Region (“SAR”) of the
People's Republic of China in the middle of 1997. The territory of Macau became
a SAR of the People’s Republic of China at the end of 1999. Management cannot
presently predict what future impact this will have on the Company, if any, or
how the political climate in China will affect the Company's contractual
arrangements in China. Substantially all of the Company's manufacturing
operations and approximately 63% of its identifiable assets are located in The
People's Republic of China and its SARs of Hong Kong and Macau. Accordingly,
events which may result from the expiration of such leases, as well as any
change in the "Most Favored Nation" status granted to China by the U.S., could
have a material adverse effect on the Company.
The
Company's research and development facilities are located in California,
Massachusetts, Hong Kong, China and the United Kingdom. Research and development
costs, which are expensed as incurred, amounted to $7.3 million in 2004, $8.4
million in 2003, and $6.6 million in 2002. The Company closed its Indiana
facility during the second quarter of 2003 and closed its Texas facility during
the fourth quarter of 2002. The Company purchased property in San Diego,
California during 2002 where its research and development facility is
located.
The
Company had sales to individual customers in excess of ten percent of
consolidated net sales as follows in 2004, 2003 and 2002: the amount and
percentages of the Company's sales to an individual customer each year were
$22,062,000 (11.6%) in 2004, $22,470,000 (14.2%) in 2003 and $11,410,000 (11.9%)
in 2002. The loss of such customers would have a material adverse effect on the
Company's consolidated results of operations, financial position and cash flows.
F-30
| 12. | RETIREMENT FUND AND PROFIT SHARING PLAN |
The
Company maintains a domestic profit sharing plan and a contributory stock
ownership and savings 401(K) plan, which combines stock ownership and individual
voluntary savings provisions to provide retirement benefits for plan
participants. The plan provides for participants to voluntarily contribute a
portion of their compensation, subject to certain legal maximums. The Company
will match, based on a sliding scale, up to $350 for the first $600 contributed
by each participant. Matching contributions plus additional discretionary
contributions is made with Company stock purchased in the open market. The
expense for the years ended December 31, 2004, 2003 and 2002 amounted to
approximately $404,000, $247,000, and $207,000, respectively. As of December 31,
2004, the plans owned 20,421 and 126,613 shares of Bel Fuse Inc. Class A and
Class B common stock, respectively.
The
Company's Far East subsidiaries have a retirement fund covering substantially
all of their Hong Kong based full-time employees. Eligible employees contribute
up to 5% of salary to the fund. In addition, the Company may contribute an
amount up to 7% of eligible salary, as determined by Hong Kong government
regulations, in cash or Company stock. The expense for the years ended December
31, 2004, 2003 and 2002 amounted to approximately $447,000, $631,000, and
$604,000, respectively. As of December 31, 2004, the plan owned 3,323 and 15,256
shares of Bel Fuse Inc. Class A and Class B common stock,
respectively.
The
Supplemental Executive Retirement Plan (the "SERP" or the “Plan”) is designed to
provide a limited group of key management and highly compensated employees of
the Company supplemental retirement and death benefits. The Plan was established
by the Company in 2002. Employees are selected at the sole discretion of the
Board of Directors of the Company to participate in the Plan. The Plan is
unfunded. The Company utilizes life insurance to partially cover its obligations
under the Plan. The benefits available under the Plan vary according to when and
how the participant terminates employment with the Company. If a participant
retires (with the prior written consent of the Company) on his normal retirement
date (65 years old, 20 years of service, and 5 years of Plan participation), his
normal retirement benefit under the Plan would be annual payments equal to 40%
of his average base compensation (calculated using compensation from the highest
5 consecutive calendar years of Plan participation), payable in monthly
installments for the remainder of his life. If a participant retires early from
the Company (55 years old, 20 years of service, and 5 years of Plan
participation), his early retirement benefit under the Plan would be an amount
(i) calculated as if his early retirement date were in fact his normal
retirement date, (ii) multiplied by a fraction, with the numerator being the
actual years of service the participant has with the Company and the denominator
being the years of service the participant would have had if he had retired at
age 65, and (iii) actuarially reduced to reflect the early retirement date. If a
participant dies prior to receiving 120 monthly payments under the Plan, his
beneficiary would be entitled to continue receiving benefits for the shorter of
(i) the time necessary to complete 120 monthly payments or (ii) 60 months. If a
participant dies while employed by the Company, his beneficiary would receive,
as a survivor benefit, an annual amount equal to (i) 100% of the participant’s
annual base salary at date of death for one year, and (ii) 50% of the
participant’s annual base salary at date of death for each of the following 4
years, each payable in monthly installments. The Plan also provides for
disability benefits, and a forfeiture of
benefits if a participant terminates employment for reasons other than those
contemplated under the Plan. The expense for the years ended December 31, 2004,
2003 and 2002 amounted to approximately $509,000, $428,000 and $197,000,
respectively.
F-31
The
following provides a reconciliation of benefit obligations, the funded status of
the SERP and a summary of significant assumptions:
|
December
31, |
2004 |
2003 |
||||||||
|
Change
in benefit obligation: |
||||||||||
|
Projected
benefit obligation at beginning of year |
$ |
2,637,902 |
$ |
1,903,982 |
||||||
|
Service
cost |
221,981
|
217,875
|
||||||||
|
Interest
cost |
145,085
|
126,163
|
||||||||
|
Actuarial
(gains) losses |
(114,855 |
) |
389,882
|
|||||||
|
Projected
benefit obligation at end of year |
$ |
2,890,113 |
$ |
2,637,902 |
||||||
|
Funded
status of plan: |
||||||||||
|
Under
funded status |
$ |
(2,890,113 |
) |
$ |
(2,637,902 |
) |
|
|||
|
Unrecognized
net loss |
259,218
|
411,326
|
||||||||
|
Unrecognized
prior service costs |
1,497,253
|
1,602,363
|
||||||||
|
Accrued
pension cost |
$ |
(1,133,642 |
) |
$ |
(624,213 |
) |
|
|||
|
Change
in plan assets: |
||||||||||
|
Fair
value of plan assets, beginning of year |
$ |
-- |
$ |
-- |
||||||
|
Comopany
contributions |
--
|
--
|
||||||||
|
Benefits
paid |
--
|
--
|
||||||||
|
Fair
value of plan assets, end of year |
$ |
-- |
$ |
-- |
||||||
|
Balance
sheet amounts: |
||||||||||
|
Accrued
benefit liability |
$ |
2,261,583 |
$ |
1,983,627 |
||||||
|
Intangible
asset |
1,127,941
|
1,359,414
|
||||||||
The
components of SERP expense are as follows: |
|||||||||||||
|
December
31, |
2004 |
2003 |
2002 |
|||||||
|
Service
cost |
$ |
221,981 |
$ |
217,875 |
$ |
80,153 |
||||
|
Interest
cost |
145,085 |
104,719 |
63,800
|
|||||||
|
Net
amortization and deferral |
142,363 |
105,110 |
52,556
|
|||||||
|
Total
SERP expense |
$ |
509,429 |
$ |
427,704 |
$ |
196,509 |
||||
|
Assumption
percentages: |
||||||||||
|
Discount
rate |
5.50 |
% |
5.50 |
% |
7.25 |
% | ||||
|
Rate
of compensation increase |
3.00 |
% |
4.00 |
% |
4.00 |
% | ||||
The
accumulated benefit obligation for the SERP was $2,261,583 and $1,983,627 as of
December 31, 2004 and 2003.
F-32
| 13. | STOCK OPTION PLAN |
The
Company has a Qualified Stock Option Plan (the "Plan") which provides for the
granting of "Incentive Stock Options" to key employees within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended. The Plan provides
for the issuance of 2,400,000 common shares. Substantially all options
outstanding become exercisable twenty-five percent (25%) one year from the date
of grant and twenty-five percent (25%) for each year of the three years
thereafter. The exercise price of the options granted pursuant to the Plan is
not to be less than 100 percent of the fair market value of the shares on the
date of grant. Accordingly, no compensation cost has been recognized for the
stock options awarded. An option may not be exercised within one year from the
date of grant, and in general, no option will be exercisable after five years
from the date granted. See Note 1 - New Financial Accounting Standards for
changes in accounting for stock options which will be effective during
2005.
Information
regarding the Company’s Stock Option Plan for 2004, 2003, and 2002 is as
follows:
|
2004 |
2003 |
2002 |
|||||||||||||||||
|
Weighted-
|
Weighted-
|
Weighted- |
|||||||||||||||||
|
Average |
Average |
Average |
|||||||||||||||||
|
Exercise |
Exercise |
Exercise |
|||||||||||||||||
|
Shares |
Price |
Shares |
Price |
Shares |
Price |
||||||||||||||
|
Options
outstanding, beginning of year |
712,600
|
$ |
21.61 |
759,238
|
$ |
19.23 |
878,115
|
$ |
17.44 |
||||||||||
|
Options
exercised |
(200,911 |
) |
$ |
19.37 |
(224,638 |
) |
$ |
11.48 |
(167,963 |
) |
$ |
11.15 |
|||||||
|
Options
granted |
24,000
|
$ |
37.00 |
200,000
|
$ |
18.89 |
78,000
|
$ |
20.92 |
||||||||||
|
Options
cancelled |
(40,400 |
) |
$ |
22.71 |
(22,000 |
) |
$ |
19.00 |
(28,914 |
) |
$ |
16.58 |
|||||||
|
Options
outstanding, end of year |
495,289
|
$ |
23.17 |
712,600
|
$ |
21.61 |
759,238
|
$ |
19.23 |
||||||||||
|
Options
price range at end of year |
$17.00
to $37.00 |
$15.38
to $29.50 |
$5.75
to $29.50 |
||||||||||||||||
| Options price range for exercised shares |
$15.38 to $29.50 |
$5.75 to $19.52 |
$5.75
to $18.70 |
||||||||||||||||
| Options available for grant at end of year | 941,000 |
925,000
|
1,105,000
|
||||||||||||||||
|
Weighted-average
fair value of options granted during the year |
$ |
8.66 |
$ |
8.03 |
$ |
9.75 |
|||||||||||||
F-33
The
following table summarizes information about fixed-price stock options
outstanding at December 31, 2004:
|
Weighted- |
||||||||||||||||
|
Number
Out- |
Average |
Weighted
|
Number |
Weighted- |
||||||||||||
|
Range
of |
standing
at |
Remaining |
Average |
Exercisable
at |
Average |
|||||||||||
|
Exercise |
December
31, |
Contractual |
Exercise |
December
31, |
Exercise |
|||||||||||
|
Prices |
2004 |
Life |
Price |
2004 |
Price |
|||||||||||
|
$17.00
to $18.70 |
114,500
|
-- |
$ |
17.48 |
114,500
|
$ |
17.48 |
|||||||||
|
$29.50
|
161,589
|
1
Year |
$ |
29.50 |
68,414
|
$ |
29.50 |
|||||||||
|
$19.52
to $22.25 |
58,500
|
2
Years |
$ |
21.20 |
22,500
|
$ |
21.46 |
|||||||||
|
$18.89
|
136,700
|
3
Years |
$ |
18.89 |
6,200
|
$ |
18.89 |
|||||||||
|
$37.00
|
24,000
|
4
Years |
$ |
37.00 |
-- |
$ |
-- |
|||||||||
|
495,289
|
211,614
|
|||||||||||||||
| 14. | COMMON STOCK |
During
2000, the Board of Directors of the Company authorized the purchase of up to ten
percent (10%) of the Company’s outstanding Class B common shares. As of December
31, 2004, the Company had purchased and retired 23,600 Class B common shares at
a cost of approximately $808,000 which reduced the number of Class B common
shares outstanding.
There are
no contractual restrictions on the Company's ability to pay dividends provided
the Company continues to comply with the financial tests in its credit
agreement. On February 2, 2004, May 2, 2004, August 2, 2004, and November 2,
2004 the Company paid a $.05 per share dividend to all shareholders of record of
Class B Common Stock in the total amount of $422,474, $424,449, $431,470, and
$432,406, respectively. On February 2, 2004, May 2, 2004, August 2, 2004, and
November 2, 2004 the Company paid a $.04 per share dividend to all shareholders
of record of Class A Common Stock in the total amount of $107,641, $107,641,
$107,678, and $107,694, respectively. During May 2004 the Company paid a
dividend on Class B Common Stock in the amount of $26,860 in connection with a
shortfall of prior payments. On February 3, 2003, April 29, 2003, August 1,
2003, and November 3, 2003 the Company paid a $.05 per share dividend to all
shareholders of record of Class B Common Stock in the total amount of $411,674,
$412,411, $413,536, and $419,639, respectively. On August 1, 2003 and November
3, 2003 the Company paid a $.04 per share dividend to all shareholders of record
of Class A Common Stock in the total amount of $106,617 and $107,617,
respectively. On February 2, 2005 the Company paid a $.04 and $.05 per share
dividend to all shareholders of record at January 15, 2005 of Class A and Class
B Common Stock in the amount of $107,735 and $433,450, respectively.
F-34
| 15. | COMMITMENTS AND CONTINGENCIES |
Leases
The
Company leases various facilities. Some of these leases require the Company to
pay certain executory costs (such as insurance and maintenance).
Future
minimum lease payments for operating leases are approximately as
follows:
|
Years
Ending |
||||
|
December
31, |
||||
|
2005 |
$ |
1,034,000 |
||
|
2006 |
642,000
|
|||
|
2007 |
56,000
|
|||
|
2008 |
56,000
|
|||
|
2009 |
188,000
|
|||
$ |
1,976,000 |
|||
Rental
expense was approximately $1,433,000, $1,450,000, and $863,000, for the years
ended December 31, 2004, 2003, and 2002, respectively.
Credit
Facilities
The
Company has one domestic line of credit amounting to $10 million, which was
unused at December 31, 2004. During March 2005, the Company borrowed $8 million
against the line of credit to partially finance the acquisition of Galaxy. The
$10 million line of credit expires on March 21, 2006 and is in addition to the
Company’s $10 million term loan described below. Borrowings under this $10
million line of credit are secured by the same assets, which secure the term
loan described below. The line of credit bears interest at LIBOR plus 1.50
percent.
The
Company's Hong Kong subsidiary has an unsecured line of credit of approximately
$2 million which was unused as of December 31, 2004. The line of credit expires
April 30, 2005. Borrowing on the line of credit is guaranteed by the U.S.
parent. The line of credit bears interest at a rate determined by the bank as
the financing is extended.
Facilities
The
Company is constructing a 117,000 square foot manufacturing facility in
Zhongshan City, PRC for approximately $2.3 million including improvements. As of
December 31, 2004 the Company has paid $426,000 on the construction.
F-35
Legal
Proceedings
| a) |
The
Company had been a party to an ongoing arbitration proceeding related to
the acquisition of its Telecom business in 1998. The Company believes that
the seller breached the terms of a related Global Procurement Agreement
dated October 2, 1998 and was seeking damages related thereto. During
2004, the Company and the seller settled the matter. The settlement
resulted in a payment to the Company and an unconditional release by the
seller of all counterclaims against the Company. The net gain of
$2,935,000 from the settlement of the lawsuit is included in the Company's
consolidated statement of operations for the year ended December 31, 2004.
|
| b) |
The
Company is a defendant in a lawsuit, captioned Murata Manufacturing
Company, Ltd. v. Bel Fuse Inc et al and brought in Illinois Federal
District Court. Plaintiff claims that its patent covers all of the
Company's modular jack products. That party had previously advised the
Company that it was willing to grant a non-exclusive license to the
Company under the patent for a 3% royalty on all future gross sales of ICM
products; payments of a lump sum of 3% of past sales including sales of
applicable Insilco products; an annual minimum royalty of $500,000;
payment of all attorney fees; and marking of all licensed ICM's with the
third party's patent number. The Company is subject to another lawsuit ,
captioned Regal Electronics, Inc. v. Bel Fuse Inc. and brought in
California Federal District Court. Plaintiff claims that its patent covers
certain of the Company's modular jack products. That party had previously
advised the Company that it was willing to grant a non transferable
license to the Company for an up front fee of $500,000 plus a 6% royalty
on future sales. The Company believes that none of its products are
covered by these patents and intends to vigorously defend its position and
no accrual has been provided in the accompanying consolidated financial
statements. The Company cannot predict the outcome of these matters;
however, management believes that the ultimate resolution of these matters
will not have a material impact on the Company's consolidated financial
condition or results of operations. |
The
Company is not a party to any other legal proceeding, the adverse outcome of
which is expected to have a material adverse effect on the Company's
consolidated financial condition or results of operations.
F-36
| 16. | SUBSEQUENT EVENT |
On March
22, 2005, the Company completed the acquisition of Galaxy Power Inc. ("Galaxy")
for approximately $18 million in cash and the assumption of approximately $2.0
million in liabilities. Galaxy is a leading designer and manufacturer of
high-density dc-dc converters for distributed power and telecommunication
applications.
The
acquisition will be accounted for using the purchase method of accounting and,
accordingly the results of operations of Galaxy will be included in the
Company's financial statements from the date of closing.
F-37
|
CONDENSED
SELECTED QUARTERLY FINANCIAL DATA | ||||||||||
|
(Unaudited) | ||||||||||
|
Total
Year |
||||||||||||||||
|
Quarter
Ended |
Ended |
|||||||||||||||
|
March
31, |
June
30, |
September
30, |
December
31, |
December
31, |
||||||||||||
|
2004 |
2004 |
2004 |
2004 |
2004 |
||||||||||||
|
Net
sales |
$ |
42,357,023 |
$ |
48,390,242 |
$ |
49,985,626 |
$ |
49,289,062 |
$ |
190,021,953 |
||||||
|
Gross
profit |
12,566,009
|
15,194,241
|
14,977,954
|
14,507,445
|
57,245,649
|
|||||||||||
|
Net
earnings |
4,654,731
|
7,145,253
|
6,894,347
|
6,027,258
|
24,721,589
|
|||||||||||
|
Earnings
per share - basic (1) |
$ |
0.42 |
$ |
0.64 |
$ |
0.61 |
$ |
0.52 |
$ |
2.19 |
||||||
|
Earnings
per share -diluted (1) |
$ |
0.41 |
$ |
0.63 |
$ |
0.60 |
$ |
0.51 |
$ |
2.15 |
||||||
|
Total
Year |
||||||||||||||||
|
Quarter
Ended |
Ended |
|||||||||||||||
|
March
31, |
June
30, |
September
30, |
December
31, |
December
31, |
||||||||||||
|
2003 |
2003 |
2003 |
2003 |
2003 |
||||||||||||
|
Net
sales |
$ |
24,947,359 |
$ |
44,821,149 |
$ |
45,863,648 |
$ |
42,865,346 |
$ |
158,497,502 |
||||||
|
Gross
profit |
6,980,158
|
11,913,406
|
13,174,156
|
12,616,922
|
44,684,642
|
|||||||||||
|
Net
earnings |
1,780,284
|
2,757,220
|
3,629,573
|
5,596,617
|
13,763,694
|
|||||||||||
|
Earnings
per share - basic (1) |
$ |
0.16 |
$ |
0.25 |
$ |
0.33 |
$ |
0.50 |
$ |
1.25 |
||||||
|
Earnings
per share - diluted (1) |
$ |
0.16 |
$ |
0.25 |
$ |
0.32 |
$ |
0.49 |
$ |
1.24 |
||||||
| (1) | Quarterly amounts of earnings per share may not agree to the total for the year due to rounding. |
F-38
|
BEL
FUSE INC. AND SUBSIDIARIES | ||||||||||||||
|
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS | ||||||||||||||
|
Column
A |
Column
B |
Column
C |
Column
D |
Column
E |
Column
F |
||||||||||||||
|
Additions |
|||||||||||||||||||
|
Charged
|
|||||||||||||||||||
|
Balance
at |
to
profit |
Charged |
Balance |
||||||||||||||||
|
beginning
|
and
loss |
to
other |
Deductions |
at
close |
|||||||||||||||
|
Description |
of
period |
or
income |
accounts |
(describe)(a) |
of
period |
||||||||||||||
|
|
|||||||||||||||||||
|
Year
ended December 31, 2004 |
|||||||||||||||||||
|
Allowance
for doubtful accounts |
$ |
1,976,000 |
$ |
233,000 |
$ |
65,000 |
(a) |
|
$ |
664,000 |
$ |
1,610,000 |
|||||||
|
Allowance
for excess and obsolete inventory |
$ |
5,679,000 |
$ |
1,250,000 |
$ |
43,000 |
(c) |
|
$ |
1,501,000 |
$ |
5,471,000 |
|||||||
|
Year
ended December 31, 2003 |
|||||||||||||||||||
|
Allowance
for doubtful accounts |
$ |
945,000 |
$ |
(77,000 |
) |
$ |
2,308,000 |
(b) |
|
$ |
1,200,000 |
$ |
1,976,000 |
||||||
|
Allowance
for excess and obsolete inventory |
$ |
3,136,000 |
$ |
863,000 |
$ |
3,320,000 |
(b) |
|
$ |
1,640,000 |
$ |
5,679,000 |
|||||||
|
Year
ended December 31, 2002 |
|||||||||||||||||||
|
Allowance
for doubtful accounts |
$ |
945,000 |
$ |
-- |
$ |
-- |
$ |
-- |
$ |
945,000 |
|||||||||
|
Allowance
for excess and obsolete inventory |
$ |
2,988,000 |
$ |
2,622,000 |
$ |
-- |
$ |
2,474,000 |
$ |
3,136,000 |
|||||||||
| (a) | Write offs. |
| (b) | For the year ended 2003, these amounts represent the reserves established at date of acquisition of the PassiveComponents Group of Insilco Technologies, Inc. |
| (c) | For the year ended 2004 these amounts represent foreign exchange rate changes. |
S-1
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. |
Not
applicable
| Item 9A. | Controls and Procedures |
Design
and Evaluation of Internal Control Over Financial Reporting
Under
Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in
this Annual Report on Form 10-K (i) a report from our management regarding the
Company’s internal controls over financial reporting, which report is required
to include, among other things, an assessment and statement as to the
effectiveness of our internal controls over financial reporting as of December
31, 2004 and (ii) an attestation report of our independent registered public
accounting firm on management’s assessment of such internal controls.
On
November 30, 2004, the SEC issued an exemptive order (SEC Release No. 50754)
which provides a 45-day extension for the filing of the management report and
the related attestation report by eligible companies. We have elected to rely on
this 45-day extension, and therefore, this Annual Report on Form 10-K does not
include such reports. We intend to include such reports in an amendment to this
Annual Report on Form 10-K in accordance with the SEC’s exemptive order.
During
2004, we spent considerable time and internal and external resources analyzing,
documenting and testing our system of internal controls over financing reporting
and have substantially completed our internal evaluation. In addition, our
management has provided our independent registered public accounting firm with a
draft of its report and we are not currently aware of any material weaknesses in
our internal controls over financial reporting.
There can
be no assurance, however, that one or more material weaknesses in our internal
controls over financial reporting will not be identified during the 45-day
extension period, that management will be able to assert that our internal
controls over financial reporting are effective as of December 31, 2004 or that
our independent registered public accounting firm will be able to attest that
management’s report is fairly stated or express an unqualified opinion on the
effectiveness of our internal controls. If such weaknesses are identified or if
our independent registered public accounting firm does not deliver an
unqualified attestation, it could result in a loss of investor confidence in our
financial reports, adversely affect our stock price and/or subject us to
sanctions or investigation by regulatory authorities.
- 43
-
Changes
in Internal Controls Over Financial Reporting
There
have been no changes in the Company’s internal control over financial reporting
that occurred during the last fiscal quarter to which this Annual Report on Form
10-K relates that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
| Item 9b. | Other Information |
Not
applicable.
| Item 10. | Directors and Executive Officers of the Registrant |
The
Registrant incorporates by reference herein information to be set forth in its
definitive proxy statement for its 2005 annual meeting of shareholders that is
responsive to the information required with respect to this item.
The
registrant has adopted a code of ethics for its directors, executive officers
and all other senior financial personnel. The Registrant will make copies of its
code of ethics available to investors upon request. Any such request should be
sent by mail to Bel Fuse Inc., 206 Van Vorst Street, Jersey City, NJ 07302 Attn:
Colin Dunn or should be made by telephone by calling Colin Dunn at 201-432-0463.
| Item 11. | Executive Compensation |
The
Registrant incorporates by reference herein information to be set forth in its
definitive proxy statement for its 2005 annual meeting of shareholders that is
responsive to the information required with respect to this Item.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |
The
Registrant incorporates by reference herein information to be set forth in its
definitive proxy statement for its 2005 annual meeting of shareholders that is
responsive to the information required with respect to this Item.
| Item 13. | Certain Relationships and Related Transactions |
The
Registrant incorporates by reference herein information to be set forth in its
definitive proxy statement for its 2005 annual meeting of shareholders that is
responsive to the information required with respect to this Item.
| Item 14. | Principal Accountant Fees and Services |
The
Registrant incorporates by reference herein information to be set forth in its
definitive proxy statement for its 2005 annual meeting of shareholders that is
responsive to the information required with respect to this Item.
- 44
-
PART
IV
| Item 15. | Exhibits, Financial Statement Schedules |
| (a) | Financial Statements |
|
Page | |||
| 1. | Financial statements filed as a part of this Annual Report on Form 10-K: | ||
| Report of Independent Registered Public Accounting Firm |
F-1 | ||
| Consolidated Balance Sheets as of December 31, 2004 and 2003 |
F-2
- F-3 | ||
| Consolidated Statements of Operations for Each of the Three Years in the Period Ended December 31, 2004 |
F-4 | ||
| Consolidated Statements of Stockholders' Equity for Each of the Three Years in the Period Ended December 31, 2004 |
F-5
- F-6 | ||
| Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 2004 |
F-7
- F-9 | ||
| Notes to Consolidated Financial Statements |
F-
10 - F-37 | ||
| Selected Quarterly Financial Data - Years Ended December 31, 2004 and 2003 (Unaudited) |
F-38 | ||
| 2. | Financial statement schedules filed as part of this report: | ||
| Schedule II: Valuation and Qualifying Accounts |
S-1 | ||
| All other schedules are omitted because they are inapplicable, not required or the information is included in the consolidated financial statements or notes thereto. |
- 45
-
| (c) | Exhibits |
|
3.1 |
Certificate
of Incorporation, as amended, is incorporated by reference to Exhibit 3.1
of the Company’s Annual Report on Form 10-K for the year ended December
31, 1999. |
|
3.2 |
By-laws,
as amended, are hereby incorporated by reference to Exhibit 4.2 of the
Company's Registration Statement on Form S-2 (Registration No. 33-16703)
filed with the Securities and Exchange Commission on August 25,
1987. |
|
10.1 |
Agency
agreement dated October 1, 1988 between Bel Fuse Ltd. and Rush Profit Ltd.
Incorporated by reference to Exhibit 10.1 of the Company's annual report
on Form 10-K for the year ended December 31,
1994. |
|
10.2 |
Contract
dated March 16, 1990 between Accessorios Electronicos (Bel Fuse Macau
Ltd.) and the Government of Macau. Incorporated by reference to Exhibit
10.2 of the Company's annual report on Form 10-K for the year ended
December 31, 1994. |
|
10.3 |
Loan
agreement dated February 14, 1990 between Bel Fuse, Ltd. (as lender) and
Luen Fat Lee Electronic Factory (as borrower). Incorporated by reference
to Exhibit 10.3 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1995. |
|
10.4 |
Stock
Option Plan. Incorporated by reference to Exhibit 28.1 of the Company's
Registration Statement on Form S-8 (Registration No.333-89376) filed with
the Securities and Exchange Commission on May 29,
2002. |
|
10.5 |
Employment
agreement between Elliot Bernstein and Bel Fuse Inc. dated October 29,
1997. Incorporated by reference to Exhibit 10.7 of the Company's Annual
Report on Form 10-K for the year ended December 31,
1997. |
| 10.6 |
Stock
and Asset Purchase Agreement among Bel Fuse Ltd, Bel Fuse Macau, L.P.A.,
Bel Connector, Inc. and Bel Transformer, Inc. and Insilco Technologies,
Inc. and certain of its subsidiaries, dated as of December 31, 2002, as
amended by Amendment No. 1, dated as of March 21, 2003, to Stock and Asset
Purchase Agreement, among Bel Fuse Inc., Bel Fuse Ltd., Bel Fuse Macau,
L.D.A., Bel Connector Inc. and Bel Transformer Inc. and Insilco
Technologies, Inc. and certain of its subsidiaries. Incorporated by
reference to Exhibit 10.6 of the Company’s Annual Report on Form 10-K for
the year ended December 31, 2002. |
| 10.7 |
Amended
and Restated Credit and Guarantee Agreement, dated as of March 21, 2003,
by and among Bel Fuse Inc., as Borrower, the Subsidiary Guarantors party
thereto and The Bank of New York, as Lender. Incorporated by reference to
Exhibit 10.7 of the Company’s Form 10-K for the year ended December 31,
2002. |
- 46
-
| Item 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) |
Exhibit
No.:
| 10.8 |
Agreement
and Plan of Merger dated as of March 4, 2005 by and among Bel Fuse, Inc.,
Bel Westboro, Inc. and Galaxy Power, Inc. Incorporated by reference to
exhibit 2.1 of the Company's Form 8-K dated March 7,
2005. |
| 10.9 |
Contract
for Purchase and Sale of Real Estate dated July 15, 2004 between Bel Fuse
Inc. and Fields Development Group Co. |
|
11.1 |
A
statement regarding the computation of earnings per share is omitted
because such computation can be clearly determined from the material
contained in this Annual Report on Form
10-K. |
|
22.1 |
Subsidiaries
of the Registrant. |
|
23.1 |
Consent
of Independent Registered Public Accounting
Firm. |
| 24.1 | Power of attorney (included on the signature page) |
| 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | Certification of the Vice President of Finance pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. |
| 32.2 | Certification of the Vice-President of Finance pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
- 47
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SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
BEL FUSE
INC.
BY:
/s/
Daniel Bernstein
Daniel
Bernstein, President, Chief Executive
Officer
and Director
Dated:
March 28, 2005
KNOW ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Daniel Bernstein and Colin Dunn as his/her
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him/her and in his/her name, place, and stead, in any and all capacities, to
sign and file any and all amendments to this Annual Report on Form 10-K, with
all exhibits thereto and hereto, and other documents with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent, and each of
them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he/she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
| Signature |
Title |
Date | ||
| /s/ Daniel Bernstein | President, Chief Executive Officer and Director |
March 28, 2005 | ||
| Daniel Bernstein | ||||
| /s/ Howard B. Bernstein | Director |
March 28, 2005 | ||
| Howard B. Bernstein | ||||
| /s/ Robert H. Simandl | Director |
March 28, 2005 | ||
| Robert H. Simandl | ||||
| /s/ Peter Gilbert | Director |
March
28, 2005 | ||
| Peter Gilbert | ||||
| /s/ John Tweedy | Director |
March
28, 2002 | ||
| John Tweedy | ||||
| /s/ John Johnson | Director |
March
28, 2005 | ||
| John Johnson |
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| /s/ Avi Eden | Director |
March
28, 2005 | ||
| Avi Eden | ||||
| /s/ Colin Dunn | Chief Accounting and Financial Officer |
March
28, 2005 | ||
| Colin Dunn |
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