<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 1998
/ / 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: 0-9788
RICHEY ELECTRONICS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-0594451
- ----------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
7441 Lincoln Way, Garden Grove, California 92842-3120
---------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(714) 898-8288
--------------------------------------------
(Registrant's Telephone Number, including Area Code)
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
---- ---
As of August 12, 1998, 9,146,113 shares of the registrant's Common
Stock, $0.001 par value, were issued and outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
RICHEY ELECTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 3, DECEMBER 31,
1998 1997
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 23,000 $ 31,000
Trade receivables 29,742,000 32,702,000
Inventories 54,512,000 49,828,000
Deferred income taxes 3,662,000 3,662,000
Other current assets 1,149,000 919,000
------------ ------------
Total current assets $ 89,088,000 $ 87,142,000
------------ ------------
LEASEHOLD IMPROVEMENTS, EQUIPMENT
FURNITURE AND FIXTURES, net $ 6,156,000 $ 5,715,000
------------ ------------
OTHER ASSETS AND INTANGIBLES
Deferred income taxes $ 3,206,000 $ 4,200,000
Deferred debt costs 2,071,000 2,237,000
Other 266,000 340,000
Goodwill 50,701,000 51,236,000
------------ ------------
$ 56,244,000 $ 58,013,000
------------ ------------
$151,488,000 $150,870,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 14,208,000 $ 14,278,000
Accounts payable 19,525,000 22,525,000
Accrued expenses 4,523,000 4,028,000
Accrued restructuring costs 898,000 746,000
------------ ------------
Total current liabilities $ 39,154,000 $ 41,577,000
------------ ------------
LONG-TERM DEBT
Subordinated notes payable $ 1,000,000 $ 1,000,000
Convertible subordinated notes payable 55,755,000 55,755,000
Other long-term debt 10,868,000 11,099,000
------------ ------------
$ 67,623,000 $ 67,854,000
------------ ------------
STOCKHOLDERS' EQUITY
Preferred Stock -- --
Common Stock $ 9,000 $ 9,000
Additional paid-in-capital 22,291,000 21,754,000
Retained earnings 22,802,000 19,895,000
Accumulated other comprehensive income (391,000) (219,000)
------------ ------------
Total stockholders' equity $ 44,711,000 $ 41,439,000
------------ ------------
$151,488,000 $150,870,000
------------ ------------
------------ -------------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE>
RICHEY ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
------------------------- ----------------------------
JULY 3, JUNE 27, JULY 3, JUNE 27,
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net Sales: $62,328,000 $59,346,000 $133,111,000 $116,140,000
Cost of Goods Sold: 46,860,000 44,684,000 100,024,000 86,949,000
----------- ----------- ------------ ------------
Gross Profit: $15,468,000 $14,662,000 $ 33,087,000 $ 29,191,000
----------- ----------- ------------ ------------
Operating expenses:
Selling, warehouse, general, and
administrative $11,080,000 $10,021,000 $ 23,031,000 $ 20,075,000
Amortization of intangibles 452,000 380,000 884,000 749,000
Restructuring costs 1,000,000 -- 1,000,000 --
----------- ----------- ------------ ------------
$12,532,000 $10,401,000 $ 24,915,000 $ 20,824,000
----------- ----------- ------------ ------------
Operating income $ 2,936,000 $ 4,261,000 $ 8,172,000 $ 8,367,000
Interest Expense 1,610,000 1,455,000 3,227,000 2,716,000
----------- ----------- ------------- -------------
Income before income taxes $ 1,326,000 $ 2,806,000 $ 4,945,000 $ 5,651,000
Federal and state income taxes 545,000 1,128,000 2,038,000 2,270,000
----------- ----------- ------------ ------------
Net income $ 781,000 $ 1,678,000 $ 2,907,000 $ 3,381,000
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Earnings per Share
Basic $ 0.09 $ 0.19 $ 0.32 $ 0.37
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Diluted $ 0.09 $ 0.18 $ 0.31 $ 0.35
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Weighted Average number of
shares outstanding
Basic 9,138,000 9,063,000 9,125,000 9,063,000
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Diluted 13,194,000 13,010,000 13,185,000 13,010,000
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
RICHEY ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------
JULY 3, JUNE 27,
1998 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,907,000 $ 3,381,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,967,000 1,584,000
Deferred income taxes 933,000 761,000
Changes in operating assets and liabilities:
(Increase) decrease in trade receivables 2,894,000 (1,134,000)
(Increase) in inventories (4,769,000) (6,351,000)
(Increase) decrease in other assets (235,000) 137,000
Increase (decrease) in accounts
payable and accrued expenses (2,433,000) 824,000
Increase in accrued restructuring costs 796,000 --
------------ ------------
Net cash provided by (used in)
operating activities $ 2,060,000 $ (798,000)
------------ ------------
CASH FLOWS (USED IN) INVESTING ACTIVITIES
Purchase of leasehold improvements and equipment $ (1,384,000) $ (706,000)
Payment of acquisition and restructuring costs (893,000) (7,290,000)
------------ ------------
Net cash (used in) investing activities $ (2,277,000) $ (7,996,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net advances (repayments) on revolving line of credit $ (138,000) $ (1,085,000)
Borrowing (payments) on long-term debt (150,000) 9,944,000
Transaction costs associated with refinancing
activities -- (38,000)
Proceeds from issuance of common stock 505,000 --
------------ ------------
Net cash provided by financing activities $ 217,000 $ 8,821,000
------------ ------------
Net effect of translation on cash $ (8,000) $ (28,000)
------------ ------------
(Decrease) in cash $ (8,000) $ (1,000)
CASH
Beginning $ 31,000 $ 30,000
------------ ------------
Ending $ 23,000 $ 29,000
------------ ------------
------------ ------------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
RICHEY ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------
JULY 3, JUNE 27,
1998 1997
------------ -------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Payments For:
Interest $3,022,000 $ 2,473,000
------------ -----------
------------ -----------
Income taxes $ 722,000 $ 913,000
------------ -----------
------------ -----------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Acquisition of Simmonds Technology:
Working capital acquired $ 1,163,000
Fair market value of equipment acquired 1,384,000
Deferred income taxes 2,920,000
Goodwill 5,547,000
Restructuring and transaction costs (2,422,000)
Other liabilities assumed (1,047,000)
Common stock warrants issued (730,000)
------------
Purchase price and related transaction costs $ 6,815,000
------------
------------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
RICHEY ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JULY 3, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------
ADDITIONAL ACCUMULATED
PREFERRED SHARES PAID-IN RETAINED COMPREHENSIVE
STOCK OUTSTANDING PAR VALUE CAPITAL EARNINGS INCOME TOTAL
-------- ----------- --------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 -- 9,068,000 $9,000 $21,754,000 $19,895,000 $(219,000) $41,439,000
Stock issued for options
and other -- 78,000 -- 537,000 -- -- 537,000
Foreign currency
translation adjustment -- -- -- -- -- (172,000) (172,000)
Net income -- -- -- -- 2,907,000 -- 2,907,000
----- --------- ------ ----------- ----------- ----------- -----------
Balance, July 3, 1998 -- 9,146,000 $9,000 $22,291,000 $22,802,000 $(391,000) $44,711,000
----- --------- ------ ----------- ----------- ----------- -----------
----- --------- ------ ----------- ----------- ----------- -----------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
RICHEY ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Richey Electronics, Inc. (the Company or Richey Electronics) is a
specialty distributor of electronic components and a provider of related
value-added assembly services. The Company distributes a broad line of
connectors, switches, wires, cables, heat shrinkable tubing, and other
interconnect, electromechanical and passive electronic components used in
assembly and manufacturing of electronic equipment. Richey Electronics also
provides a wide variety of value-added assembly services. The value-added
assembly services consist of (i) component assembly, which is the assembly of
components to manufacturer specifications and (ii) contract assembly, which
is the assembly of cable assemblies, battery packs and mechanical assemblies
to customer specifications. The Company's customers are primarily small- and
medium-sized original equipment manufacturers.
SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In management's opinion, the accompanying
financial statements reflect all material adjustments, consisting of only
normal and recurring adjustments, necessary for a fair statement of the
results for the interim periods presented. The results for the interim
periods ended July 3, 1998 and June 27,1997 are not necessarily indicative of
the results which will be reported for the entire year. For further
information, refer to the audited financial statements of the Company and
notes thereto for the year ended December 31, 1997, included in the Company's
Annual Report on Form 10-K.
RECENT PRONOUNCEMENTS
In June 1997, the FASB adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION, which establishes reporting
requirements related to a business' operating segments, products and
services, geographic areas of operations and major customers. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997, and does not
apply to interim financial statements in the year of adoption. The Company
does not expect SFAS No. 131 to have a significant impact on its Consolidated
Financial Statements and related disclosures.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, INTERNAL USE SOFTWARE, which
provides guidelines for accounting for costs of computer software developed
or obtained for internal uses. This SOP is effective for financial
statements for years beginning after December 15, 1999. The Company
7
<PAGE>
RICHEY ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
does not expect SOP 98-1 to have a significant impact on its Consolidated
Financial Statements and related disclosures.
In April 1998, the AICPA issued SOP 98-5, REPORTING ON COSTS OF START-UP
ACTIVITIES, which provides guidance on accounting for start-up costs. The
Company will be required to adopt this SOP for its year ending December 31,
1999. Management does not believe the adoption of this SOP will have a
material impact on any financial results.
EARNINGS PER SHARE
The Company adopted SFAS No. 128, EARNINGS PER SHARE, and restated all
prior period earnings per share data. Adoption of this standard did not
result in any changes to previously reported earnings per share. Statement
No. 128 requires disclosure of basic earnings per share, instead of primary
earnings per share, on the face of the income statement. In addition, for
those entities with complex capital structures, it requires disclosure of
both basic and diluted earnings per share on the face of the income statement
and requires a reconciliation of the numerator and denominator of the
computation of basic and diluted earnings per share to be disclosed.
The following is information about the computation of earnings per share
data for the quarters and six month periods ended July 3, 1998 and June 27,
1997:
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------
July 3, 1998 June 27, 1997
--------------------------------------- ---------------------------------------
Net Net
Income Shares Income Income Shares Income
(Numerator) (Denominator) Per Share (Numerator) (Denominator) Per Share
------------ ------------- --------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $ 781,000 9,138,000 $0.09 $1,678,000 9,063,000 $0.19
Effect of dilutive securities:
Convertible, 7% subordinated
notes payable 612,000 3,947,000 622,000 3,947,000
Common stock options - 109,000 -- --
---------- ----------- ----- ---------- ----------
Diluted earnings per share $1,393,000 13,194,000 $0.09* $2,300,000 13,010,000 $0.18
---------- ----------- ----- ---------- ----------
---------- ----------- ----- ---------- ----------
</TABLE>
____________________
* The effect of dilutive securities was not included for the quarter
ended July 3, 1998, because the impact would have been anti-dilutive.
8
<PAGE>
RICHEY ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------------------------------------------------------
July 3, 1998 June 27, 1997
--------------------------------------- ---------------------------------------
Net Net
Income Shares Income Income Shares Income
(Numerator) (Denominator) Per Share (Numerator) (Denominator) Per Share
------------ ------------- --------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $2,907,000 9,125,000 $0.32 $3,381,000 9,063,000 $0.37
Effect of dilutive securities:
Convertible, 7% subordinated
notes payable 1,224,000 3,947,000 1,218,000 3,947,000
Common stock options -- 113,000 -- --
----------- ---------- ----- ---------- ----------
Diluted earnings per share $4,131,000 13,185,000 $0.31 $4,599,000 13,010,000 $0.35
----------- ---------- ----- ---------- ----------
----------- ---------- ----- ---------- ----------
</TABLE>
Options to purchase 373,200 shares of common stock and a warrant to
purchase 197,044 shares of common stock were outstanding at July 3, 1998 and
were not included in the calculation of diluted earnings per share because
the option and warrant exercise price were greater than the average market
price of the common stock and, therefore, are antidilutive.
INCOME TAXES
Income tax expense in these interim financial statements is recorded
based upon the Company's expected annual effective income tax rate.
COMPREHENSIVE INCOME
In June 1997, the FASB adopted SFAS No. 130, REPORTING ON COMPREHENSIVE
INCOME, which establishes standards for reporting and disclosure of
comprehensive income and its components. Effective January 1, 1998, the
Company adopted SFAS No. 130. For the quarters ended July 3, 1998 and June
27, 1997, comprehensive income was $660,000 and $1,632,000, respectively, and
for the six month periods ended July 3, 1998 and June 27, 1997, comprehensive
income was $2,806,000 and $3,335,000, respectively. The Company's
accumulated other comprehensive income consists, at this time, solely of
cumulative foreign currency translation adjustments related to the Company's
Canadian subsidiary which was acquired on June 13, 1997.
NOTE 2. BUSINESS COMBINATIONS
STI ACQUISITION
DESCRIPTION OF ACQUISITION
On June 13, 1997, the Company completed the purchase (the STI
Acquisition) of all of the issued and outstanding common stock of Simmonds
Technologies Inc. (STI), an indirect wholly owned subsidiary of Simmonds
Capital Limited (Simmonds). STI was a distributor of interconnect,
electromechanical and passive electronic components, headquartered in
Toronto, Ontario, with additional branch locations in the Montreal, Ottawa,
Winnipeg, Saskatoon,
9
<PAGE>
RICHEY ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(UNAUDITED)
Calgary, Edmonton and Vancouver regions. The STI Acquisition was accounted
for as a purchase business combination with the operations of STI included
subsequent to the date of acquisition. In July 1997, the Company changed the
name of STI to Richey Electronics Limited.
PRO FORMA FINANCIAL INFORMATION
The following pro forma results of continuing operations assume that the
STI Acquisition (which occurred on June 13, 1997) had occurred on January 1,
1997, after giving effect to certain adjustments including amortization of
acquired goodwill, interest expense and related tax effects. The pro forma
results do not reflect any cost savings directly attributable to the
acquisition.
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 27, 1997 June 27, 1997
------------- ----------------
<S> <C> <C>
Net sales (000) $63,201 $126,453
Net income (000) $ 479 $ 947
Earnings per share
Basic $ 0.05 $ 0.10
Diluted $ 0.05 $ 0.10
</TABLE>
This pro forma financial information does not purport to be indicative
of the results of operations that would have occurred had the STI Acquisition
actually taken place at January 1, 1997.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
SUMMARY OF SELECTED DATA
(UNAUDITED)
The following tables set forth certain items in the statements of
operations as a percent of net sales for periods shown and additional items
of a statistical nature.
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JULY 3, JUNE 27, JUNE 27, JUNE 27,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold. . . . . . . . . . . . . . . 75.2 75.3 75.1 74.9
------ ------ ------ ------
Gross Profit . . . . . . . . . . . . . . . 24.8 24.7 24.9 25.1
------ ------ ------ ------
Selling, warehouse, general & administrative. . 17.8 16.9 17.3 17.3
Amortization of intangibles . . . . . . . . . . 0.7 0.6 0.7 0.6
Restructuring costs . . . . . . . . . . . . . . 1.6 - 0.8 -
------ ------ ------ ------
Operating Income . . . . . . . . . . . . . 4.7 7.2 6.1 7.2
Interest Expense. . . . . . . . . . . . . . . . 2.6 2.5 2.4 2.3
------ ------ ------ ------
Income before income taxes . . . . . . . . 2.1 4.7 3.7 4.9
Federal and state income taxes. . . . . . . . . 0.8 1.9 1.5 2.0
------ ------ ------ ------
Net Income . . . . . . . . . . . . . . . . 1.3% 2.8% 2.2% 2.9%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
JULY 3, APRIL 3, DEC. 31, SEPT. 26, JUNE 27,
1998 1998 1997 1997 1997
-------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET AND OTHER DATA:
Total assets (000) $151,488 $156,478 $150,870 $148,602 $144,699
Working capital (000) $ 49,934 $ 48,658 $ 45,565 $ 53,605 $ 51,418
Ratio of current assets to current liabilities 2.3 2.1 2.1 2.6 2.7
Short-term debt (000) $ 14,208 $ 14,819 $ 14,278 $ 4,459 $ 3,201
Subordinated long-term notes payable (000) $ 1,000 $ 1,000 $ 1,000 $ 2,000 $ 2,000
Convertible subordinated notes payable (000) $ 55,755 $ 55,755 $ 55,755 $ 55,755 $ 55,755
Other long-term debt (000) $ 10,868 $ 10,949 $ 11,099 $ 18,049 $ 18,157
Inventory turnover 3.4x 3.9x 4.2x 4.0x 4.0x
Days sales outstanding in accounts receivable 43.4 43.8 44.5 47.5 44.3
Customer order backlog (U.S. only) (000) $ 57,000 $ 63,600 $ 63,000 $ 58,600 $ 57,200
Stockholders' equity (000) $ 44,711 $ 43,988 $ 41,439 $ 39,553 $ 37,983
</TABLE>
11
<PAGE>
RESULTS OF OPERATIONS
Net income for the second quarter of 1998 was $781,000 ($0.09 per share,
diluted) compared with net income of $1,678,000 ($0.18 per share, diluted)
for the second quarter of 1997. Net income for the six months ended July 3,
1998, was $2,907,000 ($0.31 per share, diluted) compared with $3,381,000
($0.35 per share, diluted) for the same period in 1997, a decrease of 14.0%.
The Company's net income figures reflect a $1,000,000 pretax
restructuring charge incurred in the second quarter of 1998 relating to a
major reduction of the Company's selling, general, administrative and
value-added functions. The restructuring charge consists of $550,000 for
severance and separations costs, $350,000 for lease termination costs as a
result of facility consolidation and $100,000 of other costs. It is expected
that these costs will all be paid within the next twelve months. The Company
undertook this reduction in response to extensive weakness in the broad
electronics market served by the Company's customers, including the
increasingly negative impact of the slowdown in Asia. The Company's objective
in implementing these reductions is to reduce annualized selling, general,
administrative and value-added expenses by approximately $12,000,000.
Without giving effect to the restructuring charge, diluted earnings per share
for the quarter and six months ended July 3, 1998 would have been $0.15 and
$0.36, respectively.
Net sales for the second quarter of 1998 rose to $62,328,000 from
$59,346,000 for the same period in 1997, an increase of 5.0%. Net sales for
the first six months of 1998 were $133,111,000 compared to net sales of
$116,140,000 for the same period in 1997, an increase of 14.6%. Net sales
for the second quarter of 1998 and the six months ended July 3, 1998,
included $5,079,000 and $10,912,000, respectively, of STI sales compared to
$894,000 of post-acquisition Canadian sales in the second quarter of 1997.
The increase in net sales due to the STI Acquisition was more than offset
during the second quarter by decreased United States sales reflecting the
weakness of the electronics market. United States sales for the second
quarter of 1998 decreased by 2.1% from the second quarter of 1997.
Additionally, total sales for the second quarter of 1998 decreased by 11.9%
from those for the first quarter of 1998.
Net sales of electronic components decreased to $40,149,000 in the
second quarter of 1998 from $40,514,000 in the second quarter of 1997, a
decrease of 0.9%. Net sales of electronic components for the first six
months of 1998 increased to $86,947,000 from $79,542,000 for the same period
in 1997, an increase of 9.3%. This increase in component sales is primarily
the result of the acquisition of STI, which sells mostly electronic
components.
Net sales of value-added assembly services increased to $22,179,000 for
the second quarter of 1998 from $18,832,000 for the same period of 1997, an
increase of 17.8%. Net sales of value-added assembly services for the first
six months of 1998 increased to $46,164,000 from $36,598,000 for the same
period in 1997, an increase of 26.1%. Value-added sales were 35.6% of the
Company's net sales for the second quarter of 1998, compared with 31.7% of
net sales for the second quarter of 1997 and 33.9% of net sales for the first
quarter of 1998. Value-added sales were 34.7% of the Company's net sales for
the first six months of 1998, compared with 31.5% of net sales for the same
period of 1997. This increase of value-added assembly revenues is primarily
the result of the continuing trend by OEM's to outsource assembly operations.
12
<PAGE>
The Company believes that order backlog (confirmed orders from customers
for shipment within the next 12 months) generally averages two to three
months' sales in the electronics distribution industry. The Company's order
backlog at July 3, 1998 was $63,600,000 as compared with $71,900,000 at April
3, 1998 and $70,600,000 at December 31, 1997. United States backlog fell to
$57,000,000 from $63,600,000 at the end of the first quarter of 1998, a
decrease of 10.4%. Canadian backlog was $6,600,000 at the end of the second
quarter of 1998 as compared with $8,300,000 at April 3, 1998 and $7,600,000
at December 31, 1997.
Gross profit was $15,468,000 for the second quarter of 1998 compared to
$14,662,000 for the second quarter of 1997, an increase of 5.5%, and was
$33,087,000 for the first six months of 1998 compared to $29,191,000 for the
same period of 1997, an increase of 13.3%. Gross profit margin for the
second quarter of 1998 was 24.8% compared to gross profit margin of 24.7% for
the second quarter of 1997 and was 24.9% for the six months ending July 3,
1998 compared to 25.1% for the same period in the prior year. The weakness
in the broad electronics market served by the Company's customers caused the
gross profit margins to decline moderately for both component sales and
value-added assembly services. However, the Company was able to keep the
overall gross profit margin essentially flat because of the increase of the
higher margin value-added assembly services as a percentage of sales.
The Company's selling, warehouse, general and administrative expenses
for the second quarter of 1998 were $11,080,000 compared to $10,021,000 for
the second quarter of 1997, an increase of 10.6% on a sales increase of 5.0%.
These expenses decreased by $871,000 (or 7.3%) from the $11,951,000 costs of
the first quarter of 1998. For the first half of 1998, selling, warehouse,
general and administrative expenses were $23,031,000, a 14.7% increase over
the $20,075,000 of such expenses in the first six months of 1997. Sales
revenues for the same period were up 14.6%. This increase is entirely due to
the acquisition of STI in Canada in mid-June 1997. Operating expenses in the
United States are virtually flat year-to-year, while United States revenues
for the six months were up 6.0%. As explained previously, in light of the
weakness in electronic business and bookings in the second quarter of 1998,
and in anticipation that such weakness will continue, the Company has
endeavored to cut operating expenses by approximately $12.0 million on an
annualized basis, approximately $9.6 million of which is anticipated to be
selling, warehouse, general and administrative expenses.
Interest expense and amortization for the second quarter of 1998 were
$1,610,000 and $452,000, respectively, as compared with $1,455,000 and
$380,000 for the second quarter of 1997. The increases in interest expense
and amortization were primarily due to increases in borrowings and goodwill
as a result of the STI Acquisition.
Federal and state income tax expense decreased to $545,000 (41%
effective rate) for the quarter ended July 3, 1998 from $1,128,000 (40%
effective rate) for the corresponding period of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a $45 million revolving line of credit facility
(the "Revolving Line of Credit") with Wells Fargo Bank, N.A. The loan
agreement governing the Revolving Line of Credit (the "Loan Agreement")
limits the Company's ability to create or incur liens on assets, to make
distributions or investments, to enter into any mergers or make additional
acquisitions or dispositions of assets and to enter into transactions with
affiliates. In addition, the
13
<PAGE>
Company must comply with various financial and other covenants established by
the bank. The Loan Agreement also provides the bank with the right to
terminate the commitment on 30 days' notice if there is a change in control
of the Company (generally, the acquisition of more than 50% of the Company's
capital stock).
As of July 3, 1998, the Company had outstanding borrowings under the
Revolving Line of Credit of approximately $23.4 million and additional
borrowing capacity of approximately $21.6 million. Outstanding borrowings at
June 27, 1997 and December 31, 1997 were $19.4 million and $23.6 million,
respectively.
The Company believes that available borrowings under the Revolving Line
of Credit and cash generated by operations will be adequate to meet its
anticipated funding commitments for the remainder of 1998.
Working capital was $49,934,000 on July 3, 1998 as compared to
$45,565,000 on December 31, 1997, and $51,418,000 on June 27, 1997. During
the first six months of 1998 and after giving effect to the $1,000,000
restructuring charge, the Company generated $10,139,000 of earnings before
interest, income taxes, depreciation and amortization ("EBITDA") as compared
to EBITDA of $9,951,000 for the corresponding period of 1997, an increase of
1.9%.
Operating activities for the first six months of 1998 provided net cash
of $2,060,000 as compared to net cash of $798,000 used in operating
activities for the same period of 1997. During the first six months of 1998,
the Company used $2,277,000 in investing activities, including $1,384,000 for
capital expenditures relating to normal investments in leasehold
improvements, software, furniture, fixtures and equipment, and $893,000 for
payment of restructuring costs accrued in connection with the acquisition of
STI. This use of cash was primarily financed by operating activities and the
sale of common stock upon the exercise of stock options.
For the quarter ended July 3, 1998, inventory turnover was 3.4x compared
to 4.0x for the quarter ended June 27, 1997, 4.2x for the quarter ended
December 31, 1997 and 3.9x for the quarter ended April 3, 1998. The decrease
in the inventory turnover ratio for the second quarter of 1998 from the first
quarter of 1998 is primarily due to the overall deterioration of the
electronics markets discussed above. The decrease in inventory turnover for
the second quarter of 1998 as compared to the same period of 1997 also
reflected inventory investments in certain strategic product lines as a
result of opportunities presented to the Company by national franchising from
major suppliers. In addition, the Company experienced significant growth in
its military connector business in 1997 and the first half of 1998 which
normally requires investment in inventory with lower turnover than other
connector lines.
Days sales outstanding in accounts receivable were 43.4 days at July 3,
1998 compared to 44.3 days at June 27, 1997 and 44.5 days at December 31,
1997. The decrease at July 3, 1998 over June 27, 1997 is the result of
improved collection effort.
YEAR 2000
The Company is in the process of conducting a comprehensive review of
its computer and other operating systems to identify the systems that could
be affected by the "Year 2000" issue and is conducting detailed testing.
These reviews and testing are expected to be completed
14
<PAGE>
by the end of 1998. The Company presently believes that, with minor
modifications to existing software, the "Year 2000" issue will not pose
significant operational problems for the Company's computer systems as so
modified and corrected.
FORWARD-LOOKING STATEMENTS
The discussions above under the headings "Results of Operations",
"Liquidity and Capital Resources" and "Year 2000" contain "forward-looking
statements" within the contemplation of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. Such
forward-looking statements include, without limitation, statements regarding
the impact upon the Company of the weakness in the broad electronics market
served by the Company's customers, the expense reductions anticipated to be
realized from the Company's cost reduction program, the adequacy of available
borrowings and cash from operations to meet funding commitments and the
impact of the "Year 2000" issue. These forward-looking statements involve
risks and uncertainties which could cause actual results to differ materially
from those discussed above including, but not limited to, risks relating to
economic and market conditions, the demand for and pricing of the Company's
products, competitors' and suppliers' actions, the ability of the Company to
complete and realize the effect of its cost cutting actions, the level and
volatility of interest rates, the impact of current or pending legislation
and regulation, and fluctuations in quarterly results, as well as the risks
described from time to time in the Company's reports to the Securities and
Exchange Commission, including the Company's Annual Report on Form 10-K.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is subject to legal proceedings and litigation arising in
the ordinary course of business. In the opinion of management, the
result of these legal proceedings will not have a material adverse
effect on the Company's financial statements.
ITEM 2. CHANGES IN SECURITIES.
On February 26, 1996 and March 22, 1996, the Company sold to Jefferies
& Company, Inc. and Cruttenden Roth Incorporated (the "Initial
Purchasers") $55,755,000 aggregate principal amount of 7% Convertible
Subordinated Notes due 2006. The Notes are convertible into shares of
the Company's Common Stock at a conversion price of $14.125 per share
(subject to adjustment in certain events). In connection with the
sale of the Notes, the Company entered into a Registration Rights
Agreement with the Initial Purchasers requiring the Company to
maintain an effective shelf registration statement with the Commission
to register resales of the Notes and the Common Stock issuable upon
conversion of the Notes for the period set forth in the Registration
Rights Agreement. Such period expired and, effective May 1, 1998, the
Company filed an amendment to the registration statement terminating
its effectiveness.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its annual meeting to stockholders on May 5, 1998.
At the meeting, each of the following directors was reelected to serve
as a director of the Company until the next annual meeting of
stockholders and received votes as follows:
Number of Votes Number of Votes
Cast For Withheld From
Name His Election His Election
Thomas W. Blumenthal 7,510,127 15,255
William C. Cacciatore 7,510,127 15,255
Edward L. Gelbach 7,509,727 15,655
Greg A. Rosenbaum 7,510,127 15,255
Norbert W. St. John 7,508,627 16,755
Donald I. Zimmerman 7,510,127 15,255
16
<PAGE>
At the annual meeting, the stockholders also voted to ratify the
appointment of McGladrey & Pullen, LLP, as the Company's independent
public accountants for the year ending December 31, 1998. The vote
was 7,513,268 shares in favor of such appointment and 3,424 shares
opposed to such appointment, with 8,688 shares abstaining from voting.
ITEM 5. OTHER INFORMATION.
Rule 14a-8 adopted by the Securities and Exchange Commission under the
Securities Exchange Act of 1934 governs the submission of shareholder
proposals for inclusion in the Company's proxy statement and form of
proxy for the Company's annual meetings of shareholders. The
Securities and Exchange Commission has recently amended Rule 14a-4
under the Securities Exchange Act of 1934 to provide that notice of a
shareholder proposal submitted outside the processes of Rule 14a-8
will be considered untimely unless received by the Company at least 45
days before the date on which the Company first mailed its proxy
material for the prior year's annual meeting of shareholders. If
timely notice of such a proposal is not given to the Company,
management proxy holders will be allowed to exercise their
discretionary voting authority when the proposal is raised at the
annual meeting, without any discussion of the matter in the Company's
proxy statement. Notice of any such proposal will be considered
untimely with respect to the Company's 1999 annual meeting unless
received by the Company on or before February 15, 1999.
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits required by Item 601 of Regulation S-K.
3.1 Restated Certificate of Incorporation of Richey
Electronics, Inc. (Incorporated by reference from the
Registration Statement on Form S-1, filed January 7, 1994,
Registration No. 33-73916 as exhibit 3.1 thereof).
3.2 Bylaws of Richey Electronics, Inc. (Incorporated by
reference from the Registration Statement on Form S-1,
filed January 7, 1994, Registration No. 33-73916 as
exhibit 3.2 thereof).
4.1 Indenture between Richey Electronics, Inc. and First Trust
of California, National Association, dated as of February
15, 1996 (Incorporated by reference from the Annual Report
on Form 10-K for Richey Electronics, Inc. filed March 26,
1996 as exhibit 4.1 thereof).
4.2 Registration Rights Agreement among Richey Electronics,
Inc., Jefferies & Company, Inc. and Cruttenden Roth
Incorporated, dated as of February 26, 1996 (Incorporated
by reference from the Registration Statement on Form S-2,
filed April 26, 1996, Registration No. 333-02983 as
exhibit 4.2 thereof).
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RICHEY ELECTRONICS, INC.
(Registrant)
By /s/ RICHARD N. BERGER
-----------------------
Richard N. Berger
Vice President,
Chief Financial Officer
and Secretary
August 13, 1998
19
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
3.1 Restated Certificate of Incorporation of Richey Electronics,
Inc. (Incorporated by reference from the Registration
Statement on Form S-1, filed January 7, 1994, Registration
No. 33-73916 as exhibit 3.1 thereof).
3.2 Bylaws of Richey Electronics, Inc. (Incorporated by
reference from the Registration Statement on Form S-1, filed
January 7, 1994, Registration No. 33-73916 as exhibit 3.2
thereof).
4.1 Indenture between Richey Electronics, Inc. and First Trust
of California, National Association, dated as of February
15, 1996 (Incorporated by reference from the Annual Report
on Form 10-K for Richey Electronics, Inc. filed March 26,
1996 as exhibit 4.1 thereof).
4.2 Registration Rights Agreement among Richey Electronics,
Inc., Jefferies & Company, Inc. and Cruttenden Roth
Incorporated, dated as of February 26, 1996 (Incorporated by
reference from the Registration Statement on Form S-2, filed
April 26, 1996, Registration No. 333-02983 as exhibit 4.2
thereof).
27.1 Financial Data Schedule.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUL-03-1998
<CASH> 23
<SECURITIES> 0
<RECEIVABLES> 29,742
<ALLOWANCES> 0
<INVENTORY> 54,512
<CURRENT-ASSETS> 89,088
<PP&E> 11,233
<DEPRECIATION> 5,077
<TOTAL-ASSETS> 151,488
<CURRENT-LIABILITIES> 39,154
<BONDS> 67,623
0
0
<COMMON> 9
<OTHER-SE> 44,702
<TOTAL-LIABILITY-AND-EQUITY> 151,488
<SALES> 133,111
<TOTAL-REVENUES> 133,111
<CGS> 100,024
<TOTAL-COSTS> 124,939
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,227
<INCOME-PRETAX> 4,945
<INCOME-TAX> 2,038
<INCOME-CONTINUING> 2,907
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,907
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.31
</TABLE>
