ITEM 1. BUSINESS
GENERAL
Electronics distributors form an integral part of the electronics industry. Most domestic and foreign manufacturers of electronic components rely on independent authorized distributors, such as Marshall Industries ("the Company"), to augment their product marketing operations and provide stocking and service capabilities. These manufacturers are relying to an increasing extent on distributors to market their products.
The Company is the fourth largest domestic distributor in sales volume of industrial electronic components and production supplies. Through its network of 37 sales and distribution facilities and 3 corporate support and distribution centers in the United States and Canada, the Company supplies and services a broad range of products, including semiconductors, passive components, connectors and interconnect products, and computer systems and peripheral products, as well as production supplies. The distribution of electronic components accounted for approximately 94% of total Company sales in fiscal 1994 and 1995. The distribution of industrial production supplies accounted for the balance, or 6%, of total Company sales in each of such periods. The Company believes it is the largest domestic distributor in sales volume of industrial production supplies to customers in the electronics industry.
ELECTRONIC COMPONENTS DISTRIBUTION
The distribution of semiconductor products accounted for approximately 70% and 73%, respectively, of total Company sales in fiscal 1994 and 1995. Passive components, connectors and interconnect products accounted for approximately 13% and 11%, respectively, of total Company sales for those periods. Sales of computer systems and peripheral products accounted for approximately 11% and 10%, respectively, of total Company sales in fiscal 1994 and 1995.
Texas Instruments ("TI") is the Company's largest supplier of semiconductor products. TI's semiconductor products accounted for approximately 15% and 14% of total Company sales in fiscal 1994 and 1995, respectively. The Company carries the full range of semiconductor products manufactured by TI and distributes the products of a number of other leading American manufacturers. The Company is also the major distributor in sales volume of Japanese semiconductor products in the United States. Sales of these products accounted for approximately 19% and 22% of total Company sales in fiscal 1994 and 1995, respectively. Additionally, the Company distributes components manufactured by European suppliers, such as Siemens Components, Inc. ("Siemens"), Philips Semiconductors, a North American Philips Company ("Philips"), formerly "Signetics," and SGS-Thomson Microelectronics Inc. ("SGS-Thomson").
The Company purchases electronic components from over 50 major suppliers in the following general categories:
SEMICONDUCTOR PRODUCTS: Semiconductor products include memory, logic and programmable logic devices, microprocessors and microperipheral components. The Company's principal suppliers are Atmel Corporation, Cypress Semiconductor Corporation, Fujitsu, Hitachi, IBM Technology Products, a unit of IBM, Lattice Semiconductor Corporation, Linear Technology, Philips, NEC Electronics, Inc., Siemens, SGS-Thomson, Sony Electronics, Inc., Sharp Electronics Corporation, TI, Toshiba America, Inc., and Xilinx, Inc.
PASSIVE COMPONENTS: The Company distributes passive components, including multilayer ceramic, tantalum and foil capacitors as well as resistor networks. These products are manufactured by such leading suppliers as AVX Corporation, a subsidiary of Kyocera Corporation, and Bourns, Inc.
CONNECTORS AND INTERCONNECT PRODUCTS: Connectors and interconnect products include surface mount sockets and fiber optic systems, along with printed circuit board level connectors. The Company's principal suppliers of connectors and interconnect products are AMP Incorporated and T&B/Ansley Corporation, which rank among the leading suppliers of these products.
COMPUTER SYSTEMS AND PERIPHERALS: The Company's product offerings include printers, keyboards, optical, hard and floppy disk drives, monitors, motherboards for personal computers, power supplies, and other systems components. Computer Products Inc., Fujitsu, IBM Personal Computer Company, NEC Electronics, Inc., Sharp Electronics Corporation, Sony Components Products, and Toshiba America Information Systems, Inc. are the major suppliers of these products to the Company.
VALUE ADDED SERVICES: In addition to the distribution of component parts, the Company provides a variety of value added services to its customers. The Company provides programmable logic array and PROM and EPROM programming, along with certain types of testing services. The Company also packages electronic component kits to customers' specifications ("kitting") and provides cable assembling services. Through the use of third party contractors, the Company provides contract manufacturing capabilities.
PRODUCTION SUPPLIES DISTRIBUTION
The Company believes that it is the largest domestic distributor in sales volume of industrial production supplies to customers in the electronics industry. Such supplies include hand tools, static control products, test equipment, soldering supplies, soldering equipment and work stations. Leading suppliers include CooperTools, a division of Cooper Industries, Kester Solder, a division of Litton Industries, Fluke Corporation, Tektronix, Inc., Loctite Corporation and 3M.
MARKETS
The Company currently has a national distribution network in the United States and Canada consisting of 37 sales and distribution centers and 3 corporate support and distribution centers. The Company believes that it has sales facilities in all of the major electronic products markets in the United States, including the Los Angeles/Orange County, San Francisco/Silicon Valley, Boston, Chicago, Denver, Philadelphia, Portland, Seattle, Connecticut, Florida, New Jersey, Georgia, Maryland, Minnesota, Ohio and Texas areas. In Canada, the Company has sales facilities in Toronto, Montreal and Vancouver. As a result of the Company's marketing strategy and expansion programs, the Company is currently distributing products manufactured by over 50 major electronic component suppliers to approximately 30,000 customers.
As described in Note 6 to the financial statements, the Company has made an investment in Sonepar Electronique International, the third largest electronic component distributor in Europe.
At May 31, 1995, the Company had approximately 1,370 employees, substantially all of whom were employed full-time.
CUSTOMERS AND MARKETING
Distributors offer electronics customers the convenience of immediate price and delivery information, backlog status, diverse off-the-shelf inventories in small and large quantities, rapid deliveries and the financing of their purchases. The Company's electronics distribution business services approximately 30,000 customers, the majority of which are small and medium size companies in the following industries: computers, communications, capital and office equipment, industrial control and medical equipment and systems integration. In recent years, contract manufacturers have also become major customers for electronic component distributors, including the Company, as many original equipment manufacturers ("OEM's") have outsourced their purchasing and manufacturing functions to them. No single customer accounted for more than 4% of the Company's sales during any of the last five fiscal years.
The Company's products are sold by both field and inside sales people. Sales personnel work directly with customers providing price, delivery, backlog and technical information regarding the products which the Company distributes. Each sales and distribution center is electronically linked to the Company's central computer system, which provides fully integrated on-line, real-time data with respect to the Company's nationwide inventory levels. The Company's computer system facilitates the control of purchasing and payables, shipping and receiving, and billing and collections. A salesperson may order shipment of a product from any distribution center within a matter of minutes. The Company has made significant investments, particularly during the last several years, to increase the capabilities of its computerized information systems. In December, 1992, the Company implemented new software for its operating and financial systems. The Company invested approximately $9 million in the design, purchase, and implementation of these systems. In the opinion of the Company, these systems, which were written in a contemporary language and architecture, have the capabilities to support future changes and enhancements required to meet market needs and growth. These systems have also allowed the Company to increase its electronic data interchange ("EDI") capabilities with its suppliers and customers. Due to the high volume of transactions and the cost competitiveness of the electronics components distribution industry, the Company believes that the expansion and upgrading of its information systems will be an ongoing requirement. In July, 1994, the Company introduced an electronic telecommunications service that allows customers to design, engineer and purchase products via the "Internet". In late fiscal 1995, the outside sales staff at certain sales locations were equipped with laptop computers to increase and enhance their productivity and customer service capabilities. The Company plans to complete this field sales automation program in fiscal 1996.
The Company has focused on obtaining franchises with suppliers which are among the leading manufacturers of the product categories that the Company distributes. The Company offers a broad line of products to meet its customers' needs. The Company has also concentrated its inventory and marketing efforts on the following product categories that it believes are the greatest growth areas of the distribution business: (1) high performance memory and programmable logic devices; (2) data conversion products; (3) microprocessors; (4) computer systems and peripherals; (5) printed circuit board level connectors; (6) passive components; and (7) industrial production supplies and instrumentation. Additionally, the Company is focusing on having its sales force sell a balanced mix of all types of products along with expanding its customer base.
RELATIONSHIP WITH SUPPLIERS
The majority of the products sold by the Company are purchased pursuant to distributor agreements. These agreements are typically for terms of one year, renewable annually, non-exclusive, and authorize the Company to sell through its sales and distribution centers all or a portion of the products produced by that manufacturer. These agreements may be cancelled by either party on short notice and generally provide for a return of the manufacturer's inventory upon cancellation. The Company's ten largest suppliers accounted for approximately 54% and 60%, respectively, of total Company sales in fiscal 1994 and 1995. Except for TI, which accounted for 15% and 14% of total Company sales for fiscal 1994 and 1995, no other supplier accounted for
more than 10%. Cancellation of an agreement with, or trade restrictions affecting purchases from, a major supplier could have a material adverse effect upon the Company's business. The Company believes that it has a satisfactory relationship with each of its suppliers. The Company considers its relationships with its Japanese suppliers to be sound. Nonetheless, because of uncertainties relating to U.S. trade issues, the possibility exists that continued access to Japanese products could be affected. In addition, the Company cannot determine the direction of U.S. trade issues or their ultimate effect on the competitive environment and the Company's results.
Most manufacturers of electronic components, including foreign manufacturers, protect authorized distributors, such as the Company, against potential inventory losses from declining prices and obsolescence. To protect its distributors from declining market prices, most electronic component manufacturers allow their distributors pricing adjustments as products are sold to customers as well as credits on unsold inventory when the manufacturers reduce prices on their price lists. In addition, under the terms of many such agreements, the distributor has the right to return to the manufacturer, for credit, any product classified as obsolete by the manufacturer and a specified portion of other inventory items purchased within a designated period of time. A manufacturer who elects to terminate a distribution agreement without cause is generally required to purchase from the distributor the products of such manufacturer carried in the distributor's inventory. While such agreements do not protect the Company totally from inventory losses, such agreements do, in management's opinion, provide substantial protection from such losses. No assurance can be given, however, that such price adjustment and return policies will continue.
To service its kitting and contract manufacturing customers, as described on page 3, the Company must buy a certain amount of products from third parties on a non-franchised basis. Since there are typically no return or price protection privileges on these purchases, there are significantly greater inventory risks associated with kitting and contract manufacturing orders than with the purchase and stocking of inventory pursuant to its franchise agreements.
NATURE OF BUSINESS AND COMPETITION
Although the Company's business is not seasonal to any material extent, its business is affected by the cyclical nature of the electronics industry and overall trends in the general economy. In addition, the Company has experienced industry-wide product shortages and excess supplies from time to time. During the last several months, there has been a tightening of product availability and long lead times for some products, such as certain memory and surface mount devices.
Supplying and servicing the electronics industry is a highly competitive business. The competition is from other large national distributors, numerous local and regional distributors, as well as some of the Company's suppliers. Providing service to customers is the major competitive factor of the industry. In addition to providing basic distribution services such as technical information, product availability and competitive pricing, prompt delivery and credit, the Company offers many sophisticated value added services. These additional services include component testing and assembly; just in time ("JIT") inventory management and delivery systems; kitting and contract assembly. In recent years, the Company has introduced a number of sophisticated automated inventory procurement and management services for its customers through its EDI and auto replenishment programs. The Company considers its emphasis on high-quality customer service, monitored by statistical process control ("SPC") methods, to be one of its strengths.
From time to time, the Company has experienced competition from "unauthorized" U.S. distributors of Japanese semiconductors who purchase these products in foreign countries at prices below those which the Company may purchase such products directly from its suppliers. In addition, a limited number of the Company's customers have moved their manufacturing operations out of the United States in recent years. Such changes have not had a material impact on the Company's business.
Information concerning backlog is not material to an understanding of the Company's business, as the Company's objective is to ship orders on the same day they are received unless the customer has requested a specific future delivery date on an order. Additionally, it is common industry practice for customers, in most cases, to be able to re-schedule or cancel orders with future delivery dates without penalties. In the electronics industry, the book-to-bill ratio, which is the ratio of sales orders received to shipments made, is commonly used as an indicator of business trends. Since late calendar 1991, the book-to-bill ratios for both the industry and the Company have been generally positive.
ITEM 2.
ITEM 2. PROPERTIES
The Company presently has 37 sales and distribution facilities and 3 corporate support and distribution centers. The Company's executive offices and corporate support and distribution center are located in El Monte, California. This facility is Company owned, has 258,000 square feet of space and utilizes an automated inventory handling system. The Company owns an additional 65,500 square foot warehouse and office facility in El Monte.
In addition to the El Monte facilities, a majority of the sales and distribution facilities located in Marshall's major markets are Company owned. The three largest facilities range from approximately 58,000 to approximately 65,000 square feet in size and are located in Milpitas, California; Irvine, California; and Boston, Massachusetts. The Company also owns facilities in Austin, Texas; Endicott, New York; San Diego, California; and Wallingford, Connecticut of approximately 8,000 to 15,000 square feet each.
The Company leases its remaining sales and distribution facilities. They are located in cities throughout the United States and Canada, vary in size depending on sales volume and are subject to leases whose initial terms expire at various dates through fiscal 2000. Substantially all of those leases include renewal provisions.
In the opinion of the Company, the current facilities are adequate for the Company's operating requirements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the quarter ended May 31, 1995.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange under the symbol MI. The following table shows, for the periods indicated, the published closing sale prices per share for the Company's Common Stock.
The above share prices have been adjusted to reflect the two for one stock split paid on February 28, 1994.
The Company had approximately 6,000 shareholders at May 31, 1995. It has never paid a cash dividend. Earnings have been retained to provide for the growth and expansion of the Company's business.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data with respect to the statements of income of the Company for the five fiscal years ended May 31, 1995, and the balance sheets of the Company at year end for each of those years. The selected financial data is derived from financial statements for such years and at such dates as audited by Arthur Andersen LLP, independent public accountants, including the statements of income for the three years ended May 31, 1995, and the balance sheets at May 31, 1994 and 1995 included elsewhere herein.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth items in the statements of income as a percent of net sales for periods shown:
As an aid to understanding the results of operations, the following is a summary of the Company's unaudited quarterly results of operations for fiscal years 1993, 1994 and 1995 (in thousands except for per share data):
All per share amounts have been restated to reflect the two for one stock split paid on February 28, 1994.
FISCAL 1995 COMPARED TO FISCAL 1994
The increase in net sales for fiscal 1995, as compared to fiscal 1994, was due primarily to an increase in the sales volume of semiconductor products. Sales of semiconductor products increased by $157,126,000 primarily as a result of the strong market demand for such products. The sales volume of the Company's other major products increased modestly from the prior year.
The decrease in net margins for fiscal 1995, as compared to fiscal 1994, resulted from market pressures on the pricing of most of the Company's products, including value added products, and an increase in the sales volume of lower margin products, primarily memory products. The Company believes that these conditions affecting margins may continue in the near term.
The increase in selling, general and administrative ("SG & A") expenses, in dollars, for fiscal 1995, as compared to fiscal 1994, was primarily due to higher operating costs to meet the requirements from the significant increase in sales volume. SG & A expenses as a percentage of sales declined to 12% for fiscal 1995 as compared to 14% for fiscal 1994. Of the $5,067,000 increase in SG & A expenses for fiscal 1995, compared to fiscal 1994, approximately $2,200,000 was attributable to higher salaries, incentives and fringe benefits. There were also increases in delivery costs and bad debt expense, mostly due to the higher sales volume.
Interest expense, net of interest income, for fiscal 1995 remained at relatively the same amount as fiscal 1994, as the lower borrowing levels were offset by higher interest rates.
FISCAL 1994 COMPARED TO FISCAL 1993
The increase in net sales for fiscal 1994, as compared to fiscal 1993, was due to an increase in the sales volume of semiconductor products. Sales of semiconductor products increased by $178,237,000 as a result of the strong market demand and additional sales of products from new suppliers. The sales volume of the Company's other major products was relatively unchanged or decreased modestly from the prior year.
The decrease in net margins for fiscal 1994, as compared to fiscal 1993, was due to a decline in the margins of most of the Company's major products. This decline in margins resulted from market pressures on the pricing of many of the Company's products, including some of the Company's value added products, and an increase in the sales volume of lower margin products, such as DRAMS.
The increase in SG & A expenses, in dollars, for fiscal 1994, as compared to fiscal 1993, was primarily due to higher operating costs to support the significant increase in sales volume. In addition, the Company was amortizing $463,000 per quarter of deferred computer software costs associated with its new operating and financial systems that became operational in December, 1992. Fiscal 1994 expenses also included a charge of $890,000 that was recorded in the first quarter related to the costs of the elimination of approximately 120 positions. These positions were eliminated as of August 31, 1993 by a reorganization of the Company's field and corporate support functions. The amounts incurred for the last nine months of fiscal 1994 would have been higher except for the savings from the elimination of these positions. This reorganization reduced the Company's fiscal 1994 expenses by approximately $1,000,000 per quarter beginning the second quarter. Primarily due to the savings from the August, 1993 restructuring and the higher sales volume, SG & A as a percentage of sales declined significantly for fiscal 1994 as compared to fiscal 1993. The SG & A amounts for fiscal 1993 also included some extraordinary levels of expenses related to the Company's conversion to its new computer software systems in December, 1992. The Company estimated that it had incurred approximately $2.4 million to $2.9 million in additional costs, affecting both cost of sales and SG & A expenses in fiscal 1993 associated with the computer software conversion.
Interest expense for fiscal 1994 remained relatively unchanged from fiscal 1993, as lower borrowing levels were offset by higher interest rates beginning in late fiscal 1994.
In August, 1993 the Omnibus Budget Reconciliation Act of 1993 was enacted which essentially increased the Company's Federal tax rate from 34% to 35%. Additionally, as a result of the Act, a retroactive Federal tax adjustment of $163,000, or $.01 per share, was charged to income tax expense in the first quarter of fiscal 1994 for the period of January to May 1993.
INCOME TAXES
During the fourth quarter of fiscal year 1993, the Company implemented Statement of Financial Accounting Standards No. 109 covering income tax accounting. The adoption did not have a material impact on the financial statements for fiscal year 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been able to fund its working capital requirements for the past five years through cash flow from operations and bank borrowings.
For the five years ended May 31, 1995, the Company incurred approximately $14 million in net aggregate capital expenditures. Costs incurred to upgrade and expand the Company's computer system and the acquisition and construction of several facilities accounted for a significant portion of the capital expenditures for the last five years. Additionally, the Company incurred approximately $9 million for the design, purchase and development of new computer software for its operating and financial systems during fiscal years 1990 to 1993.
The Company's sources of liquidity at May 31, 1995 consisted principally of working capital of $254,394,000 and unsecured bank credit lines of $70,000,000, of which $20,000,000 in borrowings were outstanding. The Company believes that its working capital, borrowing capabilities, and the funds generated from operations should be sufficient to finance its anticipated operational requirements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Marshall Industries:
We have audited the accompanying balance sheets of Marshall Industries (a California corporation) as of May 31, 1994 and 1995, and the related statements of income, shareholders' investment and cash flows for each of the three years in the period ended May 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Marshall Industries as of May 31, 1994 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP Los Angeles, California July 21, 1995
Marshall Industries BALANCE SHEETS May 31, 1994 and 1995 (Dollars in thousands)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
Marshall Industries STATEMENTS OF INCOME For the Years Ended May 31, 1993, 1994 and 1995 (In thousands except per share data)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
Marshall Industries STATEMENTS OF SHAREHOLDERS' INVESTMENT For the Years Ended May 31, 1993, 1994 and 1995 (Dollars in thousands)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
Marshall Industries STATEMENTS OF CASH FLOWS For the Years Ended May 31, 1993, 1994 and 1995 (In thousands)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
Marshall Industries NOTES TO FINANCIAL STATEMENTS May 31, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition: Sales are recognized at the time of product shipment.
Depreciation and Amortization: Depreciation on buildings is computed using the straight-line method over useful lives of 25 years. Building and leasehold improvements are amortized on the straight-line method over the shorter of the lives of the buildings or the remaining terms of the leases or useful lives of the assets. Depreciation on all other plant and equipment is computed on the straight-line and declining balance methods over useful lives of two to ten years. Maintenance and repairs and minor replacements of property are charged to expense when incurred. Major expenditures for additions and improvements are capitalized at cost. When assets are retired, or otherwise disposed of, the cost and related reserves are removed from the accounts, and any resulting gain or loss is included in income.
Interest Expense: Interest income of $1,180,000 is netted against interest expense in fiscal 1995. Interest income was not material in fiscal 1994 and 1993.
Tax Deferred Profit Sharing Plan: Under the provisions of the Marshall Industries Tax Deferred Profit Sharing Plan (the "Plan"), participating employees may agree to defer from two to twelve percent, with certain limitations, of their earnings each payroll period, and such amount is deposited in a nonforfeitable, fully vested trust account for the employees' benefit. The Company contributes quarterly an amount equal to 50 percent of the employees' contributions, limited to 3% of such employee earnings for the quarter, reduced by employee forfeitures of prior Company contributions. Company contributions may be limited to the extent of net profits and must be invested in the Company's common stock. The Plan, however, may not own more than 20 percent of the Company's outstanding shares. At May 31, 1995, the Plan owned less than 2% of the Company's outstanding shares. Company contributions and expenses related to the Plan amounted to $952,000 in 1993, $1,125,000 in 1994 and $1,141,000 in 1995.
Income Taxes: As discussed in Note 3, during fiscal 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted tax rates.
Cash and Accounts Payable: The Company's banking system provides for the daily replenishment of its bank accounts for check clearing requirements. Accordingly, outstanding checks of $11,015,000 and $11,169,000 that had not yet been paid by the Company's banks at May 31, 1994 and 1995, respectively, are reflected in cash and accounts payable in the accompanying financial statements.
Inventories: The Company values its inventories at the lower of average cost or market.
Shareholders' Investment: The Company has authorized 200,000 shares of no par value preferred stock, of which none was outstanding at May 31, 1994 or 1995.
Capitalized Deferred Software Costs: Deferred software costs are included in other assets and represent payments to vendors for the design, purchase and implementation of the computer software for the Company's operating and financial systems. Such deferred costs, aggregating to $10,088,000, are amortized over periods not to exceed five years. At May 31, 1994 and 1995, the accumulated amortization of such costs were $2,778,000 and $5,084,000, respectively.
Net Income Per Share: Per share amounts are computed on the basis of weighted average common and common equivalent shares outstanding (17,278,000 in 1993, 17,357,000 in 1994, and 17,439,000 in 1995). Common equivalent shares include the dilutive effect of outstanding stock options, if applicable. All share and per share data included in these financial statements have been restated to reflect the two for one stock split paid on February 28, 1994.
Reclassifications: Certain prior year amounts have been reclassified to conform with the 1995 presentation.
(2) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
Bank credit lines --
The Company has revolving credit line agreements with two major banks to borrow up to $70,000,000 in the aggregate. These unsecured credit line agreements, with borrowing limits of up to $40,000,000 and $30,000,000 each, mature on December 31, 1995 and 1996, respectively. The interest rates under these credit lines are determined at the time of borrowing based on a choice of options as specified in the agreements. The options range from floating rates of LIBOR, IBOR, certificate of deposit, or banker's acceptance plus 1/2%, up to prime rate. At May 31, 1995, the prime rate was 9.0%. A commitment fee is payable based on 1/4% per annum on the daily average unused amounts of the lines of credit. In addition, both banks require a facility fee of 1/8% per annum on the commitment balance. There are no compensating balance requirements.
The terms of these credit agreements require the Company, among other things, to maintain a minimum net worth of $170,000,000 which is adjusted upward quarterly by 70 percent of net income and 70 percent of net proceeds from any sales of capital stock or subordinated debentures. At May 31, 1995, at least $231,033,000 of shareholders' investment was required to meet this covenant. The credit agreements also require the Company to meet certain specified working capital and financial ratios and not to make capital expenditures or incur lease liabilities in excess of certain specified amounts. The Company is in compliance with all conditions and covenants of these agreements.
Subsequent to May 31, 1995, the Company agreed in principle to amend one of its credit line agreements to extend its maturity date and replace the other agreement with a new agreement with a major bank. The maturity date of the amended and new agreements will be September 30, 1998. All of the major terms and conditions of the amended and new agreements are similar to the Company's current agreements. The amended and new agreements will provide the Company a total borrowing capacity of $55,000,000. This reduction in the total credit capacity was due to the Company's anticipated lower borrowing requirements.
Term loan --
In August 1994, the Company obtained an unsecured term loan in the amount of $25,000,000 with principal repayment due on September 30, 1997. The Company has the option of repaying the loan, or a portion thereof, prior to the maturity date. The interest rate on the loan is based on the 90 day LIBOR rate plus 1/2%. At May 31, 1995 the interest rate on the loan was 5.75%. The term loan agreement requires the Company to maintain a minimum net worth ($225,502,000 at May 31, 1995) and to meet certain specified working capital and financial ratios. The agreement prohibits capital expenditures in excess of specified amounts and issuance of debt, guarantees, loans or advances beyond specified amounts. The Company is in compliance with all conditions and covenants of the term loan agreement.
Industrial revenue bonds --
The industrial revenue bonds are secured by real property with a net book value of $2,985,000 at May 31, 1995.
Maturities of long-term debt --
Long-term debt at May 31, 1995 based on the amended terms is payable in succeeding fiscal years as follows: 1996 $410,000; 1997 $205,000; 1998 $25,000,000; 1999 $20,000,000.
The Company's bank credit lines, term loan and industrial revenue bonds approximate fair value as they bear floating interest rates.
(3) INCOME TAXES
The Company adopted the provisions of SFAS No. 109 effective in fiscal year 1993. The adoption of this Standard did not have a material effect on the financial statements for fiscal year 1993.
The provision (benefit) for income taxes consists of the following (in thousands):
The difference between the income tax provision at the Federal statutory rate and the recorded income tax provision is reconciled as follows (in thousands):
As of May 31, 1994 and 1995, deferred tax assets (liabilities) were comprised of the following (in thousands):
As of May 31, 1995, the Company had total deferred tax assets of $10,216,000 and total deferred tax liabilities of $4,524,000. The Company did not record any valuation allowances against deferred tax assets at May 31, 1995.
(4) COMMITMENTS AND CONTINGENCIES
Lease Commitments: The Company leases certain facilities and equipment under operating leases expiring at various dates through fiscal year 2001. The aggregate rent expense for all operating leases was $2,618,000 in 1993, $2,324,000 in 1994 and $2,665,000 in 1995.
The future minimum lease payments under all leases are shown below (in thousands):
Litigation: There are no material pending legal proceedings to which the Company is a party.
(5) STOCK OPTIONS
The Company has one active stock option plan which provides for the granting of incentive and nonqualified stock options covering 2,040,000 shares of common stock. There were three other plans, which are inactive, during the periods reported. Nonqualified stock options may have an exercise price which is less than market value at the date of grant; incentive stock options must have an exercise price equal to market value at the date of grant. There were 50,000 and 40,000 options granted in fiscal 1994 and 1995, respectively, at exercise prices ranging from $24.00 to $27.875 per share. No options were granted during fiscal 1993. At May 31, 1995, 280,500 shares were available for additional grants.
The following is a summary of changes in outstanding options for the Company's stock option plans for the year ended May 31, 1995:
The difference between the quoted market value of the shares at the date of grant and the option price for grants made under the nonqualified plans is charged to income as compensation expense over the vesting periods of the related options. During fiscal 1993, 1994 and 1995, $215,000, $103,000 and $92,000, respectively, were charged against income and credited to additional paid-in capital under these plans. Options granted are exercisable over a period of ten to twenty years. The income tax effect of any difference between the market price at the grant date and the market price at the exercise date is credited to additional paid-in capital as the options are exercised.
(6) INVESTMENT IN SONEPAR ELECTRONIQUE INTERNATIONAL
In August, 1994, the Company invested 151 million French Francs ($27.9 million in U.S. dollars) in Sonepar Electronique International ("SEI"), one of the three largest electronic component distributors in Europe. This investment is in the form of an interest bearing, convertible note, guaranteed by a major French bank as to default. The interest on the note is the same as the Company's borrowing rates under its unsecured term loan, as described in Note 2. The note plus accrued interest will be converted in 1997 into a minority equity interest of up to 20% in SEI if certain anticipated sales and pre-tax income goals are met. If these goals are not met, the Company will have the option to call for the repayment in U.S. dollar equivalent of the original loan (plus accrued interest) or to convert the loan into a 20% equity interest in SEI. Following the conversion, SEI will have a 2 year option to purchase an equivalent amount in U.S. dollars of the Company's stock of up to 5% of the Company's outstanding shares on a fully diluted basis. The option price will be based on market prices at the time of conversion. In addition, the Company will have the option of increasing its equity investment to 49% in SEI. To finance its investment in SEI, the Company obtained an unsecured term loan in the amount of $25,000,000 (Note 2).
(7) BUSINESS SEGMENT
The Company is engaged in the distribution of industrial electronic components and production supplies through a nationwide network of sales and distribution facilities. In the opinion of management, the Company's products are identifiable to only one industry segment.
The Company's Canadian operations are currently not material to its results of operations or financial position.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
Marshall will file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A involving the election of directors. The Proxy Statement for the Annual Meeting of Shareholders to be held on October 24, 1995 is incorporated herein by this reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS -- The following financial statements of Marshall Industries are set forth in Item 8 of this Annual Report on Form 10-K:
(A) 2. FINANCIAL STATEMENT SCHEDULES -- All schedules are omitted since they are not applicable, not required, or the required information is included in the financial statements or notes thereto.
(A) 3. EXHIBITS -- The following exhibits are attached to this Annual Report on Form 10-K:
(B) REPORTS ON FORM 8-K -- Marshall has not filed any reports on Form 8-K during the quarter ended May 31, 1995
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, Marshall has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MARSHALL INDUSTRIES
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.
INDEX TO EXHIBITS