NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
AS
OF AND
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 and 2005
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 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, 2007 and December 31, 2006, cash equivalents approximated $33.4
million and $35.8 million, respectively.
MARKETABLE
SECURITIES
-
The
Company generally classifies its equity securities as "available for sale",
and
accordingly, reflects unrealized gains and losses, net of deferred income taxes,
as a component of accumulated other comprehensive income.
In
accordance with Financial Accounting Standards Board (“FASB”) Staff Position
Nos. FAS 115-1 and FAS 124-1 “The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments” (“FSP 115-1”), the Company periodically
reviews its marketable securities and determines whether the investments are
other-than-temporarily impaired. If the investments are deemed to be
other-than-temporarily impaired, the investments are written down to their
then
current fair market value. See Note 4 for further discussion regarding an
impairment charge taken in the fourth quarter of 2007.
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.
ACQUISITION
EXPENSES
-
The
Company currently capitalizes all direct costs associated with proposed
acquisitions. If the proposed acquisition is 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.
Effective January 1, 2009, acquisition-related costs, including restructuring
costs, will be recognized separately from the acquisition and will generally
be
expensed as incurred in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 141(R), “Business Combinations”.
FOREIGN
CURRENCY TRANSLATION
-
The
functional currency for some foreign operations is the local currency. Assets
and liabilities of foreign operations are translated at exchange rates as of
the
balance sheet date, and income, expense and cash flow items are translated
at
the average exchange rate for the applicable 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.
Realized
foreign currency losses were ($0.2) million for the year ended December 31,
2006, and have been expensed as a component of selling, general and
administrative expense in the consolidated statement of operations. Realized
foreign currency gains (losses) for the years ended December 31, 2007 or 2005
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. In December
2007,
the Company was notified that a $25.7 million investment in the Columbia
Strategic Cash Portfolio was being liquidated and the fund was converting from
a
fixed net asset value (NAV) to a floating NAV. As a result, the Company recorded
a $0.3 million impairment charge in the fourth quarter of 2007. See Note 4
for
additional information regarding this liquidation.
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". 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 reasonably assured 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.
DDP
is defined as Delivered Duty Paid by the Company and DDU is Delivered Duty
Unpaid by the Company.
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
.
During
all periods in 2007, 2006 and 2005, inventory on consignment was
immaterial.
The
Company typically has a twelve-month warranty policy for workmanship defects.
During June 2007, the Company established a warranty accrual related to certain
defective parts sold to a customer primarily within the same quarter, which
the
Company is replacing, in the amount of approximately $1.2 million, which
included a $0.4 million inventory write off of inventory on hand. Such accrual
has been classified within cost of sales. As of December 31, 2007, the Company
has a remaining warranty accrual related to these defective parts in the amount
of $0.9 million. The Company believes that this liability will be utilized
in
2008. As the Company has not historically had significant warranty claims,
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 sales and provided for at the time
revenue is recognized.
GOODWILL
- The
Company tests goodwill for impairment annually during the 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.
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.
For
that
portion of foreign earnings that have not been repatriated, 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 deferred gains on property
sales, unrealized gains/losses on marketable securities available for sale,
foreign tax credits, the use of accelerated depreciation methods for machinery
and equipment, timing differences between book and tax amortization of
intangible assets and goodwill and certain expenses including the SERP which
have been deducted for financial reporting purposes which are not currently
deductible for income tax purposes.
Effective
January 1, 2007, uncertain tax positions are accounted for in accordance with
FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes.” See
Note 8 for further discussion.
EARNINGS
PER SHARE
- The
Company utilizes the two-class method to report its earnings per share. The
two-class method is an earnings allocation formula that determines earnings
per
share for each class of common stock according to dividends declared and
participation rights in undistributed earnings. The Company’s Certificate of
Incorporation, as amended, states that Class B common shares are entitled to
dividends at least 5% greater than dividends paid to Class A common shares,
resulting in the two-class method of computing earnings per share. In computing
earnings per share, the Company has allocated dividends declared to Class A
and
Class B based on amounts actually declared for each class of stock and 5% more
of the undistributed earnings have been allocated to Class B shares than to
the
Class A shares on a per share basis. 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, for
each class of common stock, 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 for Class A and B common shares which, if
exercised, would have a dilutive effect on earnings per share.
The
earnings and weighted average shares outstanding used in the computation of
basic and diluted earnings per share are as follows (dollars in thousands,
except share and per share data):
|
|
2007
|
|
2006
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
26,336
|
|
$
|
25,203
|
|
$
|
20,233
|
|
Less
Dividends declared:
|
|
|
|
|
|
|
|
|
|
|
Class
A
|
|
|
534
|
|
|
431
|
|
|
431
|
|
Class
B (1)
|
|
|
2,217
|
|
|
1,810
|
|
|
1,760
|
|
Undistributed
earnings
|
|
$
|
23,585
|
|
$
|
22,962
|
|
$
|
18,042
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed
earnings allocation - basic:
|
|
|
|
|
|
|
|
|
|
|
Class
A undistributed earnings
|
|
$
|
5,039
|
|
$
|
5,061
|
|
$
|
4,080
|
|
Class
B undistributed earnings
|
|
|
18,546
|
|
|
17,901
|
|
|
13,962
|
|
Total
undistributed earnings
|
|
$
|
23,585
|
|
$
|
22,962
|
|
$
|
18,042
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed
earnings allocation - diluted:
|
|
|
|
|
|
|
|
|
|
|
Class
A undistributed earnings
|
|
$
|
5,030
|
|
$
|
5,041
|
|
$
|
4,051
|
|
Class
B undistributed earnings
|
|
|
18,555
|
|
|
17,921
|
|
|
13,991
|
|
Total
undistributed earnings
|
|
$
|
23,585
|
|
$
|
22,962
|
|
$
|
18,042
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings allocation - basic:
|
|
|
|
|
|
|
|
|
|
|
Class
A undistributed earnings
|
|
$
|
5,573
|
|
$
|
5,492
|
|
$
|
4,511
|
|
Class
B undistributed earnings
|
|
|
20,763
|
|
|
19,711
|
|
|
15,722
|
|
Net
earnings
|
|
$
|
26,336
|
|
$
|
25,203
|
|
$
|
20,233
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings allocation - diluted:
|
|
|
|
|
|
|
|
|
|
|
Class
A undistributed earnings
|
|
$
|
5,564
|
|
$
|
5,472
|
|
$
|
4,482
|
|
Class
B undistributed earnings
|
|
|
20,772
|
|
|
19,731
|
|
|
15,751
|
|
Net
earnings
|
|
$
|
26,336
|
|
$
|
25,203
|
|
$
|
20,233
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Class
A - basic and diluted
|
|
|
2,637,409
|
|
|
2,702,677
|
|
|
2,702,677
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
B - basic
|
|
|
9,244,198
|
|
|
9,104,897
|
|
|
8,807,498
|
|
Dilutive
impact of stock options and
|
|
|
|
|
|
|
|
|
|
|
unvested
restricted stock awards
|
|
|
21,818
|
|
|
44,548
|
|
|
83,083
|
|
Class
B - diluted
|
|
|
9,266,016
|
|
|
9,149,445
|
|
|
8,890,581
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
Class
A - basic
|
|
$
|
2.11
|
|
$
|
2.03
|
|
$
|
1.67
|
|
Class
A - diluted
|
|
$
|
2.11
|
|
$
|
2.03
|
|
$
|
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
B - basic
|
|
$
|
2.25
|
|
$
|
2.16
|
|
$
|
1.79
|
|
Class
B - diluted
|
|
$
|
2.24
|
|
$
|
2.15
|
|
$
|
1.77
|
|
(1)
|
Includes
dividends on restricted shares which were expensed in the fourth
quarter
of 2007
|
During
the years ended December 31, 2007, 2006 and 2005, respectively, 14,000, 14,000,
and 20,000 outstanding options were not included in the foregoing computations
for Class B common shares because they were antidilutive.
STOCK-BASED
COMPENSATION
- The
Company has one stock-based compensation plan under which both incentive
stock-options and restricted stock awards are granted to employees and
directors. Effective January 1, 2006, the Company accounts for stock-based
compensation under SFAS No. 123 (R), "Share-Based Payment". The Company adopted
SFAS 123(R) using the modified prospective method. Under modified prospective
application, SFAS 123(R) applies to new awards and to awards modified,
repurchased, or cancelled after the required effective date. Additionally,
compensation costs for the portion of the awards for which the requisite service
has not been rendered that are outstanding as of the required effective date
are
being recognized as the requisite service is rendered after the required
effective date. The compensation cost for the portion of awards is based on
the
grant-date fair value of those awards as calculated for either recognition
or
pro forma disclosures under SFAS 123. Changes to the grant-date fair value
of
equity awards granted before the required effective date of this Statement
are
precluded. The compensation cost for those earlier awards is attributed to
periods beginning on or after the required effective date of SFAS 123(R) using
the attribution method that was used under SFAS 123, except that the method
of
recognizing forfeitures only as they occur was not continued.
During
the years ended December 31, 2007, 2006 and 2005, the Company issued 74,200,
21,600 and 152,400 class B common shares, respectively, under a restricted
stock
plan to various employees and directors. For additional information regarding
the accounting treatment and effect on the Consolidated Financial Statements
see
Note 13 of Notes to the Consolidated Financial Statements.
Prior
to
January 1, 2006, the Company accounted for stock option grants issued to
employees in accordance with Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees", and had adopted the disclosure
only
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation", as
amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of FASB Statement No. 123”. As such, for periods prior
to January 1, 2006, the Company presents pro forma net earnings and earnings
per
share as if the fair-value-based method of accounting had been applied under
SFAS No. 123 (dollars in thousands, except per share data).
|
|
Year
Ended
|
|
|
|
December
31, 2005
|
|
Net
earnings - as reported
|
|
$
|
20,233
|
|
Add:
Stock-based compensation
|
|
|
|
|
expense
included in net earnings,
|
|
|
|
|
net
of taxes, as reported
|
|
|
179
|
|
Deduct:
Total stock-based
|
|
|
|
|
employee
compensation expense
|
|
|
|
|
determined
under fair value based
|
|
|
|
|
method
for all awards,
|
|
|
|
|
net
of taxes
|
|
|
(643
|
)
|
Net
earnings- pro forma
|
|
$
|
19,769
|
|
Earnings
per Class A common share -
|
|
|
|
|
basic-as
reported
|
|
$
|
1.67
|
|
Earnings
per Class A common share -
|
|
|
|
|
basic-pro
forma
|
|
$
|
1.63
|
|
Earnings
per Class A common share -
|
|
|
|
|
diluted-as
reported
|
|
$
|
1.67
|
|
Earnings
per Class A common share -
|
|
|
|
|
diluted-pro
forma
|
|
$
|
1.63
|
|
Earnings
per Class B common share -
|
|
|
|
|
basic-as
reported
|
|
$
|
1.79
|
|
Earnings
per Class B common share -
|
|
|
|
|
basic-pro
forma
|
|
$
|
1.74
|
|
Earnings
per Class B common share -
|
|
|
|
|
diluted-as
reported
|
|
$
|
1.77
|
|
Earnings
per Class B common share -
|
|
|
|
|
diluted-pro
forma
|
|
$
|
1.73
|
|
No
options were granted during the years ended December 31, 2007, 2006 and
2005.
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, 2007, 2006
and 2005 amounted to $7.2 million, $6.6 million and $7.3 million, respectively.
EVALUATION
OF LONG-LIVED ASSETS
-
The
Company reviews property and equipment and finite-lived intangible assets 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.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
-
For
financial instruments, including cash and cash equivalents, marketable
securities, accounts receivable, accounts payable and accrued expenses, the
carrying amount approximates fair value because of the short maturities of
such
instruments.
RECLASSIFICATIONS
-
Certain reclassifications have been made to prior period amounts to conform
to
the current year presentation, principally
in
the
detailed disclosures within the footnote pertaining to Property, Plant and
Equipment
.
NEW
FINANCIAL ACCOUNTING STANDARDS
In
July
2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in
Income Taxes” ("FIN 48"). The interpretation requires a two step approach for
recognizing and measuring tax benefits based on a recognition threshold of
“more
likely than not”. The FASB also requires explicit disclosures about
uncertainties in tax positions including a detailed rollforward of tax benefits
that do not qualify for financial statement recognition. The adoption of FIN
48
is effective for fiscal years beginning after December 15, 2006. On January
1,
2007, the Company implemented FIN 48. At that date, the Company’s liability for
uncertain tax positions amounted to $12.4 million, of which $7.2 million was
classified as a noncurrent liability and the remainder was classified as a
current liability as a component of income tax payable. There was no charge
to
equity upon adoption. For additional information regarding the accounting
treatment and effect of FIN 48, see Note 8 of Notes to the Consolidated
Financial Statements.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Post Retirement Plans”, an amendment of FASB
Statements No. 87, 88, 106 and 132(R). SFAS 158 requires employers to recognize
their defined benefit plans’ overfunded or underfunded status in their balance
sheets, requires employers to measure plan assets and plan obligations as of
the
balance sheet date, immediately recognize any remaining transition obligation
currently being deferred, and recognize actuarial gains and losses through
other
comprehensive income. The statement is effective for fiscal years ending after
December 15, 2006. For additional information regarding the accounting treatment
and effect on the Consolidated Balance Sheet of SFAS No.
158,
see Note
12 of Notes to the Consolidated Financial Statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which
enhances existing guidance for measuring assets and liabilities using fair
value. This Standard provides a single definition of fair value, together with
a
framework for measuring it, and requires additional disclosure about the use
of
fair value to measure assets and liabilities.
SFAS
No.
157, as amended by FASB Staff Position 157-2, is effective for financial
statements issued for fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years. The Company does not believe that
SFAS No. 157 will have a material impact on its financial
statements.
In
February 2007, the FASB issued SFAS No. 159 (“SFAS 159”) “The Fair Value Option
for Financial Assets and Financial Liabilities”, providing companies with an
option to report selected financial assets and liabilities at fair value. The
Standard’s objective is to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets
and liabilities differently. It also requires entities to display the fair
value
of those assets and liabilities for which the Company has chosen to use fair
value on the face of the balance sheet. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company does not believe that SFAS No.
159 will have a material impact on its financial statements.
In
June
2007, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-3,
"Accounting for Nonrefundable Advance Payments for Goods or Services Received
for Use in Future Research and Development Activities," which is effective
for
calendar year companies on January 1, 2008. The Task Force concluded that
nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities should be deferred
and
capitalized. Such amounts should be recognized as an expense as the related
goods are delivered or the services are performed, or when the goods or services
are no longer expected to be provided. The Company is currently assessing the
potential impact of implementing this standard.
In
December 2007, the FASB issued SFAS 141(R), which replaces SFAS 141 “Business
Combinations”. This statement is intended to improve the relevance, completeness
and representational faithfulness of the information provided in financial
reports about the assets acquired and the liabilities assumed in a business
combination. This Statement requires an acquiror to recognize the assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that
date,
with limited exceptions specified in the Statement. Under SFAS 141(R),
acquisition-related costs, including restructuring costs, must be recognized
separately from the acquisition and will generally be expensed as incurred.
That
replaces SFAS 141’s cost-allocation process, which required the cost of an
acquisition to be allocated to the individual assets acquired and liabilities
assumed based on their estimated fair values. SFAS 141(R) shall be applied
prospectively to business combinations for which the acquisition date is on
or
after the beginning of the first annual report period beginning on or after
December 15, 2008. The Company will implement this statement in
2009.
In
December 2007, the FASB issued SFAS No. 160 (“SFAS 160”) “Noncontrolling
Interests in Consolidated Financial Statements”, which is effective on January
1, 2009 for calendar year companies. SFAS 160 amends ARB 51 to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It also amends certain
of ARB 51’s consolidation procedures for consistency with the requirements of
SFAS 141(R).
The
Company does not believe that SFAS 160 will have a material impact on its
financial statements.
On
June
30, 2005, the Company acquired the common stock of Netwatch s.r.o., located
in
Prague, the Czech Republic, for approximately $1.9 million in
cash
,
of
which
$0.5
million was due to the sellers and was paid by the Company during June 2006.
Netwatch s.r.o. is a designer and manufacturer of high-performance fiber optic
and copper cable assemblies for data and telecommunication applications.
Approximately $1.0 million of goodwill arose from the transaction which
goodwill
is
included in the Company’s European reporting unit.
The
acquisition has been accounted for using the purchase method of accounting
and,
accordingly, the results of operation of Netwatch s.r.o. have been included
in
the Company’s consolidated financial statements from June 30, 2005.
There
was
no in process research and development acquired as part of this
acquisition.
On
March
22, 2005, the Company acquired the common stock of Galaxy Power Inc. ("Galaxy"),
located in Westborough, Massachusetts, for approximately $19.0 million in cash
including transaction costs of approximately $0.4 million. Galaxy is a designer
and manufacturer of high-density DC-DC converters for distributed power and
telecommunication applications. The purchase price has been allocated to both
tangible and intangible assets and liabilities based on estimated fair values
after considering an independent formal appraisal. Approximately $11.5 million
of goodwill and $2.6 million of identifiable intangible assets arose from the
transaction and are included in the Company’s North American reporting unit. The
identifiable intangible assets and related deferred tax liabilities are being
amortized on a straight-line basis over their estimated useful lives.
The
acquisition has been accounted for using the purchase method of accounting
and,
accordingly, the results of operations of Galaxy have been included in the
Company's consolidated financial statements from March 22, 2005.
There
was
no in process research and development acquired as part of this
acquisition.
The
following unaudited pro forma summary results of operations assume that Galaxy
and Netwatch s.r.o. had been acquired as of January 1, 2005 (dollars in
thousands, except per share data):
|
|
Year
Ended
|
|
|
|
December
31, 2005
|
|
Net
sales
|
|
$
|
221,227
|
|
Net
earnings
|
|
|
20,026
|
|
Earnings
per share - diluted
|
|
|
|
|
Class
A
|
|
|
1.65
|
|
Class
B
|
|
|
1.75
|
|
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,
2005.
Such
information should not be construed as a representation of the future results
of
operations of the Company.
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.
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 1 to 10 years. Amortization expense was $0.8 million,
$1.8 million and $2.6 million for the years ended December 31, 2007, 2006 and
2005, respectively.
Under
the
terms of the E-Power LTD (“E-Power”) and Current Concepts, Inc. (“Current
Concepts”) acquisition agreements of May 11, 2001, the Company was 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
was
to
be paid
$2.0 million in contingent purchase price payments if sales
reached
$15.0
million and an additional $4.0 million if sales
reached
$25.0
million on a cumulative basis through May 2007. During January 2006, the $2.0
million of contingent purchase price consideration was earned by
E-Power
and
during
February
2006, E-Power was paid $2.0 million in contingent purchase price
payments
.
During
September 2006, an
additional $4.0 million was
earned
when
sales reached $25.0 million on a cumulative basis
and,
as
a
result, $4.0 million was paid in November 2006, and accounted for as additional
purchase price and as an increase to goodwill. No additional payments will
be
made under the E-Power agreement.
Current
Concepts
was
to
be
paid 16%
of the first $10.0 million in sales through May 2007. This $10.0 million
benchmark was reached during the second quarter of 2006.
During
the years ended December 31, 2006 and 2005, the Company paid approximately
$0.4
million and $0.5 million, respectively, in contingent purchase price payments
to
Current Concepts. The contingent purchase price payments for Current Concepts
were accounted for as additional purchase price and as an increase to covenants
not to compete within intangible assets when such payment obligations were
incurred. No additional payments will be made under the Current Concepts
agreement.
The
changes in the carrying value of goodwill classified by geographic reporting
units, net of accumulated amortization, for the years ended December 31, 2007
and 2006 are as follows (dollars in thousands):
|
|
Total
|
|
Asia
|
|
North
America
|
|
Europe
|
|
Balance,
January 1, 2006
|
|
$
|
22,428
|
|
$
|
6,407
|
|
$
|
14,413
|
|
$
|
1,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
related to contingent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
purchase
price payments
|
|
|
6,000
|
|
|
6,000
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
price adjustment -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reclassification
to intangible assets
|
|
|
(670
|
)
|
|
-
|
|
|
(670
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
purchase price and foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exchange
adjustments
|
|
|
359
|
|
|
-
|
|
|
323
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
28,117
|
|
|
12,407
|
|
|
14,066
|
|
|
1,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange
|
|
|
330
|
|
|
-
|
|
|
-
|
|
|
330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2007
|
|
$
|
28,447
|
|
$
|
12,407
|
|
$
|
14,066
|
|
$
|
1,974
|
|
The
components of intangible assets other than goodwill by geographic reporting
unit
are as follows (dollars in thousands):
December
31, 2007
|
|
|
|
Total
|
|
Asia
|
|
North
America
|
|
|
|
Gross
Carrying
|
|
Accumulated
|
|
Gross
Carrying
|
|
Accumulated
|
|
Gross
Carrying
|
|
Accumulated
|
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortization
|
|
Patents
and Product
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information
|
|
$
|
2,750
|
|
$
|
2,385
|
|
$
|
2,468
|
|
$
|
2,150
|
|
$
|
282
|
|
$
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
|
1,830
|
|
|
1,014
|
|
|
-
|
|
|
-
|
|
|
1,830
|
|
|
1,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,580
|
|
$
|
3,399
|
|
$
|
2,468
|
|
$
|
2,150
|
|
$
|
2,112
|
|
$
|
1,249
|
|
December
31, 2006
|
|
|
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
|
|
$
|
2,251
|
|
$
|
2,653
|
|
$
|
2,044
|
|
$
|
282
|
|
$
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
|
1,830
|
|
|
648
|
|
|
-
|
|
|
-
|
|
|
1,830
|
|
|
648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covenants
not-to-compete
|
|
|
5,300
|
|
|
5,274
|
|
|
4,500
|
|
|
4,500
|
|
|
800
|
|
|
774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,065
|
|
$
|
8,173
|
|
$
|
7,153
|
|
$
|
6,544
|
|
$
|
2,912
|
|
$
|
1,629
|
|
Estimated
amortization expense for intangible assets for the next five years is as follows
(dollars in thousands):
Year
Ending
|
|
Amortization
|
|
December
31,
|
|
Expense
|
|
2008
|
|
$
|
536
|
|
2009
|
|
|
432
|
|
2010
|
|
|
131
|
|
2011
|
|
|
24
|
|
2012
|
|
|
10
|
|
The
weighted-average estimated life of each major intangible asset class as of
December 31, 2007 is as follows:
|
|
Weighted-Average
|
Intangible
Asset
|
|
Estimated
Life
|
Patents
and product information
|
|
1.3
years
|
Customer
relationships
|
|
2.2
years
|
The
weighted-average amortization period of the Company’s intangible assets at
December 31, 2007 is 1.7 years.
4.
MARKETABLE
SECURITIES
At
December 31, 2007, the Company has an investment consisting of a private
placement of units of beneficial interest in the Columbia Strategic Cash
Portfolio (the “Columbia Portfolio”), which is an enhanced cash fund sold as an
alternative to money-market funds. Since June 2007, the Company has invested
a
portion of its cash balances on hand in this fund; during the second and third
quarters of 2007, the amounts were appropriately classified as cash equivalents
in the consolidated balance sheet as the fund was considered both short-term
and
highly liquid in nature. These investments are subject to credit, liquidity,
market and interest rate risk. For example, the Columbia Portfolio includes
investments in certain asset backed securities and structured investment
vehicles that are collateralized by sub-prime mortgage securities or related
to
mortgage securities, among other assets. As a result of adverse market
conditions that have unfavorably affected the fair value and liquidity
availability of collateral underlying the Columbia Portfolio, the Columbia
Portfolio was overwhelmed with withdrawal requests from investors and it was
closed with a restriction placed upon the cash redemption ability of its holders
in the fourth quarter of 2007.
At
that
time, the Company had $25.7 million invested in this fund, including $0.7
million of reinvested interest.
As
such,
the Company redesignated the Columbia Portfolio units from cash equivalents
to
short-term investments or long-term investments based upon the liquidation
schedule provided by the fund.
On
December 21, 2007, the Company received a cash payment of $2.3 million as
redemption for 2,311,635 shares (9%). A realized loss of less than $0.1 million
was recorded and is included in Gain on Sale of Marketable Securities, net
in
the accompanying Statement of Operations for the year ended December 31, 2007.
At December 31, 2007, the closing net asset value (“NAV”) of the Columbia
Portfolio was $0.9874. Subsequent to the Company’s December 31, 2007 year end
and through February 29, 2008, the Company has received additional cash
redemptions of $7.8 million at approximately $.9857 per unit.
As
a
result of these circumstances, the Company deemed a portion of its carrying
value in the Columbia Portfolio to be other-than-temporarily impaired at
December 31, 2007. Accordingly, the Company wrote down the carrying value of
the
investments to their then current market value at December 31, 2007 and the
reduction in value of $0.3 million was recorded as an impairment charge during
the fourth quarter of 2007. This is included in the accompanying Consolidated
Statement of Operations for the year ended December 31, 2007. Information and
the markets relating to these investment remain dynamic, and there may be
further declines in the value of these investments, the value of the collateral
held by these entities, and the liquidity of the Company’s investments. To the
extent the Company determines there is a further decline in fair value, the
Company may recognize additional impairment charges in future periods up to
the
aggregate amount of these investments.
As
of
December 31, 2007, the Company owned a total of 1,840,919 shares, or
approximately 1.9%
of the
outstanding shares
,
of the
common stock of Toko, Inc. (“Toko”) at a total cost of $5.6 million. Toko had a
market capitalization of approximately $172.9 million as of December 31, 2007.
These shares are reflected on the Company’s consolidated balance sheets as
marketable securities. These marketable securities are considered to be
available for sale under SFAS No. 115, “Accounting for Certain Investments in
Debt and Equity Securities”. Thus, as of December 31, 2007, the Company has
recorded an unrealized loss, net of income tax benefit, of approximately $1.5
million which is included in accumulated other comprehensive loss in
stockholders’ equity. The Company’s investment in Toko has been in an unrealized
loss position for less than twelve months. In accordance with FSP 115-1, the
Company periodically reviews its marketable securities and determines whether
the investments are other-than-temporarily impaired. The Company reviewed
various factors in making its determination, including volatility of the Toko
share price over the last year, Toko’s recent financial results and the
Company’s intention and ability to hold the investment. The Toko share price has
been extremely volatile over the last year, ranging from $1.22 - $4.20 (the
Company’s cost basis in its remaining shares of Toko stock is $3.07 per share).
As discussed below, in the second quarter of 2007, a gain was recognized on
the
disposition of the majority of the Company’s holdings of Toko stock. Toko
recently issued its financial results for the quarter ended December 31, 2007
and it showed a quarter over quarter increase in sales of 5.6% as compared
to
the fourth quarter of 2006 and increased profitability. The Company has the
intention and the ability to hold the investment until it is in a gain position.
As a result of these factors, management believes that the investment in Toko
is
not other-than-temporarily impaired.
During
April 2007, the Company sold 4.0 million shares of common stock of Toko on
the
open market which resulted in a gain of approximately $2.5 million, net of
investment banker fees and other expenses in the amount of $0.8 million. The
Company accrued bonuses of $0.5 million in connection with this gain which
were
paid in January 2008. For financial statement purposes approximately $0.4
million and $0.1 million has been classified within cost of sales and selling,
general and administrative expenses, respectively.
During
2004, the Company acquired a total of 2,037,500 shares of the common stock
of
Artesyn Technologies, Inc. (“Artesyn”) at a total purchase price of $16.3
million. On April 28, 2006, Artesyn was acquired by Emerson Network Power for
$11.00 per share in cash. During the second quarter of 2006, in connection
with
the Company's sale of its Artesyn common stock, the Company recognized a gain
of
approximately $5.2 million, net of investment banker advisory fees of $0.9
million. The Company accrued bonuses of $1.0 million in connection with the
gain. For financial statement purposes approximately $0.3 million and $0.7
million was classified within cost of sales and selling, general and
administrative expenses, respectively, and was paid to key employees in January
2007.
At
December 31, 2007 and 2006, respectively, marketable securities had a cost
of
approximately $5.6 million and $18.0 million, an estimated fair value of
approximately $3.3 million and $15.6 million and gross unrealized losses of
approximately $(2.3) million and $(2.4) million. Such unrealized losses are
included, net of tax, in accumulated other comprehensive loss. The Company
had
no realized losses for the year ended December 31, 2007, 2006 or 2005. Included
in other assets at December 31, 2007 and 2006 are marketable securities
designated for utilization in accordance with the Company’s SERP plan with a
cost of approximately $4.6 million and $3.8 million, respectively, and an
estimated fair value of approximately $4.9 million and $4.1 million,
respectively. The unrealized net gains of $0.3 million in each of 2007 and
2006
are included, net of tax, in accumulated other comprehensive loss.
The
components of inventories are as follows (dollars in
thousands):
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Raw
materials
|
|
$
|
24,089
|
|
$
|
24,374
|
|
Work
in progress
|
|
|
2,434
|
|
|
3,531
|
|
Finished
goods
|
|
|
12,526
|
|
|
18,392
|
|
|
|
$
|
39,049
|
|
$
|
46,297
|
|
During
2006, the Company incurred a $1.0 million pre-tax casualty loss as a result
of a
fire at its leased manufacturing facility in the Dominican Republic for raw
materials and equipment in excess of estimated insurance proceeds. The
production at this facility was substantially restored during July
2006.
7.
PROPERTY,
PLANT AND EQUIPMENT
Property,
plant and equipment consist of the following (dollars in
thousands):
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Land
|
|
$
|
3,239
|
|
$
|
3,585
|
|
Buildings
and improvements
|
|
|
27,035
|
|
|
25,167
|
|
Machinery
and equipment
|
|
|
55,425
|
|
|
59,083
|
|
Construction
in progress
|
|
|
3,431
|
|
|
1,881
|
|
|
|
|
89,130
|
|
|
89,716
|
|
Less
accumulated depreciation
|
|
|
48,017
|
|
|
45,427
|
|
|
|
$
|
41,113
|
|
$
|
44,289
|
|
Depreciation
expense for the years ended December 31, 2007, 2006 and 2005 was $7.1 million,
$7.2 million and $7.5 million, respectively.
During
May 2007, the Company sold a parcel of land located in Jersey City, New Jersey
for $6.0 million. The Company had previously estimated that approximately $0.8
million of the proceeds would be payable to the State of New Jersey as a portion
of the property is subject to tideland claims. In December 2007, the Tidelands
Resource Council voted to approve the Bureau of Tideland’s Management’s
recommendation for a Statement of No Interest. As final approval of the
Statement of No Interest is still pending, the Company has continued to defer
the estimated gain on sale of the land, in the amount of $4.6 million. Of the
$6.0 million sales price, the Company received cash of $1.5 million before
closing costs, and $4.6 million (including interest) is being held in escrow
pending final resolution of the State of New Jersey tideland claim and certain
environmental costs the Company is liable for in the maximum amount of $0.4
million. The Company anticipates resolution of this sale, release of the escrow
and corresponding guarantees and recognition of the gain during fiscal 2008.
As
the timing of the release of the escrow of $4.6 million is not under the
Company’s control, it has been classified in non-current assets as restricted
cash and the deferred gain of $4.6 million has been classified in deferred
gain
on the sale of property in the Consolidated Balance Sheet as of December 31,
2007. Additionally, the Company realized a $5.5 million pre-tax gain from the
sale of property, plant and equipment in Hong Kong and Macao during the year
ended December 31, 2007.
8.
INCOME
TAXES
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainties in Income Taxes (“FIN 48”), on January 1, 2007. Although the
implementation of FIN 48 did not impact the total amount of the Company’s
liabilities for uncertain tax positions, which amounted to $12.4 million at
January 1, 2007, the Company separately recognizes the liability for uncertain
tax positions on its balance sheet. Included in the liabilities for uncertain
tax positions at the date of adoption is $1.4 million for interest and
penalties.
At
December 31, 2007, the Company has approximately $9.2 million of liabilities
for
uncertain tax positions ($2.3 million included in income tax payable and $6.9
million included in liability for uncertain tax positions) all of which, if
recognized, would reduce the Company’s effective tax rate.
The
Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction and various states and foreign jurisdictions. The Company is no
longer subject to U.S. federal examinations by tax authorities for years before
2004 and for state examinations before 2003. Regarding foreign subsidiaries,
the
Company is no longer subject to examination by tax authorities for years before
2000. The Internal Revenue Service (“IRS”) commenced an examination of the
Company’s U.S. income tax returns for 2004 and reviewed 2003 and 2005 during the
fourth quarter of 2006. During April 2007, the IRS wrote a preliminary letter
to
the Company accepting the tax return as originally filed for 2004.
The
Company is currently being audited by the State of New Jersey, Department of
the
Treasury, Division of Taxation (“New Jersey”) for the years ended December 31,
2003 through 2006. This examination is in its early stages and to date no
adjustments have been proposed by New Jersey.
During
February 2008, the Company received correspondence from the State of California
Franchise Tax Board. They are requesting copies of U.S. federal income tax
returns for the years 2005 and 2006 for further analysis to determine if the
tax
returns will be selected for audit.
The
Inland Revenue Department (“IRD”) of Hong Kong commenced an examination of one
of the Company’s Hong Kong subsidiaries’ income tax returns for the years 2000
through 2005 and issued a notice of additional assessment during 2007 and demand
for tax in the amount of $3.8 million. This was paid in May and August 2007.
There is no interest or penalties in connection with this assessment. The IRD
proposed certain adjustments to the Company’s offshore income tax claim position
which Company management agreed with.
Based
on
possible outcomes of the examinations mentioned above, or as a result of the
expiration of the statute of limitations for specific jurisdictions, it is
reasonably possible that the related unrecognized benefits for tax positions
taken regarding previously filed tax returns may change materially from those
recorded as liabilities for uncertain tax positions in the Company’s
consolidated financial statements at December 31, 2007. Based on the number
of
tax years currently under audit by the relevant tax authorities, the Company
anticipates that several of these audits may be finalized in the next twelve
months. It is not possible to estimate the effect of changes, if any that will
occur to previously recorded uncertain tax positions over the next
year.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows
(dollars
in thousands):
Balance
January 1, 2007
|
|
$
|
12,396
|
|
Additions
based on tax positions
|
|
|
|
|
related
to the current year
|
|
|
1,669
|
|
Additions
for tax positions of prior years
|
|
|
1,000
|
|
Expiration
of statutes of limitations
|
|
|
(1,382
|
)
|
Reductions
for tax positions of prior years
|
|
|
(699
|
)
|
Settlements
|
|
|
(3,793
|
)
|
Balance
December 31, 2007
|
|
$
|
9,191
|
|
The
Company’s policy is to recognize interest and penalties related to uncertain tax
positions as a component of the current provision for income taxes. During
the
year ended December 31, 2007, the Company recognized approximately $0.5 million
in interest and penalties in the Consolidated Statement of Operations. This
amount is included in the $1.7 million noted above, related to additions based
on tax provisions related to the current year. The Company has approximately
$1.8 million accrued for the payment of interest and penalties at December
31,
2007, which is included in both income taxes payable and liability for uncertain
tax positions in the consolidated balance sheet.
The
provision for income taxes consists of the following (dollars in
thousands):
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
4,294
|
|
$
|
4,784
|
|
$
|
4,590
|
|
Foreign
|
|
|
2,598
|
|
|
1,619
|
|
|
6,250
|
|
State
|
|
|
515
|
|
|
430
|
|
|
244
|
|
|
|
|
7,407
|
|
|
6,833
|
|
|
11,084
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
and state
|
|
|
(2,119
|
)
|
|
(928
|
)
|
|
(1,420
|
)
|
Foreign
|
|
|
80
|
|
|
(60
|
)
|
|
(2,182
|
)
|
|
|
|
(2,039
|
)
|
|
(988
|
)
|
|
(3,602
|
)
|
|
|
$
|
5,368
|
|
$
|
5,845
|
|
$
|
7,482
|
|
A
reconciliation of taxes on income computed at the federal statutory rate to
amounts provided is as follows (dollars in thousands).
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Tax
provision
|
|
|
|
|
|
|
|
|
|
|
computed
at the Federal
|
|
|
|
|
|
|
|
|
|
|
statutory
rate of 35%, 34% and 34%
|
|
$
|
11,096
|
|
$
|
10,556
|
|
$
|
9,423
|
|
Increase
(decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
Repatriation
of foreign earnings
|
|
|
|
|
|
|
|
|
|
|
net
of foreign tax credit of $520 (1)
|
|
|
-
|
|
|
-
|
|
|
3,100
|
|
|
|
|
|
|
|
|
|
|
|
|
Different
tax rates and permanent differences
|
|
|
|
|
|
|
|
|
|
|
applicable
to foreign operations
|
|
|
(4,992
|
)
|
|
(4,816
|
)
|
|
(5,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Utilization
of net operating loss carryforward
|
|
|
-
|
|
|
(66
|
)
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Utilization
of research and development tax credits
|
|
|
(365
|
)
|
|
(409
|
)
|
|
(630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
State
taxes, net of federal benefit
|
|
|
335
|
|
|
279
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
Other,
including qualified production activity credits,
|
|
|
|
|
|
|
|
|
|
|
non-qualified
disposition of incentive stock options,
|
|
|
|
|
|
|
|
|
|
|
fair
value of vested stock awards over accruals and
|
|
|
|
|
|
|
|
|
|
|
amortization
of purchase accounting intangibles
|
|
|
(706
|
)
|
|
301
|
|
|
678
|
|
|
|
$
|
5,368
|
|
$
|
5,845
|
|
$
|
7,482
|
|
(1)
Under
the American Jobs Creation Act of 2004 (the "Act"), the Company has repatriated
earnings from controlled foreign corporations ("CFC's") in the amount of $70.6
million 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 results in an effective federal tax rate of approximately 5.0%.
The election to repatriate these CFC earnings expired 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.
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. Unrepatriated earnings, upon which U.S. income taxes have
not been accrued, are approximately $100.0 million at December 31, 2007.
Such
unrepatriated earnings are deemed by management to be permanently
reinvested.
Estimated income taxes (net of estimated foreign tax credits) related to
unrepatriated foreign earnings are $25.8 million under the current tax law
as
the Act has expired.
Components
of deferred income tax assets are as follows (dollars in thousands).
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
Tax
Effect
|
|
Tax
Effect
|
|
Deferred
Tax Assets - current:
|
|
|
|
|
|
Unrealized
depreciation in
|
|
|
|
|
|
|
|
marketable
securities
|
|
$
|
1,007
|
|
$
|
801
|
|
United
States net operating loss
|
|
|
|
|
|
|
|
carryforward
|
|
|
241
|
|
|
-
|
|
Foreign
tax credits carryforward
|
|
|
564
|
|
|
-
|
|
Reserves
and accruals
|
|
|
849
|
|
|
865
|
|
|
|
$
|
2,661
|
|
$
|
1,666
|
|
Deferred
Tax Assets - noncurrent:
|
|
|
|
|
|
|
|
Deferred
gain on sale of property,
|
|
|
|
|
|
|
|
plant
and equipment
|
|
$
|
1,765
|
|
$
|
-
|
|
United
States net operating loss
|
|
|
|
|
|
|
|
carryforward
|
|
|
-
|
|
|
887
|
|
Unfunded
pension liability
|
|
|
481
|
|
|
686
|
|
Depreciation
|
|
|
222
|
|
|
188
|
|
Amortization
|
|
|
773
|
|
|
519
|
|
State
net operating loss and
|
|
|
|
|
|
|
|
credits
carryforward
|
|
|
331
|
|
|
338
|
|
Other
accruals
|
|
|
1,123
|
|
|
1,145
|
|
Valuation
allowances
|
|
|
(331
|
)
|
|
(338
|
)
|
|
|
$
|
4,364
|
|
$
|
3,425
|
|
The
tax
rate in Macao for the year ended December 31, 2007 is 12%. During the year
ended
December 31, 2005, the Company used a $0.8 million net operating loss which
resulted in a tax savings of approximately $0.1 million.
Galaxy,
at the time of the acquisition, had a net operating loss carry forward of
approximately $5.4 million. The remaining net operating loss carry forward
of
approximately $0.2 million at December 31, 2007, arose principally from the
non-qualified dispositions of stock options and warrants and expires during
2024. The use of the operating loss is limited, due to the change of ownership,
but the Company expects to use the $0.2 million over the next year. The Company
has set up a valuation allowance for losses for certain state carryforwards
that
it believes will not be realized.
During
2005, the Company was granted an offshore operating license from the government
of Macao to set up a Commercial Offshore Company ("MCO") named Bel Fuse (Macao
Commercial Offshore) Limited. Sales to third party customers commenced during
the first quarter of 2006. Sales consist of products manufactured in the PRC.
The MCO is not subject to Macao corporation income taxes.
9.
DEBT
Short-term
debt
As
of
December 31, 2006, a $20 million line of credit was available to the Company
to
borrow. The loan
was
collateralized
with a
first
priority security interest in 100% of the issued and outstanding shares of
the
capital stock of the Company's material domestic subsidiaries and 65% of all
the
issued and outstanding shares of the capital stock of certain of the foreign
subsidiaries of the Company. During February 2007, the Company entered into
a
new unsecured credit agreement in the amount of $20 million, which expires
on
July 21, 2008. There were no borrowings under the credit agreement during 2007
and as such, there was no balance outstanding as of December 31, 2007. At that
date, the entire $20 million line of credit was available to the Company to
borrow. Loans under the new credit agreement will bear interest at LIBOR plus
0.75% to 1.25% based on certain financial statement ratios maintained by the
Company.
The
Company’s Hong Kong subsidiary has an unsecured line of credit of approximately
$2.0 million which was unused as of December 31, 2007. The line of credit
expires on July 21, 2008. 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.
For
the
years ended December 31, 2007, 2006 and 2005, the Company recorded interest
expense and other costs of $0.1 million, $0.1 million and $0.3 million,
respectively.
Included
in interest expense for the year ended December 31, 2007 is the write-off of
approximately $0.1 million of previously unamortized deferred financing charges
in connection with a credit facility that has been superseded.
10
ACCRUED
EXPENSES
Accrued
expenses consist of the following (dollars in thousands):
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Sales
commissions
|
|
$
|
2,930
|
|
$
|
1,716
|
|
Subcontracting
labor
|
|
|
1,723
|
|
|
2,033
|
|
Salaries,
bonuses and
|
|
|
|
|
|
|
|
related
benefits
|
|
|
4,208
|
|
|
4,147
|
|
Other
|
|
|
3,252
|
|
|
4,817
|
|
|
|
$
|
12,113
|
|
$
|
12,713
|
|
11.
BUSINESS
SEGMENT INFORMATION
The
Company operates in one industry with 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
(dollars in thousands):
|
|
2007
|
|
2006
|
|
2005
|
|
Net
sales from unrelated
|
|
|
|
|
|
|
|
entities
and country
|
|
|
|
|
|
|
|
of
Company's domicile:
|
|
|
|
|
|
|
|
North
America
|
|
$
|
78,091
|
|
$
|
73,241
|
|
$
|
69,089
|
|
Asia
|
|
|
151,550
|
|
|
153,037
|
|
|
131,104
|
|
Europe
|
|
|
29,496
|
|
|
28,655
|
|
|
15,723
|
|
|
|
$
|
259,137
|
|
$
|
254,933
|
|
$
|
215,916
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
90,939
|
|
$
|
80,860
|
|
$
|
80,836
|
|
Asia
|
|
|
182,301
|
|
|
182,808
|
|
|
151,992
|
|
Europe
|
|
|
30,680
|
|
|
30,105
|
|
|
16,967
|
|
Less
intergeographic
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
|
(44,783
|
)
|
|
(38,840
|
)
|
|
(33,879
|
)
|
|
|
$
|
259,137
|
|
$
|
254,933
|
|
$
|
215,916
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Operations:
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
6,515
|
|
$
|
2,658
|
|
$
|
4,020
|
|
Asia
|
|
|
17,488
|
|
|
19,622
|
|
|
22,391
|
|
Europe
|
|
|
1,509
|
|
|
838
|
|
|
206
|
|
|
|
$
|
25,512
|
|
$
|
23,118
|
|
$
|
26,617
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
Lived Assets:
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
18,786
|
|
$
|
18,026
|
|
|
|
|
Asia
|
|
|
26,757
|
|
|
30,050
|
|
|
|
|
Europe
|
|
|
1,005
|
|
|
690
|
|
|
|
|
|
|
$
|
46,548
|
|
$
|
48,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures:
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
1,453
|
|
$
|
2,823
|
|
$
|
1,328
|
|
Asia
|
|
|
7,069
|
|
|
6,783
|
|
|
6,322
|
|
Europe
|
|
|
196
|
|
|
227
|
|
|
96
|
|
|
|
$
|
8,718
|
|
$
|
9,833
|
|
$
|
7,746
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
|
|
|
|
|
|
|
|
expense:
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
1,841
|
|
$
|
2,314
|
|
$
|
2,526
|
|
Asia
|
|
|
5,887
|
|
|
6,476
|
|
|
7,364
|
|
Europe
|
|
|
193
|
|
|
237
|
|
|
214
|
|
|
|
$
|
7,921
|
|
$
|
9,027
|
|
$
|
10,104
|
|
Net
sales
from external customers are attributed to individual segments based on the
geographic source of the billing for such customer sales. 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
which
are
sold
to Asia for further processing. Income from operations represents gross profit
less operating expenses.
Long
lived assets consist of property, plant and equipment, net and other 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 PRC
in the middle of 1997. The territory of Macao became a SAR of the PRC 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 the PRC will affect
the
Company's contractual arrangements in the PRC. Substantially all of the
Company's manufacturing operations and approximately 42% of its identifiable
assets are located in Asia. Accordingly, events resulting from any change in
the
"Most Favored Nation" status granted to the PRC by the U.S., could have a
material adverse effect on the Company.
The
Company had sales to one customer in excess of ten percent of consolidated
net
sales in 2007, 2006 and 2005. The amount and percentages of the Company's sales
to this customer in
each
year
was $40.3 million (15.6%) in 2007, $42.2 million (16.5%) in 2006 and $32.8
million (15.2%) in 2005 and were derived primarily in Asia. Management believes
that the loss of such customer
could
have
a
material adverse effect on the Company's consolidated results of operations,
financial position and cash flows.
The
Company realized a $5.5 million pre-tax gain from the sale of property, plant
and equipment in Asia related to the sale of facilities in Hong Kong and Macao
during the year ended December 31, 2007.
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 are made with Company stock purchased in the open market.
The
expense for the years ended December 31, 2007, 2006 and 2005 amounted to
approximately $0.5 million, $0.5 million and $0.4 million, respectively. As
of
December 31, 2007, the plans owned 17,136 and 149,450 shares of Bel Fuse Inc.
Class A and Class B common stock, respectively.
The
Company's subsidiaries in Asia 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 must contribute a minimum
of 5% of eligible salary, as determined by Hong Kong government regulations.
The
Company currently contributes 7% of eligible salary, in cash or Company stock.
The
expense for the years ended December 31, 2007, 2006 and 2005 amounted to
approximately $0.4 million, $0.4 million and $0.5 million, respectively. As
of
December 31, 2007, the plan owned 3,323 and 17,342 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
with
supplemental
retirement and death benefits.
Participants
in the SERP are selected by the Compensation Committee of the Board of
Directors
.
The
SERP initially became effective in
2002
and
was amended and restated in April 2007 to conform with applicable requirements
of Section 409A of the Internal Revenue Code and to modify the provisions
regarding benefits payable in connection with a change in control of the
Company.
The
Plan
is unfunded. Benefits under the SERP are payable from the general assets of
the
Company, but the Company has certain life insurance policies in effect on
participants to partially cover the Company’s obligations under the Plan. The
Plan also allows the Company to establish a grantor trust to provide for the
payment of Plan benefits. 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, 2007,
2006 and 2005 amounted to approximately $0.7 million, $0.7 million and $0.7
million, respectively.
The
following provides a reconciliation of benefit obligations, the funded status
of
the SERP and a summary of significant assumptions (dollars in
thousands):
December
31,
|
|
2007
|
|
2006
|
|
2005
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
Projected
benefit obligation at beginning of year
|
|
$
|
4,728
|
|
$
|
4,476
|
|
$
|
2,890
|
|
Service
cost
|
|
|
313
|
|
|
325
|
|
|
332
|
|
Interest
cost
|
|
|
282
|
|
|
243
|
|
|
212
|
|
Plan
amendments
|
|
|
-
|
|
|
-
|
|
|
445
|
|
Benefits
paid
|
|
|
(75
|
)
|
|
(131
|
)
|
|
(38
|
)
|
Actuarial
(gains) losses
|
|
|
(550
|
)
|
|
(185
|
)
|
|
635
|
|
Minimum
pension obligation and
|
|
|
|
|
|
|
|
|
|
|
unfunded
pension liability
|
|
$
|
4,698
|
|
$
|
4,728
|
|
$
|
4,476
|
|
Funded
status of plan:
|
|
|
|
|
|
|
|
|
|
|
Under
funded status
|
|
$
|
(4,698
|
)
|
$
|
(4,728
|
)
|
$
|
(4,476
|
)
|
Unrecognized
net loss
|
|
|
-
|
|
|
-
|
|
|
870
|
|
Unrecognized
prior service costs
|
|
|
-
|
|
|
-
|
|
|
1,811
|
|
Accrued
pension cost
|
|
$
|
(4,698
|
)
|
$
|
(4,728
|
)
|
$
|
(1,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets, beginning of year
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Company
contributions
|
|
|
75
|
|
|
131
|
|
|
38
|
|
Benefit
paid
|
|
|
(75
|
)
|
|
(131
|
)
|
|
(38
|
)
|
Fair
value of plan assets, end of year
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet amounts:
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension obligation and
|
|
|
|
|
|
|
|
|
|
|
unfunded
pension liability
|
|
$
|
4,698
|
|
$
|
4,728
|
|
|
|
|
Accumulated
other comprehensive loss
|
|
$
|
(1,154
|
)
|
$
|
(1,647
|
)
|
|
|
|
The
components of SERP expense are as
follows:
|
Year
Ended December 31,
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Service
cost
|
|
$
|
313
|
|
$
|
325
|
|
$
|
332
|
|
Interest
cost
|
|
|
282
|
|
|
243
|
|
|
212
|
|
Net
amortization and deferral
|
|
|
146
|
|
|
161
|
|
|
155
|
|
Total
SERP expense
|
|
$
|
741
|
|
$
|
729
|
|
$
|
699
|
|
Assumption
percentages:
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.50
|
%
|
|
6.00
|
%
|
|
5.50
|
%
|
Rate
of compensation increase
|
|
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
The
accumulated benefit obligation for the SERP was $3.6 million and $3.5 million
as
of December 31, 2007 and 2006, respectively.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post
Retirement Plans”, (“SFAS No. 158”). This statement is effective for fiscal
years ending after December 15, 2006 and is applicable for the Company’s SERP
Plan
.
The
amount of net gain and prior service cost on a pretax basis included in Other
Comprehensive Income was $0 and $0.1 million, respectively, during the year
ended December 31, 2007 and $0.7 million and $1.7 million, respectively,
during
the year
ended
December 31, 2006
.
The
estimated portion of net periodic gain and prior service cost that will be
recognized as a component of net periodic benefit cost over the next fiscal
year
is $0 and $0.1 million, respectively. The Company expects to contribute $0.8
million to the SERP in 2008.
The
Company had no net transition assets or obligations recognized as an adjustment
to Other Comprehensive Income and does not anticipate any plan assets being
returned to the Company during 2008, as the plan has no assets.
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (dollars in thousands):
Years
Ending
|
|
|
|
December
31,
|
|
|
|
2008
|
|
$
|
75
|
|
2009
|
|
|
75
|
|
2010
|
|
|
130
|
|
2011
|
|
|
74
|
|
2012
|
|
|
74
|
|
2013
- 2017
|
|
|
1,168
|
|
13.
SHARE-BASED COMPENSATION
On
January 1, 2006, the Company adopted SFAS No. 123
(R)
"Share-Based Payment" requiring the recognition of compensation expense in
the
Consolidated Statements of Operations related to the fair value of its employee
stock-based options and awards. SFAS No. 123
(R)
revises SFAS No. 123 "Accounting for Stock-Based Compensation" and supercedes
APB Opinion No. 25 "Accounting for Stock Issued to Employees." SFAS No. 123(R)
is supplemented by SEC Staff Accounting Bulletin ("SAB") No. 107 "Share-Based
Payment." SAB No. 107 expresses the SEC staff's views regarding the interaction
between SFAS No. 123(R) and certain SEC rules and regulations including the
valuation of stock-based payment arrangements.
The
Company recognizes the cost of all employee stock options on a straight-line
attribution basis over their respective vesting periods, net of estimated
forfeitures. The Company has selected the modified prospective method of
transition; accordingly, prior periods have not been restated. Prior to adopting
SFAS No. 123(R), the Company applied APB Opinion No.
25
and
related interpretations in accounting for its stock-based compensation plans.
All employee stock options were granted at or above the grant date market price.
Accordingly, prior to 2006 no compensation cost was recognized for fixed stock
option grants.
On
December 31, 2007, the Company has one stock-based compensation plan, which
is
described below. During the years ended December 31, 2007 and 2006, the adoption
of SFAS No. 123(R) resulted in incremental stock-based compensation expense
of
approximately $0.1 million and $0.5 million, respectively. The incremental
stock-based compensation expense caused both the basic and diluted earnings
per
common share to
each
decrease
by $.04 and $.04 per share for Class A common stock and $.03 and $.03 per share
for Class B common stock, respectively,
for
the
year
ended December 31,
2006
and
by $.01 and $.01 per share for Class A common stock and $.01 and $.01 per share
for Class B common stock, respectively, for the year ended December 31, 2007.
In
addition, in connection with the adoption of SFAS No. 123
(R),
net
cash provided by operating activities decreased and net cash provided by
financing activities increased during the years ended December 31, 2007 and
2006
by $0.1 million and $0.3 million, respectively, related to excess tax benefits
from stock-based payment arrangements.
The
aggregate pretax compensation cost recognized in net earnings for stock-based
compensation (including incentive stock options, restricted stock and dividends
on restricted stock, as further discussed below) amounted to approximately
$1.5
million, $1.6 million and $0.2 million for the years ended December 31, 2007,
2006 and 2005, respectively
.
The
Company did not use any cash to settle any equity instruments granted under
share based arrangements during the years ended December 31, 2007 and 2006.
Under
the
provisions of SFAS 123(R), the recognition of deferred compensation,
representing the amount of unrecognized restricted stock expense that is reduced
as expense is recognized, at the date restricted stock is granted, is no longer
required. Therefore, at January 1, 2006, the amount that had been in "Deferred
compensation" in the Consolidated Balance Sheet was reversed to zero and is
currently included in additional paid in capital.
Stock
Options
The
Company has
an
equity
compensation program
(the
"
Program
")
which
provides for the granting of "Incentive Stock Options"
within
the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended
,
non-qualified stock options and restricted stock awards
.
The
Company believes that such awards better align the interest of its employees
with those of its shareholders. The Plan provides for the issuance of 2.4
million common shares.
Unless
otherwise provided at the date of grant or unless subsequently accelerated,
options granted under the Program
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. Upon exercise the Company will issue new shares. The exercise
price of
incentive
stock
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.
In
general,
no option will be exercisable after
ten
years
from the date granted.
No
incentive stock options were granted in 2007, 2006 or 2005. Expected lives
of
options previously granted were estimated using the historical exercise behavior
of employees. Expected volatilities were based on implied volatilities from
historical volatility of the Company’s stock. The Company uses historical data
to estimate employee forfeitures. The risk free rate is based on the U.S.
Treasury yield curve in effect at the time of grant.
Information
regarding the Company’s
stock
options
for the
year ended December 31, 2007 is as follows. All of the stock options noted
below
relate to options to purchase shares of the Company’s Class B common
stock.
Stock
Options
|
|
Shares
|
|
Weighted-
Average Exercise Price
|
|
Weighted-
Average Remaining Contractual Term
|
|
Aggregate
Intrinsic Value (in 000's)
|
|
Outstanding
at January 1, 2007
|
|
|
137,813
|
|
$
|
25.59
|
|
|
|
|
|
|
|
Exercised
|
|
|
(63,313
|
)
|
|
22.94
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(4,500
|
)
|
|
18.89
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
70,000
|
|
$
|
28.42
|
|
|
1.8
years
|
|
$
|
177
|
|
Exercisable
at December 31, 2007
|
|
|
36,500
|
|
$
|
26.72
|
|
|
1.2
years
|
|
$
|
177
|
|
During
the years ended December 31, 2007 and 2006 the Company received $1.5 million
and
$3.2 million from the exercise of stock options and realized tax benefits of
approximately $0.1 million and $0.3 million, respectively. The total intrinsic
value of options exercised during the years ended December 31, 2007, 2006 and
2005 was $0.9 million, $1.5 million and $2.9 million, respectively. Stock
compensation expense applicable to stock options for the years ended December
31, 2007, 2006 and 2005 was approximately $0.1 million, $0.5 million and $0,
respectively.
A
summary
of the status of the Company’s non-vested options as of December 31, 2007 and
2006 and changes during the year ended December 31, 2007 is presented
below:
Nonvested
options
|
|
Options
|
|
Weighted-Average
Grant-Date Fair Value
|
|
Nonvested
at December 31, 2006
|
|
|
91,000
|
|
$
|
25.78
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
Vested
|
|
|
(53,000
|
)
|
$
|
23.09
|
|
Forfeited
|
|
|
(4,500
|
)
|
$
|
18.89
|
|
|
|
|
|
|
|
|
|
Nonvested
at December 31, 2007
|
|
|
33,500
|
|
$
|
30.28
|
|
At
December 31, 2007 there was less than $0.1 million of total unrecognized cost
related to nonvested stock-based compensation arrangements under the
Program
.
The
cost is expected to be recognized over a weighted average period of one year.
The fair value of options that vested during the years ended December 31, 2007
and 2006 was $1.6 million and $1.5 million, respectively. The aggregate
intrinsic value of options vested during 2007 was $0.4 million. Currently,
the
Company believes that substantially all options will vest.
Restricted
Stock Awards
The
Company provides common stock awards to certain officers and key employees.
The
Company grants these awards, at its discretion, from the shares available under
the
Program.
Unless otherwise provided at the date of grant or unless subsequently
accelerated, the
shares
awarded are earned in 25% increments on the
second,
third, fourth and fifth anniversaries of the award
,
respectively, and are distributed provided the employee has remained employed
by
the Company through such anniversary dates; otherwise the unearned shares are
forfeited. The market value of these shares at the date of award is recorded
as
compensation expense on the straight-line method over the five
year
periods from the respective award dates, as adjusted for forfeitures of unvested
awards. During 2007, 2006 and 2005, the Company issued 74,200, 21,600 and
152,400 class B common shares, respectively, under a restricted stock plan
to
various officers and employees. The shares vest 25% after two years of
employment with an additional 25% vesting in each of years three through five.
This resulted in pre-tax compensation expense of $1.3 million, $1.1 million
and
$0.2 million ($0.9 million, $0.8 million and $0.2 million, after tax benefit)
for the years ended December 31, 2007, 2006 and 2005, respectively.
A
summary
of the activity under the Restricted Stock Awards Plan as of December 31, 2007
is presented below:
Restricted
Stock
Awards
|
|
Shares
|
|
Weighted
Average Award
Price
|
|
Weighted
Average Remaining Contractual
Term
|
|
Outstanding
at January 1, 2007
|
|
|
167,000
|
|
$
|
34.93
|
|
|
|
|
Granted
|
|
|
74,200
|
|
$
|
36.40
|
|
|
|
|
Vested
|
|
|
(34,250
|
)
|
$
|
35.49
|
|
|
|
|
Forfeited
|
|
|
(11,550
|
)
|
$
|
36.95
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
195,400
|
|
$
|
35.31
|
|
|
3.43
|
|
As
of
December 31, 2007, there was $5.4 million of total pre-tax unrecognized
compensation cost included within additional paid-in-capital related to
non-vested stock based compensation arrangements granted under the restricted
stock award plan; that cost is expected to be recognized over a period of 4.4
years.
The
Company's policy is to issue new shares to satisfy Restricted Stock Awards
and
stock
option exercises. Currently the Company believes that substantially all
restricted stock awards will vest.
14.
COMMON STOCK
During
2000, the Board of Directors of the Company authorized the purchase of up to
ten
percent of the Company’s outstanding common shares. As of December 31, 2007, the
Company had purchased and retired 23,600 Class B common shares at a cost of
approximately $0.8 million and had purchased and retired 160,033 Class A common
shares at a cost of approximately $5.7 million. No shares of Class B common
stock were repurchased during the year ended December 31, 2007 and 160,033
shares of Class A common stock were repurchased during the year ended December
31, 2007.
There
are
no contractual restrictions on the Company's ability to pay dividends provided
the Company is not in default immediately before such payment and after giving
effect to such payment. On February 1, 2007, May 1, 2007 and August 1, 2007
the
Company paid a $0.05 per share dividend to all shareholders of record of Class
B
Common Stock in the total amount of $0.5 million, $0.5 million and $0.5 million,
respectively. On February 1, 2007, May 1, 2007 and August 1, 2007 the Company
paid a $0.04 per share dividend to all shareholders of record of Class A Common
Stock in the total amount of $0.1 million, $0.1 million and $0.1 million,
respectively. During July 2007 the Board of Directors of the Company authorized
an increase in the dividends by $.02 per share per quarter for both Class A
and
B common shares effective with the November 2007 dividend payment. As a result,
on November 1, 2007, the Company paid a $0.06 and $0.07 per share dividend
to
all shareholders of record at October 15, 2007 of Class A and Class B Common
Stock
,
respectively,
in
the
total
amount
of $0.2 million and $0.6 million, respectively. On February 1, 2006, May 1,
2006, August 1, 2006 and November 1, 2006 the Company paid a $0.05 per share
dividend to all shareholders of record of Class B Common Stock in the total
amount of $0.4 million, $0.4 million, $0.4 million and $0.5 million,
respectively. On February 1, 2006, May 1, 2006, August 1, 2006 and November
1,
2006 the Company paid a $0.04 per share dividend to all shareholders of record
of Class A Common Stock in the total amount of $0.1 million, $0.1 million,
$0.1
million and $0.1 million, respectively.
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
(dollars in thousands):
Years
Ending
|
|
|
|
December
31,
|
|
|
|
2008
|
|
$
|
1,595
|
|
2009
|
|
|
1,107
|
|
2010
|
|
|
792
|
|
2011
|
|
|
695
|
|
2012
|
|
|
622
|
|
Thereafter
|
|
|
444
|
|
|
|
$
|
5,255
|
|
Rental
expense was approximately $2.0 million, $1.7 million and $1.6 million for the
years ended December 31, 2007, 2006, and 2005, respectively.
Other
Commitments
The
Company submits purchase orders for raw materials to various vendors throughout
the year for current production requirements, as well as forecasted
requirements. Certain of these purchase orders relate to special purpose
material, and as such, the Company may incur penalties if the order is
cancelled. At December 31, 2007, the Company has outstanding purchase orders
related to the purchase
of raw
materials in the aggregate amount of $22.3 million.
Legal
Proceedings
The
Company is a defendant in a lawsuit captioned Synqor, Inc. v. Artesyn
Technologies, Inc., Astec America, Inc., Emerson Network Power, Inc., Emerson
Electric Co., Bel Fuse Inc., Cherokee International Corp., Delta Electronics,
Inc., Delta Products Corp., Murata Electronics North America, Inc., Murata
Manufacturing Co., Ltd., Power-One, Inc., Tyco Electronics Corp. and Tyco
Electronics Ltd. brought in the United States District Court, Eastern District
of Texas in November 2007. Plaintiff claims the Company infringed its patents
covering certain power products. Synqor is seeking unspecified damages. The
Company filed an Answer to Synqor’s complaint, denying the allegations of
infringement and asserting invalidity of the patents.
The
Company is a defendant in a lawsuit captioned Halo Electronics, Inc. (“Halo”) v.
Bel Fuse Inc., Pulse Engineering, Inc. and Technitrol, Inc. brought in Nevada
Federal District Court. Plaintiff claims that the Company has infringed its
patents covering certain surface mount discrete magnetic products made by the
Company. Halo is seeking unspecified damages, which it claims should be trebled.
In December 2007, this case was dismissed by the Nevada Federal District Court
for lack of personal jurisdiction. Halo then re-filed this suit in the Northern
California Federal District Court, captioned Halo Electronics, Inc. v. Bel
Fuse
Inc., Elec & Eltek (USA) Corporation, Wurth Electronics Midcom, Inc., and
Xfmrs, Inc.
The
Company is a plaintiff in a lawsuit captioned Bel Fuse Inc. v. Halo Electronics,
Inc. brought in the United States District Court of New Jersey during May 2007.
The Company claims that Halo has infringed a patent covering certain integrated
connector modules made by Halo. The Company is seeking unspecified damages
plus
interest, costs and attorney fees.
The
Company and two of its officers were defendants in a wrongful termination
lawsuit brought in the District Court of Frankfurt am Main, Germany by a former
employee at a foreign subsidiary of the Company. During July 2007, this lawsuit
was settled for approximately $0.5 million. The Company had provided for this
liability in its financial statements prior to the settlement.
The
Company is a plaintiff in a lawsuit captioned Bel Fuse Inc. and Bel Power,
Inc.
v. Andrew Ferencz, Gregory Zvonar, Bernhard Schroter, EE2GO, Inc., Howard E.
Kaepplein and William Ng, brought in the Superior Court of the Commonwealth
of
Massachusetts. The Company was granted injunctive relief and is seeking damages
against the former stockholders of Galaxy Power, Inc., key employees of Galaxy
and a corporation formed by some or all of the individual defendants. The
Company has alleged that the defendants violated their written non-competition,
non-disclosure and non-solicitation agreements, diverted business and usurped
substantial business opportunities with key customers, misappropriated
confidential information and trade secrets, and harmed the Company’s business.
In
a
related matter, the Company is a defendant in a lawsuit captioned Robert
Chimielnski, P.C. on behalf of the stockholder representatives and the former
stockholders of Galaxy Power, Inc. v. Bel Fuse Inc. et al. brought in the
Superior Court of the Commonwealth of Massachusetts. This complaint for damages
and injunctive relief is based on an alleged breach of contract and other
allegedly illegal acts in a corporate context arising out of the Company’s
objection to the release of nearly $2.0 million held in escrow under the terms
of the stock purchase agreement between Galaxy and the Company.
The
Company is a defendant in a lawsuit captioned Murata Manufacturing Company,
Ltd.
v. Bel Fuse Inc. et al, 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; payment of a lump sum of 3% of past sales
including sales of applicable Insilco products; an annual minimum royalty of
$0.5 million; payment of all attorney fees; and marking of all licensed ICM's
with the third party's
patent
number. The Company is also a defendant in a lawsuit, captioned Regal
Electronics, Inc. v. Bel Fuse Inc., 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 $0.5
million plus a 6% royalty on future sales. The District Court has granted
summary judgment in the Company's favor dismissing Regal Electronics'
infringement claims, while at the same time dismissing the Company's invalidity
counterclaim against Regal Electronics. Regal has appealed the Court's rejection
of its infringement claims to the U.S. Court of Appeals. The case was heard on
February 6, 2007 and the U.S. Court of Appeals upheld the District Court’s
ruling in favor of the Company.
The
Company cannot predict the outcome of the unresolved 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. As of December 31, 2007, no amounts have been accrued in
connection with these lawsuits, as the amounts are not determinable.
The
Company is not a party to any other legal proceeding, the adverse outcome of
which is
likely
to
have a
material adverse effect on the Company's consolidated financial condition or
results of operations.
16.
ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
The
components of accumulated other comprehensive income (loss) as of December
31,
2007 and 2006 are summarized below (dollars in thousands)
|
|
2007
|
|
2006
|
|
Foreign
currency translation adjustment
|
|
$
|
2,101
|
|
$
|
1,141
|
|
Unrealized
holding loss on available-for-sale
|
|
|
|
|
|
|
|
securities
under SFAS No. 115, net of
|
|
|
|
|
|
|
|
taxes
of $(789) and $(801) as of
|
|
|
|
|
|
|
|
December
31, 2007 and 2006
|
|
|
(1,291
|
)
|
|
(1,310
|
)
|
Unfunded
SERP liability related to SFAS
|
|
|
|
|
|
|
|
No.
158, net of taxes of $(483) and $(686)
|
|
|
|
|
|
|
|
as
of December 31, 2007 and 2006
|
|
|
(1,154
|
)
|
|
(1,647
|
)
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive loss
|
|
$
|
(344
|
)
|
$
|
(1,816
|
)
|
17.
SUBSEQUENT
EVENT
On
February 25, 2008, the Company announced that it had acquired 4,370,052 shares
of Power-One, Inc. (“Power-One”) common stock representing, to the Company’s
knowledge, 5% of Power-One’s outstanding common stock, at a total purchase price
of $10.1 million. Power-One’s common stock is quoted on the NASDAQ Global
Market. Power-One is a designer and manufacturer of power conversion and power
management products.
CONDENSED
SELECTED QUARTERLY FINANCIAL DATA
|
(Unaudited)
|
(In
thousands, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
Total
Year
|
|
|
|
Quarter
Ended
|
|
Ended
|
|
|
|
March
31,
|
|
June
30,
|
|
September
30,
|
|
December
31,
|
|
December
31,
|
|
|
|
2007
|
|
2007
|
|
2007
|
|
2007
|
|
2007
(1)
|
|
Net
sales
|
|
$
|
61,807
|
|
$
|
61,612
|
|
$
|
66,379
|
|
$
|
69,339
|
|
$
|
259,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
13,916
|
|
|
13,014
|
|
|
14,091
|
|
|
15,109
|
|
|
56,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
4,009
|
|
|
6,158
|
|
|
5,914
|
|
|
10,255
|
|
|
26,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per Class A common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.32
|
|
$
|
0.49
|
|
$
|
0.47
|
|
$
|
0.83
|
|
$
|
2.11
|
|
Diluted
|
|
$
|
0.32
|
|
$
|
0.49
|
|
$
|
0.47
|
|
$
|
0.83
|
|
$
|
2.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per Class B common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.34
|
|
$
|
0.52
|
|
$
|
0.50
|
|
$
|
0.88
|
|
$
|
2.25
|
|
Diluted
|
|
$
|
0.34
|
|
$
|
0.52
|
|
$
|
0.50
|
|
$
|
0.88
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
|
|
Total
Year
|
|
|
|
Quarter
Ended
|
|
Ended
|
|
|
|
March
31,
|
|
June
30,
|
|
September
30,
|
|
December
31,
|
|
December
31,
|
|
|
|
2006
|
|
2006
|
|
2006
|
|
2006
|
|
2006
|
|
Net
sales
|
|
$
|
54,626
|
|
$
|
66,474
|
|
$
|
73,260
|
|
$
|
60,573
|
|
$
|
254,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
14,639
|
|
|
16,212
|
|
|
17,450
|
|
|
13,647
|
|
|
61,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
3,997
|
|
|
8,763
|
|
|
7,745
|
|
|
4,698
|
|
|
25,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per Class A common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.32
|
|
$
|
0.71
|
|
$
|
0.62
|
|
$
|
0.38
|
|
$
|
2.03
|
|
Diluted
|
|
$
|
0.32
|
|
$
|
0.71
|
|
$
|
0.62
|
|
$
|
0.38
|
|
$
|
2.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per Class B common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.35
|
|
$
|
0.75
|
|
$
|
0.66
|
|
$
|
0.40
|
|
$
|
2.16
|
|
Diluted
|
|
$
|
0.34
|
|
$
|
0.75
|
|
$
|
0.66
|
|
$
|
0.40
|
|
$
|
2.15
|
|
(1)
|
Quarterly
amounts of earnings per share may not agree to the total for the
year due
to rounding.
|