UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
| x |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the year ended
|
December
31, 2005
|
or
| o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from ____________________________ to
____________________________
Commission
File Number: 0-11676
BEL
FUSE INC.
(Exact
name of registrant as specified in its charter)
|
NEW
JERSEY
|
22-1463699
|
|
(State
of other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
206
Van Vorst Street, Jersey City, New Jersey
|
07302
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(201)
432-0463
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Class
A
Common Stock, $0.10 par value; Class B Common Stock, $0.10 par
value
Indicate
by checkmark if the registrant is a well-known issuer, as defined in Rule 405
of
the
Securities
Act. o Yes x
No
Indicate
by checkmark if the registrant is not required to file reports to Section 13
or
15(d)
Of
the
Act. o Yes x
No
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. x
Yes o
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer” and
“large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of
1934.
Large
accelerated filer o
Accelerated filer x
Non-accelerated filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
o
Yes x
No
The
aggregate market value of the voting and non-voting common equity of the
registrant held by non-affiliates (for this purpose, persons and entities other
than executive officers, directors, and 5% or more shareholders) of the
registrant, as of the last business day of the registrant's most recently
completed second fiscal quarter (June 30, 2005), was $259,550,000.
Number
of
shares of Common Stock outstanding as of March 1, 2006: 2,702,677 Class A Common
Stock; 9,059,677- Class B Common Stock
Documents
incorporated by reference:
Bel
Fuse
Inc.'s Definitive Proxy Statement for the 2006 Annual Meeting of Stockholders
is
incorporated by reference into Part III.
|
BEL
FUSE INC.
|
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Forward
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*
Page F-1 follows page 46
FORWARD LOOKING INFORMATION
The
Company’s quarterly and annual operating results are affected by a wide variety
of factors that could materially and adversely affect revenues and
profitability, including the risk factors described in Item 1A of the Company's
Annual Report on Form 10-K. As a result of these and other factors, the Company
may experience material fluctuations in future operating results on a quarterly
or annual basis, which could materially and adversely affect its business,
financial condition, operating results, and stock prices. Furthermore, this
document and other documents filed by the Company with the Securities and
Exchange Commission (the “SEC”) contain certain forward-looking statements under
the Private Securities Litigation Reform Act of 1995 (“Forward-Looking
Statements”) with respect to the business of the Company. These Forward-Looking
Statements are subject to certain risks and uncertainties, including those
mentioned above, and those detailed in Item 1A of this Annual Report on Form
10-K, which could cause actual results to differ materially from these
Forward-Looking Statements. The Company undertakes no obligation to publicly
release the results of any revisions to these Forward-Looking Statements which
may be necessary to reflect events or circumstances after the date hereof or
to
reflect the occurrence of unanticipated events. An investment in the Company
involves various risks, including those mentioned above and those which are
detailed from time to time in the Company’s SEC filings.
| Item 1. |
General
Bel
Fuse
Inc. ("Bel" or the "Company") is a leading producer of electronic products
that
help make global connectivity a reality. The Company designs, manufactures
and
markets a broad array of magnetics, modules, circuit protection devices and
interconnect products. While these products are deployed primarily in the
computer, networking and telecommunication industries, Bel’s portfolio of
products also finds application in the automotive, medical and consumer
electronics markets. These products are designed to protect, regulate, connect,
isolate or manage a variety of electronic circuits.
With
over
55 years in the electronics industry, Bel has reliably demonstrated the ability
to succeed in a variety of product areas across multiple industries. Founded
in
1949, the Company has a strong track record of technical innovation working
with
the engineering communities of market leaders. Bel has consistently proven
itself a valuable supplier to the foremost companies in its chosen industries
by
developing cost-effective solutions for the challenges of new product
development. By combining our strength in product design with our own
specially-designed manufacturing facilities, Bel has established itself as
a
formidable competitor on a global basis.
The
Company, which is organized under New Jersey law, operates in one industry
with
three geographic reporting segments as defined in Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and
Related Information". Bel’s principal executive offices are located at 206 Van
Vorst Street, Jersey City, New Jersey 07302; (201) 432-0463. The Company
operates other facilities in North America, Europe and the Far East and trades
on the NASDAQ (BELFA and BELFB). For information regarding Bel's three
geographic reporting units, see Note 11 of the Notes to Consolidated Financial
Statements.
The
terms
“Company” and “Bel” as used in this Annual Report on Form 10-K refers to Bel
Fuse Inc. and its consolidated subsidiaries unless otherwise
specified.
Product
Groups
Magnetics
|
§
|
Discrete
components
|
|
§
|
Power
transformers
|
|
§
|
MagJack®
integrated connector modules
|
The
Company, a leading producer of discrete magnetics, markets an extensive line
of
products (transformers, diplex filters, common mode chokes and delay lines)
used
in networking, telecommunications and broadband applications. These magnetic
devices condition, filter and isolate the signal as it travels through network
equipment helping to ensure accurate data and/or voice transmission. Bel’s
magnetic components are also used in the automotive and consumer products
markets.
Power
transformer products include standard and custom designs that have been added
to
the Company’s product mix as a result of the Company's Signal Transformer
acquisition in 2003. Manufactured for use in alarm, security and medical
products, these devices are designed to comply with international safety
standards governing transformers, including UL, CSA, IEC, TUV and VDE.
Marketed
under the brand MagJack®, Bel's connectors with integrated magnetics provide the
signal conditioning, electromagnetic interference suppression and signal
isolation previously performed by multiple, discrete magnetics.
Modules
|
§
|
Power
conversion modules
|
|
§
|
Integrated
analog front end modules
|
|
§
|
Custom
modules
|
Bel’s
Power conversion products include standard and custom non-isolated DC-DC
converters designed specifically to power low voltage silicon devices. The
need
for converting one DC voltage to another voltage is growing rapidly as the
developers of integrated circuits commonly adjust the supply voltage as a means
of optimizing device performance. These DC-DC converters are used in data
networking equipment, distributed power architecture, and telecommunication
devices, as well as computers and peripherals.
The
Company develops IC-compatible, integrated front end modules for
broadband and telecommunication applications. These modules, including products
acquired in the Company's APC acquisition in 2003, can eliminate the need for
several discrete components by providing the same functionality in a single,
compact device.
The
Company continues to pursue market opportunities, such as those in the
automotive industry, where it can supply customized value-added modules to
customers requiring integrated products that combine one or more of the
Company's capabilities in surface mount assembly, automatic winding, hybrid
fabrication and component encapsulation.
Circuit
Protection
|
§
|
Miniature
fuses
|
|
§
|
Micro
fuses
|
|
§
|
Surface
mount fuses
|
The
Company’s circuit protection products include board level fuse designs
(miniature, micro and surface mount fuses) designed for the global electronic
and telecommunication markets. Fuses prevent currents in an electrical circuit
from exceeding certain predetermined levels, acting as a safety valve to protect
expensive components from damage by cutting off high currents before they can
generate enough heat to cause smoke or fire.
While
the
Company continues to manufacture traditional fuse types, its surface mount
chip
fuses are in high demand for use in space-critical applications such as mobile
phones and computers. Like the majority of Bel’s fuse products, the chip fuses
comply with RoHS standards for the elimination of lead and other hazardous
materials.
The
Company’s circuit protection devices are used extensively in products such as
televisions, consumer electronics, power supplies, computers, telephones and
networking equipment.
Interconnect
|
§
|
Passive
jacks
|
|
§
|
Plugs
|
|
§
|
Cable
assemblies
|
Through
the Company's Stewart Connector acquisition in 2003, the Company has added
a
comprehensive line of modular connectors, including RJ45 and RJ11 passive jacks,
plugs and cable assemblies. Passive jacks serve primarily as the connectivity
device in networking equipment such as routers, hubs, switches and patch panels.
Modular plugs and cable assemblies are utilized within the structured cabling
system, often referred to as premise wiring. The Company’s connector products
are designed to meet all major performance standards including newly released
Category 6 compliant products targeted to next generation network standards
for
Gigabit Ethernet and 10Gigabit Ethernet.
The
following table describes, for each of Bel's product groups, the principal
functions and applications associated with such product groups.
|
Product
Group
|
Function
|
Application
|
|
|
Magnetics
|
|||
|
Discrete
Components
|
Condition,
filter and isolate the electronic signal to ensure accurate data
and/or
voice transmission.
|
Network
switches, routers, hubs and PCs used in 10/100Base-TX, Gigabit, Voice
over
the Internet Protocol (”VoIP"), home networking and cable modem
applications.
|
|
|
Power
Transformers
|
Safety
isolation and distribution.
|
Power
supplies, alarm, fire detection and security systems, HVAC, lighting
and
medical equipment.
|
|
|
MagJack®
Integrated Connector Modules
|
Condition,
filter and isolate an electronic signal to ensure accurate data and/or
voice transmission and to provide RJ45 and USB
connectivity
|
Network
switches, routers, hubs and PCs used in 10/100Base-TX, Gigabit, and
VoIP.
|
|
|
Modules
|
|||
|
Power
Conversion Modules
(DC-DC
Converters)
|
Convert
DC voltage level to other DC level as required to meet the power
needs of
low voltage silicon devices
|
Networking
equipment, distributed power architecture, telecom devices, computers
and
peripherals.
|
|
|
Integrated
Analog Front End Modules
|
Condition,
filter and isolate the electronic signal to ensure accurate data
and/or
voice transmission.
|
Broadband
and telecom equipment supporting ISDN, T1/E1, xDSL technologies.
|
|
|
Custom
Modules
|
Integrate
several discrete devices to provide customized, space-saving
solution.
|
Automotive
products.
|
|
|
Circuit
Protection
|
|||
|
Miniature
Fuses
|
Protects
devices by preventing current in an electrical circuit from exceeding
acceptable levels.
|
Power
supplies, electronic ballasts and consumer electronics.
|
|
|
Micro
Fuses
|
Protects
devices by preventing current in an electrical circuit from exceeding
acceptable levels.
|
Cellular
phone chargers, consumer electronics, power supplies and set top
boxes.
|
|
|
Surface
Mount Fuses
|
Protects
devices by preventing current in an electrical circuit from exceeding
acceptable levels.
|
Cellular
phones, mobile computers, IC and battery protection, power supplies
and
telecom line cards.
|
|
|
Interconnect
|
|||
|
Passive
Jacks
|
RJ45
and RJ11 connectivity for
data
and/or voice transmission.
|
Network
routers, hubs, switches and patch panels deployed in Category 5,
5e and 6
cable systems.
|
|
|
Plugs
|
RJ45
and RJ11 connectivity for
data
and/or voice transmission.
|
Network
routers, hubs, switches and patch panels deployed in Category 5,
5e and 6
cable systems.
|
|
|
Cable
Assemblies
|
RJ45
and RJ11 connectivity for
data
and voice transmission.
|
Structured
Category 5, 5e and 6 cabling systems (premise
wiring).
|
|
-4-
Acquisitions
Acquisitions
have played a critical role in the growth of Bel and the expansion of both
its
product portfolio and its customer base. Furthermore, acquisitions continue
to
be a key element in the Company’s growth strategy. As part of the Company’s
acquisition strategy, it may from time to time, purchase equity positions in
companies that are potential merger candidates . The Company frequently
evaluates possible merger candidates that would provide an expanded product
and
technology base that will allow the Company to further penetrate its strategic
customers and/or an opportunity to reduce overall operating expense as a
percentage of revenue. Bel also looks at whether the merger candidates are
positioned to take advantage of the Company's low cost manufacturing facilities;
and whether a cultural fit will allow the acquired company to be integrated
smoothly and efficiently.
On
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 of which the final
$0.5 million is due to the sellers by June 30, 2006. Netwatch s.r.o. is a
designer and manufacturer of high-performance fiber optic and copper cable
assemblies for data and telecommunication applications. Purchase price
allocations have been estimated by management . Management has estimated
approximately $1.0 million of goodwill arose from the transaction which is
included in the Company’ European reporting unit.
The
Company believes that the strategic value of the Netwatch s.r.o. acquisition
was
the establishment of a European manufacturing presence for the Company and
the
addition of fiber optic capability to the Bel Stewart Connector Group to
complement the Company's existing copper-based product portfolio. The Company
believes that this acquisition enabled Bel Stewart to support the Company's
customer base, including the world's largest structured cabling providers,
with
a broad range of both copper and fiber based components and
assemblies.
This
acquisition was accounted for using the purchase method of accounting and
accordingly, the results of operations of Netwatch s.r.o. have been included
in
the Company’s 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”)
for approximately $19.0 million in cash including transaction costs of
approximately $0.4 million. Purchase price allocations have been initially
estimated by management and are subject to adjustment. 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 $2.0 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
Company believes that the purchase of Galaxy’s Power Group was a logical
strategic fit with Bel’s Power Products group. The Company believes that the
products are highly complementary with minimal overlap. The customer base is
similar but still affords ample opportunity for cross selling. While Bel offers
Galaxy a much-needed cost competitive manufacturing base in China, Galaxy brings
a portfolio of products and technologies aimed at higher end markets. In
addition to these strategic synergies, there is significant opportunity for
expense reduction and the elimination of redundancies.
This
acquisition was accounted for using the purchase method of accounting and
accordingly, the results of operations of Galaxy have been included in the
Company’s financial statements from March 23, 2005.
There
was
no in process research and development acquired as part of this
acquisition.
On
March
22, 2003, the Company acquired certain assets, subject to certain liabilities,
and common shares of certain entities comprising the Passive Components Group
of
Insilco Technologies, Inc. ("Insilco") for $37.0 million (including cash
acquired of $799,000) in cash, including transaction costs of approximately
$1.4
million. This acquisition included the Stewart Connector Systems Group
(“Stewart”), InNet Technologies (“InNet”) and the Signal Transformer Group
(“Signal Transformer”). The purchase price has been allocated to both tangible
and intangible assets and liabilities based on estimated fair values after
considering various independent formal appraisals. Approximately $1.6 million
of
identifiable intangible assets (patents) arose from this transaction; such
intangible assets are being amortized on a straight-line basis over a period
of
five years. In addition, $2.9 million has been attributed to goodwill. Patents
having a carrying value of $1.6 million and goodwill of $0.8 million have been
included in the Company's Asia reporting unit. Goodwill of $1.5 million and
$0.6
million has been included in the Company's North America and European reporting
units, respectively.
The
Company believes that the purchase of Insilco's Passive Components Group was
a
logical strategic fit with Bel's then existing products and markets. With the
increased diversification of its product line, the Company believes it has
become a more attractive supplier to current customers seeking a greater variety
of products.
Both
Bel
and the acquired InNet/Stewart Group were leaders in the Integrated Connector
Module ("ICM") market with their respective MagJack product offerings.
Consolidating the engineering, manufacturing and sales capabilities of Bel
and
Stewart has strengthened the Company’s leadership in this important market. The
Company's expertise in electrical engineering and high-volume, low-cost
manufacturing complements Stewart's strengths in mechanical design and
engineering. The San Diego based InNet group was dissolved into Bel’s existing
San Diego operations.
The
Signal Transformer Group acquisition resulted in a new product line of 60Hz
power transformers for Bel and produced many new customers. The Company is
seeking to capitalize on Signal Transformer’s broad base of customers with Bel’s
expanded product offering.
Effective
January 2, 2003, the Company entered into an asset purchase agreement with
Advanced Power Components plc ("APC") to purchase the communication products
division of APC for $5.5 million in cash plus the assumption of certain
liabilities. The Company was required to make contingent payments equal to
5% of
sales (as defined) in excess of $5.5 million per year for the years 2003 and
2004. No contingent purchase price payment amounts were due for 2003 or 2004.
The purchase price has been allocated to both tangible and intangible assets
and
liabilities based on estimated fair values. Goodwill of approximately $2.1
million has been included in the Company's Asia reporting segment.
There
was
no in-process research and development acquired as part of the Passive
Components Group of Insilco and APC acquisitions.
These
transactions were accounted for using the purchase method of accounting and,
accordingly, the results of operations of the Passive Components Group of
Insilco have been included in the Company's financial statements from March
22,
2003 and the results of operations of APC have been included in the Company's
financial statements from January 2, 2003.
The
following unaudited pro forma summary results of operations assume that Galaxy
and Netwatch s.r.o. had been acquired as of January 1, 2004 (in thousands,
except per share data):
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
Net
sales
|
$
|
221,227
|
$
|
212,331
|
|||
|
Net
earnings
|
20,026
|
25,419
|
|||||
|
Earnings
per share - diluted
|
1.74
|
2.21
|
|||||
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, 2003, 2004 and 2005. Such information should not be construed as a
representation of the future results of operations of the Company.
A
condensed balance sheet of the major assets and liabilities of Galaxy and
Netwatch s.r.o. at the acquisition dates is as follows:
|
Cash
|
$
|
311,856
|
||
|
Accounts
receivable
|
3,687,331
|
|||
|
Inventories
|
2,862,571
|
|||
|
Prepaid
expenses
|
96,120
|
|||
|
Income
taxes receivable
|
5,488
|
|||
|
Property,
plant and
|
||||
|
equipment
|
1,545,526
|
|||
|
Other
assets
|
32,083
|
|||
|
Deferred
tax asset
|
1,392,850
|
|||
|
Goodwill
|
12,456,080
|
|||
|
Intangible
assets
|
1,960,000
|
|||
|
Notes
payable
|
(860,694
|
)
|
||
|
Accounts
payable
|
(2,129,165
|
)
|
||
|
Accrued
expenses
|
(465,002
|
)
|
||
|
Net
assets acquired
|
$
|
20,895,044
|
||
As
part
of its acquisition strategy, the Company acquired 2,037,500 shares of common
stock of Artesyn Technologies, Inc. during 2004 at a total price of $16,331,469.
These purchases are reflected on the Company’s consolidated statement of cash
flows as purchases of marketable securities and are reflected on the Company’s
consolidated balance sheet as marketable securities. As of December 31, 2005
and
2004, the Company has recorded unrealized gains, net of income taxes, of
approximately $2.9 million and $4.0 million, respectively. In connection with
this transaction the Company is obligated to pay an investment banker’s advisory
fee to a third party of 20% of the appreciation in the stock of Artesyn or
$1
million, whichever is lower. As of December 31, 2005, the Company has accrued
a
fee in the amount of approximately $0.9 million. The Company proposed to Artesyn
that Bel acquire it, but they did not indicate any interest in negotiating
such
a transaction with Bel. On February 2, 2006, Artesyn announced that it had
entered into an agreement to be acquired by Emerson Network Power for $11.00
per
share in cash. Artesyn has stated that consummation of the agreement is subject
to customary regulatory approvals and approval by Artesyn’s shareholders. Based
on the current terms of the agreement, the Company expects to recognize a gain
of approximately $3.2 million, net of tax and investment banker’s advisory fees.
Such gain will be recognized upon closing the transaction. The Company also
expects to pay bonuses to key employees in connection with the
transaction.
During
2005, the Company also acquired 4,600,000 shares of common stock of a merger
candidate (“Merger Candidate”) at a total purchase price of $14,393,032. The
Merger Candidate had a market capitalization of approximately $363 million
as of
February 23, 2006. These shares represent approximately 4.7% of Merger
Candidate’s outstanding shares. The Merger Candidate is a multi-national
manufacturer and marketer of electronic components, assemblies, and systems.
The
Company’s purchases of Merger Candidate’s stock are reflected on the Company’s
consolidated statement of cash flows as purchases of marketable securities.
As
of December 31, 2005, the Company has recorded an unrealized gain, net of income
taxes, of approximately $0.6 million, which is included in other comprehensive
income as stated in the consolidated statement of stockholders’ equity. In
connection with this transaction, the Company is obligated to pay an investment
banker’s advisory fee to a third party of 20% of the appreciation in the stock
of Merger Candidate, or $1 million, whichever is lower. As of December 31,
2005,
the Company has accrued a fee in the amount of approximately $0.2 million.
Such
amount has been deferred within other assets. If the proposed acquisition of
the
Merger Candidate is consummated, the investment banker’s advisory fee will be
capitalized as part of the acquisition costs. Such amount will be expensed
at
such time if and when the Company deems the consummation of the proposed
acquisition to be unsuccessful. The Company cannot assure that it will be
successful in acquiring the Merger Candidate.
Sales
and
Marketing
The
Company sells its products to customers throughout North America, Western Europe
and the Far East. Sales are made through one of three channels: direct strategic
account managers, independent sales representative organizations or authorized
distributors. Bel's strategic account managers are assigned to handle major
accounts requiring global coordination.
Independent
sales representatives and authorized distributors are overseen by the Company's
sales management personnel located throughout the world. As of December 31,
2005, the Company had a sales and support staff of 50 persons that supported
a
network of 90 sales representative organizations and non-exclusive distributors.
The Company has written agreements with all of its sales representative
organizations
and
major distributors. These written agreements, terminable on short notice by
either party, are standard in the industry.
Sales
support functions have also been established and located in Bel international
facilities to provide timely, efficient support for customers. This supplemental
level of service, in addition to first-line sales support, enables the Company
to be more responsive to customers needs on a global level. The Company’s
marketing capabilities include product management which drives new product
development, application engineering for technical support and marketing
communications. Product marketing managers facilitate technical partnerships
for
engineering development of IC-compatible components and modules.
Research
and Development
The
Company’s engineering groups are strategically located around the world to
facilitate communication with and access to customers’ engineering personnel.
This collaborative approach enables partnerships with customers for technical
development efforts. On occasion, Bel executes non-disclosure agreements with
customers to help develop proprietary, next generation products destined for
rapid deployment.
The
Company also sponsors membership in technical organizations that allow Bel’s
engineers to participate in developing standards for emerging technologies.
It
is management’s opinion that this participation is critical in establishing
credibility and a reputable level of expertise in the marketplace, as well
as
positioning the Company as an industry leader in new product
development.
Research
and development costs are expensed as incurred, and are included in cost of
sales. Generally , research and development is performed internally for the
benefit of the Company. Research and development costs include salaries,
building maintenance and utilities, rents, materials, administration costs
and
miscellaneous other items. Research and development expenses for the years
ended
December 31, 2005, 2004 and 2003 amounted to $7.3 million, $7.3 million and
$8.4
million, respectively. The decline from 2003 to 2004 and 2005 is principally
attributed to the closure of the Company's Indiana research facility in 2003
and
lower research and development costs in the Far East as many research and
development jobs were moved by the Company from Hong Kong to China and several
positions were eliminated.
Competition
The
Company operates in a variety of markets all of which are highly competitive.
There are numerous independent companies and divisions of major companies that
manufacture products that are competitive with one or more of Bel’s products. It
is management’s opinion that Bel’s expanded product portfolio helps to
differentiate the Company in these markets and, as a result, reduces the
possibility of any single direct competitor operating across all product groups.
The
Company's ability to compete is dependent upon several factors including product
performance, quality, reliability, depth of product line, customer service,
technological innovation, design, delivery time and price. Overall financial
stability and global presence also play a significant role and give Bel a
favorable position in relation to many of its competitors. Management intends
to
maintain a strong competitive posture in the Company's markets by continued
expansion of the Company’s product lines and ongoing investment in research,
development and manufacturing resources.
Employees
As
of
December 31, 2005, the Company had 1,851 full-time employees. The Company
employed 591 people in its North American facilities, 1,196 people in its Asian
facilities and 64 people in its European facilities, excluding workers supplied
by independent contractors. The Company's manufacturing facility in New York
is
represented by a labor union. The Company believes that its relations with
employees are satisfactory.
Suppliers
The
Company has multiple suppliers for most of the raw materials that it purchases.
Where possible, the Company has contractual agreements with suppliers to assure
a continuing supply of critical components.
With
respect to those items which are purchased from single sources, the Company
believes that comparable items would be available in the event that there was
a
termination of the Company's existing business relationships with any such
supplier. While such a termination could produce a disruption in production,
the
Company believes that the termination of business with any one of its suppliers
would not have a material adverse effect on its long-term operations. Actual
experience could differ materially from this belief as a result of a number
of
factors, including the time required to locate an alternative supplier, and
the
nature of the demand for the Company’s products. In the past, the Company has
experienced shortages in certain raw materials, such as capacitors, ferrites
and
integrated circuits (“IC’s”), when these materials were in great demand. Even
though the Company may have more than one supplier for certain materials, it
is
possible that these materials may not be available to the Company in sufficient
quantities or at the times desired by the Company.
Backlog
The
Company manufactures products against firm orders and projected usage by
customers. Cancellation and return arrangements are either negotiated by the
Company on a transactional basis or contractually determined. The Company's
backlog of orders as of February 28, 2006 was approximately $50.1 million,
as
compared with a backlog of $43.7 million as of February 28, 2005 . Management
expects that all of the Company's backlog as of February 28, 2006 will be
shipped by December 31, 2006. Such expectation constitutes a Forward-Looking
Statement. Factors that could cause the Company to fail to ship all such orders
by year-end include unanticipated supply difficulties, changes in customer
demand and new customer designs. The Company's major customers have negotiated
reduced lead times on purchase orders and have implemented consignment inventory
programs with the goal of reducing their inventories. Accordingly, backlog
may
no longer be a reliable indicator of the timing of future sales. See Item 1A
of
this Annual Report- "Risk Factors - Our backlog figures may not be reliable
indicators."
Intellectual
Property
The
Company has been granted a number of U.S. patents and has additional U.S. patent
applications pending relating to its products. While the Company believes that
the issued patents are defendable and that the pending patent applications
relate to patentable inventions, there can be no assurance that a patent will
be
obtained from the applications or that its existing patents can be successfully
defended. It is management's opinion that the successful continuation and
operation of the Company's business does not depend upon the ownership of
patents or the granting of pending patent applications, but upon the innovative
skills, technical competence and marketing and managerial abilities of its
personnel. The patents have a life of seventeen years from the date of issue
or
twenty years from filing of patent applications. The Company's existing patents
expire on various dates from March 11, 2006 to February 15, 2021.
The
Company utilizes U.S. registered trademarks to identify various products that
it
manufactures. The trademarks survive as long as they are in use and the
registrations of these trademarks are renewed.
Available
Information
The
Company maintains a website at www.belfuse.com
where it
makes available the proxy statements, press releases and reports on Form 4,
8-K,
10-K and 10-Q that it and its insiders file with the SEC. These forms are made
available as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC. Press releases are also
issued via electronic transmission to provide access to the Company’s financial
and product news. In addition, the Company provides notification of and access
to voice and Internet broadcasts of its quarterly and annual results.
An
investment in our common stock involves a high degree of risk. Investors should
carefully consider the risks described below, together with all other
information contained in this Annual Report before making investment decisions
with respect to our common stock.
We
do business in a highly competitive industry
Our
business is highly competitive worldwide, with relatively low barriers to
competitive entry. We compete principally on the basis of product performance,
quality, reliability, depth of product line, customer service, technological
innovation, design, delivery time and price. The electronic components industry
has become increasingly concentrated and globalized in recent years and our
major competitors, some of which are larger than us, have significant financial
resources and technological capabilities.
Our
backlog figures may not be reliable indicators.
Many
of
the orders that comprise our backlog may be canceled by customers without
penalty. Customers may on occasion double and triple order components from
multiple sources to ensure timely delivery when backlog is particularly long.
Customers often cancel orders when business is weak and inventories are
excessive. Therefore, we cannot be certain that the amount of our backlog equals
or exceeds the level of orders that will ultimately be delivered. Our results
of
operations could be adversely impacted if customers cancel a material portion
of
orders in our backlog.
There
are several factors which can cause us to lower our
prices.
a) The
average selling prices for our products tend to decrease rapidly over their
life
cycle, and customers are increasing pressure on suppliers to lower prices.
Our
profits will suffer if we are not able to reduce our costs of production or
induce technological innovations as sales prices decline.
b) Any
drop
in demand or increase in supply of our products due to the overcapacity of
our
competitors could cause a dramatic drop in our average sales prices causing
a
decrease in our gross margins.
c) The
average selling prices for our products tend to decrease rapidly over their
life
cycle, and customers are increasing pressure on suppliers to lower prices.
In
addition, increased competition from low cost suppliers around the world has
put
further pressures on pricing. The Company continually strives to lower its
costs, negotiate better pricing for components and raw materials and improve
our
operating efficiencies. Profit margins will be materially and adversely impacted
if we are not able to reduce our costs of production or introduce technological
innovations as sales prices decline.
We
are dependent on our ability to develop new products.
Our
future operating results are dependent, in part, on our ability to develop,
produce and market new and more technologically advanced products. There are
numerous risks inherent in this process, including the risks that we will be
unable to anticipate the direction of technological change or that we will
be
unable to timely develop and bring to market new products and applications
to
meet customers’ changing needs.
Our
acquisitions may not produce the anticipated results.
A
significant portion of our recent growth is from acquisitions. We cannot assure
you that we will identify or successfully complete transactions with suitable
acquisition candidates in the future. We also cannot assure you that
acquisitions we complete will be successful. If an acquired business fails
to
operate as anticipated or cannot be successfully integrated with our other
businesses, our results of operations, enterprise value, market value and
prospects could all be materially and adversely affected.
If
our
acquisitions fail to perform up to our expectations, or as the value of goodwill
decreases, we could be required to record a loss from the impairment of assets.
Integration of new acquisitions into our consolidated operations may result
in
lower average operating results for the group as a whole.
Our
strategy also focuses on the reduction of selling, general and administrative
expenses through the integration or elimination of redundant sales offices
and
administrative functions at acquired companies. Our inability to achieve these
goals could have a material and adverse effect on our results of
operations.
We
intend
to continue to seek additional acquisition candidates, although we cannot
predict when or if we will make any additional acquisitions, and what the impact
of any such acquisitions may have on our financial performance. If we were
to
undertake a substantial acquisition for cash, the acquisition would likely
need
to be financed in part through bank borrowings or the issuance of public or
private debt or equity. If we borrow money to finance acquisitions, this would
likely decrease our ratio of earnings to fixed charges and adversely affect
other leverage criteria and could result in the imposition of material
restrictive covenants. Under our existing credit facility, we are required
to
obtain our lenders’ consent for certain additional debt financing, to comply
with other covenants including the application of specific financial ratios,
and
may be restricted from paying cash dividends on our capital stock. We cannot
assure you that the necessary acquisition financing would be available to us
on
acceptable terms, or at all, when required. If we issue a substantial amount
of
stock either as consideration in an acquisition or to finance an acquisition,
such issuance may dilute existing stockholders and may take the form of capital
stock having preferences over our existing common stock.
We
are exposed to weaknesses in international markets and other risks inherent
in
foreign trade.
We
have
operations in eight countries around the world outside the United States, and
approximately 68 % of our revenues during 2005 were derived from sales to
customers outside the United States. Some of the countries in which we operate
have in the past experienced and may continue to experience political, economic,
medical epidemic and military instability or unrest. These conditions could
have
a material and adverse impact on our ability to operate in these regions and,
depending on the extent and severity of these conditions, could materially
and
adversely affect our overall financial condition and operating results.
Although
our operations have traditionally been largely transacted in U.S. dollars or
U.S. dollar linked currencies, recent world financial instability and recent
acquisitions in the Dominican Republic, Mexico, Germany, the United Kingdom,
Hong Kong and The People's Republic of China (“PRC”) may cause additional
foreign currency risks.
Other
risks inherent in doing trade internationally include: expropriation and
nationalization, trade restrictions, transportation delays, and changes in
United States laws that may inhibit or restrict our ability to manufacture
in or
sell to any particular country. For information regarding risks associated
with
our presence in Hong Kong and Macao, see "Item 2 - Properties" of this Annual
Report on Form 10-K.
While
we
have benefited from favorable tax treatment in many of the countries where
we
operate, the benefits we currently enjoy could change if laws or rules in the
United States or those foreign jurisdictions change, incentives are changed
or
revoked, or we are unable to renew current incentives.
We
may experience labor unrest.
As
we
implement transfers of certain of our operations, we may experience strikes
or
other types of labor unrest as a result of lay-offs or termination of employees
in higher labor cost countries.
Our
results of operations may be materially and adversely impacted by environmental
and other regulations.
Our
manufacturing operations, products and/or product packaging are subject to
environmental laws and regulations governing air emissions, wastewater
discharges, the handling, disposal and remediation of hazardous substances,
wastes and certain chemicals used or generated in our manufacturing processes,
employee health and safety labeling or other notifications with respect to
the
content or other aspects of our processes, products or packaging, restrictions
on the use of certain materials in or on design aspects of our products or
product packaging and responsibility for disposal of products or product
packaging. More stringent environmental regulations may be enacted in the
future, and we cannot presently determine the modifications, if any, in our
operations that any such future regulations might require, or the cost of
compliance with these regulations.
Our
results may vary substantially from period to period.
Our
revenues and expenses may vary significantly from one accounting period to
another accounting period due to a variety of factors, including customers'
buying decisions, our product mix and general market and economic conditions.
Such variations could significantly impact our stock price.
A
shortage of availability or an increase in the cost of raw materials and
components and our ability to procure high quality raw materials at cost
effective prices may negatively impact profit
margins.
a) Our
results of operations may be adversely impacted by difficulties in obtaining
raw
materials, supplies, power, natural resources and any other items needed for
the
production of our products, as well as by the effects of quality deviations
in
raw materials. Many of these materials and components are produced by a limited
number of suppliers and may be constrained by supplier capacity.
Our
results of operations may be adversely impacted by difficulties in obtaining
raw
materials, supplies, power, natural resources and any other items needed for
the
production of our products, as well as by the effects of quality deviations
in
raw materials and the effects of significant fluctuations in the prices on
existing inventories and purchase commitments for these materials.
b) Our
results of operations may be adversely impacted by difficulties in obtaining
raw
materials, supplies, power, natural resources and any other items needed for
the
production of our products, as well as by the effects of quality deviations
in
raw materials and the effects of significant fluctuations in the prices on
existing inventories and purchase commitments for these materials.
As
product life cycles shorten and during periods of market slowdowns, the risk
of
material obsolescence increases and this may adversely impact our financial
results.
Rapid
shifts in demand for various products may cause some of our inventory of raw
materials, components or finished goods to become obsolete.
The
life
cycles and demand for our products are directly linked to the life cycles and
demand for the end products into which they are designed. Rapid shifts in the
life cycles or demand for these end products due to technological shifts,
economic conditions or other market trends may result in material amounts of
inventory of either raw materials or finished goods becoming obsolete. While
the
Company works diligently to manage inventory levels, rapid shifts in demand
may
result in obsolete or excess inventory and impact financial
results.
A
loss of the services of the Company’s executive officers or other skilled
employees could negatively impact our operations and
results.
The
success of the Company’s operations is largely dependent upon the performance of
its executive officers, managers, engineers and sales people. Many of these
individuals have a significant number of years of experience within the Company
and/or the industries in which we compete and would be extremely difficult
to
replace. The loss of the services of any of these employees may materially
and
adversely impact our results of operations if we are unable to replace them
in a
timely manner.
Our
stock price, like that of many technology companies, has been and may continue
to be volatile.
The
market price of our common stock may fluctuate as a result of variations in
our
quarterly operating results and other factors beyond our control. These
fluctuations may be exaggerated if the trading volume of our common stock is
low. In addition, the market price of our common stock may rise and fall in
response to a variety of factors, including:
|
·
|
announcements
of technological or competitive
developments;
|
|
·
|
acquisitions
or strategic alliances by us or our
competitors;
|
|
·
|
the
gain or loss of a significant customer or
order;
|
|
·
|
changes
in estimates of our financial performance or changes in recommendations
by
securities analysts regarding us or our industry;
or
|
|
·
|
general
market or economic conditions.
|
In
addition, equity securities of many technology companies have experienced
significant price and volume fluctuations. These price and volume fluctuations
often have been unrelated to the operating performance of the affected
companies.
Our
intellectual property rights may not be adequately protected under the current
state of the law.
We
cannot
assure you we will be successful in protecting our intellectual property through
patent or other laws. As a result, other companies may be able to develop and
market similar products which could materially adversely affect our
business.
We
may be
sued by third parties for alleged infringement of their proprietary rights
and
we may incur defense costs and possibly royalty obligations or lose the right
to
use technology important to our business.
From
time
to time, we receive claims by third parties asserting that our products violate
their intellectual property rights. Any intellectual property claims, with
or
without merit, could be time consuming and expensive to litigate or settle
and
could divert management attention from administering our business. A third
party
asserting infringement claims against us or our customers with respect to our
current or future products may materially adversely affect us by, for example,
causing us to enter into costly royalty arrangements or forcing us to incur
settlement
or litigation costs.
Not
applicable.
| Item 2. |
The
Company is headquartered in Jersey City, New Jersey where it currently owns
62,000 square feet of office and warehouse space. On July 15, 2004 the Company
entered into an agreement for the sale of land and building of approximately
40,000 square feet located in Jersey City, New Jersey. See Item 7 of this Annual
Report on Form10-K for additional information regarding this agreement. The
Company operated 13 manufacturing facilities in 7 countries as of December
31,
2005. An additional 117,000 square foot manufacturing facility is being
constructed in the PRC to meet customer demand with an estimated completion
date
of early 2006.
The
following is a list of the locations of the Company's principal manufacturing
facilities at December 31, 2005.
|
Location
|
Approximate
Square
Feet
|
Owned/
Leased
|
Percentage
Used
for
Manufacturing
|
|||||||
|
Donnguan,
People's
|
||||||||||
|
Republic
of China
|
346,000
|
Leased
|
61
|
%
|
||||||
|
Zhongshan,
People's
|
||||||||||
|
Republic
of China
|
416,000
|
Leased
|
81
|
%
|
||||||
|
Zhongshan,
People's
|
||||||||||
|
Republic
of China
|
128,000
|
Leased
|
74
|
%
|
||||||
|
Zhongshan,
People's
|
||||||||||
|
Republic
of China
|
77,000
|
Owned
|
81
|
%
|
||||||
|
Hong
Kong
|
66,000
|
Owned
|
29
|
%
|
||||||
|
Macao
|
71,000
|
Owned
|
28
|
%
|
||||||
|
Prague,
Czech Republic
|
9,000
|
Leased
|
76
|
%
|
||||||
|
Dominican
Republic
|
29,000
|
Leased
|
76
|
%
|
||||||
|
Cananea,
Mexico
|
28,000
|
Leased
|
65
|
%
|
||||||
|
Inwood,
New York
|
35,000
|
Owned
|
60
|
%
|
||||||
|
Glen
Rock, Pennsylvania
|
74,000
|
Owned
|
60
|
%
|
||||||
|
Westboro,
MA
|
22,000
|
Leased
|
85
|
%
|
||||||
|
1,301,000
|
||||||||||
In
addition to this manufacturing space, 95,000 square feet of space is used for
engineering, warehousing, sales and administrative support functions at various
locations and 265,000 square feet of space is used for dormitories, canteen
and
other employee related facilities in the PRC and the Special Administrative
Regions of Hong Kong and Macao in Asia.
The
Territory of Hong Kong became a Special Administrative Region (“SAR”) of The
People's Republic of China during 1997. The territory of Macao became a SAR
of
The People's Republic of China at the end of 1999. Management cannot presently
predict what future impact, if any, this will have on the Company or how the
political climate in China and the Dominican Republic will affect its
contractual arrangements in China or labor relationships in the Dominican
Republic. A significant portion of the Company's manufacturing operations and
approximately 38% of its identifiable assets are located in Hong Kong, Macao,
and The People's Republic of China. Accordingly, events resulting from any
change in the "Most Favored Nation" status granted to China by the U.S. could
have a material adverse effect on the Company.
Approximately
22% of the 1,400,000 square feet the Company occupies is owned while the
remainder is leased. See Note 15 of the Notes to Consolidated Financial
Statements for additional information pertaining to leases .
For
information regarding a fire occurring in the Company’s leased facility in the
Dominican Republic, see Item 7 of this Annual Report on Form 10-K -
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - 2006 Event”.
| Item 3. |
The
Company is a plaintiff in a lawsuit captioned Bel Fuse Inc., a New Jersey
corporation, and Bel Power, Inc., a Massachusetts corporation, v. Andrew
Ferencz, Gregory Zovonar, Bernhard Schroter, EE2GO, Inc., a Massachusetts
corporation, Howard E. Kaepplein and William Ng, Defendants brought in the
Supreme Court of the Commonwealth of Massachusetts. The Company was granted
injunctive relief and is seeking damages against the former stockholders of
Galaxy Power, Inc, the Company’s recent acquisition, and 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.
The
Company is a defendant in a lawsuit captioned Murata Manufacturing Company,
Ltd.
v. Bel Fuse Inc et al and brought in Illinois Federal District Court. Plaintiff
claims that its patent covers all of the Company's modular jack products. That
party had previously advised the Company that it was willing to grant a
non-exclusive license to the Company under the patent for a 3% royalty on all
future gross sales of ICM products; payment of a lump sum of 3% of past sales
including sales of applicable Insilco products; an annual minimum royalty of
$500,000; payment of all attorney fees; and marking of all licensed ICM's with
the third party's patent number. The Company is also a defendant in a lawsuit,
captioned Regal Electronics, Inc. v. Bel Fuse Inc. and brought in California
Federal District Court. Plaintiff claims that its patent covers certain of
the
Company's modular jack products. That party had previously advised the Company
that it was willing to grant a non transferable license to the Company for
an up
front fee of $500,000 plus a 6% royalty on future sales. The District Court
has
granted summary judgment in the Company's favor dismissing Regal Electronics'
infringement claims, while at the same time the Court dismissed the Company's
invalidity counterclaim against Regal Electronics. As of the date hereof, the
Company has not been advised as to whether Regal will appeal the Court's
rejection of its infringement claims. The Company believes that none of its
products are covered by these patents and intends to vigorously defend its
position and no accrual has been provided in the accompanying consolidated
financial statements.
The
Company cannot predict the outcome of these matters; however, management
believes that the ultimate resolution of these matters will not have a material
impact on the Company's consolidated financial condition or results of
operations.
The
Company is not a party to any other legal proceeding, the adverse outcome of
which is expected to have a material adverse effect on the Company's
consolidated financial condition or results of operations.
No
matters were submitted to a vote of the Company's shareholders during the fourth
quarter of 2005.
| (a) |
Market
Information
|
The
Company’s voting Class A Common Stock, par value $0.10 per share, and non-voting
Class B Common Stock, par value $0.10 per share ("Class A" and "Class B,"
respectively), are traded on the NASDAQ National Market. The following table
sets forth the high and low closing sales price range (as reported by The Nasdaq
Stock Market Inc.) for the Common Stock on NASDAQ for each quarter during the
past two years.
|
Class
A
|
Class
A
|
Class
B
|
Class
B
|
||||||||||
|
High
|
Low
|
High
|
Low
|
||||||||||
|
Year
Ended December 31, 2004
|
|||||||||||||
|
First
Quarter
|
$
|
34.75
|
$
|
24.24
|
$
|
40.16
|
$
|
28.80
|
|||||
|
Second
Quarter
|
36.00
|
24.00
|
42.00
|
29.78
|
|||||||||
|
Third
Quarter
|
35.96
|
27.15
|
41.99
|
32.12
|
|||||||||
|
Fourth
Quarter
|
31.20
|
24.62
|
36.45
|
30.33
|
|||||||||
|
Year
Ended December 31, 2005
|
|||||||||||||
|
First
Quarter
|
29.79
|
24.10
|
34.92
|
28.42
|
|||||||||
|
Second
Quarter
|
26.74
|
21.50
|
31.72
|
25.54
|
|||||||||
|
Third
Quarter
|
29.50
|
24.50
|
36.48
|
29.72
|
|||||||||
|
Fourth
Quarter
|
30.10
|
22.39
|
37.00
|
28.88
|
|||||||||
The
Common Stock is reported under the symbols BELFA and BELFB in the NASDAQ
National Market.
| (b) |
Holders
|
As
of
February 28, 2006 there were 209 registered shareholders of the Company's Class
A Common Stock and Class B Common Stock. The Company estimates that there were
2,486 beneficial shareholders of Class A Common Stock and Class B Common Stock
as of February 28, 2006.
| (c) |
Dividends
|
There
are
no contractual restrictions on the Company's ability to pay dividends provided
the Company continues to comply with the financial tests in its credit
agreement. On February 2, 2005, May 2, 2005, August 1, 2005, and November 1,
2005 the Company paid a $0.05 per share dividend to all shareholders of record
of Class B Common Stock in the total amount of $433,450, $437,175, $439,450,
and
$442,356, respectively. On February 2, 2005, May 2, 2005, August 1, 2005 and
November 1, 2005 the Company paid a $0.04 per share dividend to all shareholders
of record of Class A Common Stock in the total amount of $107,735, $107,735,
$107,735 and $107,735, respectively. On February 2, 2004, May 2, 2004, August
2,
2004, and November 2, 2004 the Company paid a $0.05 per share dividend to all
shareholders of record of Class B Common Stock in the total amount of $422,474,
$424,449, $431,470, and $432,406, respectively. During May 2004 the Company
paid
a dividend on Class B common stock in the amount of $26,860 in connection with
a
shortfall of prior payments. On February 2, 2004, May 2, 2004, August 2, 2004,
and November 2, 2004 the Company paid a $0.04 per share dividend to all
shareholders of record of Class A Common Stock in the total amount of $107,641,
$107,641, $107,678, and $107,694, respectively.
On
February 1, 2006 the Company paid a $0.04 and $0.05 per share dividend to all
shareholders of record at January 15, 2006 of Class A and Class B Common Stock
in the amount of $107,735 and $440,580, respectively. The Company currently
anticipates paying these dividends in the future.
|
(d)
|
Securities
authorized for issuance under the Equity Compensation
Plans
|
Equity
Compensation Plan Information
|
Plan
category
|
Number
of securities to be
issued
upon exercise of
outstanding
options, warrants
and
rights and restricted stock
awards
to be granted
|
Weighted
average exercise
price
of outstanding options,
warrants
and rights
|
Number
of securities remaining
available
for future issuance
|
|||||||
|
Equity
compensation plans approved by
security holders
|
286,013
|
$
|
24.96
|
810,985
|
||||||
|
Equity
compensation plans not approved
by security holders
|
—
|
—
|
—
|
|||||||
|
Totals
|
286,013
|
$
|
24.96
|
810,985
|
||||||
|
Years
Ended December 31,
|
||||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
(In
thousands of dollars, except per share data)
|
||||||||||||||||
|
Selected
Statements of Operations Data: (a) (b) (c)
|
||||||||||||||||
|
Net
sales
|
$
|
215,916
|
$
|
190,022
|
$
|
158,498
|
$
|
95,528
|
$
|
96,045
|
||||||
|
Cost
of sales
|
156,147
|
132,776
|
113,813
|
72,420
|
89,603
|
|||||||||||
|
Selling,
general and
|
||||||||||||||||
|
administrative
expenses
|
33,152
|
31,302
|
26,757
|
22,270
|
21,561
|
|||||||||||
|
Fixed
asset impairment
|
—
|
1,033
|
—
|
—
|
—
|
|||||||||||
|
Interest
income - net
|
1,098
|
525
|
249
|
940
|
2,411
|
|||||||||||
|
Lawsuit
proceeds
|
—
|
2,935
|
—
|
—
|
—
|
|||||||||||
|
Earnings
(loss) before provision (benefit)
|
||||||||||||||||
|
for
income taxes
|
27,715
|
28,371
|
18,177
|
1,778
|
(12,709
|
)
|
||||||||||
|
Income
tax provision (benefit)
|
7,482
|
3,649
|
4,413
|
1,199
|
(547
|
)
|
||||||||||
|
Net
earnings (loss)
|
20,233
|
24,722
|
13,764
|
579
|
(12,162
|
)
|
||||||||||
|
Earnings
(loss) per common
|
||||||||||||||||
|
share
- basic
|
1.76
|
2.19
|
1.25
|
0.05
|
(1.13
|
)
|
||||||||||
|
Earnings
(loss) per common
|
||||||||||||||||
|
share
- diluted
|
1.75
|
2.15
|
1.24
|
0.05
|
(1.13
|
)
|
||||||||||
|
Cash
dividends declared per
|
||||||||||||||||
|
Class
A common share
|
0.16
|
0.16
|
0.08
|
—
|
—
|
|||||||||||
|
Cash
dividends declared per
|
||||||||||||||||
|
Class
B common share
|
0.20
|
0.20
|
0.20
|
0.20
|
0.20
|
|||||||||||
|
As
of December 31,
|
||||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
(In
thousands of dollars, except per share data and
percentages)
|
||||||||||||||||
|
Selected
Balance Sheet Data and Ratios:
|
||||||||||||||||
|
Working
capital
|
$
|
128,203
|
$
|
127,624
|
$
|
102,370
|
$
|
82,986
|
$
|
83,698
|
||||||
|
Total
assets
|
242,056
|
217,777
|
181,817
|
147,840
|
147,517
|
|||||||||||
|
Long
term debt
|
—
|
6,500
|
8,500
|
—
|
—
|
|||||||||||
|
Stockholders'
equity
|
201,577
|
178,461
|
146,855
|
130,659
|
129,463
|
|||||||||||
|
Book
value per
|
||||||||||||||||
|
share
|
18.21
|
15.70
|
13.16
|
11.95
|
12.02
|
|||||||||||
|
Return
on average
|
||||||||||||||||
|
total
assets, %
|
8.83
|
12.37
|
7.95
|
0.40
|
(7.60
|
)
|
||||||||||
|
Return
on average
|
||||||||||||||||
|
Stockholders'
|
||||||||||||||||
|
equity,
%
|
10.75
|
15.20
|
9.93
|
0.44
|
(8.80
|
)
|
||||||||||
|
(a)
|
On
May 11, 2001, the Company acquired 100% of the common stock of E-Power
Ltd
("E-Power") and the assets and business of Current Concepts, Inc.
("Current Concepts") for an aggregate of $6,285,000 in cash (including
acquisition expenses). During the years ended December 31, 2005,
2004,
2003 and 2002, the Company paid $697,000, $354,000, $209,000 and
$61,000,
respectively, in contingent purchase price payments. The transactions
were
accounted for using the purchase method of accounting and, accordingly,
the results of operations of Current Concepts and E-Power have been
included in the Company's financial statements since the date of
acquisition.
|
|
(b)
|
See
Item 1 for information regarding the acquisitions during 2005 of
Galaxy
and Netwatch and during 2003 of APC and the Passive Components Group
of
Insilco. These transactions were accounted for using the purchase
method
of accounting and, accordingly, the results of operations of Galaxy,
Netwatch, the Passive Components Group of Insilco and APC have been
included in the Company's financial statements since their respective
dates of acquisition.
|
| (c) |
The
Company was a party to an arbitration proceeding related to the
acquisition of its Telecom Components business in 1998. The Company
asserted that the seller breached the terms of a related Global
Procurement Agreement dated October 2, 1998 and sought damages
related
thereto. During December 2004, the Company and the seller settled
this
matter. The settlement resulted in a payment to the Company and
an
unconditional release by the seller of all counterclaims against
the
Company. The net gain of $2,935,000 from the settlement is included
in the
Company’s consolidated statement of operations for the year ended December
31, 2004.
|
The
following discussion and analysis should be read in conjunction with the
Company’s consolidated financial statements and the notes related thereto. The
discussion of results, causes and trends should not be construed to infer any
conclusion that such results, causes or trends will necessarily continue in
the
future.
Critical
Accounting Policies
The
Company’s discussion and analysis of its financial condition and results of
operations are based upon the Company’s consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure
of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to product returns, bad debts,
inventories, intangible assets, investments, income taxes and contingencies
and
litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Allowance
for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses from
the
inability of its customers to make required payments. The Company determines
its
reserves by both specific identification of customer accounts where appropriate
and the application of historical loss experience to non-specific accounts.
If
the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
Inventory
The
Company makes purchasing decisions principally based upon firm sales orders
from
customers, the availability and pricing of raw materials and projected customer
requirements. Future events that could adversely affect these decisions and
result in significant charges to the Company’s operations include miscalculating
customer requirements, technology changes which render certain raw materials
and
finished goods obsolete, loss of customers and/or cancellation of sales orders,
stock rotation with distributors and termination of distribution agreements.
The
Company writes down its inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon the aforementioned assumptions. If actual
market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.
When
inventory is written-off, it is never written back up; the cost remains at
zero
or the level to which it has been written-down. When inventory that has been
written-off is subsequently used in the manufacturing process, the lower
adjusted cost of the material is charged to cost of sales. Should any of this
inventory be used in the manufacturing process for customer orders, the improved
gross profit will be recognized at the time the completed product is shipped
and
the sale is recorded.
Acquisitions
Acquisitions
continue to be a key element in the Company's growth strategy. If the Company's
evaluation of a Merger Candidate misjudges its technology, estimated future
sales and profitability levels, or ability to keep pace with the latest
technology, these factors could impair the value of the investment, which could
materially adversely affect the Company's profitability. The Company recorded
a
goodwill impairment charge of $5.2 million in 2002.
Income
Taxes
The
Company files income tax returns in every jurisdiction in which it has reason
to
believe it is subject to tax. Historically, the Company has been subject to
examination by various taxing jurisdictions. To date, none of these examinations
has resulted in any material additional tax. Nonetheless, any tax jurisdiction
may contend that a filing position claimed by the Company regarding one or
more
of its transactions is contrary to that jurisdiction's laws or
regulations.
Revenue
Recognition
The
Company recognizes revenue in accordance with the guidance contained in SEC
Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial
Statements”. Revenue is recognized when the product has been delivered and title
and risk of loss have passed to the customer, collection of the resulting
receivable is deemed probable by management, persuasive evidence of an
arrangement exists and the sale price is fixed and determinable.
Historically
the Company has been successful in mitigating the risks associated with its
revenue recognition. Some issues relate to product warranty, credit worthiness
of its customers and concentration of sales among a few major
customers.
The
Company is not contractually obligated to accept returns from non-distributor
customers except for defective product or in instances where the product does
not meet the Company’s quality specifications. If these conditions existed, the
Company would be obligated to repair or replace the defective product or make
a
cash settlement with the customer. Distributors generally have the right to
return up to 5% of their purchases over the previous three to six months and
are
obligated to purchase an amount at least equal to the return. If the Company
terminates a distributor, the Company is obligated to accept as a return all
of
the distributor’s inventory from the Company. If the financial conditions of the
Company’s customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances for bad debt may be required
which could have a material adverse effect on the Company’s consolidated results
of operations and financial condition. The Company has a significant amount
of
sales with several major customers. The loss of any one of these customers
could
have a material adverse effect on the Company’s consolidated results of
operations and financial position.
Overview
Bel
is a
leading producer of electronic products that help make global connectivity
a
reality. The Company designs, manufactures and markets a broad array of
magnetics, modules, circuit protection devices and interconnect products. While
these products are deployed primarily in the computer, networking and
telecommunication industries, Bel’s expanding portfolio of products also finds
application in the automotive, medical and consumer electronics markets. Bel's
products are designed to protect, regulate, connect, isolate or manage a variety
of electronic circuits.
We
design
our products to enhance the systems in which they operate. As our products
typically become components in other third-party’s systems, our revenues are
largely driven by the extent to which our customers can design and develop
new
applications and the extent to which those customers have needs for the types
of
components that we can provide. We are problem-solvers; we design most of our
products to combine various discrete components in a manner that will allow
the
systems designer to save space and to offer a more efficient
product.
Our
expenses are driven principally by the cost of the materials that we use and
the
cost of labor where our factories are located. In recent years, the increasing
cost of copper, steel and petroleum-based products and the increased wage
structure in the Far East have contributed to increases in manufacturing
costs.
During
2005, approximately $12.0 million of the Company’s sales increase was
attributable to the acquisition by the Company of Galaxy Power, Inc. (“Galaxy”)
which occurred on March 22, 2005 and Netwatch s.r.o. (now named Bel Stewart
Net
s.r.o.) which occurred on June 30, 2005. Excluding 2005 acquisitions, the
Company had an organic sales increase of 7.3% for the year. The 2005
acquisitions resulted in additional Cost of Sales and Selling, General and
Administrative expenses of $10.5 million and $2.0 million, respectively. Galaxy
reflected a loss of approximately $1.3 million, net of tax benefit, including
amortization of intangibles of approximately $.7 million.
Gross
profit margins were lower during 2005 compared to 2004, principally due to
increased raw material resulting from higher commodity prices for copper, steel,
and petroleum-based products and changes in the Company’s product mix. Sales of
the Company’s DC-DC power products have increased. While these products are
strategic to Bel’s growth and important to total earnings, they return lower
gross profit percentage margins as a larger percentage of their bills of
material are purchased components. As these sales continue to increase, the
Company’s average gross profit percentage will likely decrease. The increasing
sales also have an impact on the accelerated write off of intangible assets
related to the acquisition of Current Concepts.
Additionally,
the Company incurred increased amortization expense in the pretax amount of
$1.3
million related to identifiable intangibles arising from contingent payments
which were made under the terms of the Current Concepts acquisition and from
the
Galaxy acquisition. See Notes 2 and 3 of Notes to Consolidated Financial
Statements relating to Acquisitions and Goodwill and Other
Intangibles.
The
Company also incurred a $0.2 million pretax stock compensation expense in
connection with its Restricted Stock Award Plan which was implemented during
2005. This expense is reflected in the Company’s selling, general and
administrative expenses.
During
June 2005 and December 2005, the Company repatriated earnings from certain
controlled foreign corporations in the amounts of $25.6 million and $45.0
million, respectively, to take advantage of the lower federal tax rate of 5.25%
which was created under the American Jobs Creation Act of 2004 for repatriations
effected on or before December 31, 2005. This repatriation resulted in an
additional tax expense of approximately $3.1 million, net of foreign tax credits
of $529,000, for the year ended December 31, 2005.
The
Company repaid bank debt during June 2005 in the amount of $14.5 million and
during December 2005 in the amount of $4.0 million. Such debt was incurred
partially to fund the acquisition of Galaxy and the purchase of the capital
stock of the previously mentioned Merger Candidate. The Company also repaid
bank
and other obligations associated with the Galaxy acquisition in the amount
of
approximately $.9 million.
2006
EVENT
On
February 17, 2006, a fire resulted in the temporary closure of the Company’s
leased manufacturing facility in San Cristobal, Dominican Republic. Management
is implementing a recovery plan that will include temporarily shifting certain
production to other Company facilities. The Company maintains insurance for
damage to this facility and some of its contents, as well as for business
interruption. The Company does not believe it has adequate insurance to cover
its entire loss. The Company estimates that the Dominican Republic facility
was
responsible for approximately 4% of the Company’s worldwide revenues in
2005.
Results
of Operations
The
following table sets forth, for the past three years, the percentage
relationship to net sales of certain items included in the Company’s
consolidated statements of operations.
|
Percentage
of Net Sales
|
||||||||||
|
Years
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Net
sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
|
Cost
of sales
|
72.3
|
69.9
|
71.8
|
|||||||
|
Selling,
general and
|
||||||||||
|
administrative
expenses
|
15.4
|
16.5
|
16.9
|
|||||||
|
Fixed
asset impairment
|
—
|
0.5
|
—
|
|||||||
|
Interest
income - net
|
0.5
|
0.3
|
0.2
|
|||||||
|
Lawsuit
proceeds
|
—
|
1.5
|
—
|
|||||||
|
Earnings
before provision for
|
||||||||||
|
income
taxes
|
12.8
|
14.9
|
11.5
|
|||||||
|
Income
tax provision
|
3.5
|
1.9
|
2.8
|
|||||||
|
Net
earnings
|
9.3
|
13.0
|
8.7
|
|||||||
The
following table sets forth the year over year percentage increases or decreases
of certain items included in the Company's consolidated statements of
operations.
|
Increase
(Decrease) from
|
|||||||
|
Prior
Period
|
|||||||
|
2005
compared
|
2004 compared | ||||||
|
with
2004
|
with
2003
|
||||||
|
Net
sales
|
13.6
|
%
|
19.9
|
%
|
|||
|
Cost
of sales
|
17.6
|
16.7
|
|||||
|
Selling,
general and administrative expenses
|
5.9
|
17.0
|
|||||
|
Net
earnings
|
(18.2
|
)
|
79.6
|
||||
Sales
Net
sales
increased 13.6% from $190.0 million during the year ended December 31, 2004
to
$215.9 million during the year ended December 31, 2005. The Company attributes
the increase to increased module sales of $14.4 million of which $10.6 million
is attributable to the acquisition of Galaxy, strong demand for interconnect
products resulting in an increase of $6.6 million in such sales, of which $1.4
million is attributable to the acquisition of Netwatch and strong demand for
magnetic sales resulting in an increase of $4.9 million in such sales, while
circuit protection sales remained substantially unchanged. Excluding 2005
acquisitions, Bel had an organic sales increase of 7.3% for the
year.
The
significant components of the Company's revenues for the year ended December
31,
2005 were magnetic products of $127.2 million (as compared with $122.4 million
during the year ended December 31, 2004), interconnect products of $40.7 million
(as compared with $34.0 million during the year ended December 31, 2004), module
products of $28.2 million (as compared with $13.8 million during the year ended
December 31, 2004 and circuit protection products of $19.8 million(as compared
with 19.8 million during the year ended December 31, 2004.)
Based
in
part on conflicting opinions the Company received from customers and competitors
in the electronics industry pertaining to revenue growth during 2005, the
Company cannot predict with any degree of certainty sales revenue for 2006.
Although the Company's backlog has been stable, the Company feels that this
is
not a good indicator of revenues. The Company continues to have limited
visibility as to future customer requirements. The Company had one customer
with
sales in excess of 10% (15.2%) of total sales during the year ended December
31,
2005. The loss of this customer could have a material adverse effect on the
Company's results of operations, financial position and cash flows.
The
Company cannot quantify the extent of sales growth arising from unit sales
mix
and/or price changes. Given the change in the nature of the products purchased
by customers from period to period, the Company believes that neither unit
changes nor price changes are meaningful. Over the past year, newer and more
sophisticated products with higher unit selling prices have been introduced.
Through the Company's engineering and research effort, the Company has been
successful in adding additional value to existing product lines, which tends
to
increase sales prices initially until that generation of products becomes mature
and sales prices experience price degradation. In general, as products become
mature, average selling prices decrease.
Net
sales
increased 19.9% from $158.5 million during 2003 to $190.0 million during 2004.
The Company attributes a portion of this increase to sales of approximately
$15.2 million from Insilco’s Passive Components Group during the first quarter
of 2004, compared to $1.9 million during the first quarter of 2003. The
acquisition took place on March 22, 2003. Additionally, the Company attributes
the increase to strong demand for magnetics sales from Bel’s existing business,
resulting in an increase of $11.0 million in such sales, increased module sales
of $4.6 million and increased circuit protection sales of $2.4 million offset
in
part by decreases in interconnect product sales of $1.7 million.
The
significant components of the Company's 2004 sales were from magnetic products
of $122.4 million (as compared with $103.0 million during the year ended
December 31, 2003), circuit protection of $19.8 million (as compared with $17.4
million during the year ended December 31, 2003), interconnect products of
$34.0
million (as compared with $29.9 million during the year ended December 31,
2003), and module products of $13.8 million (as compared with $8.2 million
during the year ended December 31, 2003).
Cost
of Sales
Bel
generally enters into processing arrangements with five independent third party
contractors in the Far East. Costs are recorded as incurred for all products
manufactured either at the Company's third party facilities or at the Company's
own manufacturing facilities. Such amounts are determined based upon the
estimated stage of production and include labor cost and fringes and related
allocations of factory overhead. The Company manufactures finished goods at
its
own manufacturing facilities in Glen Rock, Pennsylvania, Inwood, New York,
the
Dominican Republic and Mexico.
Cost
of
sales as a percentage of net sales increased from 69.9 % during the year ended
December 31, 2004 to 72.3% during the year ended December 31, 2005. The increase
in the cost of sales percentage is primarily attributable to the
following:
| ¨ |
The
Company incurred a 2.1% increase in material costs as a percentage
of net
sales. The increase in raw material costs is principally related
to
increased manufacturing of value-added products (including new Galaxy
products in 2005), which have a higher raw material content than
the
Company’s other products, and increased costs for raw materials such as
copper, steel and petroleum-based
products.
|
| ¨ |
The
Company has also started to pay higher wage rates and benefits to
its
production workers in China. These higher rates and benefits are
reflected
in the Company’s cost of goods sold.
|
| ¨ |
Sales
of the Company’s DC-DC power products have increased. While these products
are strategic to Bel’s growth and important to total earnings, they return
lower gross profit percentage margins as a larger percentage of their
bills of materials are purchased components. As these sales continue
to
increase, the Company’s average gross profit percentage will likely
decrease. The increasing sales also have an impact on the accelerated
write off of intangibles related to contingent purchase price payments
arising from the acquisition of Current
Concepts.
|
Included
in cost of sales are research and development expenses of $7.3 million and
$7.3
million for the years ended December 31, 2005 and 2004, respectively.
Cost
of
sales as a percentage of net sales decreased from 71.8 % during the year ended
December 31, 2003 to 69.9 % in 2004. The decrease in the cost of sales
percentage is primarily attributable to a 1.46 % decrease in research and
development as a percentage of sales and a 1.44 % decrease in direct labor
and
support as a percentage of sales offset in part by increased raw material costs
of 1.07%. The decrease in research and development expenses as a percentage
of
sales is more fully discussed below. The decrease in direct labor and support
as
a percentage of sales is primarily attributable to the lower labor costs
associated with the Insilco manufacturing operations and the Company's
relocating direct labor from Hong Kong to China where labor costs are lower.
The
increase in raw material costs is principally related to increased manufacturing
of value-added products which has a higher raw material content than the
Company’s other products.
The
acquisition of Insilco’s Passive Components Group resulted in additional cost of
sales in the amount of $10.7 million during the first three months of 2004.
The
acquisition took place on March 22, 2003.
In
2003,
the Company reduced the manufacturing activities of its Fuse department in
Hong
Kong and moved those positions to the PRC. In Jersey City, Mexico, Macao and
Europe, the Company reduced headcount.
Included
in cost of sales are research and development expenses of $7.3 million and
$8.4
million for the years ended December 31, 2004 and 2003, respectively. The
principal reasons for the decrease in research and development expense from
2003
to 2004 are the closure of the Indiana research facility, and lower research
and
development costs in the Far East as many of these jobs were moved by the
Company from Hong Kong to China and several positions were
eliminated.
Selling,
General and Administrative Expenses
The
percentage relationship of selling, general and administrative expenses to
net
sales decreased from 16.5% during the year ended December 31, 2004 to 15.4%
during the year ended December 31, 2005, in part as a result of the Company's
ability to leverage general and administrative expenses over a larger revenue
base. The Company attributes the $1.8 million increase in the dollar amount
of
such expenses primarily to increased selling expenses of approximately $1.1
million, including $0.6 million in Galaxy related expenses. In addition, the
Company incurred a $.7 million increase in general and administrative expenses.
This increase includes $1.8 million related to Galaxy, additional bad debt
expense of approximately $0.3 million additional stock compensation expense
of
$0.2 million, arising from the Company’s restricted stock award plan, and
additional amortization of identifiable intangibles in the amount of $.8 million
principally arising from the acquisition of Galaxy. Of the $.8 million increase
in amortization of intangibles $.7 million is included in the $1.8 million
increase in general and administrative expenses related to Galaxy. The Company
incurred increased Supplemental Executive Retirement Plan (“SERP”) costs of
approximately $0.2 million as additional employees were added to the plan.
This
was offset in part by lower employment costs of $0.6 million due to reduced
bonuses and lower professional fees of $1.2 million due to lower Sarbanes-Oxley
compliance costs.
During
2006, the Company will be required to expense share based compensation costs
in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R),
“Share-based Payment. This charge will be principally included in selling,
general and administrative expenses. The Company estimates an expense of
approximately $1.2 million, net of taxes, for the year ended December 31, 2006.
See "New Financial Accounting Standards" included in Management's Discussion
and
Analysis of Financial Condition and Results of Operations for information
regarding SFAS No. 123(R). This estimate, which assumes no additional option
grants during 2006, represents a Forward Looking Statement. Factors which could
cause this projection to be inaccurate include changes in employee termination
estimates and/or tax laws.
The
percentage relationship of selling, general and administrative expenses to
net
sales decreased from 16.9% during the year ended December 31, 2003 to 16.5%
during the year ended December 31, 2004, in part as a result of the Company's
ability to leverage general and administrative expenses over a larger revenue
base. The
Company attributes the $4.5 million increase in the dollar amount of such
expenses primarily to increased selling expenses of approximately $1.5 million
which includes salaries, commissions and related expenses. This increase relates
to increased sales. Other cost increases relate to costs associated with Insilco
operations of approximately $2.0 million which are included for the entire
year
2004 as compared with approximately 9 months during 2003. In addition, the
Company incurred a $1.5 million increase in professional fees, principally
related to Sarbanes-Oxley compliance offset in part by $0.5 million in reduced
severance, exchange rate losses and the write off of property in Indiana during
2003.
Fixed
Asset Impairment
During
the year ended December 31, 2004 the Company wrote down fixed assets,
principally machinery and equipment, with a net book value of $1,033,000 at
its
Far East manufacturing facilities. The Company considered these fixed assets
to
be surplus equipment which was replaced by equipment with more advanced
technology.
Interest
Income
Interest
income earned on cash and cash equivalents increased by approximately $660,000
during the year ended December 31, 2005 as compared to the comparable period
in
2004. The increase is due primarily to increased earnings on cash and cash
equivalent balances and marketable securities.
Interest
income earned on cash and cash equivalents increased by approximately $285,000
during the year ended December 31, 2004 as compared to 2003. The increase is
due
primarily to increased earnings on higher cash and cash equivalent
balances.
Interest
Expense
A
$10
million term loan was entered into on March 21, 2003, which was borrowed for
the
acquisition of Insilco's Passive Components Group. The loan bore interest at
LIBOR plus 1.50% payable quarterly and was completely paid off by June 30,
2005.
Interest expense increased by approximately $90,000 during the year ended
December 31, 2005 compared with 2004. The increase is attributable in part
to
higher interest rates charged on the loan during 2005 compared to 2004 and
in
part to the fact that during March 2005 the Company borrowed $8.0 million
against its domestic line of credit to partially finance the acquisition of
Galaxy. During October and November of 2005 the Company borrowed approximately
$4.0 million against its line of credit. The loan was repaid during December,
2005. The loan bore interest at LIBOR plus .75% to 1.25% annually based on
certain financial statement ratios maintained by the Company.
Interest
expense increased by approximately $10,000 during the year ended December 31,
2004 compared to 2003. The increase is attributable to higher interest rates
charged under the above mentioned $10 million loan for the entire year during
2004 versus nine months during 2003, offset in part by principal reductions
of
$500,000 per quarter during 2004.
Lawsuit
Proceeds
During
the year ended December 31, 2004, the Company settled an arbitration proceeding
related to a 1998 acquisition. The Company received $2,935,000 (net of $65,000
of related legal expenses incurred during the period) pursuant to that
settlement.
Provision
for Income Taxes
The
provision for income taxes for the year ended December 31, 2005 was $7.5 million
compared to $3.6 million during the year ended December 31, 2004. The Company's
earnings before income taxes for the year ended December 31, 2005 are
approximately $0.6 million less than in 2004. The Company incurred higher taxes
of approximately $3.1 million as a result of repatriating $70.6 million of
foreign earnings during 2005. Additionally, the income tax effective rate is
higher than the prior year’s provision primarily due to higher foreign taxes.
Recent developments in Hong Kong suggest that the authorities are applying
different standards in the treatment of offshore income. This was offset in
part
by the utilization of approximately $0.6 million in research and development
tax
credits and the utilization of a $0.1 million net operating loss carryforward
tax benefit related to a foreign subsidiary. In addition, during the year ended
December 31, 2004, the Company reversed tax accruals no longer required in
the
amount of approximately $0.4 million, utilized certain tax credits amounting
to
$0.8 million and utilized net operating loss carry forwards with a tax effect
of
approximately $0.1 million.
The
provision for income taxes for the years ended December 31, 2004 and 2003 was
$3.6 million and $4.4 million, respectively. The Company experienced increased
earnings before income taxes for the year ended December 31, 2004, as compared
with 2003. The income tax provision is lower than both the statutory federal
income tax rate and the prior year provision primarily due to lower foreign
tax
rates, the reversal of accruals no longer required in the amount of
approximately $0.4 million, the utilization of certain tax credits amounting
to
$0.8 million and the utilization of net operating loss carryforwards with a
tax
effect of approximately $0.1 million, the reduction of deferred taxes previously
provided relative to the planned repatriation of foreign earnings of $6.3
million and the establishment of accruals relative to certain tax matters of
$5.3 million. See Note 8 of Notes to Consolidated Financial
Statements.
The
Company conducts manufacturing activities in the Far East. More specifically,
the Company has the majority of its products manufactured in the People’s
Republic of China (“PRC”), Hong Kong and Macao and has not been subject to
corporate income tax in the PRC. The Company's activities in Hong Kong have
generally consisted of administration, quality control and accounting, as well
as some limited manufacturing activities. Hong Kong imposes corporate income
tax
at a rate of 17.5 percent solely on income sourced to Hong Kong. That is, its
tax system is a territorial one which only seeks to tax activities conducted
in
Hong Kong. Since the Bel entity in Hong Kong conducts most of its manufacturing
and quality control activities in the PRC, a portion of this entity’s income is
deemed “offshore” and thus not fully taxable in Hong Kong. Although the
statutory tax rate in Hong Kong is 17.5 percent, the Company generally pays
an
effective Hong Kong rate of less than 4 percent.
The
Company also conducts manufacturing operations in Macao. Macao has a statutory
corporate income tax rate of 16 percent. However, the Company, as a result
of
investing in a certain location in Macao, was able to obtain a 10-year tax
holiday in Macao, thereby reducing its effective Macao income tax rate from
16
percent to 8 percent. The tax holiday in Macao expired in April 2004. Since
most
of the Company's operations are conducted in the Far East, the majority of
its
profits are sourced in these three Far East jurisdictions. Accordingly, the
profits earned in the U.S. are comparatively small in relation to its profits
earned in the Far East. Therefore, there is generally a significant difference
between the statutory U.S. tax rate and the Company's effective tax rate.
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 with the intent to handle all of the Company’s
sales to third party customers in Asia. Sales to third party customers will
commence during the first quarter of 2006. Sales will consist of products
manufactured in the PRC. The MCO will not be subject to Macao corporation income
taxes. It is not possible at this time to determine the tax impact on the
Company regarding the establishment of this new entity.
The
Company has historically followed a practice of reinvesting a portion of the
earnings of foreign subsidiaries in the expansion of its foreign operations.
If
the unrepatriated earnings were distributed to the parent corporation rather
than reinvested in the Far East, such funds would be subject to United States
Federal income taxes. During the year ended December 31, 2005, management has
repatriated foreign earnings of approximately $70.6 million which are eligible
for the reduced tax rate of 5.25% under the American Jobs Creations Act of
2004.
See Note 8 of Notes to Consolidated Financial Statements. As a result of the
favorable tax treatment afforded the repatriation of controlled foreign
corporation (“ CFC”) earnings and management’s decision to repatriate such funds
in 2005, the Company recorded a $6,326,000 tax benefit in 2004 which results
from the difference in tax rates between the Act and the tax rates previously
provided on the portion of CFC earnings which were expected to be repatriated,
leaving deferred income taxes in the amount of approximately $1,342,000 recorded
in such earnings to be repatriated.
Inflation
and Foreign Currency Exchange
During
the past two years, the effect of inflation on the Company's profitability
was
not material. Historically, fluctuations of the U.S. Dollar against other major
currencies have not significantly affected the Company's foreign operations
as
most sales have been denominated in U.S. Dollars or currencies directly or
indirectly linked to the U.S. Dollar. Most significant expenses, including
raw
materials, labor and manufacturing expenses, are either incurred in U.S. Dollars
or the currencies of the Hong Kong Dollar, the Macao Pataca or the Chinese
Renminbi. Commencing with the acquisition of the Passive Components Group,
the
Company's European entity has sales transactions which are denominated
principally in Euros and British Pounds. Conversion of these transactions into
U.S. dollars has resulted in currency exchange losses of $27,000, $54,000 and
$236,000 for the years ended December 31, 2005, 2004 and 2003, respectively,
were charged to expense, and approximately ($669,000), $386,000 and $1,015,000
for the years ended December 31, 2005, 2004 and 2003, respectively, in
unrealized exchange gains (losses) relating to the translation of foreign
subsidiary financial statements which are included in other comprehensive
income. Any change in linkage of the U.S. Dollar and the Hong Kong Dollar,
the
Chinese Renminbi or the Macao Pataca could have a material effect on the
Company's consolidated financial position or results of operations.
Liquidity
and Capital Resources
Historically,
the Company has financed its capital expenditures primarily through cash flows
from operating activities. Currently, due to the recent acquisitions of the
Passive Components Group of Insilco Technologies, Inc. and Galaxy, the Company
has borrowed money under a secured term loan and line of credit and has unused
lines of credit as described below. Management believes that the cash flow
from
operations after payments of dividends combined with its existing capital base
and the Company's available lines of credit, will be sufficient to fund its
operations for the near term. Such statement constitutes a Forward Looking
Statement. Factors which could cause the Company to require additional capital
include, among other things, a softening in the demand for the Company’s
existing products, an inability to respond to customer demand for new products,
potential acquisitions requiring substantial capital, future expansion of the
Company's operations and net losses that would result in net cash being used
in
operating, investing and/or financing activities which result in net decreases
in cash and cash equivalents. Net losses may result in the loss of domestic
and
foreign credit facilities and preclude the Company from raising debt or equity
financing in the capital markets.
Previously,
the Company had one domestic line of credit of $10 million. During March 2005,
the Company borrowed $8 million against this line of credit to partially finance
the acquisition of Galaxy. The outstanding balance was paid off in its entirety
on June 20, 2005. During July 2005, the Company amended its credit agreement
to
increase the line of credit to $20 million, which expires on July 31, 2008.
During October 2005, the Company borrowed $4.0 million against the line of
credit which was paid off during December 2005. As of December 31, 2005 there
was no loan balance on the line of credit. The loan bears interest at LIBOR
plus
0.75% to 1.25% based on certain financial statement ratios maintained by the
Company. The entire $20 million line of credit is available to the Company
to
borrow. The
loan
is collateralized with a first priority security interest in and lien on 65%
of
all the issued and outstanding shares of the capital stock of certain of the
foreign subsidiaries of the Company and all other personal property and certain
real property of the Company.
For
the
years ended December 31, 2005, 2004 and 2003, the Company recorded interest
expense of approximately $325,000, $239,000 and $228,000, respectively.
The
Company's Hong Kong subsidiary has an unsecured line of credit of approximately
$2 million, which was unused at December 31, 2005. This line of credit expires
on May 31, 2006. Borrowing on this line of credit is guaranteed by the
Company.
For
information regarding further commitments under the Company's operating leases,
see Note 15 of Notes to Company's Consolidated Financial Statements in this
Annual Report on Form 10-K.
For
information regarding the Company's 2005 acquisitions of Galaxy Power Inc.
and
Netwatch s.r.o. and the Company's 2003 acquisition of APC and the Passive
Components Group of Insilco, see Item 1 of this Annual Report on Form
10-K.
For
information regarding the Company’s proposed acquisition of the Merger
Candidate, see Item 1 of this Annual Report on Form 10-K.
The
Company is constructing an 117,000 square foot manufacturing facility in
Zhongshan City, PRC for approximately $2.3 million. As of December 31, 2005,
the
Company has paid approximately $1.3 million toward the construction. The Company
expects to complete the construction during 2006.
During
2004, the Company completed construction of a 64,000 square foot manufacturing
facility in Zhongshan City, PRC for approximately $1.0 million.
On
July
15, 2004, the Company entered into an agreement for the sale of a certain parcel
of land located in Jersey City, New Jersey. The sales agreement is subject
to a
due diligence period by the buyer. The sales agreement expired during January
2006. The buyer and seller are continuing to negotiate about certain
environmental matters among themselves and with the State of New Jersey. The
seller and buyer are aware that a portion of the property may be subject to
tidelands claims by the State of New Jersey. Additionally, the Company is
obligated for environmental remediation costs of up to $350,000. As
of
December 31, 2005, the Company has also paid $177,000 of legal, site testing
and
State of New Jersey Environmental Protection Agency Fees. As these costs
are incurred, the Company capitalizes them on the Company's consolidated balance
sheet as assets held for sale. The Company has classified the asset as held
for
sale with a net book value of approximately $828,000 on the Company's
consolidated balance sheet at December 31, 2005.
Under
the
terms of the E-Power and Current Concepts acquisition agreements of May 11,
2001, the Company will be required to make contingent purchase price payments
up
to an aggregate of $7.6 million should the acquired companies attain specified
related sales levels. E-Power will be paid $2.0 million in contingent purchase
price payments if sales reach $15.0 million and an additional $4.0 million
if
sales reach $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. Current Concepts will be paid 16% of related sales on the first $10.0
million in sales through May 2007. During the years ended December 31, 2005,
2004 and 2003, the Company paid approximately $697,000, $354,000 and $209,000,
respectively, in contingent purchase price payments to Current Concepts. The
Company estimates that contingent payments to Current Concepts in 2006 should
be
approximately the same as in 2005. This estimate represents a Forward Looking
Statement. The primary factor which could cause such estimate to be understated
would be higher than anticipated demand for this product line. The contingent
purchase price payments have been accounted for as additional purchase price
and
as an increase other intangibles when such payment obligations are
incurred.
On
May 9,
2000, the Board of Directors authorized the repurchase of up to 10% of the
Company’s outstanding common shares from time to time in market or privately
negotiated transactions. As of December 31, 2005, the Company had purchased
and
retired 23,600 Class B shares at a cost of approximately $808,000, which reduced
the number of Class B common shares outstanding. No shares were repurchased
during the year ended December 31, 2005.
During
the year ended December 31, 2005, the Company's cash and cash equivalents
decreased by approximately $19.2 million, reflecting approximately $20.8 million
used principally for acquisitions, $19.4 million for loan repayments, $7.8
million for the purchase of property, plant and equipment, $18.0 million for
the
purchase of marketable securities, and $2.2 million for payments of dividends
offset, in part, by $31.3 million provided by operating activities (principally
as a result of net income of $20.2 million and depreciation and amortization
expense of $10.1 million), borrowings of $12.0 million, proceeds of $4.1 million
from the exercise of stock options and $1.6 million in proceeds from the sale
of
marketable securities.
During
the year ended December 31, 2004, the Company’s cash and cash equivalents
increased by approximately $13.7 million, reflecting approximately $32.1 million
provided by operating activities (principally as a result of net income of
$24.7
million and depreciation expense of $9.0 million), $6.3 million provided from
the sale of marketable securities and $3.9 million from proceeds from the
exercise of stock options offset, in part, by $17.7 million for the purchase
of
marketable securities, $6.6 million for the purchase of property, plant and
equipment, $2.0 million for loan repayments, $2.2 million for payment of
dividends and $.4 million for contingent acquisition payments.
During
2003, the Company’s cash and cash equivalents decreased by approximately $1.5
million, reflecting approximately $36.3 million in payments for acquisitions,
$3.1 million in purchases of property , plant and equipment, $5.0 million in
purchase of marketable securities and $1.9 million in dividends offset, in
part,
by $8.5 million from net proceeds from borrowings (net of repayments), $4.9
million from the sale of marketable securities, $2.6 million provided by the
exercise of stock options and $28.7 million provided by operating
activities.
Cash,
marketable securities and cash equivalents and accounts receivable comprised
approximately 53.7% and 58.6% of the Company's total assets at December 31,
2005
and December 31, 2004, respectively. The Company's current ratio (i.e., the
ratio of current assets to current liabilities) was 4.5 to 1 and 5.0 to 1 at
December 31, 2005 and December 31, 2004, respectively.
The
following table sets forth at December 31, 2005 the amounts of payments due
under specific types of contractual obligations, aggregated by category of
contractual obligation, for the time periods described below.
|
Payments
due by period
|
||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less
than
1
year
|
1-3
years
|
3-5
years
|
More
than
5
years
|
|||||||||||
|
Capital
expenditure obligations
|
$
|
1,753,728
|
$
|
1,753,728
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
|
Contingent
purchase price commitments
|
2,000,000
|
2,000,000
|
—
|
|||||||||||||
|
Operating
leases
|
3,287,395
|
1,472,846
|
1,102,869
|
711,680
|
||||||||||||
|
Raw
material purchase obligations
|
12,016,161
|
12,016,161
|
|
|
|
|||||||||||
|
Total
|
$
|
19,057,284
|
$
|
17,242,735
|
$
|
1,102,869
|
$
|
711,680
|
$
|
—
|
||||||
For
information on the contingent purchase price commitments, see Note 3 of Notes
to
Consolidated Financial Statements.
The
Company is required to pay the SERP obligations at the occurrence of certain
events. As of December 31, 2005 the SERP had an unfunded benefit obligation
of
approximately $3.5 million.
Other
Matters
The
Company believes that it has sufficient cash reserves to fund its foreseeable
working capital needs. It may, however, seek to expand such resources through
bank borrowings, at favorable lending rates, from time to time. If the Company
were to undertake a substantial acquisition for cash, the acquisition would
likely need to be financed in part through bank borrowings or the issuance
of
public or private debt or equity. If the Company borrows money to finance
acquisitions, this would likely decrease the Company’s ratio of earnings to
fixed charges and adversely affect other leverage criteria and could result
in
the imposition of material restrictive covenants. Under its existing credit
facility, the Company is required to obtain its lender’s consent for certain
additional debt financing, to comply with other covenants including the
application of specific financial ratios, and may be restricted from paying
cash
dividends on its common stock. The Company cannot assure that the necessary
acquisition financing would be available to it on acceptable terms, or at all,
when required. If the Company issues a substantial amount of stock either as
consideration in an acquisition or to finance an acquisition, such issuance
may
dilute existing stockholders and may take the form of capital stock having
preferences over its existing common stock.
New
Financial Accounting Standards
In
May
2005, the Financial Accounting Standards Board (“FASB”) issued Statement on
Financial Accounting Standards (“SFAS”) No. 154, "Accounting Changes and Error
Correction" - a replacement of APB Opinion No. 20 and FASB statement No. 3.
This
statement applies to all voluntary changes in accounting principles. It also
applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition provisions.
This statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. The statement also carries forward the guidance in APB Opinion No.
20
requiring justification of a change in accounting principle on the basis of
preferability. This statement is effective for accounting changes and
corrections made in fiscal years beginning after December 31, 2005. The adoption
of SFAS 154 is not expected to have a material effect on the Company’s
consolidated financial position or results of operations.
In
December 2004, FASB issued SFAS No. 123(R), "Share-Based Payment" , that will
require compensation costs related to share-based payment transactions to be
recognized in the financial statements. With limited exceptions, the amount
of
compensation cost will be measured based on the grant-date fair value of the
equity or liability instruments issued. In addition, liability awards will
be
remeasured each reporting period. Compensation cost will be recognized over
the
period that an employee provides service in exchange for the reward. SFAS No.
123(R) is effective as to the Company as of the beginning of the Company's
2006
fiscal year. The Company will account for the stock-based compensation costs
prospectively at the time of adoption. The adoption of SFAS 123(R) is expected
to have a material effect on the Company's consolidated results of
operations.
In
December 2004, the FASB staff issued FASB Staff Position ("FSP") FAS 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, to the
Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004" to provide guidance on the application of FASB Statement
No. 109 to the provision within the American Jobs Creations Act of 2004 (the
"Act") that provides tax relief to U.S. domestic manufacturers. The FSP states
that the deduction provided for under the Act should be accounted for as a
special deduction in accordance with Statement 109 and not as a tax rate
reduction. The FSP is effective upon issuance. The adoption of FAS 109-1
increased the provision for income taxes $3.1 million during the year ended
December 31, 2005.
In
December 2004, the FASB staff issued FSP No. FAS 109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision Within
the
American Jobs Creation Act of 2004" to provide accounting and disclosure
guidance for the repatriation provisions included in the Act. The Act introduced
a special limited-time dividends received deduction on the repatriation of
certain foreign earnings to a U.S. taxpayer. The FSP is effective upon issuance.
The adoption of FAS 109-2 increased the provision for income taxes $3.1 million
during the year ended December 31, 2005.
In
December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets",
an amendment of APB Opinion No. 29. SFAS No. 153 amends APB Opinion No. 29
by
eliminating the exception under APB No. 29 for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected
to
change significantly as a result of the exchange. SFAS No. 153 is effective
for
periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not
expected to have a material effect on the Company's consolidated financial
position or results of operations.
In
November 2004 the FASB issued SFAS No. 151, “Inventory Costs”, an amendment to
Accounting Research Bulletin No. 43 chapter 4. SFAS No. 151 requires that
abnormal costs of idle facility expenses, freight, handling costs and wasted
material (spoilage) be recognized as current-period charges. SFAS No. 151 is
effective for fiscal years beginning after June 15, 2005. Adoption of SFAS
No.
151 is not expected to have a material impact on the Company's results of
operations or financial position.
Fair
Value of Financial Instruments — The following disclosure of the estimated fair
value of financial instruments is made in accordance with the requirements
of
SFAS No. 107. The estimated fair values of financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies.
However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange.
The
Company has not entered into, and does not expect to enter into, financial
instruments for trading or hedging purposes. The Company does not currently
anticipate entering into interest rate swaps and/or similar
instruments.
The
Company's carrying values of cash, marketable securities, accounts receivable,
accounts payable and accrued expenses are a reasonable approximation of their
fair value.
The
Company enters into transactions denominated in U.S. Dollars, Hong Kong Dollars,
the Macao Pataca, the Chinese Renminbi, Euros and British Pounds. Fluctuations
in the U.S. dollar exchange rate against these currencies could significantly
impact the Company's consolidated results of operations.
The
Company believes that a change in interest rates of 1% or 2% would not have
a
material effect on the Company's consolidated statement of operations or balance
sheet.
See
the
consolidated financial statements listed in the accompanying Index to
Consolidated Financial Statements for the information required by this
item.
|
BEL
FUSE INC.
|
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|
Financial
Statements
|
Page
|
|
|
F-1
|
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|
F-2
- F-3
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|
F-4
|
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|
F-5
- F-6
|
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|
F-7
- F-9
|
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|
F-10
- F-39
|
||
|
F-40
|
||
To
the
Board of Directors and Stockholders of Bel Fuse Inc.
Jersey
City, New Jersey
We
have
audited the accompanying consolidated balance sheets of Bel Fuse Inc. and
subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related
consolidated statements of operations, stockholders' equity and cash flows
for
each of the three years in the period ended December 31, 2005. Our audits also
included the financial statement schedule listed in the Index at Item 15. We
also have audited management's assessment, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting, that the
Company maintained effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission. As
described in Management’s Report on Internal Control Over Financial Reporting,
management excluded from their assessment the internal control over financial
reporting at the Galaxy Power business, which was acquired on March 22, 2005,
and whose financial statements reflect total assets and net sales constituting
2.7% and 4.9%, respectively, of the related consolidated financial statement
amounts as of and for the year ended December 31, 2005. Accordingly, our
audit did not include the internal control over financial reporting at the
Galaxy Power business. The Company's management is responsible for these
financial statements and financial statement schedule, for maintaining effective
internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule, an opinion on management's assessment, and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our
audit of financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and
evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control,
and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our
opinions.
A
company's internal control over financial reporting is a process designed by,
or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by
the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented
or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2005 and 2004, and the results of their operations and their cash flows
for
each of the three years in the period ended December 31, 2005, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
Also in our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2005,
is
fairly stated, in all material respects, based on the criteria established
in
Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2005,
based on the criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
/S/
DELOITTE & TOUCHE LLP
New
York,
New York
March
13,
2006
|
BEL
FUSE INC. AND SUBSIDIARIES
|
||||
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
ASSETS
|
|||||||
|
Current
Assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
51,997,634
|
$
|
71,197,891
|
|||
|
Marketable
securities
|
38,463,108
|
23,120,028
|
|||||
|
Accounts
receivable - less allowance for doubtful
|
|||||||
|
accounts
of $1,107,000 and $1,610,000 at
|
|||||||
|
December
31, 2005 and 2004, respectively
|
39,304,984
|
33,247,911
|
|||||
|
Inventories
|
32,947,103
|
29,101,060
|
|||||
|
Prepaid
expenses and other current
|
|||||||
|
assets
|
1,691,017
|
2,404,718
|
|||||
|
Assets
held for sale
|
828,131
|
696,013
|
|||||
|
Total
Current Assets
|
165,231,977
|
159,767,621
|
|||||
|
Property,
plant and equipment - net
|
42,379,356
|
41,244,759
|
|||||
|
Deferred
income taxes
|
3,901,000
|
—
|
|||||
|
Intangible
assets - net
|
2,782,188
|
2,691,682
|
|||||
|
Goodwill
|
22,427,934
|
9,881,854
|
|||||
|
Prepaid
pension costs
|
1,655,362
|
1,127,941
|
|||||
|
Other
assets
|
3,678,100
|
3,062,714
|
|||||
|
TOTAL
ASSETS
|
$
|
242,055,917
|
$
|
217,776,571
|
|||
See
notes
to consolidated financial statements.
|
BEL
FUSE INC. AND SUBSIDIARIES
|
||||
|
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
|
Current
Liabilities:
|
|||||||
|
Current
portion of long-term debt
|
$
|
—
|
$
|
2,000,000
|
|||
|
Accounts
payable
|
14,560,827
|
8,814,161
|
|||||
|
Accrued
expenses
|
10,667,558
|
10,293,576
|
|||||
|
Deferred
income taxes
|
1,412,000
|
3,322,000
|
|||||
|
Income
taxes payable
|
9,840,295
|
7,172,955
|
|||||
|
Dividends
payable
|
548,000
|
541,000
|
|||||
|
Total
Current Liabilities
|
37,028,680
|
32,143,692
|
|||||
|
Long-term
Liabilities:
|
|||||||
|
Minimum
pension obligation
|
3,450,688
|
2,261,583
|
|||||
|
Long-term
debt - net of current portion
|
—
|
4,500,000
|
|||||
|
Deferred
income taxes
|
—
|
410,000
|
|||||
|
Total
Long-term Liabilities
|
3,450,688
|
7,171,583
|
|||||
|
Total
Liabilities
|
40,479,368
|
39,315,275
|
|||||
|
Commitments
and Contingencies
|
|||||||
|
Stockholders'
Equity:
|
|||||||
|
Preferred
stock, no par value,
|
|||||||
|
authorized
1,000,000 shares;
|
|||||||
|
none
issued
|
—
|
—
|
|||||
|
Class
A common stock, par value
|
|||||||
|
$.10
per share - authorized
|
|||||||
|
10,000,000
shares; outstanding
|
|||||||
|
2,702,677
and 2,702,677 shares, respectively
|
|||||||
|
(net
of 1,072,770 treasury shares)
|
270,268
|
270,268
|
|||||
|
Class
B common stock, par value
|
|||||||
|
$.10
per share - authorized
|
|||||||
|
30,000,000
shares; outstanding 9,013,264
|
|||||||
|
and
8,660,589 shares, respectively
|
|||||||
|
(net
of 3,218,310 treasury shares)
|
901,327
|
866,059
|
|||||
|
Additional
paid-in capital
|
31,713,608
|
21,989,174
|
|||||
|
Retained
earnings
|
167,991,188
|
149,949,283
|
|||||
|
Deferred
stock-based compensation
|
(3,562,709
|
)
|
—
|
||||
|
Cumulative
other comprehensive
|
|||||||
|
income
|
4,262,867
|
5,386,512
|
|||||
|
Total
Stockholders' Equity
|
201,576,549
|
178,461,296
|
|||||
|
TOTAL
LIABILITIES AND
|
|||||||
|
STOCKHOLDERS'
EQUITY
|
$
|
242,055,917
|
$
|
217,776,571
|
|||
See
notes to consolidated financial
statements.
|
BEL
FUSE INC. AND SUBSIDIARIES
|
||||||
|
Years
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
|
||||||||||
|
Net
Sales
|
$
|
215,915,756
|
$
|
190,021,953
|
$
|
158,497,502
|
||||
|
Costs
and expenses:
|
||||||||||
|
Cost
of sales
|
156,146,724
|
132,776,304
|
113,812,860
|
|||||||
|
Selling,
general and administrative
|
33,151,672
|
31,301,722
|
26,757,349
|
|||||||
|
Fixed
asset impairment
|
—
|
1,032,786
|
—
|
|||||||
|
189,298,396
|
165,110,812
|
140,570,209
|
||||||||
|
Income
from operations
|
26,617,360
|
24,911,141
|
17,927,293
|
|||||||
|
Interest
expense
|
(324,802
|
)
|
(238,552
|
)
|
(228,459
|
)
|
||||
|
Interest
income
|
1,422,719
|
763,000
|
477,860
|
|||||||
|
Lawsuit
proceeds
|
—
|
2,935,000
|
—
|
|||||||
|
Earnings
before provision for income taxes
|
27,715,277
|
28,370,589
|
18,176,694
|
|||||||
|
Income
tax provision
|
7,482,000
|
3,649,000
|
4,413,000
|
|||||||
|
Net
earnings
|
$
|
20,233,277
|
$
|
24,721,589
|
$
|
13,763,694
|
||||
|
Earnings
per common share - basic
|
$
|
1.76
|
$
|
2.19
|
$
|
1.25
|
||||
|
Earnings
per common share - diluted
|
$
|
1.75
|
$
|
2.15
|
$
|
1.24
|
||||
|
Weighted
average common shares
|
||||||||||
|
outstanding
- basic
|
11,510,175
|
11,283,750
|
11,020,916
|
|||||||
|
Weighted
average common shares
|
||||||||||
|
outstanding
- diluted
|
11,593,258
|
11,511,095
|
11,133,471
|
|||||||
See
notes to consolidated financial
statements.
|
BEL
FUSE INC. AND SUBSIDIARIES
|
||||||||||||||||
|
|
Cumulative
|
||||||||||||||||||||||||
|
|
Other
|
Deferred
|
|||||||||||||||||||||||
|
Compre-
|
Compre-
|
Class
A
|
Class
B
|
Additional
|
Stock-
|
||||||||||||||||||||
|
hensive
|
Retained
|
hensive
|
Common
|
Common
|
Paid-In
|
Based
|
|||||||||||||||||||
|
Total
|
Income
|
Earnings
|
Income
|
Stock
|
Stock
|
Capital
|
Compensation
|
||||||||||||||||||
|
|
|||||||||||||||||||||||||
|
Balance,
January 1, 2003
|
$
|
130,659,147
|
$
|
115,632,819
|
$
|
(50,132
|
)
|
$
|
267,623
|
$
|
826,149
|
$
|
13,982,688
|
$
|
—
|
||||||||||
|
Exercise
of stock
|
|||||||||||||||||||||||||
|
options
|
2,580,224
|
2,544
|
19,920
|
2,557,760
|
|||||||||||||||||||||
|
Tax
benefits arising
|
|||||||||||||||||||||||||
|
from
the disposition of
|
|||||||||||||||||||||||||
|
non-qualified
|
|||||||||||||||||||||||||
|
incentive
stock options
|
812,000
|
812,000
|
|||||||||||||||||||||||
|
Cash
dividends on Class A
|
|||||||||||||||||||||||||
|
common
stock
|
(322,234
|
)
|
(322,234
|
)
|
|||||||||||||||||||||
|
Cash
dividends on Class B
|
|||||||||||||||||||||||||
|
common
stock
|
(1,667,586
|
)
|
(1,667,586
|
)
|
|||||||||||||||||||||
|
Currency
translation
|
|||||||||||||||||||||||||
|
adjustment
- net of taxes
|
1,014,808
|
$
|
1,014,808
|
1,014,808
|
|||||||||||||||||||||
|
Increase
in unrealized gain or
|
|||||||||||||||||||||||||
|
loss
on marketable securities
|
|||||||||||||||||||||||||
|
-net
of taxes
|
14,900
|
14,900
|
14,900
|
||||||||||||||||||||||
|
Net
earnings
|
13,763,694
|
13,763,694
|
13,763,694
|
||||||||||||||||||||||
|
Comprehensive
income
|
$
|
14,793,402
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Balance,
December 31, 2003
|
146,854,953
|
127,406,693
|
979,576
|
270,167
|
846,069
|
17,352,448
|
—
|
||||||||||||||||||
|
Exercise
of stock
|
|||||||||||||||||||||||||
|
options
|
3,891,266
|
101
|
19,990
|
3,871,175
|
|||||||||||||||||||||
|
Tax
benefits arising
|
|||||||||||||||||||||||||
|
from
the disposition of
|
|||||||||||||||||||||||||
|
non-qualified
|
|||||||||||||||||||||||||
|
incentive
stock options
|
765,551
|
765,551
|
|||||||||||||||||||||||
|
Cash
dividends on Class A
|
|||||||||||||||||||||||||
|
common
stock
|
(430,707
|
)
|
(430,707
|
)
|
|||||||||||||||||||||
|
Cash
dividends on Class B
|
|||||||||||||||||||||||||
|
common
stock
|
(1,748,292
|
)
|
(1,748,292
|
)
|
|||||||||||||||||||||
|
Currency
translation
|
|||||||||||||||||||||||||
|
adjustment
- net of taxes
|
386,257
|
$
|
386,257
|
386,257
|
|||||||||||||||||||||
|
Increase
in unrealized gain or
|
|||||||||||||||||||||||||
|
loss
on marketable securities
|
|||||||||||||||||||||||||
|
-net
of taxes
|
4,020,679
|
4,020,679
|
4,020,679
|
||||||||||||||||||||||
|
Net
earnings
|
24,721,589
|
24,721,589
|
24,721,589
|
||||||||||||||||||||||
|
Comprehensive
income
|
$
|
29,128,525
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Balance,
December 31, 2004
|
178,461,296
|
149,949,283
|
5,386,512
|
270,268
|
866,059
|
21,989,174
|
—
|
||||||||||||||||||
See
notes to consolidated financial
statements.
|
BEL
FUSE INC. AND SUBSIDIARIES
|
||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS'
EQUITY
|
|
|
Cumulative
|
||||||||||||||||||||||||
|
|
Other
|
||||||||||||||||||||||||
|
Compre-
|
Compre-
|
Class
A
|
Class
B
|
Additional
|
Stock-
|
||||||||||||||||||||
|
hensive
|
Retained
|
hensive
|
Common
|
Common
|
Paid-In
|
Based
|
|||||||||||||||||||
|
Total
|
Income
|
Earnings
|
Income
|
Stock
|
Stock
|
Capital
|
Compensation
|
||||||||||||||||||
|
|
|||||||||||||||||||||||||
|
Exercise
of stock
|
|||||||||||||||||||||||||
|
options
|
4,115,508
|
20,028
|
4,095,480
|
||||||||||||||||||||||
|
Tax
benefits arising
|
|||||||||||||||||||||||||
|
from
the disposition of
|
|||||||||||||||||||||||||
|
non-qualified
|
|||||||||||||||||||||||||
|
incentive
stock options
|
429,802
|
429,802
|
—
|
||||||||||||||||||||||
|
Cash
dividends on Class A
|
|||||||||||||||||||||||||
|
common
stock
|
(430,940
|
)
|
(430,940
|
)
|
|||||||||||||||||||||
|
Cash
dividends on Class B
|
|||||||||||||||||||||||||
|
common
stock
|
(1,760,432
|
)
|
(1,760,432
|
)
|
|||||||||||||||||||||
|
Issuance
of restricted
|
|||||||||||||||||||||||||
|
common
stock
|
5,214,392
|
15,240
|
5,199,152
|
||||||||||||||||||||||
|
Deferred
stock-based
|
|||||||||||||||||||||||||
|
compensation
- net of taxes
|
(3,810,840
|
)
|
(3,810,840
|
)
|
|||||||||||||||||||||
|
Currency
translation
|
|||||||||||||||||||||||||
|
adjustment
- net of taxes
|
(669,153
|
)
|
$
|
(669,153
|
)
|
(669,153
|
)
|
||||||||||||||||||
|
Decrease
in unrealized gain or
|
|||||||||||||||||||||||||
|
loss
on marketable securities
|
|||||||||||||||||||||||||
|
-net
of taxes
|
(454,492
|
)
|
(454,492
|
)
|
(454,492
|
)
|
|||||||||||||||||||
|
Stock-based
compensation
|
|||||||||||||||||||||||||
|
expense
|
248,131
|
248,131
|
|||||||||||||||||||||||
|
Net
earnings
|
20,233,277
|
20,233,277
|
20,233,277
|
||||||||||||||||||||||
|
Comprehensive
income
|
$
|
19,109,632
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Balance,
December 31, 2005
|
$
|
201,576,549
|
$
|
167,991,188
|
$
|
4,262,867
|
$
|
270,268
|
$
|
901,327
|
$
|
31,713,608
|
$
|
(3,562,709
|
)
|
||||||||||
See
notes to consolidated financial
statements.
|
BEL
FUSE INC. AND SUBSIDIARIES
|
||||||
|
Years
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Cash
flows from operating
|
||||||||||
|
activities:
|
||||||||||
|
Net
income
|
$
|
20,233,277
|
$
|
24,721,589
|
$
|
13,763,694
|
||||
|
Adjustments
to reconcile net
|
||||||||||
|
income
to net cash provided
|
||||||||||
|
by
operating activities:
|
||||||||||
|
Depreciation
and amortization
|
10,104,373
|
9,025,364
|
8,374,918
|
|||||||
|
Fixed
asset impairment
|
—
|
1,032,786
|
364,843
|
|||||||
|
Other
|
1,712,000
|
1,238,000
|
812,000
|
|||||||
|
Deferred
income taxes
|
(3,602,000
|
)
|
(4,986,000
|
)
|
1,591,000
|
|||||
|
Changes
in operating assets
|
||||||||||
|
and
liabilities (net of acquisitions)
|
2,825,445
|
1,077,010
|
3,759,738
|
|||||||
|
Net
Cash Provided by
|
||||||||||
|
Operating
Activities
|
31,273,095
|
32,108,749
|
28,666,193
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Purchase
of property, plant
|
||||||||||
|
and
equipment
|
(7,745,817
|
)
|
(6,578,658
|
)
|
(3,119,321
|
)
|
||||
|
Purchase
of marketable
|
||||||||||
|
securities
|
(17,998,601
|
)
|
(17,723,615
|
)
|
(4,953,449
|
)
|
||||
|
Payment
for acquisitions - net of
|
||||||||||
|
cash
acquired
|
(20,807,083
|
)
|
(353,464
|
)
|
(36,277,457
|
)
|
||||
|
Proceeds
from repayment
|
||||||||||
|
by
contractors
|
—
|
29,000
|
29,000
|
|||||||
|
Proceeds
from sale of
|
||||||||||
|
marketable
securities
|
1,621,603
|
6,345,595
|
4,904,875
|
|||||||
|
Proceeds
from sale of
|
||||||||||
|
building
|
252,587
|
—
|
—
|
|||||||
|
Net
Cash Used in
|
||||||||||
|
Investing
Activities
|
(44,677,311
|
)
|
(18,281,142
|
)
|
(39,416,352
|
)
|
||||
See
notes to consolidated financial
statements.
|
BEL
FUSE INC. AND SUBSIDIARIES
|
||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Continued)
|
|
Year
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Cash
flows from financing
|
||||||||||
|
activities:
|
||||||||||
|
Proceeds
from borrowings
|
12,000,000
|
—
|
10,000,000
|
|||||||
|
Loan
repayments
|
(19,360,694
|
)
|
(2,000,000
|
)
|
(1,500,000
|
)
|
||||
|
Proceeds
from exercise of
|
||||||||||
|
stock
options
|
4,115,508
|
3,891,266
|
2,580,224
|
|||||||
|
Dividends
paid to common
|
||||||||||
|
shareholders
|
(2,183,371
|
)
|
(2,168,258
|
)
|
(1,871,494
|
)
|
||||
|
Net
Cash (Used In) Provided By
|
||||||||||
|
Financing
Activities
|
(5,428,557
|
)
|
(276,992
|
)
|
9,208,730
|
|||||
|
Effect
of exchange rate changes on cash
|
(367,484
|
)
|
186,124
|
—
|
||||||
|
Net
Increase (decrease) in
|
||||||||||
|
Cash
and Cash Equivalents
|
(19,200,257
|
)
|
13,736,739
|
(1,541,429
|
)
|
|||||
|
Cash
and Cash Equivalents
|
||||||||||
|
-
beginning of year
|
71,197,891
|
57,461,152
|
59,002,581
|
|||||||
|
Cash
and Cash Equivalents
|
||||||||||
|
-
end of year
|
$
|
51,997,634
|
$
|
71,197,891
|
$
|
57,461,152
|
||||
|
Changes
in operating assets
|
||||||||||
|
and
liabilities (net of acquisitions) consist of:
|
||||||||||
|
(Increase)
decrease in accounts
|
||||||||||
|
receivable
|
$
|
(2,638,200
|
)
|
$
|
(2,671,513
|
)
|
$
|
1,763,149
|
||
|
(Increase)
decrease in inventories
|
(1,145,242
|
)
|
(2,774,275
|
)
|
2,043,609
|
|||||
|
(Increase)
decrease in prepaid
|
||||||||||
|
expenses
and other
|
||||||||||
|
current
assets
|
809,821
|
(700,243
|
)
|
(1,187,276
|
)
|
|||||
|
Decrease
in prepaid taxes
|
—
|
—
|
681,887
|
|||||||
|
(Increase)
decrease in other assets
|
(383,980
|
)
|
(738,878
|
)
|
(425,880
|
)
|
||||
|
Increase
(decrease) in
|
||||||||||
|
accounts
payable
|
3,629,923
|
1,299,301
|
(295,887
|
)
|
||||||
|
Increase
in income taxes payable
|
3,071,828
|
6,946,523
|
792,432
|
|||||||
|
(Decrease)
increase in
|
||||||||||
|
accrued
expenses
|
(518,705
|
)
|
(283,905
|
)
|
387,704
|
|||||
|
$
|
2,825,445
|
$
|
1,077,010
|
$
|
3,759,738
|
|||||
See
notes to consolidated financial
statements.
|
BEL
FUSE INC. AND SUBSIDIARIES
|
||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Concluded)
|
|
Year
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Supplementary
information:
|
||||||||||
|
Cash
paid during the year for:
|
||||||||||
|
Income
taxes
|
$
|
6,578,000
|
$
|
2,128,000
|
$
|
1,031,000
|
||||
|
Interest
|
$
|
325,000
|
$
|
239,000
|
$
|
228,000
|
||||
|
Details
of acquisitions:
|
||||||||||
|
Fair
value of assets acquired (excluding
|
||||||||||
|
cash
of $311,856 in 2005 and $799,000
|
||||||||||
|
in
2003)
|
$
|
6,167,138
|
$
|
—
|
$
|
35,853,854
|
||||
|
Intangibles
|
2,657,518
|
353,464
|
6,870,724
|
|||||||
|
Goodwill
|
12,456,080
|
—
|
—
|
|||||||
|
21,280,736
|
353,464
|
42,724,578
|
||||||||
|
Less:
Cash on deposit in 2002
|
—
|
—
|
(6,447,121
|
)
|
||||||
|
Amounts
due on acquisition payment
|
(473,653
|
)
|
—
|
—
|
||||||
|
Cash
paid for acquisitions
|
$
|
20,807,083
|
$
|
353,464
|
$
|
36,277,457
|
||||
See
notes to consolidated financial
statements.
BEL
FUSE
INC. AND SUBSIDIARIES
FOR
THE
YEARS ENDED DECEMBER 31, 2005, 2004 and 2003
1. DESCRIPTION
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Bel
Fuse
Inc. and subsidiaries operate in one industry with three geographic reporting
segments and are engaged in the design, manufacture and sale of products used
in
local area networking, telecommunication, business equipment and consumer
electronic applications. The Company manages its operations geographically
through its three reporting units: North America, Asia and Europe. Sales are
predominantly in North America, Europe and Asia.
PRINCIPLES
OF CONSOLIDATION - The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries including the businesses acquired since their
respective dates of acquisition. All intercompany transactions and balances
have
been eliminated.
USE
OF
ESTIMATES - The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CASH
EQUIVALENTS - Cash
equivalents include short-term investments in U.S. treasury bills and commercial
paper with an original maturity of three months or less when purchased. At
December 31, 2005 and December 31, 2004, cash equivalents approximated
$13,444,000 and $38,355,000, respectively.
MARKETABLE
SECURITIES - The
Company classifies its equity securities as "available for sale", and
accordingly, reflects unrealized gains and losses, net of deferred income taxes,
as other comprehensive income.
The
fair
values of marketable securities are based on quoted market prices. Realized
gains or losses from the sale of marketable securities are based on the specific
identification method.
ACQUISITION
EXPENSES - The
Company capitalizes all direct costs associated with proposed acquisitions.
If
the proposed acquisitions are consummated, such costs will be included as a
component of the overall cost of the acquisition. Such costs are expensed at
such time as the Company deems the consummation of a proposed acquisition to
be
unsuccessful.
FOREIGN
CURRENCY TRANSLATION - The
functional currency for some foreign operations is the local currency. Assets
and liabilities of foreign operations are translated at balance sheet date
rates
of exchange and income, expense and cash flow items are translated at the
average exchange rate for the period. Translation adjustments are recorded
in
Other Comprehensive Income. The U.S. Dollar is used as the functional currency
for certain foreign operations that conduct their business in U.S. Dollars.
A
combination of current and historical exchange rates is used in measuring the
local currency transactions of these subsidiaries and the resulting exchange
adjustments are included in the statement of operations. Current exchange rates
are used for all foreign subsidiaries except for two subsidiaries in the Far
East which use both current and historical exchange rates. Realized foreign
currency losses were $27,000, $54,000 and $236,000 for the years ended December
31, 2005, 2004 and 2003, respectively, and have been expensed in the
consolidated statement of operations.
CONCENTRATION
OF CREDIT RISK - Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of accounts receivable and temporary cash investments.
The Company grants credit to customers that are primarily original equipment
manufacturers and to subcontractors of original equipment manufacturers based
on
an evaluation of the customer's financial condition, without requiring
collateral. Exposure to losses on receivables is principally dependent on each
customer's financial condition. The Company controls its exposure to credit
risk
through credit approvals, credit limits and monitoring procedures and
establishes allowances for anticipated losses.
The
Company places its temporary cash investments with quality financial
institutions and commercial issuers of short-term paper and, by policy, limits
the amount of credit exposure in any one financial instrument.
INVENTORIES
- Inventories
are stated at the lower of weighted average cost or market.
REVENUE
RECOGNITION -The
Company recognizes revenue in accordance with the guidance contained in SEC
Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements"
Revenue is recognized when the product has been delivered and title and risk
of
loss has passed to the customer, collection of the resulting receivable is
deemed probable by management, persuasive evidence of an arrangement exists
and
the sales price is fixed and determinable. Substantially all of the Company's
shipments are FCA (free carrier) which provides for title to pass upon delivery
to the customer's freight carrier. Some product is shipped DDP/DDU with title
passing when the product arrives at the customer's dock.
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 2005 and 2004, inventory on consignment was
immaterial.
The
Company typically has a twelve-month warranty policy for workmanship defects.
Warranty returns have historically averaged at or below 1% of annual net sales.
The Company establishes warranty reserves when a warranty issue becomes known
as
warranty claims have historically been immaterial. No general reserves for
warranties have been established.
The
Company is not contractually obligated to accept returns except for defective
product or in instances where the product does not meet the customer's quality
specifications. However, the Company may permit its customers to return product
for other reasons. In these instances, the Company would generally require
a
significant cancellation penalty payment by the customer. The Company estimates
such returns, where applicable, based upon management's evaluation of historical
experience, market acceptance of products produced and known negotiations with
customers. Such estimates are deducted from gross sales and provided for at
the
time revenue is recognized.
GOODWILL
AND OTHER INTANGIBLES -The
Company tests goodwill for impairment annually (fourth quarter), using a fair
value approach at the reporting unit level. A reporting unit is an operating
segment or one level below an operating segment for which discrete financial
information is available and reviewed regularly by management. Assets and
liabilities of the Company have been assigned to the reporting units to the
extent that they are employed in or are considered a liability related to the
operations of the reporting unit and were considered in determining the fair
value of the reporting unit.
DEPRECIATION
- Property,
plant and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated primarily using
the
declining-balance method for machinery and equipment and the straight-line
method for buildings and improvements over their estimated useful
lives.
INCOME
TAXES - The
Company accounts for income taxes using an asset and liability approach under
which deferred income taxes are recognized by applying enacted tax rates
applicable to future years to the differences between the financial statement
carrying amounts and the tax bases of reported assets and
liabilities.
Except
for a portion of foreign earnings that have 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.
During
2005, the Company repatriated approximately $70.6 million of foreign subsidiary
earnings to take advantage of the temporary 85% dividends received deductions
for cash dividends in excess of the historical "base-period" average. This
favorable tax treatment created under the American Jobs Creation Act of 2004
expired on December 31, 2005. The dividend repatriation resulted in an
additional income tax of approximately $3.1 million, which was recorded during
the year ended December 31, 2005.
The
principal items giving rise to deferred taxes are unrealized gains on marketable
securities available for sale, the use of accelerated depreciation methods
for
machinery and equipment, timing differences between book and tax amortization
of
intangible assets and goodwill and certain expenses which have been deducted
for
financial reporting purposes which are not currently deductible for income
tax
purposes.
STOCK-BASED
COMPENSATION
- The
Company has two stock-based compensation plans under which incentive
stock-options and restricted stock awards are granted to employees and
directors. The Company accounts for stock option grants issued to employees
in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees". APB No. 25 Opinion requires the use of the
intrinsic value method, which measures compensation cost as the excess, if
any,
of the quoted market price of the stock at the measurement date over the amount
an employee must pay to acquire the stock. The Company makes disclosures of
pro
forma net earnings and earnings per share as if the fair-value-based method
of
accounting had been applied as required by Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" .
During
2005, the Company issued 152,400 class B common shares 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 compensation expense of $179,295, net of tax benefit, for
the
year ended December 31, 2005. The balance of $3,562,709 of deferred stock-based
compensation, net of taxes, is included within Stockholders’ Equity on the
Company’s consolidated balance sheets.
In
December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No.
123”.
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. It also requires disclosure in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company adopted
the
disclosure provisions of SFAS No. 148 beginning with the year ended December
31,
2002. The Company grants stock options with exercise prices at fair market
value
at the date of the grant. The Company will continue to account for stock-based
employee compensation under the recognition and measurement principle of APB
Opinion No. 25 and related interpretations through December 31, 2005.
Thereafter, the Company will account for stock based compensation under SFAS
No.
123(R), “Share-based Payment”. The Company will account for the compensation
costs prospectively at the time of adoption.
The
Company has adopted the disclosure-only provisions of SFAS No. 123. Had
compensation cost for the Company's stock option plan been determined based
on
the fair value at the grant date for awards in 2005, 2004 and 2003 consistent
with the provisions of SFAS No. 123, the Company's net earnings and earnings
per
share would have been reduced to the pro forma amounts indicated
below:
|
December
31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Net
earnings - as reported
|
$
|
20,233,277
|
$
|
24,721,589
|
$
|
13,763,694
|
||||
|
Add:
Stock-based compensation
|
||||||||||
|
expense
included in net income,
|
||||||||||
|
net
of taxes, as reported
|
179,295
|
—
|
—
|
|||||||
|
Deduct:
Total stock-based
|
||||||||||
|
employee
compensation expense
|
||||||||||
|
determined
under fair value based
|
||||||||||
|
method
for all awards,
|
||||||||||
|
net
of taxes
|
(643,472
|
)
|
(1,125,427
|
)
|
(2,080,375
|
)
|
||||
|
Net
earnings- pro forma
|
$
|
19,769,100
|
$
|
23,596,162
|
$
|
11,683,319
|
||||
|
Earnings
per common share -
|
||||||||||
|
basic-as
reported
|
$
|
1.76
|
$
|
2.19
|
$
|
1.25
|
||||
|
Earnings
per common share -
|
||||||||||
|
basic-pro
forma
|
$
|
1.72
|
$
|
2.09
|
$
|
1.06
|
||||
|
Earnings
per common share -
|
||||||||||
|
diluted-as
reported
|
$
|
1.75
|
$
|
2.15
|
$
|
1.24
|
||||
|
Earnings
per common share -
|
||||||||||
|
diluted-pro
forma
|
$
|
1.71
|
$
|
2.04
|
$
|
1.05
|
||||
The
fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2004 and 2003: dividends yield of 0.9% and 0.9%,
expected volatility of 35% and 54% for Class B; risk-free interest rate of
5%
and 2% and expected lives of 5 years. No options were granted during the year
ended December 31, 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, 2005, 2004
and 2003 amounted to $7.3 million, $7.3 million and $8.4 million,
respectively.
EVALUATION
OF LONG-LIVED ASSETS - The
Company reviews property and equipment for impairment whenever events or changes
in circumstances indicate the carrying value may not be recoverable in
accordance with guidance in SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” If the carrying value of the long-lived asset
exceeds the present value of the related estimated future cash flows, the asset
would be adjusted to its fair value and an impairment loss would be charged
to
operations in the period identified.
EARNINGS
PER SHARE - Basic
earnings per common share are computed by dividing net earnings by the weighted
average number of common shares outstanding during the period. Diluted earnings
per common share are computed by dividing net earnings by the weighted average
number of common shares and potential common shares outstanding during the
period. Potential common shares used in computing diluted earnings per share
relate to stock options and warrants which, if exercised, would have a dilutive
effect on earnings per share.
The
following table includes a reconciliation of shares used in the calculation
of
basic and diluted earnings per share:
|
2005
|
2004
|
2003
|
||||||||
|
Weighted
average shares outstanding - basic
|
11,510,175
|
11,283,750
|
11,020,916
|
|||||||
|
Dilutive
impact of stock options and
|
||||||||||
|
unvested
restricted stock awards
|
83,083
|
227,345
|
112,555
|
|||||||
|
Weighted
average shares oustanding - diluted
|
11,593,258
|
11,511,095
|
11,133,471
|
|||||||
During
the years ended December 31, 2005, 2004 and 2003, respectively, 20,000, 24,000
and 209,600 outstanding options were not included in the foregoing computations
because they were antidilutive.
FAIR
VALUE OF FINANCIAL INSTRUMENTS - For
financial instruments, including cash, accounts receivable, accounts payable
and
accrued expenses, it was assumed that the carrying amount approximated fair
value because of the short maturities of such instruments. Interest rates that
are currently available to the Company for issuance of debt with similar terms
and remaining maturities are used to estimate fair value for bank debt.
Management believes that the carrying amount of bank debt is a reasonable
estimate of its fair value.
NEW
FINANCIAL ACCOUNTING STANDARDS
In
May
2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 154, "Accounting Changes and Error
Correction" - a replacement of APB Opinion No. 20 and FASB Statement No. 3.
This
statement applies to all voluntary changes in accounting principles. It also
applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition provisions.
This statement requires retrospective application to prior periods' financial
statements of changes in accounting principles, unless it is impracticable
to
determine either the period-specific effects or the cumulative effect of the
change. This statement is effective for accounting changes and corrections
made
in fiscal years beginning after December 31, 2005. The adoption of SFAS 154
is
not expected to have a material effect on the Company’s consolidated financial
position or results of operations.
In
December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payments”, that
will require compensation costs related to share-based payment transactions
to
be recognized in the financial statements. With limited exceptions, the amount
of compensation cost will be measured based on the grant-date fair value of
the
equity or liability instruments issued. In addition, if granted, liability
awards will be remeasured each reporting period. Compensation cost will be
recognized over the period that an employee provides service in exchange for
the
reward. SFAS No. 123(R) is effective as to the Company as of the beginning
of
the Company's 2006 fiscal year. The Company will account for stock-based
compensation costs prospectively at the time of adoption. The adoption of SFAS
123(R) is expected to have a material effect on the Company's consolidated
results of operations.
In
December 2004, the FASB staff issued FASB Staff Position ("FSP") FAS 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, to the
Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004" to provide guidance on the application of Statement 109
to
the provision within the American Jobs Creations Act of 2004 (the "Act") that
provides tax relief to U.S. domestic manufacturers. The FSP states that the
deduction provided for under the Act should be accounted for as a special
deduction in accordance with FASB Statement No. 109 and not as a tax rate
reduction. The FSP is effective upon issuance. The adoption of FAS 109-1
increased the provision for income taxes approximately $3.1 million during
the
year ended December 31, 2005.
In
December 2004, the FASB staff issued FSP FAS 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision Within the American
Jobs Creation Act of 2004" to provide accounting and disclosure guidance for
the
repatriation provisions included in the Act. The Act introduced a special
limited-time dividends received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer. The FSP is effective upon issuance. The adoption
of
FAS 109-2 increased the provision for income taxes approximately $3.1 million
during the year ended December 31, 2005.
In
December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets",
an amendment of APB Opinion No. 29. SFAS No. 153 amends APB Opinion No. 29
by
eliminating the exception under APB No. 29 for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected
to
change significantly as a result of the exchange. SFAS No. 153 is effective
for
periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not
expected to have a material effect on the Company's financial position or
results of operations.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs”, an amendment to
Accounting Research Bulletin No. 43 chapter 4 . SFAS No. 151 requires that
abnormal costs of idle facility expenses, freight, handling costs and wasted
material (spoilage) be recognized as current-period charges. SFAS No. 151 is
effective for fiscal years beginning after June 15, 2005. Adoption of SFAS
No.
151 is not expected to have a material impact on the Company's results of
operations or financial position.
|
2.
|
ACQUISITIONS
|
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 is due to the sellers by June 30, 2006. Netwatch s.r.o. is a designer
and manufacturer of high-performance fiber optic and copper cable assemblies
for
data and telecommunication applications. Purchase price allocations have been
estimated by management, and are preliminary . Management has estimated
approximately $1.0 million of goodwill arose from the transaction which 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. Purchase price allocations have been initially
estimated by management and are preliminary and subject to adjustment. 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 $2.0 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, 2004 (in thousands,
except per share data):
|
Years
Ended
|
|||||||
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
Net
sales
|
$
|
221,227
|
$
|
212,331
|
|||
|
Net
earnings
|
20,026
|
25,419
|
|||||
|
Earnings
per share - diluted
|
1.74
|
2.21
|
|||||
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, 2003, 2004 and 2005. Such information should not be construed as a
representation of the future results of operations of the Company.
A
condensed combined balance sheet of the major assets and liabilities of Galaxy
and Netwatch s.r.o., as of their acquisition dates is as follows:
|
Cash
|
$
|
311,856
|
||
|
Accounts
receivable
|
3,687,331
|
|||
|
Inventories
|
2,862,571
|
|||
|
Prepaid
expenses
|
96,120
|
|||
|
Income
taxes receivable
|
5,488
|
|||
|
Property,
plant and
|
||||
|
equipment
|
1,545,526
|
|||
|
Other
assets
|
32,083
|
|||
|
Deferred
tax asset
|
1,392,850
|
|||
|
Goodwill
|
12,456,080
|
|||
|
Intangible
assets
|
1,960,000
|
|||
|
Notes
payable
|
(860,694
|
)
|
||
|
Accounts
payable
|
(2,129,165
|
)
|
||
|
Accrued
expenses
|
(465,002
|
)
|
||
|
Net
assets acquired
|
$
|
20,895,044
|
||
On
March
22, 2003, the Company acquired certain assets (including cash acquired of
$799,000), subject to certain liabilities, and common shares of certain entities
comprising the Passive Components Group of Insilco Technologies, Inc.
("Insilco") for $37.0 million in cash, including transaction costs of
approximately $1.4 million. This acquisition included the Stewart Connector
Systems Group (“Stewart”), InNet Technologies (“InNet”) and the Signal
Transformer Group (“Signal Transformer”). The purchase price has been allocated
to both tangible and intangible assets and liabilities based on estimated fair
values after considering various independent formal appraisals. Approximately
$1.6 million of identifiable intangible assets (patents) arose from this
transaction; such intangible assets are being amortized on a straight-line
basis
over a period of five years. In addition, $2.9 million has been attributed
to
goodwill. Patents having a carrying value of $1.6 million and goodwill of $0.8
million have been included in the Company's Asia reporting unit. Goodwill of
$1.5 million and $0.6 million has been included in the Company's North America
and European reporting units, respectively.
Effective
January 2, 2003, the Company entered into an asset purchase agreement with
Advanced Power Components plc ("APC") to purchase the communication products
division of APC for $5.5 million in cash plus the assumption of certain
liabilities. The Company was required to make contingent payments equal to
5% of
sales (as defined) in excess of $5.5 million per year for the years 2003 and
2004. No contingent purchase price payment amounts are due as of December 31,
2004, which was the expiration for the contingent payments. The purchase price
has been allocated to both tangible and intangible assets and liabilities based
on estimated fair values. Goodwill of approximately $2.1 million has been
included in the Company's Asia reporting segment.
There
was
no in process research and development acquired as part of these
acquisitions.
These
transactions were accounted for using the purchase method of accounting and,
accordingly, the results of operations of Insilco's Passive Components Group
have been included in the Company's financial statements from March 22, 2003
and
the results of operations of APC have been included in the Company's financial
statements from January 2, 2003.
|
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.
Effective
January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets". Under SFAS No. 142, goodwill and intangible assets deemed
to
have indefinite lives are no longer amortized, but are subject to, at a minimum,
an annual impairment test. If the carrying value of goodwill or intangible
assets exceeds its fair market value, an impairment loss would be recorded.
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 $2,567,000,
$1,299,000 and $976,000 for the years ended December 31, 2005, 2004 and 2003,
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 is required to
make contingent purchase price payments up to an aggregate of $7.6 million
should the acquired companies attain specified sales levels. E-Power will be
paid $2.0 million in contingent purchase price payments if sales, as defined,
reach $15.0 million and an additional $4.0 million if sales reach $25.0 million
on a cumulative basis through May 2007. During January 2006, the $2.0 million
of
contingent price consideration was earned by E-Power. Current Concepts will
be
paid 16% of sales, as defined, on the first $10.0 million of sales through
May
2007. During the years ended December 31, 2005, 2004 and 2003, the Company
paid
approximately $697,000, $354,000 and $209,000, respectively, in contingent
purchase price payments to Current Concepts. The contingent purchase price
payments are accounted for as additional purchase price and as an increase
to
covenants not to compete within intangible assets when such payment obligations
are incurred.
The
changes in the carrying value of goodwill classified by geographic reporting
units, net of accumulated depreciation, for the years ended December 31, 2005
and 2004 are as follows:
|
Total
|
Asia
|
North
America
|
Europe
|
||||||||||
|
Balance,
January 1, 2004
|
$
|
9,881,854
|
$
|
6,407,435
|
$
|
2,869,092
|
$
|
605,327
|
|||||
|
Goodwill
allocation
|
|||||||||||||
|
related
to acquisitions
|
—
|
—
|
—
|
—
|
|||||||||
|
Balance,
December 31, 2004
|
9,881,854
|
6,407,435
|
2,869,092
|
605,327
|
|||||||||
|
Goodwill
allocation
|
|||||||||||||
|
related
to acquisitions
|
12,546,080
|
—
|
11,543,846
|
1,002,234
|
|||||||||
|
Balance,
December 31, 2005
|
$
|
22,427,934
|
$
|
6,407,435
|
$
|
14,412,938
|
$
|
1,607,561
|
|||||
The
components of intangible assets other than goodwill by geographic reporting
unit
are as follows:
|
December
31, 2005
|
|||||||||||||||||||
|
Total
|
Asia
|
North
America
|
|||||||||||||||||
|
Gross
Carrying
|
Accumulated
|
Gross
Carrying
|
Accumulated
|
Gross
Carrying
|
Accumulated
|
||||||||||||||
|
Amount
|
Amortization
|
Amount
|
Amortization
|
Amount
|
Amortization
|
||||||||||||||
|
Patents
and Product Information
|
$
|
2,935,000
|
$
|
1,812,853
|
$
|
2,653,000
|
$
|
1,634,566
|
$
|
282,000
|
$
|
178,287
|
|||||||
|
Customer
relationships
|
1,160,000
|
178,833
|
—
|
—
|
1,160,000
|
178,833
|
|||||||||||||
|
Covenants
not-to-compete
|
5,021,034
|
4,342,160
|
4,221,034
|
3,813,589
|
800,000
|
528,571
|
|||||||||||||
|
$
|
9,116,034
|
$
|
6,333,846
|
$
|
6,874,034
|
$
|
5,448,155
|
$
|
2,242,000
|
$
|
885,691
|
||||||||
|
December
31, 2004
|
|||||||||||||||||||
|
Total
|
Asia
|
North
America
|
|||||||||||||||||
|
Gross
Carrying
|
Accumulated
|
Gross
Carrying
|
Accumulated
|
Gross
Carrying
|
Accumulated
|
||||||||||||||
|
Amount
|
Amortization
|
Amount
|
Amortization
|
Amount
|
Amortization
|
||||||||||||||
|
Patents
and Product Information
|
$
|
2,935,000
|
$
|
1,338,765
|
$
|
2,653,000
|
$
|
1,188,654
|
$
|
282,000
|
$
|
150,111
|
|||||||
|
Covenants
not-to-compete
|
3,523,516
|
2,428,069
|
3,523,516
|
2,428,069
|
—
|
—
|
|||||||||||||
|
Supply
agreement
|
2,660,000
|
2,660,000
|
1,409,800
|
1,409,800
|
1,250,200
|
1,250,200
|
|||||||||||||
|
$
|
9,118,516
|
$
|
6,426,834
|
$
|
7,586,316
|
$
|
5,026,523
|
$
|
1,532,200
|
$
|
1,400,311
|
||||||||
Estimated
amortization expense for intangible assets for the next five years is as
follows:
|
Estimated
|
||||
|
Year
Ending
|
Amortization
|
|||
|
December
31,
|
Expense
|
|||
|
2006
|
$
|
1,282,901
|
||
|
2007
|
675,277
|
|||
|
2008
|
400,287
|
|||
|
2009
|
293,569
|
|||
|
2010
|
104,196
|
|||
4. MARKETABLE
SECURITIES
The
Company has acquired a total of 4,600,000 shares of the common stock of a
publicly-held company (“Merger Candidate”) at a total purchase price of
$14,393,032. The Merger Candidate had a market capitalization of approximately
$363 million as of February 23, 2006. These purchases are reflected on the
Company’s consolidated statement of cash flows as purchases of marketable
securities and are reflected on the Company’s consolidated balance sheet as
marketable securities. 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, 2005, the Company has
recorded an unrealized gain, net of income taxes, of approximately $0.6 million
which is included in other comprehensive income as stated in the consolidated
statement of stockholders’ equity. In connection with this transaction, the
Company is obligated to pay an investment banker’s advisory fee to a third party
of 20% of the appreciation in the stock of the Merger Candidate, or $1 million,
whichever is lower. As of December 31, 2005, the Company has accrued a fee
in
the amount of approximately $0.2 million. Such amount has been deferred within
other assets. If the proposed acquisition of the Merger Candidate is
consummated, the fee will be capitalized as part of the acquisition costs.
Such
amount will be expensed at such time as the Company deems the consummation
of
the proposed acquisition to be unsuccessful.
The
Company has acquired a total of 2,037,500 shares of the common stock of Artesyn
Technologies, Inc. (“Artesyn”) at a total purchase price of $16,331,469. These
purchases are reflected on the Company's consolidated statement of cash flows
as
purchases of marketable securities and are reflected on the Company's
consolidated balance sheet as marketable securities. As of December 31, 2005
and
2004, the Company has recorded an unrealized gain, net of income taxes, of
approximately $2.9 million and $4.0 million, which is included in other
comprehensive income as stated in the consolidated statement of stockholders'
equity. In connection with this transaction, the Company is obligated to pay
an
investment banker's advisory fee to a third party of 20% of the appreciation
in
the stock of Artesyn, or $1 million, whichever is lower. As of December 31,
2005, the Company has accrued a fee in the amount of approximately $0.9 million.
Such amount has been deferred within other assets. If the proposed acquisition
of Artesyn is consummated, the fee will be capitalized as part of the
acquisition costs. Such amount will be expensed at such time as the Company
deems the consummation of the proposed acquisition to be unsuccessful. On
February 2, 2006, Artesyn announced that it had entered into an agreement to
be
acquired by Emerson Network Power for $11.00 per share in cash. Artesyn has
stated that the consummation of the agreement is subject to customary regulatory
approvals and approval by Artesyn’s shareholders. Based on the current terms of
the agreement, the Company expects to recognize a gain of approximately $3.2
million, net of tax and investment banker’s advisory fees. Such gain will be
recognized upon the closing of the transaction. The Company also expects to
pay
bonuses to key employees in connection with this transaction.
At
December 31, 2005 and 2004, respectively, marketable securities have a cost
of
approximately $32,893,000 and $16,516,000, an estimated fair value of
approximately $38,463,000 and $23,120,000 and gross unrealized gains of
approximately $5,570,000 and $6,604,000. Such unrealized gains are included,
net
of tax, in other comprehensive income.
5. INVENTORIES
The
components of inventories are as follows:
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
Raw
material
|
$
|
19,342,703
|
$
|
15,236,393
|
|||
|
Work
in progress
|
2,515,174
|
1,607,052
|
|||||
|
Finished
goods
|
11,089,226
|
12,257,615
|
|||||
|
$
|
32,947,103
|
$
|
29,101,060
|
||||
6. IMPAIRMENT
LOSS AND RESTRUCTURING CHARGES
Restructuring
Charges
During
the year ended December 31, 2005, the Company did not incur any severance costs.
During the years ended December 31, 2004 and 2003, the Company incurred
approximately $50,000 and $700,000, respectively, of severance costs. These
expenses are included as a component of cost of sales and selling, general
and
administrative expenses on the accompanying Consolidated Statements of
Operations.
Fixed
Asset Impairment
During
the year ended December 31, 2004, the Company wrote down fixed assets,
principally machinery and equipment, with a net book value of $1,033,000 at
its
Far East manufacturing facilities. The Company considered these fixed assets
to
be surplus equipment which was replaced by equipment with more advanced
technology.
7. PROPERTY,
PLANT AND EQUIPMENT
Property,
plant and equipment consist of the following:
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
Land
|
$
|
3,348,788
|
$
|
3,274,641
|
|||
|
Buildings
and improvements
|
25,168,168
|
23,858,419
|
|||||
|
Machinery
and equipment
|
73,418,183
|
66,945,194
|
|||||
|
101,935,139
|
94,078,254
|
||||||
|
Less
accumulated depreciation
|
59,555,783
|
52,833,495
|
|||||
|
$
|
42,379,356
|
$
|
41,244,759
|
||||
Depreciation
expense for the years ended December 31, 2005, 2004, and 2003 was $7,537,000,
$7,726,000 and $7,400,000, respectively.
During
2005, property held for sale was reclassified from property, plant and equipment
in the amount of $828,131 and $696,013, as of December 31, 2005 and 2004,
respectively, to assets held for sale, a current asset on the accompanying
consolidated balance sheets. The Company presently anticipates the sale to
take
place by June 30, 2006. The Company expects to reflect a gain on the sale but
the amount can not be determined at this time.
8. INCOME
TAXES
The
provision for income taxes consists of the following:
|
Years
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Current:
|
||||||||||
|
Federal
|
$
|
4,590,000
|
$
|
3,524,000
|
$
|
1,004,000
|
||||
|
Foreign
|
6,250,000
|
5,234,000
|
1,624,000
|
|||||||
|
State
|
244,000
|
(123,000
|
)
|
194,000
|
||||||
|
11,084,000
|
8,635,000
|
2,822,000
|
||||||||
|
Deferred:
|
||||||||||
|
Federal
and state
|
(1,420,000
|
)
|
(1,586,000
|
)
|
1,031,000
|
|||||
|
Foreign
|
(2,182,000
|
)
|
(3,400,000
|
)
|
560,000
|
|||||
|
(3,602,000
|
)
|
(4,986,000
|
)
|
1,591,000
|
||||||
|
$
|
7,482,000
|
$
|
3,649,000
|
$
|
4,413,000
|
|||||
A
reconciliation of taxes on income computed at the federal statutory rate to
amounts provided is as follows:
|
Years
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Tax
provision
|
||||||||||
|
computed
at the Federal
|
||||||||||
|
statutory
rate of 34%
|
$
|
9,423,000
|
$
|
9,646,000
|
$
|
6,180,000
|
||||
|
Increase
(decrease) in
|
||||||||||
|
taxes
resulting from:
|
||||||||||
|
Benefit
relating to tax rate differential on foreign
|
||||||||||
|
earnings
to be repatriated in 2005-net (1)
|
—
|
(1,017,000
|
)
|
|||||||
|
Repatriation
of foreign earnings
|
||||||||||
|
net
of foreign tax credit of $529,000
|
3,100,000
|
|||||||||
|
Different
tax rates and permanent
|
||||||||||
|
differences
applicable to
|
||||||||||
|
foreign
operations
|
(5,250,000
|
)
|
(3,380,000
|
)
|
(2,467,000
|
)
|
||||
|
Utilization
of foreign net operating loss
|
||||||||||
|
carryforward
|
—
|
(165,000
|
)
|
|||||||
|
Principally
the utilization of research and
|
||||||||||
|
development
tax credits
|
(630,000
|
)
|
(1,413,000
|
)
|
||||||
|
Reversal
of a pre-acquisition tax benefit
|
399,000
|
|||||||||
|
Foreign
valuation allowance
|
—
|
—
|
571,000
|
|||||||
|
State
(benefit) taxes, net of federal benefit
|
161,000
|
(81,000
|
)
|
128,000
|
||||||
|
Other,
net
|
279,000
|
59,000
|
1,000
|
|||||||
|
$
|
7,482,000
|
$
|
3,649,000
|
$
|
4,413,000
|
|||||
| (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 $70,560,000 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. In prior years, the Company provided deferred taxes of approximately
$7,668,000 on a portion of its CFC earnings which management concluded
would likely be repatriated. As a result of the favorable tax treatment
afforded the repatriation of CFC earnings and management’s decision to
repatriate such funds in 2005, the Company recorded a $6,326,000
tax
benefit in 2004 which results from the difference in tax rates between
the
Act and the tax rates previously provided on the portion of CFC earnings
which were expected to be repatriated leaving deferred income taxes
in the
amount of approximately $1,342,000 recorded pertaining to such earnings
to
be repatriated. In light of the planned repatriation during 2004
of CFC
earnings in 2005, Management had identified certain domestic and
foreign
tax exposures relating to such operations. Such amount has been included
in Income Taxes Payable in the accompanying consolidated balance
sheet.
Prior to the enactment of the Act, it was management’s intention to
permanently reinvest the majority of the earnings of foreign subsidiaries
in the expansion of its foreign operations. No earnings were repatriated
during 2004 and 2003. Unrepatriated earnings, upon which U.S. income
taxes
have not been accrued, approximate $67.2 million at December 31,
2005.
Estimated income taxes related to unrepatriated foreign earnings
are
$20.2_
million under the current tax law as the Act has expired.
|
The
Company files income tax returns in all jurisdictions in which it has reason
to
believe it is subject to tax. Historically, the Company has been subject to
examination by various taxing jurisdictions. To date, none of these examinations
has resulted in any material additional tax. Nonetheless, any tax jurisdiction
may contend that a filing position claimed by the Company regarding one or
more
of its transactions is contrary to that jurisdiction's laws or
regulations.
The
types
of temporary differences between the tax basis of assets and liabilities and
their financial reporting amounts that give rise to the deferred tax liability
and deferred tax asset and their approximate tax effects are as
follows:
|
December
31,
|
|||||||||||||
|
2005
|
2004
|
||||||||||||
|
Temporary
|
|
Temporary
|
|
||||||||||
|
Difference
|
Tax
Effect
|
Difference
|
Tax
Effect
|
||||||||||
|
Deferred
Tax Assets -
|
|||||||||||||
|
non-current:
|
|||||||||||||
|
United
States net operating loss
|
|||||||||||||
|
carryforward
|
$
|
4,316,000
|
$
|
1,640,000
|
$
|
—
|
$
|
—
|
|||||
|
Restricted
stock grants
|
5,214,000
|
1,472,000
|
—
|
—
|
|||||||||
|
Depreciation
|
(2,474,000
|
)
|
(134,000
|
)
|
—
|
—
|
|||||||
|
Amortization
|
972,000
|
373,000
|
—
|
—
|
|||||||||
|
Other
accruals
|
1,446,000
|
550,000
|
—
|
—
|
|||||||||
|
$
|
9,474,000
|
$
|
3,901,000
|
$
|
—
|
$
|
—
|
||||||
|
Deferred
Tax Liability -
|
|||||||||||||
|
current:
|
|||||||||||||
|
Unremitted
earnings of
|
|||||||||||||
|
foreign
subsidiaries not
|
|||||||||||||
|
permanently
reinvested
|
$
|
—
|
$
|
—
|
$
|
25,560,000
|
$
|
1,342,000
|
|||||
|
Unrealized
|
|||||||||||||
|
appreciation/
depreciation
|
|||||||||||||
|
in
marketable securities
|
5,661,000
|
2,151,000
|
6,604,000
|
2,642,000
|
|||||||||
|
Reserves
and accruals
|
(2,352,000
|
)
|
(739,000
|
)
|
(1,655,000
|
)
|
(662,000
|
)
|
|||||
|
$
|
3,309,000
|
$
|
1,412,000
|
$
|
30,509,000
|
$
|
3,322,000
|
||||||
|
Deferred
Tax Liabilities-
|
|||||||||||||
|
non-current:
|
|||||||||||||
|
Depreciation
|
$
|
—
|
$
|
—
|
$
|
13,371,000
|
$
|
888,000
|
|||||
|
Amortization
|
—
|
—
|
(2,037,000
|
)
|
(815,000
|
)
|
|||||||
|
Other
temporary differences
|
—
|
—
|
843,000
|
337,000
|
|||||||||
|
|
$ |
—
|
$
|
—
|
$
|
12,177,000
|
$
|
410,000
|
|||||
The
Company was granted a ten year tax holiday in Macao which has an effective
tax
rate of 8% , which is 50% of the normal tax rate. Such holiday expired during
2004. At December 31, 2005 the Company had $764,000 of net operating loss
carry-forwards which expires December 31, 2006. During the year 2005, the
Company’s benefits from net operating losses were not material. During the year
ended December 31, 2004, the Company used $1.1 million of net operating loss
carry-forwards, which resulted in a tax savings of approximately $165,000.
During the year 2003 this holiday provided no benefit to the Company as the
entity incurred losses.
The
remaining net operating loss carry-forward of approximately $5.6 million expired
in 2004. Correspondingly, the valuation allowance, which was established for
this net operating loss carryforward, is no longer required. The acquisition
of
Galaxy resulted in Galaxy having a net operating loss carry forward of
approximately $5.4 million. This net operating loss carry forward arose
principally from the non-qualified dispositions of stock options and warrants
and expires during 2024.
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 will commence
during the first quarter of 2006. Sales will consist of products manufactured
in
the PRC. The MCO will not be subject to Macao corporation income taxes. It
is
not possible at this time to determine the tax impact on the Company regarding
the establishment of this new entity.
9. DEBT
a. Short-term
debt
Previously
the Company had available one domestic line of credit of $10 million. During
March 2005, the Company borrowed $8 million against the line of credit to
partially finance the acquisition of Galaxy. The outstanding balance was paid
off in its entirety on June 20, 2005. During July 2005, the Company amended
its
credit agreement to increase the line of credit to $20 million, which expires
on
July 21, 2008. During October 2005, the Company borrowed $4 million against
the
line of credit. The outstanding balance was paid off in its entirety during
December, 2005. There was no balance outstanding as of December 31, 2005. The
entire $20 million line of credit is available to the Company to borrow. The
loan
is collateralized with a first priority security interest in and lien on 65%
of
all the issued and outstanding shares of the capital stock of certain of the
foreign subsidiaries of the Company and all other personal property and certain
real property of the Company.
The
Company’s Hong Kong subsidiary has an unsecured line of credit of approximately
$2 million which was unused as of December 31, 2005. The line of credit expires
May 31, 2006. 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.
b. Long-term
debt
On
March
21, 2003, the Company entered into a $10 million secured term loan, which was
paid off in June 2005. The loan was used to partially finance the Company's
acquisition of Insilco's Passive Components Group. This term loan facility
is no
longer available.
For
the
years ended December 31, 2005, 2004 and 2003, the Company recorded interest
expense of approximately $325,000, $239,000 and $228,000, respectively.
See
Note15 for information on unused credit facilities.
10. ACCRUED
EXPENSES
Accrued
expenses consist of the following:
|
Year
Ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Sales
commissions
|
$
|
1,812,135
|
$
|
1,431,169
|
|||
|
Investment
banking commissions
|
1,105,510
|
1,000,000
|
|||||
|
Subcontracting
labor
|
1,597,279
|
1,624,963
|
|||||
|
Salaries,
bonuses and
|
|||||||
|
related
benefits
|
2,642,729
|
3,480,213
|
|||||
|
Other
|
3,509,905
|
2,757,231
|
|||||
|
$
|
10,667,558
|
$
|
10,293,576
|
||||
11. BUSINESS SEGMENT INFORMATION
The
Company operates in one industry and has three reportable segments. The segments
are geographic and include North America, Asia and Europe. The primary criteria
by which financial performance is evaluated and resources are allocated are
revenues and operating income. The following is a summary of key financial
data:
|
2005
|
2004
|
2003
|
||||||||
|
Revenue
from unrelated
|
||||||||||
|
entities
and country
|
||||||||||
|
of
Company's domicile:
|
||||||||||
|
North
America
|
$
|
69,089,000
|
$
|
67,177,000
|
$
|
51,218,000
|
||||
|
Asia
|
131,104,000
|
109,011,000
|
88,253,000
|
|||||||
|
Europe
|
15,723,000
|
13,834,000
|
19,027,000
|
|||||||
|
$
|
215,916,000
|
$
|
190,022,000
|
$
|
158,498,000
|
|||||
|
Total
Revenues:
|
||||||||||
|
North
America
|
$
|
80,836,000
|
$
|
76,979,000
|
$
|
63,033,000
|
||||
|
Asia
|
151,992,000
|
132,224,000
|
114,025,000
|
|||||||
|
Europe
|
16,967,000
|
15,194,000
|
12,076,000
|
|||||||
|
Less
intergeographic
|
||||||||||
|
revenues
|
(33,879,000
|
)
|
(34,375,000
|
)
|
(30,636,000
|
)
|
||||
|
$
|
215,916,000
|
$
|
190,022,000
|
$
|
158,498,000
|
|||||
|
Income
from Operations:
|
||||||||||
|
North
America
|
$
|
4,020,000
|
$
|
8,475,000
|
$
|
3,511,000
|
||||
|
Asia
|
22,391,000
|
15,805,000
|
13,771,000
|
|||||||
|
Europe
|
206,000
|
631,000
|
645,000
|
|||||||
|
$
|
26,617,000
|
$
|
24,911,000
|
$
|
17,927,000
|
|||||
|
Identifiable
Assets:
|
||||||||||
|
North
America
|
$
|
150,807,000
|
$
|
92,515,000
|
||||||
|
Asia
|
95,358,000
|
131,970,000
|
||||||||
|
Europe
|
7,753,000
|
3,409,000
|
||||||||
|
Less
intergeographic
|
||||||||||
|
eliminations
|
(11,862,000
|
)
|
(10,117,000
|
)
|
||||||
|
$
|
242,056,000
|
$
|
217,777,000
|
|||||||
|
Capital
Expenditures:
|
||||||||||
|
North
America
|
$
|
1,328,000
|
$
|
736,000
|
$
|
829,000
|
||||
|
Asia
|
6,322,000
|
5,557,000
|
1,911,000
|
|||||||
|
Europe
|
96,000
|
286,000
|
379,000
|
|||||||
|
$
|
7,746,000
|
$
|
6,579,000
|
$
|
3,119,000
|
|||||
|
Depreciation
and Amortizaion
|
||||||||||
|
expense:
|
||||||||||
|
North
America
|
$
|
2,526,000
|
$
|
1,928,000
|
$
|
1,775,000
|
||||
|
Asia
|
7,364,000
|
6,966,000
|
6,399,000
|
|||||||
|
Europe
|
214,000
|
131,000
|
201,000
|
|||||||
|
$
|
10,104,000
|
$
|
9,025,000
|
$
|
8,375,000
|
|||||
Transfers
between geographic areas include finished products manufactured in foreign
countries which are then transferred to the United States and Europe for sale;
finished goods manufactured in the United States which are transferred to Europe
and Asia for sale; and semi-finished components manufactured in the United
States are sold to Asia for further processing. Income from operations
represents gross profit less operating expenses.
Identifiable
assets are those assets of the Company that are identified with the operations
of each geographic area.
The
territory of Hong Kong became a Special Administrative Region (“SAR”) of the
People's Republic of China in the middle of 1997. The territory of Macao became
a SAR of the People’s Republic of China at the end of 1999. Management cannot
presently predict what future impact this will have on the Company, if any,
or
how the political climate in China will affect the Company's contractual
arrangements in China. Substantially all of the Company's manufacturing
operations and approximately 38% of its identifiable assets are located in
The
People's Republic of China and its SARs of Hong Kong and Macao. Accordingly,
events which may result from the expiration of such leases, as well as any
change in the "Most Favored Nation" status granted to China by the U.S., could
have a material adverse effect on the Company.
The
Company's research and development facilities are located in California,
Massachusetts, Hong Kong, China and the United Kingdom. Research and development
costs, which are expensed as incurred, amounted to $7.3 million in 2005, $7.3
million in 2004 and $8.4 million in 2003. The Company closed its Indiana
facility during the second quarter of 2003.
The
Company had sales to individual customers in excess of ten percent of
consolidated net sales as follows in 2005, 2004 and 2003: The amount and
percentages of the Company's sales to an individual customer each year were
$32,844,000 (15.2%) in 2005, $22,062,000 (11.6%) in 2004 and $22,470,000 (14.2%)
in 2003. The loss of such customers would have a material adverse effect on
the
Company's consolidated results of operations, financial position and cash flows.
12. RETIREMENT
FUND AND PROFIT SHARING PLAN
The
Company maintains a domestic profit sharing plan and a contributory stock
ownership and savings 401(K) plan, which combines stock ownership and individual
voluntary savings provisions to provide retirement benefits for plan
participants. The plan provides for participants to voluntarily contribute
a
portion of their compensation, subject to certain legal maximums. The Company
will match, based on a sliding scale, up to $350 for the first $600 contributed
by each participant. Matching contributions plus additional discretionary
contributions is made with Company stock purchased in the open market. The
expense for the years ended December 31, 2005, 2004 and 2003 amounted to
approximately $437,000, $404,000 and $247,000, respectively. As of December
31,
2005, the plans owned 18,697 and 132,977 shares of Bel Fuse Inc. Class A and
Class B common stock, respectively.
The
Company's Far East subsidiaries have a retirement fund covering substantially
all of their Hong Kong based full-time employees. Eligible employees contribute
up to 5% of salary to the fund. In addition, the Company may contribute an
amount up to 7% of eligible salary, as determined by Hong Kong government
regulations, in cash or Company stock. The expense for the years ended December
31, 2005, 2004 and 2003 amounted to approximately $482,000, $447,000 and
$631,000, respectively. As of December 31, 2005, 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 supplemental retirement and death benefits. The Plan was established
by the Company in 2002. Employees are selected at the sole discretion of the
Board of Directors of the Company to participate in the Plan. The Plan is
unfunded. The Company utilizes life insurance to partially cover its obligations
under the Plan. The benefits available under the Plan vary according to when
and
how the participant terminates employment with the Company. If a participant
retires (with the prior written consent of the Company) on his normal retirement
date (65 years old, 20 years of service, and 5 years of Plan participation),
his
normal retirement benefit under the Plan would be annual payments equal to
40%
of his average base compensation (calculated using compensation from the highest
5 consecutive calendar years of Plan participation), payable in monthly
installments for the remainder of his life. If a participant retires early
from
the Company (55 years old, 20 years of service, and 5 years of Plan
participation), his early retirement benefit under the Plan would be an amount
(i) calculated as if his early retirement date were in fact his normal
retirement date, (ii) multiplied by a fraction, with the numerator being the
actual years of service the participant has with the Company and the denominator
being the years of service the participant would have had if he had retired
at
age 65, and (iii) actuarially reduced to reflect the early retirement date.
If a
participant dies prior to receiving 120 monthly payments under the Plan, his
beneficiary would be entitled to continue receiving benefits for the shorter
of
(i) the time necessary to complete 120 monthly payments or (ii) 60 months.
If a
participant dies while employed by the Company, his beneficiary would receive,
as a survivor benefit, an annual amount equal to (i) 100% of the participant’s
annual base salary at date of death for one year, and (ii) 50% of the
participant’s annual base salary at date of death for each of the following 4
years, each payable in monthly installments. The Plan also provides for
disability benefits, and a forfeiture of
benefits if a participant terminates employment for reasons other than those
contemplated under the Plan. The expense for the years ended December 31, 2005,
2004 and 2003 amounted to approximately $699,000, $509,000 and $428,000,
respectively.
The
following provides a reconciliation of benefit obligations, the funded status
of
the SERP and a summary of significant assumptions:
|
December
31,
|
2005
|
2004
|
|||||
|
Change
in benefit obligation:
|
|||||||
|
Projected
benefit obligation at beginning of year
|
$
|
2,890,113
|
$
|
2,637,902
|
|||
|
Service
cost
|
331,942
|
221,981
|
|||||
|
Interest
cost
|
211,920
|
145,085
|
|||||
|
Plan
amendments
|
444,684
|
—
|
|||||
|
Benefits
paid
|
(37,500
|
)
|
—
|
||||
|
Actuarial
(gains) losses
|
635,137
|
(114,855
|
)
|
||||
|
Projected
benefit obligation at end of year
|
$
|
4,476,296
|
$
|
2,890,113
|
|||
|
Funded
status of plan:
|
|||||||
|
Under
funded status
|
$
|
(4,476,296
|
)
|
$
|
(2,890,113
|
)
|
|
|
Unrecognized
net loss
|
869,673
|
259,218
|
|||||
|
Unrecognized
prior service costs
|
1,811,297
|
1,497,253
|
|||||
|
Accrued
pension cost
|
$
|
(1,795,326
|
)
|
$
|
(1,133,642
|
)
|
|
|
Change
in plan assets:
|
|||||||
|
Fair
value of plan assets, beginning of year
|
$
|
—
|
$
|
—
|
|||
|
Company
contributions
|
37,500
|
—
|
|||||
|
Benefit
paid
|
(37,500
|
)
|
—
|
||||
|
Fair
value of plan assets, end of year
|
$
|
—
|
$
|
—
|
|||
|
Balance
sheet amounts:
|
|||||||
|
Accrued
benefit liability
|
$
|
3,450,688
|
$
|
2,261,583
|
|||
|
Intangible
asset
|
1,655,362
|
1,127,941
|
|||||
|
The
components of SERP expense are as follows:
|
||||||||||
|
December
31,
|
2005
|
2004
|
2003
|
|||||||
|
Service
cost
|
$
|
331,942
|
$
|
221,981
|
$
|
217,875
|
||||
|
Interest
cost
|
211,920
|
145,085
|
104,719
|
|||||||
|
Net
amortization and deferral
|
155,322
|
142,363
|
105,110
|
|||||||
|
Total
SERP expense
|
$
|
699,184
|
$
|
509,429
|
$
|
427,704
|
||||
|
Assumption
percentages:
|
||||||||||
|
Discount
rate
|
5.50
|
%
|
5.50
|
%
|
5.50
|
%
|
||||
|
Rate
of compensation increase
|
3.00
|
%
|
3.00
|
%
|
4.00
|
%
|
||||
The
accumulated benefit obligation for the SERP was $3,450,688 and $2,261,583 as
of
December 31, 2005 and 2004.
13. STOCK
INCENTIVE PLAN
Incentive
Stock Options
The
Company has a Qualified Stock Option Plan (the "Plan") which provides for the
granting of "Incentive Stock Options" to key employees within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended. The Plan provides
for the issuance of 2,400,000 common shares. Substantially all options
outstanding become exercisable twenty-five percent (25%) one year from the
date
of grant and twenty-five percent (25%) for each year of the three years
thereafter. The exercise price of the options granted pursuant to the Plan
is
not to be less than 100 percent of the fair market value of the shares on the
date of grant. Accordingly, no compensation cost has been recognized for the
stock options awarded. An option may not be exercised within one year from
the
date of grant, and in general, no option will be exercisable after five years
from the date granted. See Note 1 - New Financial Accounting Standards for
changes in accounting for stock options which will be effective during
2005.
Information
regarding the Company’s Stock Option Plan for 2005, 2004, and 2003 is as
follows:
|
2005
|
2004
|
2003
|
|||||||||||||||||
|
Weighted-
|
Weighted-
|
Weighted-
|
|||||||||||||||||
|
Average
|
Average
|
Average
|
|||||||||||||||||
|
Exercise
|
Exercise
|
Exercise
|
|||||||||||||||||
|
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
||||||||||||||
|
Options
out-
|
|||||||||||||||||||
|
standing,
begin-
|
|||||||||||||||||||
|
ning
of year
|
495,289
|
$
|
23.17
|
712,600
|
$
|
21.61
|
759,238
|
$
|
19.23
|
||||||||||
|
Options
exercised
|
(200,276
|
)
|
$
|
20.50
|
(200,911
|
)
|
$
|
19.37
|
(224,638
|
)
|
$
|
11.48
|
|||||||
|
Options
granted
|
—
|
$
|
—
|
24,000
|
$
|
37.00
|
200,000
|
$
|
18.89
|
||||||||||
|
Options
cancelled
|
(9,000
|
)
|
$
|
27.29
|
(40,400
|
)
|
$
|
22.71
|
(22,000
|
)
|
$
|
19.00
|
|||||||
|
Options
out-
|
|||||||||||||||||||
|
standing,
end
|
|||||||||||||||||||
|
of
year
|
286,013
|
$
|
24.96
|
495,289
|
$
|
23.17
|
712,600
|
$
|
21.61
|
||||||||||
|
Options
price
|
|||||||||||||||||||
|
range
at end
|
|||||||||||||||||||
|
of
year
|
$
|
18.89
to $37.00
|
$
|
17.00
to $37.00
|
$
|
15.38
to $29.50
|
|||||||||||||
|
Options
price
|
|||||||||||||||||||
|
range
for
|
|||||||||||||||||||
|
exercised
|
|||||||||||||||||||
|
shares
|
$
|
17.00
to $29.50
|
$
|
15.38
to $29.50
|
$
|
5.75
to $19.52
|
|||||||||||||
|
Options
available
|
|||||||||||||||||||
|
for
grant at end
|
|||||||||||||||||||
|
of
year
|
810,985
|
954,385
|
937,985
|
||||||||||||||||
|
Weighted-
|
|||||||||||||||||||
|
average
fair
|
|||||||||||||||||||
|
value
of options
|
|||||||||||||||||||
|
granted
during
|
|||||||||||||||||||
|
the
year
|
$
|
—
|
$
|
8.66
|
$
|
8.03
|
|||||||||||||
The
following table summarizes information about fixed-price stock options
outstanding at December 31, 2005:
|
Weighted-
|
||||||||||||||||
|
Number
Out-
|
Average
|
Weighted
|
Number
|
Weighted-
|
||||||||||||
|
Range
of
|
standing
at
|
Remaining
|
Average
|
Exercisable
at
|
Average
|
|||||||||||
|
Exercise
|
December
31,
|
Contractual
|
Exercise
|
December
31,
|
Exercise
|
|||||||||||
|
Prices
|
2005
|
Life
|
Price
|
2005
|
Price
|
|||||||||||
|
$29.50
|
120,817
|
—
|
$
|
29.50
|
60,817
|
$
|
29.50
|
|||||||||
|
$19.52-$22.25
|
38,200
|
1
Year
|
$
|
21.29
|
22,700
|
$
|
21.29
|
|||||||||
|
$18.89
|
106,996
|
2
Years
|
$
|
18.89
|
21,996
|
$
|
18.89
|
|||||||||
|
$37.00
|
20,000
|
3
Years
|
$
|
37.00
|
5,000
|
$
|
37.00
|
|||||||||
|
286,013
|
110,513
|
|||||||||||||||
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 Stock Option plan. 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. Deferred
stock-based compensation expense of $3.6 million associated with unearned shares
under this plan as of December 31, 2005, is reported within Stockholders' equity
on the Company's consolidated balance sheets, net of deferred tax benefit.
Pretax compensation expense was $248,131 for the year ended December 31,
2005.
Through
December 31, 2005, 152,400 shares, net of cancellations, have been awarded
under
this plan and all shares are unvested.
14. COMMON
STOCK
During
2000, the Board of Directors of the Company authorized the purchase of up to
ten
percent (10%) of the Company’s outstanding Class B common shares. As of December
31, 2005, the Company had purchased and retired 23,600 Class B common shares
at
a cost of approximately $808,000 which reduced the number of Class B common
shares outstanding.
There
are
no contractual restrictions on the Company's ability to pay dividends provided
the Company continues to comply with the financial tests in its credit
agreement. On February 2, 2005, May 2, 2005, August 1, 2005, and November 1,
2005 the Company paid a $0.05 per share dividend to all shareholders of record
of Class B Common Stock in the total amount of $433,450, $437,175, $439,450,
and
$442,356, respectively. On February 2, 2005, May 2, 2005, August 1, 2005 and
November 1, 2005 the Company paid a $0.04 per share dividend to all shareholders
of record of Class A Common Stock in the total amount of $107,735, $107,735,
$107,735 and $107,735, respectively. On February 2, 2004, May 2, 2004, August
2,
2004, and November 2, 2004 the Company paid a $0.05 per share dividend to all
shareholders of record of Class B Common Stock in the total amount of $422,474,
$424,449, $431,470, and $432,406, respectively. During May 2004 the Company
paid
a dividend on Class B common stock in the amount of $26,860 in connection with
a
shortfall of prior payments. On February 2, 2004, May 2, 2004, August 2, 2004,
and November 2, 2004 the Company paid a $0.04 per share dividend to all
shareholders of record of Class A Common Stock in the total amount of $107,641,
$107,641, $107,678, and $107,694, respectively.
15. COMMITMENTS
AND CONTINGENCIES
Leases
The
Company leases various facilities. Some of these leases require the Company
to
pay certain executory costs (such as insurance and maintenance).
Future
minimum lease payments for operating leases are approximately as
follows:
|
Years
Ending
|
||||
|
December
31,
|
||||
|
2006
|
$
|
1,473,000
|
||
|
2007
|
745,000
|
|||
|
2008
|
357,000
|
|||
|
2009
|
318,000
|
|||
|
2010
|
394,000
|
|||
|
$
|
3,287,000
|
|||
Rental
expense was approximately $1,624,000, $1,433,000 and $1,450,000 for the years
ended December 31, 2005, 2004, and 2003, respectively.
Facilities
The
Company is constructing a 117,000 square foot manufacturing facility in
Zhongshan City, PRC for approximately $2.3 million including improvements.
As of
December 31, 2005 the Company has paid $1.3 million on the construction.
Legal
Proceedings
The
Company is a plaintiff in a lawsuit captioned Bel Fuse Inc., a New Jersey
corporation, and Bel Power, Inc., a Massachusetts corporation, v. Andrew
Ferencz, Gregory Zovonar, Bernhard Schroter, EE2GO, Inc., a Massachusetts
corporation, Howard E. Kaepplein and William Ng, Defendants brought in the
Supreme Court of the Commonwealth of Massachusetts. The Company was granted
injunctive relief and is seeking damages against the former stockholders of
Galaxy Power, Inc, the Company’s recent acquisition, and 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.
The
Company is a defendant in a lawsuit captioned Murata Manufacturing Company,
Ltd.
v. Bel Fuse Inc et al and brought in Illinois Federal District Court. Plaintiff
claims that its patent covers all of the Company's modular jack products. That
party had previously advised the Company that it was willing to grant a
non-exclusive license to the Company under the patent for a 3% royalty on all
future gross sales of ICM products; payment of a lump sum of 3% of past sales
including sales of applicable Insilco products; an annual minimum royalty of
$500,000; payment of all attorney fees; and marking of all licensed ICM's with
the third party's patent number. The Company is also a defendant in a lawsuit,
captioned Regal Electronics, Inc. v. Bel Fuse Inc. and brought in California
Federal District Court. Plaintiff claims that its patent covers certain of
the
Company's modular jack products. That party had previously advised the Company
that it was willing to grant a non transferable license to the Company for
an up
front fee of $500,000 plus a 6% royalty on future sales. The District Court
has
granted summary judgment in the Company's favor dismissing Regal Electronics'
infringement claims, while at the same time the Court dismissed the Company's
invalidity counterclaim against Regal Electronics. As of the date hereof, the
Company has not been advised as to whether Regal will appeal the Court's
rejection of its infringement claims. The Company believes that none of its
products are covered by these patents and intends to vigorously defend its
position and no accrual has been provided in the accompanying consolidated
financial statements.
The
Company cannot predict the outcome of these matters; however, management
believes that the ultimate resolution of these matters will not have a material
impact on the Company's consolidated financial condition or results of
operations.
The
Company is not a party to any other legal proceeding, the adverse outcome of
which is expected to have a material adverse effect on the Company's
consolidated financial condition or results of operations.
During
the year ended December 31, 2004, the Company settled an arbitration proceeding
related to a 1998 acquisition. The Company received $2,935,000 (net of $65,000
of related legal expenses incurred during the period) pursuant to that
settlement.
|
16.
|
SUBSEQUENT
EVENT
|
On
February 17, 2006, a fire resulted in the temporary closure of the Company’s
leased manufacturing facility in San Cristobal, Dominican Republic. Management
is implementing a recovery plan that may include temporarily shifting some
production to other Company facilities. The Company maintains insurance for
damage to this facility and some of its contents, as well as for business
interruption. The Company does not believe it has adequate insurance to cover
its entire loss. The Company estimates that the Dominican Republic facility
was
responsible for approximately 4% of the Company’s worldwide revenues in 2005.
The facility contained property, equipment and inventory with a net book value
of approximately $2.3 million at the time of the fire. After insurance proceeds,
the Company estimates an out of pocket charge of approximately
$1,000,000.
|
(Unaudited)
|
||||||||||||||||
|
Total
Year
|
||||||||||||||||
|
Quarter
Ended
|
Ended
|
|||||||||||||||
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
December
31,
|
||||||||||||
|
2005
|
2005
|
2005
|
2005
|
2005
|
||||||||||||
|
Net
sales
|
$
|
45,438,285
|
$
|
57,545,421
|
$
|
56,247,745
|
$
|
56,684,305
|
$
|
215,915,756
|
||||||
|
Gross
profit
|
12,749,474
|
16,853,324
|
15,827,945
|
14,338,289
|
59,769,032
|
|||||||||||
|
Net
earnings
|
4,313,365
|
6,668,675
|
5,986,397
|
3,264,840
|
20,233,277
|
|||||||||||
|
Earnings
|
||||||||||||||||
|
per
share
|
||||||||||||||||
|
-
basic (1)
|
$
|
0.38
|
$
|
0.58
|
$
|
0.52
|
$
|
0.28
|
$
|
1.76
|
||||||
|
Earnings
|
||||||||||||||||
|
per
share -
|
||||||||||||||||
|
diluted
(1)
|
$
|
0.38
|
$
|
0.58
|
$
|
0.52
|
$
|
0.28
|
$
|
1.75
|
||||||
|
Total
Year
|
||||||||||||||||
|
Quarter
Ended
|
Ended
|
|||||||||||||||
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
December
31,
|
||||||||||||
|
2004
|
2004
|
2004
|
2004
|
2004
|
||||||||||||
|
Net
sales
|
$
|
42,357,023
|
$
|
48,390,242
|
$
|
49,985,626
|
$
|
49,289,062
|
$
|
190,021,953
|
||||||
|
Gross
profit
|
12,566,009
|
15,194,241
|
14,977,954
|
14,507,445
|
57,245,649
|
|||||||||||
|
Net
earnings
|
4,654,731
|
7,145,253
|
6,894,347
|
6,027,258
|
24,721,589
|
|||||||||||
|
Earnings
|
||||||||||||||||
|
per
share
|
||||||||||||||||
|
-
basic (1)
|
$
|
0.42
|
$
|
0.64
|
$
|
0.61
|
$
|
0.52
|
$
|
2.19
|
||||||
|
Earnings
|
||||||||||||||||
|
per
share -
|
||||||||||||||||
|
diluted
(1)
|
$
|
0.41
|
$
|
0.63
|
$
|
0.60
|
$
|
0.51
|
$
|
2.15
|
||||||
|
(1)
|
Quarterly
amounts of earnings per share may not agree to the total for the
year due
to rounding.
|
|
BEL
FUSE INC. AND SUBSIDIARIES
|
||||||||||||
|
SCHEDULE
II - VALUATION AND QUALIFYING
ACCOUNTS
|
|
Column
A
|
Column
B
|
Column
C
|
Column
D
|
Column
E
|
Column
F
|
||||||||||||||
|
Charged
|
Additions
|
||||||||||||||||||
|
Balance
at
|
to
profit
|
Charged
|
Balance
|
||||||||||||||||
|
beginning
|
and
loss
|
to
other
|
Deductions
|
at
close
|
|||||||||||||||
|
Description
|
of
period
|
or
income
|
accounts
|
(describe)(a)
|
of
period
|
||||||||||||||
|
|
|||||||||||||||||||
|
Year
ended December 31, 2005
|
|||||||||||||||||||
|
Allowance
for doubtful
|
|||||||||||||||||||
|
accounts
|
$
|
1,610,000
|
$
|
275,000
|
$
|
25,000
|
(a
|
)
|
$
|
803,000
|
$
|
1,107,000
|
|||||||
|
Allowance
for excess and
|
|||||||||||||||||||
|
obsolete
inventory
|
$
|
5,471,000
|
$
|
867,000
|
$
|
475,000
|
(c
|
)
|
$
|
1,796,000
|
$
|
5,017,000
|
|||||||
|
Year
ended December 31, 2004
|
|||||||||||||||||||
|
Allowance
for doubtful
|
|||||||||||||||||||
|
accounts
|
$
|
1,976,000
|
$
|
233,000
|
$
|
65,000
|
(a
|
)
|
$
|
664,000
|
$
|
1,610,000
|
|||||||
|
Allowance
for excess and
|
|||||||||||||||||||
|
obsolete
inventory
|
$
|
5,679,000
|
$
|
1,250,000
|
$
|
43,000
|
(c
|
)
|
$
|
1,501,000
|
$
|
5,471,000
|
|||||||
|
Year
ended December 31, 2003
|
|||||||||||||||||||
|
Allowance
for doubtful
|
|||||||||||||||||||
|
accounts
|
$
|
945,000
|
$
|
(77,000
|
)
|
$
|
2,308,000
|
(b
|
)
|
$
|
1,200,000
|
$
|
1,976,000
|
||||||
|
Allowance
for excess and
|
|||||||||||||||||||
|
obsolete
inventory
|
$
|
3,136,000
|
$
|
863,000
|
$
|
3,320,000
|
(b
|
)
|
$
|
1,640,000
|
$
|
5,679,000
|
|||||||
| (a) |
Write
offs.
|
|
(b)
|
For
the year ended 2003, these amounts represent the reserves established
at
date of acquisition of the Passive Components
Group of Insilco Technologies,
Inc.
|
| (c) |
For
the year ended 2004 these amounts represent foreign exchange rate
changes.
|
S-1
Not
applicable
| Item 9A. |
Evaluation
of Disclosure Controls and Procedures
During
the fourth quarter of 2005, the Company’s management, including the principal
executive officer and principal financial officer, evaluated the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) related to the recording,
processing, summarization, and reporting of information in the Company’s
periodic reports that the Company files with the SEC. These disclosure controls
and procedures have been designed to ensure that material information relating
to the Company, including its subsidiaries, is made known to the Company’s
management, including these officers, by other of the Company’s employees, and
that this information is recorded, processed, summarized, evaluated, and
reported, as applicable, within the time periods specified in the SEC’s rules
and forms. Due to the inherent limitations of control systems, not all
misstatements may be detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people,
or
by management override of the control. The Company’s controls and procedures can
only provide reasonable, not absolute, assurance that the above objectives
have
been met.
Based
on
their evaluation as of December 31, 2005, the Company’s principal executive
officer and principal financial officer have concluded that the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure
that the information required to be disclosed by the Company in the reports
that
the Company files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms.
Management’s
Report on Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f). Under the supervision and with the participation of the
Company’s management, including the Company’s principal executive officer and
principal financial officer, the Company conducted an evaluation of the
effectiveness of the Company’s internal control over financial reporting based
on the framework in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on the Company’s evaluation under the framework in Internal
Control
-
Integrated
Framework,
the
Company’s management concluded that the Company’s internal control over
financial reporting was effective as of December 31, 2005.
Our
management’s assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2005 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in
their
report which is included herein.
Changes
in Internal Controls Over Financial Reporting
There
have been no changes in the Company’s internal control over financial reporting
that occurred during the last fiscal quarter to which this Annual Report on
Form
10-K relates that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
| Item 9b. |
Not
applicable.
The
Registrant incorporates by reference herein information to be set forth in
its
definitive proxy statement for its 2006 annual meeting of shareholders that
is
responsive to the information required with respect to this item.
The
registrant has adopted a code of ethics for its directors, executive officers
and all other senior financial personnel. The Registrant will make copies of
its
code of ethics available to investors upon request. Any such request should
be
sent by mail to Bel Fuse Inc., 206 Van Vorst Street, Jersey City, NJ 07302
Attn:
Colin Dunn or should be made by telephone by calling Colin Dunn at 201-432-0463.
| Item 11. |
The
Registrant incorporates by reference herein information to be set forth in
its
definitive proxy statement for its 2006 annual meeting of shareholders that
is
responsive to the information required with respect to this Item.
| Item 12. |
The
Registrant incorporates by reference herein information to be set forth in
its
definitive proxy statement for its 2006 annual meeting of shareholders that
is
responsive to the information required with respect to this Item.
The
Registrant incorporates by reference herein information to be set forth in
its
definitive proxy statement for its 2006 annual meeting of shareholders that
is
responsive to the information required with respect to this Item.
The
Registrant incorporates by reference herein information to be set forth in
its
definitive proxy statement for its 2006 annual meeting of shareholders that
is
responsive to the information required with respect to this Item.
|
|
Page
|
|
|
(a)
|
Financial
Statements
|
|
|
1.
|
Financial
statements filed as a part of this Annual Report on Form
10-K:
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
Consolidated
Balance Sheets as of December 31, 2005 and 2004
|
F-2
- F-3
|
|
|
Consolidated
Statements of Operations for Each of the Three Years in the Period
Ended
December 31, 2005
|
F-4
|
|
|
Consolidated
Statements of Stockholders' Equity for Each of the Three Years
in the
Period Ended December 31, 2005
|
F-5
- F-6
|
|
|
Consolidated
Statements of Cash Flows for Each of the Three Years in the Period
Ended
December 31, 2005
|
F-7
- F-9
|
|
|
Notes
to Consolidated Financial Statements
|
F-
10 - F-39
|
|
|
Selected
Quarterly Financial Data - Years Ended December 31, 2005 and 2004
(Unaudited)
|
F-40
|
|
|
2.
|
Financial
statement schedules filed as part of this report:
|
|
|
Schedule
II: Valuation and Qualifying Accounts
|
S-1
|
|
|
All
other schedules are omitted because they are inapplicable, not
required or
the information is included in the consolidated financial statements
or
notes thereto.
|
| (c) |
Exhibits
|
|
3.1
|
Certificate
of Incorporation, as amended, is incorporated by reference to Exhibit
3.1
of the Company’s Annual Report on Form 10-K for the year ended December
31, 1999.
|
|
3.2
|
By-laws,
as amended, are incorporated by reference to Exhibit 4.2 of the Company's
Registration Statement on Form S-2 (Registration No. 33-16703) filed
with
the Securities and Exchange Commission on August 25,
1987.
|
|
10.1
|
Agency
agreement dated October 1, 1988 between Bel Fuse Ltd. and Rush Profit
Ltd.
Incorporated by reference to Exhibit 10.1 of the Company's annual
report
on Form 10-K for the year ended December 31,
1994.
|
|
10.2
|
Contract
dated March 16, 1990 between Accessorios Electronicos (Bel Fuse Macau
Ltd.) and the Government of Macao. Incorporated by reference to Exhibit
10.2 of the Company's annual report on Form 10-K for the year ended
December 31, 1994.
|
|
10.3
|
Loan
agreement dated February 14, 1990 between Bel Fuse, Ltd. (as lender)
and
Luen Fat Lee Electronic Factory (as borrower). Incorporated by reference
to Exhibit 10.3 of the Company's Annual Report on Form 10-K for the
year
ended December 31, 1995.
|
|
10.4
|
Stock
Option Plan. Incorporated by reference to Exhibit 28.1 of the Company's
Registration Statement on Form S-8 (Registration No.333-89376) filed
with
the Securities and Exchange Commission on May 29,
2002.
|
|
10.5
|
Amended
and Restated Credit and Guarantee Agreement, dated as of March 21,
2003,
by and among Bel Fuse Inc., as Borrower, the Subsidiary Guarantors
party
thereto and The Bank of New York, as Lender. Incorporated by reference
to
Exhibit 10.7 of the Company’s Form 10-K for the year ended December 31,
2002.
|
| 10.6 |
Amendment
No. 1 dated as of July 26, 2005, to the Registrant's Amended and
Restated
Credit and Guarantee Agreement dated as of March 21, 2003. Incorporated
by
Reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
dated August 1, 2005.
|
| Item 15. |
Exhibits,
Financial Statement Schedules and Reports on Form
8-K
(continued)
|
Exhibit
No.:
|
10.7
|
Agreement
and Plan of Merger dated as of March 4, 2005 by and among Bel Fuse,
Inc.,
Bel Westboro, Inc. and Galaxy Power, Inc. Incorporated by reference
to
exhibit 2.1 of the Company's Form 8-K dated March 7,
2005.
|
|
10.8
|
Contract
for Purchase and Sale of Real Estate dated July 15, 2004 between
Bel Fuse
Inc. and Fields Development Group Co .Incorporated by reference to
Exhibit
10.9 of the Company’s Form 10-K for the year ended December 31,
2004.
|
|
11.1
|
A
statement regarding the computation of earnings per share is omitted
because such computation can be clearly determined from the material
contained in this Annual Report on Form
10-K.
|
|
Subsidiaries
of the Registrant.
|
|
Consent
of Independent Registered Public Accounting
Firm.
|
| 24.1 |
Power
of attorney (included on the signature
page)
|
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Certification
of the Vice President of Finance pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
Certification
of the Chief Executive Officer pursuant to Section 906 of the Sarbanes
-
Oxley Act of 2002.
|
| 32.2 |
Certification
of the Vice-President of Finance pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of
the registrant and in the capacities and on the dates indicated.
| BEL FUSE, INC. | ||
| |
|
|
| Dated: March 15, 2006 | By: | /s/ DANIEL BERNSTEIN |
|
|
||
|
Name:
Daniel Bernstein
Title:
President, Chief Executive Officer and
Director
|
||
KNOW
ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Daniel Bernstein and Colin Dunn as his/her
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him/her and in his/her name, place, and stead, in any and all capacities,
to
sign and file any and all amendments to this Annual Report on Form 10-K, with
all exhibits thereto and hereto, and other documents with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent, and each
of
them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he/she might or could do in person, hereby ratifying
and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/S/
Daniel Bernstein
|
President,
Chief Executive Officer and Director
|
March
15, 2006
|
||
|
Daniel
Bernstein
|
|
|||
|
/s/
Howard Bernstein
|
Director
|
March
15, 2006
|
||
|
Howard
B. Bernstein
|
||||
|
/s/
Robert H. Simandl
|
Director
|
March
15, 2006
|
||
|
Robert
H. Simandl
|
||||
|
/s/
Peter Gilbert
|
Director
|
March
15, 2006
|
||
|
Peter
Gilbert
|
||||
|
/s/
John Tweedy
|
Director
|
March
15, 2006
|
||
|
John
Tweedy
|
||||
|
/s/
John Johnson
|
Director
|
March
15, 2006
|
||
|
John
Johnson
|
|
/s/
Avi Eden
|
Director
|
March
15, 2006
|
||
|
Avi
Eden
|
||||
|
/s/
Colin Dunn
|
Vice-President
- Finance and Secretary
|
|||
|
Colin
Dunn
|
|
March
15, 2006
|
-53-
|
EXHIBIT
22.1
|
|
Subsidiaries
of the Registrant
|
||
|
Jurisdiction
of
|
||
|
Name
|
Incorporation
|
|
|
Bel
Components Ltd.
|
Hong
Kong
|
|
|
Bel
Connector Inc.
|
Delaware
|
|
|
Bel
Fuse Delaware Inc.
|
Delaware
|
|
|
Bel
Fuse Europe Ltd.
|
United
Kingdom
|
|
|
Bel
Fuse Limited
|
Hong
Kong
|
|
|
Bel
Fuse Macau LDA
|
Macao
|
|
|
Bel
Fuse (Macao Commerical
|
||
|
Offshore)
Limited
|
Macao
|
|
|
Bel
Power (Hangzhou) Co. Ltd.
|
China
|
|
|
Bel
Power Products Inc.
|
Delaware
|
|
|
Bel
Stewart Gmbh
|
Germany
|
|
|
Bel
Stewart Limited
|
Hong
Kong
|
|
|
Bel
Transformer Inc.
|
Delaware
|
|
|
Bel
Ventures Inc.
|
Delaware
|
|
|
Bel
Power Inc.
|
Massachusetts
|
|
|
Netwatch
s.r.o.
|
Czech
Republic
|
|
|
Signal
Dominicana, S.A.
|
Dominican
Republic
|
|
|
Stewart
Connector Systems de
|
||
|
Mexico,
S.A. de C.V.
|
Mexico
|
|
|
Top
East Corporation Limited
|
Hong
Kong
|
EXHIBIT
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the incorporation by reference in Registration Statements Nos.
333-89376 and 333-65627 on Form S-8 of our report dated March 13, 2006, relating
to the consolidated financial statements and financial statement schedule of
Bel
Fuse Inc. and subsidiaries and management's report on the effectiveness of
internal control over financial reporting, appearing in this Annual Report
on
Form 10-K of Bel Fuse Inc. for the year ended December 31, 2005.
/s/
DELOITTE & TOUCHE LLP
New
York,
New York
March
13,
2006
EXHIBIT
31.1
CERTIFICATION
I,
Daniel
Bernstein certify that:
1. I
have
reviewed this annual report on Form 10-K of Bel Fuse Inc.;
2. Based
on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on
my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules
13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
|
(a)
|
designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
|
(b)
|
designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision,
to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
(c)
|
evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures as of the end of the period
covered
by this report based on such evaluation;
and
|
|
(d)
|
disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
|
(a)
|
all
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
(b)
|
any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
Date:
March 15, 2006
/s/
Daniel Bernstein
Daniel
Bernstein
President
and Chief Executive Officer
EXHIBIT
31.2
CERTIFICATION
I,
Colin
Dunn certify that:
1. I
have
reviewed this annual report on Form 10-K of Bel Fuse Inc.;
2. Based
on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on
my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules
13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
|
(a)
|
designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
|
(b)
|
designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision,
to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
(c)
|
evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures as of the end of the period
covered
by this report based on such evaluation;
and
|
|
(d)
|
disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
|
(a)
|
all
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
(b)
|
any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
Date:
March 15, 2006
/s/
Colin
Dunn
Colin
Dunn
Vice-President
- Finance and Secretary