MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
1994 OVERVIEW
The Company's 1994 results of operations reflect significantly improved
performance across each of its businesses compared to fiscal 1993, producing
sales growth of 25% and net income at more than double 1993 levels.
The following table summarizes the Company's sales performance by product
category (amounts in 000s):
1994 1993 1992
Power Conversion $117,995 $ 94,501 $ 77,527
Industrial Automation 18,607 13,236 20,032
Computer Systems 18,198 16,053 17,240
-------- -------- --------
Total $154,800 $123,790 $114,799
========== ========= ========
The increase in sales was achieved as the Company further established
itself in its served markets as a value added supplier, delivering high
quality products and services to its customers. The Company's focus on
high growth market sectors in the communications and networking industries
positively impacted sales by its Power Conversion and Computer Systems
divisions, as these sectors experienced considerable growth during 1994.
Additionally, sales to the utility sector by Industrial Automation
recovered from the depressed levels seen in 1993.
While volumes increased, gross margin as a percentage of sales declined
from 39.1% in 1993 to 36.9% in 1994. This decrease resulted primarily from
a shift in strategic emphasis towards higher volume Original Equipment
Manufacturer (OEM) business, with inherently lower profit margins, and
significant production start-up costs associated with increased sales of
the Company's high density converter product.
The effect on operating income of the reduction in gross margin
percentage was offset by limited expense growth as a result of the
Company's continuing efforts to manage operating expenses relative to gross
margin levels, and the cost benefits generated as a result of the
restructuring activities announced in the fourth quarter of 1993.
Consequently, total operating expenses (excluding restructuring charges) as
a percentage of sales decreased from 34% in 1993 to 29% in 1994, while
operating income improved to 8.1% of sales from 5.6% (excluding
restructuring) in 1993.
Results of operations for 1993 included a restructuring charge of $3.0
million ($2.2 million after taxes) and a $2.3 million benefit from the
cumulative effect of changes in accounting principles. The Company adopted
Statement of Financial Accounting Standards (SFAS) No. 109, `Accounting
for Income Taxes,''and SFAS No. 112, ``Employers' Accounting for Post
Employment Benefits,''in the first quarter of 1993, which required the
Company to record a non-recurring benefit of $2.3 million, or $0.11 per
share.
1994 COMPARED TO 1993
SALES increased by 25% in 1994 and order backlog increased by 15% from $32.3
million at December 1993 to $37.0 million at December 1994. The growth in sales
resulted from a $23.5 million (25%) increase in Power Conversion sales, a $5.4
million (41%) increase at Industrial Automation, and a $2.1 million (13%)
increase at Computer Systems.
Power Conversion sales increased over 1993 primarily due to two factors:
strong growth in the European business and increased worldwide demand from OEMs
particularly in the communications and networking market sectors. The Company's
European Power Conversion business recorded a 49% increase in sales over 1993
driven by growth in both its OEM and distribution sales channels. On a
worldwide basis, the Company's focus on tailoring its product and service
offerings to match the needs of customers in the communications and networking
sectors proved successful, enabling the Company to participate in the strong
growth seen in those markets during 1994.
In the other geographical areas served, North American sales increased 20%
over 1993 on strong OEM and distributor sales channel performance, while sales
to customers in Asia and the Pacific Rim decreased due to continuing government
economic controls to curb inflation in China, the Company's largest Asian
marketplace.
In 1995, Power Conversion will continue to focus on its selected markets and
will invest significantly in standard product development to expand its range of
product offerings. Management believes that the significant order backlog at the
end of fiscal 1994 is an indicator of continuing sales growth in the coming
year.
Industrial Automation sales increased 41% over 1993 as the nuclear, utility
and process industries recovered from the depressed levels encountered in the
prior year, thereby increasing demand for Industrial Automation products. It is
expected that the business will become less reliant on the cyclical utility and
nuclear market sectors as the business focuses on developing new products and
solutions for industrial applications during 1995.
Computer Systems sales increased by 13% over 1993 on increased demand from
many of its established OEM customers in product applications such as video-on-
demand, machine vision and voice messaging. Several new products were released
during the year including the Nitro60 based on Motorola's new MC 68060
microprocessor; the MIPS-based Laguna VME bus CPU boards; and the Daytona,
Computer Systems' first integrated real-time workstation.
In 1995, Computer Systems will release additional new products directed
towards the communications and graphics market sectors. Computer Systems
recorded strong fourth quarter orders to close 1994; however, revenue for 1995
is expected to be heavily dependent on the effective introduction of these new
products.
GROSS PROFIT for the year increased by $8.7 million on higher sales volume.
However, gross profit as a percentage of sales declined from 39.1% for fiscal
1993 to 36.9% for fiscal 1994, primarily due to changes in mix within Power
Conversion toward higher volume sales to OEM customers with inherently lower
margins, and the impact from production costs associated with increased sales of
the Company's high density converter product. These negative influences on gross
margin exceeded benefits gained from lower production costs, as a result of the
transition of North American Power Conversion manufacturing to overseas
locations during 1994. Margins are expected to come under increasing pressure
during 1995 due to the continuous pricing pressures in all of the Company's
served markets, making it imperative that the Company's cost structure be
continually improved.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES as a percentage of sales
declined steadily during 1994 to 22% compared to 26% in 1993, reflecting cost
containment measures implemented by management to confine growth in expenses in
light of the reduced gross margins. As the Company strives for a more efficient
cost structure, management will continue to press for greater efficiencies in
this area to strengthen the Company's competitive position.
RESEARCH AND DEVELOPMENT EXPENSES increased by 16% over 1993 as the Company
continued to invest in new product development in each of its businesses. The
Company views continued investment in research and development to be critical to
its future growth and competitiveness, and is committed to significantly
increased standard product development and an accelerated level of new standard
and custom product releases in the coming year.
OPERATING EXPENSES as a percentage of sales declined to 29% in 1994 from 34%
a year ago (excluding the $3.0 million pretax restructuring charge). As a
result, despite the decline in gross profit as a percentage of sales, OPERATING
INCOME rose to 8.1% of sales from 5.6% (excluding the restructuring charge) in
1993.
FOREIGN EXCHANGE transaction losses of $60,000 were incurred in 1994 compared
to gains of $317,000 in 1993, primarily as a result of remeasuring certain
assets of the Company's European Power Conversion division into its functional
currency, which was devalued during the first quarter of 1993.
PROVISION FOR INCOME TAXES as a percentage of pretax income was 34% and 40%
in 1994 and 1993, respectively. The effective tax rate for 1994 decreased
primarily as a result of a reduction in the valuation allowance resulting from a
higher than expected utilization of deferred tax assets. For additional
information regarding income taxes, refer to pages 26 and 27 of the Notes to
Consolidated Financial Statements.
1993 COMPARED TO 1992
SALES for fiscal 1993 increased 8% over 1992 to $123.8 million. This growth
resulted from a $17 million (22%) increase in Power Conversion sales, offset by
reductions at Industrial Automation and Computer Systems of $6.8 million (34%)
and $1.2 million (7%), respectively. Order backlog increased 26% from $25.6
million at December 1992 to $32.3 million at December 1993.
Power Conversion sales growth resulted from increased sales to OEM customers
in North America and Europe and improvements in distributor sales in North
America. Market penetration of major OEM customers in the communications,
computer and networking markets increased during the year.
Industrial Automation sales decreased largely due to a capital spending slow-
down in the nuclear, utility and process industries, while Computer Systems
sales decreased as a result of weakness in demand from the division's OEM
customer base.
GROSS PROFIT as a percentage of sales declined from 44.4% in 1992 to 39.1% in
1993. This decrease reflected a shift in mix from higher margin business to
lower margin Power Conversion sales, which increased as a percentage of total
sales from 68% in 1992 to 76% in 1993; a shift in mix within Power Conversion
towards lower margin, high volume OEM customers; and start-up costs of new
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased $3.1 million (9%) in
1993. Selling, general and administrative expenses as a percentage of sales
decreased from 31% to 26%, reflecting both the higher dollar amount of sales and
reduced expenses. The decline in expenses resulted from cost reduction measures
implemented company-wide and the re-sizing of resources within Industrial
Automation and Computer Systems to respond to the decrease in volumes.
RESEARCH AND DEVELOPMENT EXPENSES increased approximately $500,000 and
amounted to 7.6% of revenue versus 7.8% in 1992 as the Company continued to
invest in new product development.
RESTRUCTURING activities initiated in the fourth quarter of 1993 to eliminate
low-volume, high-cost production lines in North America and expand manufacturing
capacity abroad resulted in a charge of $3.0 million in fiscal 1993. For
additional information regarding the Company's restructuring activities, refer
to page 24 of the Notes to Consolidated Financial Statements.
OTHER EXPENSES decreased $483,000 in 1993. Interest expense decreased
$603,000 as a result of savings generated by the Company's repurchase of $4.0
million of its Convertible Subordinated Debentures in late 1992. Interest
income decreased $563,000 due to a reduction in average cash and equivalents
balances during 1993. Foreign exchange transaction gains of $317,000 were
generated during 1993 from remeasurement of certain assets of the Company's
European division into its functional currency, which was devalued during the
first quarter of 1993.
PROVISION FOR INCOME TAXES as a percentage of pretax income was 40% and 43%
in 1993 and 1992, respectively. The effective tax rate for 1993 decreased due to
a favorable change in the pattern of earnings between domestic and overseas
operations, which are taxed at lower foreign rates.
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES of $2.3 million
includes a benefit of $3.1 million ($0.15 per share) from the adoption of SFAS
No. 109 and a charge of $0.8 million ($0.04 per share), net of income tax
benefits, from the adoption of SFAS No. 112. These amounts represent the impact
of adoption related to fiscal years before 1993. The effect of these changes on
income before income taxes was not material. Prior years financial statements
have not been restated to apply the provisions of these statements.
OTHER
In fiscal 1995, the Company is required to adopt the provisions of Statements
of Financial Accounting Standards (`SFAS'') No. 107, ``Disclosures about Fair
Value of Financial Instruments''and No. 119, ``Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments.'' Adoption of
SFAS No. 107 and No. 119 is not expected to have a material effect on the
Company's financial position or results of operations.
FINANCIAL CONDITION
CASH AND EQUIVALENTS increased $10.1 million over 1993 as a result of higher
net income, working capital efficiencies and the issuance of long-term debt of
$3.6 million, partially reduced by the repurchase of $512,000 of the Company's
convertible subordinated debentures.
ACCOUNTS RECEIVABLE collection performance improved, limiting growth in
receivables during the year to $1.3 million (6%), despite a sales volume
increase of $31 million (25%).
INVENTORIES also yielded working capital efficiencies, increasing at a
slower rate than revenue growth. The limited increase in net inventories of
$1.6 million (8%) over 1993 resulted from effective inventory management
and the benefit of the Company's manufacturing restructuring activities
executed during the year.
PROPERTY, PLANT & EQUIPMENT increased $2.2 million net of changes in
accumulated depreciation. The increase included the purchase of a building for
$922,000 to expand manufacturing capacity in the European Power Conversion
division and additional capital expenditures to support the increased sales
volume.
LIABILITIES increased $5.8 million as a result of acquiring a $3.6 million
mortgage loan, a $857,000 (net of unamortized costs of $222,000) three-year note
for the purchase of the building mentioned above, and higher accounts payable on
increased volume, reduced by the repurchase of $512,000 of the Company's
convertible subordinated debentures. Restructuring reserves decreased by $1.7
million compared to December 1993 as a result of payments for employee severance
and outplacement relating to the Company's restructuring activities described
previously.
SHAREHOLDERS' EQUITY increased $7.2 million (22%) from 1993 principally due
to net income of $6.1 million and a $745,000 increase in foreign currency
translation adjustment, due to the impact of a stronger functional currency on
the translation of the Company's European net assets into U.S. dollars.
CASH FLOWS
NET CASH PROVIDED BY OPERATING ACTIVITIES increased $11.6 million in 1994
versus a decrease of $500,000 in 1993 compared to 1992. The increase in 1994 is
the result of higher net income and improved management of operating assets and
liabilities. The 1993 reduction reflected the Company's investment in working
capital to fund its sales growth. The Company believes its cash flows from
operations and its available line of credit are adequate to fund its anticipated
working capital requirements in 1995.
NET CASH USED IN INVESTING ACTIVITIES increased $2.2 million in 1994 versus a
decrease of $5.2 million in 1993 compared to 1992. The increase in 1994 relates
to the continued upgrading of the Company's worldwide manufacturing
capabilities. The decrease in 1993 reflected cash proceeds of $800,000 from the
sale of the Company's Government Electronics facility and the 1992 acquisition
of the Computer Systems manufacturing facility for $4.1 million.
NET CASH PROVIDED BY FINANCING ACTIVITIES in 1994 of $2.1 million includes
the issuance of the $3.6 million mortgage loan mentioned previously, reduced by
the repurchase of $512,000 of the Company's convertible subordinated debentures
and by scheduled long-term debt payments. Cash used in financing activities in
1993 of $3.1 million consists of the repayment of an 8.5% Senior Subordinated
Note for $2.1 million and regular annual debt payments. In 1992, the Company
repurchased $4.0 million of its convertible subordinated debentures for $3.9
million in cash.
FIVE-YEAR FINANCIAL HISTORY
For the Years Ended on the Friday Nearest December 31
(Dollars in Thousands Except Per Share Data)
1994 1993 1992 1991 1990
RESULTS OF OPERATIONS
Sales $154,800 $123,790 $114,799 $ 83,240 $ 95,737
Income (loss) from
continuing operations 6,059 597 2,002 (4,234) 4,068
Per share 0.29 0.03 0.10 (0.21) 0.20
Net income (loss) 6,059 2,867 2,676 (9,638) 5,293
Per share 0.29 0.14 0.13 (0.49) 0.26
FINANCIAL POSITION
Working capital $ 40,346 $ 31,122 $ 29,524 $ 35,508 $ 50,431
Property, plant & equipment,
net 26,238 24,017 23,949 19,252 18,688
Total assets 114,396 101,436 102,662 105,423 115,360
Total debt 42,571 39,713 42,900 48,309 44,803
Shareholders' equity 39,958 32,802 30,806 28,531 40,206
Total capital 82,529 72,515 73,706 76,840 85,009
FINANCIAL STATISTICS
Selling, general and
administrative expenses $ 33,687 $ 32,030 $ 35,093 $ 24,166 $ 25,630
- as a % of sales 21.8% 25.9% 30.6% 29.0% 26.8%
Research and development
expenses 10,905 9,412 8,959 6,154 5,418
- as a % of sales 7.0% 7.6% 7.8% 7.4% 5.7%
Operating income 12,478 3,900 6,908 (1,461) 7,435
- as a % of sales 8.1% 3.2% 6.0% (1.8%) 7.8%
Long-term debt as a % of
total capital 49% 53% 54% 61% 52%
Total debt as a % of total
capital 52% 55% 58% 63% 53%
Interest coverage ratio 3.44 1.27 1.81 0.14 2.05
OTHER DATA
Capital expenditures $ 5,608 $ 3,411 $ 8,055 $ 1,508 $ 1,216
Provision for depreciation
and amortization $ 5,057 $ 4,817 $ 4,375 $ 3,710 $ 4,120
Common shares outstanding 20,303 20,141 19,973 19,890 20,071
Common shareholders of
record 5,900 7,300 7,500 9,000 8,950
Employees 1,600 1,547 1,470 1,432 1,518
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended on the Friday Nearest December 31
(Amounts in Thousands Except Per Share Data)
1994 1993 1992
SALES $154,800 $123,790 $114,799
COST OF SALES 97,730 75,448 63,839
------- ------- ------
GROSS PROFIT 57,070 48,342 50,960
------- ------- ------
EXPENSES
Selling, general and administrative 33,687 32,030 35,093
Research and development 10,905 9,412 8,959
Restructuring charge 3,000
------- ------- -------
44,592 44,442 44,052
------- ------- -------
OPERATING INCOME 12,478 3,900 6,908
------- ------- -------
OTHER INCOME (EXPENSE)
Interest expense (3,760) (3,735) (4,338)
Interest income 522 519 1,082
Foreign exchange gain (loss) (60) 317 (126)
------- ------- -------
(3,298) (2,899) (3,382)
------- ------- -------
INCOME BEFORE INCOME TAXES 9,180 1,001 3,526
PROVISION FOR INCOME TAXES 3,121 404 1,524
------- ------- -------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES
AND EXTRAORDINARY CREDIT 6,059 597 2,002
Cumulative effect of changes in
accounting principles 2,270
Extraordinary credit - utilization
of net operating loss carryforwards 674
------- ------- -------
NET INCOME $ 6,059 $ 2,867 $ 2,676
======= ======= =======
EARNINGS PER SHARE:
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES
AND EXTRAORDINARY CREDIT $ 0.29 $ 0.03 $ 0.10
Cumulative effect of changes in
accounting principles 0.11
Extraordinary credit - utilization of
loss net operating carryforwards 0.03
------- ------- -------
NET INCOME $ 0.29 $ 0.14 $ 0.13
======= ======= =======
Common and common equivalent shares
outstanding 20,929 20,774 21,003
<F/N>
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
As of the Friday Nearest December 31
(Amounts in Thousands)
1994 1993
ASSETS
CURRENT ASSETS
Cash and equivalents $ 20,211 $ 10,146
Accounts receivable, net 24,669 23,369
Inventories, net 20,047 18,492
Prepaid expenses 2,157 1,432
Deferred income taxes, net 528 1,103
-------- --------
Total current assets 67,612 54,542
-------- --------
PROPERTY, PLANT & EQUIPMENT, NET 26,238 24,017
-------- --------
OTHER ASSETS
Goodwill, net 14,911 16,468
Deferred income taxes, net 3,395 3,671
Other assets 2,240 2,738
-------- --------
Total other assets 20,546 22,877
-------- --------
$114,396 $101,436
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,820 $ 1,192
Accounts payable and accrued liabilities 25,446 22,228
-------- --------
Total current liabilities 27,266 23,420
-------- --------
LONG-TERM LIABILITIES
Long-term debt 7,368 4,626
Lease liabilities 6,421 6,693
Convertible subordinated debentures 33,383 33,895
-------- --------
Total long-term liabilities 47,172 45,214
-------- --------
Total liabilities 74,438 68,634
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01; 1,000,000
shares authorized; none issued
Common stock, par value $.01; 80,000,000
shares authorized; 20,302,654 issued
and outstanding in 1994
(20,140,735 shares in 1993) 203 201
Additional paid-in capital 27,190 26,840
Retained earnings 13,521 7,462
Foreign currency translation adjustment (956) (1,701)
-------- --------
Total shareholders' equity 39,958 32,802
-------- --------
$114,396 $101,436
======== ========
<F/N>
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended on the Friday Nearest December 31
(Amounts in Thousands)
1994 1993 1992
OPERATING ACTIVITIES:
Net income $ 6,059 $ 2,867 $ 2,676
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,057 4,817 4,375
Provision for restructuring 3,000
Cumulative effect of changes in accounting
principles (2,270)
Utilization of net operating losses of
acquired company 433
Provision for inventory losses 3,043 1,166 1,319
Other non-cash charges 375 204 (1,058)
Changes in operating assets and liabilities:
Increase in accounts receivable (1,423) (3,435) (3,089)
Increase in inventories and prepaid expenses (4,964) (3,519) (4,640)
Increase (decrease) in accounts payable and
accrued liabilities 4,551 (1,734) 1,537
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,698 1,096 1,553
------ ------- ----
INVESTING ACTIVITIES:
Purchases of property, plant & equipment (4,686) (3,411) (8,055)
Proceeds from sale of building 800
Increase in other assets (433) (335) (52)
------ ------ ------
NET CASH USED IN INVESTING ACTIVITIES (5,119) (2,946) (8,107)
------ ------- ------
FINANCING ACTIVITIES:
Principal payments on debt and capital leases (1,259) (3,428) (1,065)
Proceeds from exercise of stock options 253 286 162
Issuance of long-term debt 3,600
Repurchase of convertible subordinated
debentures (520) (3,874)
------ ------ ------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 2,074 (3,142) (4,777)
------ ------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
EQUIVALENTS 412 (423) (285)
------ ------ ------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 10,065 (5,415) (11,616)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 10,146 15,561 27,177
------ ------ ------
CASH AND EQUIVALENTS, END OF YEAR $20,211 $10,146 $15,561
======= ======= =======
<F/N>
NONCASH INVESTING AND FINANCING ACTIVITIES
In fiscal 1994, the Company incurred long-term debt of $857,000 (net of
unamortized discount of $222,000) for the purchase of a building for
approximately $922,000. Also, goodwill decreased by $795,000 as a result of
utilizing tax loss carryforwards obtained in a prior business combination.
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended on the Friday Nearest December 31
(Amounts in Thousands)
FOREIGN
ADDITIONAL CURRENCY
COMMON COMMON PAID-IN RETAINED TRANSLATION
SHARES STOCK CAPITAL EARNINGS ADJUSTMENTS
BALANCE, DECEMBER 1991 19,890 $199 $26,294 $ 1,919 $ 119
Exercise of stock options 83 1 161
Foreign currency
translation adjustment (563)
Net income 2,676
------ ------ -------- ------ ------
BALANCE, DECEMBER 1992 19,973 200 26,455 4,595 (444)
Issuance of stock 38 100
Exercise of stock options 130 1 285
Foreign currency
translation adjustment (1,257)
Net income 2,867
------ ------ --------- ------ ------
BALANCE, DECEMBER 1993 20,141 201 26,840 7,462 (1,701)
Issuance of stock 42 1 98
Exercise of stock options 120 1 252
Foreign currency
translation adjustment 745
Net income 6,059
------ ------ -------- ------ --------
BALANCE, DECEMBER 1994 20,303 $203 $27,190 $13,521 $ (956)
====== ====== ======== ======= ========
<F/N>
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of Computer
Products, Inc. (the `Company'') and its subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation. The Company's fiscal year
ends on the Friday nearest December 31.
Cash and Equivalents
Only highly-liquid investments with original maturities of 90 days or less
are classified as cash and equivalents. These investments are carried at cost,
which approximates market value.
Accounts Receivable
The Company's accounts receivable are primarily due from companies in the
high technology and electronics industries. Collateral generally is not
required. Credit losses are provided for in the financial statements and
consistently have been within management's expectations. The allowance for
doubtful accounts was $1,354,000 and $1,174,000 at December 1994 and 1993,
respectively.
Inventories
Raw material inventories are stated at the lower of cost, on a first-in,
first-out basis, or market. Work in process and finished goods inventories are
stated at accumulated costs, which are not in excess of market, less customer
progress payments, if applicable.
Property, Plant & Equipment
Property is stated at cost and is depreciated using the straight-line method
over the estimated useful lives of the assets, which range from 3 to 30 years.
Major renewals and betterments are capitalized, while maintenance, repairs and
minor renewals are expensed as incurred.
Goodwill
The excess of purchase price over net assets of acquired companies (goodwill)
is capitalized and amortized on a straight-line basis over periods ranging from
20 to 40 years. Related accumulated amortization was $4,210,000 and $3,448,000
at December 1994 and 1993, respectively. On a periodic basis, the Company
estimates the future undiscounted cash flows and operating income of the
businesses to which goodwill relates in order to ensure that the carrying value
of such goodwill has not been impaired.
Foreign Currency Translation
Assets and liabilities of the Company's European subsidiaries are translated
from their functional currency into U.S. dollars using exchange rates in effect
at the balance sheet date. Results of operations are translated using average
exchange rates prevailing throughout the period. The effect of exchange rate
fluctuations on translating foreign currency assets and liabilities into U.S.
dollars is included in shareholders' equity, while gains and losses from foreign
currency transactions are included in income. The functional currency for the
Company's Asian subsidiaries is the U.S. dollar, as their transactions are
substantially denominated in U.S. dollars.
Revenue Recognition
The Company recognizes revenue at the time products are shipped, or as
services are performed.
Income Taxes
On January 2, 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Under this statement,
deferred tax assets and liabilities reflect the future tax consequences of the
differences between the financial reporting and tax bases of assets and
liabilities using tax rates in effect for the year in which differences are
expected to reverse. In addition, this standard requires the recognition of
future tax benefits, such as net operating loss carryforwards, to the extent
that realization of such benefits is more likely than not.
Prior to 1993, the provision for income taxes included federal, foreign,
state and local income taxes currently payable. Primarily because of the
Company's net operating loss carryforward position, a provision for deferred
taxes was not required in those years.
Earnings Per Share
Earnings per share is calculated based upon the weighted average number of
common shares outstanding during each year, adjusted for dilutive common stock
equivalents as applicable.
Reclassifications
Certain amounts in the 1993 and 1992 financial statements have been
reclassified to be consistent with the method of presentation used in the 1994
financial statements.
2.INVENTORIES
The components of inventories, net of allowances for slow-moving and obsolete
items, are ($000s):
1994 1993
Raw materials $11,016 $10,063
Work in process 3,174 3,705
Finished goods 5,857 4,724
------- -------
Inventories, net $20,047 $18,492
======= =======
3.PROPERTY, PLANT & EQUIPMENT
Property, plant & equipment is comprised of ($000s):
1994 1993
Land $ 1,327 $ 1,323
Buildings 20,715 19,685
Equipment 28,247 25,218
Leasehold improvements 968 1,006
-------- --------
51,257 47,232
Less accumulated depreciation 25,019 23,215
-------- --------
Property, plant & equipment, net $26,238 $24,017
======== ========
Amortization of assets acquired under capital leases is included in
depreciation expense. Depreciation expense was $3,483,000, $3,097,000 and
$2,828,000 in 1994, 1993 and 1992, respectively.
4.ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities are ($000s):
1994 1993
Accounts payable $10,123 $ 7,533
Accrued liabilities:
Compensation and benefits 7,685 6,361
Restructuring costs 898 2,636
Income taxes payable 1,449 496
Other 5,291 5,202
------- -------
Total $25,446 $22,228
======= =======
At December 1994 and 1993, other accrued liabilities primarily consists of
accruals for commissions, warranty costs, interest, advertising, rent,
accounting and legal fees, and other taxes.
On January 2, 1993, the Company adopted SFAS No. 112, "Employers' Accounting
for Postemployment Benefits." This statement requires employers to recognize
the severance cost benefits of former or inactive employees after employment but
before retirement, as the benefits are earned. The cumulative effect of
adoption was a non-cash charge of $821,000 ($0.04 per share), net of income tax
benefits of $84,000. The effect of this change on 1993 income before taxes was
not material.
5.RESTRUCTURING OF OPERATIONS
In the fourth quarter of 1993, the Company initiated a plan to restructure
its operations to eliminate low volume, high-cost production lines in North
America and consolidate its remaining U.S. Power Conversion activities into one
division. In connection with this plan, the Company recorded a $3.0 million
restructuring charge to operating expenses ($2.2 million or $0.11 per share,
after taxes). The restructuring costs included $1.9 million of estimated
employee-related severance costs and $1.1 million of estimated asset write-downs
and other expenses associated with the consolidation and termination of certain
Power Conversion North America operations.
At the time the restructuring was announced, management estimated that the
restructuring would reduce 1994 operating costs by $1.2 million, a reduction
which was achieved during the year. At the end of fiscal 1994, consistent with
the Company's restructuring plan, 109 employees had been terminated and certain
other employees had been reassigned.
As of December 30, 1994, the Company had $898,000 of accrued restructuring
costs primarily for obligations under employee severance agreements.
6.SHORT-TERM BORROWINGS
The Company has an unused $15 million revolving line of credit under an
agreement with a bank which extends through March 1995. The agreement provides
for interest at .25% over the prime lending rate and a commitment fee of .375%
of the unused balance. The interest rate and commitment fee may vary based upon
formulas contained in the agreement. The agreement is secured by the common
stock of substantially all of the Company's domestic subsidiaries and contains
certain restrictive covenants which are discussed in Note 8. The Company
expects to renew or replace this agreement at expiration.
7.LONG-TERM DEBT
Long-term debt is comprised of the following:
1994 1993
($000s) ($000s)
Mortgage note due in monthly installments of $79,268
including interest at 7.5% (a) $3,674 $4,306
Non-interest bearing Senior Subordinated Note
due in quarterly cash installments of $50,000 and an
annual installment of $100,000 in common stock
of the Company, through January 3, 1996 400 700
10% mortgage note due in monthly installments of
$7,600, including interest, through April 1, 1995 (a) 469 511
Industrial Revenue Bond due in quarterly installments
of $34,455, plus interest, through September 30, 1994
(a) 103
6.9% mortgage note due in monthly installments of
$27,700 including interest through June 28, 2001
(a)(b) 3,568
Non-interest bearing note, due 1997, net of
unamortized discount of $222,000 based on imputed
interest rate of 10% (a)(c) 857
Other 220 198
------ ------
9,188 5,818
Less: current maturities 1,820 1,192
------ ------
Long-term debt $7,368 $4,626
====== ======
<F/N>
(a) Collateralized by properties with an aggregate net book value of
approximately $14,244,000 at December 1994.
(b) On June 28, 1994, the Company obtained a $3,600,000 seven year
commercial mortgage loan from Firstar Bank Madison, N.A. at a fixed
interest rate of 6.90% for the first three years, repriced thereafter
at 250 basis points over the then prevailing four-year U.S. Treasury
Index. The loan is secured by a first mortgage on the Heurikon
Corporation facility in Wisconsin and by the Company's guaranty. The
loan proceeds were used to provide additional working capital.
(c) On December 30, 1994, the Company purchased a building for
approximately $922,000 from the Industrial Development Authority of
Ireland in exchange for a three year non-interest bearing note. The
note specifies repayment in three yearly installments due on September
30, 1995, 1996 and 1997.
On February 5, 1993, the Company paid $2.1 million to settle its 8.5% Senior
Subordinated Note.
Maturities of long-term debt are: $1,820,000 in 1995, $1,224,000 in 1996,
$1,261,000 in 1997, $943,000 in 1998, $887,000 in 1999 and $3,275,000
thereafter.
8.CONVERTIBLE SUBORDINATED DEBENTURES
The Company's 9.5% Convertible Subordinated Debentures (the ``Debentures'')
due 1997 were issued pursuant to an underwritten public offering. The
Debentures are subordinated to all existing and future Senior Indebtedness of
the Company (as defined in the indenture), and are convertible into shares of
common stock at a conversion price of $4.625 per share, subject to adjustment as
set forth in the indenture.
In 1992, the Company repurchased $4,000,000 in principal of the Debentures
for a purchase price of $3,874,000. Additionally, in 1994, the Company
repurchased $512,000 in principal of the Debentures for a purchase price of
$520,000. The respective gain and loss on repurchase, net of unamortized
issuance costs, was not material to the Company.
The convertible subordinated debenture and line of credit agreements contain
restrictive covenants which, among other things, require the Company to maintain
a minimum amount of working capital and limit the payment of cash dividends, and
the purchase, redemption or retirement of debentures and capital stock. As of
December 1994, the Company was in compliance with these covenants.
9.LEASE COMMITMENTS
The Company is obligated under noncancellable leases for facilities and
equipment which expire at various dates through 2005 and contain renewal options
at favorable terms. Future minimum annual rental obligations and noncancellable
sublease income are as follows ($000s):
RENTAL SUBLEASE
YEAR OBLIGATIONS INCOME
1995 $ 2,990 $2,116
1996 2,822 2,317
1997 2,738 2,317
1998 2,361 386
1999 2,279
Thereafter 15,939
------- ------
Total $29,129 $7,136
======= ======
Rental expense under operating leases amounted to $2,142,000, $2,184,000 and
$2,290,000 in 1994, 1993 and 1992, respectively. Sublease income was
$1,611,000, $1,570,000 and $1,459,000 for 1994, 1993 and 1992, respectively.
The Company has recorded lease liabilities for certain leased manufacturing
facilities no longer deployed in the Company's operations. Although the
facilities are being subleased, the future lease obligations exceed future
sublease income, thereby creating loss contracts. The aggregate minimum annual
rental obligations and sublease income under these leases have been included in
the lease commitments table presented above.
10. INCOME TAXES
As discussed in Note 1, the Company adopted SFAS No. 109 on a prospective
basis in the first quarter of 1993. The cumulative effect of this change in
accounting principle that relates to years prior to 1993 was to increase net
income by $3,091,000, or $0.15 per share, and reduce goodwill by $2 million for
net operating loss carryforwards of acquired companies. The effect of adopting
this statement on income before income taxes was not material.
Income before taxes for domestic and foreign operations consists of the
following ($000:):
1994 1993 1992
U.S. $7,018 $(1,175) $1,030
Foreign 2,162 2,176 2,496
------ ------ ------
Total income before taxes $9,180 $ 1,001 $3,526
====== ======== ======
The provision for income taxes consists of ($000s):
1994 1993 1992
Currently payable:
Federal $ 170 $1,048
State 596 $127 234
Foreign 483 206 242
------ ------ ------
Total current 1,249 333 1,524
------ ------ ------
Deferred provision (benefit):
Federal 1,660 (423)
State 212 302
Foreign 192
------ ------ ------
Total deferred 1,872 71
------ ------ ------
Total provision $3,121 $404 $1,524
====== ====== ======
During 1994 and 1992, the Company utilized tax loss carryforwards obtained in
a prior business combination. The effect of utilizing these carryforwards was to
reduce goodwill by approximately $795,000 and $433,000 in 1994 and 1992,
respectively.
Income taxes have not been provided on the undistributed earnings of the
Company's foreign subsidiaries, which approximated $15.9 million as of December
1994, as the Company does not intend to repatriate such earnings.
Differences between the United States federal statutory income tax rate and
the Company's effective income tax rate are as follows:
1994 1993 1992
Provision computed at U.S. federal
statutory rate 34.0% 34.0% 34.0%
Foreign tax effects (2.8) (23.3) (6.6)
Adjustments to beginning of year deferred
tax assets 9.1
Amortization of goodwill 0.7 8.5 7.9
Change in the valuation allowance (8.4) 7.3
Effect of state income taxes 6.5 (0.4) 6.6
Effect of AMT taxes 1.2
Other 2.8 5.2 1.3
------ ------ ------
Effective tax rate 34.0% 40.4% 43.2%
====== ====== ======
Significant components of the Company's deferred tax assets and liabilities as
of December 1994 and 1993 are as follows ($000s):
1994 1993
Acquired net operating loss carryforwards (expiring
1998 through 2000) $ 2,496 $ 3,683
Lease liabilities 2,659 2,764
Inventory reserves 2,094 2,612
Net operating loss carryforwards (expiring 2003 through
2008) 2,648 2,259
Tax credit carryforwards (expiring 1996 through 2001) 1,899 1,830
Restructuring costs 484 1,598
Other accrued liabilities 2,172 1,408
Other (76) 246
------- -------
Total deferred tax assets 14,376 16,400
Valuation allowance (10,453) (11,626)
------- -------
Deferred income taxes, net $ 3,923 $ 4,774
======== ========
The valuation allowance at December 30, 1994 includes approximately $1.3
million associated with acquired net operating loss carryforwards, which, if
subsequently recognized, will reduce goodwill. During the year ended December
1994, the valuation allowance decreased by $1.2 million mainly due to the
utilization of tax loss carryforwards. In assessing the likelihood of
utilization of existing deferred tax assets, management has considered the
historical results of operations and the current operating environment.
Management believes, more likely than not, that future taxable income will be
sufficient to utilize deferred tax assets of $3.9 million.
The Company made income tax payments of approximately $534,000, $206,000, and
$168,000 during 1994, 1993, and 1992, respectively.
11.CONTINGENCIES
In prior years, the Company received capital grants from the Industrial
Development Authority (IDA) of Ireland in connection with the establishment of
its Irish manufacturing facilities. The grants reduced the costs of the
facility and equipment and operating expenses. On October 26, 1994, the Company
entered into a Grant Agreement with the IDA whereby the IDA agreed to grant to
the Company the sum of approximately $2.0 million in consideration of the
Company providing employment for a given number of Irish citizens, over a three
year period. The grant will reduce operating expenses incurred in connection
with the expansion of the Company's operations in Ireland. As of December 1994,
the Company had received approximately $500,000 of the $2.0 million grant. In
the event of noncompliance with certain terms and conditions, the Company may be
required to repay approximately $1.3 million of the grants, which expire on
various dates through fiscal 2002. Management believes that non compliance with
the agreements is unlikely.
12.STOCK OPTION PLANS
The Company maintains a qualified stock option plan, a qualified employee
stock purchase plan and certain non-qualified plans, including a key employee
option plan, two plans for outside directors and a Performance Equity Plan
("PEP") for certain officers and key employees. The employee stock purchase
plan provides for the grant of options to employees at an exercise price equal
to the lower of 85% of the common stock market value at the date of grant or at
various exercise dates throughout the year.
Under such plans, a maximum of 6,350,000 option shares have been authorized,
of which 1,214,610 are available to be granted. These options may be exercised
at various times as determined at the time of grant. The PEP options may become
exercisable after the price of the Company's common stock achieves certain
levels for specified periods of time or upon the passage of designated time
periods. As of December 1994, 2,077,270 of these options were exercisable. The
exercise price per share under all plans ranges from $1.63 to $4.63. The
following table is a summary of these option plans:
OPTIONS
OUTSTANDING
Balance, DECEMBER 1991 3,379,736
Granted 746,196
Exercised (82,775)
Forfeited (228,492)
----------
Balance, DECEMBER 1992 3,814,665
Granted 306,960
Exercised (130,146)
Forfeited (327,912)
----------
Balance, DECEMBER 1993 3,663,567
Granted 682,115
Exercised (120,378)
Forfeited (574,866)
----------
Balance, DECEMBER 1994 3,650,438
==========
13.EMPLOYEES' THRIFT AND SAVINGS PLAN
The Company's Section 401(k) Qualified Plan permits substantially all United
States employees to invest up to 15% of their base compensation (as defined) on
a pretax basis in common stock of the Company, growth equity securities or fixed
income securities. The Company may, at the discretion of the Board of
Directors, make a contribution to the Plan. The Board of Directors authorized
contributions of $218,000, $250,000 and $167,000, respectively, for 1994, 1993
and 1992.
14.SUPPLEMENTAL INFORMATION
The Company incurred advertising costs of approximately $925,000, $999,000 and
$1,177,000 in 1994, 1993 and 1992, respectively. Amortization expense of
intangible assets aggregated approximately $1,575,000, $1,720,000 and $1,547,000
in 1994, 1993 and 1992, respectively. Interest paid was approximately
$3,877,000, $3,688,000 and $4,343,000 in 1994, 1993 and 1992, respectively.
15.FOREIGN OPERATIONS
The Company operates in a single industry of designing, manufacturing,
marketing, and servicing electronic systems and components. Sales and marketing
operations outside the United States are conducted principally through sales
representatives and distributors in Canada, Europe and the Pacific Rim. Sales
are primarily in U.S. dollars and certain European currencies and consist of
products manufactured domestically and in the Company's facilities in the
Republic of Ireland and Hong Kong. Intercompany sales are in U.S. dollars and
are based on cost plus a reasonable profit but less than pricing to unaffiliated
customers.
A summary of the Company's operations by geographic area is presented below
($000s):
EUROPE ASIA-
UNITED & PACIFIC OTHER ELIMI- CONSO-
STATES OTHER RIM (A) NATIONS LIDATED
1994
Sales:
Unaffiliated
customers $117,300 $34,794 $2,706 $154,800
Intercompany 3,897 2,225 50,701 $(56,823)
-------- -------- ------- ------- -------- --------
Total $121,197 $37,019 $53,407 $(56,823) $154,800
Income (loss) ========
before income
taxes $ 12,686 $ 2,169 $ 1,799 $(7,437) $ (37) $ 9,180
Identifiable
assets $ 55,720 $17,112 $23,784 $18,062 $ (282) $114,396
========
1993
Sales:
Unaffiliated
customers $96,327 $23,434 $ 4,029 $123,790
Intercompany 3,360 182 38,356 $(41,898)
-------- -------- ------- ------- -------- --------
Total $99,687 $23,616 $42,385 $(41,898) $123,790
Income (loss) ========
before income
taxes $ 4,646 $ 2,462 $1,312 $(7,561) $ 142 $ 1,001
Identifiable
assets $60,504 $11,814 $18,693 $10,669 $ (244) $101,436
========
1992
Sales:
Unaffiliated
customers $91,946 $18,855 $ 3,998 $114,799
Intercompany 4,822 689 37,081 $(42,592)
-------- -------- ------- ------- -------- --------
Total $96,768 $19,544 $41,079 $(42,592) $114,799
Income (loss) ========
before income
taxes $ 8,047 $ 1,974 $ 2,270 $(8,080) $ (685) $ 3,526
Identifiable
assets $61,342 $12,840 $17,305 $11,561 $ (386) $102,662
========
<F/N>
(a)Other included in the table above represents interest, corporate general and
administrative expenses, and certain assets not allocable to other geographic
segments.
16.SELECTED CONSOLIDATED QUARTERLY DATA (UNAUDITED)
(Amounts in Thousands Except Per Share Data and Stock Prices)
INCOME (LOSS) NET INCOME
AFTER TAXES (LOSS) STOCK PRICE
--------------- ------------ -----------
GROSS PER PER
SALES PROFIT DOLLARS SHARE DOLLARS SHARE HIGH LOW
1994
First Quarter $37,664 $13,757 $1,215 $0.06 $1,215 $0.06 $2.94 $2.25
Second Quarter 38,393 14,392 1,513 0.07 1,513 0.07 3.19 2.13
Third Quarter 36,941 13,787 1,458 0.07 1,458 0.07 3.63 2.69
Fourth Quarter 41,802 15,133 1,874 0.09 1,874 0.09 3.63 2.88
1993
First Quarter $28,661 $11,539 $ 511 $0.02 $2,781 $0.13 $3.93 $2.69
Second Quarter 30,709 12,310 649 0.03 649 0.03 3.25 2.06
Third Quarter 30,522 11,699 552 0.03 552 0.03 3.00 2.13
Fourth Quarter 33,898 12,794 (1,115) (0.06) (1,115) (0.06) 3.00 2.31
As previously described in these Notes, the Company recorded a benefit from
changes in accounting principles in the first quarter of 1993 of $2,270,000 and
a restructuring charge of $3,000,000 in the fourth quarter of 1993.
As of December 30, 1994, there were approximately 5,900 shareholders
comprised of record holders and individual participants in security position
listings.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF COMPUTER PRODUCTS, INC. :
We have audited the accompanying consolidated statements of financial
condition of Computer Products, Inc. (a Florida corporation) and subsidiaries as
of December 30, 1994 and December 31, 1993, and the related consolidated
statements of operations, shareholders' equity and cash flows for the three
fiscal years ended December 30, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Computer Products, Inc. and
subsidiaries as of December 30, 1994 and December 31, 1993, and the results of
their operations and their cash flows for the three fiscal years ended December
30, 1994 in conformity with generally accepted accounting principles.
As explained in Notes 4 and 10 to the consolidated financial statements,
effective January 2, 1993, the Company adopted Statements of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" and No. 109, "Accounting for Income Taxes."
Fort Lauderdale, Florida, ARTHUR ANDERSEN LLP
January 18, 1995.