FIVE-YEAR FINANCIAL HISTORY
For the Years Ended on the Friday Nearest December 31
(Dollars in Thousands Except Per Share Data)
1997 1996 1995 1994 1993
----------- ----------- ------------ ----------- -----------
RESULTS OF OPERATIONS
Sales $527,236 $435,731 $344,969 $264,334 $201,168
Income from continuing operations 31,882 29,555 16,483 7,658 3,636
Per share - basic 0.87 0.84 0.50 0.24 0.13
Per share - assuming dilution 0.80 0.78 0.49 0.23 0.12
Net income 29,820 30,059 17,598 9,423 5,537
Per share - basic 0.81 0.85 0.53 0.30 0.20
Per share - assuming dilution 0.75 0.79 0.52 0.28 0.18
FINANCIAL POSITION
Working capital $115,822 $ 92,029 $ 66,449 $ 54,526 $ 41,597
Property, plant & equipment, net 61,581 48,671 38,491 32,567 28,960
Total assets 322,177 239,487 202,858 159,871 134,303
Long-term debt and capital lease obligations 52,949 43,945 33,590 45,296 41,453
Total debt 68,547 57,097 50,251 53,928 47,436
Shareholders' equity 162,676 117,006 82,889 57,071 46,133
Total capital 231,223 174,103 133,140 110,999 93,569
FINANCIAL STATISTICS
Selling, general and administrative expenses $ 52,058 $ 42,232 $36,353 $35,485 $ 31,344
- as a % of sales 9.9% 9.7% 10.5% 13.4% 15.6%
Research and development expenses 30,032 23,612 21,085 14,950 11,238
- as a % of sales 5.7% 5.4% 6.1% 5.7% 5.6%
Operating income 52,443 41,077 26,776 15,865 10,211
- as a % of sales 9.9% 9.4% 7.8% 6.0% 5.1%
Total debt as a % of total capital 30% 33% 38% 49% 51%
Debt to equity ratio 42% 49% 61% 94% 103%
Interest coverage ratio 11.0 9.21 6.48 3.64 2.21
OTHER DATA
Capital expenditures $22,231 $ 9,387 $10,046 $ 7,300 $ 3,752
Depreciation and amortization $13,561 $10,287 $ 7,606 $ 6,768 $ 6,240
Common shares outstanding (000's) 38,381 36,042 34,607 31,581 30,874
Employees 4,219 3,519 2,870 2,628 2,365
Temporary employees and contractors 2,663 1,670 1,923 874 532
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BUSINESS COMBINATIONS
ZYTEC -- On December 29, 1997, shareholders of Computer Products, Inc. ("CPI")
and Zytec Corporation ("Zytec") approved the merger of CPI Acquisition Corp., a
Minnesota corporation and a wholly-owned subsidiary of CPI with and into Zytec,
pursuant to an Agreement and Plan of Merger, with Zytec becoming a wholly-owned
subsidiary of CPI. As a result of the merger, each share of Zytec's common
stock, no par value, outstanding immediately prior to the merger was converted
into 1.33 shares of CPI's common stock, $0.01 par value. The Zytec shares were
exchanged for a total of approximately 14.1 million shares of CPI common stock.
The acquisition was accounted for as a pooling-of-interests, and accordingly,
all prior period consolidated financial statements presented have been restated
to include the combined results of operations, financial position and cash flows
of Zytec as though it had always been a part of Computer Products. Hereafter the
merged entity will be collectively referred to as the Company.
The Company has begun doing business under the name Artesyn Technologies.
Management will request shareholder approval at its next annual shareholders'
meeting in May 1998 to legally change the Company's corporate name to Artesyn
Technologies, Inc. Pending shareholder approval, the Company's legal name will
remain Computer Products, Inc. and trade under the Nasdaq National Market symbol
CPRD.
The restatement of the consolidated financial information combines the financial
information of CPI and Zytec giving retroactive effect to the merger as if the
two companies had operated as a single company for all periods presented.
However, the two companies operated independently prior to the merger, and the
historical changes and trends in the financial condition and results of
operations of these two companies resulted from independent activities.
Nonetheless, the following management's discussion and analysis of financial
condition and results of operations attempts to relate the activities which
resulted in the changes in financial condition and results of operations of the
combined company, taking into consideration that a trend or change in the
historical results of the combined entity was caused by many events related to
each individual company operating independently as competitors. The financial
information presented on a historical restated basis is not indicative of the
financial condition and results of operations that may have been achieved in the
past or will be achieved in the future had the companies operated as a single
entity for the periods presented. The following discussion of the consolidated
operations and financial condition of the Company should be read in conjunction
with the Company's consolidated financial statements and related notes thereto
included elsewhere herein.
THE ELBA GROUP -- On July 22, 1997, pursuant to an Agreement on the Sale,
Purchase and Transfer of Shares, the Company acquired all the outstanding
capital stock of the following affiliated companies: Elba Electric GmbH, Elba
Modul GmbH, Elba Elektronik AG, Elba Electronics Ltd., Elba Electric-Produktion
s.r.o., Elba Electronique S.A.R.L., and KRP Power Source B.V., collectively
referred to as the Elba Group.
The Elba Group is engaged in the design, manufacture and marketing of a wide
range of both AC/DC and DC/DC power conversion products in Europe. Elba's
fastest growing product segment is its medium power AC/DC converters (150-750
watts) sold to OEM communications customers under the Elba and KRP Power Source
labels. The Elba Group's customers include major multinational corporations such
as Ericsson, Kodak, Krone AG and Siemens among others.
The purchase price of 52 million Deutsche marks (approximately $28.5 million)
was paid in cash with proceeds from two seven-year term loans from First Union
National Bank, London Branch. The loans bear interest at LIBOR plus .75%.
BUSINESS ENVIRONMENT AND RISK FACTORS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes as well as the section under the heading
"Risk Factors that May Affect Future Results." With the exception of historical
information, the matters discussed below may include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 that involve risks and uncertainties. The Company wishes to caution
readers that a number of important factors, including those identified in the
section entitled "Risk Factors that May Affect Future Results" as well as
factors discussed in the Company's other reports filed with the Securities and
Exchange Commission, could affect the Company's actual results and cause them to
differ materially from those in the forward-looking statements.
RESULTS OF OPERATIONS
Operating performance in 1997showed consistent growth as net income from
continuing operations of $31.9 million, or $0.80 per share, exceeded the $29.6
million, or $0.78 per share, achieved in 1996. Sales from continuing operations
increased 21% from $435.7 million in 1996 to $527.2 million in 1997. Operating
income increased to $52.4 million, or 9.9% of sales in 1997, compared to $41.1
million, or 9.4% in 1996.
The following table summarizes the Company's sales performance by product
category ($000s):
1997 1996 1995
---------- ----------- ----------
Power Conversion $474,116 $395,322 $314,422
Computer Systems 26,771 18,953 19,026
Services and Logistics 26,349 21,456 11,521
---------- ----------- ----------
Total $527,236 $435,731 $344,969
========== =========== ==========
1997 COMPARED TO 1996
SALES increased from $435.7 million in 1996 to $527.2 million in 1997. The 21%
growth primarily resulted from a wider range of product offerings, continued
foreign expansion and the increase of service and support programs. Power
Conversion sales increased $78.8 million (20%). Computer Systems sales increased
41% from $18.9 million to $26.8 million. Services and Logistics sales increased
23% from $21.5 million to $26.3 million.
Computer Systems sales were 41% higher than in 1996 as this division
successfully transitioned from the computer industry to the communications
sector. Similar to the Power Conversion division, the Computer Systems division
has concentrated its marketing efforts on the high-growth communications
industry, where it provides networking, telecommunications and wireless
communications solutions for a variety of customers, including OEM's. With its
focus on developing new products aimed at customers in the communications
industry and a high backlog level entering 1998, management expects that this
division will continue to increase its sales volume in the upcoming year.
Services and Logistics sales increased from $21.5 million in 1996 to $26.3
million in 1997. Services and Logistics provides repair services and logistics
for a variety of products primarily for Hewlett-Packard Company. These products
include laser and ink jet printers, facsimile machines, computer, monitors and
other products. The 23% revenue growth was due to continued expansion of the
number of products repaired for Hewlett-Packard. Management anticipates a
significant growth in Services and Logistics sales in 1998 primarily consisting
of additional business from Hewlett-Packard as well as sales of similar services
to new OEMs.
GROSS PROFIT in 1997 increased by $30.6 million compared to 1996 on higher sales
volume and improved margins. The Company's gross margin increased to 26.1% of
sales in 1997 from 24.5% in 1996 due to cost reductions in both materials and
labor as well as higher overhead absorption due to increased production volume.
OPERATING EXPENSES increased to approximately 16.1% of sales in 1997 from the
15.1% reported in the prior year. In connection with the merger, in the fourth
quarter, the Company recorded a charge to operating expenses of $3.0 million for
direct merger transaction costs consisting primarily of fees for investment
bankers, attorneys, accountants, financial printing and other related charges.
OPERATING INCOME rose to 9.9% of sales from 9.4% in 1996, as a result of higher
gross profit partially offset by the increase in operating expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES in 1997 increased to 9.9% of sales
versus 9.7% in the prior year. Sales and marketing expenses increased $5.4
million or 24% due to increased commission expense resulting from higher sales
levels, additional marketing programs to support the launch of new products,
entry into new markets worldwide and expansion of distribution channels. General
and administrative ("G&A") expenses increased $4.4 million, or 22%, as a result
of the Company's business development activities and the inclusion of the Elba
Group acquired in July 1997. As a percentage of sales, G&A expenses increased to
4.6% from 4.5% in 1996.
RESEARCH AND DEVELOPMENT (R&D) EXPENSES in 1997 increased $6.4 million or 27.2%
from the prior year. As a percentage of sales, R&D expenses were 5.7% in 1997
versus 5.4% in 1996. The higher expense level was primarily attributable to the
cost of developing new products consistent with the Company's ongoing commitment
to develop and produce high-quality, innovative products targeted to the
communications industry.
PROVISION FOR INCOME TAXES increased to 35.5% of pretax income in 1997 from
21.4% in 1996. The effective tax rate was lower in 1996 primarily due to the
recognition of an income tax benefit related to the net operating loss (NOL)
carryforwards in the Company's Austrian operations. For additional information
regarding income taxes, refer to pages 30 through 32 of the Notes to
Consolidated Financial Statements.
DISCONTINUED OPERATIONS On April 17, 1997, the Company announced its intention
to sell its Industrial Automation division, RTP Corp. ("RTP"), pursuant to a
plan of disposal approved by the Company's Board of Directors. Accordingly, the
Company classified RTP as a discontinued operation and recorded an after-tax
non-recurring charge of $2.1 million, or $0.05 per share, against 1997 earnings.
Effective July 5, 1997, the Company sold RTP Corp. to RT Acquisition Florida
Corp. Proceeds from the sale included $2.0 million cash, a subordinated
unsecured one-year note in the aggregate principal amount of approximately $2.2
million bearing interest at the prime rate, and the assumption of certain of
RTP's liabilities.
1996 COMPARED TO 1995
SALES increased from $345 million in 1995 to $435.7 million in 1996. The 26%
growth resulted primarily from a $80.9 million (26%) increase in Power
Conversion sales, including sales attributable to Jeta Power Systems (which was
acquired in July 1996), and a $9.9 million (86%) increase in Services and
Logistics sales. Computer Systems sales remained level with 1995 as this
division continued to transition its focus to the communications industry.
Although Computer Systems sales remained level with 1995, inroads were made in
the communications market as this division continued to transition from the
computer industry to the communications sector.
Service and Logistics sales increased from $11.5 million in 1995 to $21.5
million in 1996. The 86% revenue growth was due almost entirely to continued
expansion of the number of products repaired for Hewlett-Packard that made up
99% of the sales in this division in 1996.
GROSS PROFIT in 1996 increased by $22.7 million compared to 1995 on higher sales
volume while gross margin improved slightly from 24.4% in 1995 to 24.5% in 1996.
This performance improvement resulted from the Company's ongoing commitment to
reduce manufacturing costs and the favorable effect of higher production volume
on unit cost. These improvements were partially offset by the continued shift in
sales mix to the Company's high-volume, lower-margin OEM customers.
OPERATING EXPENSES declined to approximately 15% of sales in 1996 from the 17%
reported in 1995.
OPERATING INCOME rose to 9.4% of sales from 7.8% in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES in 1996 declined to 9.7% of sales
versus 10.5% in the prior year due to higher sales volume and efficiencies
generated by information systems implementation and by continued management
focus on cost reduction. Sales and marketing expenses increased $1.0 million or
5% due to increased commission expense resulting from higher sales levels.
General and administrative spending increased $4.9 million, or 33%, primarily
due to the establishment of a separate administration function in the Services
and Logistics operation. As a percentage of sales, such expenses increased to
4.5% from 4.3% in 1995.
RESEARCH AND DEVELOPMENT EXPENSES in 1996 increased $2.5 million or 12% compared
to 1995 as the Company invested in new product platforms to serve the
communications industry.
PROVISION FOR INCOME TAXES decreased to 21% of pretax income in 1996 from 30% in
1995. The effective tax rate for 1996 decreased primarily as a result of a
reduction in the valuation allowance from utilization of deferred tax assets and
the recognition of an income tax benefit related to the net operating loss (NOL)
carryforwards in the Company's Austrian operations.
LIQUIDITY AND CAPITAL RESOURCES
As of January 2, 1998, the Company's cash balance increased to $55.4 million
from $34.7 million on January 3, 1997 despite significant use of cash for
capital expenditures and principal debt repayments. These activities were funded
with cash from operations, proceeds from exercises of stock options, proceeds
from the sale of the industrial automation division in July 1997, proceeds from
the sale of the Company's Boston facility, and cash acquired in the Elba Group
acquisition.
Cash provided from operations increased to $38.8 million in 1997 versus $30.2
million in 1996 and $18.3 million in 1995. The increase in 1997 is mainly the
result of a decrease in prepaid expenses and an increase in accounts payable and
accrued liabilities partially offset by increases in accounts receivable and
inventory.
Accounts receivable increased 36% in 1997 from 1996 due to sales growth,
including the continued expansion in international operations that typically
have longer collection cycles. Days sales outstanding in receivables remained
level at 51 days for both 1997 and 1996. The increase in inventory levels was
primarily attributable to production planning to meet manufacturing lead times
and anticipated demand for new product introductions.
Accounts payable increased $9.2 million, or 33%, from January 3, 1997 due to
increases in capital expenditures, operating expenses, and material purchases to
support the Company's growth in sales.
The Company used $44.7 million, $20.9 million and $8.1 million in investing
activities in fiscal 1997, 1996 and 1995, respectively. The use of cash in
fiscal 1997 was due mainly to the acquisition of the Elba Group for $26.2
million (net of cash acquired) and increased purchases of property, plant and
equipment in line with the continued upgrading of the Company's overseas
manufacturing facilities. The major investing activities for fiscal 1996 and
1995 were capital additions to support business operations and the acquisition
of Jeta for 9.6 million (net of cash acquired) in 1996.
Cash provided by financing activities in fiscal 1997 of $27.1 million reflects
borrowings under the 52 million Deutsche Mark term loans, net of debt issuance
costs, and $5.5 million proceeds from exercises of stock options partially
offset by $14.2 million long-term debt and capital lease principal repayments
including $3.7 million on the Company's seven-year term loan. Financing
activities used $1.5 million and $3.7 million in fiscal 1996 and 1995,
respectively. In 1996, cash was used for the repurchase of the Company's common
stock and for the repayment of long-term debt partially offset by proceeds from
issuance of debt and exercises of options. Cash used in 1995 related to the
repurchase of $24.3 million of the Company's Debentures, the repurchase of
1,138,000 shares of the Company's common stock and long-term debt principal
payments partially offset by borrowings under the $25 million seven-year term
loan, net of debt issuance costs, and the proceeds from exercises of stock
options.
The Company and one of its subsidiaries entered into two separate unsecured
seven-year term loans with a bank providing an aggregate of 52 million Deutsche
marks. The term loans bear interest at Libor plus .75%. Proceeds from the term
loans were used to finance the acquisition of the Elba Group. In addition, the
Company amended and restated its existing revolving and term loan agreement to
reprice its outstanding term loan and to provide for a new $20 million
three-year multi-currency revolving working capital line of credit.
The new multi-currency revolving facility, which expires in April 2000, replaces
the Company's previous $20 million credit line which would have expired on April
1, 1998. The interest rate on the revolver was reduced from Libor plus .75% to
Libor plus .50%. As of January 2, 1998, the Company had made no borrowings under
the existing line of credit, and management believes the Company was in
compliance with the agreement's covenants.
Effective July 15, 1997, the Company's 1995 seven-year term loan, which has an
outstanding balance of $19.8 million, was repriced to bear interest at Libor
plus .75% compared to the previous rate set at Libor plus 1.5%.
Based on current plans and business conditions, the Company believes that its
cash and equivalents, its available credit line, cash generated from operations,
and other financing activities are expected to be adequate to meet capital
expenditures, working capital requirements, debt and capital lease obligations
and operating lease commitments through 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
") and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the change in equity
during the financial reporting period of a business enterprise resulting from
non-owner sources. SFAS 131 establishes standards for the reporting of operating
segment information in both annual financial reports and interim financial
reports issued to shareholders. Operating segments are components of an entity
for which separate financial information is available and is evaluated regularly
by the entity's chief operating management. Both statements require adoption in
fiscal 1998.
YEAR 2000
The Company has several information system improvement initiatives under way
that will require increased expenditures during the next few years. These
initiatives include the conversion of certain Company computer systems to be
Year 2000 compliant.
The Year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
change occurs, date-sensitive systems will recognize the year 2000 as 1900, or
not at all. This inability to recognize or properly treat the Year 2000 may
cause systems to process critical financial and operational information
incorrectly. Anticipated spending for this modification will be expensed as
incurred and is not expected to have a significant impact on the Company's
ongoing results of operations.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended on the Friday Nearest December 31
(Amounts in Thousands Except Per Share Data)
1997 1996 1995
-------------- ----------- ------------
SALES $527,236 $435,731 $344,969
COST OF SALES 389,703 328,810 260,755
-------------- ----------- ------------
GROSS PROFIT 137,533 106,921 84,214
-------------- ----------- ------------
EXPENSES
Selling, general and administrative 52,058 42,232 36,353
Research and development 30,032 23,612 21,085
Merger-related charges 3,000 - -
-------------- ----------- ------------
85,090 65,844 57,438
-------------- ----------- ------------
OPERATING INCOME 52,443 41,077 26,776
-------------- ----------- ------------
OTHER INCOME (EXPENSE)
Interest expense (4,945) (4,576) (4,306)
Interest income 1,943 1,087 1,116
-------------- ------------ ------------
(3,002) (3,489) (3,190)
-------------- ----------- ------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 49,441 37,588 23,586
PROVISION FOR INCOME TAXES 17,559 8,033 7,103
-------------- ----------- ------------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM 31,882 29,555 16,483
DISCONTINUED OPERATIONS
Profit (loss) from operations, net of income taxes of $(222), 504 1,512
$177 and $588, respectively (333)
Loss on disposal of RTP (including provision of $1,000 for
operating losses during phase-out period) net of tax benefit of $1,152 (1,729) - -
EXTRAORDINARY ITEM, NET OF INCOME TAX BENEFIT OF $187 - - (397)
-------------- ----------- ------------
NET INCOME $ 29,820 $ 30,059 $ 17,598
============== =========== ============
EARNINGS PER SHARE
BASIC -
Income from Continuing Operations $ 0.87 $ 0.84 $ 0.50
Discontinued Operations (0.06) 0.01 0.04
Extraordinary Item - - (0.01)
-------------- ----------- ------------
Net Income $ 0.81 $ 0.85 $ 0.53
============== =========== ============
ASSUMING FULL DILUTION -
Income from Continuing Operations $ 0.80 $ 0.78 $ 0.49
Discontinued Operations (0.05) 0.01 0.04
Extraordinary Item - - (0.01)
-------------- ----------- -----------
Net Income $ 0.75 $ 0.79 $ 0.52
============== =========== ============
COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING
Basic 36,650 35,375 33,267
Assuming full dilution 40,654 37,870 35,404
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
As of the Friday Nearest December 31
(Amounts in Thousands Except Share Data)
1997 1996
------------- --------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 55,392 $ 34,676
Accounts receivable, net of allowance for doubtful accounts of 62,202
$1,736 at January 2, 1998 and $1,300 at January 3, 1997 84,479
Inventories 59,663 49,502
Prepaid expenses and other 8,522 4,233
Deferred income taxes, net 5,293 1,952
Current assets of discontinued operations - 7,646
------------- --------------
Total current assets 213,349 160,211
------------- --------------
PROPERTY, PLANT & EQUIPMENT, NET 61,581 48,671
------------- --------------
OTHER ASSETS
Goodwill, net 40,704 20,022
Deferred income taxes, net 4,509 6,099
Other assets, net 2,034 2,890
Non-current assets of discontinued operations - 1,594
------------- --------------
Total other assets 47,247 30,605
------------- --------------
$322,177 $239,487
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt and capital leases $ 15,598 $ 13,152
Accounts payable and accrued liabilities 81,929 52,975
Current liabilities of discontinued operations - 2,055
------------- --------------
Total current liabilities 97,527 68,182
LONG-TERM LIABILITIES
Long-term debt and capital leases 52,949 31,945
Convertible subordinated note - 12,000
Other long-term liabilities 5,785 6,772
Deferred tax liabilities 3,240 3,582
------------- --------------
Total long-term liabilities 61,974 54,299
------------- --------------
Total liabilities 159,501 122,481
------------- --------------
COMMITMENTS AND CONTINGENCIES (see Notes 8, 10 and 13)
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01; 1,000,000 shares authorized;
none issued - -
Common stock, par value $.01; 80,000,000 shares authorized;
38,380,964 shares issued and outstanding at January 2, 1998
(36,042,007 at January 3, 1997) 384 360
Additional paid-in capital 78,056 57,874
Retained earnings 88,769 58,949
Foreign currency translation adjustment (4,533) (177)
------------- -------------
Total shareholders' equity 162,676 117,006
------------- --------------
$322,177 $239,487
============= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended on the Friday Nearest December 31
(Amounts in Thousands)
1997 1996 1995
------------- ------------ ------------
OPERATING ACTIVITIES
Net income $29,820 $30,059 $17,598
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,561 10,287 7,606
Deferred income taxes (2,176) (2,088) 2,529
Provision for inventories 4,963 1,988 4,422
Other non-cash charges 1,254 (383) 669
Changes in operating assets and liabilities:
Increase in accounts receivable (22,264) (8,730) (13,172)
(Increase) decrease in inventories (14,489) 2,860 (21,836)
(Increase) decrease in prepaid expenses and other 8,683 24 (281)
Increase (decrease) in accounts payable and accrued liabilities 18,037 (2,617) 21,415
Net cash provided by (used in) discontinued operations 1,423 (1,220) (676)
------------- ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 38,812 30,180 18,274
------------- ------------ ------------
INVESTING ACTIVITIES
Purchases of property, plant & equipment (22,231) (9,387) (10,046)
Proceeds from sale of building 1,656 - 1,524
Purchase of the Elba Group, net of cash acquired (26,186) - -
Purchase of Jeta Power Systems, Inc., net of cash acquired - (9,577) -
Purchase of Zytec Hungary Elektronikai Kft. - (830) -
Proceeds from sale of RTP Corp. 2,000 - -
(Increase) decrease in other assets 96 (206) 830
Investing activities of discontinued operations (32) (897) (397)
------------- ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (44,697) (20,897) (8,089)
------------- ------------ ------------
FINANCING ACTIVITIES
Proceeds from issuances of long-term debt 35,796 20,086 31,325
Principal payments on debt and capital leases (14,163) (14,899) (10,831)
Proceeds from revolving credit loans 14,726 144,806 139,050
Payments on revolving credit loans (14,726) (152,104) (134,474)
Decrease in bank overdrafts - (1,220) (307)
Repurchase of convertible subordinated debentures - - (24,505)
Proceeds from exercises of stock options 5,511 3,888 4,356
Repurchases of common stock - (2,032) (8,305)
------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 27,144 (1,475) (3,691)
------------- ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS (543) 216 (55)
------------- ------------ ------------
INCREASE IN CASH AND EQUIVALENTS 20,716 8,024 6,439
CASH AND EQUIVALENTS, BEGINNING OF YEAR 34,676 26,652 20,213
------------- ------------- -------------
CASH AND EQUIVALENTS, END OF YEAR $55,392 $34,676 $26,652
============= ============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES
CASH PAID DURING THE YEAR FOR:
Interest $ 4,754 $ 4,627 $ 4,328
Income taxes 9,213 5,139 2,080
NONCASH INVESTING AND FINANCING ACTIVITIES:
Fair value of assets acquired in connection with purchase acquisitions 35,000 14,055 -
Liabilities assumed in connection with purchase acquisitions 6,600 1,916 -
Goodwill reduction from utilization of loss carryforwards - 606 646
Common stock issued from conversion of note (including debt
issuance costs written off) 11,386 - -
Common stock issued from conversion of debentures - - 9,402
Tax benefit from exercises of stock options 3,163 1,934 2,141
Equipment acquired through issuance of debt 736 1,423 372
Property and equipment acquired through capital lease obligations 1,505 7,372 2,377
Note receivable from sale of RTP Corp. 2,150 - -
The accompanying notes are an integral part of these 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 STOCK PAID-IN RETAINED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT
----------- ----------- ------------- ----------- ---------
BALANCE, DECEMBER 30, 1994 25,942 $259 $38,590 $19,328 $(1,106)
Issuance of common stock 33 100
Issuance of common stock under stock option
and employee purchase plans 2,021 20 4,101
Tax benefit from exercises of stock options 2,141
Repurchases and retirement of common stock (1,138) (11) (1,939) (6,355)
Conversion of convertible subordinated
debentures 1,972 20 9,382
Foreign currency translation adjustment 761
Net income 17,598
----------- ----------- ------------- ----------- ----------
BALANCE, DECEMBER 29, 1995 28,830 288 52,375 30,571 (345)
Additional shares issued in two-for-one stock
split 5,982 60 (60)
Issuance of common stock 8 100
Issuance of common stock under stock option
and employee purchase plans 1,419 14 3,874
Tax benefit from exercises of stock options 1,934
Repurchases and retirement of common stock (197) (2) (349) (1,681)
Foreign currency translation adjustment 168
Net income 30,059
----------- ----------- ------------- ----------- ---------
BALANCE, JANUARY 3, 1997 36,042 360 57,874 58,949 (177)
Issuance of common stock 21 146
Issuance of common stock under stock option
and employee purchase plans 1,151 12 5,499
Tax benefit from exercises of stock options 3,163
Conversion of convertible subordinated note
(including debt issuance costs written off) 1,167 12 11,374
Foreign currency translation adjustment (4,356)
Net income 29,820
----------- ----------- ------------- ----------- ----------
BALANCE, JANUARY 2, 1998 38,381 $384 $78,056 $88,769 $ (4,533)
=========== =========== ============= =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION On December 29, 1997, Computer Products, Inc. completed a
merger with Zytec Corporation ("Zytec") whereby Zytec became a wholly-owned
subsidiary of Computer Products. The consolidated financial statements include
the accounts of Computer Products and its subsidiaries (collectively referred to
as the "Company"). Intercompany accounts and transactions have been eliminated
in consolidation. The consolidated financial statements for all periods
presented prior to the merger have been restated as if the Company operated as
one entity since inception. The merger has been accounted for as a
pooling-of-interests as discussed in Note 5.
The merged company has begun doing business under the name Artesyn Technologies.
Management will request shareholder approval at its next annual shareholders'
meeting in May 1998 to legally change the Company's corporate name to Artesyn
Technologies, Inc. Pending shareholder approval, the Company's legal name will
remain Computer Products, Inc. and trade under The Nasdaq National Market symbol
CPRD.
FISCAL YEAR The Company's fiscal year ends on the Friday nearest December 31,
which results in a 52- or 53-week year. The fiscal years ended January 2, 1998,
January 3, 1997 and December 29, 1995 comprise 52, 53 and 52 weeks,
respectively.
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.
INVENTORIES Inventories are stated at the lower of cost, on a first-in,
first-out basis, or market.
PROPERTY, PLANT & EQUIPMENT Property, plant and equipment is stated at cost.
Depreciation is provided for on the straight-line method over the estimated
useful lives of the assets ranging from three to 30 years or the lease terms, if
shorter. Leasehold improvements are recorded at cost and are amortized using the
straight-line method over the remaining lease term or the economic useful life,
whichever is shorter. Major renewals and improvements are capitalized, while
maintenance, repairs and minor renewals not expected to extend the life of an
asset beyond its normal useful lefe are expensed as incurred. In 1996, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." In accordance with SFAS 121, the Company periodically evaluates
its long-lived assets to determine whether an impairment has occurred. Adoption
did not have a material effect on the consolidated financial statements.
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 $7,322,000 and
$5,779,000 at January 2, 1998 and January 3, 1997, respectively. Amortization
expense was $1,550,000, $837,000 and $733,000 in fiscal years 1997, 1996 and
1995, respectively. On a periodic basis, the Company estimates the future
undiscounted cash flows and operating income of the businesses to which goodwill
relates to ensure that the carrying value of such goodwill has not been impaired
under the provisions of SFAS 121.
STOCK-BASED COMPENSATION PLANS In 1995, the Financial Accounting Standards Board
("FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS
123 allows either adoption of a fair value based method of accounting for
stock-based compensation or continuation of accounting under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related Interpretations with supplemental disclosures. The
Company has chosen to continue to account for its stock option plans using the
intrinsic value based method prescribed in APB 25. Pro forma disclosures of net
income and earnings per share as if the fair value method had been adopted are
presented below (see Note 15).
FOREIGN CURRENCY TRANSLATION The functional currency of the Company's European
subsidiaries is the foreign subsidiary's local currency. Assets and liabilities
are translated from their functional currency into U.S. dollars using exchange
rates in effect at the balance sheet date. Income and expense items are
translated using average exchange rates for the period. The effect of exchange
rate fluctuations on translating foreign currency assets and liabilities into
U.S. dollars is included in shareholders' equity. Foreign exchange transaction
gains and losses are included in the results of operations. The functional
currency of the Company's Asian subsidiaries is the U.S. dollar, as their
transactions are substantially denominated in U.S. dollars. Financial exposure
may result from the timing of transactions and the movement of exchange rates.
REVENUE RECOGNITION The Company recognizes revenue as products are shipped or
services are rendered.
PRODUCT WARRANTY The Company records estimated product warranty costs in the
period in which the related sales are recognized.
INCOME TAXES Income taxes provided reflect the current and deferred tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. The realization of deferred tax assets is based on
historical tax positions and expectations about future taxable income.
EARNINGS PER SHARE In February 1997, the FASB issued SFAS No. 128, "Earnings Per
Share". This statement simplifies the standards for computing and presenting
earnings per share ("EPS") and makes them comparable to international EPS
standards. SFAS 128 replaces the presentation of primary EPS with a presentation
of basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures.
SFAS 128 became effective beginning with the fourth quarter of 1997 and requires
restatement of all prior periods presented. As a result, all prior years
presented have been restated to conform with SFAS 128. Basic earnings per share
is calculated by dividing income available to common shareholders by the
weighted-average number of common shares outstanding during each period. Diluted
earnings per share includes the potential impact of convertible securities and
dilutive common stock equivalents using the treasury stock method of accounting.
The reconciliation of the numerator and denominator of the EPS calculation is
presented below (see Note 12).
STOCK SPLIT In April 1996, Zytec's board of directors authorized a two-for-one
stock split in the form of a 100% stock dividend distributed on June 3, 1996 to
shareholders of record on May 20, 1996. Applicable per share and number of share
data have been retroactively restated to reflect the stock split, except for the
Consolidated Statements of Shareholders' Equity.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. The
more significant estimates made by management include the provision for doubtful
accounts receivable, inventory write-downs for potentially excess or obsolete
inventory, warranty reserves, the valuation allowance for the gross deferred tax
assets, and the amortization period for intangible assets. Actual results could
differ from those estimates. Management periodically evaluates estimates used in
the preparation of the financial statements for continued reasonableness.
Appropriate adjustments, if any, to the estimates used are made prospectively
based on such periodic evaluation.
ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" which is required to be adopted in fiscal 1998. This
statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
This statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in financial statements and (b) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of statements of
financial position. Comprehensive income is defined as the change in equity
during the financial reporting period of a business enterprise resulting from
non-owner sources.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which is required to be adopted in fiscal
1998. This statement requires that a public business enterprise report financial
and descriptive information about its reportable operating segments including,
among other things, a measure of segment profit or loss, certain specific
revenue and expense items, and segment assets.
RECLASSIFICATIONS Certain prior years' amounts have been reclassified to conform
with the current year's presentation.
2. INVENTORIES
The components of inventories are as follows($000s):
1997 1996
-------- --------
Raw materials $31,181 $29,606
Work in process 12,582 9,607
Finished goods 15,900 10,289
-------- --------
Inventories $59,663 $49,502
======== ========
3. PROPERTY, PLANT & EQUIPMENT
Property, plant & equipment is comprised of the following ($000s):
1997 1996
-------- --------
Land $ 2,423 $ 840
Buildings 18,227 20,890
Machinery and equipment 77,812 57,785
Leasehold improvements 1,763 1,591
Equipment, furniture and leasehold improvements
under capital leases 12,214 11,525
-------- --------
112,439 92,631
Less accumulated depreciation and amortization 50,858 43,960
-------- --------
Property, plant & equipment, net $61,581 $48,671
======== ========
Depreciation and amortization expense was $11,525,000, $8,840,000 and
$6,285,000 in fiscal years 1997, 1996 and 1995, respectively.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities are as follows
($000s):
1997 1996
-------- --------
Accounts payable $36,790 $27,621
Accrued liabilities:
Compensation and benefits 14,875 11,195
Income taxes payable 14,071 5,104
Warranty reserve 3,457 1,609
Other 12,736 7,446
-------- --------
$81,929 $52,975
======== ========
At January 2, 1998 and January 3, 1997, other accrued liabilities primarily
consisted of accruals for commissions, advertising, accounting and legal fees,
and other taxes.
5. BUSINESS COMBINATIONS
ZYTEC -- On December 29, 1997, Computer Products completed the Merger with Zytec
Corporation by exchanging approximately 14.1 million shares of its common stock
for all the outstanding common stock of Zytec. Each share of Zytec was exchanged
for 1.33 shares of the Company's common stock. In addition, outstanding Zytec
employee stock options were converted at the same exchange factor into options
to purchase approximately 3.9 million shares of the Company's common stock. All
applicable share data have been retroactively restated in the Consolidated
Financial Statements. The merger constituted a tax-free reorganization and has
been accounted for as a pooling-of-interests under Accounting Principles Board
Opinion No. 16. Accordingly, all prior period consolidated financial statements
presented have been restated to include the combined results of operations,
financial position and cash flows of Zytec as though it had always been a part
of the Company.
There were no transactions between Computer Products and Zytec prior to the
combination and immaterial adjustments were recorded to conform Zytec's
accounting policies to the Company's accounting policies. Differences in these
practices in the past were deemed not to be material to the Company's financial
statements and therefore are being conformed only on a prospective basis.
Certain reclassifications were made to the Zytec financial statements to conform
to the Company's presentations.
Sales and earnings data for the separate companies and the combined amounts as
presented in the consolidated financial statements are displayed in the table
below ($000s). Since the merger was effective on December 29, 1997, the table
reflects sales and earnings data for the entire year 1997. Operations from
December 29, 1997 to year-end would not have had a material impact on the
datapresented.
1997 1996 1995
---------- ---------- -----------
SALES
Computer Products $262,774 $207,563 $174,451
Zytec 264,462 228,168 170,518
---------- ---------- -----------
Combined $527,236 $435,731 $344,969
========== ========== ===========
NET INCOME
Computer Products $20,089 $19,578 $13,720
Zytec 9,731 10,481 3,878
---------- ---------- -----------
Combined $29,820 $30,059 $17,598
========== ========== ===========
In connection with the merger, in the fourth quarter, the Company recorded a
charge to operating expenses of $3.0 million for direct transaction costs
consisting primarily of fees for investment bankers, attorneys, accountants,
financial printing and other related charges. In addition, as previously
disclosed in the Company's Registration Statement on Form S-4, the Company
expects to record a charge of approximately $8 million to $10 million during
1998 to eliminate duplicate facilities, functions and excess capacity.
THE ELBA GROUP -- On July 22, 1997, the Company acquired the Elba Group
("Elba"), a European designer, manufacturer and marketer of a wide range of both
AC/DC and DC/DC power conversion products. The Company purchased Elba for
approximately $28.5 million in cash provided by two seven-year term loans from a
financial institution. Elba has design, sales and manufacturing organizations in
Oberhausen and Einsiedel, Germany; Chomutov, Czech Republic and Etten-Leur,
Netherlands. Elba also has sales offices in Pfaffikon, Switzerland;
Vaulx-Milieu, France; and Chesterfield, United Kingdom.
The acquisition was accounted for under the purchase method of accounting.
Accordingly, the excess of the purchase price over the estimated fair value of
the net assets acquired, or approximately $21.5 million, was recorded as
goodwill which is being amortized on a straight-line basis over a period of 20
years. Elba's results of operations have been included in the Company's
consolidated financial statements from the date of acquisition. The following
unaudited pro forma information combines the consolidated results of operations
of the Company and Elba as if the acquisition had occurred at the beginning of
the periods presented.
UNAUDITED COMBINED PRO FORMA INFORMATION
($000 EXCEPT PER SHARE DATA)
1997 1996
------------- -------------
Sales $540,545 $462,366
Income from continuing operations 32,556 31,312
Per share - basic 0.89 0.89
Per share - assuming full dilution 0.81 0.83
Net Income 30,494 31,816
Per share - basic 0.83 0.90
Per share - assuming full dilution 0.76 0.84
The unaudited pro forma results have been prepared for comparative purposes only
and include certain adjustments, such as additional amortization expense as a
result of goodwill, increased interest expense on the acquisition debt, and
related income tax effects. The pro forma results do not purport to be
indicative of results that would have occurred had the combination been in
effect for the periods presented, nor do they purport to be indicative of the
results that will be obtained in the future.
JETA POWER SYSTEMS -- Effective August 23, 1996, the Company acquired the
remaining 90% of the outstanding capital stock of Jeta Power Systems, Inc.
("Jeta") for approximately $11.25 million in cash. Jeta designs, manufactures
and markets medium-to-high power systems in the 400 watt to 4 kilowatt range for
applications in telecommunications, networking, computing and instrumentation
markets. The Company had purchased an initial 10% of Jeta's capital stock during
1984 for approximately $433,000. The Company used cash on hand to pay for the
acquisition.
The acquisition was accounted for under the purchase method of accounting.
Accordingly, $7.9 million, representing the excess of the purchase price over
the estimated fair value of the net assets acquired, has been recorded as
goodwill and is being amortized on a straight-line basis over a period of 20
years. Jeta's results of operations have been included in the Company's
consolidated financial statements from the date of acquisition and are not
significant in relation to the Company's consolidated financial statements;
accordingly, pro forma financial disclosures have not been presented.
ZYTEC HUNGARY ELEKTRONIKAI KFT.-- In March 1996, Zytec completed the acquisition
of the outstanding stock of BHG Tatabanya Alkatrezsgyarto Kft. (now known as
Zytec Hungary Elektronikai Kft.) located in Hungary. The $830,000 purchase price
was paid in cash. This acquisition has been recorded using the purchase method
of accounting. This acquisition was not significant to Zytec or the Company's
consolidated results of operations and financial position.
6. DISCONTINUED OPERATIONS
On April 17, 1997, the Company announced its intention to sell its Industrial
Automation division, RTP Corp. ("RTP"), pursuant to a plan of disposal approved
by the Board of Directors. Effective July 5, 1997, the Company sold RTP to RT
Acquisition Florida Corp. Proceeds from the sale included $2.0 million cash, a
subordinated unsecured one-year note in the aggregate principal amount of
approximately $2.2 million bearing interest at the prime rate, and the
assumption of certain of RTP's liabilities. An estimated after-tax loss on the
sale of $1.7 million (net of income tax benefit of $1,152,000) was recorded in
the first quarter of 1997 representing the estimated loss on the disposal of
RTP's net assets and a pre-tax provision of $1,000,000 for expected operating
losses during the phase-out period. The actual loss on disposal approximated the
amount recorded in the first quarter.
RTP's sales from January 4, 1997 through its disposal date were $4,793,000. RTP
sales in fiscal years 1996 and 1995 were $14,922,000 and $16,926,000,
respectively. RTP's operating results are shown separately as discontinued
operations in the accompanying consolidated statements of operations.
Certain prior year amounts have been restated to give effect to the discontinued
operations treatment.
7. LINES OF CREDIT
Effective July 15, 1997, the Company amended and restated its existing revolving
and term loan agreement to reprice its outstanding term loan and to provide for
a new $20 million three-year, multi-currency revolving working capital line of
credit. The new multi-currency revolving facility, which expires in April 2000,
replaces the Company's previous $20 million credit line which would have expired
on April 1, 1998. The agreement provides for an interest rate on the revolver at
the London Interbank Offering Rate "Libor" plus .50% and includes a fee of .25%
on the unused balance. The agreement contains certain restrictive covenants
that, among other things, require the Company to maintain certain financial
ratios and limit the purchase, redemption or retirement of capital stock and
other assets. As of January 2, 1998, the Company had made no borrowings under
the revolving credit facility and was in compliance with the agreement's
covenants.
In May 1996, Zytec replaced its revolving credit facility with a bank. The
agreement provided up to $23 million in borrowings through May 1999. Pursuant to
the merger with the Computer Products, credit availability under the revolving
facility was reduced to $865,833 to cover the letter of credit required under
certain Industrial Development Revenue Bonds (see Note 8). At the Company's
option, advances from the revolving credit agreement may be made at either a
floating rate which is approximately equal to the bank's prime rate or at a
LIBOR rate which is based on the British Bankers Association LIBOR setting rate.
Zytec is obligated to pay a fee of .25% of the unused portion of the revolving
credit balance. The agreement requires Zytec to maintain certain leverage,
interest coverage, current and funded debt ratios. At January 2, 1998, no
amounts were outstanding under this facility.
8. LONG-TERM DEBT AND CAPITAL LEASES
Long-term obligations consist of the following ($000s):
1997 1996
---------- ----------
5.58% interest-bearing note maturing July 1, 2004 (a) $28,921 $
-
8.25% interest-bearing note maturing April 1, 2002 (b) 19,800 23,500
3.50% revolving credit loan due March 1998 (c) 3,562 4,098
6.9% mortgage note maturing July 1, 2001(d) 3,286 3,385
3.875% notes payable due 1998 (e) 2,414 2,260
Loan payable to bank due 1998 (f) 1,618 2,075
Variable rate demand industrial development revenue bonds due March
1998 (g) 820 980
4.875% long-term investment loan due July 1, 2002 (h) 713 -
Convertible subordinated promissory note (i) - 12,000
Non-interest-bearing note, due 1997, net of unamortized discount of
$80,000 based on an imputed interest rate of 10% (j) - 354
Other - 101
Capital lease obligations (see Note 10) 7,413 8,344
---------- ----------
68,547 57,097
Less current maturities 15,598 13,152
---------- ----------
Long-term debt and capital leases $52,949 $43,945
========== ==========
(a)On July 15, 1997, the Company and one of its subsidiaries entered into
two separate unsecured seven-year term loans with a bank providing an
aggregate of 52 million Deutsche marks. The term loans bear interest at
LIBOR plus .75% (see Note 17). Principal payments are as follows:
2,600,000 Deutsche marks due quarterly on January 1, April 1, July 1
and October 1 of each year beginning October 1, 1999 until maturity,
with interest payable monthly. Proceeds from the term loans were used
to finance the Elba Group acquisition on July 22, 1997 (see Note 5).
The agreements contain certain restrictive covenants similar to those
discussed in Note 7.
(b)On April 4, 1995, the Company entered into an unsecured credit
agreement with a bank that provided for a $25 million seven-year term
loan. Remaining payments are as follows: $2,200,000 due on April 1 and
October 1 of each year until maturity, with interest payable monthly.
Proceeds from the term loan were used to redeem the Company's
Debentures (see Note 9). The agreement contains certain restrictive
covenants similar to those discussed in Note 7. In May 1995, the
Company entered into an Interest Rate Collar Agreement with a bank,
which set boundaries for the interest payment terms on its $25 million
term loan. The agreement placed a ceiling of 9.75% on the Company's
floating rate option in exchange for the bank's ability to elect a
fixed rate option of 8.25%. In June 1995, the bank exercised its option
to receive interest at the fixed rate for the remaining term of the
loan. Effective July 15, 1997, the Company amended and restated its
credit agreement to bear interest at LIBOR plus .75% compared to the
previous rate set at LIBOR plus 1.5%.
(c)Zytec's Austrian subsidiary ("Zytec GmbH") has a revolving credit loan
with a bank for financing export sales. The agreement is renewable
quarterly and bears interest at 3.5%. Zytec GmbH also has a line of
credit agreement that provides $1,979,000 of overdraft financing, which
bears interest ranging from 4.0% to 7.875%. These borrowings are
collateralized by export receivables.
(d)On June 28, 1994, the Company obtained a $3,600,000 seven-year
commercial mortgage loan from a bank at a fixed interest rate of 6.9%
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 a subsidiary's facility in Wisconsin with a net
book value of approximately $3,893,000 at January 2, 1998 and by the
Company's guaranty. The loan proceeds were used to provide additional
working capital. Effective July 1, 1997, the loan agreement was amended
to extend the interest rate of 6.9% through June 30, 1998. The note is
due in monthly installments of $27,700, including interest.
(e)Notes payable include various notes which mature from January to April
1998. The interest rate on each of the notes was 3.875% at January 2,
1998. The notes are collateralized by accounts receivable of Zytec GmbH
totaling $6,134,000 and $3,728,000 at January 2, 1998 and January 3,
1997, respectively, which exclude the export receivables in (c) above.
(f)Interest is payable at rates ranging from 5% to 6.3%. The loan is
guaranteed by the Austrian government and is collateralized by certain
Austrian property, plant and equipment. As part of the agreement, the
Company is obligated to make capital contributions to Zytec GmbH up to
a maximum of $2,454,000, if Zytec GmbH's cumulative cash flow, as
defined in the loan agreement, becomes negative. Cumulative cash flow
was $17,879,000 at January 2, 1998; therefore no capital contribution
is required at January 2, 1998.
(g)The interest rate is established weekly according to market conditions
such that the market value of the bonds will remain equal to their
principal value; the maximum interest rate payable under the bonds is
10%. The interest rate at January 2, 1998 was 4.8%. The agreement
requires a bank letter of credit to be maintained in an amount
approximately equal to the outstanding principal balance of the bonds.
The letter of credit is collateralized by accounts receivable,
inventories and certain property, plant and equipment.
(h)Interest is payable at 4.875% through June 30, 1999 after which it will
be renegotiated. The loan is guaranteed by the Austrian government and
is collateralized by certain Austrian property, plant and equipment.
(i)On December 23, 1996, Zytec entered into a convertible subordinated
promissory note with a bank for $12,000,000. Pursuant to the merger,
the note was converted into shares of Zytec's common stock at a
conversion price of $13.68 per share for a total of 877,193 shares of
Zytec common stock which were exchanged for shares of the Company's
common stock in the merger at the 1.33 exchange ratio.
(j)On December 30, 1994, the Company purchased a building for
approximately $922,000 from the Industrial Development Authority
("IDA") of Ireland in exchange for a three year non-interest-bearing
note. The note specified repayment in three yearly installments due on
September 30, 1995, 1996 and 1997.
Maturities of long-term debt, excluding capital lease obligations, are as
follows: $13,064,000 in 1998, $7,551,000 in 1999, $10,454,000 in 2000,
$13,265,000 in 2001, $8,126,000 in 2002 and $8,674,000 thereafter.
The fair value of the debt and capital leases, based upon discounted cash flow
analysis using current market interest rates, approximates its carrying value at
January 2, 1998.
9. 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
were subordinated to all existing and future Senior Indebtedness of the Company
(as defined in the indenture), and were 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 $4.0 million 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.
In May 1995, the Company called for redemption of all its outstanding
Debentures, which amounted to $33.4 million. The Debentures were redeemed for an
aggregate amount of $1,054.86 per $1,000 of principal amount (consisting of a
redemption payment of $1,010 plus accrued and unpaid interest of $44.86). As a
result of the redemption, holders of Debentures representing a principal amount
of $9.1 million elected to convert the Debentures into 1,972,085 shares of the
Company's common stock, pursuant to the terms of the Debentures, while the
balance of $24.3 million was redeemed. This transaction resulted in an increase
in shareholders' equity of approximately $9.4 million. The redemption resulted
in an extraordinary loss of approximately $397,000 (net of taxes of $187,000),
consisting of a 1% redemption premium of $165,000 and a write-off of unamortized
financing costs of $232,000.
10. LEASE OBLIGATIONS
Equipment under capital leases includes certain production and office equipment.
The Company is also obligated under noncancelable operating leases for
facilities and equipment that expire at various dates through 2005 and contain
renewal options at favorable terms. Future minimum annual rental obligations and
noncancelable sublease income are as follows ($000s):
Capital Operating Sublease
YEAR Leases Leases Income
-------- ---------- ----------- -----------
1998 $ 3,104 $ 5,802 $ 1,776
1999 2,589 5,426 2,322
2000 1,627 4,993 2,346
2001 1,165 4,539 2,617
2002 36 4,292 2,617
Thereafter 30 13,607 427
---------- ----------- -----------
$ 8,551 $38,659 $12,105
=========== ===========
Less amount representing interest (1,138)
----------
Present value of net minimum
lease payments $ 7,413
==========
Rental expense under operating leases amounted to $9,294,000, $6,395,000 and
$4,632,000 in fiscal 1997, 1996 and 1995, respectively. Sublease income was
$1,941,000 $1,941,000 and $1,710,000 for fiscal 1997, 1996 and 1995,
respectively.
Lease liabilities have been recorded 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. Lease liabilities are estimated based on
contract provisions and historical and current market rates. These estimates can
be materially affected by changes in market conditions. These lease liabilities
are included in other liabilities in the Consolidated Statements of Financial
Condition and amounted to $4,377,000 and $5,994,000 as of January 2, 1998 and
January 3, 1997.
11. INCOME TAXES
The components of the income from continuing operations provision for income
taxes consist of the following ($000s):
1997 1996 1995
-------- ------- -------
Currently payable:
Federal $12,979 $4,410 $2,205
State 2,129 2,424 964
Foreign 5,846 3,287 1,405
-------- ------- -------
Total current 20,954 10,121 4,574
-------- ------- -------
Deferred provision:
Federal (3,019) 612 2,276
State 140 134 186
Foreign (516) (2,834) 67
-------- ------- -------
Total deferred (3,395) (2,088) 2,529
-------- ------- -------
Total provision for income
taxes $17,559 $8,033 $7,103
========= ======= =======
The exercise of nonqualified stock options resulted in state and federal income
tax benefits to the Company related to the difference between the fair market
price of the stock at the date of exercise and the exercise price. In fiscal
1997, 1996 and 1995, the provision for income taxes excludes current tax
benefits of $3,163,000, $1,934,000 and $2,141,000, respectively, related to the
exercise of stock options credited directly to additional paid-in capital.
During fiscal 1996 and 1995, the Company utilized tax loss carryforwards
obtained in a prior business combination. The effect of utilizing these
carryforwards was to reduce goodwill by approximately $606,000 and $646,000 in
1996 and 1995, respectively.
Income taxes have not been provided on the undistributed earnings of the
Company's foreign subsidiaries, which approximated $45.4 million as of January
2, 1998, as the Company does not intend to repatriate such earnings.
The components of the Company's income from continuing operations before
provision for income taxes consist of the following ($000s):
1997 1996 1995
------- -------- -------
U.S. $28,626 $25,157 $16,922
Foreign 20,815 12,431 6,664
------- -------- -------
Total income before income
taxes $49,441 $37,588 $23,586
======= ======== =======
The Company's effective tax rate differs from the U.S. statutory federal income
tax rate due to the following:
1997 1996 1995
------- -------- -------
U.S.federal statutory tax rate 35.0% 35.0% 35.0%
Foreign tax effects (2.3) (1.8) (2.6)
Recognition of deferred tax
benefit of NOL carryforward - (8.4) -
Permanent items -non-deductible 2.7 0.3 1.6
Change in the valuation
allowance (5.2) (10.8) (9.8)
Effect of AMT and state
income taxes 5.1 6.9 6.9
Other 0.2 0.2 (1.0)
------- -------- -------
Effective income tax rate 35.5% 21.4% 30.1%
======= ======== =======
In May 1996, the Austrian government changed the treatment of NOL carryforwards
by (a) suspending the use of NOLs during the years 1996 and 1997 retroactively
to January 1, 1996 and (b) removing the time limitations on the use of the NOLs.
In light of this new statute and based on the Company's assessment of the
strong financial results of the Austrian operations, Zytec recognized the
deferred income tax benefit related to the Austrian NOL carryforwards. This
resulted in a $2,626,000 net reduction of income taxes in the second quarter of
1996, comprised of a tax benefit of $3,175,000 relating to recognition of the
deferred tax benefit offset by $549,000 in income tax expense resulting from the
retroactive application of this tax law change to first and second quarter
Austrian operations.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and deferred tax liabilities as of January 2,
1998 and January 3, 1997 are as follows ($000s):
1997 1996
--------- ---------
DEFERRED TAX ASSETS
Net operating loss carryforwards
(expiring 2003 through 2011) $1,118 $ 2,807
Tax credit carryforwards (expiring 1998
through 2001) 2,086 2,080
Foreign net operating loss carryforwards 2,665 3,067
Lease liabilities 1,799 2,395
Inventory reserves 2,558 2,341
Other accrued liabilities 3,430 2,634
Allowance for bad debt 595 778
Other 402 875
--------- ---------
Gross deferred tax assets 14,653 16,977
Valuation allowance (4,851) (8,926)
--------- ---------
Net deferred tax assets 9,802 8,051
--------- ---------
DEFERRED TAX LIABILITIES
Depreciation (1,300) (1,319)
Amortization of goodwill (412) (343)
Other (1,528) (1,920)
--------- ---------
Deferred tax liabilities (3,240) (3,582)
--------- ---------
Deferred income taxes, net $6,562 $ 4,469
========= =========
The valuation allowance at January 2, 1998 includes approximately $3.2 million
related to the exercise of stock options which, when recognized, will be
credited directly to additional paid-in capital. During the year ended January
2, 1998, the valuation allowance decreased by approximately $4.1 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 it is more likely than not, that future taxable income will
be sufficient to utilize deferred tax assets of $9.8 million.
12. EARNINGS PER SHARE
The following data show the amounts used in computing earnings per share and the
effects on income and the weighted-average number of shares of potential
dilutive common stock. The number of shares used in the calculations for 1996
and 1995 reflect a two-for-one stock split occurring on June 3, 1996. Also, the
number of shares used in the calculation for all periods presented was adjusted
to reflect the additional shares issued pursuant to the merger with Zytec at a
conversion ratio of 1.33. The reconciliation of the numerator and denominator of
the EPS calculation is presented below ($000s except per share data):
1997 1996 1995
=========================== =========================== ===========================
Income Shares Income Shares Income Shares
Numerator Denominator EPS Numerator Denominator EPS Numerator Denominator EPS
-------- ----------- ----- --------- ----------- ----- --------- ----------- -----
Income from
continuing
operations $31,882 $29,555 $16,483
-------- -------- --------
BASIC EPS
Income available
to common
shareholders 31,882 36,650 $0.87 29,555 35,375 $0.84 16,483 33,267 $0.50
====== ====== ======
EFFECT OF
DILUTIVE
SECURITIES
Stock options 2,837 2,495 1,454
Convertible Debt 548 1,167 - - 788 683
-------- --------- -------- --------- -------- ---------
DILUTED EPS
Income available
to common
shareholders $32,430 40,654 $0.80 $29,555 37,870 $0.78 $17,271 35,404 $0.49
======== ========= ====== ======== ========= ====== ======== ========= ======
Options to purchase 167,123, 432,668 and 431,834 shares of common stock were not
included in computing diluted EPS for fiscal 1997, 1996 and 1995, respectively,
because their effects were antidilutive for the respective periods.
13. CONTINGENCIES
In current and prior years, the Company received grant assistance, under grant
agreements, from the IDA in connection with the Company's establishment of its
Irish manufacturing operations. The funds received reduced the cost of the
facility and equipment and operating expenses. In October of 1997, the Company
entered into a new Grant Agreement whereby the IDA granted the sum of
approximately $3.3 million to the Company in consideration for the Company
providing employment for a given number of Irish citizens, over a three-year
period. As of January 2, 1998, the Company had not yet received any of the $3.3
million grant. The funds will reduce operating expenses incurred in connection
with the expansion of the Company's operations in Ireland. In the event of
noncompliance with certain terms and conditions of the above-mentioned grant
agreements, the Company may be required to repay approximately $2.6 million of
funds received to date from prior grants. Management believes that noncompliance
with the agreements is unlikely.
14. STOCK REPURCHASES
During fiscal 1996 and 1995, the Company repurchased and retired a total of
197,000 and 1,138,000 shares, respectively, of its common stock pursuant to a
share buy-back plan announced in May 1995. The Company did not repurchase any
shares during 1997. The excess of the cost of shares repurchased over par value
was allocated to additional paid-in capital based on the pro rata share amount
of additional paid-in capital for all shares with the difference charged to
retained earnings. In September 1997, the Company terminated the stock
repurchase program.
15. STOCK-BASED COMPENSATION PLANS
EMPLOYEE STOCK OPTION PLANS Under the Company's 1981 Incentive Stock Option
Plan, options were granted to purchase up to 2,000,000 shares of the Company's
common stock at prices not less than the fair market value at date of grant. The
options generally vest at the rate of 25% per year beginning one year from the
date of grant. The options expire 10 years from the date of grant or three
months after termination of employment, if earlier. This plan was replaced by
the 1990 Performance Equity Plan ("PEP").
The Company established the PEP plan in 1990 under which it had reserved
3,000,000 shares of common stock for granting of either incentive or
nonqualified stock options to key employees and officers. The Company increased
authorized shares under the PEP plan to 5,950,000 in 1997. Both incentive or
nonqualified stock options have been granted at prices not less than the fair
market value on the date of grant as determined by the Company's Board of
Directors. The options maximum term is 10 years, although some options were
granted with a five-year term in 1995. Beginning with grants made in 1995, the
majority of the options become exercisable after the price of the Company's
common stock achieves certain levels for specified periods of time or upon the
passage of a certain number of years from the date of grant. For grants made
prior to 1995, options vest at the rate of 25% per year beginning one year from
the date of grant. As of January 2, 1998, 1,899,149 shares of common stock were
reserved for future grants.
The Zytec stock options outstanding at the date of the merger were converted to
the Company's stock options. The Zytec option activity and share prices have
been restated, for all years presented, to Company's equivalents using the
exchange ratio of 1.33 shares of the Company's common stock to one share of
Zytec common stock. Zytec existing options generally expire six years from the
date of grant, or three months after termination of employment, if earlier.
Options vest at the rate of 20% per year beginning one year from the date of
grant. Of the converted stock options, 424,590 were exercisable as of January 2,
1998. No additional options will be granted from the Zytec plans.
OUTSIDE DIRECTORS STOCK OPTION PLANS The Company established an Outside
Directors Stock Option Plan in 1986 under which it authorized and reserved
250,000 shares of common stock for granting of nonqualified stock options to
directors of the Company who are not employees of the Company at exercise prices
not less than the fair market value on the date of grant. The plan was replaced
by the 1990 Outside Directors Stock Option Plan under which the Company
initially authorized and reserved 250,000 shares. The Company increased
authorized shares under such plan to 500,000 in 1996. Effective in 1996, upon
initial election or appointment to the Board of Directors and each year
thereafter, outside directors shall receive an option to purchase 10,000 shares
of common stock provided that they own a given number of shares of common stock
of the Company based on a formula as defined in the plan. The options granted
under both Outside Directors plans fully vest on the one-year anniversary of the
date of grant. As of January 2, 1998, 130,000 shares of common stock were
reserved for future grants.
In accordance with APB 25, as the exercise price of the Company's stock options
equals the market price of the underlying stock on the date of grant, no
compensation cost has been recognized for its fixed stock option plans. Pro
forma information regarding net income and earnings per share is required by
SFAS 123 and has been determined as if the Company had accounted for its
employee and outside directors stock-based compensation plans under the fair
value method. The fair value of each option grant was estimated at the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1997 1996 1995
----------- ---------- -----------
Risk-free interest rate 6.2% 6.0% 6.4%
Dividend yield - - -
Expected volatility 63% 52% 56%
Expected life 3.2 YEARS 3.4 years 2.7 years
The Company's pro forma information follows ($000s except per share data):
1997 1996 1995
--------- ---------- ----------
NET INCOME As reported $29,820 $30,059 $17,598
========= ========== ==========
Pro forma $24,028 $27,354 $16,733
========= ========== ==========
EPS - BASIC As reported $ 0.81 $ 0.85 $ 0.53
========= ========== ==========
Pro forma $ 0.66 $ 0.77 $ 0.50
========= ========== ==========
EPS-ASSUMING DILUTION
As reported $ 0.75 $ 0.79 $ 0.52
========= ========== ==========
Pro forma $ 0.61 $ 0.72 $ 0.49
========= ========== ==========
The effects of applying SFAS 123 in this pro forma disclosure are not
necessarily indicative of future results. SFAS 123 does not apply to awards
prior to 1995.
The following table summarizes activity under all plans for the years ended
1997, 1996 and 1995.
1997 1996 1995
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Options price Options price Options price
----------- ---------- ----------- ---------- ----------- ----------
Options outstanding, beginning of year 4,808,247 $ 6.50 4,163,603 $ 2.77 5,175,758 $2.12
Options granted 2,876,493 14.99 2,345,771 10.81 1,440,750 4.15
Options exercised (1,055,662) 4.43 (1,403,047) 2.70 (2,158,731) 2.09
Options canceled (450,274) 10.36 (298,080) 6.08 (294,174) 3.23
----------- ---------- ----------- ---------- ----------- ----------
Options outstanding, end of year 6,178,804 $10.53 4,808,247 $ 6.51 4,163,603 $2.77
========== ========== ===========
Options exercisable, end of year 1,947,762 1,787,520 2,536,281
========== =========== ===========
Weighted-average fair value of
options granted during the year $6.87 $4.42 $1.51
=========== =========== ===========
The following table summarizes information about stock options outstanding at
January 2, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- ----------------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Range of Number Contractual Life Average Number Average
Exercise Outstanding (Years) Exercise Price Exercisable Exercise Price
Prices at 1/2/98 at 1/2/98
- ------------------ ---------------- ----------------- --------------- -------------- ---------------
$ 0.56 - 3.57 1,240,278 3.43 $ 2.45 888,768 $ 2.40
3.62 - 9.30 1,258,792 3.99 5.91 409,161 5.33
9.59 - 10.39 1,395,284 5.19 9.80 18,620 9.59
11.25 - 18.00 1,649,462 7.81 15.82 594,213 14.96
18.25 - 29.56 634,988 6.38 23.32 37,000 18.33
---------------- --------------
$ 0.56 - 29.56 6,178,804 5.41 10.53 1,947,762 7.22
================ ==============
EMPLOYEE STOCK PURCHASE PLANS In May 1996, the Company's Board of Directors
established an employee stock purchase plan effective July 1, 1996 that allows
substantially all employees to purchase shares of the Company's common stock.
Under the terms of the plan, eligible employees may purchase shares of common
stock through the accumulation of payroll deductions of at least 2% and up to 6%
of their base salary. The purchase price is an amount equal to 85% of the market
price determined on the tenth trading day following each three-month offering
period. The Company's policy is to purchase these shares on the market rather
than issue them from treasury; therefore, the 15% employee discount is currently
being recognized as compensation expense. Such amount was not significant in
fiscal years 1997 and 1996. Employees purchased 17,864 and 8,707 shares in 1997
and 1996, respectively.
The 1989 Qualified Employee Stock Option Plan provided for employees to purchase
common stock of the Company at a purchase price equal to the lower of 85% of the
common stock market value as of the beginning of an offering period or at
various purchase dates extending over a two-year period. The plan expired in
1995 and was replaced by the 1996 Employee Stock Purchase Plan described above.
Employees purchased 22,475 and 102,570 shares in 1996 and 1995, respectively, at
a purchase price of $2.76. Under SFAS 123, compensation cost is recognized for
the fair value of the employees' purchase rights, which was estimated using the
Black-Scholes model with the following weighted-average assumptions for 1995:
risk-free interest rate of 6.48%, dividend yield of 0%, expected volatility of
52% and expected life of .84 year. The weighted-average fair value of the
purchase rights granted in 1995 was $.57.
On October 9, 1996, Zytec's shareholders approved a stock purchase plan allowing
substantially all employees to purchase, through payroll deductions, newly
issued shares of Zytec's common stock. The plan allows Zytec's employees to
purchase common stock on a quarterly basis at the lower of 85% of the market
price at the beginning or end of each calendar quarter. Employees purchased
71,742 shares in 1997 at purchase prices ranging from $9.03 to $22.41. No shares
were issued in 1996. Under SFAS 123, compensation cost is recognized for the
fair value of the employees' purchase rights, which was estimated using the
Black-Scholes model with the following weighted-average assumptions for 1997:
risk-free interest rate of 5.73%, dividend yield of 0%, expected volatility of
69% and expected life of .25 year. The weighted-average fair value of the
purchase rights granted in 1997 was
$5.03.
16. EMPLOYEE BENEFIT PLANS
The Company provides retirement benefits to its employees through the Computer
Products Inc. Employees' Thrift and Savings Plan (the "Plan"). As allowed under
Section 401(k) of the Internal Revenue Code, the Plan provides tax deferred
salary deductions for eligible employees. The Plan permits substantially all
United States employees to contribute up to 15% of their base compensation (as
defined) to the Plan, limited to a maximum amount as set by the Internal Revenue
Service. The Company may, at the discretion of the Board of Directors, make a
matching contribution to the Plan. Costs charged to operations for matching
contributions were $444,000, $400,000 and $489,000, respectively, for fiscal
1997, 1996 and 1995.
Zytec has a defined contribution 401(k) plan covering substantially all domestic
employees. Contributions to the plan by Zytec are based on employee
contributions to the plan. Costs charged to operations were $657,000, $424,000
and $370,000, respectively, for fiscal 1997, 1996 and 1995.
In April 1996, Zytec's board of directors established a noncontributory
profit-sharing plan covering substantially all Zytec employees. The plan was
effective July 1, 1996. Zytec contributed to such plan $1.3 million in 1997. No
contributions were made to such plan in 1996.
Substantially all employees of Zytec GmbH are entitled to benefit payments under
a severance plan. The benefit payments are based primarily on the employees'
salaries and the number of years of service and are paid upon the employees'
voluntary retirement. At January 2, 1998 and January 3, 1997, Zytec had recorded
a liability of $681,000 and $543,000, respectively, related to this severance
plan. Zytec recorded $260,000, $106,000 and $124,000 in severance expense during
1997, 1996 and 1995, respectively. Zytec has invested in Austrian bonds of
$294,000 and $301,000 at January 2, 1998 and January 3, 1997, respectively, to
partially fund the severance plan as required by Austrian law.
17. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
FOREIGN EXCHANGE INSTRUMENTS --The Company enters into foreign currency forward
contracts to minimize its exposure to potentially adverse changes in foreign
currency exchange rates on anticipated but not firmly committed purchases or
sales denominated in foreign currencies made by its international subsidiaries.
The foreign exchange contracts on receivables require the Company to exchange
European ECU for Irish Punts and U.S. dollars for Austrian Shillings. The
foreign exchange contracts on payables require the Company to exchange Japanese
Yen to receive U.S. dollars. At January 2, 1998, the Company held $6.6 million
of forward currency exchange contracts on receivables maturing in one to three
months while no contracts on payables were outstanding. The Company held $8.8
million of forward currency exchange contracts on receivables maturing in one to
three months as of January 3, 1997. Gains and losses on these contracts are
included in the consolidated statement of operations as they arise. Costs
associated with entering into these contracts are amortized over the contract
lives, which typically mature within one year. The amount of any gain or loss on
these contracts during the period was not material. The Company does not hold or
issue financial instruments for trading purposes.
INTEREST RATE INSTRUMENTS -- On July 14, 1997, the Company entered into two
interest rate swap agreements with First Union National Bank pursuant to which
it exchanged its floating rate interest obligations on the aggregate 52 million
Deutsche marks notional principal loan amount for a fixed rate payment
obligation of 5.58% per annum for a seven-year period beginning August 1, 1997.
The fixing of the interest rates for these periods minimizes the Company's
exposure to the uncertainty of floating interest rates during this seven-year
period. The differential paid or received on these interest rate swaps is
recognized as an adjustment to interest expense.
The Company enters into various other types of financial instruments in the
normal course of business. Fair values for certain financial instruments are
based on quoted market prices. For other financial instruments, fair values are
based on the appropriate pricing models, using current market information. The
amounts ultimately realized upon settlement of these financial instruments will
depend on actual market conditions during the remaining life of the instruments.
Fair values of cash and equivalents, accounts receivable, accounts payable,
other current liabilities and debt reflected in the January 2, 1998 statement of
financial condition approximate carrying value at that date.
CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the
Company to concentrations of credit risk consist principally of cash and
equivalents and accounts receivable. The Company's cash management and
investment policies restrict investments to low-risk, highly liquid securities,
and the Company performs periodic evaluations of the credit standing of the
financial institutions with which it deals. The Company sells its products to
customers in various geographical areas. The Company performs ongoing credit
evaluations of its customers' financial condition and generally does not require
collateral. The Company maintains reserves for potential credit losses, and such
losses traditionally have been within management's expectations and have not
been material in any year. As of January 2, 1998 and January 3, 1997, management
believes the Company had no significant concentrations of credit risk.
18. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMER
The Company operates in a single industry segment encompassing the design,
development, manufacture and sale of electronic products and subsystems for
power conversion and other real-time systems applications. The Company's sales
are made through both direct and indirect sales channels to a wide customer base
in North America, Europe and Asia-Pacific. The principal markets served are
telecommunications, networking, wireless communications and computing.
Approximately 56% of the Company's products are manufactured in foreign
locations. Specifically, 30% of the Company's 1997 sales were from products
manufactured in Hong Kong and China, 26% from products manufactured in Europe
and the remaining 44% from domestic operations. Included in the Company's
consolidated statement of financial condition at January 2, 1998 are the net
assets of the Company's European and Asian subsidiaries, which total
approximately $58.2 million and $21.6 million, respectively.
Sales and marketing operations outside the United States are conducted
principally through Company sales representatives, independent manufacturer's
representatives and distributors in Canada, Europe and Asia-Pacific. Sales are
in U.S. dollars and certain European currencies. Intercompany sales are in U.S.
dollars and are based on cost plus a reasonable profit. There were no material
amounts of United States export sales.
Sales to one customer amounted to $79.2 million (15% of 1997 sales) and $62.8
million (14% of 1996 sales) in fiscal 1997 and 1996, respectively. No sales to
one customer accounted for 10% or more of 1995 sales.
Given the current economic situation in Asia, there is a risk that the current
pegging of the Hong Kong dollar to the U.S. dollar will be removed. The
Company's management has assessed the potential exposure in the event the peg is
removed/changed and there was a devaluation in the Hong Kong dollar. Since the
Company's sales are in U.S. dollars and purchases are either in U.S. dollars or
Hong Kong dollars, the major impact would be to the carrying value of the Hong
Kong fixed assets whose value currently approximates $7.0 million.
A summary of the Company's operations by geographic area is presented below
($000s):
1997 1996 1995
---------- --------- ----------
SALES
TO UNAFFILIATED CUSTOMERS:
United States $345,485 $299,122 $247,741
Europe 155,948 115,328 91,552
Asia-Pacific 25,803 21,281 5,676
INTERCOMPANY SALES:
United States 12,283 10,278 7,992
Europe 10,267 5,554 4,219
Asia-Pacific 112,043 92,275 79,191
Eliminations (134,593) (108,107) (91,402)
---------- --------- ----------
Total sales $527,236 $435,731 $344,969
========== ========= ==========
INCOME BEFORE INCOME TAXES
United States $32,411 $25,755 $21,072
Europe 16,243 9,006 6,322
Asia-Pacific 7,056 5,859 3,560
Other (a) (5,942) (4,027) (6,075)
Eliminations (327) 995 (1,293)
---------- --------- ----------
Income before income taxes $49,441 $37,588 $23,586
========== ========= ==========
IDENTIFIABLE ASSETS
United States $145,004 $132,648 $106,627
Europe 105,816 49,929 38,490
Asia-Pacific 40,474 37,675 33,058
Other (a) 38,050 23,024 22,262
Eliminations (7,167) (3,789) 2,421
---------- --------- ----------
Total assets $322,177 $239,487 $202,858
========== ========= ==========
(a)Other included in the table above represents interest, corporate general and
administrative expenses, and certain assets not allocable to other geographic
segments.
19. SELECTED CONSOLIDATED QUARTERLY DATA (UNAUDITED)
(Amounts in Thousands Except Per Share Data)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
FISCAL 1997
Sales $114,463 $130,878 $133,744 $148,151
Gross profit 29,556 35,798 36,292 35,887
Income from continuing operations 7,076 10,437 10,383 3,986
Per share - Basic 0.20 0.29 0.28 0.11
- Assuming dilution 0.19 0.26 0.25 0.10
Net Income 5,014 10,437 10,383 3,986
Per share - Basic 0.14 0.29 0.28 0.11
- Assuming dilution 0.13 0.26 0.25 0.10
Stock price per common share:
High 18.75 25.25 33.44 30.88
Low 13.75 13.75 23.25 14.56
FISCAL 1996
Sales $108,452 $108,775 $107,630 $110,874
Gross profit 25,047 26,606 26,228 29,040
Income from continuing operations 6,285 9,107 6,728 7,435
Per share - Basic 0.18 0.26 0.19 0.21
- Assuming dilution 0.17 0.24 0.18 0.20
Net Income 6,019 9,271 6,905 7,864
Per share - Basic 0.17 0.26 0.19 0.22
- Assuming dilution 0.16 0.24 0.18 0.21
Stock price per common share:
High 14.50 23.00 21.75 21.88
Low 9.25 13.25 12.81 17.88
Net income for the fourth quarter of 1997 includes direct merger costs of $3.0
million.
Quarterly sales and gross profit amounts exclude sales and gross profits of RTP
Corp., which the Company classified as discontinued operations in the first
quarter of 1997.
Data in the above table are presented on a 13-week period basis except for the
fourth quarter of 1996, which includes 14 weeks, as fiscal 1996 consisted of 53
weeks.
The sum of the quarterly earnings per share amounts differs from those reflected
in the Company'sconsolidated statements of operations due to the weighting of
common and common equivalent shares outstanding during each of the respective
periods.
The Company's common stock is traded on the Nasdaq National Stock Market under
the symbol CPRD. As of January 2, 1998, there were approximately 20,701
shareholders consisting of record holders and individual participants in
security position listings. To date, the Company has not paid any cash dividends
on its capital stock. The Board of Directors presently intends to retain all
earnings for use in the Company's business and does not anticipate paying cash
dividends in the foreseeable future.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
As noted above, the foregoing discussion and the letter to shareholders may
include forward-looking statements which involve risks and uncertainties. In
addition, Computer Products, Inc. identified the following risk factors that
could affect the Company's actual results and cause them to differ materially
from those in the forward-looking statements.
POTENTIAL PROBLEMS WITH INTEGRATION OF OPERATIONS The success of the merger will
depend in large part upon whether Computer Products ("CPI") and Zytec's
respective businesses are integrated in an efficient and effective manner. The
combination of the two companies will require, among other things, integration
of the companies' respective product offerings, technologies, management
information systems, and the coordination of their sales and marketing and
research and development efforts. In addition, the integration of CPI and Zytec
will require the dedication of management resources, which may temporarily
divert attention from the day-to-day business of the combined company, the
development or acquisition of new technologies, and the pursuit of other
business acquisition opportunities. Failure to successfully integrate the
combined Company's operations could have a material adverse effect on its
business, results of operations and financial condition.
NON-REALIZATION OF BENEFICIAL SYNERGIES Management of both CPI and Zytec pursued
the merger with the expectation that the merger will result in beneficial
synergies, including cost reductions from purchasing efficiencies and improved
market penetration. Achieving these anticipated synergies may be limited by a
number of factors including, without limitation, problems and delays in the
integration of CPI's and Zytec's operations and general and industry-specific
economic factors. No assurance can be given that the benefits expected from such
integration will be realized.
CUSTOMER RELATIONSHIPS There can be no assurance that the Company's customers
will continue their current and/or historical buying patterns in light of the
merger. Certain customers may defer purchasing decisions as they evaluate the
combined company's future product strategy and consider the product offerings of
competitors. If substantial numbers of customers determine to defer such
purchases or purchase products from competitors, such deferrals and purchases
could have a material adverse effect on the business, results of operations and
financial condition of the Company. In addition, Zytec has historically depended
upon a limited number of customers for a significant portion of its business.
Decisions by a relatively small number of these customers to defer their
purchasing decisions or to purchase products elsewhere could have a material
adverse effect on the business, results of operations and financial condition of
the Company.
MERGER RELATED OPERATING CHARGE The Company incurred $3.0 million in direct
merger costs for the period ending January 2, 1998. In addition, as previously
disclosed in the Company's Registration Statement on Form S-4, the Company
expects to record a charge of approximately $8 million to $10 million during
1998 to eliminate duplicate facilities, functions and excess capacity. Although
the Company expects that the elimination of duplicate expenses as well as
other efficiencies related to the integration of the operations of the combining
companies may offset additional expenses over time, there can be no assurance
that such net benefits will be achieved.
RISKS RELATED TO NEW PRODUCTS The markets for the Company's products are
characterized by rapidly changing technologies, increasing customer demands,
evolving industry standards, frequent new product introductions and, in some
cases, short product life cycles. The development of new, technologically
advanced products is a complex and uncertain process requiring high levels of
innovation and cost, as well as the accurate anticipation of technological and
market trends. There can be no assurance that the Company will successfully
develop, introduce or manage the transition of new products. The failure of or
the delay in anticipating technological advances or developing and marketing
product enhancements or new products that respond to any significant
technological change could have a material adverse effect on the business,
operating results and financial condition of the Company.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company has experienced recent
quarterly growth in sales principally due to increased sales in the
communications market, increased market acceptance of its products and the
expansion of its product lines and sales channels. Due to the rapidly changing
nature of the markets for its products, as well as the likelihood of increased
competition, there can be no assurance that the Company's growth rate in sales
and positive operating results will continue. If sales are below expectations in
any given quarter, the adverse impact of any shortfall on the operating results
of the Company may be magnified to the extent the Company is unable to adjust
spending to compensate for the shortfall. Accordingly, there can be no assurance
that the Company will be able to sustain profitability in the future,
particularly on a quarter-to-quarter basis.
COMPETITION; INCREASED COMPETITION DUE TO INDUSTRY CONSOLIDATION The industries
in which the Company competes are highly competitive and characterized by
increasing customer demands for product performance, shorter manufacturing
cycles and lower prices. These trends result in frequent introductions of new
products with added capabilities and features and continuous improvements in the
relative price/performance of the products. Increased competition could result
in price reductions, reduced profit margins and loss of market share, each of
which could adversely affect the Company's results of operations and financial
condition. The Company's principal competitors include Lucent Technologies,
Delta Product and Astec (BSR) plc. Certain of the Company's major competitors
have also been engaged in merger and acquisition transactions. Such
consolidations by competitors are likely to create entities with increased
market share, customer bases, technology and marketing expertise, sales force
size, and/or proprietary technology. These developments may adversely affect the
Company's ability to compete in such markets.
DEPENDENCE ON PERSONNEL The success of the Company will depend in part upon the
efforts of its employees and the retention of key employees of the Company.
Competition for qualified personnel in the power supply industry is very
intense. The loss of services of any of the key employees could materially and
adversely affect the combined company's business, financial condition and
results of operations
RISKS RELATED TO GROSS MARGIN The Company's gross margin percentage is a
function of the product mix sold in any period. Other factors such as unit
volumes, heightened price competition, changes in channels of distribution,
shortages in components due to timely supplies of parts from vendors or ability
to obtain items at reasonable prices, and availability of skilled labor, also
may continue to affect the cost of sales and the fluctuation in gross margin
percentages in future periods.
RISKS RELATED TO BACKLOG The Company has attempted to reduce its product
manufacturing lead times and its backlog of orders. To the extent that backlog
is reduced during any particular period, it could result in more variability and
less predictability in the Company's quarter-to-quarter sales and operating
results. If manufacturing lead times are not reduced, the Company's customers
may cancel, or not place, orders if shorter lead times are available from other
manufacturers
RISKS RELATED TO INTELLECTUAL PROPERTY RIGHTS The Company currently relies upon
a combination of patents, copyrights, trademarks and trade secret laws to
establish and protect its proprietary rights in its products. There can be no
assurance that the steps taken by the Company in this regard will be adequate to
prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent, as
do the laws of the United States. Although the Company continues to evaluate and
implement protective measures, there can be no assurance that these efforts will
be successful or that third parties will not assert intellectual property
infringement claims against the Company.
RISKS RELATED TO ACQUISITIONS Acquisitions of complementary businesses and
technologies, including technologies and products under development, have been
an important part of the Company's business strategy. Acquisitions require
significant financial and management resources both at the time of the
transaction and during the process of integrating the newly acquired business
into the Company's operations. The Company's operating results could be
adversely affected if it is unable to successfully integrate such new companies
into its operations. Future acquisitions by the Company could also result in
issuances of equity securities or the rights associated with the equity
securities, which could potentially dilute earnings per share. In addition,
future acquisitions could result in the incurrence of additional debt, taxes, or
contingent liabilities, and amortization expenses related to goodwill and other
intangible assets. These factors could adversely affect the Company's future
operating results and financial position.
DEPENDENCE ON SOLE SOURCE SUPPLIERS As a result of the custom nature of certain
of the Company's manufactured products, components used in the manufacture of
these products are currently obtained from a limited number of suppliers.
Although there are a limited number of manufacturers of certain components,
management believes that other suppliers could provide similar components on
comparable terms. A change in suppliers, however, could cause a delay in
manufacturing and a possible loss of sales that could adversely affect the
Company's future operating results and financial position.
RISKS RELATED TO INTERNATIONAL SALES International sales have been, and are
expected to continue to be, an increasingly important contributor to sales of
the Company. International sales are subject to certain inherent risks,
including unexpected changes in regulatory requirements and tariffs,
difficulties in staffing and managing foreign operations, longer payment cycles,
problems in collecting accounts receivable and potentially adverse tax
consequences. Other risks of international sales include changes in economic
conditions in the international markets in which the products are sold,
political and economic instability, fluctuations in currency exchange rates,
import and export controls, and the burden and expense of complying with foreign
laws. In addition, sales in developing nations may fluctuate to a greater extent
than sales to customers in developed nations, as those markets are only
beginning to adopt new technologies and establish purchasing practices. These
risks may adversely affect the operating results and financial condition of the
Company.
RISKS RELATED TO GOVERNMENT REGULATIONS AND PRODUCT CERTIFICATION The Company's
operations are subject to laws, regulations, government policies and product
certification requirements worldwide. Changes in such laws, regulations,
policies or requirements could affect the demand for the Company's products or
result in the need to modify products, which may involve substantial costs or
delays in sales and could have an adverse effect on the Company's future
operating results.
RISKS RELATED TO FOREIGN MANUFACTURING OPERATIONS The Company manufactures a
significant amount of its products in foreign locations. Specifically, 30% of
the Company's 1997 sales were from products manufactured in Hong Kong and China,
26% from products manufactured in Europe and the remaining 44% from domestic
operations.
The supply and cost of these products can be adversely affected, among other
reasons, by changes in foreign currency exchange rates, increased import duties,
imposition of tariffs, imposition of import quotas, interruptions in sea or air
transportation and political or economic changes. From time to time, the Company
explores opportunities to diversify its sourcing and/or production of certain
products to other low cost locations or with other third parties to reduce its
dependence on production in any one location. In addition, the Company has taken
necessary measures, including insuring against certain risks, to mitigate its
exposure to potential political and economic changes in Hong Kong and China. In
the event of confiscation, expropriation, nationalization, or governmental
restrictions in the above mentioned foreign or other locations, earnings could
be adversely affected from business disruption resulting in delays and/or
increased costs in the production and delivery of products.
VOLATILITY OF STOCK PRICE The market price of the Company's common stock has
been, and, may continue to be, relatively volatile. Factors such as new product
announcements by the Company, its customers or its competitors, quarterly
fluctuations in operating results, challenges associated with integration of
businesses and general conditions in the markets in which the Company competes,
such as a decline in industry growth rates, may have a significant impact on the
market price of the Company's common stock. These conditions, as well as factors
which generally affect the market for stocks of technology companies could cause
the price of the Company's common stock to significantly fluctuate over
relatively short periods.
In addition to the foregoing, the Company wishes to refer readers to the
Company's other reports filed with the Securities and Exchange Commission,
specifically the most recent reports on Form S-4, Form 10-K and Form 10-Q, for a
further discussion of risks and uncertainties that could cause actual results to
differ materially from those in forward-looking statements.
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
January 2, 1998 and January 3, 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three fiscal
years in the fiscal period ended January 2, 1998. 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 did not audit
the statement of financial condition as of January 3, 1997 and the related
statements of operations, shareholders' equity and cash flows for each of the
two fiscal years in the fiscal year ended January 3, 1997 of Zytec Corporation,
a company acquired on December 29, 1997 in a transaction accounted for under the
pooling-of-interests method of accounting, as discussed in Note 5. Such
statements are included in the consolidated financial statements of Computer
Products, Inc. and reflect total assets of 35 % in 1996 and total sales of 52%
and 49% in 1996 and 1995, respectively, of the related consolidated totals.
These statements were audited by other auditors whose report has been furnished
to us and our opinion, insofar as it relates to amounts included for Zytec
Corporation, is based solely upon the report of the other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Computer Products, Inc. and
subsidiaries as of January 2, 1998 and January 3, 1997, and the results of their
operations and their cash flows for each of the three fiscal years in the fiscal
period ended January 2, 1998 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
January 23, 1998.
STATEMENT OF MANAGEMENT RESPONSIBILITY
The Company's management is responsible for the preparation, integrity and
objectivity of the consolidated financial statements and other financial
information presented in this report. The accompanying financial statements have
been prepared in conformity with generally accepted accounting principles and
reflect the effects of certain estimates and judgments made by management.
The Company's management maintains an effective system of internal control that
is designed to provide reasonable assurance that assets are safeguarded and
transactions are properly recorded and executed in accordance with management's
authorization. The system is continuously monitored by direct management review
and by internal auditors who conduct an extensive program of audits throughout
the company. The Company selects and trains qualified people who are provided
with and expected to adhere to the Company's standards of business conduct.
These standards, which set forth the highest principles of business ethics and
conduct, are a key element of the Company's control system. Additionally, our
independent certified public accountants, Arthur Andersen LLP, obtain a
sufficient understanding of the internal control structure in order to plan and
complete the annual audit of the Company's financial statements.
The Audit Committee of the Board of Directors, which consists of six outside
directors, meets regularly with management, the internal auditors and the
independent certified public accountants to review accounting, reporting,
auditing and internal control matters. The Committee has direct and private
access to both internal and external auditors.
JOSEPH M. O'DONNELL
Co-Chairman of the Board, President and Chief Executive Officer
RICHARD J. THOMPSON
Vice President, Finance and Chief Financial Officer