Exhibit 99.1
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Stockholders of ZERO Corporation:
We have audited the accompanying consolidated balance sheets of ZERO Corporation
and its subsidiaries as of March 31, 1998 and 1997, and the related statements
of consolidated income, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1998. Our audits also included the
financial statement schedule of the Company listed in Item 14(a)(2). These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of ZERO Corporation and its
subsidiaries at March 31, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended March 31, 1998
in conformity with generally accepted accounting principles. Also in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Los Angeles, California
May 11, 1998
21
Statements of Consolidated Income
Years Ended March 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Net Sales $258,745,000 $225,442,000 $206,247,000
Cost of Sales 171,386,000 151,131,000 135,708,000
- ----------------------------------------------------------------------------------------------------------------
Gross Profit 87,359,000 74,311,000 70,539,000
Selling and Administrative Expenses 50,925,000 45,522,000 43,933,000
Special Items 7,024,000 - -
Other Income 1,236,000 1,847,000 1,077,000
Interest Income 953,000 515,000 1,727,000
Interest Expense 4,747,000 4,670,000 1,163,000
- ----------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 40,900,000 26,481,000 28,247,000
Income Taxes 16,520,000 10,593,000 11,297,000
- ----------------------------------------------------------------------------------------------------------------
Net Income $ 24,380,000 $ 15,888,000 $ 16,950,000
- ----------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 1.98 $ 1.30 $ 1.08
Diluted Earnings Per Share $ 1.93 $ 1.28 $ 1.07
- ----------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
22
Consolidated Balance Sheets
March 31, 1998 1997
- ---------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 30,979,000 $ 16,201,000
Short-term investments 9,990,000 -
Receivables (less allowances for doubtful accounts of
$818,000 in 1998 and $607,000 in 1997) 35,002,000 35,966,000
Inventories
Raw materials and supplies 18,967,000 21,504,000
Work in process 7,673,000 7,821,000
Finished goods 4,769,000 5,685,000
Other (including deferred tax assets of $2,608,000 in 1998
and $1,864,000 in 1997) 8,365,000 4,172,000
- ---------------------------------------------------------------------------------------------------
Total Current Assets 115,745,000 91,349,000
- ---------------------------------------------------------------------------------------------------
Property, Plant and Equipment, Net 49,005,000 44,375,000
Goodwill (less accumulated amortization of $13,245,000 in 1998
and $11,844,000 in 1997) 36,505,000 30,602,000
Other Assets 15,743,000 19,630,000
- ---------------------------------------------------------------------------------------------------
Total Assets $216,998,000 $185,956,000
- ---------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
23
Consolidated Balance Sheets
March 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------
Liabilities
Current Liabilities
Current portion of long-term debt $ 2,000 $ 35,000
Accounts payable 8,174,000 8,901,000
Income taxes payable 4,371,000 -
Accrued liabilities
Wages and commissions 7,964,000 6,579,000
Workers' compensation 1,666,000 1,128,000
Other 6,017,000 4,365,000
- -------------------------------------------------------------------------------------------------------------
Total Current Liabilities 28,194,000 21,008,000
- -------------------------------------------------------------------------------------------------------------
Non-Current Liabilities (including deferred compensation of
$10,787,000 in 1998 and $9,443,000 in 1997) 12,184,000 12,192,000
Long-term Debt 50,555,000 51,503,000
Commitments and Contingencies
Stockholders' Equity
Preferred stock - authorized 1,000,000 shares of $.01 par
value; none issued
Common stock -- authorized 30,000,000 shares of $.01 par
value; issued shares, 16,611,749 in 1998 and 16,445,332
in 1997; outstanding shares, 12,416,827 in 1998 and
12,250,427 in 1997 166,000 164,000
Additional paid-in capital 40,236,000 37,021,000
Retained earnings 159,366,000 137,750,000
Foreign currency translation adjustment 113,000 132,000
Treasury stock (4,194,922 shares in 1998 and 4,194,905
shares in 1997), at cost (73,816,000) (73,814,000)
- -------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 126,065,000 101,253,000
- -------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $216,998,000 $185,956,000
- -------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
24
Statements of Consolidated Stockholders' Equity
Foreign
Additional Currency
Issued Common Paid-in Retained Translation Treasury
Shares* Stock Capital Earnings Adjustments Stock
- -------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1995 16,124,144 $161,000 $31,079,000 $115,754,000 $ 261,000 $(1,661,000)
Net Income for the year - - - 16,950,000 - -
Cash Dividends declared - $.44
per share - - - (7,059,000) - -
Exercise of stock options and
issuance of treasury stock 161,199 2,000 3,169,000 (1,461,000) - 11,000
Stock repurchase - - - - - (71,871,000)
Foreign currency translation
adjustments and other - - - - (504,000) -
- -------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 16,285,343 163,000 34,248,000 124,184,000 (243,000) (73,521,000)
Net Income for the year - - - 15,888,000 - -
Cash Dividends declared - $.12 (1,460,000)
per share - - - - -
Exercise of stock options and
issuance of treasury stock 159,989 1,000 2,773,000 (862,000) - -
Stock repurchase - - - - - (293,000)
Foreign currency translation
adjustments and other - - - - 375,000 -
- -------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 16,445,332 164,000 37,021,000 137,750,000 132,000 (73,814,000)
Net Income for the year - - - 24,380,000 - -
Cash Dividends declared - $.12
per share - - - (1,480,000) - -
Exercise of stock options and
issuance of treasury stock 166,417 2,000 3,215,000 (1,316,000) - -
Stock repurchase - - - - - (2,000)
Foreign currency translation
adjustments and other - - - 32,000 (19,000) -
- -------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 16,611,749 $166,000 $40,236,000 $159,366,000 $ 113,000 $(73,816,000)
===============================================================================================================================
* Outstanding shares at March 31, 1998, 1997 and 1996 were 12,416,827,
12,250,427 and 12,105,840, respectively.
The Notes to Consolidated Financial Statements are an integral part of these
statements.
25
Statements of Consolidated Cash Flows
Years Ended March 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Cash Flow From Operating Activities
Net income $ 24,380,000 $ 15,888,000 $ 16,950,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 7,024,000 6,249,000 5,069,000
Amortization of goodwill 1,401,000 1,200,000 1,086,000
Gain from sale of assets (9,899,000) (511,000) (46,000)
Provision for loss from sale of subsidiary 4,500,000 - -
Changes in operating assets and liabilities, net
of effect of business acquisitions
Receivables 277,000 (2,046,000) (4,833,000)
Inventories 1,599,000 (2,711,000) (1,852,000)
Other non-current assets 2,685,000 (2,239,000) (215,000)
Accounts payable 372,000 603,000 (8,000)
Accrued liabilities 7,737,000 49,000 118,000
Other non-current liabilities 948,000 1,417,000 2,639,000
Other (4,308,000) 1,305,000 (1,582,000)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 36,716,000 19,204,000 17,326,000
- --------------------------------------------------------------------------------------------------------------------
Cash Flow From Investing Activities
(Purchases) sales of short-term investments, net (9,990,000) 965,000 18,937,000
Purchase of non-cash assets of acquired (9,022,000) (1,936,000) (11,748,000)
businesses
Expenditures for property, plant and equipment (14,585,000) (10,822,000) (8,657,000)
Payment of note from sale of property 2,450,000 - -
Proceeds from sale of assets 8,740,000 1,651,000 1,670,000
Other 75,000 (142,000) 324,000
- --------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (22,332,000) (10,284,000) 526,000
- --------------------------------------------------------------------------------------------------------------------
Cash Flow From Financing Activities
Stock repurchases (2,000) (293,000) (71,871,000)
Cash dividends paid (1,480,000) (1,460,000) (7,059,000)
Proceeds from issuance of long-term debt - - 50,000,000
Payments of long-term debt (35,000) (273,000) (253,000)
Exercise of stock options 1,901,000 1,912,000 1,710,000
Other (including effect of exchange rate 10,000 377,000 (493,000)
changes)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 394,000 263,000 (27,966,000)
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 14,778,000 9,183,000 (10,114,000)
Cash and cash equivalents at beginning of period 16,201,000 7,018,000 17,132,000
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 30,979,000 $ 16,201,000 $ 7,018,000
=====================================================================================================================
The Notes to Consolidated Financial Statements are an integral part of these
statements.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Cash Equivalents
Cash equivalents include mutual funds, treasury bills and other highly liquid
investments with maturities of three months or less. As of March 31, 1998 and
1997, the carrying values of cash equivalents approximated market values.
Short-term Investments
Short-term investments at March 31, 1998 consist primarily of government agency
notes and bonds with maturities greater than three months that are classified as
securities available-for-sale. Market prices, which approximated cost at the
balance sheet date, are reasonable estimates of the portfolio's fair value.
Inventories
Inventories are stated at the lower of cost (first-in, first-out or average) or
market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is computed
principally using the straight-line method over the estimated useful lives of
the assets. Capital leases and leasehold improvements are amortized over the
life of the related assets or the life of the lease, whichever is shorter.
Intangible Assets
Costs in excess of the fair value of net assets acquired in purchase
transactions are recorded as goodwill and amortized over periods of up to 40
years. The Company reviews the recoverability of intangible assets to determine
if there has been any impairment. Such review includes estimating future cash
flows based on operating performance and future prospects of the business.
Earnings Per Share
During the third quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This
statement requires the disclosure of basic and diluted earnings per share. All
prior period earnings per share data in these financial statements have been
restated in accordance with SFAS No. 128.
27
In accordance with SFAS No. 128, earnings per share were computed as follows:
1998 1997 1996
- -------------------------------------------------------------------------------------------------------
Numerator:
Net income $24,380,000 $15,888,000 $16,950,000
Denominator:
Weighted average common shares outstanding for 12,340,000 12,177,000 15,719,000
basic earnings per share
Net effect of dilutive options based on the treasury
stock method using average market price 282,000 238,000 147,000
- -------------------------------------------------------------------------------------------------------
Weighted average common and equivalent shares
outstanding for diluted earnings per share 12,622,000 12,415,000 15,866,000
=======================================================================================================
Basic Earnings Per Share $ 1.98 $ 1.30 $ 1.08
Diluted Earnings Per Share $ 1.93 $ 1.28 $ 1.07
=======================================================================================================
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated into U.S. dollars
at the year-end exchange rate and gains and losses are being accumulated in
stockholders' equity. The related income statement is translated at the average
exchange rate for the year.
Supplemental Cash Flow Information
For the years ended March 31, 1998, 1997 and 1996, cash paid for income taxes,
net of refunds, was $12,157,000, $11,696,000 and $12,065,000, respectively, and
cash paid for interest on long-term debt was $3,555,000, $3,801,000 and
$118,000, respectively.
In connection with acquisitions during fiscal years 1998, 1997 and 1996, the
following liabilities were assumed:
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Estimated fair value of tangible assets acquired $ 1,216,000 $ 2,488,000 $ 9,696,000
Goodwill and identifiable intangible assets 7,806,000 1,331,000 3,899,000
Net cash paid (9,022,000) (1,936,000) (11,748,000)
- -----------------------------------------------------------------------------------------------------------------
Liabilities assumed $ - $ 1,883,000 $ 1,847,000
=================================================================================================================
Concentration of Credit Risks
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of cash equivalents, short-term investments and
receivables. The Company places its cash equivalents and short-term investments
with high credit quality institutions and limits the amount of credit exposure
with any one institution. Credit risk on trade receivables is minimized as a
result of the diverse nature of the Company's customer base. The Company
performs ongoing credit evaluations of its customers and maintains an allowance
for potential credit losses.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
Such estimates and assumptions affect the reported amounts of assets and
liabilities, and the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
New Accounting Standards
During the third quarter of fiscal 1998, the Company adopted SFAS No. 128,
"Earnings Per Share." This statement requires the disclosure of basic and
diluted earnings per share and supersedes the Company's previous standards for
computing earnings per share under Accounting Principles Board No. 15. All prior
period earnings per share data have been restated in accordance with the new
standard.
28
In June 1997, Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." Both statements are effective for fiscal
years beginning after December 15, 1997. The Company is assessing the required
disclosures and will adopt these statements in fiscal 1999.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, short-term investments, receivables, accounts payable and debt
instruments. The carrying values of all financial instruments, other than debt
instruments, are representative of their fair values due to their short
maturities. The estimated fair value of the notes payable has been determined
using quoted prices of debt instruments with similar terms and maturities and
approximates carrying value.
Impairment of Long-lived Assets
During 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Under the
provisions of this statement, the Company evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be fully recoverable. If the estimated future
cash flows (undiscounted and without interest charges) from the use of an asset
are less than the carrying value, a write down would be recorded to reduce the
related asset to its estimated fair value.
Report Presentation
Certain amounts reported in prior years have been reclassified to conform to the
1998 presentation.
NOTE 2
Property, Plant and Equipment
Property, plant and equipment and accumulated depreciation and amortization at
March 31, 1998 and 1997 consisted of:
Estimated
Useful Lives 1998/1/ 1997
- -------------------------------------------------------------------------------------------------
Land $ 3,248,000 $ 2,866,000
Buildings/land improvements 10-40 years 20,593,000 20,835,000
Machinery/equipment 3-15 years 71,526,000 68,894,000
Leasehold improvements 5-9 years 4,525,000 4,646,000
- -------------------------------------------------------------------------------------------------
Total 99,892,000 97,241,000
Less accumulated depreciation and
amortization 50,887,000 52,866,000
- -------------------------------------------------------------------------------------------------
Property, plant and equipment, net $49,005,000 $44,375,000
=================================================================================================
/1/Excludes amounts included in net assets held for sale (Note 12)
NOTE 3
Employee Benefits
The Company has a defined contribution pension plan and, as of January 1, 1995,
a 401(k) plan which cover all employees who have completed at least one year of
service and are employed by U.S. divisions that have elected to participate.
The pension plan cost, which is fully funded on a current basis, is based upon
percentages of eligible employees' compensation. The Company's contributions to
the pension plan aggregated $1,758,000, $1,607,000 and $1,539,000 in 1998, 1997
and 1996, respectively, and to the 401(k) plan aggregated $513,000, $489,000 and
$427,000 in 1998, 1997 and 1996, respectively.
The Company has a nonqualified deferred compensation plan for key employees who
can elect to have a portion of their compensation deferred. The amounts set
aside earn interest at rates generally higher than the average prime interest
rate. Interest expense accrued on the participants' accounts totaled $1,015,000,
$862,000 and $714,000 in 1998, 1997 and 1996, respectively. Generally, payment
of a participant's account balance will be deferred until death, disability,
retirement or termination.
29
NOTE 4
Long-term Debt
At March 31, 1998 and 1997, long-term debt consisted of:
1998 1997
- -----------------------------------------------------------------------------------------------
Senior promissory notes, due March 8, 2011 $50,000,000 $50,000,000
Other notes payable, due July 3, 2002 and March 31, 2005 1,525,000 1,538,000
- -----------------------------------------------------------------------------------------------
Total 51,525,000 51,538,000
Less:
Amount included in net assets held for sale (Note 12) 968,000 -
Current portion 2,000 35,000
- -----------------------------------------------------------------------------------------------
Total long-term debt $50,555,000 $51,503,000
===============================================================================================
The senior promissory notes bear interest at 7.13%, and are payable in 11 annual
payments of $4,545,000 beginning March 8, 2001. The proceeds from the notes were
used solely for the repurchase of the Company's common stock in a Dutch Auction
Tender Offer (refer to Note 7) and for payment of related expenses. Other notes
payable have imputed interest rates ranging from 8.5% to 10%.
In March 1998, the Company negotiated a $50,000,000 shelf facility for future
acquisitions. The interest rate for the shelf facility would be based on U.S.
Treasury rates at the time of borrowing.
Aggregate maturities of long-term debt over the next five fiscal years are as
follows: $57,000 in 1999, $239,000 in 2000, $4,826,000 in 2001, $4,870,000 in
2002, $4,915,000 in 2003 and $36,618,000 thereafter.
NOTE 5
Acquisitions and Divestiture
The Company acquired one company during fiscal 1998 and two companies in fiscal
1997, all of which complement existing operations. These acquisitions were
accounted for using the purchase method of accounting. The operating results of
the entities acquired, which were not material, were included in the
consolidated financial statements from their respective acquisition dates. The
purchase prices of these acquisitions were allocated to the net assets acquired,
including intangible assets, based upon their estimated fair values at the dates
of acquisition. Intangible assets, principally the excess of cost over the fair
value of identifiable net assets of these purchased businesses, are being
amortized using the straight-line method over a period of 15 to 20 years.
During fiscal 1997, the Company completed the sale of Anvil Cases, Inc., a
subsidiary of the Company, which manufactures riveted cases primarily for the
music, packaging specialists and audio/video markets. The gain on the sale of
Anvil Cases, Inc. was not material.
The pro forma effect of these transactions on 1998 and 1997 was not material.
30
NOTE 6
Common Stock
The Company has a stock option plan that provides for the granting of options to
purchase shares of the Company's stock to directors, officers and other key
employees at a price not less than the fair market value on the date of grant.
Options are granted for terms of five to eight years and are exercisable in
annual installments (generally one-third of the total grant) commencing one year
from date of grant, on a cumulative basis.
The Company's stock option plan provides for the granting of qualified and
nonqualified options as well as stock appreciation rights ("SARs") in tandem
with options. The SARs entitle a holder to receive an amount equal to the excess
of the fair market value of the Company's common stock on the date of exercise
over the option price. The exercise of SARs automatically cancels the option on
the related shares. Compensation expense recognized in connection with SARs
during the years ended March 31, 1998, 1997 and 1996 was not material.
Changes in the number of shares subject to options during the three years ended
March 31, 1998, are summarized as follows:
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Avg. Exercise Avg. Exercise Avg. Exercise
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 810,228 $15.22 826,741 $13.60 866,048 $12.82
Granted 161,732 $26.98 216,900 $19.47 253,500 $15.39
Exercised (211,435) $13.18 (204,378) $13.17 (250,871) $12.74
Cancelled or expired (18,621) $18.96 (29,035) $15.13 (41,936) $13.45
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 741,904 $18.23 810,228 $15.22 826,741 $13.60
- ----------------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 377,589 392,262 370,447
Weighted average fair value of
options granted during the year $8.53 $6.10 $4.62
Options available for future grant 413,657 56,768 255,868
- ----------------------------------------------------------------------------------------------------------------------------------
In July 1997, the stockholders of the Company approved the increase in the
number of shares available for grant of options by 500,000.
The Company has recognized no compensation cost for its stock option plan. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant dates for awards under this plan consistent with the
method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's
pro forma net income and earnings per share would have been as follows:
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
Pro forma net income $23,777,000 $15,552,000 $16,853,000
Pro forma basic earnings per share $ 1.93 $ 1.28 $ 1.07
Pro forma diluted earnings per share $ 1.88 $ 1.25 $ 1.06
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions for fiscal years 1998, 1997 and 1996, respectively: risk-free
interest rate of 6.1%, 6.3% and 5.8%; expected volatility of 22.9%, 22.6% and
23.3%; dividend yield of .4%, .6% and .8%; and an expected life of five years.
No adjustments have been made for non-transferability or risk of forfeiture.
31
The following table summarizes information about stock options outstanding at
March 31, 1998:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------- ---------------------------------------------
Weighted Avg. Weighted
Number Remaining Avg.
Range of Outstanding at Contractual Exercise Number Exercisable at Weighted Avg.
Exercise Prices March 31, 1998 Life Price March 31, 1998 Exercise Price
- ----------------------------------------------------------------------- ---------------------------------------------
$ 11.31 - $ 13.75 216,103 2.6 $13.14 216,103 $13.14
$ 15.38 - $ 15.63 176,416 4.6 $15.39 105,050 $15.39
$ 19.38 - $ 21.38 190,303 5.6 $19.48 56,436 $19.49
$ 25.75 - $ 27.69 159,082 6.6 $26.98
NOTE 7
Common Stock Repurchase
In February 1996, the Company repurchased approximately 4,019,000 shares of its
common stock at a cost of approximately $71,871,000 in a Dutch Auction Tender
Offer. The source of the funds to repurchase the shares was provided by the
issuance of promissory notes totaling $50,000,000 by the Company (refer to Note
4), together with available cash and cash derived from the sale of short-term
investments.
In November 1996, the Board of Directors authorized the repurchase of up to an
additional 400,000 shares, as well as shares of "odd lot" stockholders. During
fiscal 1998 and 1997, total shares repurchased were insignificant.
NOTE 8
Income Taxes
The Company uses the asset and liability method of accounting for income taxes.
This approach requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
financial reporting basis and tax basis of assets and liabilities.
The provision for income taxes is summarized as follows:
1998 1997 1996
- ------------------------------------------------------------------------------------------------
Current
Federal $15,246,000 $ 8,470,000 $10,031,000
State 3,085,000 1,432,000 2,145,000
Deferred
Federal (1,502,000) 708,000 (740,000)
State (309,000) (17,000) (139,000)
- ------------------------------------------------------------------------------------------------
Total $16,520,000 $10,593,000 $11,297,000
- ------------------------------------------------------------------------------------------------
Deferred tax assets and liabilities comprised the following as of:
March 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
- --------------------------------------------------------------------------------------------------------------
Depreciation/amortization $ - $3,093,000 $ - $2,814,000
Provision for estimated expenses 2,689,000 444,000
Employee benefit plans 6,292,000 5,353,000
State and foreign taxes 135,000 235,000
Other 1,803,000 884,000
- --------------------------------------------------------------------------------------------------------------
Total $8,981,000 $5,031,000 $5,797,000 $3,933,000
- --------------------------------------------------------------------------------------------------------------
32
A reconciliation between the income taxes computed at the federal statutory rate
and the provision for income taxes is as follows:
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Income taxes computed at the Federal statutory rate $14,315,000 $ 9,268,000 $ 9,886,000
State income taxes, net of Federal income tax benefit 1,803,000 909,000 1,304,000
Tax-exempt income (168,000) (97,000) (90,000)
Other 570,000 513,000 197,000
- ----------------------------------------------------------------------------------------------------------------
Total provision $16,520,000 $10,593,000 $11,297,000
- ----------------------------------------------------------------------------------------------------------------
Effective income tax rate 40.4% 40.0% 40.0%
- ----------------------------------------------------------------------------------------------------------------
NOTE 9
Commitments
Future minimum lease payments under operating leases at March 31, 1998 are
summarized as follows:
Year Ending March 31,
1999 $2,306,000
2000 1,809,000
2001 1,460,000
2002 1,382,000
2003 922,000
Thereafter 1,979,000
- -----------------------------------
Total $9,858,000
- -----------------------------------
Rental expense under operating leases was $2,346,000, $2,090,000, and $2,059,000
for 1998, 1997 and 1996, respectively. Obligations under capital leases at March
31, 1998 were not material.
NOTE 10
Contingent Liabilities
Environmental Matters
In November 1996, the Company, along with 39 other potentially responsible
parties ("PRPs"), received an Administrative Order for Remedial Action from the
U.S. Environmental Protection Agency (the "EPA") with regard to implementation
of the interim remedy for the Glendale North and Glendale South Operable Units
of the San Fernando Valley Superfund Site near Los Angeles, California ("the
Site"). An administrative order on consent relating to the design work for the
interim remedies was entered into in March 1994 between the EPA and 24 PRPs,
including the Company. The design work is complete. In addition, the Company,
through the PRP Group, is responding to a unilateral order received on October
1, 1997 from the EPA for the construction, operation and maintenance of the
interim remedy.
An arbitrated award has resulted in the allocation of a 58.8% share of the total
costs associated with the Site to certain Burbank Operable Unit PRPs. The
remaining 41.2% share was allocated to the Glendale PRPs, including the Company.
The Company has provided reserves of approximately $1,400,000 for its estimated
share of the total costs of construction, operation and maintenance of the EPA
selected remedy, as well as certain response and oversight costs of the EPA and
the State of California in connection with the Site. The Company's liabilities
for these costs are based on management's best estimate of undiscounted future
costs, excluding possible insurance recoveries. The Company's ultimate liability
related to environmental matters at the Site is dependent upon a variety of
factors, including changes in the cost of the construction, operation and
maintenance of the interim remedy and the final remedy, as well as any changes
to the allocation of those costs among the PRPs including any additional
participants. The Company has received favorable rulings from the U.S. District
Court in response to its claim for reimbursement of defense costs related to the
Site from its insurance carriers. These rulings are currently being appealed by
the insurance carriers.
The Company is also engaged in remediation and/or environmental monitoring at
three other locations, and has been named by the State of California and/or the
EPA as a de minimus potentially responsible party at two locations. The Company
has provided reserves, which are not deemed to be material, for the cleanup
costs associated with these sites to the extent they could be reasonably
estimated at this time.
33
Other Matters
The Company is subject to legal proceedings that arise in the ordinary course of
its business activities. In the opinion of management, any liability that may
result from the resolution of these matters will not have a material adverse
effect on its financial statements.
NOTE 11
Segment Information
Business segment information as of and for the years ended March 31, 1998, 1997
and 1996 is as follows:
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
Net sales
Enclosures and Accessories $205,845,000 $175,119,000 $152,378,000
Other 52,900,000 50,323,000 53,869,000
- ---------------------------------------------------------------------------------------------------
Consolidated $258,745,000 $225,442,000 $206,247,000
- ---------------------------------------------------------------------------------------------------
Operating income
Enclosures and Accessories $ 38,240,000 $ 31,312,000 $ 30,547,000
Other 954,000/1/ 4,222,000 2,435,000
Corporate (7,260,000) (6,745,000) (6,376,000)
- ---------------------------------------------------------------------------------------------------
Consolidated $ 31,934,000 $ 28,789,000 $ 26,606,000
- ---------------------------------------------------------------------------------------------------
Identifiable assets at year end
Enclosures and Accessories $118,563,000 $102,194,000 $ 99,570,000
Other 36,366,000 46,519,000 47,264,000
Corporate 62,069,000 37,243,000 19,004,000
- ---------------------------------------------------------------------------------------------------
Consolidated $216,998,000 $185,956,000 $165,838,000
- ---------------------------------------------------------------------------------------------------
Depreciation and amortization
Enclosures and Accessories $ 5,244,000 $ 4,283,000 $ 3,280,000
Other 1,780,000 1,966,000 1,789,000
- ---------------------------------------------------------------------------------------------------
Consolidated $ 7,024,000 $ 6,249,000 $ 5,069,000
- ---------------------------------------------------------------------------------------------------
Capital expenditures
Enclosures and Accessories $ 13,181,000 $ 9,063,000 $ 6,573,000
Other 1,404,000 1,759,000 2,084,000
- ---------------------------------------------------------------------------------------------------
Consolidated $ 14,585,000 $ 10,822,000 $ 8,657,000
- ---------------------------------------------------------------------------------------------------
/1/ Includes $4,500,000 provision for loss on sale of European subsidiary (Note
12)
The Company's Enclosures and Accessories segment consists of products that serve
the system packaging, thermal management and engineered case requirements of the
telecommunications, instrumentation, data processing and government/military
markets of the electronics industry. These products include card cages for
printed circuit boards, backplanes, filter fan packages and microprocessor-
controlled fan trays, blowers, motorized impellers, heat exchangers, air
conditioners and computerized thermal management controls, electronic cabinets
and consoles, cable management racks, deep drawn aluminum ZERO boxes and cases,
fabricated cases, specialized case hardware and other specialized enclosures
sold to the electronics industry. The Company also manufactures and sells air
cargo enclosures and hardware, aluminum luggage, camera cases, industrial
carrying cases, food service containers and other custom metal products.
34
The following presents a summary of operations by geographic area as of and for
the years ended March 31, 1998, 1997 and 1996:
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
Net sales
U.S. operations $ 228,827,000 $201,784,000 $183,662,000
European operations 29,918,000 23,658,000 22,585,000
- ---------------------------------------------------------------------------------------------------
Consolidated $ 258,745,000 $225,442,000 $206,247,000
- ---------------------------------------------------------------------------------------------------
Net sales between operations $ 3,158,000 $ 2,198,000 $ 3,230,000
- ---------------------------------------------------------------------------------------------------
Operating income
U.S. operations $ 34,436,000 $ 29,444,000 $ 25,163,000
European operations (2,502,000)/1/ (655,000) 1,443,000
- ---------------------------------------------------------------------------------------------------
Consolidated $ 31,934,000 $ 28,789,000 $ 26,606,000
- ---------------------------------------------------------------------------------------------------
Identifiable assets at year end
U.S. operations $ 209,492,000 $168,242,000 $149,394,000
European operations 7,506,000 17,714,000 16,444,000
- ---------------------------------------------------------------------------------------------------
Consolidated $ 216,998,000 $185,956,000 $165,838,000
- ---------------------------------------------------------------------------------------------------
/1/ Includes $4,500,000 provision for loss on sale of European subsidiary (Note
12)
Total export sales from U.S. operations and net sales from European operations
were $45,817,000, $36,276,000, and $34,323,000, or 18%, 16% and 17% of total net
sales, for the fiscal years ended March 31, 1998, 1997 and 1996, respectively.
Sales under U.S. government contracts and subcontracts were less than of 10% of
total sales in fiscal 1998, 1997 and 1996.
NOTE 12
Special Items
During 1998, the Company recognized a $7,024,000 pre-tax net gain consisting of
the following:
- ----------------------------------------------------------------------------
Gain from life insurance $ 1,709,000
Gain from sale of property 9,815,000
Provision for estimated loss on sale of subsidiary (4,500,000)
- ----------------------------------------------------------------------------
Special Items $ 7,024,000
- ----------------------------------------------------------------------------
The Company recognized a non-taxable gain of $1,709,000 in the second quarter of
fiscal 1998 from insurance proceeds on the life of its former Vice President of
Marketing and Sales. In March 1998, the Company completed the sale of its
facility in Burbank, California. The sale price consisted of cash of $8,740,000
and a receivable of $4,000,000 included in Other Current Assets in the
Consolidated Balance Sheet, resulting in a pre-tax gain of $9,815,000.
During the fourth quarter of fiscal 1998, the Company completed its evaluation
of a European subsidiary and approved a plan for its disposition. As of March
31, 1998, this subsidiary is classified as net assets held for sale and is
included in noncurrent Other Assets in the Consolidated Balance Sheet. Based on
the Company's evaluation of this subsidiary, a $4,500,000 nonrecurring charge
was recorded in fiscal 1998.
NOTE 13
Subsequent Events
On April 6, 1998, the Company entered into a definitive merger agreement with
Applied Power Inc. ("API") pursuant to which it would become a wholly owned
subsidiary of API (the "Merger"). Stockholders of the Company would receive
0.85 share of API for each share of ZERO stock. The merger agreement has been
approved by both companies' boards but is subject to stockholder approval and
satisfaction of other conditions. The Merger is structured to be tax free to
ZERO stockholders and will be accounted for as a pooling of interests.
Completion of the Merger is expected in July 1998.
35
================================================================================
Selected Quarterly Financial Data (Unaudited)
Income Basic Diluted
Net Gross Before Net Earnings per Earnings per
Quarter Ended: Sales Profit Income Taxes Income Share Share
- --------------------------------------------------------------------------------------------------------------------------
March 31, 1998 $62,818,000 $22,137,000 $14,553,000 $7,871,000 $0.63 $0.62
December 31, 1997 66,910,000 22,118,000 8,619,000 5,189,000 0.42 0.41
September 30, 1997 64,465,000 21,526,000 9,723,000 6,517,000 0.53 0.52
June 30, 1997 64,552,000 21,578,000 8,005,000 4,803,000 0.39 0.38
March 31, 1997 $58,845,000 $18,975,000 $ 6,863,000 $4,167,000 $0.34 $0.33
December 31, 1996 58,546,000 19,210,000 6,878,000 4,199,000 0.34 0.34
September 30, 1996 53,387,000 17,372,000 6,310,000 3,722,000 0.31 0.30
June 30, 1996 54,664,000 18,754,000 6,430,000 3,800,000 0.31 0.31
36
SCHEDULE II
ZERO CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
Doubtful
Balance at Provision Accounts Balance at
Beginning of Charged to Written Other End of
Year Income Off/1/ Deductions/2/ Year
- -------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
April 1, 1997 to March 31, 1998 $607,000 $387,000 $(135,000) $(41,000) $ 818,000
April 1, 1996 to March 31, 1997 $759,000 $101,000 $(253,000) $ 607,000
April 1, 1995 to March 31, 1996 $724,000 $236,000 $(201,000) $ 759,000
- -----------------
/1/ Net of recoveries
/2/ Adjusted for net assets held for sale (see Note 12 of Notes to Consolidated
Financial Statements)
37