As filed with the Securities and Exchange Commission on June 13, 1996.
Registration No. 333-05515
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
ZYTEC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1465891
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
7575 MARKET PLACE DRIVE
EDEN PRAIRIE, MINNESOTA 55344
TELEPHONE: (612) 941-1100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
RONALD D. SCHMIDT
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
ZYTEC CORPORATION
7575 MARKET PLACE DRIVE
EDEN PRAIRIE, MINNESOTA 55344
TELEPHONE: (612) 941-1100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES OF COMMUNICATIONS TO:
ERIC O. MADSON, ESQ. THOMAS C. THOMAS, ESQ.
WINTHROP & WEINSTINE, P.A. OPPENHEIMER WOLFF & DONNELLY
3000 DAIN BOSWORTH PLAZA 3400 PLAZA VII BUILDING
60 SOUTH SIXTH STREET 45 SOUTH SEVENTH STREET
MINNEAPOLIS, MINNESOTA 55402 MINNEAPOLIS, MINNESOTA 55402
TELEPHONE: (612) 347-0700 TELEPHONE: (612) 344-9300
Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities being offered on this Form are to be offered pursuant to
dividend or interest reinvestment plans, check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 13, 1996
PROSPECTUS
2,272,000 Shares
[ZYTEC LOGO]
Common Stock
Of the 2,272,000 shares of Common Stock offered hereby, 2,000,000 shares are
being sold by Zytec Corporation (the "Company" or "Zytec"), and 272,000 shares
are being sold by the Selling Shareholders. See "Principal and Selling
Shareholders." The Company will not receive any of the proceeds from the sale of
shares by the Selling Shareholders. The Company's Common Stock is quoted on the
Nasdaq National Market under the symbol "ZTEC." On June 12, 1996, the last
reported sale price for the Company's Common Stock as reported on the Nasdaq
National Market was $17.75 per share. See "Price Range of Common Stock."
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share $ $ $ $
Total (3) $ $ $ $
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $275,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 300,000 shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $
, respectively. See "Underwriting."
The shares of Common Stock offered by this Prospectus are offered by the several
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by them, and subject to the right of the Underwriters to reject orders in whole
or in part. It is expected that delivery of the shares of Common Stock will be
made in New York, New York on or about , 1996.
Needham & Company, Inc. Nesbitt Burns Securities Inc.
The date of this Prospectus is , 1996.
[Inside front cover: Schematic representation of the internet]
[Gatefold: Photos of five customers' products overlaid on schematic
representation of the internet]
Caption: Cabletron MMAC-WordPlus
Caption: Digital Equipment Corporation AlphaServer 8400
Caption: Hewlett-Packard Company HP 9000 K-Class
Caption: Cisco Systems 7010 Router
Caption: Bay Networks, Inc. BCN Router
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A
UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
THIS PROSPECTUS CONTAINS OR INCORPORATES CERTAIN FORWARD-LOOKING STATEMENTS. FOR
THIS PURPOSE, ANY STATEMENTS CONTAINED OR INCORPORATED IN THIS PROSPECTUS THAT
ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE FOREGOING, WORDS SUCH AS "MAY," "WILL,"
"EXPECT," "BELIEVE," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR
OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL
RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED UNDER THE CAPTION "RISK FACTORS."
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO,
INCLUDED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE
INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND HAS BEEN ADJUSTED TO
REFLECT A TWO-FOR-ONE STOCK SPLIT OF THE COMMON STOCK OF THE COMPANY EFFECTED AS
A 100% STOCK DIVIDEND ON JUNE 3, 1996.
THE COMPANY
Zytec Corporation ("Zytec" or the "Company") is a leading designer and
manufacturer of custom electronic power supplies for original equipment
manufacturers ("OEMs") in the communications, networking, computer and other
electronic equipment marketplaces. Recently, the Company has experienced
significant sales growth because it has been the sole-source provider of power
supplies to many of the OEMs that provide hardware for the internet. The Company
also repairs power supplies and related products, and provides dedicated repair
and logistics services for a major customer. The Company's power supply
components are sold in North America and Europe, and its products are used
worldwide. Zytec's principal OEM customers include Digital Equipment,
Hewlett-Packard, IBM, Cabletron, Cisco Systems, Sun Microsystems, Bay Networks
and Silicon Graphics. In 1995, the Company manufactured and delivered over
700,000 power supplies representing over 141 different products. The Company's
dedication to quality resulted in its winning the Malcolm Baldrige National
Quality Award in 1991.
Power supplies perform many essential functions relating to the supply,
regulation, and distribution of electrical power in electronic equipment. Basic
power supplies convert alternating current ("AC") from a primary power source
into the direct current ("DC") required to power an electronic system. As
electronic equipment has become more complex, power supplies and their
underlying technology have become more advanced. The dominant technology now
used in power supplies is switching technology. Electronic systems typically
have a number of subsystems, each of which may require a unique operating
voltage or level of power. To better address this need, a newer and more
flexible switching technology is emerging, referred to by the Company as
"distributed power architecture" ("DPA"). Using DPA, power may be distributed to
DC/DC converters located on or near the subsystem being powered.
According to Micro-Tech Consultants, the worldwide market for power supplies
exceeded $19.6 billion in 1995 and is projected to grow to $32.7 billion by the
year 2000. The United States' portion of this market exceeded $4.3 billion in
1995. The mid-range segment of the power supply market, which is the Company's
primary target market, comprised 65% of the total United States market in 1995.
Mid-range power supplies tend to be moderate to high volume, highly
sophisticated and used in complex products such as hubs, routers, file servers,
workstations and communications systems.
Zytec believes that a number of important trends affecting its customers will
continue to shape the power supply marketplace. OEMs are continually faced with
pressures from end-users to improve the price, performance and other
characteristics of their products, and therefore require that their power
systems suppliers maintain both rapid product design and rapid market
introduction of products. To meet these demands, the design and manufacture of
power supplies have become more complex and specialized, leading OEMs to migrate
from captive suppliers to merchant power supply engineering and manufacturing
specialists such as Zytec who custom-design power systems. In addition, rapidly
growing applications market segments, such as workstations and data
communications hardware, increasingly use mid-range power.
According to Micro-Tech Consultants, in 1995 Zytec was the 5th largest power
supply company in the United States and the 9th largest in the world. The
Company's objective is to become the supplier of choice to a targeted group of
multinational OEMs requiring sophisticated custom power supply solutions and
having substantial volume requirements. To achieve this objective, Zytec's
strategy is to differentiate itself through advanced technology and design,
shorter product development cycles and superior product performance, quality,
service and value. The Company implements this strategy by delivering
high-quality products and services; providing leading-edge engineering and time
to market; developing and expanding collaborative relationships; leveraging
advanced manufacturing and management techniques; and expanding complementary
businesses.
The Company was incorporated under Minnesota law in August 1983 and commenced
operations in January 1984. Its executive and administrative offices are located
at 7575 Market Place Drive, Eden Prairie, Minnesota 55344, and its telephone
number is (612) 941-1100.
THE OFFERING
Common Stock offered by the Company 2,000,000 shares
Common Stock offered by the Selling
Shareholders 272,000 shares
Common Stock to be
outstanding after the offering 10,996,472 shares (1)
Use of proceeds To repay all outstanding indebtedness
under the Company's revolving credit
agreement, and for capital equipment and
leasehold improvements in connection
with expansion of manufacturing
technology and capacity, potential
acquisitions, and general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol ZTEC
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, ------------------
---------------------------------------------------------- APRIL 2, MARCH 31,
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales $79,393 $89,639 $90,614 $128,141 $170,518 $32,881 $61,087
Gross profit 11,888 11,000 13,992 18,294 20,596 3,648 7,946
Other revenue 791 1,520 3,624 2,462 1,559 384 353
Operating expenses 10,934 14,413 12,245 14,534 15,726 3,766 4,850
Operating income (loss) 1,745 (1,893) 5,371 6,222 6,429 266 3,449
Net income (loss) $ 551 $(3,287) $ 2,671 $ 3,364 $ 3,878 $ 120 $ 2,108
Net income (loss) per share
(fully diluted) (2) $ 0.09 $ (0.55) $ 0.35 $ 0.36 $ 0.41 $ 0.01 $ 0.21
Common and common equivalent shares
outstanding (fully diluted) (2) 6,136 6,011 7,555 9,324 9,389 9,249 9,812
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
AS
ACTUAL ADJUSTED (3)
------ ------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 2 $ 20,523
Working capital 14,473 47,568
Total assets 86,012 106,533
Short-term debt, including current portion of long-term debt and
capital lease obligations (4) 20,874 8,300
Long-term debt and capital lease obligations, less current
portion 6,916 6,916
Stockholders' equity 23,550 56,645
</TABLE>
(1) Based on 8,996,472 shares outstanding at June 4, 1996; does not reflect
outstanding stock options and warrants, as of June 4, 1996, to purchase
1,826,132 shares of Common Stock (of which options and warrants for 385,772
shares are presently exercisable).
(2) Restated to reflect a two-for-one stock split effected as a 100% stock
dividend on June 3, 1996.
(3) Adjusted to give effect to the application of the estimated net proceeds
of this offering based on an assumed public offering price of $17.75 per
share. See "Use of Proceeds."
(4) Includes indebtedness of $12.6 million under the Company's revolving
credit agreement, all of which will be repaid with the net proceeds of
this offering. See "Use of Proceeds."
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS OR INCORPORATED HEREIN
BY REFERENCE, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE SHARES OFFERED IN
THIS PROSPECTUS..
FLUCTUATIONS IN FINANCIAL RESULTS
Zytec's financial results are subject to fluctuation due to various factors,
including the mix of products between custom-designed and customer-designed
power supplies; the stage of each product in its life cycle; component and
materials cost and availability; the rate of addition and magnitude of new
projects; the timing of orders from and shipments of products to customers; and
exchange rate fluctuations. Of these factors, the timing of orders from and the
shipment of product to customers is particularly significant. The Company is in
production on a limited number of projects at any given time, so when an OEM
customer cancels or curtails a project, the operating impact to Zytec may be
significant. This significance is a function of the relative percentage of
Zytec's production and revenues which are represented by the specific project.
Because of these factors, quarterly comparisons of financial results may not be
indicative of future results. Net sales in the first quarter of 1996 increased
as component availability allowed delivery schedules to improve, enabling the
Company to deliver products for which it had not made delivery in 1995. As a
result, the Company expects that first quarter consolidated net sales will
represent a larger percentage of annual net sales for 1996 than has historically
been the case. In addition, in May 1996 the Austrian government suspended the
use of net operating loss carryforwards ("NOLs") in 1996 and 1997 and removed
the time limitation on the use of such NOLs. As a result of this change, the
Company's income taxes in the second quarter of 1996 will be reduced by
approximately $2.6 million, comprised of a tax benefit of $2.9 million relating
to recognition of the deferred tax benefit related to such NOLs offset by the
realization of income tax expense of $280,000 resulting from retroactive
application of this tax law change to first quarter Austrian operations. The
Company expects that its consolidated effective tax rate will increase to and
stabilize at levels of approximately 38%. See "Recent Developments" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON COMPUTER AND OTHER ELECTRONIC EQUIPMENT INDUSTRIES;
CUSTOMERS' PRODUCT ACCEPTANCE AND LIFE CYCLE
Substantially all of Zytec's existing customers are in the computer, networking,
communications and other electronic equipment industries, and produce products
which are subject to rapid technological change, obsolescence and large
fluctuations in product demand. These industries are characterized by intense
competition and demands from end users for increased product performance and
lower product prices. Given this industry environment, similar demands are made
on the OEMs' component suppliers such as Zytec. Thus, in order to be successful,
the Company must properly assess developments in the computer and other
electronic equipment industries and identify product groups and customers with
the potential for continued and future growth. Factors affecting the computer
and other electronic equipment industries, in general, or any of the Company's
major customers or their products, in particular, could have a material adverse
effect on the Company's results of operations. The Company's success is also
dependent on the market acceptance and life cycle of its customers' products for
which the Company provides power supplies. If such products do not achieve
market acceptance or become obsolete, the Company's results of operations could
be adversely affected even though the industry in general is experiencing
growth. See "Business -- Sales, Marketing and Customers."
VOLATILITY OF STOCK PRICE
The Company's Common Stock is traded on the Nasdaq National Market. The market
price for the Common Stock has been and following this offering may continue to
be highly volatile depending on various factors including, among others, the
Company's consolidated operating results, expectations of analysts and other
investment groups, general conditions in the computer and other electronic
equipment industries, announcements of technological innovations or new products
by the Company, its competitors or its customers, and the market for similar
securities, which market is subject to various pressures. In addition, the stock
market is subject to price and volume fluctuations unrelated to operating
performance of the Company. See "Price Range of Common Stock" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON SUPPLIERS
The Company is dependent on its suppliers for timely shipments of components and
typically uses a primary source of supply for each component. While the
Company's products are generally not dependent on unique components which
cannot be duplicated or replaced with components from other suppliers,
establishing alternate sources of supply may require a period of time which
could result in supply shortages. In the short term, any shortages of particular
components may adversely affect the Company's business by increasing product
delivery times, increasing costs associated with manufacturing, including
increased labor and component prices, and reducing gross margins. In 1995, the
Company experienced shortages of certain semiconductor components, which reduced
the Company's gross margin. While Zytec works closely with its suppliers to
anticipate and respond to any component price increases or supply shortages, any
significant unanticipated shortages of components or price increases could have
a material adverse effect on Zytec's results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
INTERNATIONAL OPERATIONS
Shipments to international customers have, and are expected to continue, to
account for a material portion of the Company's net sales. Sales and operations
outside of the United States are subject to certain inherent risks, including
fluctuations in the value of the U.S. dollar relative to foreign currencies,
tariffs, quotas, taxes and other market barriers, political and economic
instability, restrictions on the export or import of technology, potentially
limited intellectual property protection, difficulties in staffing and managing
international operations, difficulties in collecting receivables and potentially
adverse tax consequences. There can be no assurance that any of these factors
will not have a material adverse effect on the Company's financial condition or
results of operations. In particular, because the Company's international sales
are denominated primarily in U.S. dollars, currency fluctuations in countries
where the Company does business may render the Company's products less price
competitive than those of foreign manufacturers. In addition, because the
Company purchases certain of its supplies of components and labor in foreign
currencies, fluctuations in such foreign currencies could result in exchange
rate gains and losses not directly related to operations. See "Recent
Developments" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
TECHNOLOGICAL CHANGE; UNCERTAINTY REGARDING COMPLEX TECHNOLOGY
While the basic technology in the power supply industry has not changed rapidly,
some risk of technological change exists, and technological issues also arise
from the current level of complexity of power supply designs. The Company has
developed an affiliation with Virginia Polytechnic Institute's Power Electronics
Center in order to anticipate technological changes. However, if the Company
does not adequately anticipate significant technological advances or develop and
market product enhancements or new products that respond to any significant
technological change, the Company's results of operations could be materially
adversely affected. In 1995, the Company experienced significant delays in
completing development of a custom-designed complex power supply, due to
unforeseen technological difficulties. The customer required such product to be
placed in production while such product was still undergoing development, which
resulted in additional costs to the Company. There can be no assurance that
unforeseen technological difficulties will not arise in the future. Any such
difficulties could have a material adverse effect on the Company and its
operating results. See "Business -- Research and Development."
CUSTOMER CONCENTRATION
Zytec focuses its resources on developing long-term collaborative relationships
with its OEM customers, and its revenues are dependent on a relatively limited
number of customers. During 1995, revenue growth resulted almost entirely from
existing customers and four customers each accounted for more than 10% of
Zytec's net sales. The Company's customers are not contractually obligated to
utilize the Company's products or services at current levels, if at all.
However, because of the "designed-in" nature of custom power supplies, it is
Zytec's experience that existing projects are rarely transferred to other
companies or facilities after the commencement of production, although the risk
of transfer or cancellation of a power supply project by an OEM is somewhat
greater in the project's design and preproduction phases. There can, however, be
no assurance that a customer will not transfer, reduce the volume of, or cancel
a power supply project, which could adversely affect the Company's results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Sales, Marketing and Customers."
COMPETITION
The design, manufacture and sale of power supplies is a highly competitive
industry. Zytec's competition includes companies located throughout the world,
some of which have advantages over the Company in terms of labor and component
costs, and which may offer products comparable in quality to those
of the Company. Certain of the Company's competitors have substantially greater
resources and geographic presence than the Company. Zytec also faces competition
from current and prospective customers, which may decide to design and
manufacture the power supplies needed for their products internally. To remain
competitive, management believes that Zytec must continue to compete favorably
on the basis of value by providing advanced manufacturing technology, offering
superior customer service and design engineering services, continuously
improving quality and reliability levels, and offering flexible and reliable
delivery schedules. There can be no assurance that the Company will be able to
continue to compete successfully in this market. See "Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
The development of the Company's business and operations is dependent to a
significant extent upon the efforts and talents of its executive officers. The
loss of these officers could adversely affect Zytec's operations. The Company's
continued success also will depend on its ability to continue to attract, train,
motivate, and retain qualified employees. The Company does not have employment
or noncompete agreements with its key employees. As the Company continues to
grow its revenue base through product acquisition and development, the Company's
ability to continue to meet increasing production requirements and manage future
growth will depend in part on its success in attracting and retaining additional
management and technical personnel. Industry growth and the low unemployment
rate in the Minneapolis, Minnesota and Redwood Falls, Minnesota areas, which
include the Company's principal facilities, has increased the competition for
such personnel. See "Management."
FUTURE ACQUISITIONS
The Company may pursue acquisitions of technologies, product lines or
businesses. Future acquisitions by the Company could result in the use of a
portion of the proceeds from this offering, dilutive issuances of equity
securities and the incurrence of additional debt and amortization expenses
related to goodwill and intangible assets, which could adversely affect the
Company's operating results. In addition, gross margins of any acquired
products, technologies or businesses, expenditures for necessary product or
technology development and other factors related to any such acquisitions could
result in dilution to the Company's earnings. Acquisitions also may involve
numerous other risks, including difficulties in the assimilation of the
operations and products of the acquired business, dependence on new products and
processes, the diversion of management's attention from other business concerns,
risks of entering markets in which the Company has no or limited direct prior
experience, the potential loss of key employees of the acquired business and
difficulties in attracting additional key employees necessary to absorb added
management responsibilities. If the Company is unable to manage growth
effectively and meet increasing production requirements, customer confidence
could erode and demand for the Company's products could deteriorate, which could
materially and adversely affect the Company's business and operating results.
INTELLECTUAL PROPERTY
Certain equipment, processes, information and knowledge developed by Zytec and
used in the design and manufacture of its products are regarded as proprietary
by the Company. Zytec relies on a combination of trade secret and other
intellectual property law, non-disclosure agreements with employees, and other
measures to protect its proprietary rights, including holding patents and
evaluating the benefits of obtaining patents. Such protection, however, may not
preclude competitors from developing products similar to the Company's products.
In addition, the laws of certain foreign countries may not protect the Company's
intellectual property 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. No such claims or litigation related to any such matter are
currently pending against Zytec. However, there can be no assurance that none
will be initiated, that the Company would prevail in any such litigation seeking
damages or an injunction against the sale of the Company's products, or that
Zytec would be able to obtain any necessary licenses on reasonable terms or at
all. See "Business -Intellectual Property Matters."
CONTROL OF THE COMPANY BY DIRECTORS AND EXECUTIVE OFFICERS
At June 4, 1996, the directors and executive officers of the Company
beneficially owned in the aggregate 3,480,226 shares of Common Stock,
representing 38.0% of Zytec's outstanding Common Stock, including shares which
may be acquired within 60 days of June 4, 1996, pursuant to the exercise of
stock options. Upon completion of this offering, the directors and executive
officers would own in the aggregate 3,208,226 shares of Common Stock,
representing 28.8% of Zytec's outstanding Common Stock, including shares which
may be acquired within 60 days of June 4, 1996, pursuant to the exercise of
stock options. As a result, such directors and executive officers are, and
subsequent to this offering will be, able to exercise substantial control over
the Company's affairs. See "Principal and Selling Shareholders" and "Description
of Common Stock."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of Common
Stock offered by the Company hereby are estimated to be approximately $33.1
million ($38.1 million if the Underwriters' over-allotment option is exercised
in full), assuming a public offering price of $17.75 per share (the closing
price of the Common Stock on June 12, 1996) and after deduction of the estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company. A portion of the net proceeds will be used to repay all advances
made under the Company's revolving credit facility with Harris Trust and Savings
Bank (the "Bank"), which advances were incurred for working capital purposes. At
May 31, 1996, advances under the revolving credit facility totalled
approximately $12.9 million. In addition, approximately $14.0 million of the net
proceeds will be used for capital equipment and leasehold improvements in
connection with expansion of manufacturing technology and capacity. The balance
of the net proceeds may be used to fund collaborative arrangements or
acquisitions of or investments in complementary businesses, products or
technologies (although the Company currently has no commitments for any such
arrangements or acquisitions) and for general corporate purposes, including
working capital.
Although a portion of the net proceeds will be used to repay all advances under
the Company's revolving credit facility with the Bank, the Company intends to
maintain a revolving credit facility and to incur indebtedness thereunder from
time to time. The Company's revolving credit facility with the Bank bears
interest at the bank's prime rate (8.25% per annum at May 31, 1996) or, at the
Company's option, at a LIBOR rate, and is unsecured. This revolving credit
facility provides for borrowings of up to $23 million through August 31, 1996,
and of up to $10 million thereafter, and expires in May 1999. See Notes to
Unaudited Consolidated Financial Statements, Note 7.
The foregoing represents Zytec's best estimate, at this time, of its use of the
net proceeds of this offering, based on its present plans and forecasts
regarding its future revenues and expenditures and general economic and industry
conditions. Pending application of the proceeds of the offering, the Company may
invest the net proceeds in short-term, investment-grade, interest-bearing
securities. The Company will not receive any proceeds from the sale of shares by
the Selling Shareholders.
RECENT DEVELOPMENTS
Zytec's consolidated effective tax rate has fluctuated historically as a result
of the use of NOL carryforwards against profits in Austria. In May 1996, the
Austrian government changed the treatment of NOL carryforwards by (1) suspending
the use of NOL carryforwards during the years 1996 and 1997 (retroactive to
January 1, 1996) and (2) removing the time limitations on the use of the NOLs.
In light of this new statute, and based on its current assessment of the
financial results at its Austrian operations, the Company has concluded that it
should recognize the deferred income tax benefit related to the Austrian NOL
carryforwards. This change will reduce taxes in the second quarter of 1996 and
increase taxes in subsequent quarters. The amount of the reduction in the second
quarter of 1996 will be approximately $2.6 million, comprised of a tax benefit
of $2.9 million relating to recognition of the deferred income tax benefit,
which will be offset by the realization of income tax expense of $280,000
resulting from the retroactive application of this tax law change to first
quarter Austrian operations. Due to these recent tax changes, the Company
expects that its consolidated effective tax rate will increase to and stabilize
at statutory levels of approximately 38%.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is reported on the Nasdaq National Market under the
symbol "ZTEC." The following table sets forth, for the periods indicated, the
high and low closing prices for the Common Stock, as reported by the Nasdaq
National Market and adjusted to reflect a two-for-one stock split effected as a
100% stock dividend on June 3, 1996.
HIGH LOW
---- ---
FISCAL YEAR ENDED DECEMBER 31, 1994
First Quarter $ 5-1/8 $4
Second Quarter 5-1/8 4-1/4
Third Quarter 5-7/8 4-5/8
Fourth Quarter 6 3-1/4
FISCAL YEAR ENDED DECEMBER 31, 1995
First Quarter 4-3/8 2-3/4
Second Quarter 4-1/16 3
Third Quarter 4-5/8 3
Fourth Quarter 6-1/8 4-3/16
FISCAL YEAR ENDED DECEMBER 31, 1996
First Quarter 9-3/4 5-1/4
Second Quarter (through June 12, 1996) 23-1/4 9-1/2
The last reported sale price of the Common Stock on the Nasdaq National Market
on June 12, 1996 was $17.75 per share. As of June 4, 1996, there were
approximately 290 record holders of the Common Stock and approximately 2,000
additional beneficial holders whose shares were held in street name.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock and
does not expect to pay any cash dividends in the foreseeable future. The Company
intends to reinvest its net income in the continued operation, development and
expansion of its business. A financial covenant in the Company's current
revolving credit facility restricts payment of dividends without the lender's
consent, and financial covenants in another financing agreement prevent the
payment of dividends if the Company is not meeting certain ratios. See Notes to
Audited Consolidated Financial Statements, Note 4.
CAPITALIZATION
The following table sets forth the short-term indebtedness and capitalization of
the Company at March 31, 1996, and as adjusted to give effect to the issuance
and sale of 2,000,000 shares of Common Stock offered by the Company in this
offering at an assumed public offering price of $17.75 per share and after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company:
MARCH 31, 1996
--------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
Short-term debt, including current portion of
long-term debt and capitalized leases (1)(2) $20,874 $ 8,300
Long-term debt and capitalized leases, less
current portion (2) 6,916 6,916
Stockholders' equity:
Common stock, no par value; 25,000,000 shares
authorized; 8,811,156 shares issued and
outstanding; 10,811,156 shares issued and
outstanding, as adjusted (3)(4) 11,919 45,014
Retained earnings 11,793 11,793
Foreign currency translation adjustments (162) (162)
Total stockholders' equity 23,550 56,645
Total capitalization $30,466 $63,561
(1) Includes indebtedness of $12.6 million under the Company's revolving
credit agreement, all of which will be repaid with the net proceeds of
this offering. See "Use of Proceeds."
(2) For information regarding the Company's lease obligations, see Notes to
Audited Consolidated Financial Statements, Note 5.
(3) Does not include 1,753,022 shares issuable upon exercise of stock options
and warrants outstanding at March 31, 1996 (of which options and warrants
for 534,462 shares were exercisable). See Notes to Audited Consolidated
Financial Statements, Note 7.
(4) Restated to reflect a two-for-one stock split effected as a 100% stock
dividend on June 3, 1996.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table contains certain selected consolidated financial data of
the Company and is qualified by the more detailed Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. The
consolidated statement of operations data for the fiscal years ended December
31, 1993, 1994 and 1995 and the consolidated balance sheet data as of December
31, 1994 and 1995 have been derived from the Consolidated Financial Statements,
which statements have been audited by Coopers & Lybrand L.L.P., independent
accountants, and are included elsewhere in this Prospectus. The consolidated
statement of operations data for the years ended December 31, 1991 and 1992 and
the consolidated balance sheet data as of December 31, 1991, 1992 and 1993 have
been derived from the Company's consolidated financial statements, which
statements have been audited by Coopers & Lybrand L.L.P. and are not included in
this Prospectus. The consolidated statements of operations data set forth below
for the three months ended April 2, 1995 and March 31, 1996 and the consolidated
balance sheet data set forth below at April 2, 1995 and March 31, 1996 are
derived from unaudited consolidated financial statements and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results for such periods.
The results of operations for the three months ended March 31, 1996, are not
necessarily indicative of results to be expected for the full year or any other
period. The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, -------------------
----------------------------------------------------------- APRIL 2, MARCH 31,
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales $79,393 $89,639 $90,614 $128,141 $170,518 $32,881 $61,087
Cost of goods sold 67,505 78,639 76,622 109,847 149,922 29,233 53,141
------- ------- ------- -------- -------- ------- -------
Gross profit 11,888 11,000 13,992 18,294 20,596 3,648 7,946
Other revenue 791 1,520 3,624 2,462 1,559 384 353
Selling, general and administrative (5,293) (6,945) (5,309) (6,390) (7,139) (1,605) (2,460)
Research and development (5,641) (7,468) (6,936) (8,144) (8,587) (2,161) (2,390)
------- ------- ------- -------- -------- ------- -------
Operating income (loss) 1,745 (1,893) 5,371 6,222 6,429 266 3,449
Other income (expense):
Interest expense (956) (1,131) (1,173) (766) (1,053) (224) (381)
Other, net 219 363 191 (38) 703 149 (129)
------- ------- ------- -------- -------- ------- -------
Income (loss) before income taxes 1,008 (2,661) 4,389 5,418 6,079 191 2,939
Income taxes 457 626 1,718 2,054 2,201 71 831
------- ------- ------- -------- -------- ------- -------
Net income (loss) $ 551 $(3,287) $ 2,671 $ 3,364 $ 3,878 $ 120 $2,108
======= ======= ======= ======== ======== ======= ======
Net income (loss) per share
(fully diluted) (1) $ 0.09 $ (0.55) $ 0.35 $ 0.36 $ 0.41 $ 0.01 $ 0.21
======= ======= ======= ======== ======== ======= ======
Common and common equivalent shares
outstanding (fully diluted) (1) 6,136 6,011 7,555 9,324 9,389 9,249 9,812
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------- APRIL 2, MARCH 31,
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,018 $ 2 $ 4,271 $ 2 $ 2 $ 2 $ 2
Working capital 3,125 (927) 10,475 14,180 14,457 12,112 14,473
Total assets 27,419 24,793 32,867 45,475 66,637 46,170 86,012
Short-term debt, including current
portion of long-term debt and
capital lease obligations 6,835 8,159 4,833 7,280 13,942 7,397 20,874
Long-term debt and capital lease
obligations, less current portion 6,293 5,262 3,902 4,764 4,050 3,227 6,916
Stockholders' equity 4,461 1,148 13,331 17,113 21,367 17,276 23,550
</TABLE>
(1) Restated to reflect a two-for-one stock split effected as a 100% stock
dividend on June 3, 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains or incorporates certain forward-looking statements. For
this purpose, any statements contained or incorporated in this Prospectus that
are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, words such as "may," "will,"
"expect," "believe," "anticipate," "estimate" or "continue" or the negative or
other variations thereof or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending on a
variety of factors, including those described under the caption "Risk Factors."
INTRODUCTION
The first quarter of 1996 represented the continuation of a period of sustained
growth for Zytec dating back to 1993. As a designer and manufacturer of custom
power supplies to OEMs, Zytec's growth has been driven by the acceptance and
growth of its customers' products during this period. During the latter part of
this period, the Company was faced with various challenges and constraints
related to (1) the capacity of its manufacturing facilities, (2) the
availability of certain raw materials and electronic components, particularly
power semiconductors, and (3) margin pressure related to the relatively early
stage of manufacturing and production of several large programs. Each of these
challenges has had an impact on the Company's financial condition and results of
operations.
RESULTS OF OPERATIONS
The following table sets forth certain information derived from the Company's
Consolidated Statements of Operations for the periods indicated, expressed as a
percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, ---------------------
------------------------------ APRIL 2, MARCH 31,
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 84.6 85.7 87.9 88.9 87.0
----- ----- ----- ----- -----
Gross profit 15.4 14.3 12.1 11.1 13.0
Other revenue 4.0 1.9 0.9 1.2 0.5
Selling, general and
administrative (5.9) (5.0) (4.2) (4.9) (4.0)
Research and development (7.6) (6.4) (5.0) (6.6) (3.9)
----- ----- ----- ----- -----
Operating income 5.9 4.8 3.8 0.8 5.6
Other income (expense):
Interest expense (1.3) (0.6) (0.6) (0.7) (0.6)
Other, net 0.2 -- 0.4 0.5 (0.2)
----- ----- ----- ----- -----
Income before income taxes 4.8 4.2 3.6 0.6 4.8
Income taxes 1.9 1.6 1.3 0.2 1.3
----- ----- ----- ----- -----
Net income 2.9% 2.6% 2.3% 0.4% 3.5%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 AND APRIL 2, 1995
NET SALES. Net sales increased 86% to $61.1 million in the first quarter of 1996
from $32.9 million in the first quarter of 1995. This increase in net sales was
due in part to a broadening of the customer base. Historically, the first
quarter has represented seasonally low net sales due to the purchasing patterns
of one large customer. As sales of new products to a broader customer base have
increased, sales to that customer have become a lower percentage of net sales,
and were 10% of net sales in the first quarter of 1996 compared to 23% in the
first quarter of 1995. Net sales also increased as component availability,
specifically power semiconductors, allowed delivery schedules to improve,
enabling the Company to deliver products for which it had not made delivery in
1995. As a result of these factors, the Company expects that first quarter
consolidated net sales will represent a larger percentage of annual net sales
for 1996 than has historically been the case. Both USA and Austria power supply
sales, as well as the Company's California service and logistics business, grew
at similar rates during this period.
GROSS MARGIN. Gross margin was 13.0% in the first quarter of 1996, up from 11.1%
in the first quarter of 1995. Gross margin on USA power supply manufacturing
operations improved due to cost reductions associated with full volume
production of several large programs. Manufacturing overhead costs fell relative
to net sales because of greater leveraging of fixed costs from the higher sales
level. Offsetting these gross margin improvements were the startup costs of the
new Colorado facility, which were expensed. Although there was no significant
production activity at this new facility in the quarter, the facility was
outfitted, equipment was purchased and installed and staff was hired. The net
effect was that USA gross margin improved only slightly from the first quarter
1995 to the first quarter 1996. Zytec Austria's gross margin improved as a
result of the Austrian operation's ability to leverage fixed costs and labor
costs from the higher sales level.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses increased 53.3% to $2.5 million in the first quarter of 1996,
from $1.6 million in the first quarter of 1995, due to relocation expenses and
establishment of administrative functions at the Company's California and
Colorado facilities. Expenses were 4.0% of net sales in the first quarter of
1996 compared with 4.9% of net sales in the first quarter of 1995. This decrease
as a percentage of net sales continues a trend of leveraging these costs with
higher sales, although there can be no assurance that this trend will continue.
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses increased
10.6% to $2.4 million in the first quarter of 1996 from $2.2 million in the
first quarter of 1995. This increase was due to an overall increase in the
number of new programs. The dollar amount of R&D expenses typically varies based
on the number of new programs.
OTHER REVENUE. Other revenue, which consists of customer payments to fund
development of custom power supplies, decreased 8.1% to $353,000 in the first
quarter of 1996, from $384,000 in the first quarter of 1995. Other revenue has
been, and will continue to be, affected by the number and timing of development
programs, and variations in levels of funding among programs.
INTEREST EXPENSE. Interest expense increased 70.1% to $381,000 in the first
quarter of 1996 from $224,000 in the first quarter of 1995, as the Company
increased borrowing to support sales and working capital growth. Interest rates
improved slightly as the Company switched from the prime rate to a LIBOR-based
rate for its USA revolving credit facility. The Company believes that interest
expense for the remainder of fiscal year 1996 will decrease due to repayment of
borrowings with the net proceeds of this offering.
INCOME TAXES. Zytec's consolidated effective tax rate was 28.3% in the first
quarter of 1996 compared with 37.2% in the first quarter of 1995 resulting from
a 40% effective tax rate on domestic operations offset by the use of NOL
carryforwards against profits in Austria. In May 1996, the Austrian government
changed the treatment of NOL carryforwards by (1) suspending the use of NOL
carryforwards during the years 1996 and 1997 (retroactive to January 1, 1996)
and (2) removing the time limitations on the use of the NOLs. In light of this
new statute, and based on its current assessment of the financial results of its
Austrian operations, the Company has concluded that it should recognize the
deferred income tax benefit related to the Austrian NOL carryforwards. This
change will reduce taxes in the second quarter of 1996 and increase taxes in
subsequent quarters. The amount of the reduction in the second quarter of 1996
will be approximately $2.6 million, comprised of a tax benefit of $2.9 million
relating to recognition of the deferred tax benefit, which will be offset by the
realization of income tax expense of $280,000 resulting from the retroactive
application of this tax law change to first quarter Austrian operations. Due to
these recent tax changes, the Company expects that its consolidated effective
tax rate will increase to and stabilize at statutory levels of approximately
38%.
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NET SALES. Net sales increased 33% to $170.5 million in 1995 from $128.1 million
in 1994, and increased 41% from net sales of $90.6 million in 1993. In 1995, net
sales from USA and Austrian operations increased 34% and 30%, respectively.
Compound average growth of sales for the five-year period 1991-95 was 21%. Sales
growth in the power supply business was due to the addition of a number of new
power supply programs and to generally strong demand from existing power supply
programs, particularly in the internetworking market. Growth in the number of
new power supply programs reduced the Company's reliance on its previously
largest customer to 15% of consolidated net sales in 1995, a continued decrease
from 29% in 1994 and 36% in 1993. In addition, the Company's service and
logistics business in California grew 84% in 1995 and 85% in 1994.
GROSS MARGIN. Zytec's consolidated gross margin was 12.1% in 1995, 14.3% in 1994
and 15.4% in 1993. The decline of 2.2 percentage points in 1995 was due to
component shortages and their effect on efficiency and capacity, new product
start-ups, and the effect of a weak dollar.
In 1995, the Company experienced market shortages in certain semiconductor
components. To secure sufficient parts, the Company purchased from more
expensive alternate sources and maintained higher levels of inventories. Most of
the price premiums were passed on to Zytec's customers. Nonetheless, the
shortages and related delays in securing components reduced gross margins
indirectly by consuming limited production capacity and forcing outsourcing to
expensive external manufacturing resources. In addition, the delays resulted in
increased labor and freight costs and reduced plant overhead efficiencies.
The addition of several new products in early production reduced margins because
new products generally have higher material content. In addition, high initial
volumes of these complex units multiplied the effect on profits. Also, the
precipitous decline of strength in the dollar early in 1995 adversely affected
the Company's Austria operation, which sells over one-half of its product in
dollars and buys most of its parts in other currencies. This reduced Austria's
gross margin, particularly in the early part of 1995. Austria was able to reduce
product costs in the latter part of the year to offset a substantial portion of
the initial exposure, and the Company has established financial hedges to help
stabilize currency exposures.
The strong electronics market of 1995 resulted in many near-term schedule
increases and forced the Company to operate above efficient capacity in Redwood
Falls. During the year, employment increased in the Company's Redwood Falls
location from 616 to 921 (of which 343 were temporary employees). An expansion
of the Redwood Falls plant was completed in March 1996. This addition will allow
reorganization of manufacturing lines to improve productivity, but will not add
substantially to Zytec's overall capacity. In January 1996, Zytec leased a
manufacturing facility in Broomfield, Colorado, which began operations in the
first quarter of 1996, with initial employment of approximately 80 employees.
The Company expects that the addition of the Broomfield plant will allow the
Redwood Falls plant to return to its normal capacity by the end of the second
quarter of 1996.
Gross margins were also affected by charges related to inventory obsolescence of
$645,000 in 1995, $991,000 in 1994 and $515,000 in 1993. These amounts represent
2.7%, 5.7% and 5.6% of year-end inventories, respectively. The Company believes
these obsolescence charges are low for its industry.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased 11.7% to $7.1
million in 1995 from $6.4 million in 1994 and increased 20.4% from $5.3 million
in 1993, primarily due to increased travel costs and salary increases. SG&A
expenses decreased to 4.2% of net sales in 1995 compared with 5.0% in 1994 and
5.9% in 1993. SG&A expenses continued to decline as a percentage of net sales as
the Company leveraged these costs with higher sales levels.
RESEARCH AND DEVELOPMENT. R&D expenses increased 5.4% in 1995 to $8.6 million,
or 5.0% of sales. R&D expenses were $8.1 million, or 6.4% of sales in 1994 and
$6.9 million, or 7.6% of sales in 1993. While the Company continues to increase
R&D expenses for development of new products, these expenses have continued a
downward trend as a percentage of net sales. The number of products in design
declined somewhat in the USA from their historically high 1994 levels and
increased in Austria. The research portion of R&D grew rapidly from a small base
in 1995 as the Company continued to develop new distributed power architecture
products and began a project to accelerate development cycle time through
computer-based simulation.
OTHER REVENUE. Other revenue decreased 36.7% to $1.6 million in 1995 from $2.5
million in 1994, and decreased 32.1% from $3.6 million in 1993. Other revenue
consists principally of reimbursement of R&D expenses from the Company's
customers, and represented 18% of R&D expenses in 1995, 30% of R&D expense in
1994 and 52% of R&D expense in 1993. In 1993, the Company received an unusual
reimbursement of $900,000 for work performed in prior periods. The decline of
Other revenue as a percentage of R&D is due in part to higher levels of research
(which are not reimbursed by customers) and partly due to the trend toward lower
funding per project.
INTEREST EXPENSE. Interest expense increased 37.5% in 1995 to $1.1 million, or
0.6% of net sales. Interest expense was $766,000, or 0.6% of net sales in 1994,
and $1.2 million, or 1.3% of net sales in 1993. The increase in interest expense
in 1995 was generally due to higher debt to support sales and working capital
growth.
OTHER INCOME. Other income (expense), net increased to $703,000 income in 1995
from $38,000 expense in 1994 and $191,000 income in 1993. The increase in 1995
is made up of an exchange gain of $202,000 as compared to an exchange loss in
1994 of $229,000. Also in 1995, the Company received an export duty refund of
approximately $124,000.
INCOME TAXES. Zytec's consolidated effective tax rate was 36.2% in 1995 compared
with 37.9% in 1994 and 39.1% in 1993. In 1995, 1994 and 1993, profits from
Austria permitted use of small amounts of its net operating loss carryforwards
and resulted in a reduction of Zytec's consolidated tax rate. At December 31,
1995, the Company continued to maintain a valuation allowance which offset the
entire tax benefit of remaining loss carryforwards in Austria. As discussed
above, the Company expects that the entire valuation allowance will be
eliminated in the second quarter of 1996.
QUARTERLY INFORMATION (UNAUDITED)
The following tables present selected quarterly consolidated financial
information for the periods indicated in both dollars and as a percentage of net
sales. This information was derived from unaudited consolidated financial
statements which have been prepared on a basis consistent with the Company's
audited consolidated financial statements and notes thereto included elsewhere
in this Prospectus and, in the opinion of management, reflects all normal
recurring adjustments necessary to fairly present the information. The Company
has experienced and expects to continue to experience significant fluctuations
in its quarterly financial results due to a variety of factors, including the
mix of products between custom-designed and customer-designed power supplies;
the stage of each product in its life cycle; component and material cost and
availability; the rate of addition and magnitude of new projects; the timing of
orders from and shipments of products to customers; foreign currency
fluctuations; and general economic conditions. The operating results for any
quarter do not necessarily indicate the results to be expected for any future
period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------
1994 1995 1996
---------------------------------- ---------------------------------- --------
APRIL 3 JULY 3 OCT. 2 DEC. 31 APRIL 2 JULY 2 OCT. 1 DEC. 31 MARCH 31
------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $23,148 $32,432 $36,769 $35,792 $32,881 $40,544 $44,589 $52,504 $61,087
Cost of goods sold 19,876 27,254 30,971 31,746 29,233 36,171 38,726 45,792 53,141
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit 3,272 5,178 5,798 4,046 3,648 4,373 5,863 6,712 7,946
Other revenue 654 546 572 690 384 411 399 365 353
Selling, general and administrative (1,549) (1,602) (1,576) (1,663) (1,605) (1,854) (1,740) (1,940) (2,460)
Research and development (1,845) (2,063) (2,078) (2,158) (2,161) (2,157) (2,063) (2,206) (2,390)
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income 532 2,059 2,716 915 266 773 2,459 2,931 3,449
Other income (expense):
Interest expense (166) (183) (201) (216) (224) (223) (300) (306) (381)
Other, net 49 (96) (143) 152 149 16 162 376 (129)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 415 1,780 2,372 851 191 566 2,321 3,001 2,939
Income taxes 133 599 998 324 71 211 873 1,046 831
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income $ 282 $ 1,181 $ 1,374 $ 527 $ 120 $ 355 $ 1,448 $ 1,955 $ 2,108
======= ======= ======= ======= ======= ======= ======= ======= =======
Net income per share (fully diluted)(1) $ 0.03 $ 0.13 $ 0.15 $ 0.06 $ 0.01 $ 0.04 $ 0.16 $ 0.21 $ 0.21
======= ======= ======= ======= ======= ======= ======= ======= =======
Common and common equivalent
shares outstanding (fully diluted)(1) 9,286 9,315 9,357 9,292 9,233 9,259 9,287 9,420 9,812
</TABLE>
(1) Restated to reflect a two-for-one stock split effected as a 100% stock
dividend on June 3, 1996.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------
1994 1995 1996
---------------------------------------- --------------------------------------- -------
APRIL 3 JULY 3 OCT. 2 DEC. 31 APRIL 2 JULY 2 OCT. 1 DEC. 31 MARCH 31
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 85.9 84.0 84.2 88.7 88.9 89.2 86.9 87.2 87.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit 14.1 16.0 15.8 11.3 11.1 10.8 13.1 12.8 13.0
Other revenue 2.8 1.6 1.6 1.9 1.2 1.0 0.9 0.7 0.5
Selling, general and administrative (6.7) (4.9) (4.3) (4.6) (4.9) (4.6) (3.9) (3.7) (4.0)
Research and development (7.9) (6.4) (5.7) (6.0) (6.6) (5.3) (4.6) (4.2) (3.9)
----- ----- ----- ----- ----- ----- ----- ----- -----
Operating income 2.3 6.3 7.4 2.6 0.8 1.9 5.5 5.6 5.6
Other income (expense):
Interest expense (0.7) (0.5) (0.5) (0.6) (0.7) (0.5) (0.7) (0.6) (0.6)
Other, net 0.2 (0.3) (0.4) 0.4 0.5 0.0 0.4 0.7 (0.2)
----- ----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes 1.8 5.5 6.5 2.4 0.6 1.4 5.2 5.7 4.8
Income taxes 0.6 1.9 2.8 0.9 0.2 0.5 2.0 2.0 1.3
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income 1.2% 3.6% 3.7% 1.5% 0.4% 0.9% 3.2% 3.7% 3.5%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The Company's operating results over the nine quarters ended March 31, 1996
reflect increasing net sales, with the exception of the fourth quarter of 1994
and the first quarter of 1995. Net sales in both of these quarters reflect
adjustments in production schedules by two customers. Net sales in the first
quarter of 1995 also reflect a rapid decrease in the exchange rate of the U.S.
dollar relative to the Austrian schilling, which had the effect of reducing
Austrian net sales. Net sales increased in the first quarter of 1996 due in part
to component availability which allowed delivery schedules to improve, enabling
the Company to deliver products for which it had not made delivery in 1995.
Gross margin varied from quarter to quarter due to the timing of the addition of
new products, exchange rate fluctuations and, in the second through fourth
quarters of 1995, market shortages in certain semiconductor components.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 1996, the Company's operating activities used cash of
$5.8 million. Net income and depreciation and amortization provided cash of $2.9
million; however, changes in operating assets and liabilities used cash of $8.7
million. For the year 1995, the Company's operating activities provided cash of
$820,000. Net income and depreciation and amortization provided $6.6 million,
while changes in operating assets and liabilities used $5.9 million.
Cash and cash equivalents were $2,000 at March 31, 1996 and at year-end 1995 and
1994, and were $4.3 million at year-end 1993. When the Company is borrowing
against its revolving credit facilities, as it was in 1994, 1995 and the first
quarter of 1996, cash balances are minimal.
Working capital was $14.5 million at March 31, 1996 and December 31, 1995 and
$14.2 million at December 31, 1994. The growth in the first quarter of 1996 was
slower than sales increases. The apparent slow growth of working capital in 1995
and in the first quarter of 1996 was due primarily to timing of receipts of
materials and the level of accounts payable that resulted from these receipts.
Accounts receivable increased $7.4 million during the first quarter of 1996, and
increased $10.3 million from 1994 to 1995, resulting in an average days
sales outstanding (DSO) of 50.9 in the first quarter of 1996, 43.5 in 1995, 42.1
in 1994 and 38.1 in 1993. The trend of increased DSO has been caused primarily
by the reduction of a very large program which includes faster-than-average
payment of receivables. As this program has become a relatively smaller part of
net sales, DSO has increased. As of March 31, 1996, fewer than 3.4% of accounts
receivable were 60 days or more beyond terms, and the Company does not believe
this increase in DSO poses an increased risk to collection of accounts
receivable.
Inventory turnover averaged 6.8 times (annualized) in the first quarter of 1996,
7.4 times in 1995, 7.9 times in 1994 and 9.0 times in 1993. Zytec's decision to
increase stocks of certain semiconductors and other components due to limited
capacity in the industry to support the Company's growth rate has resulted in
some reduction in inventory turnover. In addition, the inefficiencies caused by
over-capacity operations and the shorter production runs caused by parts
shortages have increased work-in-process inventory to levels above Zytec's
historical expectations. While the addition of a new facility in Colorado will
cause duplication of some inventory levels, it is expected that overall
inventory turnover will improve as the Company works out of the capacity and
component shortage it experienced in 1995 and early 1996.
Investing activities required cash of $2.2 million in the first quarter of 1996,
$3.3 million in 1995, $3.2 million in 1994, and $673,000 in 1993. Capital
expenditures, including new capital lease obligations and additional debt, were
$5.0 million in the first quarter of 1996, $5.8 million in 1995 and $3.5 million
in 1994. In all periods, these expenditures were used to purchase surface mount
technology, other automated insertion equipment, test equipment, computer
equipment and to expand physical capacity. The relatively heavy capital
expenditures in the first quarter of 1996 were to equip the Broomfield, Colorado
facility. In the first quarter of 1996, the Company entered into approximately
$2.9 million of capital lease obligations and an operating lease for production
facilities in Colorado which will result in additional annual rent expense of
approximately $329,000 for 10 years. In 1995, approximately 47% of these
expenditures were financed through capital leases and long-term debt, with the
remainder financed through internally generated funds and short-term borrowings.
In 1994, most expenditures were financed through internally generated funds and
the proceeds of the Company's initial public offering in November 1993.
Cash provided by financing activities was $7.9 million in the first quarter of
1996, $2.7 million in 1995, $4.7 million in 1994 and $3.2 million in 1993. These
increases were primarily from increases in the revolving credit loans.
The Company has two bank lines of credit which are described in Note 4 to
Audited Consolidated Financial Statements and Note 7 to Unaudited Consolidated
Financial Statements. The USA facility provides up to $23 million in borrowings
through August 1996, and $10 million thereafter, and expires in May 1999. This
credit facility is unsecured. Credit availability under this facility is based
on accounts receivable, inventories and plant and equipment of the USA
operations and is used primarily to finance working capital. The Company's other
line of credit is guaranteed by the Austrian National Bank and issued to finance
Austrian export sales. This line was $3.5 million as of December 31, 1995. The
Company will use a portion of the net proceeds of this offering to repay
outstanding advances under the Company's USA facility.
BUSINESS
Zytec Corporation ("Zytec" or the "Company") is a leading designer and
manufacturer of custom electronic power supplies for original equipment
manufacturers ("OEMs") in the communications, networking, computer and other
electronic equipment marketplaces. Recently, the Company has experienced
significant sales growth because it has been the sole-source provider of power
supplies to many of the OEMs that provide hardware for the internet. The Company
also repairs power supplies and related products, and provides dedicated repair
and logistics services for a major customer. The Company's power supply
components are sold in North America and Europe, and its products are used
worldwide. Zytec's principal OEM customers include Digital Equipment,
Hewlett-Packard, IBM, Cabletron, Cisco Systems, Sun Microsystems, Bay Networks
and Silicon Graphics. In 1995, the Company manufactured and delivered over
700,000 power supplies representing over 141 different products. The Company's
dedication to quality resulted in its winning the Malcolm Baldrige National
Quality Award in 1991.
INDUSTRY BACKGROUND
Power supplies perform many essential functions relating to the supply,
regulation, and distribution of electrical power within electronic equipment.
Electronic systems require a steady supply of electrical power at one or more
voltage levels. Power supplies convert alternating current ("AC") from a primary
power source into the direct current ("DC") required to power the electronic
system. In addition, power supplies provide different DC voltage levels required
by the different subsystems and components in the system and monitor and
regulate those voltages to protect the product and its components from power
surges. Power supplies can also be designed to perform diagnostic functions that
prevent electronic equipment from being damaged by its own malfunction, as well
as provide power through use of a short-term battery back-up system when the
primary power source fails.
The dominant technology now used in power supplies is switching technology.
Before the development of switching power supplies, power supply technology was
fairly simple, and power supplies consisted of a transformer and some related
components to rectify and control power surges. As the complexity of electronic
equipment has increased, power supplies and their underlying technology have
become more advanced. Switching power supplies such as those manufactured by
Zytec have hundreds of components, provide advanced diagnostic and power
management functions, can be designed to provide battery back-up power, and are
smaller and more efficient than power supplies using simpler technology.
SWITCHING POWER SUPPLIES
[GRAPHIC SHOWING FROM AC WALL POWER IN TO AC TO DC POWER SUPPLY TO A
DISK DRIVE OR MEMORY OR INTEGRATED CIRCUITS OR MOTORS OR MONITORS]
As a further enhancement of AC/DC power supplies utilizing switching technology,
a newer, more flexible technology is emerging which the Company refers to as
"distributed power architecture" ("DPA"). Most electronic systems have a number
of subsystems, each of which may require a different operating voltage or level
of power. As a result, power supplies often have multiple outputs that can
provide all required system voltage levels. In such power supplies, power is
"distributed" throughout the system so that in addition to the main AC/DC power
supply, DC/DC converters located on or near the subsystem or component being
powered change the voltage of the DC to the specific level of voltage needed.
Distributed power permits greater flexibility to meet the power supply
requirements if components or subsystems are added or upgraded. The Darnell
Group forecasts that the high density DC/DC converter power supply market will
grow from $257 million in 1995 to $823 million in the year 2000, representing a
projected average annual growth rate of approximately 26%, which significantly
exceeds the projected growth rate of other portions of the power supply market.
DISTRIBUTED POWER ARCHITECTURE
[GRAPHIC SHOWING FROM INPUT TO AC TO DC FRONT END
TO OUTPUT TO VARIOUS SUB SYSTEMS]
MARKET OVERVIEW
Over 90% of the Company's business is the manufacture of custom power supplies.
According to a market report from Micro-Tech Consultants, the worldwide market
for power supplies was estimated to be over $19.6 billion in 1995. The overall
market for power supplies can be defined several ways, as follows:
MERCHANT/CAPTIVE. Merchant power supply manufacturers design and manufacture
power supplies for others. Captive power supply manufacturers design and
manufacture power supplies for use within their own products. According to
Micro-Tech Consultants, the merchant segment of the market accounted for 50% of
the power supply units shipped in the United States in 1995 and is projected to
grow to 63% in the year 2000 as OEMs demand product options and features and
high quality levels that make power supplies increasingly difficult to design
and manufacture in-house.
POWER RANGE. The market is also segmented by power supply output range, as
follows:
<TABLE>
<CAPTION>
TYPICAL % OF REPRESENTATIVE
POWER RANGE CHARACTERISTICS MARKET* END USERS APPLICATIONS
<S> <C> <C> <C> <C>
Low * Less than 150 Watts 22% * PC Companies * Personal Computers
* Lower Technology * Consumer Electronics * Consumer Electronics
* Higher Volume * Desk Top Printers
* Lower Margin
Mid * 150-750 Watts 65% * Internetwork Companies * Routers, Hubs
* High Technology * Computer Companies * Workstations, Fault
* Moderate Volume Tolerant Computers
* Higher Margin * Medical Companies * Blood Analyzers
High * More than 750 Watts 13% * Computer Companies * Main-frame Computers
* High Technology * Industrial Companies * Industrial Process Control
* Lower Volume * Internetworking Companies * High-end Routers/Switches
* Higher Unit Margin
</TABLE>
*Based on a market report from Micro-Tech Consultants.
APPLICATION. The United States power supply market also is segmented into
different applications. Set forth below are the principal segments and the
corresponding compound annual revenue growth rate as forecasted by Micro-Tech
Consultants:
GROWTH RATE
APPLICATIONS 1995-2000
- ------------ ---------
Computers, Peripherals and Office
Equipment* 14.2%
Communications* 18.0%
Military/Aerospace 0.0%
Industrial* 10.9%
*Zytec actively participates in the computers, peripherals and office
equipment; communications; and industrial market segments.
CUSTOM/STANDARD. Custom power supplies are designed and packaged to meet the
form, fit, and functional requirements of an OEM's unique and specific
application. They are attractive to OEMs because they present maximum design
flexibility, provide the lowest cost, and allow the use of special features.
Standard, "off-the-shelf" power supplies are not design-specific but also do not
require substantial up-front engineering design costs. Once a product has
reached the stage of development where the OEM is confident that there will be a
market demand for the product, it is typically cost-effective to custom design a
unique power supply to meet that product's specific requirements. The OEM is
then able to utilize a moderately high-volume, customized solution at the lowest
cost per watt of power without paying for unnecessary features or capabilities.
Custom power supplies represented 78.0% of the United States market in 1995,
according to Micro-Tech Consultants.
Zytec pursues the custom power supply business because it capitalizes on its
strengths in the area of sophisticated design, volume manufacturing, and
customer service. The effect, though, is that competition among qualified design
and manufacturing outsourcing companies providing these customized solutions is
keen. The competition causes downward pressure on gross margins, which is only
partially offset by lower selling and distribution costs.
Zytec believes a number of important trends affecting its customers will
continue to shape the power supply marketplace. The applications segments which
are growing rapidly, such as workstations and data communications hardware
(e.g., hubs, routers and file servers), need mid-range power. In addition, OEMs
face pressure from end users to improve the price and performance of products,
bring new products to market quickly, provide more product options and features,
reduce product size, and meet increasingly complex safety and regulatory agency
standards. The Company believes that these pressures will support the need for
and encourage a modest migration from captive manufacturers to
merchant-provided, custom-designed power supply manufacturers such as Zytec and
that market dynamics will maintain the vitality of the mid-range segment of the
market.
STRATEGY
Zytec's objective is to be the supplier of choice to a targeted group of
multinational OEM customers who require sophisticated power supply solutions and
who are likely to have substantial volume requirements. To achieve this
objective, Zytec's strategy is to differentiate itself through advanced
technology and design, shorter product development cycles and superior product
performance, quality, service and value. The Company's primary target market for
the last several years has been OEMs in the communications, networking, computer
and other electronic equipment marketplaces. These OEMs manufacture hubs,
routers, high availability file servers and disk arrays which typically have
complex technical needs, high product reliability standards, short product
development cycles and variable production needs. The Company implements this
strategy by combining the following key elements:
DELIVER HIGH-QUALITY PRODUCTS AND SERVICES. Zytec believes that quality and
responsiveness to the customer's needs are of critical importance in its efforts
to compete successfully. Zytec's Minnesota and Austrian operations are certified
to ISO 9001, and the Company plans to qualify each of its other locations to
applicable ISO 9000 standards as necessary to meet customer requirements. Zytec
actively involves all employees in implementing techniques to measure, monitor
and improve performance and provides all employees with education and training,
including courses in statistical process control and related techniques. Also,
employees actively participate in Zytec's planning sessions and monitor
adherence to their annual plans on a monthly basis. Through its commitment to
customer service and quality, the Company believes it is able to provide
superior value to its customers.
PROVIDE LEADING-EDGE ENGINEERING AND TIME TO MARKET. Zytec's target markets and
customers are characterized by high growth rates and continually evolving
technology. As a result, Zytec's customers typically require leading-edge
technology designed in a relatively short period. Zytec's initiatives to
maintain leading-edge technology and reduce time to market include collaborative
research with the Power Electronics Center at Virginia Polytechnic Institute; a
series of in-house technical training symposia; increased use of standard
circuits; sharing of engineering concepts between Austria and USA; and
simulation of analog design characteristics (begun in 1995). These initiatives
have contributed to a reduction of time to market of about 20% per year in 1994
and 1995.
DEVELOP AND EXPAND COLLABORATIVE RELATIONSHIPS. Through the development and
expansion of collaborative relationships with its customers, Zytec attempts to
satisfy their needs by offering a full range of value added services, including
design expertise, process development and control, testing, inventory
management, and rapid response to volume and design changes. Some
custom-designed projects are priced based on agreed-to gross margins and allow
for a sharing of the costs, risks and rewards of the manufacturing process with
the customer. These relationships also provide the Company with valuable
knowledge regarding the customer's products. The Company focuses its efforts on
customers with which it believes the opportunity exists to further develop
long-term business collaborations.
LEVERAGE ADVANCED MANUFACTURING AND MANAGEMENT TECHNIQUES. Zytec's strategy
focuses on the quality of all elements of the production process, rather than
merely the quality of the end product. To implement this strategy, Zytec uses
sophisticated design and manufacturing techniques (such as computer integrated
design and manufacture, computer aided design, and automated testing and
assembly of printed circuit boards), combined with advanced management
techniques, including just-in-time manufacturing, statistical process control
and total quality commitment. These techniques allow the Company to decrease
production costs by improving the efficiency of production processes.
EXPAND COMPLEMENTARY BUSINESSES. The Company believes that providing a wide
range of services affords the Company a competitive advantage, as it further
addresses customer needs and therefore increases the likelihood that the Company
will make continuing sales to its customers. For example, at a customer's
request, the Company may build assemblies by adding cables, harnesses, frames,
and other components to its power supply unit. In addition, Zytec offers power
supply repair services for Zytec-manufactured power supplies as well as power
supplies manufactured by others.
PRODUCTS AND SERVICES
In 1995, the Company manufactured and delivered over 700,000 power supplies
representing over 141 different products, including 31 customer-designed power
supplies and 110 products designed by Zytec. Zytec also provides related repair
and support services to customers.
POWER SUPPLY PRODUCTS. A Zytec-designed power supply progresses through a
five-phase cycle of development that may last from 12 to 18 months, depending on
the customer's product introduction schedule. In the first phase of the
development, a team is assembled, the product specifications are refined with
varying degrees of customer involvement, and the product design is planned. In
the second phase, the product's electrical circuits and physical structure are
designed and documented and the Company begins to track the product's actual
cost against its targeted cost. In the third phase, prototypes are built and
tested extensively by Zytec and the customer, design documentation is finalized,
and plans for limited production are completed. In the fourth phase, production
plans, processes, and capabilities are established to support volume production.
In the fifth phase, product evaluation by safety and quality agencies is
completed and customer service standards are implemented as volume production
begins. The following table summarizes Zytec's product development cycle.
THE PRODUCT DEVELOPMENT CYCLE
TYPICAL TIME LINE ACTIVITIES
Phase 1 Week 1-2 * Design Team and Customer Team
* Specification Review
Phase 2 Week 2-4 * Electrical and Mechanical Design
* Cost Targets Compared to Quote
Phase 3 Month 2-4 * Build Prototypes
* Testing
* Documentation
* Production Startup Plans
Phase 4 Month 3-18 * Production Plans
* Manufacturing Processes Developed
* Factory, Equipment Sizing
Phase 5 Month 12-18 * Approvals by Safety Agencies
* Full Production Commenced
As customers demand shorter development times, the risk that all five phases of
development will not be completed successfully on schedule rises. Early life
project profitability can be reduced substantially if the Company has not
completed all phases of development before manufacturing start-up.
Zytec also manufactures power supplies based on designs supplied by the
customer. In customer-designed projects, Zytec manufactures a power supply that
the customer has designed, using suppliers that the customer specifies.
In 1995, Zytec introduced and shipped the first substantial quantities of its
DPA converters. This technology, licensed from Digital Equipment Corporation and
subsequently Galaxy Power, Inc., offers higher efficiency in smaller size than
traditional switching power supplies. In early 1996, the Company established a
subsidiary in Dallas, Texas to lead the Company's design and marketing efforts
for this new technology.
REPAIR OF POWER SUPPLIES. In 1995, Zytec repaired over 1,000 different power
supply models originally manufactured by over 200 different companies in its
Redwood Falls, Minnesota location. Repair activities are also carried out in
Kindberg, Austria. Many of the Company's power supply customers use Zytec's
repair services for power supplies manufactured by the Company and by others.
SERVICE AND LOGISTICS. In 1992, Zytec began to provide materials management and
electronic product repair services for Hewlett-Packard in California. Zytec
continues this activity, repairing a variety of products and managing
disposition of repairable units. In 1995, the Company began repair of laser
printers, ink jet printers and fax machines.
OPERATIONS
QUALITY MANAGEMENT TECHNIQUES. A key element of Zytec's competitive strategy is
delivering high-quality products and services. Zytec's focus on this strategy
led to its receipt of one of three Malcolm Baldrige National Quality Awards
given in 1991. The Company also won the first Minnesota Quality Award in 1991,
and has received over 30 superior service and quality awards from its customers,
including IBM, Abbott Laboratories, Stratus Computers, Tektronix and Sun
Microsystems, since 1987.
Zytec's quality management techniques focus on all elements of the production
process, rather than merely the quality of the end product. To implement this
strategy, Zytec uses sophisticated design and manufacturing techniques (such as
computer integrated design and manufacture, computer aided design, and automated
testing and assembly of printed circuit boards), combined with advanced
management techniques, including just-in-time ("JIT") manufacturing, statistical
process control ("SPC"), and total quality commitment ("TQC"). These techniques
allow the Company to decrease production costs by improving the efficiency of
production processes.
* JIT manufacturing increases efficiencies and shortens the manufacturing
cycle.
* SPC complements the JIT process and is a set of analytical and problem
solving techniques through which Company personnel can continuously evaluate
stages of production and administrative processes.
* TQC is a management approach which involves all employees in establishing
overall and specific goals, tracking adherence to these goals on a monthly,
weekly or daily basis, and being responsible and accountable for achieving
the established objectives.
MANUFACTURING PROCESS. A typical power supply consists primarily of one or more
printed circuit boards, electronic components, transformers and other
electromagnetic components, and a sheet metal chassis. The production of the
Company's power supplies entails the assembly of structural hardware combined
with sophisticated automated assembly of circuit boards using automated surface
mount and pin-through-hole interconnection technology. Surface mount technology
permits reduction in board size by eliminating the need for holes in the printed
circuit boards, allowing components to be placed on both sides of a board.
Pin-through-hole assembly involves attaching electrical components to circuit
boards by means of pins or leads that are inserted into pre-drilled holes and
soldered to the electrical circuits on the boards.
In response to market demands for increased quality and reliability, design
complexity, and sophisticated technology, Zytec has automated many electronic
assembly and testing processes which were traditionally performed manually. In
addition, the demand for shorter manufacturing cycles has also led to increased
use of automated assembly and testing. The Company believes that the power
supply manufacturing industry has remained fragmented partly because it
traditionally has been a labor intensive, low investment industry; thus, it
believes that increased levels of automation will strengthen Zytec's competitive
position.
Many of the Company's customers increasingly require that their power supplies
meet or exceed established international safety and quality standards as their
operations expand internationally. In response to this need, Zytec designs and
manufactures power supplies in accordance with the certification requirements of
many international agencies, such as Underwriters Laboratories Incorporated (UL)
in the United States; the Canadian Standards Association (CSA) in Canada;
Technischer Uberwachungs-Verein (TUV) and Verband Deutscher Electrotechniker
(VDE), both in Germany; the British Approval Board for Telecommunications (BABT)
in the United Kingdom; and International Electrotechnical Committee (IEC), a
European standards organization. Both Zytec Austria and Zytec USA (Redwood
Falls) are certified to ISO 9001, which is a European model for quality
assurance.
SUPPLIERS. Zytec typically uses a primary source of supply for each specific
component, but it has several sources for each kind of component. As with
customers, Zytec stresses early supplier involvement in design, the use of
quality methods such as SPC and TQC, and frequent feedback through monthly
statistical analysis of quality and delivery. Several major suppliers provide
"just in time" shipments of products to Zytec. No supplier provides more than
10% of the dollar value of material used by the Company on a consolidated basis.
In March 1996, an existing supplier of magnetic components (transformers, coils
and toroids) to Austria was acquired by the Company from the Hungarian
government by privatization. The acquisition gives the Company a source of very
high quality, low-cost custom components. This facility will be operated as a
wholly-owned subsidiary of the Austrian operation. It will provide the majority
of magnetic components used by Zytec Austria and has recently become a supplier
to US operations as well.
SALES, MARKETING AND CUSTOMERS
Zytec markets its products and services through an integrated sales approach
involving direct sales representatives and account managers, along with active
support from design engineering and production personnel. The Company's products
and repair services are sold worldwide through a nine-member sales organization.
Six sales personnel based in Eden Prairie, Minnesota, are responsible for North
American power supply sales. One sales representative is responsible for
marketing the Company's repair business in North America. Two sales persons,
headquartered in Vienna, Austria, are responsible for European power supply
sales.
Because of the costs inherent in starting new customer relationships, the
Company focuses on retaining existing customers and targets a select few major
and emerging OEM industry leaders with which the opportunity exists to provide
products and services across a number of product families and through successive
product generations. The Company focuses its resources on market segments that
are (a) growing relatively fast and (b) have the potential for profit. Potential
customers are assigned to Company sales representatives who evaluate the
customer against the Company's customer selection criteria. For most end
products of a customer, or versions of such end products, the Company believes
it has established itself as a sole source provider of power supplies for the
product.
The typical sales process begins with a customer or a potential customer making
a request for quote ("RFQ") from a number of power supply manufacturers. Based
on the nature of the RFQ, the Zytec sales representative may work with the
Company's design engineers on early stage design in an effort to determine the
product's likely specifications, cost and price range. Once this process is
completed, Zytec will submit its bid for the project. The requesting OEM will
review the RFQ responses it receives and make a "short list" of two or three
potential suppliers. Further refinements are made during a second round of
bidding, at which point one supplier is selected, usually within 60 days. If
Zytec's bid is selected, a Zytec account manager is assigned to manage order
placement, delivery scheduling and design change implementation for that
customer. On an ongoing basis, Zytec's engineering personnel provide technical
support to customers in the areas of product design changes, field performance
and testing.
Some customers prefer to use Zytec to produce customer-designed products as an
introduction to the Company and its full service design and manufacturing
capabilities. Zytec's collaborative relationships allow it to gain valuable
knowledge about an existing customer and its processes, which Zytec believes
gives it an advantage in obtaining future business from that customer.
Historically, the Company has had substantial recurring sales from existing
customers. In 1995, revenue growth resulted almost entirely from existing
customers.
The Company's promotional activities include informational mailings to customers
and selected potential customers and the publication in industry periodicals of
articles written by Zytec personnel. In addition, the Company participates
regularly in industry-wide conferences and trade shows and sponsors customer
seminars.
The following chart profiles the percentage of Zytec's 1995 revenues and typical
customers in major market application segments:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
WORLDWIDE
PRODUCT OR MARKET SERVED BY CUSTOMERS REVENUES REPRESENTATIVE CUSTOMERS
<S> <C> <C> <C>
POWER SUPPLIES:
Computers and peripherals:
COMPUTER PERIPHERALS/OFFICE
AUTOMATION 21% Digital Equipment, Hewlett-Packard,
IBM, 3M, Xerox
FILE SERVERS 19 Digital Equipment, Hewlett-Packard,
Compaq, Apple
MINI COMPUTERS/FAULT TOLERANT
COMPUTERS 16 IBM, Unisys, Stratus
WORKSTATIONS 6 Hewlett-Packard, Silicon Graphics,
--- Sun Microsystems
SUBTOTAL COMPUTERS AND
PERIPHERALS 62%
Data communications 20 Cabletron, Bay Networks,
Cisco, Ericsson
Test and measurement 9 Tektronix, Hewlett-Packard, Abbott
--- Laboratories
SUBTOTAL POWER SUPPLIES 91
REPAIR AND SERVICE:
REPAIR 2 Various
SERVICE AND LOGISTICS 7 Hewlett-Packard
---
SUBTOTAL REPAIR AND SERVICE 9
---
TOTAL 100%
===
</TABLE>
Although the Company seeks to diversify both its customer and market application
base, a small number of companies are responsible for a significant portion of
Zytec's net sales. At December 31, 1995, the Company had 25 power supply product
customers worldwide. During 1995, the Company had four customers with revenue
exceeding $20 million, including Digital Equipment Corporation ($29 million, or
17% of net sales), Hewlett-Packard ($28 million, or 16% of net sales), IBM ($26
million, or 15% of net sales), and Cabletron ($21 million, or 12% of net sales),
and a total of eight customers with revenues exceeding $5 million. The Company
expects to continue to depend upon a limited number of customers for a
substantial portion of its revenues.
BACKLOG
Sales are made pursuant to purchase orders rather than long-term contracts.
Backlog consists of purchase orders on hand generally having delivery dates
scheduled within the next three months. Zytec's backlog was $59.3 million, $52.3
million and $26.8 million at March 31, 1996, December 31, 1995 and December 31,
1994, respectively. Due to the increasing trend for OEMs to reduce their lead
time for purchase orders, and because customers may cancel or reschedule
deliveries, the Company does not consider backlog to be a reliable indicator of
future financial results.
COMPETITION
The merchant power supply manufacturing industry is highly fragmented and
characterized by intense competition. According to Micro-Tech Consultants, there
were approximately 300 power supply manufacturers in the United States in 1994.
Over 80% of the power supply companies in the world have annual revenues less
than $10 million. According to Micro-Tech Consultants, in 1995 Zytec was the 5th
largest power supply company in the United States and the 9th largest power
supply company in the world.
Zytec's competition includes companies located throughout the world, some of
which have advantages over the Company in terms of labor and component costs,
and which may offer products comparable in quality to those of Zytec. Certain
of the Company's competitors have greater resources and geographic presence than
Zytec. Zytec also views as competitive threats the potential that its customers
may decide to produce their own power supplies, and that OEMs with captive
manufacturing capabilities may compete in the merchant market. However, several
large OEMs have divested their captive power supply manufacturing operations,
including NCR, TRW and Digital Equipment. Management believes that the principal
bases of competition in Zytec's targeted market are manufacturing technology,
cycle time of design and manufacture, technical knowledge, quality, and the
availability of value added services. To remain competitive, Zytec must compete
favorably on the basis of value by providing technologically advanced
manufacturing services, improving quality and reliability levels, offering
flexible delivery schedules, and delivering finished products on a reliable
basis.
RESEARCH AND DEVELOPMENT
Zytec's research and development activities are principally directed to the
development of new custom power supply products to satisfy specific customer
needs. Additionally, the Company continues to develop common circuit design to
assist in the development of future products for specific customers. Zytec's
research activities also include internally performed research and an
affiliation with the Virginia Polytechnic Institute Power Electronics Center.
Internal research efforts are primarily focused on improving electromagnetic
components in order to reduce component costs, improve ease of manufacture, and
accommodate product size constraints.
Customers in the Company's target markets require product designs to be
completed quickly. A major challenge for Zytec is to reduce design time without
reducing quality of the design. In 1995, the Company's average time to design
and introduce a product into production improved by 20%, the same rate of
improvement achieved in 1994. Most of the improvement comes from restructuring
existing resources and process improvements. In 1995, the Company began a
product to use computer simulation to speed the process of original design. The
Company does not expect to realize results from this project in 1996.
Product development is performed by a group of 36 engineers located in
Minnesota, 3 engineers in Texas and 18 engineers in Austria. The Company's total
expenditures for research and development were $2.4 million for the quarter
ended March 31, 1996, and were $8.6 million, $8.1 million, and $6.9 million for
the years of 1995, 1994 and 1993, respectively. Of these amounts, 14.8%, 18.2%,
30.2% and 52.2%, respectively, were funded by customers in connection with new
product designs. Customer reimbursements of research and development
expenditures are reported as "Other revenue" in the Company's financial
statements. In 1993, the Company received an unusual reimbursement to the
Company for work performed in prior periods. Other revenue as a percentage of
research and development expenditures is declining, due in part to higher levels
of research (which are not reimbursed by customers) and in part to the trend
toward lower funding per project. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
INTELLECTUAL PROPERTY MATTERS
Certain equipment, processes, information and knowledge developed by Zytec and
used in the design and manufacture of its products are regarded as proprietary
by the Company. Within Zytec, intellectual property protection is implemented
through nondisclosure agreements with employees. In addition, Zytec relies on a
combination of trade secret and other intellectual property law and other
measures to protect its proprietary rights, including holding patents and
evaluating the benefits of obtaining patents. If the Company believes that it
has patentable properties and that patents could enhance the Company's position,
patents are pursued. Zytec currently holds patents in the United States and
Europe relating to proprietary technology used in its products, as well as two
trademarks and a service mark. The remaining terms for these marks vary from
five to 15 years and, subject to use, the Company expects to renew each mark.
The Company's United States patent expires in 2004, and its European patents
have 20-year terms from the dates of their filings. The Company believes that
although the patents and other proprietary information it holds and may obtain
will be of value, they will not determine the Company's success, which depends
principally on its emphasis on quality, service and value.
Zytec signed a licensing agreement in September 1992 with Digital Equipment
Corporation to complete the design and manufacture of a family of DC/DC
converters in the 150 watt to 300 watt range. In addition, Zytec signed a
license agreement with Ericsson Components AB ("Ericsson"), a multinational
telecommunications firm headquartered in Sweden, for Ericsson's power division
to market Zytec's DC/DC converters in the standard power supply marketplace
world wide. The licensing agreement with Ericsson will expire December 31, 1996.
Zytec also signed a licensing agreement in December 1994, with Galaxy Power
Inc., Boston, Massachusetts to develop a "next generation" family of high
density DC/DC converters. This agreement is a non-exclusive, perpetual license
to make, have made, use, market and sell certain high density DC/DC product
lines under Zytec's name and on a private label basis to Ericsson for an
up-front license fee plus engineering fees. Zytec also has a first right to
acquire a license from Galaxy for certain future products developed by Galaxy.
These products will be introduced to the marketplace in 1996.
FACILITIES
The following table identifies the Company's facilities. Assuming successful
commencement of operations in the Company's Colorado facility, management
believes that the Company's facilities are adequate for the foreseeable future.
APPROXIMATE OWNED VS.
FACILITY PRIMARY ACTIVITY SQUARE FOOTAGE LEASED
Eden Prairie, MN Engineering, Administration 28,000 Leased
Redwood Falls, MN Manufacturing 98,700 Owned
118,000 Leased
Broomfield, CO Manufacturing 74,000 Leased
Vienna, Austria Engineering, Administration 8,700 Leased
Kindberg, Austria Manufacturing 58,000 Leased
Lincoln, CA Repair, Logistics, 180,000 Leased
Hewlett-Packard
Tatabanya, Hungary Magnetics Manufacturing 62,000 Owned
EMPLOYEES
As of March 31, 1996, the Company had 1,764 full-time employees, in the
following locations:
Minnesota 649
Colorado 101
California 341
Texas 3
Austria 339
Hungary 331
-----
Total 1,764
=====
Of these employees, 1,377 were in production, 92 were in research and
development, 69 were in clerical positions, 23 were in sales, marketing and
customer service, and 203 were in executive and administrative positions. The
Company also engaged other personnel on a part-time basis. None of the Company's
United States employees are members of a collective bargaining unit. The
employees of Zytec Austria are members of a national labor union, as are most
employees of Austrian companies. Management believes employee relations are
good.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers are as follows:
NAME AGE POSITION WITH COMPANY
- ---- --- ---------------------
Ronald D. Schmidt 60 Chairman of the Board, President, and
Chief Executive Officer
John M. Steel 52 Vice President, Marketing and Sales and Director
Josef J. Matz 55 Managing Director of Zytec Austria and Director
John B. Rogers 53 Treasurer and Vice President, Finance
N. Charles Wussow 50 Vice President, Engineering
Max Davis 52 Vice President, Manufacturing
Sherman Winthrop 65 Secretary and Director
Lawrence J. Matthews 67 Director
Gary C. Flack 59 Director
Dr. Fred C. Lee 50 Director
John V. Titsworth 70 Director
James S. Womack 67 Director
RONALD D. SCHMIDT is a co-founder of the Company and has served as an officer
and a Director since the Company commenced operations in January 1984. Until
January 1984, he was employed by Control Data Corporation ("CDC") in many areas
of general and product management, including Vice President and General Manager,
Computer Peripherals, Inc., and Managing Director for Control Data Portugal. Mr.
Schmidt also was involved with CDC in connection with its divestiture of the
Centronics printer business and the merger of the Sperry disk operations into
Magnetic Peripherals, Inc.
JOHN M. STEEL is a co-founder of the Company and has been an officer and a
Director since January 1984. Until January 1984, he was employed by CDC in
numerous positions in marketing and general management, with his latest position
with CDC being General Manager -- OEM Technical Support.
JOSEF J. MATZ joined Zytec in November 1991 as Managing Director -- Zytec GmbH,
the Company's wholly-owned subsidiary located in Austria. From October 1990 to
November 1991, he was Vice President -- European Operations for Modular Computer
Systems, a computer manufacturer. Until accepting this position with Modular
Computer Systems, Mr. Matz had been employed with CDC for approximately 20
years, including positions as General Manager -Marketing and Operations Europe,
and several sales, marketing and operations positions.
JOHN B. ROGERS has been Treasurer and Vice President -- Finance of the Company
since January 1986. He held prior positions as Chief Financial Officer of Wagner
Spray Tech, Vice President -- Administration of Bachman's, Inc., and Director of
Finance of Dayton-Hudson Corporation.
N. CHARLES WUSSOW joined Zytec in March 1993 as Vice President --
Engineering. In 1978, he co-founded Summit Electronics, Inc. ("Summit"), a
power supply company. In 1982, Summit was sold to Basler Electric Company and
Mr. Wussow remained as General Manager of Basler's Electronic Product Group
until his employment with Zytec.
MAX DAVIS has been Vice President -- Manufacturing since April 1995. From July
1991 to April 1995, he was a Senior Partner for Thomas Group, Inc., a management
consulting firm. Mr. Davis served as Vice President Manufacturing for Outbound
Systems, Inc. from January 1990 to July 1991, and as Vice President
Manufacturing for Loredan Biomedical from September 1988 to November 1989. For
19 years prior to 1988, Mr. Davis was employed in various manufacturing
management positions with Hewlett-Packard, most recently as Manufacturing
Manager, Terminals and Personal Computers, in Roseville, California.
SHERMAN WINTHROP has been Secretary since January 1984 and a Director since
November 1984. He has been a principal in the law firm of Winthrop & Weinstine,
P.A., since 1979. Winthrop & Weinstine, P.A. has been counsel to the Company
since Zytec's formation in 1983. See "Legal Matters." Mr. Winthrop is also a
director of Bremer Financial Corporation, a regional multi-bank holding company.
LAWRENCE J. MATTHEWS is a co-founder of the Company, has been a Director since
January 1984, and was Vice President -- Engineering of the Company from January
1984 until his retirement in May 1993. Until January 1984, he was employed by
CDC in engineering design and management and operations management.
GARY C. FLACK has been a Director of the Company since April 1988 and an
associate in Thomas Group, Inc., a management consulting firm, since November
1988. He was Vice President -- Manufacturing for the Company from December 1987
to November 1988. Prior to December 1987, he was Vice President and General
Manager of the Interconnect Group of Sheldahl, Inc., which manufactures
electronic materials, flexible circuitry, graphic display systems and engineered
products.
DR. FRED C. LEE has been a Director of the Company since February 1986. He
has been a Professor at Virginia Polytechnic Institute and State University
("VPI") in Blacksburg, Virginia, and Director of the Virginia Power
Electronics Center at VPI since 1977.
JOHN V. TITSWORTH has been a Director of the Company since August 1986. He is
retired Chairman, Board of Managers, at the Rose Hulman Institute of Technology,
a private engineering college, and held that position from 1988 to 1995. From
February 1988 until March 1989, he was Chairman of the Board and Chief Executive
Officer of Priam Corporation, a computer disk memory company in San Jose,
California, and prior to February 1988 he was Executive Vice President and a
member of the Board of Directors of Xerox Corp.
JAMES S. WOMACK has been a Director of the Company since April 1984. He is
Chairman of the Board of Sheldahl, Inc., and was its Chief Executive Officer
until 1991. He is also a Director of General Securities, a mutual fund.
All directors hold office until the next annual meeting of shareholders and
until their successors have been elected and qualified or until their earlier
death, resignation or removal from office. The officers of the Company are
appointed by the Board of Directors and hold office until their successors
are chosen and qualified or until their earlier death, resignation, or removal
from office.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information as of June 4, 1996, except as
otherwise noted, with respect to the beneficial ownership of the Company's
Common Stock by (i) each shareholder who is known by the Company to own
beneficially more than 5% of the outstanding Common Stock, (ii) each director
and each executive officer, (iii) each Selling Shareholder, and (iv) all
executive officers and directors as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING (1) NUMBER OF OFFERING (1)
----------------------- SHARES BEING -----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT (2) OFFERED NUMBER PERCENT (3)
- ------------------------ ------ ----------- ------- ------ -----------
<S> <C> <C> <C> <C> <C>
Stein Roe & Farnham Incorporated (3) 509,000 5.7% -- 509,000 4.6%
One South Wacker Drive
Chicago, IL 60606
Ronald D. Schmidt (4)(5) 951,950 10.6 95,200 856,750 7.8
7575 Market Place Drive
Eden Prairie, MN 55344
John M. Steel (5) 870,952 9.7 87,100 783,852 7.1
7575 Market Place Drive
Eden Prairie, MN 55344
Lawrence J. Matthews 896,620 10.0 89,700 806,920 7.3
7601 Fifth Avenue
Richfield, MN 55423
Gary C. Flack (4) 251,250 2.8 -- 251,250 2.3
John B. Rogers (5) 93,804 1.0 -- 93,804 *
Sherman Winthrop 60,000 * -- 60,000 *
James S. Womack 60,000 * -- 60,000 *
Dr. Fred C. Lee 29,000 * -- 29,000 *
Josef J. Matz (6) 156,000 1.7 -- 156,000 1.4
John V. Titsworth 30,000 * -- 30,000 *
N. Charles Wussow (6) 60,000 * -- 60,000 *
Max Davis (6) 20,650 * -- 20,650 *
All executive officers and
directors as a group (12 persons)(7) 3,480,226 38.0% 272,000 3,208,226 28.8%
</TABLE>
*Less than 1%.
(1) Unless otherwise indicated, each person or group has sole voting and
investment power with respect to all outstanding shares. The table includes
shares not outstanding but which may be acquired within 60 days of June 4,
1996 pursuant to the exercise of options to purchase Common Stock.
(2) The percentage calculations are based upon 8,996,472 shares outstanding at
June 4, 1996, and 10,996,472 shares outstanding after the offering,
respectively. The number of shares which may be acquired within 60 days of
June 4, 1996 pursuant to the exercise of options is deemed outstanding for
purposes of computing the percent of class owned by such person.
(3) Reflects information as of December 31, 1995, based on a Schedule 13G, dated
February 12, 1996, filed by such company with the Securities and Exchange
Commission, which indicates that the shareholder has no voting power and
sole dispositive power with respect to said shares.
(4) Includes shares held by a partnership consisting of the individual and
members of his family, as follows: Mr. Schmidt (400,000 shares) and Mr.
Flack (25,650).
(5) Includes shares held by the individual's spouse and children, as follows:
Mr. Schmidt (1,700 shares), Mr. Steel (200,000), Mr. Flack (95,600), and
Mr. Rogers (48,502).
(6) Includes, for each individual named, the following number of shares
subject to non-qualified options or options granted under the Company's
Incentive Stock Option Plans ("ISOPs"): Mr. Matz (80,000), Mr. Wussow
(60,000) and Mr. Davis (20,000).
(7) Includes 160,000 shares subject to non-qualified options or options granted
under the ISOPs.
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting Agreement, the
Underwriters named below, for whom Needham & Company, Inc. and Nesbitt Burns
Securities Inc. are acting as representatives (the "Representatives"), have
severally agreed to purchase from the Company and the Selling Shareholders, and
the Company and the Selling Shareholders agreed to sell to each Underwriter, the
aggregate number of shares of Common Stock set forth opposite their respective
names in the table below. The Underwriting Agreement provides that the
obligations of the Underwriters to pay for and accept delivery of the shares of
Common Stock are subject to certain conditions precedent, and that the
Underwriters are committed to purchase and pay for all shares if any shares are
purchased.
NUMBER
UNDERWRITER OF SHARES
- ----------- ----------
Needham & Company, Inc.
Nesbitt Burns Securities Inc.
----------
Total 2,272,000
==========
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the offering price
set forth on the cover page of this Prospectus and to certain dealers (who may
include the Underwriters) at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may allow, a concession not
in excess of $ per share to certain other dealers (who may include the
Underwriters). After the offering to the public, the offering price and other
selling terms may be changed by the Representatives.
The Company has granted the Underwriters a 30-day option to purchase up to an
additional 300,000 shares, solely to cover over-allotments, if any, at the
public offering price per share, less the underwriting discounts and commissions
set forth on the cover page of this Prospectus. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
Common Stock offered hereby. To the extent the Underwriters exercise such
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares of Common Stock to be purchased by such
Underwriters as shown in the above table bears to the total shown.
In the Underwriting Agreement, the Company and the Selling Stockholders have
agreed to indemnify the Underwriters against certain liabilities that may be
incurred in connection with this offering, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company's officers and directors and the Selling Stockholders have agreed
that, without the prior written consent of Needham & Company, Inc., they will
not directly or indirectly offer, sell, contract to sell or otherwise dispose of
any shares of Common Stock or any securities convertible or exchangeable
therefor for 180 days after the date of this Prospectus; however, beginning on
the thirty-first day after the date of this Prospectus, the Representatives have
consented to the sale of up to an aggregate of 45,000 of these shares, provided
that such sales are made through Needham & Company, Inc. The Company has agreed
in the Underwriting Agreement not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exchangeable for shares of Common Stock, other than the shares of Common Stock
being offered hereby, for a period of 180 days after the date of this Prospectus
without the prior written consent of Needham & Company, Inc.
The representatives have advised the Company that the Underwriters do not intend
to confirm sales to any account over which they exercise discretionary
authority.
The offering of the shares is made for delivery when, as and if accepted by the
Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject any order for the purchase of shares in whole or in part.
In connection with this offering, the Underwriters may engage in passive market
making transactions in the Common Stock on the Nasdaq National Market
immediately prior to the commencement of sales in this offering, in accordance
with Rule 10b-6A under Securities and the Exchange Act of 1934, as amended (the
"Exchange Act"). Passive market making consists of displaying bids on the Nasdaq
National Market limited by the bid prices of independent market makers and
purchase limited by such prices. Net purchases by a passive market maker on each
day are limited to a specified percentage of the passive market maker's average
daily trading volume in the Common Stock during a specified prior period and
must be discontinued when such limit is reached. Passive market making may
stabilize the market price of the Common Stock at a level above that which might
otherwise prevail and, if commenced, may be discontinued at any time.
The foregoing is a brief summary of the provisions of the Underwriting Agreement
and does not purport to be a complete statement of its terms and conditions. A
copy of the Underwriting Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
LEGAL MATTERS
Certain legal matters in connection with the validity of the Common Stock
offered hereby will be passed upon for the Company by Winthrop & Weinstine,
P.A., St. Paul, Minnesota. Sherman Winthrop, a director, officer and shareholder
of the Company, is a principal of Winthrop & Weinstine, P.A., which receives
compensation from the Company for rendering legal services. Certain legal
matters relating to the offering will be passed upon for the Underwriter by
Oppenheimer Wolff & Donnelly, Minneapolis, Minnesota, counsel for the
Underwriter.
EXPERTS
The consolidated financial statements and financial statement schedules of Zytec
Corporation as of December 31, 1995 and 1994, and for each of the three years in
the period ended December 31, 1995 included or incorporated by reference in the
Registration Statement have been included or incorporated herein in reliance on
the report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's regional offices located at Northwestern Atrium Center,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material may also be obtained by mail from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
This Prospectus is part of a Registration Statement on Form S-3 (the
"Registration Statement") which the Company has filed with the Commission under
the Securities Act of 1933, as amended (the "Securities Act"), relating to the
securities offered hereby. This Prospectus omits certain information contained
in the Registration Statement, to which reference is hereby made for further
information with respect to the Company and the Shares offered hereby. Copies of
the Registration Statement may be inspected without charge at the offices of the
Commission or obtained at prescribed rates from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents are hereby incorporated by reference in this Prospectus
except as superseded or modified herein: (i) the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995; (ii) the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1996; and (iii) the
description of the Company's Common Stock, contained in the Company's Form 8-A
relating to its Common Stock, filed by the Company with the Commission on
September 21, 1993.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering of the shares offered hereby shall
be deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the date of filing such documents.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person, including a beneficial
owner, to whom this Prospectus is delivered, upon written or oral request of
such person, a copy of any or all documents that have been or may be
incorporated by reference herein (other than exhibits to such documents which
are not specifically incorporated by reference into such documents). Such
requests should be directed to the Chief Financial Officer at the Company's
principal executive offices at 7575 Market Place Drive, Eden Prairie, Minnesota
55344, telephone number (612) 941-1100.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of March 31, 1996 F-2
Consolidated Statements of Operations for the three months ended
March 31, 1996 and April 2, 1995 F-3
Consolidated Statements of Cash Flows for the three months ended
March 31, 1996 and April 2, 1995 F-4
Notes to Consolidated Financial Statements F-5
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants F-8
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-9
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 F-10
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993 F-11
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 F-12
Notes to Consolidated Financial Statements F-13
ZYTEC CORPORATION
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1996
-------
<S> <C>
Current assets:
Cash and cash equivalents $ 2
Accounts receivable 34,092
Inventories 31,185
Deferred income taxes 959
Other current assets 2,194
-------
Total current assets 68,432
Property, plant and equipment, net 16,772
Other assets 808
-------
Total assets $86,012
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debt and capital lease obligations, current portion $20,874
Accounts payable 24,880
Accrued expenses 8,205
-------
Total current liabilities 53,959
Debt and capital lease obligations, less current portion 6,916
Deferred income taxes 1,012
Other liabilities 575
-------
Total liabilities 62,462
-------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; 25,000,000 shares authorized, 8,811,156
shares outstanding at March 31, 1996 11,919
Retained earnings 11,793
Foreign currency translation adjustments (162)
-------
Total stockholders' equity 23,550
-------
Total liabilities and stockholders' equity $86,012
=======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
ZYTEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED
------------------
MARCH 31, APRIL 2,
1996 1995
---------- ----------
Net sales $ 61,087 $ 32,881
Cost of goods sold 53,141 29,233
---------- ----------
Gross profit 7,946 3,648
---------- ----------
Other revenue 353 384
---------- ----------
Operating expenses:
Selling 844 755
General and administrative 1,616 850
Research and development 2,390 2,161
---------- ----------
Total operating expenses 4,850 3,766
---------- ----------
Operating income 3,449 266
Other income (expense):
Interest expense (381) (224)
Other, net (129) 149
---------- ----------
Income before income taxes 2,939 191
Income taxes 831 71
---------- ----------
Net income $ 2,108 $ 120
========== ==========
Net income per share:
Primary $ 0.22 $ 0.01
========== ==========
Fully diluted $ 0.21 $ 0.01
========== ==========
Common and common equivalent shares outstanding:
Primary 9,606,038 9,233,254
========== ==========
Fully diluted 9,812,288 9,248,516
========== ==========
See accompanying notes to unaudited consolidated financial statements.
ZYTEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
------------------
MARCH 31, APRIL 2,
1996 1995
-------- --------
Cash flows from operating activities:
Net income $ 2,108 $ 120
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 817 610
Changes in operating assets and liabilities (8,691) 3,444
Other (44) (184)
-------- --------
Net cash (used in) provided by operating
activities (5,810) 3,990
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (1,343) (614)
Cash paid for Zytec Hungary Elektronikai Kft. (839)
Increase in other assets (25)
-------- --------
Net cash used in investing activities (2,207) (614)
-------- --------
Cash flows from financing activities:
Payments of debt and capital lease obligations (2,283) (2,450)
Proceeds from debt and capital lease obligations 1,931 2,152
Proceeds from revolving credit agreement 55,509 23,657
Payments on revolving credit agreement (48,866) (25,979)
Sale of common stock for cash 120 7
Decrease in bank overdrafts 1,534 (511)
-------- --------
Net cash provided by (used in) financing
activities 7,945 (3,124)
-------- --------
Effect of exchange rate changes on cash 72 (252)
-------- --------
Change in cash and cash equivalents $ -- $ --
======== ========
See accompanying notes to unaudited consolidated financial statements.
ZYTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements as of March 31, 1996 and for the periods
ended March 31, 1996 and April 2, 1995, have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. The consolidated financial statements reflect all
adjustments, consisting of normal recurring adjustments, which the Company
considers necessary for a fair presentation of the results for the indicated
periods. The results of operations for any interim period are not necessarily
indicative of results for the full year. Certain information and accounting
policies and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These consolidated
financial statements should be read in conjunction with the accompanying audited
consolidated financial statements and notes thereto.
2. SELECTED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
MARCH 31,
1996
--------
(IN THOUSANDS)
<S> <C>
Inventories
Work in process and finished goods $ 8,728
Parts and subassemblies 22,457
--------
$ 31,185
========
Property, plant and equipment:
Land and land improvements $ 76
Building and building improvements 649
Equipment, furniture and leasehold improvements 19,279
Equipment, furniture and leasehold improvements
under capital leases 6,181
--------
26,185
Less accumulated depreciation (12,769)
Less accumulated amortization of equipment and leasehold improvements
under capital leases (2,084)
--------
11,332
Construction in progress and deposits on equipment 5,440
--------
$ 16,772
========
</TABLE>
Accounts payable included bank overdrafts of $2,727,000 at March 31, 1996.
3. SUPPLEMENTAL CASH FLOW DATA:
The following provides supplemental disclosures of cash flow activities for the
three months ended March 31, 1996 and April 2, 1995, respectively:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS
----------------------
MARCH 31, APRIL 2,
1996 1995
------- ------
(IN THOUSANDS)
<S> <C> <C>
Changes in operating assets and liabilities:
Accounts receivable $(7,644) $ 387
Inventories (7,137) 375
Other current assets (162) 939
Accounts payable 4,977 1,952
Accrued expenses 1,275 (209)
------- ------
$(8,691) $3,444
======= ======
Noncash transactions:
Property and equipment acquired through capital lease
obligations $ 2,920 $ 413
Equipment acquired through issuance of debt 781 --
</TABLE>
4. INCOME TAXES:
The 1996 and 1995 consolidated effective tax rates differ from the federal
statutory tax rate primarily due to state taxes offset by the utilization of the
Austrian subsidiary's net operating loss carryforwards. See further explanation
regarding the Company's effective tax rate in Management's Discussion and
Analysis of Financial Condition and Results of Operations.
5. EMPLOYEE BENEFIT PLANS:
In April 1996, the Company's Board of Directors established a noncontributory
profit-sharing plan covering substantially all employees. The Company may make
semiannual contributions to the plan based on profit performance in relation to
goals to be established by the Board of Directors. The plan will become
effective July 1, 1996.
In April 1996, the Company's Board of Directors established a stock purchase
plan that will allow substantially all employees to purchase, through payroll
deductions, newly issued shares of the Company's common stock. The plan will
become effective July 1, 1996.
6. STOCK SPLIT:
In April 1996, the Company's Board of Directors authorized a two-for-one stock
split in the form of a 100% stock dividend to be distributed on June 3, 1996 to
shareholders of record on May 20, 1996. All per share and number of share data
have been retroactively restated to reflect the stock split, except for the
Consolidated Statements of Stockholders' Equity.
7. DEBT ARRANGEMENTS:
In May 1996, the Company extended its revolving credit arrangement with its bank
through June 30, 1996. This agreement also extended the maximum amount of
borrowings from $14 million to $16 million. On May 30, 1996, the Company entered
into a revolving credit facility with a new bank. The agreement provides up to
$23 million in borrowing through August 1996, and $10 million thereafter, and
expires in May 1999. Credit availability under this facility is subject to a
defined borrowing base that is based on certain percentages of accounts
receivable, inventories and plant and equipment. 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. The
Company must pay a fee of .25% on the unused portion of the revolving credit
balance. The agreement requires the Company to maintain certain leverage,
interest coverage, current and funded debt ratios.
8. ACQUISITION:
In March 1996, the Company completed the acquisition of the outstanding stock of
BHG Tatabanya Alkatrezsgyarto Kft. (now known as Zytec Hungary Elektronikai
Kft.) located in Hungary. The $839,000 purchase price was paid in cash. This
acquisition has been recorded using the purchase method of accounting. This
acquisition is not significant to the Company's consolidated results of
operations and financial position.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Zytec Corporation:
We have audited the accompanying consolidated balance sheets of Zytec
Corporation as of December 31, 1995 and 1994, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Zytec Corporation
as of December 31, 1995 and 1994, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
February 21, 1996
ZYTEC CORORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
------- -------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2 $ 2
Accounts receivable 26,648 16,315
Inventories 24,201 17,303
Deferred income taxes 932 750
Other current assets 2,082 2,180
------- -------
Total current assets 53,865 36,550
------- -------
Property, plant and equipment, net 11,823 8,621
Other assets 679 304
------- -------
Total assets $66,367 $45,475
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debt and capital lease obligations, current portion $13,942 $ 7,280
Accounts payable 18,487 9,988
Accrued expenses 6,979 5,102
------- -------
Total current liabilities 39,408 22,370
------- -------
Debt and capital lease obligations, less current portion 4,050 4,764
Deferred income taxes 1,001 823
Other liabilities 541 405
------- -------
Total liabilities 45,000 28,362
Commitments and contingencies
Stockholders' equity (Common stock, no par value;
25,000,000 shares authorized, 8,687,306 and 8,479,666
shares outstanding at December 31, 1995 and December 31,
1994, respectively) 21,367 17,113
------- -------
Total liabilities and stockholders' equity $66,367 $45,475
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
ZYTEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
<S> <C> <C> <C>
Net sales $ 170,518 $ 128,141 $ 90,614
Cost of goods sold 149,922 109,847 76,622
---------- ---------- ----------
Gross profit 20,596 18,294 13,992
---------- ---------- ----------
Other revenue 1,559 2,462 3,624
---------- ---------- ----------
Operating expenses:
Selling 3,117 2,857 2,456
General and administrative 4,022 3,533 2,853
Research and development 8,587 8,144 6,936
---------- ---------- ----------
Total operating expenses 15,726 14,534 12,245
---------- ---------- ----------
Operating income 6,429 6,222 5,371
Other income (expense):
Interest expense (1,053) (766) (1,173)
Other, net 703 (38) 191
---------- ---------- ----------
Income before income taxes 6,079 5,418 4,389
Income taxes 2,201 2,054 1,718
---------- ---------- ----------
Net income $ 3,878 $ 3,364 $ 2,671
========== ========== ==========
Net income per share:
Primary $ 0.42 $ 0.36 $ 0.37
========== ========== ==========
Fully diluted $ 0.41 $ 0.36 $ 0.35
========== ========== ==========
Common and common equivalent shares outstanding:
Primary 9,267,784 9,323,936 7,298,676
========== ========== ==========
Fully diluted 9,388,880 9,323,936 7,554,586
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
ZYTEC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED FOREIGN
COMMON STOCK EARNINGS CURRENCY
--------------------- (ACCUMULATED TRANSLATION
SHARES AMOUNT DEFICIT) ADJUSTMENTS TOTAL
------ ------ -------- ----------- -----
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 2,876,027 $ 1,546 $ (228) $(170) $ 1,148
Exercise of stock options 158,736 153 153
Tax benefit realized upon exercise of stock
options 145 145
Proceeds from initial public offering of common
stock (net of offering costs of $1,155) 1,000,000 9,220 9,220
Net income for the year 2,671 2,671
Foreign currency translation adjustments (6) (6)
--------- ------- ------ ----- -------
Balance, December 31, 1993 4,034,763 11,064 2,443 (176) 13,331
Exercise of stock options 205,070 219 219
Tax benefit realized upon exercise of stock
options 173 173
Net income for the year 3,364 3,364
Foreign currency translation adjustments 26 26
--------- ------- ------ ----- -------
Balance, December 31, 1994 4,239,833 11,456 5,807 (150) 17,113
Exercise of stock options 103,820 147 147
Tax benefit realized upon exercise of stock
options 196 196
Net income for the year 3,878 3,878
Foreign currency translation adjustments 33 33
--------- ------- ------ ----- -------
Balance, December 31, 1995 4,343,653 $11,799 $9,685 $(117) $21,367
========= ======= ====== ===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
ZYTEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net income $ 3,878 $ 3,364 $ 2,671
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 2,728 2,172 1,954
Deferred income taxes (4) (108) 177
Changes in operating assets and liabilities (5,872) (11,243) (3,048)
Other 90 124 58
--------- -------- --------
Net cash provided by (used in) operating
activities 820 (5,691) 1,812
--------- -------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (3,035) (3,212) (673)
Increase in other assets (300) -- --
--------- -------- --------
Net cash used in investing activities (3,335) (3,212) (673)
--------- -------- --------
Cash flows from financing activities:
Proceeds from debt and capital lease obligations 6,950 6,500 3,494
Payments of debt and capital lease obligations (8,884) (7,043) (5,503)
Proceeds from revolving credit loan 139,050 71,872 76,087
Payments on revolving credit loan (134,474) (68,493) (79,354)
Increase (decrease) in bank overdrafts (307) 1,442 (1,089)
Exercise of stock options 147 219 161
Tax benefit realized upon exercise of stock
options 196 173 145
Net proceeds from issuance of common stock in
initial public offering -- -- 9,220
--------- -------- --------
Net cash provided by financing activities 2,678 4,670 3,161
--------- -------- --------
Effect of exchange rate changes on cash (163) (36) (31)
--------- -------- --------
Increase (decrease) in cash and cash equivalents -- (4,269) 4,269
Cash and cash equivalents, beginning of year 2 4,271 2
--------- -------- --------
Cash and cash equivalents, end of year $ 2 $ 2 $ 4,271
========= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
ZYTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES:
Zytec Corporation (the Company) is a designer and manufacturer of custom
electronic power supplies for original equipment manufacturers in the computer
and electronic equipment industries. The Company also provides repair services
for power supplies and repair and materials management services for a
significant customer.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned Austrian subsidiary, Zytec GmbH.
All intercompany accounts and transactions have been eliminated in
consolidation.
FOREIGN CURRENCY TRANSLATION: The financial position and results of operations
of the Company's international subsidiary are measured using the local currency
as the functional currency. Assets and liabilities of this subsidiary are
translated at the exchange rates in effect at each fiscal year-end. Statement of
Operations accounts are translated at the average rates of exchange prevailing
during the year. Translation adjustments arising from the use of differing
exchange rates from period to period are included in the foreign currency
translation adjustments account in stockholders' equity.
FOREIGN CURRENCY OPTIONS AND FORWARD CONTRACTS: The Company utilizes hedging
financial instruments (foreign currency option and forward contracts) from time
to time to limit the financial risk of foreign currency exchange rates primarily
related to certain receivables. The Company does not use hedging instruments of
a speculative nature for trading purposes. Realized and unrealized gains and
losses are deferred and recognized as part of the specific transaction being
hedged. The Company had foreign currency option and forward contracts with a
face amount of $5.0 million and $1.0 million at December 31, 1995 and December
31, 1994, respectively. The unrealized losses on the contracts were not
significant.
CASH AND CASH EQUIVALENTS: The Company considers its investments in all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents.
INVENTORIES: Inventories are valued at the lower of cost or market, with cost
determined on a first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at
cost. Depreciation and amortization are computed on the straight-line method
over the estimated useful lives of the assets or the lease terms, if shorter.
Maintenance and repairs are charged to expense as incurred. The cost and related
accumulated depreciation on asset disposals are removed from the accounts and
any gain or loss thereon is included in operations in the year of disposition.
INCOME TAXES: Deferred income tax assets and liabilities are recognized for the
expected future tax consequences of differences in the financial statement and
tax bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. Valuation allowances are
provided, when necessary, to reduce defferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable for the period and the
change in deferred income tax assets and liabilities during the period.
REVENUE RECOGNITION: Sales are recorded as products are shipped or services are
rendered. The Company enters into agreements with certain customers whereby the
customers fund a portion of research and development expenses relating to the
designing of particular products. This funding is recognized as Other revenue in
the Consolidated Statements of Operations in the periods the Company incurs the
related costs and has agreed with the customer as to the amount.
The Company functions as a buying agent for certain materials and supplies for a
significant customer. Because the customer reimburses the Company for all actual
costs and bears all risk of loss under this arrangement, the costs for these
materials and supplies are presented net of the related reimbursements in the
Consolidated Statements of Operations. Revenues for the services the Company
provides as a buying agent and the related costs are included in Net sales and
Cost of goods sold, respectively, in the Consolidated Statements of Operations.
PRODUCT WARRANTY: The Company records estimated product warranty costs in the
period in which the related sales are recognized.
RESEARCH AND DEVELOPMENT: Research and development costs are expensed as
incurred.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARES: Net income per common and
common equivalent shares has been computed by dividing net income by the
weighted average number of common and common equivalent shares outstanding for
the period, using the modified treasury stock method. Common equivalent shares
relate to stock options. For 1995 and 1993, fully diluted earnings per share
reflects the additional dilution related to stock options because the market
price at the end of the period was higher than the average market price during
the period.
Shares sold and stock options issued within twelve months prior to the date of
the initial public offering for a per share price less than the initial public
offering price are included in the calculation of net income per share under
Securities and Exchange Commission rules as if they had been outstanding for the
entire period prior to the initial public offering, using the modified treasury
stock method.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant areas which require the use of management estimates relate to
product warranty costs, allowance for inventory obsolescence, and valuation
allowance for deferred taxes.
STOCK SPLIT: In April 1996, the Company's Board of Directors authorized a
two-for-one stock split in the form of a 100% stock dividend to be distributed
on June 3, 1996 to shareholders of record on May 20, 1996. All per share and
number of share data have been retroactively restated to reflect the stock
split, except for the Consolidated Statements of Stockholders' Equity.
NOTE 2 -- SELECTED BALANCE SHEET DATA:
1995 1994
-------- -------
(IN THOUSANDS)
Inventories:
Work in process and finished goods $ 7,392 $ 4,770
Parts and subassemblies 16,809 12,533
-------- -------
$ 24,201 $17,303
======== =======
Property, plant and equipment, net:
Land and land improvements $ 76 $ 76
Building and building improvements 637 612
Equipment, furniture and leasehold
improvements 18,493 14,462
Equipment, furniture and leasehold
improvements under capital leases 5,228 4,205
-------- -------
24,434 19,355
Less accumulated depreciation (12,176) (9,370)
Less accumulated amortization (1,970) (1,889)
10,288 8,096
Construction in progress and deposits
on equipment 1,535 525
-------- -------
$ 11,823 $ 8,621
======== =======
Accrued expenses:
Vacation $ 2,160 $ 1,938
Other 4,819 3,164
-------- -------
$ 6,979 $ 5,102
======== =======
Accounts payable included bank overdrafts of $1,148,000 and $1,442,000 at
December 31, 1995 and 1994, respectively.
NOTE 3 -- SUPPLEMENTAL CASH FLOW DATA:
The following provides supplemental disclosures of cash flow activities for the
years ended December 31, 1995, 1994 and 1993, respectively.
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1995 1994 1993
- ------------------------------------------------ ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Changes in operating assets and liabilities:
Accounts receivable $(9,839) $ (5,835) $(2,979)
Inventories (6,499) (7,820) (1,408)
Other current assets 244 (1,036) (496)
Accounts payable 8,472 2,032 2,129
Accrued expenses 1,750 1,416 (294)
------- -------- -------
$(5,872) $(11,243) $(3,048)
======= ======== =======
</TABLE>
1995 1994 1993
------ ------ ------
(IN THOUSANDS)
Cash paid during the year for:
Interest $1,054 $ 787 $1,199
Income taxes 1,202 2,120 1,596
Noncash transactions:
Property and equipment acquired through
capital lease obligations 2,377 331 288
Equipment acquired through issuance of debt 372 -- 625
NOTE 4 -- DEBT ARRANGEMENTS:
Debt consisted of the following at December 31:
1995 1994
-------- -------
(IN THOUSANDS)
Capital lease obligations (Note 5) $ 2,787 $ 1,478
Variable rate demand industrial development revenue
bonds due 2002 (A) 1,140 1,300
Revolving credit and term loan due April 1996 (B) 7,273 2,883
Revolving credit loan due March 1996 (C) 3,461 3,177
Notes payable due 1996 (D) 2,156 2,033
Loan payable to bank due 2002 (E) 995 --
Loan payable to bank -- 912
Other 180 261
-------- -------
17,992 12,044
Less current portion (13,942) (7,280)
-------- -------
$ 4,050 $ 4,764
======== =======
(A) 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 December 31, 1995, was 5.85%. 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.
(B) The revolving credit agreement provides up to a maximum of $10,000,000 of
borrowings, subject to a defined borrowing base that is based on certain
percentages of accounts receivable and inventories. At the Company's option,
advances from the revolving credit agreement may be made at either a
floating rate equal to the bank's prime rate or at a LIBOR rate which is
equal to the British Bankers' Association LIBOR setting rate. The bank's
prime rate at December 31, 1995, was 8.5%. The Company must pay a fee of
.25% on the unused portion of the revolving credit balance. The debt is
collateralized by domestic accounts receivable, inventories and certain
property, plant and equipment. The agreement requires the Company to
maintain certain debt coverage, debt to worth and current ratios. In January
1996, the maximum amount of borrowings available to the Company was
increased to $14,000,000.
(C) Zytec GmbH has a revolving credit loan with a bank for financing export
sales. The agreement is renewable quarterly and, as of December 31, 1995,
extends through March 31, 1996, with an interest rate of 4.5%. The Company
had borrowed the maximum amounts of $3,461,000 and $3,156,000 at December
31, 1995 and 1994, respectively. These borrowings are collateralized by
export receivables. Zytec GmbH also has a line of credit agreement which
provides $494,000 of overdraft financing at an interest rate of 9.25% and
$1,483,000 of notes at a floating interest rate which was 5.125% at December
31, 1995. The agreement extends through March 31, 1996. At December 31,
1995, no amounts were outstanding. At December 31, 1994, the Company had an
outstanding balance of $21,000.
(D) Notes payable include various notes which mature from January to April 1996.
The interest rate was 5.125% at December 31, 1995. The notes are
collateralized by accounts receivable of Zytec GmbH totaling $3,241,000 and
$2,415,000 at December 31, 1995 and 1994, respectively, which exclude the
export receivables collateralized in (C) above.
(E) Interest is payable at a rate of 3.5% from January 1, 1995 to December 31,
1996 and then changes to 5% for the remaining life of the loan. The loan is
guaranteed by the Austrian government and is collateralized by certain
property, plant and equipment. As part of the agreement, the Company is
obligated to make capital contributions to Zytec GmbH up to a limit of
$2,966,000, if its cumulative cash flow as defined in the loan agreement
becomes negative. Cumulative cash flow was $2,793,000 at December 31, 1995;
therefore, no capital contribution is required at December 31, 1995.
The aggregate amount of maturities of long-term debt, excluding capital lease
obligations, is as follows at December 31, 1995:
AMOUNT
---------
(IN THOUSANDS)
1996 $12,949
1997 557
1998 376
1999 331
2000 331
Thereafter 661
-------
$15,205
=======
In January 1996, the Company entered into a $1,200,000 construction and term
loan agreement with a bank to finance the expansion of a building. Upon the
completion date of the building expansion, the loan will be payable in equal
monthly installments over seven years at which time the remaining principal
balance is due. The interest rate on the loan will be 2.25% in excess of the
current yield on United States Government Treasury Securities with constant
maturities of five years.
The fair value of the debt based upon discounted cash flow analysis approximates
its carrying value at December 31, 1995.
NOTE 5 -- LEASE OBLIGATIONS:
Equipment under capital leases includes certain production and office equipment.
The Company also leases production facilities, warehouses, office buildings and
various equipment under operating leases.
Related to certain capital lease agreements, the Company was contingently liable
under irrevocable letters of credit for $1,200,000 and $1,367,000 at December
31, 1995 and December 31, 1994, respectively.
Minimum annual rental commitments as of December 31, 1995, are as follows:
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
(IN THOUSANDS)
1996 $1,209 $1,892
1997 910 1,627
1998 594 1,063
1999 392 735
2000 104 562
Thereafter 43 442
------ ------
$3,252 $6,321
Less amount representing interest (465)
------
Present value of net minimum lease payments $2,787
======
Rent expense for the years ended December 31, 1995, 1994 and 1993 was
$2,323,000, $1,638,000, and $1,070,000, respectively. Future minimum rental
income under subleases related to operating leases is $785,000.
Subsequent to December 31, 1995, the Company entered into approximately
$3,600,000 in capital lease obligations and an operating lease for production
facilities in Colorado which will result in additional annual rent expense of
approximately $329,000 for 10 years.
NOTE 6 -- INCOME TAXES:
Income tax expense (benefit) consisted of the following:
1995 1994 1993
------ ------ ------
(IN THOUSANDS)
Current:
Federal $1,906 $1,765 $1,380
State 299 397 161
Deferred (4) (108) 177
------ ------ ------
$2,201 $2,054 $1,718
====== ====== ======
The components of domestic deferred income taxes as of December 31, are as
follows:
1995 1994
------ ----
(IN THOUSANDS)
Current deferred tax asset:
Inventories $ 235 $165
Other accruals, primarily vacation 697 585
------ ----
$ 932 $750
====== ====
Net noncurrent deferred tax liability:
Depreciation $1,002 $825
Other, net (1) (2)
------ ----
$1,001 $823
====== ====
At December 31, 1995, the Company's Austrian subsidiary has accumulated
approximately $8,500,000 of operating loss carryforwards for income tax purposes
(representing approximately $2,900,000 of tax benefits at the statutory rate).
These carryforwards are only available to offset future taxable income of the
subsidiary until their expiration, occurring primarily in 1998 and 1999. A
valuation allowance has been established for the entire tax benefit associated
with the Austrian subsidiary's operating loss carryforwards due to uncertainty
regarding whether future taxable income will be sufficient to realize the
operating loss carryforwards before they expire.
A reconciliation of the provision for income taxes and the amount computed by
applying the federal statutory rate to income before income tax expense is as
follows:
1995 1994 1993
------ ------ ------
(IN THOUSANDS)
Income before income tax expense:
Domestic $5,119 $5,194 $4,346
Foreign 960 224 43
------ ------ ------
$6,079 $5,418 $4,389
====== ====== ======
Computed income tax expense at federal
statutory rate $2,067 $1,842 $1,536
Increase (reduction) resulting from:
State taxes, net of federal tax effect 196 236 115
Utilization of subsidiary operating
loss carryforwards (326) (76) (15)
Other 264 52 82
------ ------ ------
Income tax expense $2,201 $2,054 $1,718
====== ====== ======
NOTE 7 -- STOCK OPTION PLANS AND WARRANTS:
The Company has several qualified incentive stock option plans under which a
total of 4,000,000 shares of its common stock have been reserved for the
granting of options to employees. Options can be granted under these plans until
January 2000.
Participants in the plans will be granted options at the fair value of the stock
at the date of the grant. The options expire six years from the date of the
grant or three months after termination of employment, if earlier. In the case
of termination of employment due to death or disability, the options expire six
years after grant or twelve months after termination of employment, if earlier.
Twenty percent of the total number of options become exercisable at each
anniversary date of the granting of the options. As of December 31, 1995,
573,510 shares were available for grant under the plans.
Incentive stock option transactions during 1995, 1994 and 1993 were as follows:
OPTIONS PRICE
OUTSTANDING PER SHARE
--------- -----------
Balance, December 31, 1992 1,587,630 $ .50-$1.00
Granted 503,800 1.00- 5.19
Exercised (311,182) .50- .75
Cancelled (348,882) .50- 1.50
--------- -----------
Balance, December 31, 1993 1,431,366 .50- 5.19
Granted 228,000 4.25- 4.75
Exercised (386,454) .50- 1.50
Cancelled (71,800) .50- 5.19
--------- -----------
Balance, December 31, 1994 1,201,112 .50- 5.19
Granted 495,000 3.00- 4.81
Exercised (197,640) .50- 1.50
Cancelled (76,760) .50- 5.19
--------- -----------
Balance, December 31, 1995 1,421,712 .50- 5.19
--------- -----------
Options exercisable at December 31, 1995 339,952 $ .50-$5.19
========= ===========
The Company has also granted nonqualified stock options to employees and outside
directors. The terms and conditions of these options are the same as those
provided under the Company's incentive stock option plans. As of December 31,
1995, 70,000 options exercisable at $.50 per share were outstanding, all of
which were exercisable.
As a part of the Company's initial public offering, the Company issued warrants
to the underwriters for the purchase of 124,000 shares of common stock. These
warrants have an exercise price of $6.23 per share and are exercisable through
November 1998.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, a new standard of accounting and
reporting for stockbased compensation plans. The Company is not required to
adopt the new standard until 1996. The Company will continue to measure
compensation cost for its stock option plans using the intrinsic value based
method of accounting it has historically used and, therefore, the new standard
will have no effect on the Company's operating results. The Company's financial
statement disclosures will be expanded in 1996, as required, to include pro
forma disclosures as if the fair value based method of accounting had been
followed.
NOTE 8 -- EMPLOYEE BENEFIT PLANS:
The Company has a defined contribution 401(k) plan covering substantially all
domestic employees. Contributions to the plan by the Company are based on
employee contributions to the plan. Costs charged to operations were $370,000,
$350,000, and $219,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
During 1991, the Company established an Employee Stock Ownership Plan (ESOP) for
the benefit of its domestic employees. The amount contributed by the Company to
the ESOP is determined annually by the Board of Directors. No contribution was
authorized for 1995, 1994 or 1993. The ESOP has purchased no shares of the
Company's common stock and has no effect on the Company's financial statements.
Substantially all of the 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 December 31, 1995, and 1994, the Company had
recorded a liability of $541,000 and $405,000, respectively, related to this
severance plan. The Company recorded $124,000, $104,000 and $136,000 in
severance expense during 1995, 1994 and 1993, respectively.
NOTE 9 -- TRANSACTIONS WITH SIGNIFICANT CUSTOMERS AND SUPPLIERS:
A portion of the Company's sales has been derived from significant customers in
1995, 1994 and 1993 as follows:
1995 1994 1993
---- ---- ----
Customer 1 17% 11% 7%
Customer 2 16 9 8
Customer 3 15 29 36
Customer 4 12 12 12
-- -- --
60% 61% 63%
== == ==
The Company's major customers operate in the electronics industry. As a result,
the Company has a concentration of trade receivables in this broad industrial
segment.
The Company sells its manufactured products to original equipment manufacturers
in accordance with agreements specific to certain manufacturer product programs.
The Company's continued sales to these customers is often dependent upon the
continuance of the customers' product programs. The Company's ten largest
customers accounted for approximately 85%, 86% and 89% of net sales in 1995,
1994 and 1993, respectively.
Because of the custom nature of the Company's manufactured products and
quality-driven reasons, the Company currently limits the number of suppliers of
individual components used in the manufacture of products. 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, which could affect operating results adversely.
NOTE 10 -- GEOGRAPHIC REPORTING:
The following presents information about the operations in the United States and
Europe for the years ended December 31, 1995, 1994 and 1993:
1995 1994 1993
-------- -------- -------
(IN THOUSANDS)
Net sales:
Domestic $125,394 $ 93,337 $64,404
Foreign 45,124 34,804 26,210
-------- -------- -------
$170,518 $128,141 $90,614
======== ======== =======
Operating income:
Domestic $ 5,627 $ 5,600 $ 5,003
Foreign 802 622 368
-------- -------- -------
$ 6,429 $ 6,222 $ 5,371
======== ======== =======
Identifiable assets:
Domestic $ 53,558 $ 33,815 $24,881
Foreign 16,678 14,030 9,068
Eliminations (3,869) (2,370) (1,082)
-------- -------- -------
$ 66,367 $ 45,475 $32,867
======== ======== =======
Identifiable assets are all assets, including corporate assets, identified with
operations in each geographic area. Loans between the geographic areas and the
investment in the wholly-owned subsidiary have been excluded.
Foreign currency transaction gains (losses) were $202,000, ($229,000), and
$162,000 in 1995, 1994 and 1993, respectively.
In February 1996, the Company agreed to acquire the outstanding stock of BHG
Tatabanya Alkatreszgyarto Kft. (BHG) located in Hungary. In March 1996, the
transaction will be effective after payment of the purchase price which is
approximately $845,000. The purchase price will be financed by a loan, interest
on which is subsidized by the Austrian government, such that the interest rate
is approximately 5%. BHG manufactures magnetics which are used by the Company in
manufacturing power supplies. The transaction will be recorded using the
purchase method of accounting.
[Photo of Malcolm Baldrige National Quality Award]
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR
INCORPORATED HEREIN BY REFERENCE IN CONNECTION WITH THE OFFERING MADE BY THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH THIS
PROSPECTUS RELATES, OR AN OFFER IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN OR INCORPORATED HEREIN BY REFERENCE IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OF THE DATE OF THE REPORT
FROM WHICH IT IS INCORPORATED OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE SUCH DATE.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary 3
Risk Factors 5
Use of Proceeds 9
Recent Developments 9
Price Range of Common Stock 10
Dividend Policy 10
Capitalization 11
Selected Consolidated Financial Data 12
Management's Discussion and
Analysis of Financial Condition and Results
of Operations 13
Business 19
Management 30
Principal and Selling Shareholders 32
Underwriting 33
Legal Matters 34
Experts 34
Available Information 34
Incorporation of Certain Documents
by Reference 35
Index to Consolidated Financial Statements F-1
2,272,000 Shares
[ZYTEC LOGO]
Common Stock
------------------
PROSPECTUS
------------------
Needham & Company, Inc.
Nesbitt Burns Securities Inc.
------------------
, 1996
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the distribution of the shares of Common Stock offered hereby:
SEC registration fee $ 17,738
NASD filing fee 5,644
Nasdaq listing fee 17,500
Legal fees and expenses 60,000
Accounting fees and expenses 50,000
Blue Sky fees and expenses 7,500
Printing expenses 50,000
Transfer agent fees and expenses 2,500
Miscellaneous 64,118
--------
TOTAL $275,000
========
Each amount set forth above, except the SEC registration fee, NASD filing fee
and Nasdaq listing fee, is estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 302A.521 of the Minnesota Statutes provides that unless prohibited or
limited by a corporation's articles of incorporation or bylaws, the Company must
indemnify its current and former officers, directors, employees and agents
against expenses (including attorneys' fees), judgments, penalties, fines and
amounts paid in settlement and which were incurred in connection with actions,
suits, or proceedings in which such persons are parties by reason of the fact
that they are or were an officer, director, employee or agent of the
corporation, if they (i) have not been indemnified by another organization, (ii)
acted in good faith, (iii) received no improper personal benefit, (iv) in the
case of a criminal proceeding, had no reasonable cause to believe the conduct
was unlawful, and (v) reasonably believed that the conduct was in the best
interests of the corporation. Section 302A.521 also permits a corporation to
purchase and maintain insurance on behalf of its officers, directors, employees
and agents against any liability which may be asserted against, or incurred by,
such persons in their capacities as officers, directors, employees and agents of
the corporation, whether or not the corporation would have been required to
indemnify the person against the liability under the provisions of such section.
Article VI of the Bylaws of the Company provides that current and former
officers, directors, employees and agents of the Company and other persons shall
have the rights to indemnification provided by Section 302A.521 of the Minnesota
Statutes.
Section 7 of the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement provides certain indemnification rights to officers and
directors of the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following exhibits are filed as part of this Registration Statement on Form
S-3:
EXHIBIT
NO. DESCRIPTION
1.1 Form of Underwriting Agreement*
5.1 Opinion of Winthrop & Weinstine, P.A.*
23.1 Consent of Winthrop & Weinstine, P.A. (included in Exhibit 5.1).
23.2 Consent of Coopers & Lybrand L.L.P., Independent Accountants.
24.1 Powers of Attorney (included in signature page on page II-3).
99.1 Credit Agreement dated as of May 30, 1996, among Zytec Corporation,
the Lenders named therein, and Harris Trust and Savings Bank,
Individually and as Agent.*
- --------------
* Previously filed.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d) of
the Securities Exchange Act of 1934 (and, were applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it
was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Eden Prairie, State of Minnesota, on June 13,
1996.
Zytec Corporation
By /S/ RONALD D. SCHMIDT
Ronald D. Schmidt
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1
to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ RONALD D. SCHMIDT Chairman of the Board, President
Ronald D. Schmidt and Chief Executive Officer
(Principal Executive Officer) June 13, 1996
/S/ JOHN B. ROGERS Chief Financial Officer (Principal
John B. Rogers Financial and Accounting Officer) June 13, 1996
* Vice President, Marketing and Sales
John M. Steel and Director June 13, 1996
* Managing Director of Zytec GmbH
Josef J. Matz and Director June 13, 1996
* Secretary and Director June 13, 1996
Sherman Winthrop
* Director June 13, 1996
Lawrence J. Matthews
* Director June 13, 1996
Gary C. Flack
* Director June 13, 1996
Dr. Fred C. Lee
* Director June 13, 1996
John V. Titsworth
* Director June 13, 1996
James S. Womack
* By /s/ RONALD D. SCHMIDT
Ronald D. Schmidt
As Attorney-in-Fact
</TABLE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C> <C>
1.1 Form of Underwriting Agreement *
5.1 Opinion of Winthrop & Weinstine, P.A. *
23.1 Consent of Winthrop & Weinstine, P.A. (included in Exhibit 5.1).
23.2 Consent of Coopers & Lybrand L.L.P., Independent Accountants electronically
24.1 Powers of Attorney (included in signature page on page II-3).
99.1 Credit Agreement dated as of May 30, 1996, among Zytec Corporation,
the Lenders named therein, and Harris Trust and Savings Bank,
Individually and as Agent *
</TABLE>
*Previously filed.
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion or incorporation by reference in this registration
statement on Form S-3 of our reports dated February 21, 1996, on our audits of
the consolidated financial statements and financial statement schedule of Zytec
Corporation. We also consent to the reference to our firm under the captions
"Selected Consolidated Financial Data" and "Experts."
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
June 13, 1996
