Logitech 2001 Annual Report Download - page 17

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This annual report to shareholders contains forward-looking statements that involve risks and uncertainties. The Company’s
actual results could differ materially from those anticipated in these statements as a result of certain factors, including those set
forth below.
Overview
Logitech designs, manufactures and markets human interface devices and supporting software that serve as the
primary physical interface between people and their personal computers and the internet. The Company’s products
include corded and cordless mice, trackballs and keyboards; joysticks, gamepads, and racing systems; internet video
cameras; and multimedia speakers.
The Company sells its products through two primary channels, original equipment manufacturers (“OEMs”) and a
network of distributors and resellers ("retail"). Products sold to OEMs, principally pointing devices, are generally resold to
end users bundled with new PCs. Sales to OEMs as a percentage of total net sales can vary significantly and have
ranged from 17% to 38% on a quarterly basis over the past three fiscal years.
Logitech was founded in Switzerland in 1981, and in 1988 listed its shares in an initial public offering in Switzerland.
In 1997, the Company sold shares in a U.S. initial public offering in the form of American Depository Shares (“ADS”), and
listed the ADSs on the Nasdaq National Market System. The Company’s operational headquarters are in Fremont,
California through its U.S. subsidiary, with regional headquarters in Romanel, Switzerland and Hsinchu, Taiwan through
local subisidiaries. In addition, Logitech has manufacturing operations in China, with distribution facilities in the United
States, Europe and Asia.
Recent Developments
On March 27, 2001, Logitech completed the acquisition of Labtec Inc., a publicly traded Vancouver, Washington-
based provider of PC speakers, headsets and microphones, personal audio products for MP3 players and other portable
audio devices, 3D input devices, and other peripherals and accessories for computing, communication and entertainment.
Under terms of the merger agreement, Logitech purchased substantially all outstanding shares of Labtec for $73 million in
cash and stock, plus $3.3 million of transaction costs. Consideration for the purchase was obtained through i) short term
borrowings of $35 million under a term loan credit facility, ii) the issuance of 1,142,998 Logitech ADSs, and iii) the use of
$12.5 million of working capital funds.
The Company has financed the cash portion of the purchase price with $90 million of borrowings ($35 million drawn
down as of March 31, 2001) under a bridge loan facility. The bridge loan matures one year after the initial draw. The
Company intends to refinance this loan prior to maturity, either through a debt or equity financing or a new bank facility. As
a result of the increased leverage, the Company's principal and interest obligations will increase substantially.
The acquisition was accounted for using the purchase method of accounting. Therefore, the assets acquired and
liabilities assumed were recorded at their estimated fair values as determined by the Company’s management based upon
information currently available and on current assumptions as to future operations. Labtec’s results of operations from the
March 27, 2001 acquisition date were not significant because the acquisition occurred shortly before the end of the fiscal
year. Logitech also recorded a $3.3 million in-process research and development charge in connection with the
acquisition.
The acquisition will have a significant impact on the Company's results of operations. The impact will include:
• Significantly increased interest expense resulting from the borrowings under the bridge loan;
• Significantly increased expense resulting from amortization of goodwill and other intangible assets arising from
the acquisition;
• A possible increase in the Company’s effective tax rate due to the amortization of transaction-related costs;
• A possible dilutive impact on earnings per share resulting from the shares issued to acquire Labtec;
• Higher sales and gross profit, increased headcount, and higher operating expenses.