<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NO. 0-29454
------------------------
POWER-ONE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0420182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
740 CALLE PLANO, CAMARILLO, CA 93012
(Address of principal executive (Zip code)
offices)
</TABLE>
(805) 987-8741
Registrant's telephone number, including area code
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such a shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of November 14, 2000 there were outstanding 78,482,095 shares of common
stock, $.001 par value.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
POWER-ONE, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets--
September 30, 2000 and December 31, 1999.................... 3
Consolidated Statements of Operations--
for the Three Months and the Nine Months Ended
September 30, 2000 and 1999................................. 4
Consolidated Statements of Comprehensive Income (Loss)--
for the Three Months and the Nine Months Ended
September 30, 2000 and 1999................................. 5
Consolidated Statements of Cash Flows--
for the Nine Months Ended September 30, 2000 and 1999....... 6
Notes to Consolidated Financial Statements.................. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 20
PART II--OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......... 22
Item 5. Other Information........................................... 22
Item 6. Exhibits and Reports on Form 8-K............................ 22
SIGNATURES.......................................................................... 23
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1--CONSOLIDATED FINANCIAL STATEMENTS
POWER-ONE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 19,578 $ 63,769
Accounts receivable:
Trade, less allowance for doubtful accounts:
$2,396--September 30, 2000; $1,918--December 31,
1999................................................ 111,618 45,805
Other................................................... 3,483 1,914
Inventories............................................... 153,175 61,834
Deferred income taxes, net--current....................... 2,622 1,916
Current portion of notes receivable from stockholders..... -- 30
Prepaid expenses and other current assets................. 4,238 1,795
-------- --------
Total current assets................................ 294,714 177,063
-------- --------
PROPERTY & EQUIPMENT, net of accumulated depreciation and
amortization: $25,132--September 30, 2000;
$16,717--December 31, 1999................................ 87,800 55,608
INTANGIBLE ASSETS, net...................................... 161,785 59,217
NOTES RECEIVABLE FROM STOCKHOLDERS, less current portion.... -- 79
OTHER ASSETS................................................ 13,153 3,137
-------- --------
TOTAL ASSETS................................................ $557,452 $295,104
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank credit facilities.................................... $145,716 $ 7,579
Current portion of long-term debt......................... 2,453 4,002
Current portion of long-term capital leases............... 610 897
Bank overdraft............................................ 9,269 5,804
Accounts payable.......................................... 48,468 13,107
Accrued payroll and related expenses...................... 5,879 2,583
Other accrued expenses.................................... 38,372 16,811
-------- --------
Total current liabilities........................... 250,767 50,783
-------- --------
LONG-TERM DEBT, less current portion........................ 9,897 3,379
LONG-TERM CAPITAL LEASES, less current portion.............. 392 842
DEFERRED INCOME TAXES, noncurrent........................... 9,714 2,757
OTHER LIABILITIES........................................... 598 112
STOCKHOLDERS' EQUITY:
Common stock, par value $0.001; 300,000,000 shares
authorized; 73,713,206 and 71,962,224 shares issued and
outstanding at September 30, 2000 and December 31, 1999,
respectively............................................ 74 72
Additional paid-in-capital................................ 241,793 212,148
Accumulated other comprehensive loss...................... (8,478) (3,476)
Retained earnings......................................... 52,695 28,487
-------- --------
Total stockholders' equity.......................... 286,084 237,231
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY.................... $557,452 $295,104
======== ========
</TABLE>
See accompanying notes
3
<PAGE>
POWER-ONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET SALES................................. $150,391 $72,626 $341,242 $163,240
COST OF GOODS SOLD........................ 92,490 44,883 206,476 99,513
-------- ------- -------- --------
GROSS PROFIT.......................... 57,901 27,743 134,766 63,727
EXPENSES:
Selling, general and administrative..... 19,066 11,294 59,145 30,047
Engineering and quality assurance....... 8,980 5,988 26,602 15,372
Amortization of intangible assets....... 3,649 1,354 7,721 4,914
In-process research and development..... -- -- -- 3,300
-------- ------- -------- --------
Total expenses........................ 31,695 18,636 93,468 53,633
INCOME FROM OPERATIONS.................... 26,206 9,107 41,298 10,094
OTHER INCOME (EXPENSE)
Interest expense, net................... (2,511) (1,111) (2,951) (2,784)
Other income (expense), net............. 334 (151) (727) 125
-------- ------- -------- --------
Total other expense................... (2,177) (1,262) (3,678) (2,659)
INCOME BEFORE INCOME TAXES................ 24,029 7,845 37,620 7,435
INCOME TAXES.............................. 8,063 2,624 12,547 3,863
-------- ------- -------- --------
NET INCOME................................ $ 15,966 $ 5,221 $ 25,073 $ 3,572
======== ======= ======== ========
BASIC EARNINGS PER COMMON SHARE........... $ 0.22 $ 0.09 $ 0.34 $ 0.06
======== ======= ======== ========
DILUTED EARNINGS PER COMMON SHARE......... $ 0.20 $ 0.09 $ 0.33 $ 0.06
======== ======= ======== ========
BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING............................. 73,623 57,606 73,070 57,018
======== ======= ======== ========
DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING............................. 78,271 59,931 76,830 58,644
======== ======= ======== ========
</TABLE>
See accompanying notes
4
<PAGE>
POWER-ONE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET INCOME................................... $15,966 $5,221 $25,073 $ 3,572
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment.... (7,464) 1,506 (5,002) (3,601)
------- ------ ------- -------
COMPREHENSIVE INCOME (LOSS).................. $ 8,502 $6,727 $20,071 $ (29)
======= ====== ======= =======
</TABLE>
See accompanying notes
5
<PAGE>
POWER-ONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 25,073 $ 3,572
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization........................... 16,625 10,583
Stock compensation...................................... 13,312 262
Stock incentive plan (Note 4)........................... (2,229) --
Purchased in-process research and development........... -- 3,300
Net (gain) loss on disposal of property and equipment... (21) 60
Deferred income taxes................................... 6,294 (525)
Changes in operating assets and liabilities:
Accounts receivable, net................................ (51,494) (27,377)
Inventories............................................. (82,558) (13,369)
Prepaid expenses and other current assets............... (2,307) 643
Accounts payable........................................ 25,859 12,344
Accrued expenses........................................ 23,465 4,804
Other liabilities....................................... 8 (132)
--------- --------
Net cash used in operating activities............... (27,973) (5,835)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Powec, net of cash acquired (Note 4)........ (72,545) --
Telecommunications product line acquired from Eldec
(Note 4)................................................ (14,000) --
Investment in IPD, net of cash acquired (Note 5).......... (13,000) (28,739)
Acquisition of property and equipment..................... (34,245) (20,111)
Proceeds from sale of property and equipment.............. 35 112
Other assets.............................................. (20,089) (901)
--------- --------
Net cash used in investing activities............... (153,844) (49,639)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on bank credit facilities........ 148,996 64,235
Repayments of borrowings on bank credit facilities........ (13,857) (72,188)
Bank overdraft............................................ 3,519 3,111
Proceeds from borrowings on long-term debt................ -- 526
Repayments of borrowings on long-term debt................ (3,020) (2,209)
Principal payments under capital lease obligations........ (713) (680)
Issuance of common stock, net............................. 3,600 95,570
Proceeds from notes receivable from stockholders.......... 109 --
Distributions to stockholders............................. (865) --
--------- --------
Net cash provided by financing activities........... 137,769 88,365
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (143) (201)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............ (44,191) 32,690
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 63,769 10,971
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 19,578 $ 43,661
========= ========
</TABLE>
See accompanying notes
6
<PAGE>
POWER-ONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
-------------- --------------
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for
Interest....................................... $ 3,252 $2,561
Income taxes................................... $10,988 $ 712
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On May 16, 2000, Power-One, Inc. ("Power-One" or the "Company") acquired
Norwegian-based Powec AS and the minority interests of certain Powec
subsidiaries (collectively referred to as "Powec") for approximately $72.0
million in cash, plus $2.5 million in acquisition costs, and 428,070 shares of
the Company's common stock (See Note 4). In connection with the acquisition,
liabilities assumed were determined as follows:
<TABLE>
<S> <C>
Fair value of tangible assets acquired...................... $ 38,766
Fair value of goodwill and other identifiable intangible
assets.................................................... 83,645
Cash paid for Powec's capital stock......................... (74,452)
Fair value of stock issued for Powec's capital stock........ (12,735)
--------
Liabilities assumed......................................... $ 35,224
========
</TABLE>
On May 16, 2000, the Company also acquired a telecommunications product line
from Eldec Corporation, a subsidiary of Crane Co. ("Eldec"), for $14.0 million
in cash (See Note 4). In connection with the acquisition, liabilities assumed
were determined as follows:
<TABLE>
<S> <C>
Fair value of tangible assets acquired...................... $ 2,290
Fair value of goodwill and other identifiable intangible
assets.................................................... 12,129
Cash paid for product line.................................. (14,000)
--------
Liabilities assumed......................................... $ 419
========
</TABLE>
On January 29, 1999, the Company purchased all of the capital stock of
International Power Devices, Inc. ("IPD") for $29.5 million. In connection with
the acquisition, liabilities assumed were determined as follows:
<TABLE>
<S> <C>
Fair value of tangible assets acquired...................... $ 21,248
Fair value of goodwill and other identifiable intangible
assets.................................................... 17,454
Cash paid for IPD's capital stock........................... (29,500)
--------
Liabilities assumed......................................... $ 9,202
========
</TABLE>
7
<PAGE>
POWER-ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. In the opinion of management, adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the period ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000. For further information, refer to the supplemental consolidated financial
statements and notes thereto for the year ended December 31, 1999, included in
the Company's Form 8-K, filed on April 20, 2000, which were restated under the
pooling of interests method of accounting to give retroactive effect to the
merger between a wholly-owned subsidiary of the Company and HC Power, Inc.
("HCP") (see Note 4).
The Company's reporting period coincides with the 52- to 53-week period
ending on the Sunday closest to December 31 and its fiscal quarters are the
13-to 14-week periods ending on the Sunday nearest to March 31, June 30,
September 30 and December 31. For simplicity of presentation, the Company has
described its year-ended January 2, 2000 as December 31, 1999 and the
three-month and nine-month periods ended October 1, 2000 and September 26, 1999
as September 30.
All share and per share amounts have been retroactively restated to give
effect to the Company's three-for-two stock split that occurred on June 2, 2000
and the Company's two-for-one stock split that occurred on September 11, 2000.
Certain reclassifications have been made to the amounts in the Consolidated
Balance Sheet as of December 31, 1999 and the Consolidated Statement of Cash
Flows for the nine-month period ended September 30, 1999 to conform to the
classifications in the current year period.
Revenue is recognized upon shipment of product. Sales are recorded net of
sales returns and discounts. In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB 101), which provides additional guidance in applying
generally accepted principles to revenue recognition in the financial
statements. We have evaluated our revenue recognition policies pursuant to the
adoption of SAB 101, and we believe that such adoption will not have any impact.
The Company enters into derivative instrument contracts to manage exposure
to fluctuations in interest rates. The interest rate differential and any gains
and losses resulting from interest rate swap or swaption contracts, all of which
are used to hedge underlying debt obligations, are reflected as an adjustment to
interest expense over the life of the contracts. At December 31, 1999 and
September 30, 2000, no derivative instruments were held by the Company.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. The Company
is currently evaluating the impact of SFAS No. 133 on its operations and
financial position.
8
<PAGE>
POWER-ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--INVENTORIES
Inventories consist of the following (In thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- -------------
<S> <C> <C>
Raw materials....................................... $111,601 $40,970
Subassemblies-in-process............................ 29,140 8,360
Finished goods...................................... 12,434 12,504
-------- -------
$153,175 $61,834
======== =======
</TABLE>
NOTE 3--EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding for the period while diluted earnings per
share also includes the dilutive impact of stock options. Basic and diluted
earnings per share for the three-month and nine-month periods ended
September 30 are calculated as follows (in thousands, except share and per share
data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------------------ ------------------------------
NET AVERAGE PER NET AVERAGE PER
INCOME SHARES SHARE INCOME SHARES SHARE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income.................... $15,966 $5,221
Basic earnings per share:
Weighted average shares
outstanding............... 73,623 57,606
------- ------ ------ ------
Basic earnings per share.... 15,966 73,623 $.22 5,221 57,606 $.09
==== ====
Dilutive securities--
Stock options............... 4,648 2,325
------- ------ ------ ------
Diluted earnings per share:... $15,966 78,271 $.20 $5,221 59,931 $.09
======= ====== ==== ====== ====== ====
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------------------ ------------------------------
NET AVERAGE PER NET AVERAGE PER
INCOME SHARES SHARE INCOME SHARES SHARE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income.................... $25,073 $3,572
Basic earnings per share:
Weighted average shares
outstanding............... 73,070 57,018
------- ------ ------ ------
Basic earnings per share.... 25,073 73,070 $.34 3,572 57,018 $.06
==== ====
Dilutive securities--
Stock options............... 3,760 1,626
------- ------ ------ ------
Diluted earnings per share:... $25,073 76,830 $.33 $3,572 58,644 $.06
======= ====== ==== ====== ====== ====
</TABLE>
9
<PAGE>
POWER-ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--ACQUISITIONS
On February 29, 2000, the Company acquired HCP; the former shareholders of
HCP received a total of 6,363,621 shares of the Company's common stock for all
shares of common stock of HCP outstanding on the effective date of the merger.
Of the total shares issued, 636,351 shares were placed in an escrow to fund
possible indemnification claims under the merger agreement. The merger has been
accounted for as a pooling of interests. Accordingly, all prior period
consolidated financial statements presented have been restated to give
retroactive effect to the acquisition of HCP by the Company. All transactions
between the Company and HCP have been eliminated in the consolidated financial
statements. Net sales and net income (loss) for the separate companies and the
combined amounts presented in the consolidated financial statements follow:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
----------------------------------
(IN THOUSANDS)
INTERCOMPANY
ELIMINATIONS
------------
<S> <C> <C> <C>
NET SALES:
Power-One..................................... $297,970 $ -- $297,970
HCP........................................... 43,272 -- 43,272
-------- ----- --------
Combined...................................... $341,242 $ -- $341,242
======== ===== ========
<CAPTION>
INTERCOMPANY
ELIMINATIONS
------------
<S> <C> <C> <C>
NET INCOME (LOSS):
Power-One..................................... $ 29,899 $(269) $ 29,630
HCP........................................... (4,826) 269 (4,557)
-------- ----- --------
Combined...................................... $ 25,073 $ -- $ 25,073
======== ===== ========
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
----------------------------------
(IN THOUSANDS)
INTERCOMPANY
ELIMINATIONS
------------
<S> <C> <C> <C>
NET SALES:
Power-One..................................... $142,643 $ -- $142,643
HCP........................................... 20,597 -- 20,597
-------- ----- --------
Combined...................................... $163,240 $ -- $163,240
======== ===== ========
<CAPTION>
INTERCOMPANY
ELIMINATIONS
------------
<S> <C> <C> <C>
NET INCOME (LOSS):
Power-One..................................... $ 2,984 $ -- $ 2,984
HCP........................................... 588 -- 588
-------- ----- --------
Combined...................................... $ 3,572 $ -- $ 3,572
======== ===== ========
</TABLE>
10
<PAGE>
POWER-ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--ACQUISITIONS (CONTINUED)
HCP is based in Irvine, California and is a supplier of power systems for
telecommunications and Internet service providers and OEM equipment
manufacturers. HCP's major customers include service providers such as Williams
Communications, CEA Telecom, Qwest and Nextel, and OEMs such as Motorola and
Nortel Networks.
HCP provided for stock bonus incentives to certain key employees. The stock
bonus agreements provided for the granting of HCP common stock to the employees
over specified vesting periods, ranging from three to 12 years. All stock bonus
agreements contained accelerated vesting provisions upon a change in control of
HCP. The unvested shares became vested at the time of the merger with the
Company. 812,928 shares of the Company's common stock were issued to the
employees of HCP in exchange for the accelerated shares. The Company recorded
compensation expense of $13.3 million in the first quarter of 2000 which was
based on $16.38 per share, the fair value of the Company's common stock on
February 29, 2000, and a $2.2 million tax benefit in the second quarter of 2000.
In connection with the HCP acquisition, the Company amended its credit
agreement with lenders to waive certain requirements and amend certain
provisions.
On May 16, 2000, the Company acquired Powec for approximately $72.0 million
in cash, plus $2.5 million in acquisition costs, and 428,070 shares of the
Company's common stock. The market value of the Company's common stock on the
date of acquisition was $29.75 per share resulting in a total purchase price
valued at approximately $84.7 million, plus $2.5 million in acquisition costs.
Additionally, Powec had approximately $12 million of debt outstanding. Certain
additional payments may be made to Powec stockholders based on the attainment of
defined operational performance objectives through 2001.
Powec is a leading supplier of power systems for major service providers and
equipment manufacturers in the telecommunications industry. Powec's customers
include Nokia, Vodafone, Ericsson, Eircom, Telia, Hong Kong Telecom, Telenor,
Sonera and TeleDanmark.
On May 16, 2000, the Company also acquired the telecommunications product
line from Eldec Corporation, for $14.0 million in cash. This product line
includes the exclusive distribution rights for Powec's products in North, South
and Central America and extensive relationships with telecommunication equipment
manufacturers such as Motorola, Ericsson, and Nokia US.
In addition to the shares issued for the Powec purchase, the purchases were
financed with $20.0 million of the Company's cash and approximately $68.5
million of advances under the Company's credit facility, which includes $2.5
million to finance the related acquisition costs.
The acquisitions were accounted for using the purchase method of accounting.
The net purchase price, plus transaction costs, was allocated to tangible assets
and intangible assets. The excess of the aggregate purchase price over the
estimated fair values of the net tangible assets acquired was recognized as
goodwill and other identifiable intangible assets, and is being amortized over
periods ranging from three to 15 years. The fair value of Powec's assets and
liabilities, as well as the fair value of the assets and liabilities acquired
from Eldec, have been included in the Company's balance sheet as of
September 30, 2000. The consolidated statements of operations, comprehensive
income and cash flow for the nine months ended September 30, 2000, include five
months of Powec's operations.
11
<PAGE>
POWER-ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--ACQUISITIONS (CONTINUED)
The following unaudited pro forma financial information combines the
consolidated results of operations as if the acquisitions of Powec and the
telecommunications product line had occurred as of the beginning of the periods
presented. Pro forma adjustments include only the effects of events directly
attributable to the transaction that are expected to have a continuing impact
and that are factually supportable. The pro forma amounts contained in the table
below include adjustments for amortization of intangibles, assumed interest
expense, assumed decrease in interest earned and the related income tax effect
of such adjustments. The pro forma amounts for the nine-month period ended
September 30, 2000 exclude non-recurring items totaling $1.5 million, which
consist of an inventory fair market value write-up of $2.0 million, net of
related income tax benefit.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
-------------- --------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
PRO FORMA:
Net sales.......................................... $366,912 $205,245
Net income (loss).................................. $ 25,344 $ (2,272)
Basic earnings (loss) per common share............. $ 0.35 $ (0.04)
Diluted earnings (loss) per common share........... $ 0.33 $ (0.04)
</TABLE>
The pro forma financial information does not necessarily reflect the
operating results that would have occurred had the acquisition been consummated
as of the above dates, nor is such information indicative of future operating
results. In addition, the allocation of the purchase price is based on
preliminary data and could change when final valuation information is obtained.
NOTE 5--INTANGIBLE ASSETS
Intangible assets include cost in excess of net assets acquired in
connection with the acquisition of the Company in 1995, of Melcher Holding AG
("Melcher") in 1998, of IPD in 1999 and of Powec in 2000 (see Note 4) which have
been allocated among certain intangible items determined by management to have
value, such as the company name, distribution network and product lines.
Provision for amortization has been made based upon the estimated useful lives
of the intangible asset categories, which range from three to 20 years, using
the straight-line method.
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- -------------
<S> <C> <C>
Goodwill and trade name............................. $118,518 $40,093
Distribution network................................ 5,207 5,207
Sales force......................................... 625 681
Product technology.................................. 32,003 19,500
Assembled workforce................................. 1,582 800
Customer relationships.............................. 23,060 4,700
-------- -------
180,995 70,981
Less accumulated amortization....................... 19,210 11,764
-------- -------
$161,785 $59,217
======== =======
</TABLE>
12
<PAGE>
POWER-ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INTANGIBLE ASSETS (CONTINUED)
The increase in intangible assets from December 31, 1999 is primarily
related to intangibles totaling approximately $88.1 million which were recorded
upon the acquisition of Powec and the purchase of the telecommunications product
line from Eldec in May 2000, as well as a $13.0 million payment made to IPD's
shareholders in the second quarter of 2000, upon IPD attaining certain defined
operational performance objectives.
NOTE 6--CREDIT FACILITY
On May 10, 2000, the Company entered into a Revolving Loan Agreement with
Union Bank of California, N.A., as administrative agent and lead arranger, which
provides the Company with a revolving line of credit of $200 million. The line
of credit bears interest on amounts outstanding payable quarterly based on the
Company's leverage ratio and one of the following rates as selected by the
Company: LIBOR, 6.6% at September 30, 2000, plus 1.25% to 2.25%, or the bank's
base rate, 9.8% at September 30, 2000, plus 0% to 1.00%. The credit agreement:
- provides for restrictions on additional borrowings, leases and capital
expenditures;
- prohibits us from paying dividends, liquidating, merging, consolidating or
selling our assets or business without the bank's prior approval;
- requires us to maintain a specified net worth, maximum leverage ratio and
minimum fixed charge coverage ratio;
- prohibits us, in certain circumstances, from making strategic investments
in excess of $10 million without the bank's prior approval;
- prohibits us, in certain circumstances, from paying $30 million or more
for acquisitions not previously approved by the bank; and
- requires us to use the proceeds of any public offering of our stock to pay
off any indebtedness then outstanding under the loan agreement evidenced
by notes.
Borrowings under this line of credit are collateralized by the capital stock
of each of our domestic subsidiaries and 65% of the capital stock of each of our
foreign subsidiaries. At September 30, 2000, amounts outstanding under this line
of credit were $142.3 million at a weighted average interest rate of 8.1%.
NOTE 7--SUBSEQUENT EVENTS
On November 2, 2000, the Company entered into an underwriting agreement for
the sale by the Company of 4 million shares of its common stock, for gross
proceeds to the Company of $280 million. Morgan Stanley Dean Witter acted as the
sole underwriter in the transaction, and the issue was underwritten on a "bought
deal" basis. The underwriter also exercised in full an over-allotment option for
500,000 additional shares of common stock, which resulted in $35 million of
additional gross proceeds to the Company.
Net proceeds, after deducting underwriting discounts and commissions and
estimated offering expenses, were approximately $314 million. We used a portion
of the net proceeds to repay approximately $154 million of indebtedness
outstanding under our revolving loan agreement on November 7, 2000. The
remaining offering proceeds were invested in short-term, interest-bearing
investment grade financial instruments.
13
<PAGE>
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL. In January 1999, we broadened our portfolio of DC/DC products by
acquiring International Power Devices, Inc., or IPD, for $45 million, including
certain capitalized lease obligations and other indebtedness of IPD. IPD is
based in Boston, Massachusetts and is a leading supplier of high-density
board-mounted DC/DC power converters ("Bricks"). In February 2000, we acquired
HC Power, Inc., or HCP, in a stock-for-stock transaction, in which the former
shareholders of HCP received a total of 6,363,621 shares of our common stock for
all shares of common stock of HCP outstanding on the effective date of the
merger. HCP is based in Irvine, California and is a leading supplier of power
systems for telecommunications and Internet service providers and OEM equipment
manufacturers. In May 2000, we further increased our presence in the
telecommunications industry by acquiring Norwegian-based Powec AS and the
minority interests of certain Powec subsidiaries, collectively referred to as
Powec, for approximately $72.0 million, plus $2.5 million in acquisition costs
and 428,070 shares of our common stock, as well as the assumption of
approximately $12 million of debt. Powec is a leading supplier of power systems
for major service providers and equipment manufacturers in the
telecommunications industry. The acquisitions of IPD and Powec were accounted
for using the purchase method of accounting, and, as such, their results of
operations have been included in the consolidated results of operations since
their respective dates of acquisition. Although the acquisition of Powec
occurred on May 16, 2000, the Company has elected to use the beginning of the
month as the acquisition date for purchase accounting. As such, all references
to operating data for the three and nine months ended September 30, 2000 include
three and nine months of operations for IPD, and three and five months of
operations for Powec, respectively. All references to operating data for the
three and nine months ended September 30, 1999 include three and eight months of
operations for IPD. The acquisition of HCP was accounted for as a pooling of
interests, and all prior periods have been restated to give retroactive effect
to the acquisition of HCP.
NET SALES. Net sales increased $178.0 million, or 109.0%, to $341.2 million
for the nine months ended September 30, 2000 from $163.2 million for the nine
months ended September 30, 1999. The increase in net sales was attributable to
strong growth in shipments across all major product lines. The primary
contributors to the $178.0 million increase in net sales were DC/DC power
supplies which resulted primarily from strong growth in unit shipments of our
advanced line of Bricks to the communications market, telecom power systems, of
which $35.0 million was contributed by Powec, and embedded AC/DC power supplies,
primarily due to strong sales to the ATE/semiconductor test equipment,
communications and industrial markets. Results for the first nine months of 1999
were adversely affected by lower sales to the ATE/semiconductor test equipment
market, which was still experiencing a slowdown in the first half of last year.
Net sales to OEMs in the first nine months of 2000 were $259.9 million, or
76.2% of net sales, up from $128.8 million, or 78.9% of net sales, for the
comparable period of 1999. Net sales to Cisco, our largest customer, represented
20.3% of net sales in the nine months ended September 30, 2000. Cisco was the
only customer to exceed 10% of net sales for the nine months ended
September 30, 2000. Net sales to service providers were $23.5 million, or 6.9%
of net sales, in the first nine months of 2000, compared with $3.8 million, or
2.3% of net sales in the comparable period in 1999. Net sales through
distributors were $57.8 million, or 16.9% of net sales, in the first nine months
of 2000, compared with $30.6 million, or 18.8% of net sales, in the same period
in 1999. The decrease in our percentage of net sales through distributors is due
to the customer base of our recent acquisitions of IPD, HCP and Powec, each of
which makes a larger proportion of their sales to OEMs and service providers.
Net sales for the three months ended September 30, 2000 increased $77.8
million, or 107.1%, to $150.4 million compared with $72.6 million for the three
months ended September 30, 1999. As was the case in the first nine months of
2000, the increase in net sales for the third quarter was attributable to strong
growth in shipments across all major product lines. The main contributors to the
$77.8 million
14
<PAGE>
increase in net sales were primarily Bricks, telecom power systems, and embedded
AC/DC power supplies.
Net sales to OEMs in the third quarter of 2000 were $115.7 million, or 76.9%
of net sales, up from $58.5 million, or 80.6% of net sales, for the comparable
period in 1999. Net sales to Cisco represented 23.2% of net sales in the third
quarter of 2000. Cisco was the only customer to exceed 10% of net sales in the
third quarter of 2000. Net sales to service providers were $10.7 million, or
7.1% of net sales, in the third quarter of 2000 compared with $2.9 million, or
4.0% of net sales, in the third quarter of 1999. Net sales through distributors
were $24.0 million, or 16.0% of net sales, in the third quarter of 2000 compared
with $11.2 million, or 15.5% of net sales, in the same period in 1999.
Net sales by markets for the nine months ended September 30, 2000 and 1999
were:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPT. 30,
----------------
2000 1999
----- -----
<S> <C> <C>
Communications............................................. 67.6% 50.0%
ATE/Semiconductor test equipment........................... 12.0% 8.4%
Industrial................................................. 8.6% 17.7%
Other...................................................... 11.8% 23.9%
----- -----
Total.................................................. 100.0% 100.0%
</TABLE>
The Company's combined backlog on September 30, 2000 was $238.2 million, an
increase of 255.8% and 256.9% compared to backlog of $66.9 million on December
31, 1999 and $66.7 million on September 30, 1999, respectively. Powec
contributed approximately $12.0 million to our third quarter backlog. The
significant increase in backlog was driven primarily by strong demand from our
communications customers for our Bricks and telecom rack systems, as well as
robust growth from the ATE/semiconductor test equipment market.
GROSS PROFIT. Gross profit increased $71.0 million, or 111.5%, to $134.8
million for the nine months ended September 30, 2000 from $63.7 million for the
nine months ended September 30, 1999. As a percentage of net sales, gross profit
increased to 39.5% for the first nine months of 2000 from 39.0% for the same
period in 1999. Gross profit for the nine-month periods include inventory
write-up related purchase accounting adjustments due to the Powec acquisition in
May 2000 and the IPD acquisition in January 1999 of approximately $2.0 million
and $0.8 million, respectively, which negatively impacted each year's gross
profit margin. Excluding these non-recurring adjustments, gross profit margin
would have been 40.1% for the first nine months of 2000 and 39.5% for the same
period in 1999. On this basis, the improved 0.6% profit margin in the first nine
months of 2000 compared with the same period last year is primarily due to the
increase in net sales which allowed us to better leverage our fixed
manufacturing expenses, as well as the transfer of high-density DC/DC product
manufacturing from our Boston facility to our low cost manufacturing facility in
Mexico. Our gross profit margin in 2000 was also negatively impacted by higher
material costs due to tight allocations for certain components that were
adversely affected by component availability issues facing the industry. Looking
forward, however, we expect our materials issues to improve in the fourth
quarter and next year.
Gross profit for the three months ended September 30, 2000 increased $30.2
million, or 108.7%, to $57.9 million from $27.7 million for the same period in
1999. As a percentage of net sales, gross profit increased to 38.5% for the
third quarter of 2000 from 38.2% for the third quarter of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $29.1 million, or 96.8%, to $59.1 million for
the nine months ended September 30, 2000 from $30.0 million for the nine months
ended September 30, 1999. As a percentage of net sales, selling, general
15
<PAGE>
and administrative expense decreased to 17.3% for the first nine months of 2000
from 18.4% for the same period in 1999.
Selling expense increased $7.5 million primarily due to higher employee
costs and an increase in sales commissions due to the increase in net sales, as
well as approximately $2.5 million in selling expense contributed by Powec.
General and administrative expense increased $21.6 million, which was
primarily due to an $8.7 million stock compensation charge related to HCP bonus
agreements that vested on the date of acquisition, $2.4 million of HCP
acquisition costs, $1.3 million in administrative expense contributed by Powec,
and an increase of $9.2 million in our core administrative expense. The increase
in our core administrative expense was primarily due to higher employee costs,
with the remainder of the increase primarily due to higher depreciation on our
Oracle ERP system, as well as increases in other operating expenses to support
the increase in business activities.
Excluding non-recurring items, selling, general and administrative expense
increased $17.9 million, or 59.5%, to $47.9 million, or 14.0% of net sales for
the nine months ended September 30, 2000 from $30.0 million, or 18.4% for the
nine months ended September 30, 1999.
Selling, general and administrative expense for the three months ended
September 30, 2000, increased $7.8 million, or 68.8%, to $19.1 million from
$11.3 million for the three months ended September 30, 1999. As a percentage of
net sales, selling, general and administrative expense decreased to 12.7% for
the three months ended September 30, 2000 from 15.6% for the same period in
1999.
Selling expenses increased $3.7 million primarily due to higher employee
costs and an increase in sales commissions due to the increase in net sales, as
well as $1.6 million in selling expense contributed by Powec.
General and administrative expense increased $4.1 million primarily due to
higher employee costs, higher depreciation, as well as increases in other
operating expenses to support the increase in business activities.
ENGINEERING AND QUALITY ASSURANCE EXPENSE. Engineering and quality
assurance expense increased $11.2 million, or 73.1%, to $26.6 million for the
nine months ended September 30, 2000 from $15.4 million for the nine months
ended September 30, 1999. As a percentage of net sales, engineering and quality
assurance expense decreased to 7.8% for the first nine months of 2000 from 9.4%
for the comparable period in 1999. The increase of $11.2 million was primarily
due to a $4.6 million stock compensation charge due to HCP stock bonus
agreements that vested on the date of acquisition, $1.1 million in engineering
and quality assurance expenses contributed by Powec, with the remainder of the
increase primarily due to higher employee costs which are directly attributable
to our commitment to make R&D investments in support of our future growth.
Excluding non-recurring items, engineering and quality assurance expense
increased $6.5 million, or 42.5%, to $21.9 million, or 6.4% of net sales, for
the nine months ended September 30, 2000 from $15.4 million, or 9.4% of net
sales, for the nine months ended September 30, 1999.
Engineering and quality assurance expense for the three months ended
September 30, 2000, increased $3.0 million, or 50.0%, to $9.0 million from $6.0
million for the three months ended September 30, 1999. As a percentage of net
sales, engineering and quality assurance expense decreased to 6.0% for the three
months ended September 30, 2000 from 8.2% for the same period in 1999. The
increase of $3.0 million was primarily due to higher employee costs, higher
product development costs, as well as a $713,000 engineering and quality
assurance expense contributed by Powec.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased $2.8
million, or 57.1%, to $7.7 million for the nine months ended September 30, 2000
from $4.9 million for the nine months ended September 30, 1999. Included in the
nine-month period ended September 30, 1999 is a $1.0 million
16
<PAGE>
charge taken in the first quarter of 1999 to write off the unamortized balance
of the intangible asset value of a technology and license agreement related to
substantially similar product technology acquired as a result of the IPD
acquisition. Excluding this non-recurring charge, amortization of intangibles
increased $3.8 million, or 97.3%, to $7.7 million for the nine months ended
September 30, 2000 from $3.9 million for the nine months ended September 30,
1999. The $3.8 million increase in amortization expense was primarily
attributable to $2.9 million for five months of amortization expense related to
the intangibles recorded for the acquisition of Powec and a $625,000 increase in
amortization related to intangibles recorded for the acquisition of IPD since a
$13.0 million earn-out was paid to IPD's former shareholders in the second
quarter of 2000.
Amortization of intangibles increased $2.3 million, or 169.5%, to $3.6
million for the three months ended September 30, 2000 from $1.4 million for the
same period in 1999. This increase was primarily due to $1.8 million of
amortization related to the Powec acquisition and a $235,000 increase in
earn-out related amortization expense attributable to the IPD acquisition.
IN-PROCESS RESEARCH AND DEVELOPMENT. As a result of the IPD acquisition, we
recorded a one-time charge of $3.3 million in the first quarter of 1999 for
purchased in-process technology that had not reached technological feasibility
and had no alternative future use.
INCOME FROM OPERATIONS. As a result of the items above, income from
operations increased $31.2 million, or 309.0%, to $41.3 million for the nine
months ended September 30, 2000 from $10.1 million for the nine months ended
September 30, 1999. Excluding non-recurring items totaling approximately $15.9
million in the first quarter of 2000 related to the HCP acquisition and $2.0
million in the second quarter of 2000 related to the Powec acquisition, income
from operations would have been $59.3 million, or 17.4% of net sales for the
first nine months of 2000. Excluding non-recurring items totaling approximately
$5.1 million related to the IPD acquisition, income from operations would have
been $15.2 million, or 9.3% of net sales for the first nine months of 1999.
As a result of the items above, income from operations increased $17.1
million, or 187.8%, to $26.2 million for the three months ended September 30,
2000 from $9.1 million for the three months ended September 30, 1999. As a
percentage of net sales, income from operations increased to 17.4% for the three
months ended September 30, 2000 from 12.5% for the same period in 1999.
INTEREST INCOME (EXPENSE), NET. Net interest expense increased $167,000, or
6.0%, to $3.0 million for the nine months ended September 30, 2000 from $2.8
million for the nine months ended September 30, 1999. We used our bank line of
credit to fund the acquisitions of Melcher in August 1998 and IPD in January
1999. As a result, we incurred interest expense on the outstanding borrowings
for the majority of the nine months ended September 30, 1999. In September 1999,
we issued additional shares of common stock and used the proceeds to pay off
substantially all of the outstanding bank debt. Net interest expense for the
first nine months of 2000 was primarily related to borrowings from our revolving
bank credit facility to help finance the acquisition of Powec in May 2000, as
well as capital expenditures to support our manufacturing facilities.
Net interest expense for the three months ended September 30, 2000 increased
$1.4 million, or 126.0%, to $2.5 million from $1.1 million for the three months
ended September 30, 1999. The increase in net interest expense was primarily due
to bank credit facility advances to finance the Powec acquisition and capital
expenditures.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, decreased
$852,000 to $727,000 expense for the nine months ended September 30, 2000 from
$125,000 income for the nine months ended September 30, 1999. Other income
(expense), net, increased $485,000 to $334,000 income for the three months ended
September 30, 2000 from $151,000 expense for the same period in 1999. The
increased expense for the nine-month period is primarily attributable to losses
recorded on foreign currency transactions at our international locations and a
$242,000 write-off of bank fees related to our
17
<PAGE>
$65 million line of credit which was terminated in the second quarter of 2000
and replaced with a $200 million line of credit with another group of banks. The
increased income for the third quarter of 2000 was primarily due to gains on
foreign currency transactions at our international locations.
INCOME TAXES. The provision for income taxes was $12.5 million for the nine
months ended September 30, 2000 compared to $3.9 million for the nine months
ended September 30, 1999. The income tax expense for the first nine months of
2000 reflects a non-recurring benefit of $366,000 related to net deferred tax
assets recorded upon HCP's conversion from an S-corporation to a C-corporation.
The pre-tax income for the first nine months of 1999 includes the $3.3 million
charge for in-process research and development and $304,000 amortization of
goodwill related to the IPD acquisition, both of which were nondeductible for
tax purposes. Excluding non-recurring items, the effective tax rate would have
been approximately 34.2% for the first nine months of 2000 compared to 36.7% for
the first nine months of 1999. The provision for income taxes for the three
months ended September 30, 2000 was $8.1 million compared to $2.6 million for
the same period in 1999. The effective tax rate was approximately 33.6% for the
three months ended September 30, 2000 compared to 33.4% for the comparable
period in 1999. The lower effective tax rate for the nine months ended
September 30, 2000, after excluding non-recurring items, compared to the same
period in 1999 was primarily the result of greater profits being earned by our
international subsidiaries that are located in countries with lower effective
tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents balance decreased $44.2 million, or 69.3% from
$63.8 million at December 31, 1999 to $19.6 million at September 30, 2000. Our
primary source of cash in the first nine months of 2000 consisted of borrowings
from our bank credit facilities of $149.0 million. The primary uses of cash in
the first nine months of 2000 consisted of $74.5 million for the purchase of
Powec, $14.0 million for the purchase of the telecommunications product line
from Eldec, $13.0 million for the earn-out paid to IPD's former stockholders,
$34.2 million for the acquisition of property and equipment, $13.9 million for
the repayment of borrowings on our bank credit facilities and $28.0 million for
operating activities.
Cash used in operating activities in the first nine months of 2000 was $28.0
million and was primarily attributable to cash earnings from operations of $52.8
million (net income plus depreciation, stock compensation, stock incentive plan
and loss on disposal of property and equipment) offset by $80.8 million used for
working capital. The $80.8 million used for working capital was primarily due to
an increase in accounts receivable and inventories of $51.5 million and $82.6
million, respectively, and a net decrease in accounts payable and accrued
expenses of $25.9 million and $23.5 million, respectively.
The $34.2 million to acquire property and equipment included approximately
$15.5 million to acquire surface-mount technology (SMT) equipment, $1.2 million
for hardware, software and implementation support related to our Oracle ERP
system conversion at our Caribbean facility, $9.7 million for other
manufacturing equipment and the balance for additional property, plant and
capital equipment expenditures consistent with supporting our growth plans.
Of the $149.0 million of proceeds from borrowings on our bank credit
facilities, approximately $68.5 million was used to finance the Powec
acquisition and the purchase of the telecommunications product line from Eldec
and $13 million was used for the IPD earn-out. The remaining proceeds were
primarily used to finance capital expenditures, procure inventory to support our
operations and for the repayment of debt.
On May 10, 2000, we entered into a Revolving Loan Agreement with Union Bank
of California, N.A., as administrative agent and lead arranger, which provides
us with a revolving line of credit of $200 million. The line of credit bears
interest on amounts outstanding payable quarterly based on our leverage ratio
and one of the following rates as selected by us: LIBOR, 6.6% at September 30,
2000,
18
<PAGE>
plus 1.25% to 2.25%, or the bank's base rate, 9.8% at September 30, 2000, plus
0% to 1.00%. The credit agreement:
- provides for restrictions on additional borrowings, leases and capital
expenditures;
- prohibits us from paying dividends, liquidating, merging, consolidating or
selling our assets or business without the bank's prior approval;
- requires us to maintain a specified net worth, maximum leverage ratio and
minimum fixed charge coverage ratio;
- prohibits us, in certain circumstances, from making strategic investments
in excess of $10 million without the bank's prior approval;
- prohibits us, in certain circumstances, from paying $30 million or more
for acquisitions not previously approved by the bank; and
- requires us to use the proceeds of any public offering of our stock to pay
off any indebtedness then outstanding under the loan agreement evidenced
by notes.
Borrowings under this line of credit are collateralized by the capital stock
of each of our domestic subsidiaries and 65% of the capital stock of each of our
foreign subsidiaries. At September 30, 2000, amounts outstanding under this line
of credit were $142.3 million at a weighted average interest rate of 8.1%.
As a result of the Melcher acquisition, we have various credit facilities
with banks in Switzerland and Germany which can be drawn upon in the form of
term loans. The aggregate credit limit for all such credit facilities is
approximately $6.9 million. Melcher's credit facilities in Switzerland bear
interest on amounts outstanding payable at various time intervals and market
rates based on Swiss LIBOR plus a margin ranging from 1.25% to 2.00%. Some of
Melcher's credit agreements require Melcher to maintain certain financial
covenants and to provide certain financial reports to the lenders, none of which
materially restricts Melcher. At September 30, 2000, short-term, including
current portion of long-term debt, and long-term amounts outstanding under
Melcher's credit facilities were $2.0 million and $2.0 million, respectively.
As a result of the Powec acquisition, we have credit facilities with banks
in various European and Asian countries, as well as Australia. The aggregate
credit limit for all such credit facilities is approximately $5.7 million. The
largest of these credit facilities are with banks in Norway totaling
approximately $4.4 million and bear interest on amounts outstanding payable at
various time intervals and market rates ranging between 7.85% and 8.32%. At
September 30, 2000, amounts outstanding under Powec's credit facilities were
$3.4 million.
In addition, Powec has a long-term property loan with a bank in Norway
totaling approximately $8.3 million. The loan was for the purchase of Powec's
primary office and manufacturing facility in Norway and is collateralized by the
building. The 19.5-year loan bears an interest rate based on the bank's rate,
8.3% at September 30, 2000, and is payable in semiannual installments until its
maturity date in July 2019. At September 30, 2000, the current and long-term
amounts outstanding under this loan were $400,000 and $7.9 million,
respectively.
At September 30, 2000, short-term, including current portion of long-term
debt, and long-term amounts outstanding under all credit agreements with banks
were $148.2 million and $9.9 million, respectively.
We currently anticipate that our total capital expenditures for 2000 will be
approximately $60 million, of which approximately $2 million represents costs
related to the implementation of our Oracle ERP system at Power-Electronics,
Inc., as well as continued enhancements and upgrades at our Camarillo and Mexico
locations, approximately $30 million represents investments in SMT automation
19
<PAGE>
and approximately $20 million represents investments in manufacturing
improvements. By year end, we expect to have a total of 19 SMT lines in
operation, of which 15 lines were acquired in the current year. The amount of
these anticipated capital expenditures will frequently change during the year
based on changes in expected revenues, our financial condition and general
economic conditions.
On November 7, 2000, we received net proceeds of $314 million from the sale
of 4,500,000 shares of our common stock. After paying off all indebtedness
outstanding on that date under our revolving loan agreement, approximately
$154 million, we invested the remainder of the offering proceeds in short-term,
interest-bearing, investment grade obligations.
Based on current plans and business conditions, we believe our existing
working capital and borrowing capacity, coupled with the funds generated from
our operations, will be sufficient to fund our anticipated working capital,
capital expenditures and debt payment requirements for the next twelve months.
However, if we make a large acquisition, it may be necessary to raise debt or
equity in the private or public securities markets.
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in
interest rates and changes in foreign currency exchange rates. Our exposure to
interest rate risk results from the financial debt instruments which arise from
transactions entered into during the normal course of business. We may enter
into derivative financial instrument transactions, such as swaps, in order to
manage or reduce our exposure to interest rate changes related to our portfolio
of borrowings. Under no circumstances do we enter into derivative or other
financial instrument transactions for speculative purposes.
DEBT. We are exposed to cash flow risk due to changes in market interest
rates related to our outstanding debt. For example, in Europe some of our credit
facilities bear interest on borrowings outstanding at various time intervals and
market rates based on Swiss LIBOR, 3.4% at September 30, 2000, an offshore rate
that is similar to the London Interbank Offered Rate ("LIBOR"), plus a margin
ranging from 1.25% to 2.00%. Our principal risk with respect to our long-term
debt is to changes in these market rates.
The table below presents principal cash flows and related weighted average
interest rates for our credit facilities and long-term debt obligations at
September 30, 2000 by expected maturity dates. The information is presented in
U.S. dollar equivalents, our reporting currency, and parenthetically in Swiss
francs, Norwegian Kroner or Australian dollars, where applicable. Additionally,
the U.S. dollar equivalent carrying value of Swiss franc and Norwegian Kroner
denominated debt is sensitive to foreign currency exchange rates. However, a 10%
change in the U.S. dollar exchange rate against these currencies would not have
a significant effect on our future earnings.
20
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<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
---------------------------------------------------------------
THERE- FAIR
2000 2001 2002 2003 2004 AFTER TOTAL VALUE
-------- -------- -------- -------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CREDIT FACILITIES:
Variable Rate ($US)......... $137,938 -- -- -- -- -- $137,938 $137,938
Average Interest Rate..... 8.2% 8.2%
Variable Rate
(CHF 7,537)............... $ 4,343 -- -- -- -- -- $ 4,343 $ 4,343
Average Interest Rate..... 4.9% 4.9%
Variable Rate
(NOK 29,380).............. $ 3,217 -- -- -- -- -- $ 3,217 $ 3,217
Average Interest Rate..... 8.3% 8.3%
Variable Rate (AUD 400)..... $ 218 -- -- -- -- -- $ 218 $ 218
Average Interest Rate..... 8.4% 8.4%
LONG-TERM DEBT:
Fixed Rate (CHF 8,500)...... $ 1,152 $2,017 $865 -- -- -- $ 4,034 $ 3,882
Average Interest Rate..... 4.0% 3.8% 4.4% 4.0%
Variable Rate
(NOK 75,925).............. $ 0 $ 436 $436 $436 $436 $6,572 $ 8,316 $ 4,111
Average Interest Rate..... 8.3% 8.3% 8.3% 8.3% 8.3% 8.3%
</TABLE>
FOREIGN CURRENCY. A significant portion of our business operations are
conducted in various countries in Europe. As a result, we have a certain degree
of market risk with respect to our cash flows due to changes in foreign currency
exchange rates when transactions are denominated in currencies other than our
functional currency. Historically, we have not actively engaged in substantial
exchange rate hedging activities, and at September 30, 2000, we had not entered
into any significant foreign exchange contracts.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains statements which, to the extent that they are not
recitations of historical fact, constitute "forward-looking statements" within
the meaning of Section 21E of the Securities Exchange Act of 1934. The words
"expect," "believe," "anticipate" and similar expressions are intended to
identify forward-looking statements. Such forward-looking information involves
important risks and uncertainties that could materially alter results in the
future from those expressed in any forward-looking statements made by, or on
behalf of, the Company. These risks and uncertainties include, but are not
limited to the Company's ability to meet expected revenues and maintain its
financial condition which could be affected by any of the following: general
domestic and international economic conditions including interest rate and
currency exchange rate fluctuations, communications infrastructure and
electronics industries market conditions and growth rates, acquisitions, the
cyclical nature of the Company's business, government and regulatory policies,
technological developments and changes in the competitive environment in which
the Company operates. Persons reading this Form 10-Q are cautioned that such
forward-looking statements are only predictions and that actual events or
results may differ materially. In evaluating such statements, readers should
specifically consider the various factors which could cause actual events or
results to differ materially from those indicated by such forward-looking
statements.
21
<PAGE>
PART II--OTHER INFORMATION
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 31, 2000, at a special meeting of stockholders, stockholders
approved a proposal to amend Article FOURTH of the Company's Restated
Certificate of Incorporation to increase the total number of authorized shares
of common stock from 60 million to 300 million shares. Votes were cast as
follows:
<TABLE>
<CAPTION>
<S> <C>
FOR......................................................... 23,960,348
AGAINST..................................................... 9,873,868
ABSTAIN..................................................... 11,073
</TABLE>
ITEM 5--OTHER INFORMATION
The two-for-one stock split, declared by the Company's Board of Directors on
July 26, 2000 and effected in the form of a 100 percent stock dividend, was paid
on September 11, 2000 to stockholders of record on August 31, 2000. The dividend
had been conditioned upon approval by the stockholders of the amendment to the
Company's Restated Certificate of Incorporation increasing the authorized common
stock.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 3.1--Amendment to Certificate of Incorporation, filed with the State
of Delaware Secretary of State on August 31, 2000.
Exhibit 27--Financial Data Schedule
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated November 2, 2000 was filed on
November 6, 2000 to provide information in connection with the issuance by
the Company of 4,500,000 shares of common stock pursuant to the Company's
Registration Statement on Form S-3.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
Dated: November 14, 2000 POWER-ONE, INC.
By: /s/ STEVEN J. GOLDMAN
-----------------------------------------
Steven J. Goldman
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
By: /s/ EDDIE K. SCHNOPP
-----------------------------------------
Eddie K. Schnopp
SR. VICE PRESIDENT, FINANCE,
CHIEF FINANCIAL OFFICER AND SECRETARY
</TABLE>
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