<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): FEBRUARY 29, 2000
------------------------
POWER-ONE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-29454 77-0420182
(State or other jurisdiction (Commission (I.R.S. Employer
of File number) Identification No.)
incorporation or organization)
</TABLE>
<TABLE>
<S> <C>
740 CALLE PLANO, CAMARILLO, CA 93012
(Address of principal (Zip code)
executive offices)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 987-8741
------------------------
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
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<PAGE>
ITEM 5--OTHER EVENTS
As previously reported in Registrant's Form 8-K filed March 13, 2000, on
February 29, 2000, HC Power, Inc. ("HC Power") was merged with and into a wholly
owned subsidiary of Power-One, Inc. ("Power-One"). In connection with the merger
(the "Merger"), Power-One is supplying selected consolidated supplemental
financial and operating data and the restated audited consolidated financial
statements of Power-One and its subsidiaries as of December 31, 1999 and 1998
and for each of the three years in the three-year period ended December 31,
1999, together with the related "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of Power-One.
The supplemental consolidated financial statements give retroactive effect
to the Merger, which has been accounted for as a pooling of interests as
described in Note 1 to the supplemental consolidated financial statements.
Accounting principles generally accepted in the United States of America
proscribe giving effect to a consummated business combination accounted for by
the pooling of interests method in financial statements that do not include the
date of consummation. The supplemental consolidated financial statements do not
extend through the date of consummation. However, they will become the
historical financial statements of Power-One after financial statements covering
the date of consummation of the Merger are issued.
SELECTED FINANCIAL DATA
GENERAL
Before September 27, 1995, Power-One, Inc., a California corporation ("Power
CA"), Power-Electronics, Inc., a Puerto Rico corporation ("P-E"), and Poder Uno
de Mexico, S.A. de C.V., a Mexican corporation ("Poder Uno"), collectively
referred to for the period prior to September 30, 1995 as the "Predecessor
Company", were owned by a small group of investors, including management, each
in similar ownership percentages, and were operated collectively by management
located primarily in California. On September 27, 1995, Power-One LLC, a
Delaware limited liability company ("Power-One LLC"), acquired the assets of
Power CA and the stock of P-E and Poder Uno in an arms-length transaction that
was negotiated between Stephens Group Inc., and certain of its affiliates
("Stephens Investors") and our previous owners. The Stephens Investors acquired
approximately 65% of the membership interests of Power-One LLC, with the
remainder being acquired by our senior management. The aggregate amount of
consideration paid by the Stephens Investors and by our senior management was
approximately $15 million as well as the deferral of approximately $5.3 million
that was owed to our senior management. After the total consideration was
determined, our senior management participated on the same pricing as the
Stephens Investors. As of February 1, 1996, Power-One LLC was reorganized when
it was merged with and into Power-Merger, Inc., a Delaware corporation, which
changed its name to Power-One, Inc. When this merger occurred, there was no
change in the ownership percentages. The selected financial data has been
prepared to give retroactive effect to the Merger with HC Power on February 29,
2000.
In the table below, we provide you with selected supplemental consolidated
financial and operating data. We have prepared this information using financial
statements for the fiscal years ended December 31, 1997, 1998 and 1999 which
have been audited by Deloitte & Touche LLP, independent auditors, and using
unaudited financial statements for the fiscal years ended December 31, 1995 and
1996. When you read this selected supplemental consolidated financial and
operating data, it is important that you read along with it the section titled
Management's Discussion and Analysis of Financial Condition and Operating
Results included elsewhere in this Form 8-K. Historical results are not
necessarily indicative of future results.
2
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SELECTED CONSOLIDATED SUPPLEMENTAL FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY(1)(2) COMPANY(1)
-------------- -----------------------------------------------------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1996 1997 1998(5) 1999(6)
-------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................ $63,872 $24,406 $96,957 $109,221 $119,451 $237,157
Cost of goods sold....... 38,823 16,781 61,035 66,344 74,954 142,818
------- ------- ------- -------- -------- --------
Gross profit............. 25,049 7,625 35,922 42,877 44,497 94,339
Selling expense.......... 7,074 2,298 9,492 9,846 13,832 24,992
General and
administrative
expense................ 4,962 2,086 6,996 7,686 9,119 18,218
Engineering expense...... 2,538 1,078 4,215 6,001 8,098 17,086
Quality assurance
expense................ 1,612 456 2,342 2,539 2,584 4,422
Amortization of
intangibles............ 472 2,003 2,029 2,625 6,212
In process research and
development............ 3,300
Other expense............ 613
------- ------- ------- -------- -------- --------
Total expense............ 16,186 6,390 25,661 28,101 36,258 74,230
Income from operations... 8,863 1,235 10,261 14,776 8,239 20,109
Interest income.......... 97 35 30 365 1,397 807
Interest expense......... (532) (1,039) (4,358) (3,297) (898) (3,211)
Other income (expense)... (32) (60) (16) (26) (632) 307
------- ------- ------- -------- -------- --------
Income before income
taxes.................. 8,396 171 5,917 11,818 8,106 18,012
Income taxes(3).......... 163 15 408 3,535 2,310 6,458
------- ------- ------- -------- -------- --------
Net income............... $ 8,233 156 5,509 8,283 5,796 11,554
-------
Less: Preferred stock
accretion and
dividends.............. 1,415 1,514
------- ------- -------- -------- --------
Net income attributable
to common
stockholders........... $ 156 $ 4,094 $ 6,769 $ 5,796 $ 11,554
======= ======= ======== ======== ========
Basic earnings per common
share.................. $ 0.01 $ 0.34 $ 0.50 $ 0.31 $ 0.57
======= ======= ======== ======== ========
Diluted earnings per
common share........... $ 0.01 $ 0.34 $ 0.49 $ 0.30 $ 0.55
======= ======= ======== ======== ========
Pro forma amounts:(3)
Income before income taxes
as reported.............. $ 8,396 $ 171 $ 5,917 $ 11,818 $ 8,106 $ 18,012
Pro forma income tax
provision................ 3,139 132 1,440 3,545 2,340 7,044
------- ------- ------- -------- -------- --------
Pro forma net income....... $ 5,257 $ 39 $ 4,477 $ 8,273 $ 5,766 $ 10,968
======= ======= ======= ======== ======== ========
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
3
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY(1)(2) COMPANY(1)
-------------- -----------------------------------------------------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1996 1997 1998 1999
-------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Gross profit margin...... 39.2% 31.2% 37.0% 39.2% 37.3% 39.8%
EBITDA(4)................ $ 9,685 $ 2,092 $14,679 $19,377 $ 14,871 $ 38,548
Cash flows from (used in):
Operating activities..... 7,733 (1,714) 4,053 8,439 23,637 (1,727)
Investing activities..... (2,170) (49,915) (3,872) (5,556) (53,155) (57,730)
Financing activities..... (1,781) 55,379 (2,147) 27,527 7,746 112,677
</TABLE>
<TABLE>
<CAPTION>
AT AT AT AT AT
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1998(5) 1999(6)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $11,040 $13,859 $ 66,266 $ 35,604 $126,280
Total assets.................. 78,367 81,417 120,334 160,170 296,320
Total long-term debt
(including current
portion).................... 35,589 36,668 415 10,904 9,120
Total debt.................... 48,289 47,068 2,342 26,084 16,699
Redeemable preferred stock.... 0 16,287 0 0 0
Total stockholders' equity.... 18,064 6,218 104,294 112,361 237,231
</TABLE>
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(1) Our fiscal year is the 52- or 53-week period ending on the Sunday nearest to
December 31. For clarity of presentation we have described year-ends
presented as if the year ended on December 31. As such, the years ended
December 31, 1995 through 1998 represent 52-week years and the year ended
December 31, 1999 represents a 53-week year.
(2) Effective September 27, 1995, we acquired substantially all of the assets
and liabilities of the Predecessor Company. For financial reporting
purposes, this acquisition has been treated as if it were effective on
October 1, 1995, the beginning of our fourth quarter.
(3) Pro forma information reflects the provision for U.S. federal and state
income taxes as if we and the Predecessor Company had been subject to
federal and state income taxation as a C corporation, prior to January 29,
1996, the date we converted from a limited liability company to a C
corporation. Prior to January 29, 1996, our net income and the Predecessor
Company's net income flowed through to the stockholders/members. Pro forma
information also reflects the provision for U.S. federal and state income
taxes as if HC Power had been subject to federal and state income taxation
as a C corporation, prior to February 29, 2000, the date of the Merger and
when it converted from a S corporation to a C corporation. Prior to
February 29, 2000, HC Power's net income flowed through to the stockholders.
For presentation purposes, U.S. federal and state income taxes have not been
provided on earnings of P-E as there is no intention to remit these
earnings. See Management's Discussion and Analysis of Financial Condition
and Results of Operations--Income Taxes, and Notes 2 and 14 of Notes to
Supplemental Consolidated Financial Statements.
(4) EBITDA, which we calculate as income from operations before depreciation,
amortization, and compensation charges for stock option/bonus plans, is a
supplemental financial measurement used by us in the evaluation of our
business and by many analysts in our industry. However, EBITDA should only
be read in conjunction with all of our supplementary financial data
summarized above and the supplementary financial statements prepared in
accordance with generally accepted accounting
4
<PAGE>
principles appearing elsewhere herein, and should not be construed as an
alternative either to income from operations (as determined in accordance
with accounting principles generally accepted in the United States of
America) as an indicator of our operating performance or to cash flows from
operating activities (as determined in accordance with accounting principles
generally accepted in the United States of America) as a measure of our
liquidity. The calculation of EBITDA varies among companies.
(5) On August 31, 1998, we acquired Melcher for a purchase price of $53 million,
including $11.2 million of debt assumed. In addition, we incurred
transactions costs of approximately $1.6 million. We accounted for the
acquisition using the purchase method of accounting. See Note 3 of Notes to
Supplemental Consolidated Financial Statements.
(6) On January 29, 1999, we purchased IPD for $32 million, including certain
capitalized lease obligations and other indebtedness of IPD. In addition, we
incurred approximately $1.2 million of transaction costs. We accounted for
the acquisition using the purchase method of accounting. See Note 3 of Notes
to Supplemental Consolidated Financial Statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OUR
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES. THE
FOLLOWING DISCUSSION AND OTHER PARTS OF THIS FORM 8-K CONTAIN FORWARD-LOOKING
INFORMATION THAT INVOLVES RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED BY FORWARD-LOOKING INFORMATION DUE TO
FACTORS DISCUSSED UNDER RISK FACTORS, BUSINESS AND ELSEWHERE IN OUR ANNUAL
REPORT FILED ON FORM 10-K.
GENERAL
We are a leading designer and manufacturer of more than 2,500 high-quality
brand name power supplies. We sell our products both to OEMs and distributors
who value quality, reliability, technology and service. We have more than 10,000
customers in the communications, industrial, automatic/semiconductor test
equipment, transportation, medical equipment and other electronic equipment
industries.
We were founded in 1973 as a manufacturer of AC/DC power supplies and until
1981 operated solely from our Southern California facility. During the 1980s, we
established additional operations in Puerto Rico and Mexico to take advantage of
certain labor, manufacturing and, in Puerto Rico, tax efficiencies. Between 1994
and 1996, we moved most of our Puerto Rico manufacturing operations to the
Dominican Republic to capitalize on certain labor benefits. In September 1995,
Stephens Group, Inc., an affiliate of Stephens Inc., and our management
purchased Power-One from its previous owners and formulated a more aggressive
growth strategy, which included a plan to grow through acquisitions.
In August 1998, we increased our international presence and our product
offerings by acquiring Melcher for $53 million, including debt assumed. In
January 1999, we further broadened our DC/DC product offerings by acquiring IPD
for $32 million, including certain capitalized lease obligations and other
indebtedness of IPD.
All references herein to Power-One and to operating data for 1998, include
four months of Melcher's operations. For 1999, financial results are
consolidated to include both Melcher and, for 11 months, IPD. All periods have
been restated to give retroactive effect to the Merger between Power-One and HC
Power, which has been accounted for as a pooling of interests.
5
<PAGE>
The years ended December 31, 1997 and 1998 represent 52-week years and the
year ended December 31, 1999 represents a 53-week year. The following table sets
forth, for the periods indicated, certain Supplemental Consolidated Statements
of Income data as a percentage of net sales for the periods presented:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales.......................................... 100.0% 100.0% 100.0%
Cost of goods sold................................. 60.8 62.7 60.2
----- ----- -----
Gross profit....................................... 39.2 37.3 39.8
Selling expense.................................... 9.0 11.6 10.5
General and administrative......................... 7.0 7.6 7.7
Engineering expense................................ 5.5 6.8 7.2
Quality assurance expense.......................... 2.3 2.2 1.9
Amortization of intangibles........................ 1.9 2.2 2.6
In process research and development................ 0.0 0.0 1.4
----- ----- -----
Income from operations............................. 13.5 6.9 8.5
Interest income.................................... 0.3 1.2 0.3
Interest expense................................... (3.0) (0.8) (1.3)
Other expense...................................... (0.0) (0.5) 0.1
----- ----- -----
Income before income taxes......................... 10.8 6.8 7.6
Income taxes....................................... 3.2 1.9 2.7
----- ----- -----
Net income......................................... 7.6 4.9 4.9
Preferred stock accretion and dividends............ 1.4 0.0 0.0
----- ----- -----
Net income to common stockholders.................. 6.2% 4.9% 4.9%
===== ===== =====
</TABLE>
YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998.
NET SALES. Net sales increased $117.7 million, or 98.5%, to $237.2 million
for 1999 from $119.5 million for 1998. Included in net sales for 1999 are $43.6
million from Melcher, and $61.3 million from IPD. The main contributors to the
$117.7 million increase in net sales were DC/DC power supplies which contributed
$85.0 million, telecom power products, which contributed $14.8 million,
low-range power supplies, which contributed $12.2 million, custom power
supplies, which contributed $5.2 million, and high-range power supplies, which
contributed $3.9 million. These increases were partially offset by declines in
our linear power supplies of $4.0 million. Most of the growth in the DC/DC
business was derived from strong order flow from the communications market,
which includes datacommunications and network equipment manufacturers such as
Cisco, Nortel, Lucent Technologies and Newbridge Networks who are among our top
customers. On the AC/DC side, the automatic/semiconductor test equipment market
continued to expand with key customers such as Teradyne rebounding during 1999.
We also experienced solid growth in other key markets such as industrial and
transportation.
Net sales to OEMs for 1999 were $183.5 million, or 77.4% of net sales, an
increase of $105.8 million or 135.9% over the comparable period in 1998, when
net sales to OEMs represented 65.1% of net sales. Net sales to Cisco represented
13.9% of net sales in 1999. Cisco was the only customer that exceeded 10% of net
sales in 1999. Net sales through distributors for 1999 were $53.6 million, or
22.6% of net sales, an increase of $12.0 million or 28.8% compared to the same
period in 1998, when such net sales represented 34.9% of net sales. The lower
percentage of net sales through distributors in 1999 is primarily due to the
change in the mix of our customer base which, compared to last year, has shifted
more toward OEM customers in the communications market.
6
<PAGE>
Our recent acquisition of IPD has significantly broadened our customer base
by increasing net sales to key OEMs and adding new OEMs in the communications
market.
Net sales by markets for the years ended December 31, 1998 and 1999 were:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Communications.............................................. 25% 51%
Industrial.................................................. 28% 18%
Automatic/Semiconductor test equipment...................... 16% 10%
Transportation.............................................. 3% 6%
Medical equipment........................................... 10% 5%
Computer, Retail and Other.................................. 18% 10%
--- ---
Total..................................................... 100% 100%
</TABLE>
The changes in the percentage of our net sales by market are primarily due
to a significantly larger concentration of net sales to the communications and
transportation markets.
During 1999, demand for our products increased significantly, especially in
the second half of the year. Our combined backlog on December 31, 1999 was $68.5
million, an increase of 139.9%, compared to backlog of $29.1 million on
December 31, 1998. Pro forma backlog, which assumes IPD's backlog was in place
at December 31, 1998, increased 103.3% at the end of December 1999 as compared
to year-end 1998. For the quarter ended December 31, 1999 we experienced a
strong bookings trend with $72.6 million in new orders taken. Much of this
growth comes from strong demand in the communications market, which is primarily
driven by datacommunications and network equipment manufacturers, as well as
increased demand of our high-power product line, which are typically sold to the
automatic/semiconductor test equipment market.
GROSS PROFIT. Gross profit increased $49.8 million, or 112.0%, to $94.3
million for 1999 from $44.5 million for 1998. As a percent of net sales, gross
profit increased to 39.8% for 1999 from 37.3% for the same period in 1998. The
increase in gross profit margin primarily resulted from the inventory write-up
related purchase accounting adjustments due to the Melcher acquisition which
negatively impacted the prior year period. Excluding the non-recurring
adjustments related to our acquisitions of IPD in 1999 and Melcher in 1998, our
gross profit margin would have been approximately 40.1% in 1999 and 39.7% in
1998. The improved profit margin in 1999 is primarily due to the increase in net
sales which allowed us to better leverage out fixed manufacturing expenses.
SELLING EXPENSE. Selling expense increased $11.2 million, or 80.7%, to
$25.0 million for 1999 from $13.8 million for 1998. As a percent of net sales,
selling expense decreased from 11.6% in 1998 to 10.5% in 1999. The increase of
$11.2 million was primarily due to the additional selling expense related to
Melcher and IPD of $3.9 million and $4.9 million, respectively. Excluding
Melcher and IPD, selling expense increased $2.4 million primarily due to higher
employee costs of $322,000, increased freight and travel expense aggregating
$693,000 and increased commissions and trade show expenses aggregating
approximately $1.0 million, to support the increase in business growth during
1999.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $9.1 million, or 99.8%, to $18.2 million for 1999 from $9.1 million
for 1998. As a percent of net sales, general and administrative expense remained
fairly consistent at 7.6% in 1998 and 7.7% in 1999. The increase of $9.1 million
was primarily due to additional administrative expense related to Melcher and
IPD of $1.9 million and $2.5 million, respectively, as well as an increase of
$4.7 million in our core administrative expense. The increase in our core
administrative expense of $4.7 million was primarily due to higher employee
costs of $1.8 million related to an increase in staff, employee performance
bonuses and temporary help; increased depreciation expense of $835,000 primarily
related to the Oracle ERP project and other capital expenditures; higher
professional fees of $521,000; increased insurance expense of $242,000; stock
compensation
7
<PAGE>
expense of $171,000 related to HC Power stock bonus agreements; and increases in
other general operating expenses such as travel, utilities and office supplies
expenses.
ENGINEERING EXPENSE. Engineering expense increased $9.0 million, or 111.0%,
to $17.1 million for 1999 from $8.1 million for 1998. The increase of $9.0
million was primarily due to Melcher's and IPD's additional engineering expense
of $3.0 million and $4.2 million, respectively. In addition, our core
engineering expenses increased $1.8 million primarily due to a $751,000 increase
in employee costs, a $108,000 increase in product development expenses, and
$315,000 stock compensation expense related to HC Power stock bonus agreements.
As a percent of net sales, engineering expense increased to 7.2% for 1999 from
6.8% for 1998. This increase is directly attributable to our commitment to make
strategic investments in support of our future growth.
QUALITY ASSURANCE EXPENSE. Quality assurance expense increased $1.8
million, or 71.1%, to $4.4 million for 1999 from $2.6 million for 1998. As a
percent of net sales, quality assurance expense decreased slightly from 2.2% in
1998 to 1.9% in 1999. The increase of $1.8 million was primarily due to
additional quality assurance expense related to Melcher and IPD of $378,000 and
$710,000, respectively, as well as an increase of $750,000 in our core quality
assurance expense primarily related to increased employee costs.
AMORTIZATION EXPENSE. The amortization of intangibles increased $3.6
million, or 136.6%, to $6.2 million for 1999 from $2.6 million for 1998. As a
percent of net sales, amortization of intangibles increased to 2.6% for 1999
from 2.2% for 1998. The increase is attributable to a $1.0 million charge taken
to write-off the unamortized balance of the intangible asset value of a
technology and licensee agreement related to substantially similar product
technology acquired as a result of the IPD acquisition. The balance of the
increase is due to 11 months of amortization of intangibles initially recorded
upon the acquisition of IPD on January 29, 1999 totaling approximately $1.6
million, as well as and additional $1.1 million of amortization of intangibles
related to the Melcher acquisition.
IN-PROCESS RESEARCH & DEVELOPMENT. In connection with the IPD acquisition,
we recorded a one time charge of $3.3 million for purchased in-process
technology that had not reached technological feasibility.
INCOME FROM OPERATIONS. As a result of the above factors, income from
operations increased $11.9 million, or 144.1%, to $20.1 million, or 8.5% of net
sales, for 1999 from $8.2 million, or 6.9% of net sales, for 1998. Excluding
non-recurring items totaling approximately $5.1 million in 1999 consisting of
inventory fair market value write-up of $0.8 million, in-process research and
development charge of $3.3 million and write-off of $1.0 million technology and
license agreement, all of which were related to the IPD acquisition, and $2.9
million in 1998 for the inventory fair market value write-up related to the
Melcher acquisition, income from operations would have been $25.1 million, or
10.6% of net sales, in 1999 and $11.1 million, or 9.3% of net sales, in 1998.
INTEREST INCOME. Interest income decreased $0.6 million, or 42.2%, to $0.8
million for 1999 from $1.4 million for 1998. This decrease was primarily related
to the reduction in short-term, interest bearing financial instruments as a
result of the available cash used for the Melcher acquisition in the third
quarter of 1998. This decrease was partially offset by interest earned on
proceeds from the sale of our stock in September and October 1999 which were
invested in short-term, interest bearing financial instruments.
INTEREST EXPENSE. Interest expense increased $2.3 million, or 257.6%, to
$3.2 million for 1999 from $0.9 million for 1998. The increase was primarily due
to advances under our credit facilities to finance the IPD acquisition, as well
as additional investments in facilities and capital equipment to increase our
capacity to support the rapid growth of our business. This increase was
partially offset by the repayment of $54.1 million of outstanding debt under our
credit agreement with Bank of America, N.A. using the proceeds from the sale of
our stock in September and October 1999.
8
<PAGE>
OTHER INCOME (EXPENSE), NET. Other income increased $939,000, to $307,000
for 1999, from other expense of $632,000 for 1998, and is primarily due to gains
on foreign currency transactions partly offset by net losses on disposals of
fixed assets.
INCOME TAXES. The provision for income taxes increased $4.1 million, to
$6.5 million for 1999, from $2.3 million for 1998. The effective tax rate of
35.9% in 1999 is significantly higher than the 28.5% in 1998. This is primarily
attributable to the $3.3 million charge for in-process research and development
and $1.6 million amortization of goodwill related to the IPD acquisition, both
of which are not deductible for tax purposes.
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997.
NET SALES. Net sales increased $10.2 million, or 9.4%, to $119.5 million
for 1998 from $109.2 million for 1997. The increase in net sales resulted
primarily from a $18.8 million contribution from Melcher since the date of
acquisition, as well as strong growth in unit shipments of standard and modified
standard power supplies, particularly in high-range power configurations, during
the first half of 1998. Including Melcher's results, the principal contributors
to the $10.2 million increase in net sales were DC/DC power products, which
contributed $14.1 million in net sales, and low-range power products, which
contributed $4.4 million. These increases were offset by declines in linear and
custom power products of $3.4 million and $3.9 million, respectively, and
decreases in all other product lines of $1.0 million, net. Excluding Melcher,
our net sales decreased $8.6 million, or 7.9%, to $100.6 million in 1998 from
$109.2 million in 1997. This was primarily due to the general slowdown in demand
for products within the electronics industry, as well as domestic inventory
reductions at OEMs, including some of our customers, in the second half of 1998.
Net sales to OEMs for 1998 were $77.8 million, or 65% of net sales, an
increase of $10.3 million or 15.2% over the comparable period in 1997, when net
sales to OEMs represented 61.8% of net sales. Net sales through distributors for
1998 were $41.6 million, or 35% of net sales, which was consistent with the
dollar volume of sales through distriubtors in 1997 but a decrease in percentage
of net sales compared to the 38% in 1997. As a result of the Melcher
acquisition, our OEM net sales to the communications and transportation markets
increased $7.1 million and $3.6 million, respectively.
Our total backlog on December 31, 1998 was $29.1 million, which included
Melcher's backlog of $12.4 million. Our backlog stood at $38.9 million on
December 31, 1997.
Beginning in the three month period ended June 30, 1998, demand for products
slowed significantly within the electronics industry. This was the result of a
softening trend in capital equipment markets, which in turn has been negatively
influenced by weak demand due to the business recessions in various Asian
economies, as well as an overall slowing in global economic activities. Demand
for our products was further weakened by domestic inventory reduction
initiatives at OEMs and distributors, including some of our customers. The
contribution of Melcher, which sells primarily into the European market, more
than offset the decline in our North American business. We expect that the
Melcher acquisition will continue to have a positive impact on our overall
business growth, particularly in data communications and telecommunications.
To counter the impact of the soft business climate in 1998, management
pursued action steps to position us for increased growth in 1999. Some of these
initiatives included actively pursuing new business synergies with Melcher in
the areas of sales and cost reductions; aggressively pursuing acquisitions which
culminated in the acquisition of IPD on January 29, 1999; and providing for
additional investment in research and development. Additionally, we made
significant progress to further upgrade our core business systems with the
implementation of a new Oracle ERP system. Although this fully integrated Oracle
ERP system is Year 2000 certified, the key reasons for implementing the new
system are to further enhance our technical infrastructure by providing to
management the tools available in a new generation of systems and software to
speed information retrieval; to position us for business growth; to facilitate
business integration of acquired companies; and to provide a clearer audit trail
for the source of information.
9
<PAGE>
GROSS PROFIT. Gross profit increased $1.6 million, or 3.8%, to $44.5
million for 1998 from $42.9 million for 1997, which is primarily due to the
inclusion of Melcher's gross profit since the date of the acquisition. As a
percent of net sales, gross profit decreased to 37.3% for 1998 from 39.2% for
the same period in 1997. The decline in gross profit margin primarily resulted
from the inventory write-up related purchase accounting adjustments related to
the Melcher acquisition. Excluding the Melcher related inventory fair market
value purchase write-up adjustments, gross profit margin would have been 39.7%
in 1998 and 39.2% in 1997.
SELLING EXPENSE. Selling expense increased $4.0 million, or 40.5%, to $13.8
million for 1998 from $9.8 million for 1997. The increase of $4.0 million is
primarily due to the inclusion of Melcher's selling expense of $3.6 million
since the date of acquisition. As a percent of net sales, selling expense
increased to 11.6% in 1998 from 9.0% for 1997, which is primarily due to our
decision to maintain our sales resources intact during the business downturn in
the latter portion of 1998, and due to the addition of Melcher which had
proportionately higher selling expense on a stand-alone basis.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $1.4 million, or 18.6%, to $9.1 million for 1998 from $7.7 million for
1997. As a percent of net sales, general and administrative expense increased to
7.6% in 1998 from 7.0% in 1997. The increase of $1.4 million is primarily due to
higher public company expenses of $268,000, higher travel costs primarily
related to pursuing other acquisitions of $149,000, higher depreciation expense
of $244,000, higher general office expenses of $291,000, other expenses
aggregating $285,000 and the inclusion of Melcher's general and administrative
expenses of $748,000 since the date of acquisition. These increases are
partially offset by decreases in salaries of $270,000 and bad debt expense of
$315,000.
ENGINEERING EXPENSE. Engineering expense increased $2.1 million, or 34.9%,
to $8.1 million for 1998 from $6.0 million for 1997. As a percent of net sales,
engineering expense increased to 6.8% for 1998 from 5.5% for 1997. The increase
is primarily due to higher employee costs of $484,000, increased product
development expense of $109,000, and the inclusion of Melcher's engineering
expenses of $1.7 million since the date of acquisition.
QUALITY ASSURANCE EXPENSE. Quality assurance expense was fairly consistent
at $2.6 million in 1998 compared to $2.5 million in 1997. As a percent of net
sales, quality assurance expense decreased slightly to 2.2% for 1998 from 2.3%
from 1997. Excluding Melcher, quality assurance expense decreased $153,000, or
6.0%, to $2.4 million in 1998 compared to $2.5 million in 1997. This decrease is
primarily attributable to a decrease in salary expense.
AMORTIZATION EXPENSE. The amortization of intangibles increased $596,000,
or 29.4%, to $2.6 million for 1998 from $2.0 million for 1997. As a percent of
net sales, amortization of intangibles increased to 2.2% for 1998 from 1.9% for
1997. The increase is directly attributable to four months of amortization of
intangibles initially recorded upon the acquisition of Melcher on August 31,
1998.
INCOME FROM OPERATIONS. As a result of the above factors, income from
operations decreased $6.5 million, or 44.2%, to $8.2 million for 1998 from $14.8
million for 1997. As a percent of net sales, income from operations decreased to
6.9% for 1998 from 13.5% for 1997. Excluding the charge to cost of sales of $2.9
million for the Melcher-related inventory fair market value purchase write-up
adjustments, income from operations would have been $11.1 million in 1998
compared to $14.8 million in 1997.
INTEREST INCOME. Interest income increased $1.0 million, or 282.7%, to $1.4
million for 1998 from $0.4 million for 1997. This increase is primarily due to
the interest income derived from investment of a portion of the net proceeds
from our initial public offering, or IPO, in short-term, interest-bearing
investment-grade financial instruments.
INTEREST EXPENSE. Interest expense decreased $2.4 million, or 72.8%, to
$0.9 million for 1998 from $3.3 million for 1997. This decrease is primarily the
result of the repayment of all bank borrowings under
10
<PAGE>
our existing bank credit facility using the net proceeds from our IPO completed
in the fourth quarter of 1997.
OTHER INCOME (EXPENSE), NET. Other expense increased $606,000, to $632,000
for 1998, from $26,000 for 1997, and is primarily due to foreign currency
translation losses of $455,000 related to Melcher since the date of acquisition
and other expenses aggregating $151,000.
INCOME TAXES. The provision for income taxes decreased $1.2 million, to
$2.3 million for 1998, from $3.5 million for 1997. Income taxes as a percent of
net sales decreased to 1.9% in 1998 from 3.2% in 1997. The decrease is due to a
$721,000 reduction in tax provision related to the $7.2 million write-up of
assets to fair value as a result of purchase accounting adjustments made for the
Melcher acquisition. The remainder is attributable to a $122,000 tax credit
related to a pre-tax loss incurred by our U.S. operations in the third quarter
of 1998, as well as a decrease in the overall effective tax rate due to a
relatively lower portion of operating income generated in the second half of
1998, primarily as a result of lower net sales of high-power products.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents balance increased $52.8 million, or 481.3%
from $11.0 million at December 31, 1998 to $63.8 million at December 31, 1999.
This increase in cash is primarily due to $118.3 million in net proceeds from
our sale of 4,975,000 shares of common stock in September and October 1999.
Prior to the sale of our stock, our primary source of cash, other than cash from
operations, consisted of borrowings from credit facilities of $67.8 million. The
primary uses of cash in 1999 consisted of $75.7 million for repayment of credit
facility borrowings, $28.3 million for the purchase of IPD and $1.2 million of
related transaction costs, and $27.9 million for the acquisition of property and
equipment.
Cash used in operating activities in 1999 was $1.7 million and was primarily
attributable to cash earnings from operations of $30.0 million (net income plus
depreciation, amortization, stock compensation, in-process research and
development charge and loss on disposal of fixed assets) offset by $31.7 million
used for working capital. The $31.7 million use of working capital was primarily
due to an increase in accounts receivable and inventories of $22.0 million each,
offset by an increase in accounts payable and accrued expense of $5.2 million
and $7.4 million, respectively.
The $27.9 million to acquire property and equipment included approximately
$5.6 million for hardware, software and implementation support related to our
Oracle ERP system conversion, $4.3 million to purchase IPD's manufacturing
facility, $5.9 million to acquire surface-mount technology equipment, and the
balance for additional property, plant and capital equipment expenditures
consistent to support our growth plans.
In 1999 we restructured our credit agreement to provide for more flexibility
and to increase our credit limits. We now have a $65 million revolving line of
credit, which bears interest on amounts outstanding payable quarterly based on
our leverage ratio and one of the following rates as selected by us: LIBOR plus
1.25% to 2.50%, or the bank's base rate plus 0% to 1.25%. The credit agreement
(a) provides for restrictions on additional borrowings, leases and capital
expenditures; (b) prohibits us, without prior approval, from paying dividends,
liquidating, merging, consolidating or selling our assets or business; and (c)
requires us to maintain a specified net worth, minimum working capital and
certain ratios of current liabilities and total debt to net worth. At December
31, 1999, amounts outstanding under our line of credit were $2.5 million all of
which was borrowed by Melcher. Borrowings are collateralized by substantially
all of our assets.
In addition, we have a revolving loan of $8 million and equipment line of
credit of $1 million. The revolving loans mature on January 31, 2001, with
interest payable monthly in arrears at either the prime rate or at LIBOR plus
2.25%, at our election. Maximum borrowings are not to exceed $8 million. At
December 31, 1999, amounts outstanding under this revolving loan were $3.5
million. The loans are
11
<PAGE>
collateralized by substantially all of HC Power's assets and are personally
guaranteed by certain shareholders. The equipment line of credit matures on
January 31, 2001, with interest payable monthly in arrears at Prime plus 0.25%
or at LIBOR plus 2.25%, at our election. Monthly principal repayments equal to
1/48th of the balance outstanding as of January 31, 2001 will commence on
March 1, 2001. There were no amounts outstanding under this equipment line of
credit at December 31, 1999. The loans are collateralized by substantially all
of HC Power's assets.
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 $13.2 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 December 31, 1999, short-term (including
current portion of long-term debt) and long-term amounts outstanding under
Melcher's credit facilities were $5.5 million and $3.1 million, respectively.
At December 31, 1999, short-term (including current portion of long-term
debt) and long-term amounts outstanding under all credit agreements with banks
were $11.6 million and $3.4 million, respectively.
We currently anticipate that our total capital expenditures for 2000 will be
approximately $23.1 million, of which approximately $1.9 million represents
costs related to the implementation of our Oracle ERP system at P-E, as well as
continued enhancements and upgrades at our Camarillo and Mexico locations,
approximately $7.3 million represents investments in surface-mount technology
automation and approximately $9.6 million represents investments in
manufacturing improvements. 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.
In addition, we are paying $13 million to IPD's former shareholders in the
first half of 2000, since IPD attained certain defined operational performance
objectives in the 13 month period ending March 31, 2000.
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.
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 our credit
facilities bear interest on borrowings outstanding at various time intervals and
market rates based on Swiss LIBOR, 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.
12
<PAGE>
The table below presents principal cash flows and related weighted average
interest rates for our credit facilities and long-term debt obligations at
December 31, 1999 by expected maturity dates. The information is presented in
U.S. dollar equivalents, our reporting currency, and parenthetically in Swiss
francs, where applicable. Additionally, the U.S. dollar equivalent carrying
value of Swiss franc denominated debt is sensitive to foreign currency exchange
rates. However, a 10% change in the U.S. dollar exchange rate against the Swiss
franc would not have a significant effect on our future earnings.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
--------------------------------------------------
2000 2001 2002 2003
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C> <C>
Credit facility:
Variable Rate ($US)........ $3,500
Average Interest Rate.... 8.5%
Fixed Rate (CHF 6,500)..... $4,079
Average Interest Rate.... 3.5%
Long-term Debt:
Fixed Rate (CHF 11,250).... $3,922 2,200 938 --
Average Interest Rate.... 3.9% 4.0% 5.0%
Fixed Rate ($US)........... $ 80 80 80 $ 81
Average Interest Rate.... 8.5% 8.5% 8.5% 8.5%
<CAPTION>
EXPECTED MATURITY DATE
------------------------ FAIR
2004 THEREAFTER TOTAL VALUE
-------- ---------- -------- --------
(AMOUNTS IN THOUSANDS EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C> <C>
Credit facility:
Variable Rate ($US)........ $3,500 3,500
Average Interest Rate.... 8.5%
Fixed Rate (CHF 6,500)..... $4,079 $4,079
Average Interest Rate.... 3.5%
Long-term Debt:
Fixed Rate (CHF 11,250).... -- -- $7,060 $7,060
Average Interest Rate.... 4.1%
Fixed Rate ($US)........... $ 321 $ 321
Average Interest Rate.... 8.5%
</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. However, a 10% change in the U.S. dollar exchange ratio in
the various countries in Europe would not have a significant impact on the
Supplemental Consolidated Statements of Income. Historically, we have not
actively engaged in substantial exchange rate hedging activities, and at
December 31, 1999, we had not entered into any significant foreign exchange
contracts.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The following financial statements are filed as a part of this Report:
POWER-ONE, INC.
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report................................ F-1
Supplemental Consolidated Balance Sheets.................... F-2
Supplemental Consolidated Statements of Income.............. F-3
Supplemental Consolidated Statements of Comprehensive Income
(Loss).................................................... F-4
Supplemental Consolidated Statements of Redeemable Preferred
Stock and Stockholders' Equity............................ F-5
Supplemental Consolidated Statements of Cash Flows.......... F-6
Notes to Supplemental Consolidated Financial Statements..... F-9
Supplemental Quarterly Financial Data for the 1998 and 1999
Quarters (unaudited)...................................... F-28
</TABLE>
SCHEDULES
The following financial statement schedule is filed as a part of this
Report.
POWER-ONE, INC.
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
</TABLE>
<TABLE>
<S> <C>
Supplemental Schedule II: Valuation and Qualifying
Accounts.................................................. S-1
</TABLE>
13
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Power-One, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
Power-One, Inc. and its subsidiaries (the "Company") as of December 31, 1998 and
1999 and the related supplemental consolidated statements of income,
comprehensive income, redeemable preferred stock and stockholders' equity, and
of cash flows for each of the three years in the period ended December 31, 1999.
Our audits also included the supplemental consolidated financial statement
schedule listed at Item 14. These supplemental financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these supplemental financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such supplemental consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 1998 and 1999, and the consolidated results of
operations and cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic supplemental consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As described in Note 1, on February 29, 2000, Power-One, Inc. merged with HC
Power, Inc. in a transaction accounted for as a pooling of interests. The
accompanying supplemental consolidated financial statements give retroactive
effect to the merger of Power-One, Inc. with HC Power, Inc. Accounting
principles generally accepted in the United States of America proscribe giving
effect to a consummated business combination accounted for by the pooling of
interests method in financial statements that do not include the date of
consummation. These supplemental financial statements do not extend through the
date of consummation; however, they will become the historical consolidated
financial statements of Power-One, Inc. after financial statements covering the
date of consummation of the business combination are issued.
Deloitte & Touche LLP
Los Angeles, California
March 17, 2000, except for Note 16, as to which
the date is March 31, 2000
F-1
<PAGE>
Amounts have been restated under the pooling of interests method of
accounting to include the financial results of HC Power, Inc., acquired on
February 29, 2000.See Note 1.
POWER-ONE, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 10,971 $ 63,769
Accounts receivable:
Trade, less allowance for doubtful accounts:
$1,452--1998; $1,918--1999............................ 20,023 45,805
Other................................................... 2,184 1,914
Inventories............................................... 35,242 61,834
Deferred income tax asset--current........................ 1,880 3,132
Current portion of notes receivable from stockholders..... 30
Prepaid expenses and other current assets................. 1,398 1,795
-------- --------
Total current assets.................................. 71,698 178,279
PROPERTY AND EQUIPMENT, net................................. 35,389 55,608
INTANGIBLE ASSETS, net...................................... 51,019 59,217
NOTES RECEIVABLE FROM STOCKHOLDERS, less current portion.... 102 79
OTHER ASSETS................................................ 1,962 3,137
-------- --------
TOTAL....................................................... $160,170 $296,320
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank credit facilities.................................... $ 15,180 $ 7,579
Current portion of long-term debt......................... 2,912 4,002
Current portion of long-term capital leases............... 141 897
Bank overdraft............................................ 5,804
Accounts payable.......................................... 6,992 13,107
Accrued payroll and related expenses...................... 1,481 2,583
Other accrued expenses.................................... 8,079 16,811
Deferred income tax liability--current.................... 1,309 1,216
-------- --------
Total current liabilities............................. 36,094 51,999
-------- --------
LONG-TERM DEBT, less current portion........................ 7,645 3,379
LONG-TERM CAPITAL LEASES, less current portion.............. 206 842
DEFERRED INCOME TAX LIABILITY, non-current.................. 3,585 2,757
OTHER LIABILITIES........................................... 279 112
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $0.001; 60,000,000 shares
authorized; 18,889,632 shares issued and outstanding at
December 31, 1998 and 23,987,408 shares issued and
outstanding at December 31, 1999........................ 19 24
Additional paid-in capital................................ 92,912 212,196
Accumulated other comprehensive income (loss)............. 2,177 (3,476)
Retained earnings......................................... 17,253 28,487
-------- --------
Total stockholders' equity............................ 112,361 237,231
-------- --------
TOTAL....................................................... $160,170 $296,320
======== ========
</TABLE>
See notes to supplemental consolidated financial statements.
F-2
<PAGE>
Amounts have been restated under the pooling of interests method of
accounting to include the financial results of HC Power, Inc., aquired on
February 29, 2000, See Note 1.
POWER-ONE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
NET SALES................................................... $109,221 $119,451 $237,157
COST OF GOODS SOLD.......................................... 66,344 74,954 142,818
-------- -------- --------
GROSS PROFIT................................................ 42,877 44,497 94,339
-------- -------- --------
EXPENSES:
Selling................................................... 9,846 13,832 24,992
General and administrative................................ 7,686 9,119 18,218
Engineering............................................... 6,001 8,098 17,086
Quality assurance......................................... 2,539 2,584 4,422
Amortization of intangible assets......................... 2,029 2,625 6,212
In process research and development....................... 3,300
-------- -------- --------
Total expenses.......................................... 28,101 36,258 74,230
-------- -------- --------
INCOME FROM OPERATIONS...................................... 14,776 8,239 20,109
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income........................................... 365 1,397 807
Interest expense.......................................... (3,297) (898) (3,211)
Other income (expense).................................... (26) (632) 307
-------- -------- --------
Total other expense..................................... (2,958) (133) (2,097)
-------- -------- --------
INCOME BEFORE INCOME TAXES.................................. 11,818 8,106 18,012
INCOME TAXES................................................ 3,535 2,310 6,458
-------- -------- --------
NET INCOME.................................................. 8,283 5,796 11,554
PREFERRED STOCK ACCRETION AND DIVIDENDS..................... 1,514 -- --
-------- -------- --------
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS.............. $ 6,769 $ 5,796 $ 11,554
======== ======== ========
BASIC EARNINGS PER COMMON SHARE............................. $ 0.50 $ 0.31 $ 0.57
======== ======== ========
DILUTED EARNINGS PER COMMON SHARE........................... $ 0.49 $ 0.30 $ 0.55
======== ======== ========
PRO FORMA AMOUNTS:
INCOME BEFORE INCOME TAXES, AS REPORTED..................... $ 11,818 $ 8,106 $ 18,012
PRO FORMA INCOME TAX PROVISION (Note 14).................... 3,545 2,340 7,044
-------- -------- --------
PRO FORMA NET INCOME........................................ $ 8,273 $ 5,766 $ 10,968
======== ======== ========
BASIC SHARES OUTSTANDING.................................... 13,448 18,871 20,199
======== ======== ========
DILUTED SHARES OUTSTANDING.................................. 13,721 19,121 20,823
======== ======== ========
</TABLE>
See notes to supplemental consolidated financial statements.
F-3
<PAGE>
Amounts have been restated under the pooling of interests method of
accounting to include the financial results of HC Power, Inc., acquired on
February 29, 2000, See Note 1.
POWER-ONE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
NET INCOME.................................................. $8,283 $5,796 $11,554
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments.................. -- 2,177 (5,653)
------ ------ -------
COMPREHENSIVE INCOME........................................ $8,283 $7,973 $ 5,901
====== ====== =======
</TABLE>
See notes to supplemental consolidated financial statements.
F-4
<PAGE>
Amounts have been restated under the pooling of interests method of
accounting to include the financial results of HC Power, Inc., acquired on
February 29, 2000, See Note 1.
POWER-ONE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RECEIVABLE COMMON STOCK-- NOTES ACCUMULATED
PREFERRED STOCK $.001 PAR VALUE ADDITIONAL REDEEMABLE OTHER
---------------------- --------------------- PAID-IN FROM COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS INCOME (LOSS)
----------- -------- ---------- -------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.... 15,153,698 16,287 11,777,624 12 $ 477 $(225) $ --
Interest on notes receivable
from stockholders........... (15)
Accrual of preferred stock
dividend.................... -- 1,258
Accretion of preferred stock
to redemption value......... 256
Stock option compensation
expense..................... 16
Conversion of other
liabilities to common
stock....................... 55,408 776
Conversion of preferred stock
to common stock............. (14,950,848) (17,559) 1,254,177 1 17,558
Repurchase of preferred
stock....................... (202,850) (242)
Payment on notes receivable
from stockholders........... 240
Stock issuance to public...... 5,750,000 6 80,494
Stock issuance costs.......... (6,707)
Issuance of common stock...... 18,781 157
Distributions to
stockholders................
Net income....................
----------- ------- ---------- --- -------- ----- -------
BALANCE, DECEMBER 31, 1997.... -- -- 18,855,990 19 92,771 0 0
Stock option compensation
expense..................... 27
Issuance of common stock under
stock option and purchase
plans....................... 33,642 27
Distributions to
stockholders................
Income tax benefit for
employee stock option
transactions................ 87
Cumulative translation
adjustment.................. 2,177
Net income....................
----------- ------- ---------- --- -------- ----- -------
BALANCE, DECEMBER 31, 1998.... -- -- 18,889,632 19 92,912 0 2,177
Stock option compensation
expense..................... 27
Issuance of common stock under
stock option and purchase
plans....................... 68,949 464
Income tax benefit for
employee stock option
transactions................ 207
Stock issuance to public...... 4,975,000 5 124,370
Stock issuance costs.......... (6,046)
Cumulative translation
adjustment.................. (5,653)
Issuance of common stock...... 53,827 262
Distributions to
stockholders................
Net income....................
----------- ------- ---------- --- -------- ----- -------
BALANCE, DECEMBER 31, 1999.... -- -- 23,987,408 $24 $212,196 $ -- $(3,476)
=========== ======= ========== === ======== ===== =======
<CAPTION>
RETAINED
EARNINGS TOTAL
--------- --------
<S> <C> <C>
BALANCE, DECEMBER 31, 1996.... 4,908 $ 5,172
Interest on notes receivable
from stockholders........... (15)
Accrual of preferred stock
dividend.................... (1,258) (1,258)
Accretion of preferred stock
to redemption value......... (256) (256)
Stock option compensation
expense..................... 16
Conversion of other
liabilities to common
stock....................... 776
Conversion of preferred stock
to common stock............. 17,559
Repurchase of preferred
stock.......................
Payment on notes receivable
from stockholders........... 240
Stock issuance to public...... 80,500
Stock issuance costs.......... (6,707)
Issuance of common stock...... 157
Distributions to
stockholders................ (171) (171)
Net income.................... 8,283 8,283
------- --------
BALANCE, DECEMBER 31, 1997.... 11,506 104,296
Stock option compensation
expense..................... 27
Issuance of common stock under
stock option and purchase
plans....................... 27
Distributions to
stockholders................ (49) (49)
Income tax benefit for
employee stock option
transactions................ 87
Cumulative translation
adjustment.................. 2,177
Net income.................... 5,796 5,796
------- --------
BALANCE, DECEMBER 31, 1998.... 17,253 112,361
Stock option compensation
expense..................... 27
Issuance of common stock under
stock option and purchase
plans....................... 464
Income tax benefit for
employee stock option
transactions................ 207
Stock issuance to public...... 124,375
Stock issuance costs.......... (6,046)
Cumulative translation
adjustment.................. (5,653)
Issuance of common stock...... 262
Distributions to
stockholders................ (320) (320)
Net income.................... 11,554 11,554
------- --------
BALANCE, DECEMBER 31, 1999.... $28,487 $237,231
======= ========
</TABLE>
See notes to supplemental consolidated financial statements.
F-5
<PAGE>
Amounts have been restated under the pooling of interests method of
accounting to include the financial results of HC Power, In., aquired on
February 29, 2000, See Note 1.
POWER-ONE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 8,283 $ 5,796 $ 11,554
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization........................... 4,312 6,605 14,626
Stock compensation...................................... 157 262
Purchased in process research and development........... 3,300
Net loss on disposal of property and equipment.......... 283
Deferred income taxes................................... 2,085 (1,963) (467)
Changes in operating assets and liabilities:
Accounts receivable, net................................ (3,228) 4,391 (22,011)
Inventories............................................. (3,656) 8,562 (22,007)
Refundable income taxes................................. (2,382) 2,411 426
Prepaid expenses and other current assets............... 84 222 (297)
Accounts payable........................................ 1,751 (412) 5,215
Accrued expenses........................................ 574 (2,139) 7,382
Other liabilities....................................... 459 164 7
------- -------- --------
Net cash provided by (used in) operating activities... 8,439 23,637 (1,727)
======= ======== ========
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment..................... (5,492) (11,768) (27,856)
Proceeds from sale of property and equipment.............. 112
Payments for purchased technology......................... (326)
Other assets.............................................. (64) (362) (1,247)
Investment in Melcher, net of cash acquired............... (40,699)
Investment in IPD, net of cash acquired................... (28,739)
------- -------- --------
Net cash used in investing activities................. (5,556) (53,155) (57,730)
======= ======== ========
</TABLE>
See notes to supplemental consolidated financial statements.
F-6
<PAGE>
Amounts have been restated under the pooling of interests method of
accounting to include the financial results of HC Power, In., aquired on
February 29, 2000, See Note 1.
POWER-ONE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on bank credit facilities........ $ 2,242 $ 11,428 $ 67,817
Repayments of borrowings on bank credit facilities........ (1,695) (2,916) (75,738)
Repayments of note payable to bank........................ (10,400)
Bank overdraft............................................ (656) 5,804
Proceeds from borrowings on long-term debt................ 2,051 499
Repayments of long-term debt.............................. (29,929) (2,901) (3,492)
Principal payments under capital lease obligations........ (912)
Sale and issuance of common stock--net.................... 73,793 141 119,026
Proceeds from (issuance of) notes receivable from
stockholders............................................ 191 (8) (7)
Repurchase of preferred stock............................. (242)
Distributions to stockholders............................. (171) (49) (320)
Payment of other liabilities.............................. (5,606)
-------- -------- --------
Net cash provided by financing activities............... 27,527 7,746 112,677
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... 590 (422)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 30,410 (21,182) 52,798
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 1,743 32,153 10,971
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 32,153 $ 10,971 $ 63,769
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION--
Cash paid for:
Interest................................................ $ 3,297 $ 722 $ 3,028
Income taxes............................................ $ 4,347 $ 2,968 $ 3,508
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
On October 6, 1997, the Company converted 14,950,848 shares of redeemable
preferred stock to 1,254,177 shares of common stock at the initial public
offering price of $14 per share, a value of $17,559.
On October 6, 1997, the Company issued 55,408 shares of common stock to
extinguish $776 in other liabilities.
On August 31, 1998, the Company purchased all of the capital stock of Melcher
for $43.4 million (see Note 3).
In conjunction with the acquisition, liabilities were assumed as follows :
Fair value of tangible assets acquired................ $ 45,159
Fair value of goodwill and other identifiable
intangible assets................................... 25,210
Cash paid for capital stock........................... (43,421)
--------
Liabilities assumed................................... $ 26,948
========
</TABLE>
F-7
<PAGE>
POWER-ONE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES (Continued):
On January 29, 1999, the Company purchased all of the capital stock of
International Power Devices, Inc. (IPD) for $29.5 million (See Note 3).
In conjuction with the acquisition, liabilities were assumed as follows:
Fair value of tangible assets acquired.................. $ 21,248
Fair value of goodwill and other identifiable intangible
assets................................................ 17,454
Cash paid for capital stock............................. (29,500)
--------
Liabilities assumed..................................... $ 9,202
========
Capital lease obligations of $285 were incurred in 1999 when the Company
entered into leases for new equipment.
</TABLE>
See notes to supplemental consolidated financial statements.
F-8
<PAGE>
POWER-ONE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1. GENERAL INFORMATION
The supplemental consolidated financial statements (the "supplemental
financial statements") of Power-One, Inc. (the "Company" or "Power-One") have
been prepared to give retroactive effect to the merger with HC Power, Inc. ("HC
Power") on February 29, 2000. Under the terms of the merger agreement, HC Power
shareholders received a total of 2,121,207 shares of Power-One Common Stock.
Accounting principles generally accepted in the United States of America
proscribe giving effect to a consummated business combination accounted for
under a pooling-of-interests method in financial statements that do not include
the date of consummation. These supplemental financial statements do not extend
through the date of consummation (February 29, 2000); however, they will become
the historical consolidated financial statements of Power-One after the
financial statements covering the date of consummation of the business
combination are issued.
The supplemental financial statements reflect the combination of the
historical consolidated financial statements of Power-One for the years ended
December 31, 1997, 1998, and 1999 with the historical financial statements of HC
Power for the years ended December 31, 1997, 1998, and 1999.
The accompanying supplemental financial statements of Power-One reflect the
consolidated results of its operations for the years ended December 31, 1997,
1998 and 1999 and include the accounts of Power-One, Inc., located in Camarillo,
California, and its wholly owned subsidiaries, Power-Electronics, Inc. ("P-E")
in Puerto Rico and its Division located in the Dominican Republic, Poder Uno de
Mexico, S.A. de C.V. ("Poder Uno"), a company located in Mexico under the
maquiladora program, Melcher Holding AG ("Melcher"), a company located in Uster,
Switzerland, and International Power Devices, Inc., or ("IPD"), a company
located in Boston, Massachusetts.
Substantially all of the Company's products are manufactured in the
Dominican Republic, Mexico, Switzerland, Slovakia, Massachusetts, and
California. These operations represent captive manufacturing facilities of the
Company. The Company's reporting period coincides with the 52- or 53-week period
ending on the Sunday closest to December 31 and its fiscal quarters are the 13-
or 14- week periods ending on the Sunday nearest to March 31, June 30,
September 30 and December 31. The years ended December 31, 1997 and 1998
represent 52-week years. The year ended December 31, 1999 represents a 53-week
year. For simplicity of presentation, the Company has described year-ends
presented as of December 31.
ORGANIZATION--Power-One, Inc., formerly Power-One, LLC, converted from a
limited liability company to a C-corporation on January 29, 1996.To effect the
conversion, the Company formed a new corporation and transferred all of the
assets and liabilities into the newly formed entity. The new corporation, Power-
One, Inc., simultaneously issued 10,000,000 shares of common stock, with a par
value of $0.001 per share, and 15,153,698 shares of Series A redeemable
preferred stock in exchange for all existing member's respective percentage
ownership interest in Power-One LLC. The exchange has been recorded at the
Company's historical carrying values on the date of conversion (see Note 10).
OPERATIONS--The Company operates primarily in one industry segment which
includes the design, development and manufacture of AC/DC and DC/DC power
supplies for the electronics equipment industry. The Company sells its products
and grants credit to customers in this industry, primarily in the United States
and Europe. Net sales to the Company's largest customers amounted to 12%, 10%
and 10% each to three customers in 1997, 11%to a single customer in 1998 and 14%
to a single customer in 1999. At
F-9
<PAGE>
POWER-ONE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1. GENERAL INFORMATION (CONTINUED)
December 31, 1998 and 1999, no single customer represented greater than 10% of
the consolidated trade accounts receivable balance.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The accompanying supplemental financial
statements include the consolidated accounts of the Company and its wholly owned
subsidiaries. The majority of P-E's and all of Poder Uno's sales are to
Power-One. There were intercompany sales between Melcher, IPD and Power-One in
1999. There were no significant intercompany sales between Melcher and Power-One
in 1998. All intercompany accounts and transactions have been eliminated in the
accompanying supplemental financial statements.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
instruments with an original maturity of three months or less to be cash
equivalents.
INVENTORIES--The Company's inventories are stated at the lower of cost
(first-in, first-out method, or average costing method) or market.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost.
Provision for depreciation has been made based upon the estimated useful lives
of the assets, which range from three to twenty years, using principally the
double declining balance and straight-line methods. Provision for amortization
of leasehold improvements is made based upon the estimated lives of the assets
or terms of the leases, whichever is shorter.
INTANGIBLE ASSETS--Intangible assets include cost in excess of net assets
acquired in connection with the acquisition of the Company in 1995, of Melcher
in 1998 and of IPD in 1999 (see Note 3) 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 five to 25 years, using the straight-line method.
Intangible assets at December 31, 1998 also included purchased technology
related to a technology and license agreement (the "Agreement") with a company
entered on April 2, 1996. The Agreement called for total cash payments of
$1,500,000 over approximately two years in return for exclusive rights to
specified technical information. The obligation and asset were recorded at
present value using an implicit interest rate of 8.5%. The asset was being
amortized over the 10 year term of the Agreement using the straight-line method.
Since the technology acquired as a result of the Agreement is substantially
similar to the product lines acquired as a result of the IPD acquisition, the
Company recorded a charge of approximately $1.0 million, in 1999,for the
unamortized balance of the intangible asset value related to the Agreement.
Accumulated amortization for the license agreement was $384,000 at December 31,
1998.
F-10
<PAGE>
POWER-ONE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Goodwill and trade name................................... $39,121 $40,093
Distribution network...................................... 5,207 5,207
Sales force............................................... 790 681
Product technology........................................ 11,632 19,500
Assembled workforce....................................... -- 800
Customer relationships.................................... -- 4,700
License agreement......................................... 1,396 --
------- -------
58,146 70,981
Less accumulated amortization............................. 7,127 11,764
------- -------
$51,019 $59,217
======= =======
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS--The Company evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. If the estimated future cash
flows (undiscounted and without interest charges) from the use of an asset are
less than the carrying value, a write-down would be recorded to reduce the
related asset to its estimated fair value.
INCOME TAXES--Income taxes for Power-One, Inc. are provided for taxes
currently payable or refundable, and deferred income taxes arising from future
tax consequences of events that have been recognized in the Company's financial
statements or tax returns. The effects of income taxes are measured based on
enacted tax laws or rates.
Under the provisions of the Puerto Rico Industrial Incentives Act of 1987,
the Company has been granted a 90% partial tax exemption from the payment of
Puerto Rico taxes on income derived from marketing the products manufactured by
the Company in Puerto Rico. In addition, the grant also provides for a 90%
exemption on property taxes and a 60% exemption on municipal license taxes. The
Company has received similar tax exemptions in Puerto Rico in connection with
the distribution of its products. All of these exemptions are valid through
2010. Additionally, P-E operates in the Dominican Republic in a tax-free
enterprise zone and, accordingly, pays no income taxes in connection with its
operations in that country. The Company has not provided for the U.S. federal
and state income tax that would be paid on unremitted earnings from P-E and
Melcher of approximately $18,124,000 and $3,064,000, respectively, at
December 31, 1999, as there is no intention to remit the earnings.
The Company's operations in Mexico are subject to various income and
corporate taxes on earnings generated in Mexico under the maquiladora program.
These taxes have not been material to date.
F-11
<PAGE>
POWER-ONE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE--The following is a reconciliation of the earnings per
share data (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
------------------------------ ------------------------------ ------------------------------
AVERAGE PER AVERAGE PER AVERAGE PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income attributable to
common stockholders... $6,769 $5,796 $11,554
Basic EPS:
Shares outstanding...... 13,448 18,871 20,199
------ ------ ------ ------ ------- ------
Basic EPS............... 6,769 13,448 $.50 5,796 18,871 $.31 11,554 20,199 $.57
---- ---- ----
Dilutive
securities--Stock
options............... 273 250 624
------ ------ ------ ------ ------- ------
Diluted EPS............. $6,769 13,721 $.49 $5,796 19,121 $.30 $11,554 20,823 $.55
====== ====== ==== ====== ====== ==== ======= ====== ====
</TABLE>
REVENUE RECOGNITION--Revenue is recognized upon shipment of product.Sales
are recorded net of sales returns and discounts.
WARRANTY ACCRUAL--The Company provides for estimated warranty costs based on
historical warranty repair experience and current sales volume.
ENGINEERING--Engineering costs include sustaining product engineering,
custom product development and research and development costs which are expensed
in the period incurred. Research and development expenses were $3,701,000,
$3,747,000 and $10,760,000for the years ended December 31, 1997, 1998 and 1999,
respectively.
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS--The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported therein. Due to the inherent uncertainty involved in
making estimates, actual results reported in future periods may differ from
those estimates.
DERIVATIVE INSTRUMENTS--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, 1998 and 1999, 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," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
addition, this statement requires hedge accounting when certain conditions are
met. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15,
F-12
<PAGE>
POWER-ONE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
2000. The Company is currently evaluating the impact of SFAS No. 133 on its
operations and financial position.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The recorded values of accounts
receivable, accounts payable and accrued expenses approximate their fair values
based on their short-term nature. The recorded values of notes payable to bank,
long-term debt and other liabilities approximate fair value, as interest is tied
to or approximates market rates.
CONCENTRATION OF CREDIT RISK--Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash and cash
equivalents, placed with high credit quality institutions, and trade
receivables. The Company sells products and extends credit to customers,
primarily in the United States and Europe, periodically monitors its exposure to
credit losses, and maintains allowances for anticipated losses.
CONVERSION OF FOREIGN CURRENCIES--The reporting currency for the
consolidated financial statements of the Company is the U. S. dollar. The assets
and liabilities of companies whose functional currency is other than the U.S.
dollar are included in the consolidation by translating the assets and
liabilities at the exchange rates applicable at the end of the reporting year.
The statements of operations and cash flows of such companies are translated at
the average exchange rates during the applicable period. Translation gains or
losses are accumulated as a separate component of shareholders' equity. The
Company has not tax effected the cumulative translation adjustment as there is
no intention to remit the earnings.
3. ACQUISITIONS
In August 1998, the Company increased its international presence
andportfolio of products by acquiring Melcher for $53 million, including debt
assumed. Total cash consideration paid was $41.8 million plus $1.6 million of
transaction related costs. Located in Uster Switzerland, Melcher primarily
designs and manufactures high-reliability DC/DC and AC/DC power supplies which
it sells to leading OEMs throughout Europe and North America, including
Ericsson, Daimler-Chrysler and Siemens. High-reliability power supplies are
designed for rugged use in heavy-duty equipment in industries such as
transportation and telecommunications. Melcher has manufacturing operations in
three European locations and sales and application engineering offices in six
European countries. By acquiring Melcher, the Company added approximately 750
products to its portfolio and gained better access to the $4 billion European
power supply market. The purchase price was negotiated at arms length with the
sellers, none of whom had any prior relationship with the Company. The source of
funds for the acquisition was a combination of the Company's available cash, as
well as advances totaling $10.0 million under its existing credit facility.
The acquisition was accounted for using the purchase method of accounting.
The purchase price, including liabilities assumed, was allocated to tangible
assets and intangible assets. The excess of the aggregate purchase price over
the estimated fair market values of the net assets acquired was recognized as
goodwill and other identifiable intangible assets, and is being amortized over
periods ranging from seven to 20 years. The fair market value of Melcher's
assets and liabilities have been included in the Company's balance sheet as of
December 31, 1998. The consolidated statements of operations, comprehensive
income and of cash flow for the year ended December 31, 1998, include four
months of Melcher's operations.
On January 29, 1999, the Company completed its purchase of IPD for $31.8
million, including capitalized lease obligations and other indebtedness of IPD.
The total cash consideration paid was $28.3
F-13
<PAGE>
POWER-ONE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
3. ACQUISITIONS (CONTINUED)
million plus approximately $1.2 million of transaction related costs. In
addition, the Company plans to pay $13 million to IPD's former shareholders in
the first half of 2000, since IPD attained certain defined operations
performance objectives in the 13 month period ending March 31, 2000. The
purchase price was negotiated at arms length with IPD, with which the Company
had no prior relationship. The source of funds for the acquisition was a
combination of the Company's available cash, as well as advances totaling
approximately $28 million under the Company's existing credit facility. In a
separate transaction, the Company acquired IPD's manufacturing facility from a
separate partnership for its appraised value. The purchase of the manufacturing
facility was completed in the second quarter of 1999 for approximately $4.3
million and was funded by additional borrowings from credit facilities.
IPD, a Boston-based company supplies high-density DC/DC power supplies,
which it sells primarily in North America. High density DC/DC power technology
is preferred in applications using high speed/low voltage logic, including the
fast growing voice and data communications industries. IPD sells over 90 models
of high-density DC/DC products to leading OEMs, including Cisco, Nortel and
Newbridge Networks. As part of the acquisition, the Company also acquired IPD's
49% ownership position in Shenzhen SED-IPD International Electronic Device Co.,
Ltd., a joint venture based in Shenzhen, China.
The acquisition was accounted for using the purchase method of accounting.
The net purchase price, plus transaction costs, were allocated to tangible
assets and intangible assets. The excess of the aggregate purchase price over
the estimated fair market values of the net assets acquired was recognized as
goodwill and other identifiable intangible assets and is being amortized over
periods ranging from five to 15 years. The fair market value of IPD's assets and
liabilities have been included in the Company's balance sheet as of
December 31, 1999. In connection with the IPD acquisition, the Company recorded
a one time charge of $3.3 million for purchased in-process technology that had
not yet reached technical feasibility. The consolidated statements of
operations, comprehensive income and of cash flows for the year ended
December 31, 1999 included 11 months of IPD's operations.
In connection with the IPD acquisition, the Company amended its credit
agreement with lenders to waive certain requirements and amend certain
provisions.
The product lines acquired as a result of the IPD acquisition were
substantially similar to purchased technology related to the Agreement for which
an intangible asset was being amortized over the term of the licensing agreement
(see Note 1). Consequently, the Company recorded a charge of approximately $1.0
million for the unamortized balance of the intangible asset value related to the
Agreement in 1999.
The following unaudited pro forma financial information combines the
consolidated results of operations as if the acquisitions of Melcher and IPD 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, depreciation expense,
F-14
<PAGE>
POWER-ONE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
3. ACQUISITIONS (CONTINUED)
assumed interest expense, assumed decrease in interest earned and related tax
effect. The pro forma amounts exclude non-recurring items totaling $4.4 million
in 1999 and $2.3 million in 1998.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Net sales............................................... $178,589 $239,386
Net income attributable to common stockholders.......... $ 5,863 $ 13,734
Basic earnings per common share......................... $ 0.31 $ 0.68
Diluted earnings per common share....................... $ 0.31 $ 0.66
</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 pro forma financial results contain estimates since
Melcher did not maintain information on a period comparable with the Company's
fiscal year-end.
4. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Raw materials............................................. $18,117 $40,970
Subassemblies-in-process.................................. 5,477 8,360
Finished goods............................................ 11,648 12,504
------- -------
$35,242 $61,834
======= =======
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Land...................................................... $ 633 $ 1,629
Buildings (useful lives of 20 years)...................... 5,229 13,265
Factory and office equipment (useful lives of 3 to 10
years).................................................. 26,206 50,450
Vehicles (useful lives of 3 to 7 years)................... 823 797
Leasehold improvements (useful lives of 5 to 10 years).... 2,905 2,944
Construction in progress.................................. 9,097 3,240
------- -------
44,893 72,325
Less accumulated depreciation and amortization............ 9,504 16,717
------- -------
$35,389 $55,608
======= =======
</TABLE>
F-15
<PAGE>
POWER-ONE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
5. PROPERTY AND EQUIPMENT (CONTINUED)
Factory and office equipment under capital leases included in property and
equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Cost........................................................ $599 $2,184
Less accumulated depreciation and amortization.............. 95 779
---- ------
$504 $1,405
==== ======
</TABLE>
6. CREDIT FACILITY
On August 12, 1999, the Company entered into a Second Amended and Restated
Credit Agreement with Bank of America, N.A. which increased its revolving line
of credit from $50 million to $65 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 plus 1.25% to 2.50%
or the bank's base rate plus 0% to 1.25%. The credit agreement (a) provides for
restrictions on additional borrowings, dividends, leases and capital
expenditures; (b) prohibits the Company, without prior approval, from paying
dividends, liquidating, merging, consolidating or selling its assets or
business; and (c) requires the Company to maintain a specified net worth,
minimum working capital and certain ratios of current liabilities and total debt
to net worth. At December 31, 1998 and 1999 amounts outstanding under this line
of credit were $10.0 million and $2.5 million, respectively (interest rate of
6.63% at December 31, 1998 and 3.69% at December 31, 1999). Borrowings are
collateralized by substantially all of the Company's assets.
In addition, Melcher has various credit facilities with banks in Switzerland
and Germany ranging from $0.3 million to $4.8 million which can be drawn upon in
the form of term loans. The aggregate credit limit for all credit facilities is
$13.2 million. Melcher's credit facility in Switzerland bears 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%. Certain of Melcher's
credit agreements require Melcher to maintain certain financial covenants as
well as certain financial reporting obligations to the lenders none of which is
materially restrictive to Melcher. At December 31, 1998, short-term (including
current portion of long-term debt) and long-term amounts outstanding under
Melcher's credit facilities were $7.6 million and $7.7 million, respectively, at
interest rates ranging from 2.9%to 5.5% and 3.2% to 7.0%, respectively. At
December 31, 1999, short-term (including current portion of long-term debt) and
long-term amounts outstanding under Melcher's credit facilities were $5.5
million and $3.1 million, respectively, at interest rates ranging from 2.9%to
4.4% and 3.6% to 5.0%, respectively.
On September 10, 1997, the Company entered into a loan agreement with a bank
(the "Loan Agreement"), which was amended on November 15, 1999, increasing the
Company's available revolving loans to $8 million and creating a new equipment
line of credit of $1 million. The revolving loans mature on January 31, 2001,
with interest payable monthly in arrears at either the prime rate or at LIBOR
plus 2.25%, at the Company's election. Maximum borrowings are not to exceed $8
million. At December 31, 1998 and 1999, amounts outstanding under this revolving
loan were $0.5 million and $3.5 million, respectively. The loans are
collateralized by substantially all of HC Power's assets and are personally
guaranteed by certain shareholders. The equipment line of credit matures on
January 31, 2001, with
F-16
<PAGE>
POWER-ONE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
6. CREDIT FACILITY (CONTINUED)
interestpayable monthly in arrears at Prime plus 0.25% or at LIBOR plus 2.25%,
at the Company's election. Monthly principal repayments equal to 1/48th of the
balance outstanding as of January 31, 2001 will commence on March 1, 2001. There
were no amounts outstanding under this equipment line of credit at December 31,
1998 and 1999. The loans are collateralized by substantially all of HC Power's
assets. The interest rates on all outstanding amounts at December 31, 1998 and
1999 were 7.75% and 8.50%, respectively.
The Loan Agreement contains restrictive covenants, which include minimum
tangible net worth, maximum net worth ratio, minimum quick ratio, minimum debt
service coverage ratio, insurance and financial reporting requirements. The Loan
Agreement restricts additional indebtedness, transfer of ownership and
investments in other companies. All amounts outstanding under the Loan Agreement
were repaid on February 29, 2000.
At December 31, 1998 and 1999, short-term (including current portion of
long-term debt) amounts outstanding under all credit agreements (including term
notes described in Note 7) were $18.1 million and $11.6 million, respectively.
At December 31, 1998 and 1999, long-term amounts outstanding under all credit
agreements with banks were $7.6 million and $3.4 million, respectively.
On February 11, 2000, the Company amended its $65 million credit agreement
with the lenders and the administrative lender to waive certain of the
requirements of the credit agreement and amend certain provisions of the credit
agreement in connection with the Company's acquisition of HC Power (See Notes 1
and 16).
F-17
<PAGE>
POWER-ONE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
7. LONG-TERM DEBT
Long-term debt consists primarily of borrowings in Swiss francs as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Term loan due February 1, 1999, payable to a bank. Interest
is payable annually in arrears at a rate of 3.5%. The loan
was extended on February 1, 1999 to expire on
February 28, 2000 at an interest rate of 2.9%, payable on
the due date.............................................. $ 1,092 $ --
Term loans maturing between September 30, 1999 and
September 30, 2000, payable to a bank. Interest is payable
half yearly in arrears at rates ranging between 3.2% and
3.7%. The loans are subject to the restrictive covenants
described in Note 6....................................... 1,457 941
Term loan due November 14, 1999, payable to a bank. Interest
is payable half yearly in arrears at a rate of 7.0%. The
loan is collateralized by real property owned by the
Company (net book value of $3,937) and is subject to the
restrictive covenants described in Note 6................. 1,456 --
Term loans maturing between June 30, 2000 and June 2, 2002,
payable to a bank. Interest is payable quarterly in
arrears at rates ranging between 4.0% and 5.0%. The loan
is collateralized by real property owned by the Company
(net book value of $3,937) and is subject to the
restrictive covenants described in Note 6................. 2,912 --
Term loans maturing between November 24, 2000 and
October 7, 2002, payable to a bank. Interest is payable
quarterly in arrears at rates ranging between 3.6% and
5.0%...................................................... 2,912 2,508
Term loan due February 15, 2000, payable to a bank. Interest
is payable half yearly in arrears at a rate of 3.5%....... 728 628
Term loans maturing between March 31, 2000 and June 2, 2002,
payable to a bank. Interest is payable quarterly in
arrears at rates ranging between 3.4% and 5.0%. The loan
is collateralized by real property owned by the Company
(net book value of $3,261) and is subject to the
restrictive covenants described in Note 6................. -- 2,983
Term loan due December 31, 2003, payable to a bank. Interest
is payable monthly in arrears at prime plus 0.5%. Monthly
principal repayments of $7 commence on January 3, 2000.
The loan is collateralized by substantially all of the
Company's assets and is subject to restrictive covenants
described in Note 6....................................... 321
------- ------
10,557 7,381
Less current portion........................................ 2,912 4,002
------- ------
Long-term debt, less current portion........................ $ 7,645 $3,379
======= ======
</TABLE>
F-18
<PAGE>
POWER-ONE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
7. LONG-TERM DEBT (CONTINUED)
The long-term debt matures as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
-------------
<S> <C>
2000........................................................ $4,002
2001........................................................ 2,280
2002........................................................ 1,018
2003........................................................ 81
------
$7,381
======
</TABLE>
8. OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Accrued warranty........................................... $1,890 $ 2,020
Accrued bonuses............................................ 1,025 4,077
Income taxes payable....................................... 585 3,250
Other accrued expenses..................................... 4,579 7,464
------ -------
$8,079 $16,811
====== =======
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
LEASES--Power-One, Inc. leases its production and office facilities in
Camarillo, California under a lease agreement expiring on September 1, 2004. The
lease provides for increases each five years under a formula based upon changes
in the consumer price index.
The Company also leases office and manufacturing facilities in Irvine,
California under lease agreements expiring through November 2006. One of the
leases provides for increases every 30 months. Additionally, the Company also
has several vehicles with leases expiring through 2003.
Power-One, Inc. also leases manufacturing facilities in Puerto Rico and the
Dominican Republic. The leases in Puerto Rico and the Dominican Republic expire
at various dates through 2008 and provide for renewal options of ten years in
Puerto Rico and six years in the Dominican Republic.
Melcher leases office and manufacturing facilities in Switzerland, France,
Italy, Germany, the Netherlands, and Ireland. The leases expire at various dates
through 2005 and provide for renewal options ranging from three months to six
years. In addition, Melcher and IPD lease certain factory and office equipment
under capital lease agreements.
F-19
<PAGE>
POWER-ONE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments for operating leases and the present value of
minimum lease payments under capital leases as of December 31, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDING DECEMBER 31, LEASES LEASES
- ------------------------- -------- ---------
<S> <C> <C>
2000...................................................... $ 997 $ 2,586
2001...................................................... 603 2,413
2002...................................................... 263 2,293
2003...................................................... 41 2,278
2004...................................................... 1,834
Thereafter................................................ 2,100
------ -------
Total minimum lease payments.............................. 1,904 $13,504
-------
Less amount representing interest......................... 165
------
Present value of minimum lease payments................... 1,739
Less current obligation under capital leases.............. 897
======
Obligations under capital leases, excluding current
installments............................................ $ 842
======
</TABLE>
Total rent expense was approximately $1,944,000, $2,484,000 and $3,281,000
for the years ended December 31, 1997, 1998 and 1999, respectively.
LEGAL PROCEEDINGS--The Company is involved in routine litigation arising in
the ordinary course of its business. In the opinion of the Company's management,
none of the pending litigation will have a material adverse effect on the
Company's consolidated financial condition or results of operations.
10. REDEEMABLE PREFERRED STOCK
Upon conversion from a limited liability company to a C-corporation on
January 29, 1996, the Company issued 10,000,000 shares of Common Stock with a
par value of $0.001 and 15,153,698 shares of Series A redeemable preferred stock
with a stated value of $1.00 in a proportionate exchange for each member's
interest in Power One, LLC, with an aggregate historical value of $14,972,000.
The historical book value of equity has been allocated $100,000 to Common Stock
with the remaining $14,872,000 allocated to preferred stock. The difference
between the stated par value and the assigned historical value of the preferred
stock was being accreted into the preferred stock value over ten years. In 1997,
the remaining unamortized balance was accreted into the preferred stock in
conjunction with the conversion and repayment of the preferred stock on
October 6, 1997 as discussed below. For financial presentation purposes the
accretion has been included with preferred stock dividends in the statement of
operations.
Preferred stockholders were entitled to 10% cumulative dividends, if
declared. At December 31, 1996, undeclared dividends totaled $1,389,000, which
had been recorded to redeemable preferred stock.
Preferred shares were redeemable on February 1, 2006, or such earlier date
as determined by the Company's board of directors, with the redemption price
being computed at the original issuance price of $1.00 per share plus any unpaid
dividends, declared or undeclared. On October 6, 1997 in conjunction with
F-20
<PAGE>
POWER-ONE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
10. REDEEMABLE PREFERRED STOCK (CONTINUED)
the Company's initial public offering, 14,950,848 shares of preferred stock were
converted into 1,254,177 shares of Common Stock at the initial public offering
price of $14 per share.
The remaining 202,850 shares of preferred stock were repurchased from a
stockholder for a lump sum payment of $242,000. The conversion and repurchase
was based on the liquidation value of the preferred stock on October 6, 1997 of
approximately $17,800,000, which included accrued undeclared dividends of
$2,648,000.
11. COMMON STOCK
Effective in September 1997, the Company increased its authorized capital
stock to 60,000,000 shares of Common Stock with a par value of $.001, and
30,000,000 shares of Preferred Stock.
On October 6, 1997, the Company completed its initial public offering of
5,000,000 shares of the Company's Common Stock. In conjunction with the Offering
the Company granted the underwriters an overallotment option to purchase up to
750,000 additional shares of the Common Stock at the public offering price of
$14.00 per share. On October 20, 1997, the underwriters exercised their
overallotment option. All of these shares were newly issued and sold on behalf
of the Company. The gross proceeds of the 5,750,000 shares sold by the Company
were $80,500,000. The Company incurred $6,707,000 in costs in connection with
the offering consisting of underwriter commissions and expenses, printing costs,
legal, accounting and other fees. After offering costs the Company's net
proceeds totaled $73,793,000.
On September 20, 1999, the Company completed a secondary public stock
offering of 6,500,000 shares of the Company's Common Stock at an offering price
of $25.00. In connection with the offering, the Company granted the underwriters
an overallotment option to purchase up to an additional 975,000 shares of the
Common Stock at the public offering price of $25.00 per share. On October 14,
1999, the underwriters exercised their overallotment option. The Company sold
4,975,000 of these shares. The remaining 2,500,000 shares were sold by certain
stockholders, and the Company did not receive any proceeds from the sale of
these shares. The gross proceeds of the 4,975,000 shares were $124,375,000. The
Company incurred approximately $6,046,000 in costs in connection with the
offering consisting of underwriter commissions and expenses, printing costs,
legal, accounting and other fees. After offering costs, the Company's net
proceeds were $118,329,000.
HC POWER STOCK ISSUANCES--HC Power provided stock bonus incentives to
certain key employees. The stock bonus agreements provided for the granting of
HC Power common stock to the employees over specified vesting periods, ranging
from three to twelve years. All stock bonus agreements contained accelerated
vesting provisions upon a change of control of HC Power. The stock bonuses have
been recognized as compensation expense in the period of grant. The compensation
expense was determined based on the fair market value at the date of grant. In
1997 and 1999, 18,781 and 53,827 shares were granted to employees and
compensation expense of $273,000 and $486,000 was recognized, respectively. At
December 31, 1999 3,740 shares were unvested. The unvested shares vested and
were granted at the time of merger with Power-One.
STOCK OPTIONS--In February 1996, the Board of Directors approved a stock
option plan for the issuance of 1,000,000 shares of Common Stock. In January
1999, the Plan was amended to increase the shares issuable under the plan. The
Company can issue either qualified or non-qualified stock options under the
Plan. At December 31, 1999, 4,427,435 shares of Common Stock were issuable under
the Plan. The option
F-21
<PAGE>
POWER-ONE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
11. COMMON STOCK (CONTINUED)
price is determined by the Board of Directors based on the fair market value of
the Company's Common Stock on the date of grant. The options vest over four and
seven year terms.Those options with seven year vesting terms include accelerated
vesting provisions that allow for vesting over five years if certain performance
measures are met. There were no options exercisable as of December 31, 1997.
There were 504,350 and 507,383 options exercisable as of December 31, 1998 and
December 31, 1999, respectively. In connection with the issuance of stock
options in March and June of 1997, the Company has computed compensation cost
for the difference between the estimated fair market values and the option
exercise prices at the date of grant totaling approximately $190,000, which is
being amortized over the seven year vesting period of the options. For the years
ended December 31, 1998 and 1999, $27,000 in compensation expense was recognized
each year. Subsequent to 1997, all options have been granted at the fair market
value.
Stock option activity of the Company is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF EXERCISE PRICE AVERAGE
OPTIONS PER OPTION EXERCISE PRICE
--------- -------------- --------------
<S> <C> <C> <C>
Options outstanding--December 31, 1996................ 467,500 $ 1.00 $ 1.00
Options granted....................................... 317,150 $1.50 - $19.00 $12.80
Options canceled...................................... (7,750) $1.50 - $14.00 $ 1.98
--------- -------------- ------
Options outstanding--December 31, 1997................ 776,900 $1.00 - $19.00 $ 5.81
Options granted....................................... 1,190,515 $6.13 - $14.25 $ 8.76
Options exercised..................................... (27,950) $ 1.00 $ 1.00
Options canceled...................................... (553,850) $1.00 - $19.00 $11.92
--------- -------------- ------
Options outstanding--December 31, 1998................ 1,385,615 $1.00 - $14.00 $ 5.97
Options granted....................................... 474,000 $7.00 - $29.81 $13.71
Options exercised..................................... (54,775) $1.00 - $14.00 $ 6.93
Options cancelled..................................... (45,635) $6.13 - $10.38 $ 8.97
--------- -------------- ------
Options outstanding--December 31, 1999................ 1,759,205 $1.00 - $29.81 $ 7.95
</TABLE>
The Company accounts for its plans in accordance with Accounting Principles
Board Opinion No. 25. Had compensation cost been determined on the basis of fair
value pursuant to SFAS No. 123, "Accounting
F-22
<PAGE>
POWER-ONE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
11. COMMON STOCK (CONTINUED)
for Stock-Based Compensation," net income and basic and diluted earnings per
share would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net income
As reported...................................... $8,283 $5,796 $11,554
Pro forma........................................ 8,190 5,312 10,488
Basic earnings per share
As reported...................................... $ 0.50 $ 0.31 $ 0.57
Pro forma........................................ $ 0.50 $ 0.28 $ 0.52
Diluted earnings per share
As reported...................................... $ 0.49 $ 0.30 $ 0.55
Pro forma........................................ $ 0.49 $ 0.28 $ 0.50
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes model, with the following assumptions used in 1997, 1998 and
1999: risk-free interest rate of 6.90%, 4.18%, and 5.79%, respectively, expected
volatility of 44.6%, 63.8% and 76.9%, respectively, an expected option life of
8.5, 8.5, and 7.5 years, respectively, and no expected dividends for each of the
three years. The fair value of stock options granted were $2,599,000, $3,811,000
and $4,977,000 in 1997, 1998 and 1999, respectively.
The following table summarizes information regarding options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ----------------------------
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------ ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.00 - $2.00...................... 429,575 6.33 yrs $ 1.04 429,575 $ 1.04
$6.13.............................. 466,830 8.81 yrs $ 6.13 3,058 $ 6.13
$6.94 - $9.94...................... 238,000 8.77 yrs $ 7.21 9,750 $ 7.00
$10.38............................. 267,000 9.08 yrs $10.38 -- --
$13.25 - $15.38.................... 255,300 8.10 yrs $14.14 65,000 $14.00
$18.50 - $29.81.................... 102,500 9.71 yrs $25.20 -- --
--------- ---------- ------ ------- ------
$1.00 - $29.81..................... 1,759,205 8.19 yrs $ 7.95 507,383 $ 2.85
========= ========== ====== ======= ======
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN--The Company has adopted, effective January 1,
1998, an Employee Stock Purchase Plan, under which 3,000,000 shares are reserved
for purchase by employees. Substantially all of the Company's employees may
contribute from two to eight percent of their qualified earnings toward the
purchase of Company Common Stock. The plan provides the participants the
opportunity to purchase shares at 85% of the fair market value on either the
grant date or the closing price at the end of each six month offering period,
which generally runs from January 1 through June 30 and July 1 through
F-23
<PAGE>
POWER-ONE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
11. COMMON STOCK (CONTINUED)
December 31, whichever is lower. At December 31, 1998 and December 31, 1999
there were 5,692 and 19,866 shares issued under this plan.
12. PROFIT SHARING PLANS
The Company has 401(k) profit sharing plans covering all employees, subject
to certain participation, age and vesting requirements. The plans provide that
the Company will partially match employee contributions at either a
discretionary amount or up to specified percentages. Total contributions were
$79,000, $180,000 and $255,000 for the years ended December 31, 1997, 1998 and
1999, respectively.
13. BUSINESS GEOGRAPHICAL LOCATIONS
As required by SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", the Company has reviewed its business activities and
determined that it does not have more than one operating segment as defined by
this statement. This determination was based on the management approach which
focuses on the way management organizes the Company's business activities for
making operating decisions and assessing performance. The Company primarily
operates in one industry segment which includes the design, development and
manufacture of AC/DC and DC/DC power supplies for the electronics equipment
industry.
The Company has manufacturing and distribution facilities in the United
States, Puerto Rico, Dominican Republic,Mexico, Switzerland and Slovakia. The
Company's operations in Puerto Rico are considered part of the United States and
are included as North America. The following table summarizes the Company's
revenues and long lived assets in different geographic locations (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues: (a)
North America............................... $107,742 $101,210 $184,200
Europe...................................... 1,290 17,757 45,117
Other foreign countries..................... 189 484 7,840
-------- -------- --------
Total..................................... $109,221 $119,451 $237,157
======== ======== ========
Long Lived Assets:
United States............................... $ 7,241 $ 9,527 $ 24,232
Mexico...................................... 3,926 7,974 12,601
Switzerland................................. 11,752 9,605
Dominican Republic.......................... 3,347 5,245 8,367
Other foreign countries..................... 2,853 3,940
-------- -------- --------
Total..................................... $ 14,514 $ 37,351 $ 58,745
======== ======== ========
</TABLE>
- ------------------------
(a) Revenues are attributable to countries based on location of customer
F-24
<PAGE>
POWER-ONE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
14. INCOME TAXES
The components of income tax expense for the years ended December 31, 1997,
1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 955 $ 2,625 $3,424
State............................................ 117 585 929
Foreign.......................................... 378 1,063 3,006
------ ------- ------
Total current...................................... 1,450 4,273 7,359
====== ======= ======
Deferred:
Federal.......................................... 1,575 (675) (457)
State............................................ 510 (202) (119)
Foreign.......................................... (1,086) (325)
------ ------- ------
Total deferred..................................... 2,085 (1,963) (901)
====== ======= ======
Provision for income taxes......................... $3,535 $ 2,310 $6,458
====== ======= ======
</TABLE>
The components of deferred tax assets (liabilities) at December 31, 1998 and
1999 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------------------------------ ------------------------------
FEDERAL STATE FOREIGN FEDERAL STATE FOREIGN
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Current:
Uniform capitalization................... $ 236 $ 61 $ 246 $ 62
Sales discount reserve................... 214 56 253 63
Bad debt reserve......................... 309 80 $ (50) 480 124 $ (131)
Inventory reserve........................ 477 124 (436) 955 244 (362)
Warranty reserve......................... 2 338 89
State Taxes.............................. 201 10 22
Inventory Overheads...................... (736) (781)
Litigation reserves...................... (583) (109)
NOL...................................... 521 214
Other.................................... 97 23 (25) 189 57 (47)
------- ----- ------- ------- ----- -------
Total current.......................... 1,536 344 (1,309) 2,471 661 (1,216)
Noncurrent:
Intangible assets........................ (1,448) (382) (1,399) (364)
Fixed Assets............................. (2) (1,788) 283 71
Other.................................... 48 12 (25) 150 83 (1,581)
------- ----- ------- ------- ----- -------
Total noncurrent....................... (1,402) (370) (1,813) (966) (210) (1,581)
Net deferred tax assets (liabilities)...... $ 134 $ (26) $(3,122) $ 1,505 $ 451 $(2,797)
======= ===== ======= ======= ===== =======
</TABLE>
F-25
<PAGE>
POWER-ONE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
14. INCOME TAXES (CONTINUED)
Net deferred tax assets amounting to $1,272,000 were acquired by the Company
through the acquisition of IPD.
A reconciliation of the Company's provision for income taxes for the years
ended December 31, 1997, December 31, 1998 and 1999 to the U.S. federal
statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---------------------- ---------------------- ----------------------
AMOUNT % AMOUNT % AMOUNT %
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes at statutory
rate....................................... $ 3,997 34% $2,723 $ 34% $ 5,614 31%
Foreign income taxed at lower rates.......... (1,137) (10) (494) (6) (1,438) (8)
State taxes net of federal benefit........... 414 4 253 3 534 3
IPD Nondeductible goodwill................... -- -- -- -- 559 3
IPD Nondeductible in process research and
development................................ -- -- -- -- 1,122 7
Other........................................ 261 2 (172) (2) 67
------- --- ------ ---- ------- --
$ 3,535 30% $2,310 $ 29% $ 6,458 36%
======= === ====== ==== ======= ==
</TABLE>
Through December 31, 1999, HC Power was an S-Corporation and was taxed at
the 1.5% California income tax rate. Pro forma amounts assume the Company's
effective income tax rate is included in the Statements of Operations. HC Power
will be converted to a C-Corporation on the consummation date of the merger
(February 29, 2000). At the date of conversion, the cumulative net deferred tax
asset of approximately $366,000 will be recorded, resulting in an estimated
income tax benefit at the date of conversion.
15. RELATED PARTY TRANSACTIONS
Stephens Inc, a majority stockholder, provided financial advisory services
of approximately $710,000 relating to the acquisition of IPD. Similar services
were provided in relation to theHC Power acquisition (see Subsequent
Events--Note 16). At December 31, 1999 no amounts were owed to Stephens Inc.
HC Power has two stockholder notes receivable totaling $109,000 at December
31, 1999.These notes bear interest at HC Power's incremental borrowing rate. One
of the notes is due on October 7, 2000, and the other is due on April 29, 2001.
F-26
<PAGE>
POWER-ONE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
16. SUBSEQUENT EVENTS
On March 31, 2000, the Company agreed to acquire Norwegian-based Powec AS
for $78 million. The consideration to be paid consists of approximately $70
million in cash and 140,340 shares of the Company's common stock. Additionally,
the Company will assume approximately $8 million in debt. Certain additional
payments may be made to Powec shareholders based on the attainment of defined
operational performance through 2001. The acquisition will be accounted for
using the purchase method of accounting.
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.
The Company has also agreed to acquire a telecommunications product line
from Crane Co. for approximately $14 million in cash. This product line has 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.
Amounts have been restated under the pooling of interests method of
accounting to include the financial results of HC Power, Inc., acquired on
February 29, 2000, See Note 1.
F-27
<PAGE>
POWER-ONE, INC.
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
1998 AND 1999 QUARTERS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 QUARTERS ENDED
-----------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales............................................... $31,268 $28,464 $27,252 $32,467
Gross profit............................................ 12,733 11,276 9,263 11,225
Income (loss) from operations........................... 4,205 3,964 259 (189)
Net income (loss) attributable to common stockholders... 3,160 3,052 213 (629)
Diluted earnings (loss) per share....................... $ 0.17 $ 0.16 $ 0.01 $ (0.03)
</TABLE>
<TABLE>
<CAPTION>
1999 QUARTERS ENDED
-----------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales............................................... $38,920 $51,694 $72,626 $73,917
Gross profit............................................ 14,634 21,350 27,743 30,612
Income (loss) from operations........................... (3,359) 4,346 9,107 10,015
Net income (loss) attributable to common stockholders... (3,511) 1,862 5,221 7,982
Diluted earnings (loss) per share....................... $ (0.19) $ 0.10 $ 0.26 $ 0.32
</TABLE>
F-28
<PAGE>
POWER-ONE, INC.
SUPPLEMENTAL SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
CHANGE IN
BALANCE AT CHARGED TO FOREIGN CURRENCY
BEGINNING OF COSTS AND ACQUIRED ON BEGINNING BALANCE AT
DESCRIPTIONS PERIOD EXPENSES(1) BALANCES(2) DEDUCTIONS(3) BALANCE END OF PERIOD
- ------------ ------------ ----------- ----------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year Ended December 31,
1997..................... $ 728,000 $296,000 $ $(109,000) $ $ 915,000
Year Ended December 31,
1998..................... 915,000 100,000 468,000 (31,000) 1,452,000
Year Ended December 31,
1999..................... 1,452,000 221,000 501,000 (192,000) (64,000) 1,918,000
Accrued sales discounts and
returns:
Year Ended December 31,
1997..................... 585,000 (50,000) 535,000
Year Ended December 31,
1998..................... 535,000 217,000 752,000
Year Ended December 31,
1999..................... 752,000 14,000 766,000
Accrued Warranties:
Year Ended December 31,
1997..................... 500,000 198,000 (173,000) 525,000
Year Ended December 31,
1998..................... 525,000 397,000 1,192,000 (224,000) 1,890,000
Year Ended December 31,
1999..................... 1,890,000 607,000 150,000 (450,000) (177,000) 2,020,000
</TABLE>
- ------------------------
(1) For the allowance for doubtful accounts, represents charges to bad debt
expense for the year. For the accrued sales discounts and returns,
represents the provision for estimated discounts and returns. For the
accrued warranties, represents the provision for estimated warranties.
(2) Beginning balance upon acquisition of Melcher effective August 31, 1998 and
of IPD effective January 29, 1999.
(3) For the allowance for doubtful accounts, represents write off ofbad debt.
For the accrued warranties, represents material used to satisfy customer
warranty repairs
S-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
<TABLE>
<S> <C> <C>
Date: April 20, 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>
