<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED JULY 2, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NO. 0-29454
------------------------
POWER-ONE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0420182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
740 CALLE PLANO, CAMARILLO, CA 93012
(Address of principal executive (Zip code)
offices)
</TABLE>
(805) 987-8741
Registrant's telephone number, including area code
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such a shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of August 11, 2000 there were outstanding 36,793,198 shares of common
stock, $.001 par value.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
POWER-ONE, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets--
June 30, 2000 and December 31, 1999......................... 3
Consolidated Statements of Operations--
for the Three Months and the Six Months Ended June 30, 2000
and 1999.................................................... 4
Consolidated Statements of Comprehensive Income (Loss)--
for the Three Months and the Six Months Ended June 30, 2000
and 1999.................................................... 5
Consolidated Statements of Cash Flows--
for the Six Months Ended June 30, 2000 and 1999............. 6
Notes to Consolidated Financial Statements.................. 8
Item 2. Management's Discussion and Analysis of Financial Condition 14
and Results of Operations...................................
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 20
PART II--OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......... 22
Item 6. Exhibits and Reports on Form 8-K............................ 22
SIGNATURES.......................................................................... 23
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1--CONSOLIDATED FINANCIAL STATEMENTS
POWER-ONE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 12,834 $ 63,769
Accounts receivable:
Trade, less allowance for doubtful accounts:
$2,643--June 30, 2000; $1,918--December 31, 1999...... 86,460 45,805
Other................................................... 3,240 1,914
Inventories............................................... 109,544 61,834
Deferred income tax assets, net--current.................. 2,546 1,916
Current portion of notes receivable from stockholders..... -- 30
Prepaid expenses and other current assets................. 2,019 1,795
-------- --------
Total current assets................................ 216,643 177,063
-------- --------
PROPERTY & EQUIPMENT, net of accumulated depreciation and
amortization: $22,163--June 30, 2000;
$16,717--December 31, 1999................................ 75,388 55,608
INTANGIBLE ASSETS, NET...................................... 158,810 59,217
NOTES RECEIVABLE FROM STOCKHOLDERS, less current portion.... -- 79
OTHER ASSETS................................................ 7,046 3,137
-------- --------
TOTAL ASSETS................................................ $457,887 $295,104
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank credit facilities.................................... $ 85,621 $ 7,579
Current portion of long-term debt......................... 3,307 4,002
Current portion of long-term capital leases............... 665 897
Bank overdraft............................................ 6,272 5,804
Accounts payable.......................................... 39,179 13,107
Accrued payroll and related expenses...................... 5,304 2,583
Other accrued expenses.................................... 25,374 16,811
-------- --------
Total current liabilities........................... 165,722 50,783
-------- --------
LONG-TERM DEBT, less current portion........................ 11,003 3,379
LONG-TERM CAPITAL LEASES, less current portion.............. 526 842
DEFERRED INCOME TAX LIABILITY, noncurrent................... 2,757 2,757
OTHER LIABILITIES........................................... 630 112
STOCKHOLDERS' EQUITY
Common stock, par value $0.001 60,000,000 shares
authorized; 36,787,826 and 35,981,112 shares issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively............................................ 37 36
Additional paid-in-capital................................ 241,497 212,184
Accumulated other comprehensive loss...................... (1,014) (3,476)
Retained earnings......................................... 36,729 28,487
-------- --------
Total stockholders' equity.......................... 277,249 237,231
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY.................... $457,887 $295,104
======== ========
</TABLE>
See accompanying notes
3
<PAGE>
POWER-ONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ---------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES............................................. $113,839 $51,694 $190,851 $90,614
COST OF GOODS SOLD.................................... 69,030 30,344 113,986 54,630
-------- ------- -------- -------
GROSS PROFIT...................................... 44,809 21,350 76,865 35,984
EXPENSES:
Selling............................................. 8,704 6,265 15,309 11,541
General and administrative.......................... 7,471 4,217 24,770 7,212
Engineering......................................... 5,516 4,046 14,887 7,430
Quality assurance................................... 1,496 1,135 2,735 1,954
Amortization of intangible assets................... 2,750 1,341 4,072 3,560
In-process research and development................. -- -- -- 3,300
-------- ------- -------- -------
Total expenses.................................... 25,937 17,004 61,773 34,997
INCOME FROM OPERATIONS................................ 18,872 4,346 15,092 987
OTHER INCOME (EXPENSE)
Interest income..................................... 432 4 1,180 41
Interest expense.................................... (1,308) (990) (1,620) (1,714)
Other income (expense), net......................... (1,196) (76) (1,061) 276
-------- ------- -------- -------
Total other income (expense)...................... (2,072) (1,062) (1,501) (1,397)
INCOME (LOSS) BEFORE INCOME TAXES..................... 16,800 3,284 13,591 (410)
INCOME TAXES.......................................... 6,204 1,422 4,484 1,239
-------- ------- -------- -------
NET INCOME (LOSS)..................................... $ 10,596 $ 1,862 $ 9,107 $(1,649)
======== ======= ======== =======
BASIC EARNINGS (LOSS) PER COMMON SHARE................ $ 0.29 $ 0.07 $ 0.25 $ (0.06)
======== ======= ======== =======
DILUTED EARNINGS (LOSS) PER COMMON SHARE.............. $ 0.28 $ 0.06 $ 0.24 $ (0.06)
======== ======= ======== =======
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING............. 36,629 28,368 36,394 28,364
======== ======= ======== =======
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING........... 38,527 29,088 38,052 28,364
======== ======= ======== =======
</TABLE>
See accompanying notes
4
<PAGE>
POWER-ONE, INC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME (LOSS)........................................ $10,596 $ 1,862 $ 9,107 $(1,649)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment................ 3,939 (2,086) 2,462 (5,107)
------- ------- ------- -------
COMPREHENSIVE INCOME (LOSS).............................. $14,535 $ (224) $11,569 $(6,756)
======= ======= ======= =======
</TABLE>
See accompanying notes
5
<PAGE>
POWER-ONE, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 30, JUNE 30,
2000 1999
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 9,107 $ (1,649)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization........................... 9,428 7,140
Stock compensation...................................... 13,312 --
Purchased in-process research and development........... -- 3,300
Loss on disposal of property and equipment.............. 7 47
Deferred income taxes................................... (893) (256)
Changes in operating assets and liabilities:
Accounts receivable, net................................ (24,498) (12,273)
Inventories............................................. (37,610) (9,733)
Prepaid expenses and other current assets............... (29) 258
Accounts payable........................................ 15,713 8,453
Accrued expenses........................................ 9,246 920
Other liabilities....................................... (9) (159)
--------- --------
Net cash used in operating activities............... (6,226) (3,952)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Powec, net of cash acquired (Note 4)........ (72,545) --
Telecommunications product line acquired from Eldec (Note
4)...................................................... (14,000) --
Investment in IPD (Note 5)................................ (13,000) (28,739)
Acquisition of property and equipment..................... (15,740) (12,497)
Proceeds from sale of property and equipment.............. 2 112
Other assets.............................................. (2,294) (1,284)
--------- --------
Net cash used in investing activities............... (117,577) (42,408)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on bank credit facilities........ 87,340 46,568
Repayments of borrowings on bank credit facilities........ (12,761) (10,379)
Bank overdraft............................................ 454 3,924
Proceeds from borrowings on long-term debt................ 54 526
Repayments of long-term debt.............................. (1,966) (1,599)
Principal payments under capital lease obligations........ (538) (448)
Issuance of common stock-net.............................. 1,037 41
Proceeds from notes receivable from stockholders.......... 109 --
Distributions to stockholders............................. (865) --
--------- --------
Net cash provided by financing activities........... 72,864 38,633
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 4 (320)
DECREASE IN CASH AND CASH EQUIVALENTS....................... (50,935) (8,047)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 63,769 10,971
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 12,834 $ 2,924
========= ========
</TABLE>
See accompanying notes
6
<PAGE>
POWER-ONE, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
JUNE 30, JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for
Interest............................................... $1,066 $1,308
Income taxes........................................... $2,882 347
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
On May 16, 2000, Power-One, Inc. ("Power-One" or the "Company") acquired
Powec AS and the minority interests of certain Powec subsidiaries (collectively
referred to as "Powec") for approximately $72.0 million in cash, plus
$2.5 million in acquisition costs, and 214,035 shares of the Company's common
stock (See Note 4). In conjuction with the acquisition, liabilities were assumed
as follows:
<TABLE>
<S> <C>
Fair value of tangible assets acquired...................... $ 38,766
Fair value of goodwill and other indentifiable intangible
assets.................................................... 75,951
Cash paid for Powec's capital stock......................... (74,452)
Fair value of stock issued for Powec's capital stock........ (12,735)
--------
Liabilities assumed......................................... $ 27,530
========
</TABLE>
On May 16, 2000, the Company also acquired a telecommunications product line
from Eldec Corporation, a subsidiary of Crane Co. ("Eldec"), for $14.0 million
in cash (See Note 4). In conjunction with the acquisition, liabilities were
assumed as follows:
<TABLE>
<S> <C>
Fair value of tangible assets acquired...................... $ 2,290
Fair value of goodwill and other indentifiable intangible
assets.................................................... 12,129
Cash paid for product line.................................. (14,000)
--------
Liabilities assumed......................................... $ 419
========
</TABLE>
The Company recorded a $2.2 million tax benefit to additional
paid-in-capital in the second quarter of 2000 on the disposition of 406,464
shares of the Company's common stock made by certain employees of HC Power Inc.
(See Note 4).
On January 29, 1999, the Company purchased all of the capital stock of
International Power Devices, Inc. ("IPD") for $29.5 million. In conjunction with
the acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of tangible assets acquired...................... $ 21,248
Fair value of goodwill and other indentifiable intangible
assets.................................................... 17,454
Cash paid for IPD's capital stock........................... (29,500)
--------
Liabilities assumed......................................... $ 9,202
========
</TABLE>
Capital lease obligations of $230 were incurred in the first quarter of 1999
when the Company entered into leases for new equipment.
See accompanying notes
7
<PAGE>
POWER-ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. In the opinion of management, adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the period ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. For further information, refer to the supplemental
consolidated financial statements and notes thereto for the year ended
December 31, 1999, included in the Company's Form 8-K dated February 29, 2000
and filed on April 20, 2000, which were restated under the pooling of interests
method of accounting to give retroactive effect to the merger between Power-One
and HC Power, Inc. ("HCP") (see Note 4).
The Company's reporting period coincides with the 52- to 53-week period
ending on the Sunday closest to December 31 and its fiscal quarters are the 13-
to 14- week period ending on the Sunday nearest to March 31, June 30,
September 30 and December 31. For simplicity of presentation, the Company has
described its year-ended January 2, 2000 as December 31, 1999 and the three and
six month periods ended July 2, 2000 and June 27, 1999 as June 30.
All share and per share amounts have been retroactively restated to give
effect to the Company's three-for-two stock split that occurred on June 2, 2000.
Certain reclassifications have been made to the amounts in the Consolidated
Balance Sheet as of December 31, 1999 and the Consolidated Statement of Cash
Flows for the six month period ended June 30, 1999 to conform to the
classifications in the current year period.
NOTE 2--INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- -------------
<S> <C> <C>
Raw materials......................................... $ 73,476 $40,970
Subassemblies-in-process.............................. 18,898 8,360
Finished goods........................................ 17,170 12,504
-------- -------
$109,544 $61,834
======== =======
</TABLE>
NOTE 3--EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss) by
the weighted average common shares outstanding for the period while diluted
earnings per share also includes the dilutive
8
<PAGE>
POWER-ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--EARNINGS (LOSS) PER SHARE (CONTINUED)
impact of stock options. Basic and diluted earnings (loss) per share for the
three-month and six-month periods ended June 30 are calculated as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
------------------------------ ------------------------------
NET AVERAGE PER NET AVERAGE PER
INCOME SHARES SHARE INCOME SHARES SHARE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income.................... $10,596 $1,862
Basic earnings per share:
Weighted average shares
outstanding............... 36,629 28,368
------- ------ ------ ------
Basic earnings per share.... 10,596 36,629 $.29 1,862 28,368 $.07
==== ====
Dilutive securities--
Stock options............... 1,898 720
------- ------ ------ ------
Diluted earnings per share:... $10,596 38,527 $.28 $1,862 29,088 $.06
======= ====== ==== ====== ====== ====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
------------------------------ ------------------------------
NET AVERAGE PER NET AVERAGE PER
INCOME SHARES SHARE LOSS SHARES SHARE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)............. $9,107 $(1,649)
Basic earnings (loss) per
share:
Weighted average shares
outstanding............... 36,394 28,364
------ ------ ------- ------
Basic earnings (loss) per
share..................... 9,107 36,394 $.25 (1,649) 28,364 $(.06)
==== =====
Dilutive securities--
Stock options............... 1,658
------ ------ ------- ------
Diluted earnings (loss) per
share:...................... $9,107 38,052 $.24 $(1,649) 28,364 $(.06)
====== ====== ==== ======= ====== =====
</TABLE>
The dilutive effect of options outstanding at June 30, 1999 was not included
in the calculation of diluted loss per share for the six-month period ended
June 30, 1999 because to do so would have had an anti-dilutive effect as the
Company had a net loss for the period. The weighted average number of such
options excluded from the diluted loss per share computation was approximately
637,000.
NOTE 4--ACQUISITIONS
On February 29, 2000, the Company acquired HCP in a stock-for-stock
transaction, whereby the former shareholders of HCP received a total of
3,181,811 shares of the Company's common stock for all shares of common stock of
HCP outstanding on the effective date of the merger. Of the total shares issued,
318,176 shares were placed in an escrow to fund possible indemnification claims
under the merger agreement. The merger has been accounted for as a pooling of
interests. Accordingly, all prior period consolidated financial statements
presented have been restated to give retroactive effect to the
9
<PAGE>
POWER-ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--ACQUISITIONS (CONTINUED)
acquisition of HCP by the Company. All transactions between the Company and HCP
have been eliminated in the consolidated financial statements. Net sales and net
income (loss) for the separate companies and the combined amounts presented in
the consolidated financial statements follow:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 2000
-----------------------------------------
(DOLLARS IN THOUSANDS)
INTERCOMPANY
ELIMINATIONS
-------------
<S> <C> <C> <C>
NET SALES:
Power-One................................. $166,134 $ -- $166,134
HCP....................................... 24,717 -- 24,717
-------- ----- --------
Combined.................................. $190,851 $ -- $190,851
======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
INTERCOMPANY
ELIMINATIONS
------------
<S> <C> <C> <C>
NET INCOME (LOSS):
Power-One................................. $ 15,207 $(127) $ 15,080
HCP....................................... (6,100) 127 (5,973)
-------- ----- --------
Combined.................................. $ 9,107 $ -- $ 9,107
======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
-----------------------------------------
(DOLLARS IN THOUSANDS)
INTERCOMPANY
ELIMINATIONS
-------------
<S> <C> <C> <C>
NET SALES:
Power-One................................. $ 81,402 $ -- $ 81,402
HCP....................................... 9,212 -- 9,212
-------- ----- --------
Combined.................................. $ 90,614 $ -- $ 90,614
======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
INTERCOMPANY
ELIMINATIONS
------------
<S> <C> <C> <C>
NET INCOME (LOSS):
Power-One................................. $ (1,538) $ -- $ (1,538)
HCP....................................... (111) -- (111)
-------- ----- --------
Combined.................................. $ (1,649) $ -- $ (1,649)
======== ===== ========
</TABLE>
HCP is based in Irvine, CA and is a supplier of power systems for
telecommunications and Internet service providers and OEM equipment
manufacturers. HCP's major customers include service providers such as Williams
Communications, CEA Telecom, Qwest and Nextel, and OEMs such as Motorola and
Nortel Networks.
10
<PAGE>
POWER-ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--ACQUISITIONS (CONTINUED)
HCP provided for stock bonus incentives to certain key employees. The stock
bonus agreements provided for the granting of HCP common stock to the employees
over specified vesting periods, ranging from three to twelve years. All stock
bonus agreements contained accelerated vesting provisions upon a change in
control of HCP. The unvested shares were granted and became vested at the time
of the merger with the Company. 406,464 shares of the Company's common stock
were issued to the employees of HCP in exchange for the accelerated shares. The
Company recorded compensation expense of $13.3 million in the first quarter of
2000 which was determined based on the fair value of the Company's common stock
on February 29, 2000 which was $32.75 per share.
In connection with the HCP acquisition, the Company amended its credit
agreement with lenders to waive certain requirements and amend certain
provisions.
On May 16, 2000, the Company acquired Norwegian-based Powec AS and the
minority interests of certain Powec subsidiaries (collectively referred to as
"Powec") for approximately $72.0 million in cash, plus $2.5 million in
acquisition costs, and 214,035 shares of the Company's common stock. The market
value of the Company's common stock on the date of acquisition was $59.50 per
share resulting in a total purchase price valued at approximately
$84.7 million, plus $2.5 million in acquisition costs. Additionally, Powec had
approximately $12 million of debt outstanding. Certain additional payments may
be made to Powec stockholders based on the attainment of defined operational
performance through 2001.
Powec is a leading supplier of power systems for major service providers and
equipment manufacturers in the telecommunications industry. Powec's customers
include Nokia, Vodafone, Ericsson, Eircom, Telia, Hong Kong Telecom, Telenor,
Sonera and TeleDanmark.
On May 16, 2000, the Company also acquired a telecommunications product line
from Eldec Corporation, a subsidiary of Crane Co. ("Eldec"), for $14.0 million
in cash. This product line includes the exclusive distribution rights for
Powec's products in North, South and Central America and extensive relationships
with telecommunication equipment manufacturers such as Motorola, Ericsson, and
Nokia US.
In addition to the shares issued for the Powec purchase, the purchases were
financed with $20.0 million of the Company's cash and approximately
$68.5 million of advances under the Company's credit facility, which includes
$2.5 million to finance the related acquisition costs.
The acquisitions were accounted for using the purchase method of accounting.
The net purchase price, plus transaction costs, was allocated to tangible assets
and intangible assets. The excess of the aggregate purchase price over the
estimated fair values of the net tangible assets acquired was recognized as
goodwill and other identifiable intangible assets, and is being amortized over
periods ranging from three to 15 years. The fair value of Powec's assets and
liabilities, as well as the fair value of the assets and liabilities acquired
from Eldec, have been included in the Company's balance sheet as of June 30,
2000. The consolidated statements of operations, comprehensive income (loss) and
of cash flow for the six months ended June 30, 2000, include two months of
Powec's operations.
The following unaudited pro forma financial information combines the
consolidated results of operations as if the acquisitions of Powec and the
telecommunications product line had occurred as of the beginning of the periods
presented. Pro forma adjustments include only the effects of events directly
attributable to the transaction that are expected to have a continuing impact
and that are
11
<PAGE>
POWER-ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--ACQUISITIONS (CONTINUED)
factually supportable. The pro forma amounts contained in the table below
include adjustments for amortization of intangibles, assumed interest expense,
assumed decrease in interest earned and the related income tax effect of such
adjustments. The pro forma amounts for the six-month period ended June 30, 2000
exclude non-recurring items totaling $1.5 million, which consist of an inventory
fair market value write-up of $2.0 million, net of related income tax benefit.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------
JUNE 30, JUNE 30,
2000 1999
--------- ---------
(IN THOUSANDS,
EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
PRO FORMA:
Net sales............................................... $216,521 $118,618
Net income (loss)....................................... $ 9,852 $ (4,787)
Basic earnings (loss) per common share.................. $ 0.27 $ (0.17)
Diluted earnings (loss) per common share................ $ 0.26 $ (0.17)
</TABLE>
The pro forma financial information does not necessarily reflect the
operating results that would have occurred had the acquisition been consummated
as of the above dates, nor is such information indicative of future operating
results. In addition, the allocation of the purchase price is based on
preliminary data and could change when final valuation information is obtained.
NOTE 5--INTANGIBLE ASSETS
Intangible assets include cost in excess of net assets acquired in
connection with the acquisition of the Company in 1995, of Melcher Holding AG
("Melcher") in 1998, of IPD in 1999 and of Powec in 2000 (see Note 4) which have
been allocated among certain intangible items determined by management to have
value, such as the company name, distribution network and product lines.
Provision for amortization has been made based upon the estimated useful lives
of the intangible asset categories, which range from three to 20 years, using
the straight-line method.
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- -------------
<S> <C> <C>
Goodwill and trade name............................... $115,218 $40,093
Distribution network.................................. 5,207 5,207
Sales force........................................... 664 681
Product technology.................................... 27,661 19,500
Assembled workforce................................... 1,633 800
Customer relationships................................ 24,259 4,700
-------- -------
174,642 70,981
Less accumulated amortization......................... 15,832 11,764
-------- -------
$158,810 $59,217
======== =======
</TABLE>
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<PAGE>
POWER-ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INTANGIBLE ASSETS (CONTINUED)
The increase in intangible assets from December 31, 1999 is primarily
related to intangibles totaling approximately $88.1 million which were recorded
upon the acquisition of Powec and the purchase of the telecommunications product
line from Eldec in May 2000, as well as a $13.0 million payment made to IPD's
shareholders in the second quarter of 2000, since IPD attained certain defined
operational performance objectives in the 13 month period ended March 31, 2000.
NOTE 6--CREDIT FACILITY
On May 10, 2000, the Company entered into a Revolving Loan Agreement with
Union Bank of California, N.A., as administrative agent and lead arranger, which
provides the Company with a revolving line of credit of $200 million. The line
of credit bears interest on amounts outstanding payable quarterly based on the
Company's leverage ratio and one of the following rates as selected by the
Company: LIBOR (6.6% at June 30, 2000) plus 1.25% to 2.25%, or the bank's base
rate (9.5% at June 30, 2000) plus 0% to 1.00%. The credit agreement
(a) provides for restrictions on additional borrowings, 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,
maximum leverage ratio and minimum fixed charge coverage ratio. Borrowings under
this line of credit are collateralized by the capital stock of each of the
Company's domestic subsidiaries and 65% of the capital stock of each of the
Company's foreign subsidiaries. At June 30, 2000, amounts outstanding under this
line of credit were $82.5 million at a weighted average interest rate of 7.8%.
NOTE 7--SUBSEQUENT EVENTS
On July 26, 2000, the Company's Board of Directors approved a two-for-one
stock split, conditioned upon the approval of its stockholders of an increase in
its authorized common stock. A special meeting of stockholders will be held on
August 31, 2000, to vote on the proposed amendment to the Company's Restated
Certificate of Incorporation, increasing the total authorized common stock from
60 million to 300 million shares. If the stockholders approve the amendment, the
stock split will be effected in the form of a 100 percent stock dividend payable
September 11, 2000, to stockholders of record on August 31, 2000. The dividend
would increase the number of shares outstanding from approximately 36.8 million
to approximately 73.6 million.
On July 26, 2000, the Company's Board of Directors approved a Stockholder
Rights Plan under which preferred stock purchase rights have been distributed
for each outstanding share of the Company's common stock held at the close of
business on August 7, 2000. Each right entitles a holder of the Company's common
stock to buy one one-thousandth of a share of a new series of preferred stock at
an exercise price of $625.00 subject to adjustment. If a person acquires more
than 15% of the Company's common stock, holders of the rights are entitled to
purchase the Company's common stock or, in the event of a merger, stock in the
merged entity, at half of the market value. The Company is entitled to redeem
the rights for a nominal amount at any time until the day that a 15% position
has been acquired. The Rights are designed to protect the Company from unfair
takeovers.
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ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL. In January 1999, we broadened our portfolio of DC/DC products by
acquiring International Power Devices, Inc., or IPD, for $32 million, including
certain capitalized lease obligations and other indebtedness of IPD. In
February 2000, we acquired HC Power, Inc., or HCP, in a stock-for-stock
transaction, in which the former shareholders of HCP received a total of
3,181,811 shares of our common stock for all shares of common stock of HCP
outstanding on the effective date of the merger. HCP is based in Irvine, CA and
is a leading supplier of power systems for telecommunications and Internet
service providers and OEM equipment manufacturers. In May 2000, we further
increased our presence in the telecommunications industry by acquiring
Norwegian-based Powec AS and the minority interests of certain Powec
subsidiaries, collectively referred to as Powec, for approximately
$72.0 million, plus $2.5 million in acquisition costs, and 214,035 shares of our
common stock. Powec is a leading supplier of power systems for major service
providers and equipment manufacturers in the telecommunications industry. The
acquisitions of IPD and Powec were accounted for using the purchase method of
accounting, and as such, their results of operations have been included in the
consolidated results of operations since their respective dates of acquisition.
Although the acquisition of Powec occurred on May 16, 2000, the Company has
elected to use the beginning of the month as the acquisition date for purchase
accounting. As such, all references to operating data for the three and six
months ended June 30, 2000 include three and six months of operations for IPD,
respectively, and two months of operations in each period for Powec. All
references to operating data for the three and six months ended June 30, 1999
include three and five months of operations for IPD. The acquisition of HCP was
accounted for as a pooling of interests, and all prior periods have been
restated to give retroactive effect to the acquisition of HCP.
NET SALES. Net sales increased $100.2 million, or 110.6%, to
$190.9 million for the six months ended June 30, 2000 from $90.6 million for the
six months ended June 30, 1999. The increase in net sales was attributable to
increases across all product lines. The main contributors to the $100.2 million
increase in net sales were DC/DC power supplies which contributed $42.3 million
primarily from strong growth in unit shipments of our advanced line of
high-density board-mounted DC/DC converters ("Bricks") to the communications
market, telecom power systems which contributed $29.5 million of which $14.0
million was contributed from Powec, high-range power supplies which contributed
$14.5 million primarily due to strong sales into the ATE/semiconductor test
equipment and industrial markets, low-range power supplies which contributed
$6.6 million and all other product lines combined which contributed $7.3
million. Period-over-period, a significant portion of the sales growth in this
year's first six months is attributable to the stronger demand for our high
power product line in the ATE/semiconductor test equipment market which was
still going through a recovery stage during the same period last year.
Net sales to OEMs in the first six months of 2000 were $155.1 million, or
81.3% of net sales, up from $71.3 million, or 78.7% of net sales, for the
comparable period in 1999. Net sales to Cisco represented 17.6% of net sales in
the first half of 2000. Cisco was the only customer to exceed 10% of net sales
in the first six months of 2000. Net sales through distributors were
$35.8 million, or 18.7% of net sales, in the first six months of 2000, compared
with $19.3 million, or 21.3% of net sales, in the same period in 1999. The
decrease in our percentage of net sales through distributors is due to the
customer base of our recent acquisitions of IPD, HCP and Powec each of which
makes a larger proportion of their sales to OEMs.
Net sales for the three months ended June 30, 2000 increased $62.1 million,
or 120.2%, to $113.8 million compared with $51.7 million for the three months
ended June 30, 1999. Similar to the first six months, the increase in net sales
for the second quarter was attributable to increases across all product lines.
The main contributors to the $62.1 million increase in net sales were DC/DC
power supplies which contributed $25.0 million, telecom power systems which
contributed $23.3 million,
14
<PAGE>
high-range power supplies which contributed $8.3 million, low-range power
supplies which contributed $3.2 million and all other product lines combined
which contributed $2.3 million. The primary causes for the net sales increases
by product lines in the three month comparison are similar to those in the six
month comparison.
Net sales to OEMs in the second quarter of 2000 were $95.4 million, or 83.8%
of net sales, up from $40.6 million, or 78.5% of net sales, for the comparable
period in 1999. Net sales to Cisco represented 17.4% of net sales in the second
quarter of 2000. Cisco was the only customer to exceed 10% of net sales in the
second quarter of 2000. Net sales through distributors were $18.4 million, or
16.2% of net sales, in the second quarter of 2000 compared with $11.1 million,
or 21.5% of net sales, in the same period in 1999.
Net sales by markets for the six months ended June 30, 2000 and 1999 were:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Communications.............................................. 61.0% 43.9%
Industrial.................................................. 14.7% 19.0%
ATE/Semiconductor test equipment............................ 10.4% 6.1%
Transportation.............................................. 3.6% 7.7%
Medical..................................................... 3.0% 8.0%
Computer, Retail and Other.................................. 7.3% 15.3%
----- -----
Total................................................... 100.0% 100.0%
</TABLE>
The Company's combined backlog on June 30, 2000 was $196.0 million, an
increase of 192.9% and 172.7% compared to backlog of $66.9 million on
December 31, 1999 and $71.9 million on June 30, 1999, respectively. Powec
contributed approximately $9 million to our second quarter backlog. The
significant increase in backlog was driven primarily by strong demand from our
communications customers for our high-density DC/DC converters, as well as
robust growth from the ATE/ semiconductor test equipment market.
GROSS PROFIT. Gross profit increased $40.9 million, or 113.6%, to
$76.9 million for the six months ended June 30, 2000 from $36.0 million for the
six months ended June 30, 1999. As a percent of net sales, gross profit
increased to 40.3% for the first six months of 2000 from 39.7% for the same
period in 1999. Gross profit for the six month periods include inventory
write-up related purchase accounting adjustments due to the Powec acquisition in
May 2000 and the IPD acquisition in January 1999 of approximately $2.0 million
and $0.8 million, respectively, which negatively impacted each year's gross
profit margin. Excluding these non-recurring adjustments, gross profit margin
would have been 41.3% for the first six months of 2000 and 40.5% for the same
period in 1999. On this basis, the improved 0.8% profit margin in the first half
of 2000 versus the same period last year is primarily due to the increase in net
sales which allowed us to better leverage our fixed manufacturing expenses, as
well as the transfer of high-density DC/DC product manufacturing from our Boston
facility to our low cost manufacturing facility in Mexico.
Gross profit for the three months ended June 30, 2000 increased
$23.4 million, or 109.9%, to $44.8 million from $21.4 million for the same
period in 1999. As a percent of net sales, gross profit decreased to 39.4% for
the second quarter of 2000 from 41.3% for the second quarter of 1999. The
decrease in gross profit margin primarily resulted from the inventory write-up
related purchase accounting adjustment of $2.0 million for the Powec acquisition
which negatively impacted the second quarter's gross profit margin in 2000.
Excluding this non-recurring adjustment, gross profit margin would have been
41.2% for the three months ended June 30, 2000.
SELLING EXPENSE. Selling expense increased $3.8 million, or 32.6%, to
$15.3 million for the six months ended June 30, 2000 from $11.5 million for the
comparable period in 1999. As a percent of net
15
<PAGE>
sales, selling expense decreased to 8.0% for the first six months of 2000 from
12.7% for the same period in 1999. Selling expense for the second quarter of
2000 increased $2.4 million, or 38.9%, to $8.7 million from $6.3 million for the
same period in 1999. As a percent of net sales, selling expense decreased to
7.6% for the second quarter of 2000 compared with 12.1% for the comparable
period in 1999. The dollar increase in selling expenses for both the three and
six month periods was primarily due to higher employee costs and an increase in
sales commissions due to the increase in sales volume, as well as $0.9 million
in selling expenses contributed by Powec.
ADMINISTRATIVE EXPENSE. Administrative expense increased $17.6 million, or
243.5%, to $24.8 million for the six months ended June 30, 2000 from
$7.2 million for the six months ended June 30, 1999. As a percent of net sales,
administrative expense increased to 13.0% for the first six months of 2000 from
8.0% for the comparable period in 1999. The increase of $17.6 million was
primarily attributable to an $8.7 million stock compensation charge due to HCP
stock bonus agreements that vested on the date of acquisition, $2.4 million in
HCP acquisition costs, $0.5 million in administrative expenses contributed by
Powec, with the remainder of the increase due to higher employee costs and
depreciation on our Oracle ERP system and other capital expenditures. Excluding
non-recurring items, administrative expense increased $6.3 million, or 87.8%, to
$13.5 million, or 7.1% of net sales, for the six months ended June 30, 2000 from
$7.2 million, or 8.0% of net sales, for the six months ended June 30, 1999.
Administrative expense for the second quarter of 2000 increased
$3.3 million, or 77.2%, to $7.5 million from $4.2 million for the same period in
1999. As a percent of net sales, administrative expense decreased to 6.6% for
the second quarter of 2000 compared with 8.2% for the comparable period in 1999.
The $3.3 million increase is due to the $0.5 million administrative expenses
contributed by Powec and the increase in employee costs and depreciation.
ENGINEERING EXPENSE. Engineering expense increased $7.5 million, or 100.4%,
to $14.9 million for the six months ended June 30, 2000 from $7.4 million for
the six months ended June 30, 1999. As a percent of net sales, engineering
expense decreased to 7.8% for the first six months of 2000 from 8.2% for the
comparable period in 1999. The increase of $7.5 million was primarily due to a
$4.6 million stock compensation charge due to HCP stock bonus agreements that
vested on the date of acquisition, $0.3 million in engineering expenses
contributed by Powec, with the remainder of the increase due to higher employee
costs which are directly attributable to our commitment to making research and
development investments in support of our future growth. Excluding non-recurring
items, engineering expense increased $2.8 million, or 37.2%, to $10.2 million,
or 5.3% of net sales, for the six months ended June 30, 2000 from $7.4 million,
or 8.2% of net sales, for the six months ended June 30, 1999.
Engineering expense for the second quarter of 2000 increased $1.5 million,
or 36.3%, to $5.5 million from $4.0 million for the same period in 1999. As a
percent of net sales, engineering expense decreased to 4.8% for the second
quarter of 2000 compared with 7.8% for the comparable period in 1999. The
$1.5 million increase is due to the $0.3 million engineering expenses
contributed by Powec and higher employee costs.
While engineering expense as a percent of net sales has decreased for both
the six month period comparison, excluding non-recurring items, and the three
month period comparison, we expect this percentage to increase in future
quarters as our increases in research and development investments begin to ramp
up relative to our net sales increase.
QUALITY ASSURANCE EXPENSE. Quality assurance expense increased
$0.8 million, or 40.0%, to $2.7 million for the six months ended June 30, 2000
from $2.0 million for the six months ended June 30, 1999. As a percent of net
sales, quality assurance expense decreased to 1.4% for the first six months of
2000 from 2.2% for the comparable period in 1999. Quality assurance expense for
the second quarter of 2000 increased $0.4 million, or 31.8%, to $1.5 million
from $1.1 million for the
16
<PAGE>
comparable period in 1999. As a percent of net sales, quality assurance expense
decreased to 1.3% for the second quarter of 2000 compared with 2.2% for the same
period in 1999. The dollar increase in quality assurance expense for both the
three and six month periods is primarily attributable to $0.2 million in
expenses contributed by Powec and higher employee costs.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased
$0.5 million, or 14.4%, to $4.1 million for the six months ended June 30, 2000
from $3.6 million for the same period in 1999. Included in the six month period
ended June 30, 1999 is a $1.0 million charge taken in the first quarter of 1999
to write off the unamortized balance of the intangible asset value of a
technology and license agreement related to substantially similar product
technology acquired as a result of the IPD acquisition. Excluding this
non-recurring charge, amortization of intangibles increased $1.5 million or
59.1% to $4.1 million for the six months ended June 30, 2000 from $2.6 million
for the same period in 1999. The $1.5 million increase is primarily attributable
to $1.1 million for two months of amortization expense related to the
intangibles recorded for the acquisition of Powec and $0.4 million increase in
amortization related to intangibles recorded for the acquisition of IPD since a
$13.0 million earn out was paid to IPD's shareholders in the second quarter of
2000 for the attainment of certain defined operational objectives in the
13 month period ended March 31, 2000.
Amortization of intangibles increased $1.4 million, or 105.1%, to
$2.8 million for the three months ended June 30, 2000 from $1.3 million for the
same period in 1999. As described above, this increase is due to the
$1.1 million of amortization related to the Powec acquisition and $0.4 million
increase in amortization related to the IPD acquisition.
IN-PROCESS RESEARCH AND DEVELOPMENT. As a result of the IPD acquisition,
the Company recorded a one time charge of $3.3 million in the first quarter of
1999 for purchased in-process technology that had not reached technological
feasibility and had no alternative future use.
INCOME FROM OPERATIONS. As a result of the items above, income from
operations increased $14.1 million, or 1429.1%, to $15.1 million for the six
months ended June 30, 2000 from $1.0 million for the comparable period in 1999.
Excluding non-recurring items totaling approximately $15.9 million in the first
quarter of 2000 related to the HCP acquisition consisting of acquisition costs
of $2.4 million, stock compensation charges of $13.3 million and payroll related
taxes of $0.2 million, and $2.0 million in the second quarter of 2000 related to
the Powec acquisition for an inventory fair value write-up adjustment, income
from operations would have been $33.1 million, or 17.3% of net sales for the
first six months of 2000. Excluding non-recurring items totaling approximately
$5.1 million related to the IPD acquisition consisting of an inventory fair
value write-up of $0.8 million, an in-process research and development charge of
$3.3 million and a write-off of $1.0 million for a technology and license
agreement, income from operations would have been $6.0 million, or 6.7% of net
sales for the first six months of 1999.
Income from operations increased $14.5 million, or 334.2%, to $18.9 million
for the three months ended June 30, 2000 from $4.3 million for the same period
in 1999. Excluding the non-recurring items referred to above in the second
quarter of 2000, income from operations would have been $20.9 million, or 18.4%
of net sales compared to $4.3 million, or 8.4% of net sales, in the second
quarter of 1999.
INTEREST INCOME. Interest income increased $1.1 million to $1.2 million for
the six months ended June 30, 2000 from $41,000 for the six months ended
June 30, 1999. The increase is primarily due to interest earned on proceeds from
the sale of our stock during a secondary offering in September and October 1999
which were invested in short-term, interest bearing financial instruments. Most
of the increase in interest income was experienced in the first four months of
2000 prior to the acquisition of Powec which was financed using a combination of
our available cash and credit facility advances.
17
<PAGE>
Interest income for the three months ended June 30, 2000 increased $428,000 to
$432,000 from $4,000 in the same period in 1999.
INTEREST EXPENSE. Interest expense decreased $94,000, or 5.5%, to
$1.6 million for the six months ended June 30, 2000 from $1.7 million for the
comparable period in 1999. The decrease is primarily due to the timing and
amounts of credit facility advances used to finance our acquisitions. Interest
expense in the first six months of 1999 is related to debt incurred in
connection with the acquisition of Melcher in the third quarter of 1998 and IPD
in the first quarter of 1999, therefore, these advances were outstanding for the
majority of the period. Interest expense in the first six months of 2000 is
related primarily to debt incurred in connection with the acquisition of Powec
in May 2000. Interest expense for the three months ended June 30, 2000 increased
$318,000 to $1.3 million from $1.0 million in the same period in 1999. The
increase in interest expense related primarily to credit facility advances to
finance the Powec acquisition and capital expenditures at our manufacturing
sites.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, decreased
$1.3 million to $1.1 million expense for the six months ended June 30, 2000 from
$276,000 income for the six months ended June 30, 1999. Other expense, net
increased $1.1 million to $1.2 million for the three months ended June 30, 2000
from $76,000 for the same period in 1999. The increased expense for both the
three and six month periods is primarily attributable to losses recorded on
foreign currency transactions at our international locations and a $242,000
write-off of bank fees related to our $65 million line of credit which was
terminated in the second quarter of 2000 and replaced with a $200 million line
of credit with another financial institution. The new line of credit was
primarily necessary to finance the acquisition of Powec in May 2000.
INCOME TAXES. The provision for income taxes was $4.5 million for the six
months ended June 30, 2000 compared to $1.2 million for the same period in 1999.
The income tax expense for the first six months of 2000 reflects a non-recurring
benefit of $366,000 related to net deferred tax assets recorded upon HCP's
conversion from an S-corporation to a C-corporation. The recorded loss for the
first six months of 1999 did not generate an income tax benefit primarily due to
the $3.3 million charge for in process research and development and $304,000
amortization of goodwill related to the IPD acquisition, both of which were
nondeductible for tax purposes. Excluding non-recurring items, the effective tax
rate would have been approximately 34.7% for the first six months of 2000
compared to 42.1% for the first six months of 1999. The provision for income
taxes for the second quarter of 2000 was $6.2 million compared to $1.4 million
for the same period in 1999. The effective tax rate was approximately 36.9% for
the second quarter of 2000 compared to 43.3% for the second quarter of 1999. The
lower tax rate for both the three months and six months ended June 30, 2000
compared to the same periods in 1999 is primarily the result of the distribution
of profit among our various international subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents balance decreased $50.9 million, or 79.9% from
$63.8 million at December 31, 1999 to $12.8 million at June 30, 2000. Our
primary source of cash in the first six months of 2000 consisted of borrowings
from our bank credit facilities of $87.3 million. The primary uses of cash in
the first six months of 2000 consisted of $74.5 million for the purchase of
Powec, $14.0 million for the purchase of the telecommunications product line
from Eldec, $13.0 million for the earnout paid to IPD's former stockholders,
$15.7 million for the acquisition of property and equipment, $12.8 million for
the repayment of borrowings on our bank credit facilities and $6.2 million for
operating activities.
Cash used in operating activities in the first six months of 2000 was
$6.2 million and was primarily attributable to cash earnings from operations of
$31.9 million (net income plus depreciation, stock compensation and loss on
disposal of property and equipment) offset by $38.1 million used for working
18
<PAGE>
capital. The $38.1 million used for working capital was primarily due to an
increase in accounts receivable and inventories of $24.5 million and
$37.6 million, respectively, and a net decrease in accounts payable and accrued
expenses of $15.7 million and $9.2 million, respectively.
The $15.7 million to acquire property and equipment included approximately
$5.7 million to acquire surface-mount technology (SMT) equipment, $0.7 million
for hardware, software and implementation support related to our Oracle ERP
system conversion at our Caribbean facility, $6.0 million for other
manufacturing equipment and the balance for additional property, plant and
capital equipment expenditures consistent with supporting our growth plans.
Of the $87.3 million of proceeds from borrowings on our bank credit
facilities, approximately $68.5 million was used to finance the Powec
acquisition and the purchase of the telecommunications product line from Eldec.
The remaining proceeds were primarily used to finance capital expenditures and
for the repayment of debt.
On May 10, 2000, we entered into a Revolving Loan Agreement with Union Bank
of California, N.A., as administrative agent and lead arranger, which provides
us with a revolving line of credit of $200 million. The line of credit bears
interest on amounts outstanding payable quarterly based on our leverage ratio
and one of the following rates as selected by us: LIBOR (6.6% at June 30, 2000)
plus 1.25% to 2.25%, or the bank's base rate (9.5% at June 30, 2000) plus 0% to
1.00%. 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,
maximum leverage ratio and minimum fixed charge coverage ratio. Borrowings under
this line of credit are collateralized by the capital stock of each of our
domestic subsidiaries and 65% of the capital stock of each of our foreign
subsidiaries. At June 30, 2000, amounts outstanding under this line of credit
were $82.5 million at a weighted average interest rate of 7.8%.
As a result of the Revolving Loan Agreement with Union Bank of California,
N.A., we repaid all outstanding amounts under our $65 million revolving line of
credit with Bank of America, N.A. and terminated the agreement.
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 $8.6 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 June 30, 2000, short-term (including current
portion of long-term debt) and long-term amounts outstanding under Melcher's
credit facilities were $3.1 million and $2.1 million, respectively.
As a result of the Powec acquisition, we have credit facilities with banks
in various European and Asian countries, as well as Australia. The aggregate
credit limit for all such credit facilities is approximately $6.1 million. The
largest of these credit facilities are with banks in Norway totaling
approximately $4.7 million and bear interest on amounts outstanding payable at
various time intervals and market rates ranging between 7.85% and 8.32%. At
June 30, 2000, amounts outstanding under Powec's credit facilities were
$3.1 million.
In addition, Powec has a long-term property loan with a bank in Norway
totaling approximately $9.1 million. The loan was for the purchase of Powec's
primary office and manufacturing facility in Norway and is collateralized by the
building. The 19.5 year loan bears an interest rate based on the bank's rate
(8.3% at June 30, 2000) and is payable in semiannual installments until its
maturity date in
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July 2019. At June 30, 2000, the current and long-term amounts outstanding under
this loan were $0.2 million and $8.9 million, respectively.
In the first quarter of 2000 we repaid the outstanding balance on our
$8 million revolving loan and $1 million equipment line of credit and cancelled
the agreements. Total principal amounts repaid were $6.2 million and
$0.3 million, respectively.
At June 30, 2000, short-term (including current portion of long-term debt)
and long-term amounts outstanding under all credit agreements with banks were
$88.9 million and $11.0 million, respectively.
We currently anticipate that our total capital expenditures for 2000 will be
approximately $55 million, of which approximately $2 million represents costs
related to the implementation of our Oracle ERP system at
Power-Electronics, Inc., as well as continued enhancements and upgrades at our
Camarillo and Mexico locations, approximately $25 million represents investments
in surface-mount technology automation and approximately $20 million represents
investments in manufacturing improvements. By year end, we expect to have a
total of 17 SMT lines in operation of which 13 lines represent expenditures in
the current year. The amount of these anticipated capital expenditures will
frequently change during the year based on changes in expected revenues, our
financial condition and general economic conditions.
Based on current plans and business conditions, we believe our existing
working capital and borrowing capacity, coupled with the funds generated from
our operations, will be sufficient to fund our anticipated working capital,
capital expenditures and debt payment requirements for the next twelve months.
However, if we make a large acquisition, it may be necessary to raise debt or
equity in the private or public securities markets.
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in
interest rates and changes in foreign currency exchange rates. Our exposure to
interest rate risk results from the financial debt instruments which arise from
transactions entered into during the normal course of business. We may enter
into derivative financial instrument transactions, such as swaps, in order to
manage or reduce our exposure to interest rate changes related to our portfolio
of borrowings. Under no circumstances do we enter into derivative or other
financial instrument transactions for speculative purposes.
DEBT. We are exposed to cash flow risk due to changes in market interest
rates related to our outstanding debt. For example, in Europe some of our credit
facilities bear interest on borrowings outstanding at various time intervals and
market rates based on Swiss LIBOR, an offshore rate that is similar to the
London Interbank Offered Rate ("LIBOR"), plus a margin ranging from 1.25% to
2.00%. Our principal risk with respect to our long-term debt is to changes in
these market rates.
The table below presents principal cash flows and related weighted average
interest rates for our credit facilities and long-term debt obligations at
June 30, 2000 by expected maturity dates. The information is presented in U.S.
dollar equivalents, our reporting currency, and parenthetically in Swiss francs
or Norwegian Kroner, where applicable. Additionally, the U.S. dollar equivalent
carrying value of Swiss franc and Norwegian Kroner denominated debt is sensitive
to foreign currency exchange rates.
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<PAGE>
However, a 10% change in the U.S. dollar exchange rate against these currencies
would not have a significant effect on our future earnings.
<TABLE>
<CAPTION>
THERE- FAIR
2000 2001 2002 2003 2004 AFTER TOTAL VALUE
-------- -------- -------- -------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CREDIT FACILITIES:
Variable Rate ($US)......... $77,938 -- -- -- -- -- $77,938 $77,938
Average Interest Rate..... 7.9% 7.9%
Variable Rate (CHF 7,500)... $ 4,590 -- -- -- -- -- $ 4,590 $ 4,590
Average Interest Rate..... 4.6% 4.6%
Variable Rate (NOK
24,450)................... $ 2,853 -- -- -- -- -- $ 2,853 $ 2,853
Average Interest Rate..... 8.3% 8.3%
Variable Rate (AUD 400)..... $ 240 -- -- -- -- -- $ 240 $ 240
Average Interest Rate..... 8.4% 8.4%
LONG-TERM DEBT:
Fixed Rate (CHF 8,500)...... $ 2,162 $2,142 $918 -- -- -- $ 5,222 $ 5,222
Average Interest Rate..... 3.7% 3.8% 4.4% 3.9%
Variable Rate (NOK
77,890)................... $ 232 $ 465 $465 $465 $465 $6,996 $ 9,088 $ 9,088
Average Interest Rate..... 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3%
</TABLE>
FOREIGN CURRENCY. A significant portion of our business operations are
conducted in various countries in Europe. As a result, we have a certain degree
of market risk with respect to our cash flows due to changes in foreign currency
exchange rates when transactions are denominated in currencies other than our
functional currency. Historically, we have not actively engaged in substantial
exchange rate hedging activities, and at June 30, 2000, we had not entered into
any significant foreign exchange contracts.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains statements which, to the extent that they are not
recitations of historical fact, constitute "forward-looking statements" within
the meaning of Section 21E of the Securities Exchange Act of 1934. The words
"expect," "believe," "anticipate" and similar expressions are intended to
identify forward-looking statements. Such forward-looking information involves
important risks and uncertainties that could materially alter results in the
future from those expressed in any forward-looking statements made by, or on
behalf of, the Company. These risks and uncertainties include, but are not
limited to the Company's ability to meet expected revenues and maintain its
financial condition which could be affected by any of the following: general
domestic and international economic conditions including interest rate and
currency exchange rate fluctuations, electronics industry market conditions and
growth rates, acquisitions, the cyclical nature of the Company's business,
government and regulatory policies, technological developments and changes in
the competitive environment in which the Company operates. Persons reading this
Form 10-Q are cautioned that such forward-looking statements are only
predictions and that actual events or results may differ materially. In
evaluating such statements, readers should specifically consider the various
factors which could cause actual events or results to differ materially from
those indicated by such forward-looking statements.
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<PAGE>
PART II--OTHER INFORMATION
ITEMS 1 THROUGH 3--NOT APPLICABLE
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 9, 2000, the Annual Meeting of Stockholders of Power-One, Inc. was
held in Agoura Hills, California.
An election of directors was held with the following individual being
elected to the Company's Board of Directors.
Jon E. M. Jacoby (27,129,746 votes for and 2,017,446 votes withheld)
Other matters voted upon and approved at the meeting, and the number of
votes cast with respect to each matter were as follows:
To approve the selection of Deloitte & Touche LLP as the Company's
independent public accountants for the 2000 fiscal year (29,143,853 votes for,
1,515 votes against and 1,824 abstaining).
ITEM 5--NOT APPLICABLE
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 3.2--Amended and Restated Bylaws of the Company
Exhibit 10.1--Revolving Loan Agreement among Power-One, Inc., International
Power Devices, Inc., Melcher Holding AG and HC Power, Inc. and certain
lenders, dated May 10, 2000.
Exhibit 27--Financial Data Schedule
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated February 29, 2000 was filed on April 20,
2000 to provide supplemental consolidated financial statements giving
retroactive effect to the acquisition of HC Power, Inc. by the Company.
A Current Report on Form 8-K dated June 2, 2000 was filed on June 20, 2000
to report that the Company's Board of Directors declared a three-for-two
stock split of the Company's common stock.
A Current Report on Form 8-K dated May 16, 2000 was filed on July 17, 2000,
in accordance with Item 7 of Form 8-K, to provide financial statements and
the pro forma financial information relating to the acquisition of Powec AS
by the Company.
A Current Report on Form 8-K dated July 26, 2000 was filed on August 9, 2000
to report that the Company's Board of Directors declared a rights
distribution with respect to the Company's common stock.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
Dated: August 15, 2000 POWER-ONE, INC.
By: /s/ STEVEN J. GOLDMAN
-----------------------------------------
Steven J. Goldman
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
By: /s/ EDDIE K. SCHNOPP
-----------------------------------------
Eddie K. Schnopp
SR. VICE PRESIDENT, FINANCE,
CHIEF FINANCIAL OFFICER AND SECRETARY
</TABLE>
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