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Power-One 8-K 2007

Documents found in this filing:

  1. 8-K/A
  2. Ex-23
  3. Ex-23

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 8-K/A

CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): October 23, 2006

Commission File Number  000-29454

POWER-ONE, INC.

(Exact name of registrant as specified in its charter)

Delaware

 

77-0420182

(State or other jurisdiction of incorporation)

 

(I.R.S. Employer Identification Number)

 

 

 

740 Calle Plano, Camarillo, California

 

93012

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (805) 987-8741

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o            Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o            Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o            Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o            Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 




This Current Report on Form 8-K/A amends and supplements the Current Report on Form 8-K filed by Power-One, Inc. (the “Company”) on October 26, 2006 (the “Initial Form 8-K”) to include financial statements and pro forma financial information permitted pursuant to Item 9.01 of Form 8-K to be excluded from the Initial Form 8-K and filed by amendment to the Initial Form 8-K no later than 71 days after the date the Initial Form 8-K was required to be filed.

ITEM 2.01.  COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS.

Effective October 23, 2006, pursuant to the Purchase and Sale Agreement (the “Purchase Agreement”), dated September 28, 2006, Power-One, Inc. (the “Company”) completed its acquisition of certain assets and liabilities of Magnetek, Inc. and all outstanding common stock of Magnetek, SpA, a subsidiary of Magnetek, Inc. (collectively the “Power Electronics Group”).  The Power Electronics Group sells power supplies and alternative energy products to a wide range of customers and markets. The Power Electronics Group is a leading builder of power conditioners for commercial fuel cells and multi-megawatt power inverters for large wind generators, as well as a provider of new-generation digital drive systems for coal mining.

The preliminary purchase price for the Power Electronics Group is $68.8 million in cash, subject to contractual closing adjustments, and the assumption of approximately $17.4 million of net indebtedness.  The preliminary purchase price is subject to additional working capital adjustments.

ITEM 9.01.  FINANCIAL STATEMENTS AND EXHIBITS.

(a.)                               FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED

Power Electronics Group combined balance sheets as of July 2, 2006 and July 3, 2005, and the related combined statements of operations, net parent company investment, and cash flows for each of the three years in the period ended July 2, 2006 and Report of Independent Registered Public Accounting Firm.

Power Electronics Group unaudited condensed combined balance sheets as of October 1, 2006 and July 2, 2006, and the unaudited condensed combined statements of operations and cash flows for the three months ended October 1, 2006 and October 2, 2005.

(b.)                              UNAUDITED PRO FORMA FINANCIAL INFORMATION

Unaudited pro forma condensed combined consolidated statements of operations of the Company and the Power Electronics Group for the year ended January 1, 2006 and the nine months ended October 1, 2006.

Unaudited pro forma condensed combined consolidated balance sheet of the Company and the Power Electronics Group as of October 1, 2006.

Notes to the unaudited pro forma condensed combined consolidated financial information of the Company and the Power Electronics Group.

(d.)          EXHIBITS




ITEM 9.01. (a)  FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Magnetek, Inc.

We have audited the accompanying combined balance sheets of the Power Electronics Group of Magnetek, Inc. as of July 2, 2006 and July 3, 2005, and the related combined statements of operations, net parent company investment, and cash flows for each of the three years in the period ended July 2, 2006. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Group’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Power Electronics Group of Magnetek, Inc. at July 2, 2006 and July 3, 2005, and the combined results of its operations and its cash flows for each of the three years in the period ended July 2, 2006, in conformity with accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the Power Electronics Group of Magnetek, Inc. will continue as a going concern.  As more fully described in Note 1, the parent company has incurred recurring operating losses, has not complied with certain covenants of loan agreements with banks and has significant future cash flow commitments.  These conditions raise substantial doubt about the parent company’s ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 1.  The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities of the Power Electronics Group of Magnetek, Inc. that may result from the outcome of this uncertainty.

Ernst & Young LLP

Woodland Hills, CA

October 12, 2006




POWER ELECTRONICS GROUP OF MAGNETEK, INC.

COMBINED STATEMENTS OF OPERATIONS

For the years ended
(Amounts in thousands)

 

July 2,
2006

 

July 3,
2005

 

June 27,
2004

 

 

 

 

 

 

 

 

 

Net sales

 

$

160,541

 

$

170,176

 

$

166,605

 

Cost of sales

 

134,151

 

134,094

 

133,507

 

Gross profit

 

26,390

 

36,082

 

33,098

 

Research and development

 

11,557

 

10,680

 

9,894

 

Sales, general and administrative

 

20,791

 

18,597

 

19,831

 

Goodwill impairment charge

 

21,861

 

 

 

Income (loss) from operations

 

(27,819

)

6,805

 

3,373

 

Non operating expense (income):

 

 

 

 

 

 

 

Interest income

 

(326

)

(62

)

(154

)

Interest expense

 

1,524

 

1,311

 

1,576

 

Income (loss) before provision for income taxes

 

(29,017

)

5,556

 

1,951

 

Provision (benefit) for income taxes

 

(2,996

)

1,383

 

1,720

 

Net income (loss)

 

$

(26,021

)

$

4,173

 

$

231

 

 

The accompanying notes are an integral part of these combined financial statements.

1




POWER ELECTRONICS GROUP OF MAGNETEK, INC.

COMBINED BALANCE SHEETS

As of
(Amounts in thousands)

 

July 2,
2006

 

July 3,
2005

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

1,491

 

$

6,259

 

Accounts receivable, less allowance for doubtful accounts of $3,159 in 2006 and $3,457 in 2005

 

48,217

 

41,913

 

Inventories

 

45,513

 

40,914

 

Deferred income taxes

 

1,982

 

3,190

 

Prepaid expenses and other current assets

 

3,176

 

3,158

 

Total current assets

 

100,379

 

95,434

 

Property, plant and equipment:

 

 

 

 

 

Land

 

1,302

 

1,240

 

Buildings and improvements

 

13,142

 

12,791

 

Machinery and equipment

 

107,435

 

98,063

 

Less accumulated depreciation

 

(95,110

)

(84,241

)

Net property, plant and equipment

 

26,769

 

27,853

 

Note receivable from Parent Company

 

3,253

 

 

Goodwill

 

14,313

 

35,583

 

Other assets

 

1,436

 

1,682

 

Total assets

 

$

146,150

 

$

160,552

 

 

 

 

 

 

 

Liabilities and net Parent Company investment

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

34,985

 

$

29,564

 

Accrued liabilities

 

5,926

 

3,055

 

Current portion of long-term debt

 

3,040

 

1,775

 

Total current liabilities

 

43,951

 

34,394

 

Long-term debt, net of current portion

 

21,254

 

19,475

 

Other long-term liabilities

 

8,531

 

7,627

 

Deferred income taxes

 

3,927

 

9,585

 

Advance from Parent Company

 

11,400

 

9,639

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Net Parent Company investment:

 

 

 

 

 

Investment by Parent Company

 

68,497

 

68,497

 

Retained earnings (deficit)

 

(1,742

)

24,279

 

Accumulated other comprehensive loss

 

(9,668

)

(12,944

)

Total net Parent Company investment

 

57,087

 

79,832

 

Total liabilities and net Parent Company investment

 

$

146,150

 

$

160,552

 

 

The accompanying notes are an integral part of these combined financial statements.

2




POWER ELECTRONICS GROUP OF MAGNETEK, INC.

COMBINED STATEMENTS OF NET PARENT COMPANY INVESTMENT

(Amounts in thousands)

 

 

Investment by 
Parent Company

 

Retained 
Earnings 
(Deficit)

 

Accumulated Other 
Comprehensive Loss

 

Total

 

Balance, June 29, 2003

 

$

68,497

 

$

19,875

 

$

(14,613

)

$

73,759

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

231

 

 

231

 

Translation adjustments

 

 

 

2,174

 

2,174

 

Comprehensive income

 

 

 

 

2,405

 

Balance, June 27, 2004

 

$

68,497

 

$

20,106

 

$

(12,439

)

$

76,164

 

Net income

 

 

4,173

 

 

4,173

 

Translation adjustments

 

 

 

(505

)

(505

)

Comprehensive loss

 

 

 

 

3,668

 

Balance, July 3, 2005

 

$

68,497

 

$

24,279

 

$

(12,944

)

$

79,832

 

Net loss

 

 

(26,021

)

 

(26,021

)

Translation adjustments

 

 

 

3,276

 

3,276

 

Comprehensive loss

 

 

 

 

(22,745

)

Balance, July 2, 2006

 

$

68,497

 

$

(1,742

)

$

(9,668

)

$

57,087

 

 

The accompanying notes are an integral part of these combined financial statements.

3




POWER ELECTRONICS GROUP OF MAGNETEK, INC.

COMBINED STATEMENTS OF CASH FLOWS

For the years ended
(Amounts in thousands)

 

July 2,
2006

 

July 3,
2005

 

June 27,
2004

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

(26,021

)

$

4,173

 

$

231

 

Adjustments to reconcile net income (loss) from operations to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation

 

7,125

 

7,464

 

7,706

 

Goodwill and asset impairment charges

 

22,177

 

 

 

Changes in operating assets and liabilities

 

(4,322

)

(4,534

)

(6,645

)

Total adjustments

 

24,980

 

2,930

 

1,061

 

Net cash provided by (used in) operating activities

 

(1,041

)

7,103

 

1,292

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

(5,279

)

(7,545

)

(5,237

)

Net cash used in investing activities

 

(5,279

)

(7,545

)

(5,237

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Borrowings (repayments) under line-of-credit agreements

 

2,384

 

9,472

 

(5,393

)

Borrowings (repayments) under capital leases and long term notes

 

660

 

(2,053

)

1,772

 

(Increase) decrease in note receivable from Parent Company

 

(3,253

)

 

7,187

 

Increase (decrease) in advance from Parent Company

 

1,761

 

(3,003

)

2,231

 

Net cash provided by financing activities

 

1,552

 

4,416

 

5,797

 

Net increase (decrease) in cash

 

(4,768

)

3,974

 

1,852

 

Cash at the beginning of the year

 

6,259

 

2,285

 

433

 

Cash at the end of the year

 

$

1,491

 

$

6,259

 

$

2,285

 

 

The accompanying notes are an integral part of these combined financial statements.

4




POWER ELECTRONICS GROUP OF MAGNETEK, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

(All amounts in the notes to combined financial statements are expressed in thousands unless otherwise noted)

1.   Summary of Significant Accounting Policies

Principles of Combination

The combined financial statements include the accounts of the Power Electronics Group (“PEG”) of Magnetek, Inc. (“Parent Company”).  PEG is comprised of Magnetek, SpA and its subsidiaries (Magnetek, Electronics (Shenzhen) Co. Ltd; Magnetek kFT; and Magnetek Vetriebsgesellschaft GmbH) together with the U.S. division of PEG. All significant inter-group accounts and transactions have been eliminated.

Description of Business and Basis of Presentation

PEG is a global provider of digital power electronic products, primarily AC-to-DC switching power supplies; AC-to-DC rectifiers and battery chargers, DC-to-DC power converters and DC-to-AC power inverters.  These products are used primarily in telecommunications, data processing and storage, digital imaging, semiconductor processing and testing equipment, medical instrumentation and home appliances.  PEG also provides power control systems for street light monitoring and control and utility grid monitoring.

The results of PEG have historically been included in the consolidated financial statements of the Parent Company.   The accompanying combined financial statements of PEG have been prepared on a stand alone basis.  In accordance with Securities and Exchange Commission’s Staff Accounting Bulletin No. 55, the following methods have been applied to PEG’s results in deriving these financial statements:

Expense Allocation

Direct costs incurred by the Parent Company that are directly attributable to the operations of PEG, such as insurance and employee benefit costs, are charged to PEG by the Parent Company.  These direct costs relate solely to the U.S. division of PEG and aggregated $1,043, $1,350 and $1,372 for the fiscal years 2006, 2005 and 2004, respectively.  PEG is also charged a management fee by the Parent Company for providing certain services, including marketing support, strategic planning, technology consultancy, and financial reporting assistance.  The fee was $1,020 in each of the three fiscal years ended July 2, 2006 and is included in general and administrative expense in the accompanying combined statements of operations.

Income Tax Expense

Income tax expense for the foreign entities included in PEG has been determined based on the respective tax jurisdictions and tax returns.  Income tax expense for the U.S. division of the Parent Company (that is included in the Parent Company’s consolidated tax return) has been determined as if the division filed a separate return.

Interest Expense

Interest expense includes interest on debt that has been incurred by Magnetek SpA.  The debt is reflected on the combined balance sheet.  Interest is not charged on the Advance from Parent, which is entirely related to the U.S. division, as the Parent Company is not servicing debt that is specifically related to the division’s operations.

The accompanying combined financial statements have been prepared on the basis of PEG continuing as a going concern. During recent years, the Parent Company has incurred significant net losses, and an adverse decision in a patent arbitration. As a result the Parent Company is not in compliance with certain financial covenants included in its credit agreements. Additionally, future cash flows will be negatively impacted by scheduled debt repayments and mandatory contributions to the Parent Company’s defined benefit pension plan. These conditions raise substantial doubt about the Parent Company’s ability to continue as a going concern.

During the fourth quarter of fiscal 2006, the Parent Company completed a review of various cash raising alternatives and committed to a plan to divest PEG (see Note 15 of Notes to Combined Financial Statements).  The Parent Company intends to use proceeds from the sale of this business to repay its debt and substantially fund its pension plan which will result in a significant reduction in interest cost and pension expense.  The Parent Company also plans to further reduce corporate overhead expenses.  Management believes these actions will enable the Parent Company to both address its pending obligations and improve future profitability and cash flow in its continuing operations. As a result, the combined financial statements for PEG do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of the Parent Company’s or PEG’s ability to continue as a going concern.

5




Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.   Significant areas requiring management estimates include the following key financial areas:

Accounts Receivable

Accounts receivable represent receivables from customers in the ordinary course of business.  PEG is subject to losses from uncollectible receivables in excess of its allowances.  PEG maintains allowances for doubtful accounts for estimated losses from customers’ inability to make required payments.  In order to estimate the appropriate level of this allowance, PEG analyzes historical bad debts, customer concentrations, current customer creditworthiness, current economic trends and changes in customer payment patterns.  If the financial conditions of PEG’s customers were to deteriorate and to impair their ability to make payments, additional allowances may be required in future periods.  PEG’s management believes that all appropriate allowances have been provided.

Inventories

PEG’s inventories are stated at the lower of cost or market.  Cost is determined by the first-in, first-out (“FIFO”) method, including material, labor and factory overhead.  Inventory on hand may exceed future demand either because the product is obsolete, or the amount on hand is more than can be used to meet future needs.  PEG identifies potentially obsolete and excess inventory by evaluating overall inventory levels.  In assessing the ultimate realization of inventories, PEG is required to make judgments as to future demand requirements and compare those with the current or committed inventory levels.  If future demand requirements are less favorable than those projected by management, additional inventory write-downs may be required.

Reserves for Contingent Liabilities

PEG periodically records the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes.  The accounting for such events is prescribed under Statement of Financial Accounting Standard (“SFAS”) No. 5, Accounting for Contingencies.  SFAS No. 5 defines a contingency as “an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.”

SFAS No. 5 does not permit the accrual of gain contingencies under any circumstances.  For loss contingencies, the loss must be accrued if (1) information is available that indicates it is probable that the loss has been incurred, given the likelihood of uncertain events; and (2) that the amount of the loss can be reasonably estimated.

The accrual of a contingency involves considerable judgment on the part of management.  PEG uses its internal expertise, and outside experts, as necessary, to help estimate the probability that a loss has been incurred and the amount (or range) of the loss.

Income Taxes

PEG uses the liability method to account for income taxes.  The preparation of combined financial statements involves estimating PEG’s current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.  These differences result in deferred tax assets and liabilities, which are included in the combined balance sheets.  An assessment of the recoverability of the deferred tax assets is made, and a valuation allowance is established based upon this assessment.

The results of the U.S. division of PEG are included in the Parent’s tax return for filing purposes.  In preparing the combined financial statements, the tax impacts from the results of the U.S. division of PEG are presented as if the division was filing a separate return.

Revenue Recognition

PEG’s policy is to recognize revenue when the earnings process is complete.  The criteria used in making this determination are persuasive evidence that an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured.  Sales are recorded net of returns and allowances, which are estimated using historical data, at the time of sale.

6




Revenue is recognized upon shipment, except in those cases where product is shipped to customers with consignment stock agreements, wherein revenue is recognized when the customer removes the product from consignment stock.  With the exception of consignment stock, terms of shipment are FOB shipping point, and payment is not contingent upon resale or any other matter other than passage of time.  As a result, title to goods passes upon shipment.  Amounts billed to customers for shipping costs are reflected in net sales; shipping costs are reflected in cost of sales.

Sales to distributors are recorded with appropriate reserves for future returns in accordance with SFAS No. 48, Revenue Recognition When Right of Return Exists, and generally do not include future installation obligations or acceptance requirements.

Property, Plant and Equipment

Additions and improvements are capitalized at cost, whereas expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is provided over the estimated useful lives of the respective assets principally on the straight-line method (machinery and equipment normally five to ten years, buildings and improvements normally ten to forty years).

Goodwill

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, PEG reviews the carrying value of goodwill at least annually, and more frequently if indicators of potential impairment arise, using fair market values and discounted future cash flow analyses as prescribed in SFAS 142.

Recent Accounting Pronouncements

In November 2005, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4.  The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current period charges and require the allocation fixed production overheads to inventory based on normal capacity of the production facilities.  The pronouncement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.  The adoption of this pronouncement on July 4, 2005 did not have a material effect on PEG’s financial position, results of operations or liquidity.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections.  SFAS No. 154 replaces APB No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and establishes retrospective application as the required method for reporting a change in accounting principle.  SFAS No. 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable.  The reporting of a correction of an error by restating previously issued financial statements is also addressed.  SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.  The adoption of this pronouncement on July 3, 2006, is not expected to have a material effect on PEG’s financial position, results of operations or liquidity.

On July 13, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”).  FIN 48 creates a single model to address uncertainty in tax positions, clarifying the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 applies to all tax positions related to income taxes subject to SFAS No. 109, Accounting for Income Taxes.  FIN 48 utilizes a two-step approach for evaluating tax positions.  Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is “more-likely-than-not” to be sustained upon examination.  Measurement (step two) is only addressed if step one has been satisfied.  Those tax positions failing to qualify for initial recognition are recognized in the first subsequent interim period they meet the more-likely-than-not standard, or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute of limitations.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption would be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings.  The adoption of this pronouncement is not expected to have a material effect on PEG’s financial position, results of operations, or liquidity.

Research and Development

Expenditures for research and development are charged to expense as incurred and aggregated $11,557, $10,680, and $9,894 for the fiscal years 2006, 2005, and 2004, respectively.

Advertising

Expenditures for advertising are charged to expense as incurred and aggregated $85, $168 and $88 for the fiscal years 2006, 2005 and 2004, respectively.

7




Foreign Currency Translation

PEG’s foreign entities’ accounts are measured using local currency as the functional currency.  Assets and liabilities are translated at the exchange rate in effect at year-end.  Revenues and expenses are translated at the rates of exchange prevailing during the year.  Unrealized translation gains and losses arising from differences in exchange rates from period to period are included as a component of accumulated other comprehensive loss in net Parent Company investment.

Derivative Financial Instruments

PEG periodically uses derivative financial instruments to reduce financial market risks. These instruments are used to hedge foreign currency and interest rate market exposures. PEG does not use derivative financial instruments for speculative or trading purposes.  The fair values of the derivatives are recorded in other current or non-current assets or liabilities in the accompanying combined balance sheet.  No hedging relationship is designated for these derivatives held and they are marked to market through earnings.  The fair value of these derivative instruments is based on quoted market prices.  Cash flows from financial instruments are recognized in the combined statement of cash flows in a manner consistent with the underlying transaction.

At July 2, 2006, PEG had two interest rate swap agreements outstanding to hedge exposure to variable interest rates for an aggregate of Euro 7,339 principal amount of debt whereby PEG pays interest based on fixed rates and receives interest at variable rates.  One contract for Euro 2,339 expires in 2008 and the other contract for Euro 5,000 expires in 2011.  The aggregate fair value of these contracts was $159 at July 2, 2006 and has been recorded in other assets.  Unrealized gain on the interest rate swap contracts for fiscal 2006 was $159 which has been recorded in interest income.

Fiscal Year

PEG uses a fifty-two, fifty-three week fiscal year ending on the Sunday nearest June 30.  The fiscal years ended July 2, 2006 and June 27, 2004 each contained fifty-two weeks. The fiscal year ended July 3, 2005 contained fifty-three weeks.

2.  Goodwill

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is no longer amortized but rather reviewed for impairment annually or more frequently if certain indicators arise.  PEG is considered a reporting unit for purposes of the Parent Company’s annual test for goodwill impairment.  The Parent Company conducted its impairment test for fiscal 2006 in the fourth quarter.  The impairment test, which consists primarily of discounted cash flow analyses, indicated impairment in the carrying value of goodwill in PEG.

Under the provisions of SFAS No. 142, the best indication of fair value of a reporting unit is the amount at which the unit as a whole could be bought or sold in a current transaction between willing parties.  As indicated in Note 1 of Notes to Combined Financial Statements, during the fourth quarter of fiscal 2006, the Parent Company committed to a plan to divest PEG.  Therefore, in evaluating impairment in the carrying value of goodwill for the business, management used information contained in indications of value received from third parties during the process of marketing PEG.  Based on this information, a goodwill impairment charge of $21,861 has been recorded in PEG’s financial results for fiscal 2006, representing the difference between the estimated fair value and the Parent Company’s carrying amount of PEG.

The changes in the carrying value of goodwill for the years ended July 2, 2006 and July 3, 2005 are as follows:

 

Total

 

Balance at June 27, 2004

 

$

35,787

 

Currency translation

 

(204

)

Balance at July 3, 2005

 

$

35,583

 

Impairment charge

 

(21,861

)

Currency translation

 

591

 

Balance at July 2, 2006

 

$

14,313

 

 

8




3.  Inventories

Inventories consist of the following:

 

 

July 2,

 

July 3,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Raw materials

 

$

23,245

 

$

22,852

 

Work-in-process

 

11,538

 

8,460

 

Finished goods

 

10,730

 

9,602

 

 

 

$

45,513

 

$

40,914

 

 

4.  Long-Term Debt and Bank Borrowing Arrangements

Long-term debt consists of the following:

 

 

July 2,

 

July 3,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Revolving bank loans

 

$

18,597

 

$

16,213

 

Long term notes

 

5,697

 

5,037

 

 

 

24,294

 

21,250

 

Less current portion

 

3,040

 

1,775

 

 

 

$

21,254

 

$

19,475

 

 

Bank Borrowing Arrangements

PEG’s European entity, Magnetek, SpA (SpA) maintains revolving borrowing arrangements with local banks, primarily to support working capital needs.  Available borrowings under these arrangements aggregate approximately Euro 20.0 million depending in part upon levels of accounts receivable, and bear interest at various rates ranging from 3% to 8%.  In addition, SpA has an agreement with a European bank to provide borrowings secured by SpA’s land and building. Borrowings under this agreement bear interest at EURIBOR plus 1.5%.  The initial commitment to lend under this agreement was Euro 7.0 million, and the commitment has been reduced ratably on a quarterly basis beginning March 31, 2004 and ending September 30, 2013.  The agreement contains financial covenants that require a minimum EBITDA as a percentage of net revenue and a maximum percentage of debt to shareholder’s equity.  At July 2, 2006, SpA was in compliance with these covenants.  SpA also has certain long-term notes related mainly to equipment purchases.   At July 2, 2006 the weighted average interest rate on SpA’s long-term debt was approximately 4.6%.

Aggregate principal maturities on long-term debt outstanding at July 2, 2006, are as follows:

Fiscal year

 

 

 

 

 

 

 

2007

 

$

3,040

 

2008

 

2,890

 

2009

 

2,045

 

2010

 

1,087

 

2011

 

1,003

 

Thereafter

 

14,229

 

 

 

$

24,294

 

 

9




5.  Fair Values of Financial Instruments

The carrying amounts of certain financial instruments such as cash and borrowings under revolving credit agreements approximate their fair values, based on the short-term nature of these instruments and primarily variable interest rates on borrowings.   The fair value of the outstanding interest rate swap contracts are based on quoted market prices.

6.  Asset Impairment and Other Charges

In the fourth quarter of fiscal 2006, PEG recorded impairment charges aggregating $26,703.  The charges consisted of $21,861 for goodwill; $4,526 for inventory; and $316 for fixed assets.  The charges are included in the accompanying combined statement of operations as follows:  goodwill in goodwill impairment charge; inventory in cost of sales; fixed asset in general and administrative expense.

In fiscal 2004, PEG recorded a $1.7 million charge to increase its reserve for accounts receivable due to the bankruptcy filing by a customer.  The charge is included in general and administrative expense in the accompanying combined statement of operations.

7.  Restructuring Costs

During fiscal 2004, PEG began a series of restructuring activities that impacted primarily its foreign operations.  SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities requires that liabilities for costs associated with exit or disposal activities initiated after December 31, 2002, be recognized when the liability is incurred, with the exception of termination of certain leases and contracts.

During the second quarter of fiscal 2004, PEG began a workforce reduction of approximately 200 positions in Italy.  PEG completed these activities in fiscal 2005.  Costs incurred were $296 and $1,277 for fiscal years 2005 and 2004, respectively, and are included in general and administrative expense in the accompanying combined statement of operations.

During the fourth quarter of fiscal 2006, PEG finalized negotiations with the labor union in Italy to reduce the workforce at its Valdarno, Italy facility by 55 positions and communicated the planned reduction to its workforce. The reduction is expected to occur over the next three years.  PEG currently estimates the total cost of the reduction at Euro 1.5 million (approximately $1.8 million).  As of July 2, 2006 approximately $300 was paid under this program and approximately $1.5 million is included in accrued liabilities in the accompanying combined balance sheet.

8.  Income Taxes

The components of provision for income taxes are as follows:

 

 

July 2,

 

July 3,

 

June 27,

 

Fiscal year ended

 

2006

 

2005

 

2004

 

Current:

 

 

 

 

 

 

 

Federal

 

$

 

$

 

$

 

Foreign

 

1,505

 

898

 

959

 

Deferred:

 

 

 

 

 

 

 

Federal

 

(3,133

)

673

 

674

 

Foreign

 

(1,368

)

(188

)

87

 

Total income tax provision

 

$

(2,996

)

$

1,383

 

$

1,720

 

 

PEG’s foreign taxes are from its foreign entities in Italy, Hungary and China

PEG’s U.S. business is a division of the Parent Company and is included in the Parent Company’s consolidated U.S. tax return.  The tax provision has been calculated as if the U.S. division filed a separate return.  The U.S. division had net operating losses for tax purposes in each of the three years ended July 2, 2006 and therefore no Federal taxes are reflected in PEG’s provision for income taxes.  The Federal deferred provision for fiscal 2005 and 2004 relates to tax deductible amortization of goodwill that is no longer amortized for financial reporting purposes. The Federal deferred benefit in fiscal 2006 reflects the tax impact associated with the goodwill impairment charge recorded during the fiscal year.

10




A reconciliation of PEG’s effective tax rate to the statutory Federal tax rate is as follows:

 

 

July 2,

 

July 3,

 

June 27,

 

 

 

2006

 

2005

 

2004

 

Fiscal year ended

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Benefit computed at the statutory rate

 

$

(10,404

)

35.0

 

$

1,945

 

35.0

 

$

683

 

35.0

 

Foreign tax rates in excess of federal statutory rate

 

(99

)

0.3

 

(1,290

)

(23.2

)

425

 

21.8

 

Losses not benefited

 

7,507

 

(25.2

)

728

 

13.1

 

612

 

31.4

 

Total income tax provision

 

$

(2,996

)

10.1

 

$

1,383

 

24.9

 

$

1,720

 

88.2

 

 

Income (loss) before provision for income taxes of PEG’s foreign entities was approximately $(13,095), $5,713 and $1,774 for fiscal years 2006, 2005 and 2004, respectively.  Losses not benefited primarily reflect the establishment of valuation allowances against deferred tax assets.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  Significant components of PEG’s deferred tax liabilities and assets as of July 2, 2006 and July 3, 2005 are as follows:

 

 

July 2,

 

July 3,

 

 

 

2006

 

2005

 

Deferred tax liabilities:

 

 

 

 

 

Depreciation and amortization (including differences in the basis of acquired assets)

 

$

(3,927

)

$

(9,585

)

Total deferred tax liabilities

 

(3,927

)

(9,585

)

Deferred tax assets:

 

 

 

 

 

Inventory and other reserves

 

4,377

 

2,205

 

Net operating loss and capital loss carryforwards

 

10,254

 

7,048

 

Total gross deferred tax assets

 

14,631

 

9,253

 

Less: Valuation allowance

 

(12,649

)

(6,063

)

Net deferred tax asset / (liability)

 

$

(1,945

)

$

(6,395

)

 

PEG records valuation allowances against its deferred tax assets, when necessary, in accordance with SFAS No. 109, Accounting for Income Taxes.  Realization of deferred tax assets (such as net operating loss carryforwards and income tax credits) is dependent on future taxable earnings and is therefore uncertain.  To the extent PEG believes that recovery is unlikely, a valuation allowance is established against its deferred tax asset, increasing its income tax expense in the period such determination is made.  Due to the uncertainty surrounding the timing of realizing the benefits of its deferred tax assets in future tax returns, PEG has recorded a valuation allowance against its otherwise recognizable deferred tax assets in Italy and the U.S.

PEG’s entity in China had a tax holiday arrangement with the tax authorities wherein no income taxes were owed on pretax profits in China through calendar 2004, and income taxes will be paid at 50% of the current 15% tax rate (or 7.5%) from calendar 2005 through calendar 2007.

For U.S. income tax purposes, PEG has a net operating loss carry forward of $19,751 and $16,916 as of July 2, 2006 and July 3, 2005, respectively, expiring between fiscal years 2018 and 2026.  For Italian income tax purposes, PEG has a net operating loss carry forward of $10,082 and $3,575 as of July 2, 2006 and July 3, 2005, respectively, expiring between fiscal years 2007 and 2011.

11




9.  Commitments and Contingencies

Leases

PEG leases certain facilities and machinery and equipment primarily under operating lease arrangements. Future minimum rental payments under noncancelable operating leases as of July 2, 2006 are as follows:

 

Minimum

 

Minimum

 

Net

 

 

 

Lease

 

Sublease

 

Lease

 

Fiscal Year

 

Payments

 

Rentals

 

Payments

 

2007

 

$

841

 

$

66

 

$

775

 

2008

 

841

 

66

 

775

 

2009

 

753

 

66

 

687

 

2010

 

489

 

66

 

423

 

2011

 

458

 

66

 

392

 

Thereafter

 

1,363

 

 

1,363

 

 

 

$

4,745

 

$

330

 

$

4,415

 

 

For the fiscal years 2006, 2005 and 2004, rent expense was $783, $545 and $510 respectively, while sublease rental income was $66, $0 and $0 respectively.

Litigation

Hitachi G.E. Lighting (Hitachi) has filed a claim in Italy against PEG in the amount of $1.5 million alleging defective product sold by PEG to Hitachi between July 1999 and January 2002.  Hitachi presented evidence of damages to the court and PEG has challenged the adequacy of the evidence.  The court has yet to issue a decision regarding the claim.

MBM Italia has filed a civil action in Italy against PEG in the amount of Euro 1.5 million (approximately $1.9 million) alleging the use of unlicensed software that PEG purchased from a third party.  Magnetek has asked for a dismissal of the action and a request for indemnification from the third party vendor.  MBM asked the court to issue an injunction against PEG prohibiting PEG’s use of the software which the court has rejected.  A trial was held in December, 2005 and the court has yet to issue a decision.

PEG is aggressively defending these matters and management does not believe the ultimate outcome, individually or collectively, will have a material adverse effect on PEG’s financial position or results of operations.

10.  Related Party Transactions

PEG sells certain products to affiliated companies and businesses that are also owned by the Parent Company.  Sales to these affiliates are generally made at arms-length negotiated prices and were $3,722, $3,786 and $4,178 for the fiscal years 2006, 2005 and 2004, respectively.

Direct costs incurred by the Parent Company that are directly attributable to the operations of PEG, such as insurance and employee benefit costs, are charged to PEG by the Parent Company.  These direct costs relate solely to the U.S. division of PEG and aggregated $1,043, $1,350 and $1,372 for the fiscal years 2006, 2005 and 2004, respectively.  PEG is also charged a management fee by the Parent Company for providing certain services, including marketing support, strategic planning, technology consultancy, and financial reporting assistance.  The fee was $1,020 in each of the three fiscal years ended July 2, 2006 and is included in general and administrative expense in the accompanying combined statements of operations.

On September 30, 2005, PEG provided a loan to the Parent Company in the amount of Euro 2.5 million (approximately $3 million at the date of the loan).  The loan bears interest at 5.5% payable annually and is due September 30, 2008.  The balance of the loan, including accrued interest of approximately $115, is included as Note receivable from Parent Company in the accompanying combined balance sheet as of July 3, 2006.

12




11.  Accrued Liabilities

Accrued liabilities consisted of the following at fiscal year end:

 

 

July 2,

 

July 3,

 

 

 

2006

 

2005

 

Salaries, wages and related items

 

$

2,674

 

$

2,331

 

Severance

 

1,543

 

 

Income Taxes

 

318

 

154

 

Other

 

1,391

 

570

 

 

 

$

5,926

 

$

3,055

 

 

PEG offers warranties for certain products that it manufactures, with the warranty term generally ranging from one to two years.  Warranty reserves are established for costs expected to be incurred after the sale and delivery of products under warranty, based mainly on known product failures and historical experience.

Changes in the warranty reserve for fiscal 2006 and 2005 were as follows:

 

 

July 2,

 

July 3,

 

 

 

2006

 

2005

 

Balance at beginning of year

 

$

55

 

$

76

 

Additions charged to earnings

 

102

 

11

 

Use of reserve for warranty obligations

 

(30

)

(32

)

Balance at end of year

 

$

127

 

$

55

 

 

12.  Supplemental Cash Flow Information

Changes in operating assets and liabilities were as follows:

 

 

July 2,

 

July 3,

 

June 27,

 

Fiscal year ended

 

2006

 

2005

 

2004

 

 

 

 

 

 

 

 

 

(Increase) decrease in accounts receivable

 

$

(5,500

)

$

3,285

 

$

(9,646

)

(Increase) decrease in inventories

 

(3,796

)

507

 

(4,783

)

(Increase) decrease in prepaids and other current assets

 

(18

)

(1,994

)

1,948

 

Decrease in other operating assets

 

246

 

1,172

 

517

 

Increase (decrease) in accounts payable

 

5,421

 

(5,164

)

5,343

 

(Increase) decrease in accrued liabilities

 

2,871

 

(2,402

)

2,139

 

Decrease in deferred income taxes

 

(4,450

)

(15

)

(532

)

Increase (decrease) in other operating liabilities

 

904

 

77

 

(1,631

)

 

 

 

 

 

 

 

 

 

 

$

(4,322

)

$

(4,534

)

$

(6,645

)

Cash paid for interest and income taxes :

 

 

 

 

 

 

 

Interest

 

$

946

 

$

599

 

$

1,234

 

Income taxes

 

$

1,050

 

$

1,199

 

$

790

 

 

13.  Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consisted entirely of foreign currency translation adjustments at July 2, 2006 and July 3, 2005.

13




14.  Business Segment and Geographic Information

PEG currently operates within a single business segment, digital power products. PEG sells its products primarily to large original equipment manufacturers. PEG performs ongoing credit evaluations of its customers’ financial conditions and generally requires no collateral.  PEG had a customer whose purchases represented 11% of PEG’s total revenue in fiscal year 2006.

Information with respect to PEG’s foreign operations follows:

 

 

July 2,

 

July 3,

 

June 27,

 

For the fiscal year

 

2006

 

2005

 

2004

 

Sales

 

$

103,851

 

$

122,245

 

$

125,853

 

Income from operations

 

(8,801

)

5,825

 

2,773

 

Identifiable assets

 

125,975

 

125,907

 

121,046

 

Capital expenditures

 

5,216

 

7,282

 

4,941

 

Depreciation and amortization

 

6,562

 

6,907

 

7,115

 

 

Sales by foreign entities include only sales of products to customers outside of the U.S.   The majority of PEG’s foreign operations are in Italy.  Fiscal 2006 sales by the Italian operation (including sales to U.S. customers) were $93.6 million.

Export sales from the United States were $3,017, $4,632 and $3,164 in fiscal years 2006, 2005 and 2004, respectively.

15. Subsequent Events (unaudited)

Subsequent to July 2, 2006, the Parent Company entered into an agreement to sell PEG to Power One, Inc. for $71.7 million in cash plus the assumption of approximately $16.7 million in debt, subject to customary pre-closing and post-closing tangible net worth and net debt adjustments.  Pursuant to the Purchase and Sale Agreement (the “Agreement”) dated September 28, 2006, by and between the Parent Company and Power One, Inc., Power One, Inc. will purchase PEG through the acquisition of all of the outstanding shares of Magnetek SpA and of the assets and liabilities of the U.S. division.  The terms of the Agreement were negotiated at arms-length.

The Agreement provides for indemnification for breaches of representations and warranties and other customary matters that the Parent Company believes are typical for this type of transaction, and for the satisfaction or waiver of customary closing conditions.  The Parent Company expects the transaction to be completed during October 2006.

14




UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED OCTOBER 1, 2006 AND OCTOBER 2, 2005 AND BALANCE SHEETS AS OF OCTOBER 1, 2006 AND JULY 2, 2006

POWER ELECTRONICS GROUP OF MAGNETEK, INC.
UNAUDITED CONDENSED COMBINED BALANCE SHEETS

(Amounts in thousands)

 

October 1, 2006

 

July 2, 2006

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

2,532

 

$

1,491

 

Accounts receivable, net

 

35,280

 

48,217

 

Inventories

 

49,085

 

45,513

 

Deferred income taxes

 

1,982

 

1,982

 

Prepaid expenses and other current assets

 

3,360

 

3,176

 

TOTAL CURRENT ASSETS

 

92,239

 

100,379

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT, net

 

26,187

 

26,769

 

NOTE RECEIVABLE FROM PARENT COMPANY

 

3,356

 

3,253

 

GOODWILL, net

 

14,441

 

14,313

 

OTHER ASSETS

 

1,802

 

1,436

 

TOTAL ASSETS

 

$

138,025

 

$

146,150

 

 

 

 

 

 

 

LIABILITIES AND NET PARENT COMPANY INVESTMENT

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Accounts payable

 

$

37,452

 

$

34,985

 

Accrued liabilities

 

6,508

 

5,926

 

Current portion of long-term debt

 

2,239

 

3,040

 

TOTAL CURRENT LIABILITIES

 

46,199

 

43,951

 

 

 

 

 

 

 

LONG-TERM DEBT, net of current portion

 

15,123

 

21,254

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

8,655

 

8,531

 

 

 

 

 

 

 

DEFERRED INCOME TAXES

 

3,641

 

3,927

 

 

 

 

 

 

 

ADVANCE FROM PARENT COMPANY

 

9,741

 

11,400

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

NET PARENT COMPANY INVESTMENT:

 

 

 

 

 

Investment by Parent Company

 

68,497

 

68,497

 

Retained earnings (deficit)

 

(4,490

)

(1,742

)

Accumulated other comprehensive loss

 

(9,341

)

(9,668

)

TOTAL NET PARENT COMPANY INVESTMENT

 

54,666

 

57,087

 

TOTAL LIABILITIES AND NET PARENT COMPANY INVESTMENT

 

$

138,025

 

$

146,150

 

 

The accompanying notes are an integral part of these combined financial statements.

15




POWER ELECTRONICS GROUP OF MAGNETEK, INC.
UNAUDITED CONDENSED COMBINED STATEMENTS OF OPERATIONS

 

 

Three Months Ended

 

(Amounts in thousands)

 

October 1,
2006

 

October 2,
2005

 

 

 

 

 

 

 

NET SALES

 

$

44,252

 

$

36,831

 

COST OF SALES

 

39,771

 

28,786

 

GROSS PROFIT

 

4,481

 

8,045

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

Research and development

 

2,392

 

2,567

 

Sales, general and administrative

 

4,150

 

4,205

 

TOTAL EXPENSES

 

6,542

 

6,772

 

 

 

 

 

 

 

INCOME (LOSS) FROM OPERATIONS

 

(2,061

)

1,273

 

 

 

 

 

 

 

NON OPERATING (EXPENSE) INCOME:

 

 

 

 

 

Interest income

 

 

9

 

Interest expense

 

(362

)

(304

)

Total interest expense, net

 

(362

)

(295

)

 

 

 

 

 

 

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES

 

(2,423

)

978

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

325

 

616

 

NET INCOME (LOSS)

 

$

(2,748

)

$

362

 

 

The accompanying notes are an integral part of these combined financial statements.

16




POWER ELECTRONICS GROUP OF MAGNETEK, INC.
UNAUDITED COMBINED STATEMENTS OF CASH FLOWS

 

 

Three Months Ended

 

(Amounts in thousands)

 

October 1,
2006

 

October 2,
2005

 

 

 

 

 

 

 

CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

 

$

(2,748

)

$

362

 

Adjustments to reconcile net income (loss) from operations to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,639

 

2,254

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

13,032

 

2,043

 

Inventories

 

(3,440

)

(222

)

Prepaid and other current assets

 

(184

)

3,033

 

Other operating assets

 

(494

)

(1,528

)

Accounts payable

 

2,568

 

(4,522

)

Accrued liabilities

 

581

 

903

 

Deferred income taxes

 

(286

)

(1,801

)

Other operating liabilities

 

124

 

244

 

Net cash provided by operating activities

 

10,792

 

766

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(1,057

)

(1,903

)

Net cash used in investing activities

 

(1,057

)

(1,903

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Borrowings (repayments) under line-of-credit agreements, capital leases and long-term debt

 

(6,932

)

(139

)

(Increase) decrease in note receivable from Parent Company

 

(103

)

(3,002

)

Increase (decrease) in advance from Parent Company

 

(1,659

)

136

 

Net cash used in financing activities

 

(8,694

)

(3,005

)

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH

 

1,041

 

(4,142

)

CASH, BEGINNING OF PERIOD

 

1,491

 

6,259

 

CASH, END OF PERIOD

 

$

2,532

 

$

2,117

 

 

The accompanying notes are an integral part of these combined financial statements.

17




POWER ELECTRONICS GROUP OF MAGNETEK, INC.
UNAUDITED NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
Three Months Ended October 1, 2006

(All amounts in the notes to combined financial statements are expressed in thousands unless otherwise noted)

1.   Summary of Significant Accounting Policies

Principles of Combination

The combined financial statements include the accounts of the Power Electronics Group (“PEG”) of Magnetek, Inc. (“Parent Company”).  PEG is comprised of Magnetek, SpA and its subsidiaries (Magnetek, Electronics (Shenzhen) Co. Ltd; Magnetek kFT; and Magnetek Vetriebsgesellschaft GmbH) together with the U.S. division of PEG. All significant inter-group accounts and transactions have been eliminated.  Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to Securities and Exchange Commission rules and regulations.

Description of Business and Basis of Presentation

PEG is a global provider of digital power electronic products, primarily AC-to-DC switching power supplies; AC-to-DC rectifiers and battery chargers, DC-to-DC power converters and DC-to-AC power inverters.  These products are used primarily in telecommunications, data processing and storage, digital imaging, semiconductor processing and testing equipment, medical instrumentation and home appliances.  PEG also provides power control systems for street light monitoring and control and utility grid monitoring.

The results of PEG have historically been included in the consolidated financial statements of the Parent Company.   The accompanying combined financial statements of PEG have been prepared on a stand alone basis.

Recent Accounting Pronouncements

In November 2005, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4.  The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current period charges and require the allocation fixed production overheads to inventory based on normal capacity of the production facilities.  The pronouncement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.  The adoption of this pronouncement on July 4, 2005 did not have a material effect on PEG’s financial position, results of operations or liquidity.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections.  SFAS No. 154 replaces APB No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and establishes retrospective application as the required method for reporting a change in accounting principle.  SFAS No. 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable.  The reporting of a correction of an error by restating previously issued financial statements is also addressed.  SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.  The adoption of this pronouncement on July 3, 2006, is not expected to have a material effect on PEG’s financial position, results of operations or liquidity.

On July 13, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”).  FIN 48 creates a single model to address uncertainty in tax positions, clarifying the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 applies to all tax positions related to income taxes subject to SFAS No. 109, Accounting for Income Taxes.  FIN 48 utilizes a two-step approach for evaluating tax positions.  Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is “more-likely-than-not” to be sustained upon examination.  Measurement (step two) is only addressed if step one has been satisfied.  Those tax positions failing to qualify for initial recognition are recognized in the first subsequent interim period they meet the more-likely-than-not standard, or are resolved through

18




negotiation or litigation with the taxing authority, or upon expiration of the statute of limitations.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption would be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings.  The adoption of this pronouncement is not expected to have a material effect on PEG’s financial position, results of operations, or liquidity.

Fiscal Year

PEG uses a fifty-two, fifty-three week fiscal year ending on the Sunday nearest June 30.  Its fiscal quarters are the 13- to 14-week periods ending on the Sunday nearest to March 31, June 30, September 30, and December 31.  The fiscal quarters ended October 1, 2006 and October 2, 2005 were 13-week periods.

2.  Inventories

Inventories consist of the following:

 

October 1, 2006

 

July 2, 2006

 

 

 

 

 

 

 

Raw Materials

 

$

27,517

 

$

23,245

 

Work-in-progress

 

11,515

 

11,538

 

Finished goods

 

10,053

 

10,730

 

TOTAL

 

$

49,085

 

$

45,513

 

 

3.  Restructuring Costs

During fiscal 2004, PEG began a series of restructuring activities that impacted primarily its foreign operations.  SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities requires that liabilities for costs associated with exit or disposal activities initiated after December 31, 2002, be recognized when the liability is incurred, with the exception of termination of certain leases and contracts.

During the second quarter of fiscal 2004, PEG began a workforce reduction of approximately 200 positions in Italy.  PEG completed these activities in fiscal 2005.  During the fourth quarter of fiscal 2006, PEG finalized negotiations with the labor union in Italy to reduce the workforce at its Valdarno, Italy facility by 55 positions and communicated the planned reduction to its workforce. The reduction is expected to occur over the next three years.  PEG currently estimates the total cost of the reduction at Euro 1.5 million (approximately $1.8 million).  As of October 1, 2006 approximately $0.4 million was paid under this program and approximately $1.4 million is included in accrued liabilities in the accompanying combined balance sheet.

4.  Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consisted entirely of foreign currency translation adjustments at October 1, 2006.

5. Subsequent Events

Subsequent to July 2, 2006, the Parent Company entered into an agreement to sell PEG to Power One, Inc. for $71.7 million in cash plus the assumption of approximately $16.7 million in debt, subject to customary pre-closing and post-closing tangible net worth and net debt adjustments.  Pursuant to the Purchase and Sale Agreement (the “Agreement”) dated September 28, 2006, by and between the Parent Company and Power One, Inc., Power One, Inc. would purchase PEG through the acquisition of all of the outstanding shares of Magnetek SpA and of the assets and liabilities of the U.S. division.  The terms of the Agreement were negotiated at arms-length.

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The Agreement provides for indemnification for breaches of representations and warranties and other customary matters that the Parent Company believes are typical for this type of transaction, and for the satisfaction or waiver of customary closing conditions.  The transaction was completed October 23, 2006 for a purchase price of approximately $68.8 million, subject to contractual closing adjustments, of which $50.0 million was borrowed, and $18.8 million was paid in cash, including $2.6 million of direct acquisition costs.

20




ITEM  9.01. (b) UNAUDITED PRO FORMA FINANCIAL INFORMATION

POWER-ONE, INC.
PRO FORMA FINANCIAL INFORMATION

Pursuant to the Purchase and Sale Agreement, dated as of September 28, 2006, the Company acquired certain assets and liabilities of Magnetek, Inc. and all of the outstanding shares of Magnetek SpA, a subsidiary of Magnetek, Inc. (collectively referred to as “Power Electronics Group”), for a purchase price approximately $68.8 million, subject to contractual closing adjustments, on October 23, 2006, of which $50.0 million was borrowed, and $18.8 million was paid in cash, including $2.6 million of direct acquisition costs.  Additionally, the Power Electronics Group had approximately $17.4 million of debt outstanding.

The acquisition was accounted for using the purchase method of accounting. The net purchase price was allocated to tangible 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.  Other identifiable amortizable intangible assets will be amortized over 3 months to 10 years. The pro forma condensed combined consolidated statements of operations include adjustments, which are based on preliminary estimates, to reflect the allocation of purchase price to the acquired assets and liabilities of the Power Electronics Group.  The preliminary purchase price allocation for the Power Electronics Group is subject to revision as more detailed analysis is completed and additional information on the fair values of the Power Electronics Group becomes available.  Any change in the fair value of the net assets of the Power Electronics Group will change the amount of the purchase price allocable to goodwill.  Final purchase accounting adjustments may differ materially from the pro forma adjustments presented herein.

The following unaudited pro forma condensed combined consolidated statements of operations give effect to the acquisition of the Power Electronics Group as if it had occurred at the beginning of the period presented and include adjustments which give effect to events that are directly attributable to the transaction that are expected to have a continuing impact and that are factually supportable. The unaudited pro forma balance sheet gives effect to the acquisition as if it occurred as of October 1, 2006, and includes adjustments which give effect to events that are directly attributable to the transaction and factually supportable regardless of whether they have a continuing impact or are nonrecurring. The notes to the pro forma financial information describe the pro forma amounts and adjustments presented below. 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.  The unaudited pro forma financial statements do not reflect any operating efficiencies and cost savings that the Company may achieve with respect to the combined companies.

The unaudited pro forma condensed combined consolidated financial statements should be read in conjunction with the Company’s historical consolidated financial statements and accompanying notes on Form 10-K on file with the SEC.

21




POWER-ONE, INC.
PRO FORMA FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
October 1, 2006
(In thousands, unaudited)

 

 

Power-One

 

Power 
Electronics 
Group

 

Pro Forma
Adjustments

 

Ref.

 

Pro Forma

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents, and marketable securities

 

$

74,915

 

$

2,532

 

$

(19,054

)

(a)

 

$

58,393

 

Accounts receivable

 

74,570

 

35,280

 

 

 

 

109,850

 

Inventories

 

67,626

 

49,085

 

(6,074

)

(b)

 

110,637

 

Prepaid expenses and other current assets

 

3,641

 

5,342

 

(1,982

)

(j)

 

7,001

 

TOTAL CURRENT ASSETS

 

220,752

 

92,239

 

(27,110

)

 

 

285,881

 

 

 

 

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, net

 

36,167

 

26,187

 

6,863

 

(c)

 

69,217

 

GOODWILL

 

32,389

 

14,441

 

851

 

(j)

 

47,681

 

OTHER INTANGIBLE ASSETS, net

 

18,431

 

 

12,850

 

(f)

 

31,281

 

ADVANCE TO PARENT COMPANY

 

 

3,356

 

(3,356

)

(j)

 

 

OTHER ASSETS

 

2,171

 

1,802

 

250

 

(e)

 

4,223

 

TOTAL

 

$

309,910

 

$

138,025

 

$

(9,652

)

 

 

$

438,283

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

53,607

 

$

37,452

 

$

 

 

 

$

91,059

 

Other accrued expenses and current liabilities

 

24,707

 

8,747

 

 

(d)

 

33,454

 

TOTAL CURRENT LIABILITIES

 

78,314

 

46,199

 

 

 

 

124,513

 

 

 

 

 

 

 

 

 

 

 

 

 

LONG TERM DEBT

 

 

15,123

 

50,000

 

(e)

 

65,123

 

OTHER LONG-TERM LIABILITIES

 

451

 

12,296

 

4,755

 

(i)

 

17,502

 

ADVANCE FROM PARENT COMPANY

 

 

9,741

 

(9,741

)

(j)

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Common stock, additional paid-in capital, and parent investment

 

609,928

 

68,497

 

(68,497

)

 

 

609,928

 

Accumulated other comprehensive income (loss)

 

24,685

 

(9,341

)

9,341

 

 

 

24,685

 

Accumulated deficit

 

(403,468

)

(4,490

)

4,490

 

 

 

(403,468

)

TOTAL STOCKHOLDERS’ EQUITY

 

231,145

 

54,666

 

(54,666

)

 

 

231,145

 

TOTAL

 

$

309,910

 

$

138,025

 

$

(9,652

)

 

 

$

438,283

 

 

See notes to unaudited pro forma condensed combined consolidated financial information.

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POWER-ONE, INC.
PRO FORMA FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JANUARY 1, 2006
(In thousands, except per share data. unaudited)

 

 

Power-One

 

Power
Electronics
Group

 

Pro Forma
Adjustments

 

Ref.

 

Pro Forma

 

 

 

 

 

 

 

 

 

 

 

 

 

NET SALES

 

$

261,557

 

$

153,667

 

$

 

 

 

$

415,224

 

COST OF GOODS SOLD

 

184,870

 

121,547

 

 

 

 

306,417

 

GROSS PROFIT

 

76,687

 

32,120

 

 

 

 

 

108,807

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

58,561

 

17,544

 

 

 

 

76,105

 

Engineering and quality assurance

 

36,936

 

10,790

 

 

 

 

47,726

 

Amortization of intangibles

 

3,877

 

 

1,890

 

(f)

 

5,767

 

Restructuring costs

 

11,135

 

 

 

 

 

11,135

 

Asset impairment

 

5,098

 

 

 

 

 

5,098

 

TOTAL EXPENSES

 

115,607

 

28,334

 

1,890

 

 

 

145,831

 

INCOME (LOSS) FROM OPERATIONS

 

(38,920

)

3,786

 

(1,890

)

 

 

(37,024

)

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST AND OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

2,371

 

66

 

(457

)

(g)

 

1,980

 

Interest expense

 

(220

)

(1,375

)

(5,167

)

(h)

 

(6,762

)

Other income (expense), net

 

307

 

 

 

 

 

307

 

TOTAL INTEREST AND OTHER INCOME (EXPENSE)

 

2,458

 

(1,309

)

(5,624

)

 

 

(4,475

)

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES

 

(36,462

)

2,477

 

(7,514

)

 

 

(41,499

)

 

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

1,820

 

1,899

 

 

(i)

 

3,719