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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED |
For the quarterly period ended June 30, 2001
OR
/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to to
Commission file number 1-333-55797
ELGAR HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 51-0373329 (I.R.S. Employer Identification No.) | |
9250 Brown Deer Road San Diego, California (Address of Principal Executive Offices) | 92121-2294 (Zip Code) |
Registrant's telephone number, including area code: (858) 450-0085
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, as amended, during the preceding 12 months (or for such 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 / /
On August 13, 2001, the number of shares outstanding of the Registrant's Common Stock was 4,602,433.
ELGAR HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
| | | Page Number | |||
---|---|---|---|---|---|---|
Part I | Financial Information | |||||
Item 1 | Consolidated Financial Statements | |||||
Consolidated Statements of Operations for the three and six months ended July 1, 2000 (unaudited) and June 30, 2001 (unaudited) | 3 | |||||
Consolidated Balance Sheets as of December 30, 2000 and June 30, 2001 (unaudited) | 4 | |||||
Consolidated Statements of Cash Flows for the six months ended July 1, 2000 (unaudited) and June 30, 2001 (unaudited) | 5 | |||||
Notes to Consolidated Financial Statements (unaudited) | 6 | |||||
Item 2 | Management's Discussion and Analysis of Financial Condition and Results of Operations | 10 | ||||
Item 3 | Quantitative and Qualitative Disclosures About Market Risks | 12 | ||||
Part II | Other Information | |||||
Item 6 | Exhibits and Reports on Form 8-K | 14 |
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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) (in thousands)
| For the Three Months Ended | For the Six Months Ended | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| July 1, 2000 | June 30, 2001 | July 1, 2000 | June 30, 2001 | ||||||||||
Net sales | $ | 15,937 | $ | 15,291 | $ | 30,167 | $ | 32,604 | ||||||
Cost of sales | 9,009 | 9,498 | 17,128 | 20,324 | ||||||||||
Gross profit | 6,928 | 5,793 | 13,039 | 12,280 | ||||||||||
Selling, general and administrative expense | 2,951 | 2,883 | 5,440 | 5,815 | ||||||||||
Research and development and engineering expense | 1,727 | 1,767 | 3,414 | 3,291 | ||||||||||
Amortization expense | 609 | 609 | 1,218 | 1,218 | ||||||||||
Operating income | 1,641 | 534 | 2,967 | 1,956 | ||||||||||
Interest expense, net | 2,630 | 2,710 | 5,249 | 5,383 | ||||||||||
Loss before income tax benefit | (989 | ) | (2,176 | ) | (2,282 | ) | (3,427 | ) | ||||||
Income tax benefit | (21 | ) | — | (21 | ) | — | ||||||||
Net loss | $ | (968 | ) | $ | (2,176 | ) | $ | (2,261 | ) | $ | (3,427 | ) | ||
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Financial Statements
3
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
| December 30, 2000 | June 30, 2001 | |||||||
---|---|---|---|---|---|---|---|---|---|
| | (unaudited) | |||||||
ASSETS | |||||||||
CURRENT ASSETS: | |||||||||
Cash and cash equivalents | $ | 224 | $ | 1,255 | |||||
Accounts receivable, net of allowance for doubtful accounts of $163 and $146 at the end of each period, respectively | 10,252 | 8,077 | |||||||
Inventories | 10,700 | 12,391 | |||||||
Deferred income taxes | 615 | — | |||||||
Prepaids and other | 424 | 332 | |||||||
Total current assets | 22,215 | 22,055 | |||||||
PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated depreciation and amortization of $4,029 and $4,252, respectively | 2,690 | 3,204 | |||||||
INTANGIBLE ASSETS, net of accumulated amortization of $11,243 and $12,827, respectively | 31,247 | 29,663 | |||||||
DEFERRED INCOME TAXES, net of current portion | 834 | 1,449 | |||||||
$ | 56,986 | $ | 56,371 | ||||||
LIABILITIES AND STOCKHOLDERS' DEFICIT | |||||||||
CURRENT LIABILITIES: | |||||||||
Accounts payable | $ | 3,379 | $ | 2,807 | |||||
Accrued liabilities | 8,858 | 8,986 | |||||||
Line of credit | — | 5,000 | |||||||
Current portion of long-term debt | 3,625 | 5,459 | |||||||
Total current liabilities | 15,862 | 22,252 | |||||||
LONG-TERM DEBT, net of current portion | 96,000 | 93,291 | |||||||
Total liabilities | 111,862 | 115,543 | |||||||
SERIES A 10% CUMULATIVE REDEEMABLE PREFERRED STOCK, no par value, 20,000 shares authorized; 10,000 shares issued and outstanding | 12,126 | 12,323 | |||||||
STOCKHOLDERS' DEFICIT: | |||||||||
Series B 6% Cumulative Convertible Preferred Stock, no par value, 5,000 shares authorized, issued and outstanding | 5,000 | 5,000 | |||||||
Series C 6% Cumulative Convertible Preferred Stock, no par value, 4,000 shares authorized, issued and outstanding | 4,000 | 4,000 | |||||||
Common Stock, $.01 par value, 15,000,000 shares authorized; 4,601,533 and 4,602,433 shares issued and outstanding, respectively | 46 | 46 | |||||||
Additional paid-in capital | (68,572 | ) | (68,567 | ) | |||||
Accumulated deficit | (7,476 | ) | (11,974 | ) | |||||
(67,002 | ) | (71,495 | ) | ||||||
$ | 56,986 | $ | 56,371 | ||||||
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Financial Statements
4
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in thousands)
| For the Six Months Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| July 1, 2000 | June 30, 2001 | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||
Net loss | $ | (2,261 | ) | $ | (3,427 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||
Amortization of intangibles | 1,583 | 1,584 | ||||||||
Depreciation and amortization on property, plant and equipment | 428 | 455 | ||||||||
Loss on sale of property, plant and equipment | 2 | 41 | ||||||||
(Increases) decreases in assets: | ||||||||||
Accounts receivable | (728 | ) | 2,175 | |||||||
Inventories | (2,337 | ) | (1,691 | ) | ||||||
Prepaids and other | (62 | ) | 92 | |||||||
Increases (decreases) in liabilities: | ||||||||||
Accounts payable | 1,113 | (572 | ) | |||||||
Accrued liabilities | (4 | ) | (746 | ) | ||||||
Net cash used in operating activities | (2,266 | ) | (2,089 | ) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||
Purchases of property, plant and equipment | (816 | ) | (1,012 | ) | ||||||
Proceeds from sales of property, plant and equipment | — | 2 | ||||||||
Net cash used in investing activities | (816 | ) | (1,010 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||
Exercise of common stock options | — | 5 | ||||||||
Repayment on debt | — | (875 | ) | |||||||
Proceeds from line of credit | — | 5,000 | ||||||||
Net cash provided by financing activities | — | 4,130 | ||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (3,082 | ) | 1,031 | |||||||
CASH AND CASH EQUIVALENTS, beginning of period | 4,479 | 224 | ||||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 1,397 | $ | 1,255 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||
Cash paid for interest | $ | 4,888 | $ | 4,961 | ||||||
Cash paid for income taxes | 23 | 92 | ||||||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||||
Series A preferred stock dividend-in-kind | $ | 616 | $ | 113 | ||||||
Series A, B and C preferred stock dividend accrual | 290 | 874 | ||||||||
Accretion of discount on Series A preferred stock | 84 | 84 |
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Financial Statements
5
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Company Operations
Elgar Holdings, Inc., a Delaware corporation (the "Company"), manufactures and sells programmable power supply units through its direct and indirect wholly owned subsidiaries, Elgar Electronics Corporation ("Elgar") and Power Ten, for semiconductors, telecommunications, measurement and control, and defense applications. The Company's primary sales are within the United States and Europe.
2. Summary of Significant Accounting Policies
Principles of Consolidation/Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company, its wholly owned subsidiary, Elgar, and Elgar's wholly owned subsidiary, Power Ten. All significant intercompany accounts and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q. The Company suggests that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the fiscal year ended December 30, 2000. These financial statements include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of financial condition, results of operations and cash flows for such periods.
Interim Accounting Periods
The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending the Saturday closest to December 31. Interim periods include 13 or 14 weeks ending the last Saturday closest to the end of the quarter. Results of operations for the three months ended June 30, 2001 are not necessarily indicative of the results to be expected for the Company's fiscal year ending December 29, 2001.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.
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Inventories
Inventories, which include materials, direct labor and manufacturing overhead, are stated at the lower of cost (first-in, first-out) or market and are comprised of the following (in thousands):
| December 30, 2000 | June 30, 2001 | |||||
---|---|---|---|---|---|---|---|
| | (unaudited) | |||||
Raw materials | $ | 6,033 | $ | 7,610 | |||
Work-in-process | 3,230 | 3,145 | |||||
Finished goods | 1,437 | 1,636 | |||||
Total | $ | 10,700 | $ | 12,391 | |||
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations". This statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16,Business Combinations, and FASB Statement No. 38,Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations in the scope of this statement are to be accounted for using one method, the purchase method. The Company will adopt the provisions of SFAS No. 141 for all business combinations initiated after June 30, 2001. As of June 30, 2001, the adoption of this statement had no effect on the financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,Intangible Assets. SFAS 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Upon adoption of SFAS 142, goodwill is no longer subject to amortization over its estimated useful life. SFAS No. 142 requires that the Company apply a fair value approach to evaluating goodwill impairment, using at least an annual assessment, as compared to the current model under SFAS No. 121 that is based on projected future cash flows. Upon adoption of SFAS No. 142, the Company will cease the amortization of its goodwill and may be required to record an impairment of goodwill under the fair value approach. The Company has not yet determined if an impairment exists under the new fair value approach or the amount of any such impairment that may exist upon adoption. Any impairment identified upon adoption will be reported as a cumulative effect of a change in accounting method in the statement of operations. The Company will adopt these standards on December 30, 2001 and has not yet determined what impact the adoption of SFAS No. 142 will have on its consolidated financial statements, results of operations or related disclosures thereto.
3. Concentrations of Credit Risk
Sales to one customer accounted for approximately 14% and 13% of the Company's net sales in the quarters ended June 30, 2001 and July 1, 2000, respectively. In the six months ended June 30, 2001 and July 1, 2000, sales to one customer accounted for approximately 10% and 11% of the Company's net sales, respectively. No other customers individually represented more than 10% of net sales in the three and six months ended June 30, 2001 and July 1, 2000. The Company performs ongoing credit evaluation of its customers' financial condition, and maintains reserves for potential credit losses.
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4. Credit Facility and Capital Call Agreement
On March 27, 2001, Elgar, the Company and Bankers Trust Company, as agent under the Credit Facility, entered into a Fourth Amendment to the Credit Agreement in anticipation of not complying with the EBITDA and fixed charge covenants for the quarter ended March 31, 2001. In addition to receiving waivers for any covenant violations both before and after giving effect to the Fourth Amendment, the Fourth Amendment (i) reset the fixed charge coverage ratio for the quarter ended June 30, 2001 and for following quarters, (ii) reset the minimum EBITDA levels for the quarter ended closest to June 30, 2001 and for following quarters, (iii) reset the leverage ratio for the quarter ended closest to June 30, 2001 and for the following quarters, (iv) defers the $875,000 principal payment that was due on June 30, 2001 until December 31, 2001, (v) defers the $875,000 principal payment due on June 30, 2001 as follows: $292,000 is to be paid on March 31, 2002, $292,000 on June 30, 2002 and $291,000 on September 30, 2002, and (vi) provides for Elgar to pay the bank an additional 50 basis points of interest on loans outstanding, as discussed below. The payments referenced in (iv) and (v) are in addition to the currently scheduled principal repayments. Elgar was not in compliance with the amended covenants contained in the credit agreement as of June 30, 2001. See Note 8 below.
Indebtedness under the Credit Facility bears interest at a floating rate equal to, at Elgar's option, the Eurodollar Rate plus a margin of 2.75%, or the Base Rate plus a margin of 1.75%. Pursuant to the Fourth Amendment to the Credit Agreement, Elgar is to pay the bank an additional 50 basis points of interest on loans outstanding from and after March 27, 2001, with such payment of additional interest to be made at maturity or upon earlier repayment of the loans.
The Company, Elgar and the Company's majority shareholder are parties to a capital call agreement with Bankers Trust Company, as agent (the "Capital Call Agreement"). Pursuant to the terms of this agreement, as amended, the majority shareholder agreed to contribute up to $5.0 million of capital to the Company upon the occurrence of certain events, including the Company's failure to comply with certain financial covenants contained in the Capital Call Agreement. The Company was in compliance with these covenants for the quarter ended June 30, 2001.
5. Convertible Preferred Stock
In connection with Elgar's acquisition of Power Ten, the Company issued 5,000 shares of Series B 6% Cumulative Convertible Preferred Stock (the "Series B Preferred Stock") for cash proceeds of $5.0 million. This offering, which was made in compliance with the subscription rights contained in the Company's Shareholders Agreement, was completed on May 29, 1998.
In connection with entering into the first amendment to the credit agreement, the Company's majority shareholder made a $4.0 million capital contribution to the Company. In order to effectuate the contribution, the Company issued 4,000 shares of Series C 6% Cumulative Convertible Preferred Stock (the "Series C Preferred Stock") for cash proceeds of $4.0 million. This offering, which was made in compliance with the subscription rights contained in the Company's Shareholders Agreement, was completed on March 30, 1999.
Dividends are payable to the holders of the Series B Preferred Stock and Series C Preferred Stock at the annual rate per share of 6% times the sum of (x) $1,000 and (y) accrued but unpaid dividends. For the series B Preferred Stock, dividends are payable semi-annually on April 30 and October 31. For the Series C Preferred Stock, dividends are payable semi-annually on March 31 and September 30. These dividends are payable when and if declared by the Board of Directors out of funds legally available for such payment. During the three months ended June 30, 2001 and July 1, 2000, the Company accrued $88,470 and $83,392, respectively, for dividends on the Series B Preferred Stock and $67,608 and $63,729, respectively, for dividends on the Series C Preferred Stock. During the six months ended June 30, 2001 and July 1, 2000, the Company accrued $175,206 and $165,148, respectively, for
8
dividends on the Series B Preferred Stock and $133,248 and $125,601, respectively, for dividends on the Series C Preferred Stock.
6. Series A Redeemable Preferred Stock
Dividends are payable quarterly to the holders of Series A cumulative redeemable preferred stock at an annual rate of 10%. The dividends were payable in-kind through January 31, 2001 and in cash thereafter. Under the terms of the indenture governing the Company's $90.0 million of senior notes, the Company is prohibited from paying cash dividends unless its consolidated fixed charge coverage ratio is at least 2.0 to 1.0. The Company does not anticipate that this ratio will equal or exceed 2.0 to 1.0 during 2001. As a result, the Company has accrued dividends of $565,973 from February 1, 2001 to June 30, 2001 (which includes $341,825 for the quarter ended June 30, 2001), and anticipates that it will continue to accrue dividends, rather than pay cash dividends, on the Series A preferred stock during the remainder of 2001.
7. Interest Rate Swap
On June 22, 1998, the Company entered into an interest rate swap agreement with a bank with a notional amount of $7.5 million. Under the swap agreement, the Company was required to make a payment based on a fixed rate of 5.83% on each March 24, June 24, September 24 and December 24. This swap agreement continued for the life of the related term loan agreement, with the notional amounts of the swap decreasing as principal decreases on the related loan agreement, and terminated on June 25, 2001. The Company received a floating rate based on three-month LIBOR on the same dates as described above. In connection with the swap agreement, the Company has included settlement income of $8,152 and settlement expense of $18,461, respectively, in interest expense, net, in its consolidated statements of operations for the three months ended July 1, 2000 and June 30, 2001. The Company has included settlement income of $14,787 and settlement expense of $6,710, respectively, in interest expense, net, in its consolidated statements of operations for the six months ended July 1, 2000 and June 30, 2001. The swap expired on June 25, 2001.
8. Subsequent Events
On July 25, 2001, Bankers Trust granted the Company a waiver for covenant violations existing as of June 30, 2001 relating to financial covenants specified in the Fourth Amendment to the Credit Agreement (the "Financial Covenants"). The Company anticipates that it will not be in compliance with the Financial Covenants in the period ending September 29, 2001 and has notified Bankers Trust that the Company intends to renegotiate the Financial Covenants for the September 29, 2001 period and future periods. Although no assurance can be given that the Company will be successful in these negotiations with Bankers Trust, past experience in renegotiating covenants and obtaining waivers has been successful. The Credit Facility debt, excluding the short term portion, is currently classified as long term debt in the Company's balance sheet. If the Company were not successful in renegotiating the covenants for the September 29, 2001 period and future periods and, as a result, the Company were to violate the Financial Covenants without a waiver being obtained for such violation, then the long term portion of the Credit Facility debt would be reclassified as short term debt in the Company's balance sheet.
In July 2001, the Company announced plans to close its Power Ten facility in Northern California and move the production and manufacturing to its San Diego facilities. In connection with the closure, the Company expects to incur certain shut-down costs that will be expensed as incurred, including certain employee termination costs, lease termination costs and costs associated with moving machinery, equipment and personnel to San Diego. The Company expects that this plant consolidation will provide it with material ongoing cost savings.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited Consolidated Financial Statements and Notes thereto of the Company included elsewhere herein.
This report contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by, and information currently available to management. The words "anticipates," "believes," "estimates," "expects," "plans," "intends" and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company, with respect to future events and are subject to certain risks, uncertainties and assumptions, that could cause actual results to differ materially from those expressed in any forward-looking statement, including, without limitation: competition from other manufacturers in the Company's industry, loss of key employees and/or general economic conditions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. The Company does not intend to update these forward-looking statements.
Results of Operations
The following table sets forth certain income statement information for the Company as a percentage of net sales for the three and six months ended July 1, 2000 and June 30, 2001:
| Three Months Ended | Six Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| July 1, 2000 | June 30, 2001 | July 1, 2000 | June 30, 2001 | ||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||
Cost of sales | 56.5 | 62.1 | 56.8 | 62.3 | ||||||
Gross profit | 43.5 | 37.9 | 43.2 | 37.7 | ||||||
Selling, general and administrative expense | 18.5 | 18.9 | 18.0 | 17.9 | ||||||
Research and development and engineering expenses | 10.9 | 11.5 | 11.3 | 10.1 | ||||||
Amortization expense | 3.8 | 4.0 | 4.1 | 3.7 | ||||||
Operating income | 10.3 | % | 3.5 | % | 9.8 | % | 6.0 | % | ||
Comparison of the Three Months Ended July 1, 2000 to the Three Months Ended June 30, 2001
Net sales. Net sales for the quarter ended June 30, 2001 were $15.3 million, a decrease of $0.6 million, or 3.8%, from net sales of $15.9 million for the quarter ended July 1, 2000. This decrease was primarily attributable to a decrease in sales of programmable DC products, predominantly sales of Power Ten products and sales to Racal, partially offset by an increase in sales of Space Systems products. In the quarter ended June 30, 2001, sales of Power Ten products, which are part of the DC product line, were $2.3 million, a decrease of $0.9 million from the quarter ended July 1, 2000. In the quarter ended June 30, 2001, net sales attributable to Racal were down $0.4 million compared to the quarter ended July 1, 2000.
Gross profit. Gross profit for the quarter ended June 30, 2001 was $5.8 million, a decrease of $1.1 million, or 15.9%, from gross profit of $6.9 million for the quarter ended July 1, 2000. The decrease in gross profit was partly due to the decrease in net sales, and mainly a result of a decrease in the gross margin due to higher overall production costs when compared to the quarter ended July 1, 2000.
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Selling, general and administrative expenses. Selling, general and administrative ("SG&A") expenses were $2.9 million for the quarter ended June 30, 2001, a decrease of $0.1 million, or 3.3%, from SG&A expenses of $3.0 million for the quarter ended July 1, 2000. SG&A expenses increased slightly as a percentage of net sales from 18.5% in the quarter ended July 1, 2000 to 18.9% in the quarter ended June 30, 2001. The dollar decrease was primarily due to lower expenses for customer demonstration equipment and decreased incentive and bonus compensation.
Research and development and engineering expenses. Research and development and engineering ("R&D&E") expenses were $1.8 million for the quarter ended June 30, 2001, an increase of $0.1 million, or 5.9%, from R&D&E expenses of $1.7 million for the quarter ended July 1, 2000. R&D&E expenses increased as a percentage of net sales from 10.9% in the quarter ended July 1, 2000 to 11.5% in the comparable 2001 period. The increase in dollars was primarily due to additional research and development expenses at Power Ten as compared to the quarter ended July 1, 2000.
Amortization expense. Amortization expense was $0.6 million in each of the quarters ended June 30, 2001 and July 1, 2000. Amortization expense is comprised of the amortization of goodwill associated with the April 1996 acquisition of Elgar by the predecessor to Elgar Holdings, Inc. and our May 1998 acquisition of Power Ten.
Operating income. Operating income was $0.5 million for the quarter ended June 30, 2001, a decrease of $1.1 million, or 68.8%, from operating income of $1.6 million for the quarter ended July 1, 2000. Operating income decreased as a percentage of net sales from 10.3% for the quarter ended July 1, 2000 to 3.5% for the quarter ended June 30, 2001, due to the factors discussed above.
Interest expense. Net interest expense was $2.7 million in the quarter ended June 30, 2001, an increase of $0.1 million, or 3.8%, from net interest expense of $2.6 million in the quarter ended July 1, 2000. Net interest expense increased as a percentage of net sales from 16.4% in the quarter ended July 1, 2000 to 17.6% in the comparable 2001 period. The increase in dollars was a result of higher outstanding borrowings on our revolving line of credit partially offset by lower interest rates on those borrowings.
Income Taxes. Income taxes for the quarters ended June 30, 2001 and July 1, 2000 were $0. [table shows a benefit of $21,000 in the 2000 quarter?] Losses generated in these quarters do not have a carryback benefit and thus have not been recognized because future realization is uncertain.
Net loss. Net loss was $2.2 million in the quarter ended June 30, 2001, an increased loss of $1.2 million from a net loss of $1.0 million for the quarter ended July 1, 2000. In order to improve operating results, we have undertaken a number of initiatives to increase sales across our multiple product lines. These include (1) increasing marketing efforts to existing and new semiconductor end-market customers, (2) introducing our value-added-integration services to high tech end customers, (3) introducing four new products to the marketplace in the past 12 months and (4) initiating cost reduction efforts in the manufacturing and procurement processes, including the relocation of our Power Ten operations to our San Diego facilities.
Comparison of the Six Months Ended July 1, 2000 to the Six Months Ended June 30, 2001
Net sales. Net sales for the six months ended June 30, 2001 were $32.6 million, an increase of $2.4 million, or 7.9%, from net sales of $30.2 million for the six months ended July 1, 2000. This increase was primarily attributable to an increase in sales of Space Systems products and a net increase in sales of programmable DC products, predominantly sales of Sorensen products, partially offset by a decrease in sales of Power Ten products and sales to Racal. In the six months ended June 30, 2001, sales of Sorensen products, which are part of the DC product line, were $13.5 million, an increase of $3.2 million from the six months ended July 1, 2000. In the six months ended June 30, 2001, net sales
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attributable to Racal were approximately $1.6 million, down from $[4.6] million in the first half of 2000. In early second quarter 2001, we were notified by Racal that it was canceling existing backlog of $0.5 million. We anticipate little additional sales attributable to Racal in the balance of 2001.
Gross profit. Gross profit for the six months ended June 30, 2001 was $12.3 million, a decrease of $0.7 million, or 5.4%, from gross profit of $13.0 million for the six months ended July 1, 2000. The decrease in gross profit was mainly due to a decrease in the gross margin due to a greater concentration of sales of lower-margin products and higher overall production costs when compared to the six months ended July 1, 2000, partially offset by the increase in net sales.
Selling, general and administrative expenses. SG&A expenses were $5.8 million for the six months ended June 30, 2001, an increase of $0.4 million, or 7.4%, from SG&A expenses of $5.4 million for the six months ended July 1, 2000. SG&A expenses decreased slightly as a percentage of net sales from 18.0% in the six months ended July 1, 2000 to 17.9% in the six months ended June 30, 2001. The dollar increase was primarily due to higher sales volume resulting in $0.3 million in increased commissions expense.
Research and development and engineering expenses. R&D&E expenses were $3.3 million for the six months ended June 30, 2001, a decrease of $0.1 million, or 2.9%, from R&D&E expenses of $3.4 million for the six months ended July 1, 2000. R&D&E expenses decreased as a percentage of net sales from 11.3% in the six months ended July 1, 2000 to 10.1% in the comparable 2001 period. The decrease in dollars was primarily due to fewer employees in research and development as compared to the six months ended July 1, 2000.
Amortization expense. Amortization expense was $1.2 million in each of the six months ended June 30, 2001 and July 1, 2000. Amortization expense is comprised of the amortization of goodwill associated with the April 1996 acquisition of Elgar by the predecessor to Elgar Holdings, Inc. and our May 1998 acquisition of Power Ten.
Operating income. Operating income was $2.0 million for the six months ended June 30, 2001, a decrease of $1.0 million, or 33.3%, from operating income of $3.0 million for the six months ended July 1, 2000. Operating income decreased as a percentage of net sales from 9.8% for the six months ended July 1, 2000 to 6.0% for the six months ended June 30, 2001, due to the factors discussed above.
Interest expense. Net interest expense was $5.4 million in the six months ended June 30, 2001, an increase of $0.1 million, or 1.9%, from net interest expense of $5.3 million in the six months ended July 1, 2000. Net interest expense decreased as a percentage of net sales from 17.4% in the six months ended July 1, 2000 to 16.5% in the comparable 2001 period. The increase in dollars was a result of higher outstanding borrowings on our revolving line of credit partially offset by lower interest rates on those borrowings.
Income Taxes. Income taxes for the six months ended June 30, 2001 and July 1, 2000 were both $0[table shows a benefit of $21,000 in the 2000 period?]. Losses generated in these six months do not have a carryback benefit and thus have not been recognized because future realization is uncertain.
Net loss. Net loss was $3.4 million in the six months ended June 30, 2001, an increased loss of $1.1 million from a net loss of $2.3 million for the six months ended July 1, 2000. In order to improve operating results, we have undertaken a number of initiatives to increase sales across our multiple product lines, as discussed in "Net loss" for the quarterly comparison above.
Liquidity and Capital Resources
Uses and Sources of Capital. The Company's principal uses of cash are to finance working capital and debt service requirements, and, to a lesser extent, for capital expenditures. The Company is
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required to make principal payments on the term loan outstanding under its credit facility of $1,000,000 on September 30, 2001 and $1,875,000 on December 31, 2001, and its next scheduled interest payment of approximately $4.5 million on the senior notes is due on February 1, 2002. In addition, the Company intends to make near-term, non-recurring expenditures required to consolidate its Power Ten facility, which management expects will generate material ongoing cost savings, as discussed in Subsequent Events in section 8 of Item 1 above. Historically, the Company has funded its cash requirements principally from working capital, a revolving line of credit and the sale of convertible preferred stock to its stockholders.
On July 25, 2001, Bankers Trust granted the Company a waiver for covenant violations existing as of June 30, 2001 relating to certain financial covenants specified in the Fourth Amendment to the Credit Agreement (the "Financial Covenants"). The Company anticipates that it will not be in compliance with the Financial Covenants in the period ending September 29, 2001 and has notified Bankers Trust that the Company intends to renegotiate the Financial Covenants for the September 29, 2001 period and future periods. Although no assurance can be given that the Company will be successful in these negotiations with Bankers Trust, past experience in renegotiating covenants and obtaining waivers has been successful.
The Company's $5.0 million revolving line of credit under its credit facility was fully drawn at June 30, 2001. The line of credit matures on February 3, 2003.
Our ability to make scheduled principal payments of, or to pay the interest on our debt, as well as make other general corporate expenditures, will depend on our future performance which is subject to general economic, financial, competitive, legislative, regulatory and other factors, many of which are beyond our control. While management believes that certain actions it is in the process of initiating, including renegotiating the amount available under and the terms of the credit facility, should enable us to meet our liquidity needs, there can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available under the credit facility in an amount sufficient to enable us to service our debt or to fund our other liquidity needs.
Capital Requirements. The Company's capital expenditures were $1,012,000 in the six months ended June 30, 2001 and $816,000 in the six months ended July 1, 2000. Our expenditures during the six months ended June 30, 2001 were primarily for facility relocation and installing new automated manufacturing capabilities at Elgar.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
In the past, we have had only limited involvement in derivative financial instruments. We do not hold or issue derivative financial instruments for trading purposes. As of June 30, 2001, $13,750,000 of outstanding borrowings under our credit facility, including letters of credit, are at variable interest rates and are thus subject to market risk resulting from interest rate fluctuations. We have entered into interest rate swaps in part to alter interest rate exposures. Interest rate swaps allow us to raise long-term borrowings at floating rates and effectively swap them into fixed rates that are lower than those available to us if fixed-rate borrowings were made directly. Under interest rate swaps, we agree with another party to exchange, at specified intervals, the difference between fixed-rate and floating-rate amounts calculated by reference to an agreed notional principal amount. As of June 30, 2001, none of our long-term bank debt and letters of credit were covered by swap arrangements, as our swap arrangement matured on June 25, 2001.
In addition, we are exposed to market risks related to fluctuations in interest rates on our $90,000,000 of senior notes outstanding at June 30, 2001. For fixed rate debt such as the senior notes, changes in interest rates generally affect the fair value of the debt instrument. We do not have an obligation to repay the senior notes prior to maturity in February 2008 and, as a result, interest-rate risk and changes in fair value should not have a significant impact on us.
The tables below provide information as of June 30, 2001 about our derivative instruments and other financial instruments that are sensitive to changes in interest rates.
Long-Term Bank Debt (Variable Rate)
Principal amount | $8,750,000 | ||
Variable interest rate | 7.0%(1)(2) | ||
Maturity—loan | February 3, 2003 | ||
Remaining principal payments: | |||
2001 | $1,000,000 | ||
2002 | $5,750,000 | ||
2003 | $2,000,000 |
- (1)
- Renewals are based on the Eurodollar Rate plus 2.75%.
- (2)
- From and after March 27, 2001, the Company will be accruing and paying an additional 0.5% of interest on outstanding borrowings which is due at loan maturity.
Revolving Bank Debt (Variable Rate)
Line of credit limit | $5,000,000 | |
Principal amount outstanding | $5,000,000 | |
Variable interest rate | 8.5%/6.625%/6.6875%(1)(2) | |
Loan expiration | February 3, 2003 |
- (1)
- Renewals are based on the Eurodollar Rate plus 2.75% for $4.0 million of the principal amount and Base Rate (Bank Prime Rate) plus 1.75% for $1.0 million of the principal amount.
- (2)
- $1.0 million is with no stated maturity date at a Variable Base Rate of 8.5%; $2.0 million is at a three-month maturity rate on October 4, 2001 of 6.625%; and $2.0 million is at a six-month maturity rate on January 2, 2002 of 6.6875%.
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Interest Rate Swap Arrangement (Fixed Rate)
Parties | The Company (fixed rate payor) and Bankers Trust Company (floating rate payor) | |
Notional amount | $7,500,000 | |
Fixed interest rate | 5.83%(1) | |
Floating interest rate | 4.85625% for the current period(2) | |
Swap interest/(credit) | $17,243(3) | |
Commencement date | June 24, 1998 | |
Maturity date | June 25, 2001 |
- (1)
- As the fixed interest rate payor, the Company was required to pay a fixed rate of 5.83% per annum, payable quarterly, on the $7,500,000 notional amount.
- (2)
- As the floating rate payor, Bankers Trust Company was required to pay a floating rate of interest, payable quarterly, on the $7,500,000 notional amount, based on the three-month London Interbank Offering Rate (LIBOR).
- (3)
- In connection with the swap agreement, the Company recorded $17,243 as a charge to interest expense for the three months ended June 30, 2001.
Senior Notes (Fixed Rate)
Principal amount outstanding | $90,000,000 | |
Fixed interest rate | 9.875% | |
Maturity date | February 1, 2008 |
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- (a)
- Exhibits.
Exhibit No. | Description | |
---|---|---|
10.1 | Waiver, dated July 25, 2001, among the Company, Elgar Electronics Corporation and Bankers Trust Company, as agent under the Credit Agreement |
- (b)
- No current reports on Form 8-K were filed during the quarter ended June 30, 2001.
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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.
ELGAR HOLDINGS, INC. | ||||
Dated: August 14, 2001 | By: | /s/ CHRISTOPHER W. KELFORD Christopher W. Kelford Vice President—Finance, Chief Financial Officer, Treasurer and Assistant Secretary |
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ELGAR HOLDINGS, INC. QUARTERLY REPORT ON FORM 10-Q INDEX
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNATURE