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 April 3, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 1-333-55797
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ELGAR HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0373329
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9250 BROWN DEER ROAD
SAN DIEGO, CALIFORNIA 92121
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 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
----- -----
As of May 17, 1999, the number of shares outstanding of the
Registrant's Common Stock was 2,300,000.
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
PART I FINANCIAL INFORMATION NUMBER
- ------ --------------------- ------
Item 1 Consolidated Financial Statements
Consolidated Statements of Operations for the three months ended
March 28, 1998 (unaudited) and the three months ended April 3,
1999 (unaudited).................................................. 3
Consolidated Balance Sheets as of March 28, 1998 and
April 3, 1999 (unaudited)......................................... 4
Consolidated Statements of Cash Flows for the three months ended
March 28, 1998 (unaudited) and the three months ended April 3,
1999 (unaudited).................................................. 5
Notes to Consolidated Financial Statements (unaudited).................. 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 12
Item 3 Quantitative and Qualitative Disclosures About Market Risks............. 15
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K.................................... 17
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
FOR THE THREE MONTHS ENDED
-------------------------------
MARCH 28, 1998 APRIL 3, 1999
-------------- -------------
Net sales..................................... $15,881 $14,993
Cost of sales................................. 8,619 8,589
------- -------
Gross profit.............................. 7,262 6,404
Selling, general and administrative expense... 2,652 2,644
Research and development and engineering
expenses................................... 1,795 1,497
Amortization expense.......................... 328 606
------- -------
Operating income.......................... 2,487 1,657
Interest expense, net......................... 2,245 2,689
------- -------
Income (loss) before income tax provision
(benefit).................................. 242 (1,032)
Income tax provision (benefit)................ 39 (175)
------- -------
Net income (loss)......................... $ 203 $ (857)
======= =======
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS
3
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 28, 1998 APRIL 3, 1999
(UNAUDITED)
-------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 2,666 $ 3,243
Accounts receivable, net of allowance for doubtful accounts of $197 and
$234 as of March 28, 1998 and April 3, 1999, respectively................ 6,453 6,213
Inventories................................................................. 8,305 8,423
Deferred tax assets......................................................... 1,098 796
Prepaids and other.......................................................... 373 983
-------- --------
Total current assets.................................................... 18,895 19,658
PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated depreciation and
amortization of $1,643 and $2,565 as of March 28, 1998 and April 3, 1999,
respectively............................................................... 2,952 2,459
INTANGIBLE ASSETS, net of accumulated amortization of $2,711 and $5,700
as of March 28, 1998 and April 3, 1999, respectively....................... 22,412 36,791
DEFERRED TAX ASSETS, net of current portion................................... 653 653
-------- --------
$ 44,912 $ 59,561
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................................................ $ 3,068 $ 2,062
Accrued liabilities......................................................... 4,801 4,602
Current portion of long-term debt........................................... -- --
Current portion of capital lease obligations................................ 17 14
-------- --------
Total current liabilities............................................... 7,886 6,678
CAPITAL LEASE OBLIGATIONS, net of current portion............................. 19 5
LONG-TERM DEBT, net of current portion........................................ 90,000 100,000
-------- --------
Total liabilities....................................................... 97,905 106,683
-------- --------
SERIES A 10% CUMULATIVE REDEEMABLE PREFERRED STOCK,
no par value, 20,000 shares authorized; 10,000 shares
issued and outstanding..................................................... 8,478 9,721
-------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Series B 6% Cumulative Convertible Preferred Stock, no par value, 0 and
5,000 shares authorized, issued and outstanding on March 28, 1998
and April 3, 1999, respectively.......................................... -- 5,000
Series C 6% Cumulative Convertible Preferred Stock, no par value,
0 and 4,000 shares authorized, issued and outstanding on March 28, 1998
and April 3, 1999, respectively.......................................... -- 4,000
Common Stock, $.01 par value, 5,000,000 shares authorized; 2,300,000 shares
issued and outstanding................................................... 23 23
Additional paid-in capital.................................................. (67,926) (68,558)
Retained earnings........................................................... 6,432 2,692
-------- --------
(61,471) (56,843)
-------- --------
$ 44,912 $ 59,561
======== ========
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)
(DOLLARS IN THOUSANDS)
FOR THE THREE MONTHS ENDED
--------------------------------
MARCH 28, 1998 APRIL 3, 1999
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................................... $ 203 $ (857)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Amortization of intangibles....................................... 329 606
Amortization of deferred loan costs............................... 83 184
Write-off of deferred loan costs.................................. 665 --
Depreciation and amortization on property, plant and equipment.... 276 293
(Gain) loss on sale of property, plant and equipment.............. (12) 27
(Increases) decreases in assets:
Accounts receivable............................................ 1,111 (1,045)
Inventories.................................................... (56) 672
Prepaids and other............................................. (160) 373
Deferred tax assets............................................ (119) --
Increases (decreases) in liabilities:
Accounts payable............................................... 101 (1,102)
Accrued liabilities............................................ 146 (8)
Income taxes payable........................................... (943) --
Interest payable............................................... 1,303 (2,222)
------- --------
Net cash provided by (used in) operating activities................... 2,927 (3,079)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............................ (295) (180)
Proceeds from sale of property, plant and equipment................... 10 --
------- --------
Net cash used in investing activities................................. (285) (180)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance ......................................... 19,014 --
Proceeds from preferred stock/warrant issuance........................ 10,000 4,000
Issuance of Senior Notes ............................................. 90,000 --
Proceeds from bank borrowings......................................... 580 --
Repayments on debt ................................................... (11,789) (4,000)
Payments under capital leases......................................... (8) (5)
Deferred financing costs ............................................. (5,414) --
Recapitalization consideration........................................ (102,617) --
------- --------
Net cash used in financing activities................................. (234) (5)
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... 2,408 (3,264)
CASH AND CASH EQUIVALENTS, beginning of period.......................... 258 6,507
------- --------
CASH AND CASH EQUIVALENTS, end of period................................ $ 2,666 $ 3,243
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................................ $ 289 $ 4,736
Cash paid for income taxes............................................ 1,225 (596)
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Series A preferred stock dividend-in-kind............................. $ 150 $ 275
Series B and Series C preferred stock dividend accrual................ $ -- $ 82
Accretion of discount on Series A preferred stock..................... $ 28 $ 42
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS
5
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY OPERATIONS
Elgar Holdings, Inc., a Delaware corporation (the "Company"),
manufactures and sells programmable power supply units through its wholly owned
subsidiary, Elgar Electronics Corporation ("Elgar"), to commercial and defense
entities as well as to governmental agencies. The Company's primary sales are
within the United States and Europe.
On February 3, 1998, the Company consummated a recapitalization (the
"Recapitalization") in which all shares of the Company's common stock, other
than those retained by certain members of management and certain other
shareholders (the "Continuing Shareholders"), were converted into the right to
receive cash based upon a formula. The Continuing Shareholders retained
approximately 15% of the common equity of the Company while new investors
acquired the balance of the equity interests in the Company.
On May 29, 1998, Elgar acquired all of the issued and outstanding
shares of common stock of Power Ten, which specializes in developing and
manufacturing high-quality, high-power DC power supplies. In connection with the
acquisition, which was accounted for as a purchase, Elgar entered into
non-compete agreements with the two former stockholders of Power Ten, one of
whom is currently a member of Power Ten's management team. The acquisition was
financed by the issuance of 5,000 shares of Series B Convertible Preferred Stock
and borrowings under the Company's credit facility (the "Credit Facility") with
Bankers Trust Company, as agent ("Bankers Trust").
Unaudited condensed pro forma net sales and net income (loss) for
the three month periods ended March 28, 1998 and April 3, 1999, assuming the
Recapitalization and the Power Ten acquisition occurred on December 28, 1997,
and also assuming a 40% statutory tax rate, are as follows (in thousands):
THREE MONTHS ENDED
---------------------------------
MARCH 28, 1998 APRIL 3, 1999
-------------- -------------
Net sales........................... $ 18,545 $ 14,993
Net income (loss)................... $ 210 $ (857)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION/BASIS OF PRESENTATION
The accompanying consolidated financial statements as of and for the
three months ended April 3, 1999 include the accounts of the Company and its
wholly owned subsidiary, Elgar, and the accounts of Elgar's wholly owned
subsidiary, Power Ten. All significant intercompany accounts and transactions
have been eliminated. The accompanying financial statements as of and for the
three months ended March 28, 1998 include only the accounts of Elgar. These
financial statements have been prepared in accordance with generally accepted
accounting principles and with the instructions to Form 10-Q. These financial
statements have not been examined by independent public accountants, but 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
6
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company operates and reports financial results on a fiscal year of
52 or 53 weeks ending the Saturday closest to December 31. As disclosed in its
Current Report on Form 8-K filed on March 26, 1999, the Company recently changed
its fiscal year end from the Saturday closest to March 31 to 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 April 3, 1999 are not necessarily indicative of the results to be
expected for the Company's fiscal year ending January 1, 2000.
CASH EQUIVALENTS
Cash equivalents at March 28, 1998 and April 3, 1999 consist of cash
held in a money market account.
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):
MARCH 28, 1998 APRIL 3, 1999
-------------- -------------
Raw materials............................... $3,745 $3,868
Work-in-process............................. 3,677 2,461
Finished goods.............................. 883 2,094
------ ------
Total.................................. $8,305 $8,423
====== ======
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation of
property, plant and equipment is provided using the straight-line method over
the estimated useful lives of the related assets.
INTANGIBLE ASSETS
Intangible assets represent (i) the excess of purchase price over net
book value of assets acquired in connection with acquisitions, (ii) deferred
financing costs incurred in connection with the Recapitalization and the Power
Ten acquisition and (iii) agreements not to compete relating to the Power Ten
acquisition. The components of intangible assets are being amortized on a
straight-line basis over their estimated useful lives, ranging from 5 to 15
years.
The Company periodically re-evaluates the original assumptions and
rationale utilized in the establishment of the carrying value and estimated
useful lives of these assets. The criteria used for these evaluations include
management's estimate of the assets' continuing ability to generate income from
operations and positive cash flows in future periods as well as the strategic
significance of the intangible assets to the Company's business activity.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which requires the use of the liability method in providing for income taxes.
Current income tax expense is the amount of income taxes expected to be
7
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
payable in the current year.
REVENUE RECOGNITION
The Company recognizes revenue when goods are shipped to the customer,
net of sales returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
In the quarter ended April 3, 1999, sales to two customers accounted
for approximately 25% and 20% of the Company's net sales. In the quarter ended
March 28, 1998, sales to three customers accounted for approximately 23%, 19%
and 11% of the Company's net sales. No other customers individually represented
more than 10% of net sales in the quarter ended April 3, 1999 or March 28, 1998.
The Company performs ongoing credit evaluation of its customers' financial
condition, and maintains reserves for potential credit losses.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information." SFAS No. 130
establishes standards for reporting of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS No. 131 requires
reporting certain information about operating segments in annual and
interim-period financial statements. The Company adopted SFAS No. 130 on March
29, 1998. The Company had no elements of comprehensive income during the three
months ended April 3, 1999. The Company adopted SFAS No. 131 on January 3, 1999.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and for Hedging Activities." SFAS No. 133 requires that all
derivatives be recorded on the balance sheet as an asset or liability measured
at its fair value with changes in fair value recognized currently in earnings
unless hedge accounting criteria are met. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999; however, a company may implement the
provisions of SFAS No. 133 as of the beginning of any fiscal quarter after June
16, 1998. The Company has not yet determined what impact, if any, the adoption
of SFAS No. 133 will have on the Company's consolidated financial statements,
results of operations or related disclosures thereto. The Company intends to
adopt SFAS No. 133 on January 2, 2000.
8
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LONG-TERM DEBT, CREDIT FACILITY AND CAPITAL CALL AGREEMENT
SENIOR NOTES
In connection with the Recapitalization, all outstanding borrowings
under the then-existing revolving line of credit agreement and term loans
payable to a bank aggregating approximately $10.9 million were repaid and,
concurrently, the Company issued $90 million of 9.875% Senior Notes due February
1, 2008 and entered into the Credit Facility. Interest on the Senior Notes is
payable semi-annually on each February 1 and August 1.
CREDIT FACILITY
In connection with the Recapitalization, Elgar, as borrower, and the
Company, as guarantor, entered into a credit agreement (the "Credit Agreement")
with Bankers Trust, as agent, which provided for a $15 million revolving credit
facility (the "Revolving Facility") that matures on February 3, 2003. On May 29,
1998, in connection with the acquisition of Power Ten, the Credit Agreement was
amended and restated to, among other things, increase the available borrowings
to $30 million by adding a $15 million term facility (the "Term Facility") to
the existing $15 million Revolving Facility. Elgar used all of the proceeds from
the Term Facility to finance a portion of the purchase price for Power Ten.
Loans under the Credit Agreement are secured by substantially all of the
Company's assets (including a pledge of the capital stock of Elgar and Power
Ten) and guaranteed by the Company and Power Ten. No amounts were outstanding
under the Revolving Facility as of March 28, 1998 and April 3, 1999,
respectively.
The Credit Agreement contains restrictions on the incurrence of debt,
the sale of assets, mergers, acquisitions and other business combinations,
voluntary prepayment of other debt of the Company, transactions with affiliates,
repurchase or redemption of stock from stockholders, and various financial
covenants, including covenants requiring the maintenance of fixed charge
coverage, and maximum debt to earnings, before interest, taxes, depreciation and
amortization (EBITDA) ratios and minimum consolidated EBITDA.
On February 12, 1999, the Company and Elgar entered into a First
Amendment and Waiver to the Credit Agreement pursuant to which, among other
things, available borrowings under the Revolving Facility were reduced from $15
million to $5 million, certain financial covenants were amended, and the Company
and Elgar received a waiver for past noncompliance with the covenants referred
to in the prior paragraph. The Company was in compliance with the covenants
contained in the Credit Agreement, as amended, for the quarter ended April 3,
1999.
CAPITAL CALL AGREEMENT
In connection with amending the Credit Agreement on May 29, 1998, the
Company, Elgar and the Company's majority shareholder entered into a capital
call agreement with Bankers Trust (the "Capital Call Agreement"). On February
12, 1999, in connection with entering into the First Amendment and Waiver to the
Credit Agreement, the majority shareholder agreed to make a capital contribution
to the Company by no later than March 31, 1999 in the amount of $4.0 million.
This contribution was made on March 31, 1999, at which time the Company
transferred the funds to Elgar for purposes of repaying outstanding indebtedness
under the Credit Agreement. See Note 4 below. In addition, on February 12, 1999,
the majority shareholder entered into an Amended and Restated Capital Call
Agreement with Bankers Trust pursuant to which, among other things, the majority
shareholder agreed to contribute up to an additional
9
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$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 Amended and Restated Capital Call Agreement. The Company was
in compliance with such covenants for the quarter ended April 3, 1999.
4. PREFERRED STOCK
REDEEMABLE PREFERRED STOCK
In connection with the Recapitalization, the Company issued 10,000
shares of redeemable preferred stock, designated as Series A 10% Cumulative
Redeemable Preferred Stock (the "Series A Preferred Stock"), for cash proceeds
of $10.0 million. In connection with such issuance, the Company also issued to
the purchasers of the Series A Preferred Stock warrants to purchase 353,744
shares of the Company's common stock. A value of $1.7 million has been
attributed to the warrants. The $1.7 million warrant value is included in
additional paid-in-capital as of March 28, 1998 and April 3, 1999.
Dividends are payable to the holders of the Series A Preferred Stock
at the annual rate per share of 10% times the sum of $1,000 and accrued but
unpaid dividends. Dividends are payable at the rate per share of 0.10 shares
of Series A Preferred Stock through January 31, 2001, and in cash on and
after April 30, 2001. Dividends are payable quarterly on January 31, April
30, July 31 and October 31 of each year, commencing April 30, 1998. Dividends
are fully cumulative and accrue on a quarterly basis.
CONVERTIBLE PREFERRED STOCK
In connection with the 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. The 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 and Waiver to the
Credit Agreement, the Company's majority shareholder agreed to make a capital
contribution to the Company by no later than March 31, 1999 in the amount of
$4.0 million. 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. The offering, which was
made in compliance with the subscription rights contained in the Company's
Shareholders Agreement, was completed on March 31, 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
$1,000 and accrued but unpaid dividends. Such dividends are payable
semi-annually on April 30 and October 31 of each year, commencing October 31,
1998, when and if declared by the Board of Directors out of funds legally
available therefor. During the quarter ended April 3, 1999, the Company accrued
$77,108 of dividends on the Series B Preferred Stock and $4,667 of dividends on
the Series C Preferred Stock.
The Series B Preferred Stock and Series C Preferred Stock, which rank
on a parity with each other, rank junior to the Series A Preferred Stock.
10
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. COMMON STOCK
On February 3, 1998, immediately prior to the Recapitalization, the
Company effected (i) an increase in the number of shares authorized from 1,000
to 9,340,000 shares and (ii) a 9,340 to 1 stock split of the common stock
distributed in the form of a stock dividend. As a result of this action,
9,339,000 shares were issued to shareholders of record on February 3, 1998. All
references throughout the accompanying consolidated financial statements to the
number of shares of the Company's common stock and earnings per share have been
restated to reflect the effect of the stock split. In connection with the
Recapitalization, the number of authorized shares of common stock was then
reduced to 5,000,000 shares.
At March 28, 1998 and April 3, 1999, a total of 353,744 shares of
common stock were reserved for issuance for the exercise of warrants at the
initial exercise price of $5.00 per share to the holders of the Series A
Preferred Stock. The exercise price and number of warrant shares are both
subject to adjustment in certain events.
6. 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 is required to pay a fixed rate of 5.83% on each March
24, June 24, September 24 and December 24, commencing on September 24, 1998. The
swap agreement terminates on June 25, 2001. The Company will receive a floating
rate based on the three-month London Interbank Offering Rate (LIBOR) on the same
dates as described above. In connection with the swap agreement, the Company has
included $0 and $10,875 in interest expense in its consolidated statements of
operations for the three months ended March 28, 1998 and April 3, 1999,
respectively.
7. STOCK OPTION PLAN
The Elgar Holdings, Inc. 1998 Stock Option Plan, as amended on March
24, 1999 (the "Option Plan"), provides for the issuance of up to 489,763
shares of common stock pursuant to awards granted under the Option Plan (as
of January 2, 1999, prior to the amendment, 265,374 shares of common stock
were authorized for issuance under the Option Plan). As of April 3, 1999,
there were options outstanding to purchase 468,500 shares of common stock
(though issuances of options to purchase 168,500 shares of common stock are
subject to receipt of a waiver by the requisite percentage of the Company's
stockholders of a subscription right contained in the Shareholders
Agreement). All options have been granted at fair market value on the date of
grant. Options vest ratably over four years and generally expire on the tenth
anniversary of the date of grant.
11
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 months ended March 28,
1998 and April 3, 1999, with the results of Power Ten included from its date of
acquisition on May 29, 1998:
THREE MONTHS ENDED
-----------------------------------
MARCH 28, 1998 APRIL 3, 1999
----------------- ----------------
Net sales............................... 100.0% 100.0%
Cost of sales........................... 54.3 57.3
----- -----
Gross profit........................ 45.7 42.7
Selling, general and administrative
expense.............................. 16.7 17.6
Research and development and
engineering expenses................. 11.3 10.0
Amortization expense.................... 2.0 4.0
----- -----
Operating income.................... 15.7% 11.1%
----- -----
COMPARISON OF THE THREE MONTHS ENDED APRIL 3, 1999 TO THE THREE MONTHS ENDED
MARCH 28, 1998
NET SALES. Net sales for the quarter ended April 3, 1999 were $15.0
million, a decrease of $0.9 million, or 5.7%, from net sales of $15.9 million
for the quarter ended March 28, 1998. This decrease was due to a decrease in
sales of programmable DC products (primarily attributable to decreased sales to
Racal Instruments, Inc. ("Racal"), as discussed in the following paragraph),
partially offset by an increase in sales of Space Systems products and the
inclusion of the results of Power Ten.
Racal is a systems integrator for test and measurement equipment which
provides certain automatic test equipment ("ATE") systems utilizing Elgar's
programmable power supplies to manufacturers, including a leading semiconductor
manufacturer. In the second quarter of calendar year 1998, Racal notified the
Company that the leading semiconductor manufacturer had decided to cease orders
for Elgar's current AT-8000 DC power supplies until the "next generation"
technology was available. Elgar's prototype power
12
supplies for this next-generation technology were delivered to the end-user
in August 1998. The Company commenced delivering pre-production power
supplies to the end-user in the second quarter of 1999, and anticipates
receiving production orders from the end-user in the latter part of calendar
1999 or early 2000. Racal accounted for approximately $3.6 million, or 22.6%,
of the Company's total net sales in the quarter ended March 28, 1998, the
substantial majority of which was attributable to the semiconductor
manufacturer. The Company did not record any sales to Racal in the quarter
ended April 3, 1999.
A major customer of Space Systems products recently requested that the
Company upgrade one of its satellite testing systems. Since this upgrade will
require additional engineering efforts on the part of the Company and testing on
the part of the customer, deliveries of additional systems to the customer are
expected to be delayed. These delays are expected to adversely affect the
Company's net sales at the end of calendar 1999 and the beginning of calendar
2000.
GROSS PROFIT. Gross profit for the quarter ended April 3, 1999 was $6.4
million, a decrease of $0.9 million, or 12.3%, from gross profit of $7.3 million
for the quarter ended March 28, 1998. As a percentage of net sales, gross profit
decreased from 45.7% for the quarter ended March 28, 1998 to 42.7% for the
quarter ended April 3, 1999. The decrease in gross profit was primarily
attributable to unfavorable product mix and lower sales volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses were $2.6 million for the quarter ended April
3, 1999, a decrease of $0.1 million, or 3.7%, from SG&A expenses of $2.7 million
for the quarter ended March 28, 1998. SG&A expenses increased as a percentage of
net sales from 16.7% for the quarter ended March 28, 1998 to 17.6% for the
quarter ended April 3, 1999. The increase in SG&A as a percentage of net sales
was primarily due to lower sales.
RESEARCH AND DEVELOPMENT AND ENGINEERING EXPENSES. Research and
development and engineering expenses were $1.5 million for the quarter ended
April 3, 1999, a decrease of $0.3 million, or 16.7%, from research and
development and engineering expenses of $1.8 million for the quarter ended March
28, 1998. As a percentage of net sales, research and development and engineering
expense decreased from 11.3% for the quarter ended March 28, 1998 to 10.0% for
the quarter ended April 3, 1999. The decrease was due to lower labor and
software purchases in the quarter ended April 3, 1999 versus the quarter ended
March 28, 1998.
AMORTIZATION EXPENSE. Amortization expense increased to $0.6 million
for the quarter ended April 3, 1999 from $0.3 million for the quarter ended
March 28, 1998. This increase was due to three months of amortization expense
incurred in connection with the Company's acquisition of Power Ten.
OPERATING INCOME. Operating income was $1.7 million for the quarter
ended April 3, 1999, a decrease of $0.8 million, or 32.0%, from operating income
of $2.5 million for the quarter ended March 28, 1998. Operating income decreased
as a percentage of net sales from 15.7% for the quarter ended March 28, 1998 to
11.1% for the quarter ended April 3, 1999, due to the factors discussed above.
INCOME TAXES. Income taxes for the three months ended April 3, 1999
contained a tax benefit of $175,000, compared to a tax provision of $39,000 for
the three months ended March 28, 1998. The Company's effective tax rate was
17.0% for the three months ended April 3, 1999 and 16.1% for the three months
ended March 28, 1998. The effective tax rate differs from the statutory tax rate
of 40.0%, primarily due to the non-deductibility of goodwill for tax purposes
and realization of research and development tax credits utilized by the Company.
13
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW. The Company's principal uses of cash are to finance working
capital, debt service and capital expenditures. Historically, the Company has
funded its activities principally from working capital and a line of credit.
Cash flow used by operating activities for the three months ended April
3, 1999 was $3.1 million, a decrease of $6.0 million from cash flow of $2.9
million provided by operating activities for the three months ended March 28,
1998. This decrease was attributable to a decrease in net income of $1.1
million, a $3.5 million increase in interest payable on the Senior Notes in the
quarter ended April 3, 1999 as compared to the quarter ended March 28, 1998, an
increase of $2.2 million in accounts receivable and a decrease of $1.2 million
in accounts payable, offset by a $0.9 million increase in income tax payable, a
$0.8 million decrease in inventory, and a $0.3 million decrease in intangibles.
SOURCES OF CAPITAL. The Company anticipates that its principal uses of
cash will be working capital requirements, debt service requirements and capital
expenditures. Based upon current and anticipated levels of operations,
management believes that its cash flow from operations, together with amounts
available under the Company's credit facility, will be adequate to meet its
anticipated requirements for the foreseeable future for working capital,
interest payments, payments under the Company's term credit facility and capital
expenditures. The Company's future operating performance will be subject to
future economic conditions and to financial, business and other factors, many of
which may be beyond the Company's control.
CAPITAL REQUIREMENTS. The Company's capital expenditures were $180,000
in the three months ended April 3, 1999 compared to $295,000 in the three months
ended March 28, 1998.
YEAR 2000
Many computer programs have been written using two digits rather than
four to define the applicable year. Computer programs with time-sensitive
software may recognize a date using "00" as the year 1900 rather the year 2000.
This "year 2000" issue could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
With a view to the year 2000 issue, the Company has undertaken a
detailed review of all of the significant operating systems, software
applications and hardware used in its operations. The Company has also made
contact with its major suppliers in order to determine their state of readiness.
The Company's operating systems and business software updates have been
installed and tested, and personal computer hardware and software
upgrades/replacements have been converted. Other items such as the phone switch,
bank capabilities, outside insurance carriers and the outside payroll system are
being evaluated for conversion before the end of June 1999. Management expects
that the cost to become year 2000 compliant, including conversion of its
business software and upgrades of its personal computer hardware and software,
will total approximately $80,000 ($38,000 of which has been incurred to date).
Compliance status from key suppliers is being evaluated to determine whether the
Company will need to switch sources to ensure ongoing product/service
availability. This evaluation/conversion is expected to be completed by
September 1999. A contingency plan is being developed, notwithstanding that the
risk on remaining items is considered low.
14
Management believes that its most significant exposure on the year 2000
issue is from suppliers that experience problems. Along those lines, management
is both obtaining year 2000 compliance certificates from significant suppliers
and meeting with key suppliers to assess compliance status. Should any of the
areas being addressed not provide adequate results, management will evaluate
alternate suppliers for raw material requirements.
Based on the steps taken to date, management does not expect that the
year 2000 issue will materially affect the Company's operations due to problems
encountered by its suppliers, customers or end-users for its products, although
no assurances can be given as to this.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has only limited involvement in derivative financial
instruments and does not hold or issue them for trading purposes. Certain
amounts borrowed under the Company's Credit Facility are at variable interest
rates and the Company is thus subject to market risk resulting from interest
rate fluctuations. The Company enters into interest rate swaps in part to
alter interest rate exposures. Interest rate swaps allow the Company to raise
long-term borrowings at floating rates and effectively swap them into fixed
rates that are lower than those available to the Company if fixed-rate
borrowings were made directly. Under interest rate swaps, the Company agrees
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. See Note 6 to the Company's Consolidated
Financial Statements included elsewhere in this report. As of April 3, 1999,
all but $2,500,000 of the Company's long-term bank debt was covered by this
swap arrangement. Thus, the Company's exposure with respect to upward
movements in interest rates is with respect this portion of its bank debt.
In addition, the Company is exposed to market risks related to
fluctuations in interest rates on the Senior Notes. For fixed rate debt such as
the Senior Notes, changes in interest rates generally affect the fair value of
the debt instrument. The Company does 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 the Company.
The tables below provide information as of April 3, 1999 about the
Company's derivative instruments and other financial instruments that are
sensitive to changes in interest rates.
15
LONG TERM BANK DEBT (VARIABLE RATE)
Principal amount $10,000,000(1)
Variable interest rate 7.75%(2)
Maturity--tranche June 30, 1999
Maturity--loan February 3, 2002
Remaining principal payments:
1999 $0
2000 $1,250,000
2001 $3,750,000
2002 $4,000,000
2003 $1,000,000
- ----------------
(1) $7,500,000 of this amount is covered by the interest-rate swap arrangement
described below.
(2) Renewals are based on the Eurodollar Rate plus 2.75%.
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 5.6875% for the current period (2)
Swap interest $10,875 (3)
Commencement date June 24, 1998
Maturity date June 25, 2001
- ----------------
(1) As the fixed interest rate payor, the Company is required to pay a fixed
rate of 5.83% per annum on the $7,500,000 notional amount, payable
quarterly on each March 24, June 24, September 24 and December 24 (with
the first such payment made on September 24, 1998).
(2) As the floating rate payor, Bankers Trust Company is required to pay a
floating rate of interest on the $7,500,000 notional amount, based on the
three-month London Interbank Offering Rate (LIBOR), payable quarterly on
each March 24, June 24, September 24 and December 24 (with the first such
payment made on September 24, 1998).
(3) In connection with the swap agreement, the Company recorded $10,875 of
interest expense for its fiscal quarter ended April 3, 1999.
SENIOR NOTES (FIXED RATE)
Principal amount outstanding $90,000,000
Fixed interest rate 9.875%
Maturity date February 1, 2008
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
EXHIBIT NO. DESCRIPTION
3.1 Certificate of Designations for the Series C 6%
Cumulative Convertible Preferred Stock of Elgar
Holdings, Inc.
10.1 First Amendment and Waiver, dated as of
February 12, 1999, among Elgar Holdings, Inc.,
Elgar Electronics Corporation, the lenders
party to the Credit Agreement and Bankers Trust
Company, as Agent
10.2 Second Amendment, dated as of March 24, 1999,
among Elgar Holdings, Inc., Elgar Electronics
Corporation, the lenders party to the Credit
Agreement and Bankers Trust Company, as Agent
10.3 Amended and Restated Capital Call Agreement,
dated as of May 29, 1998 and amended and
restated as of February 12, 1999, among J.F.
Lehman Equity Investors L.P., Elgar Holdings,
Inc., Elgar Electronics Corporation and Bankers
Trust Company, as Agent
10.4 Elgar Holdings, Inc. 1998 Stock Option Plan, as
Amended and Restated on March 24, 1999
27 Financial Data Schedule
(b) A Form 8-K was filed on March 26, 1999.
17
SIGNATURE
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: May 17, 1999 By: /s/ CHRISTOPHER W. KELFORD
--------------------------------------------
Christopher W. Kelford
Vice President--Finance, Chief Financial
Officer, Treasurer and Assistant Secretary
18