<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 27, 1998
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 (Zip Code)
Executive Offices)
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 September 10, 1998, the number of shares outstanding of the
Registrant's Common Stock was 2,300,000.
<PAGE>
ELGAR HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
PART I FINANCIAL INFORMATION NUMBER
- ------ --------------------- ------
<S> <C> <C>
Item 1 Consolidated Financial Statements
Consolidated Statements of Operations for the three months
ended June 28, 1997 (unaudited) and
June 27, 1998 (unaudited) 3
Consolidated Balance Sheets as of March 28, 1998 and June 27,
1998 (unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended June 28, 1997 (unaudited) and
June 27, 1998 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
PART II OTHER INFORMATION
- ------- -----------------
Item 6 Exhibits and Reports on Form 8-K 18
</TABLE>
2
<PAGE>
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Three Months
Ended
-------------------------------
June 28, June 27,
1997 1998
-------- --------
<S> <C> <C>
Net sales................................................... $13,019 $17,176
Cost of sales............................................... 7,056 8,907
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Gross profit.............................................. 5,963 8,269
Selling, general and administrative expense................. 2,199 2,821
Research and development and engineering expenses........... 1,203 1,673
Amortization expense........................................ 328 421
------- -------
Operating income.......................................... 2,233 3,354
Interest expense, net....................................... 386 2,442
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Income before income tax provision.......................... 1,848 912
Income tax provision........................................ 874 531
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Net income................................................ $ 973 $ 381
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE
AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
3
<PAGE>
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
June 27,
MARCH 28, 1998
1998 (unaudited)
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,666 $ 7,709
Accounts receivable, net of allowance for doubtful accounts of
$197 and $198, respectively 6,453 7,111
Inventories 8,305 8,514
Deferred tax assets 1,098 1,167
Prepaids and other 373 280
-------- --------
Total current assets 18,895 24,781
PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated
depreciation and amortization of $1,643 and $2,319, 2,952 2,938
respectively
INTANGIBLE ASSETS, net of accumulated amortization of
$2,711 and $3,285, respectively 22,412 39,143
DEFERRED TAX ASSETS, net of current portion 653 653
-------- --------
$ 44,912 $ 67,515
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 3,068 $ 3,026
Accrued liabilities 4,801 7,704
Current portion of long-term debt -- 2,000
Current portion of capital lease obligations 17 14
-------- --------
Total current liabilities 7,886 12,744
CAPITAL LEASE OBLIGATIONS, net of current portion 19 15
LONG-TERM DEBT, net of current portion 90,000 103,000
-------- --------
Total liabilities 97,905
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115,759
SERIES A 10% CUMULATIVE REDEEMABLE PREFERRED STOCK, no par value,
20,000 shares authorized; 10,000 shares issued and outstanding in 1998 8,478 8,772
-------- --------
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 June 27, 1998, respectively -- 5,000
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 6,519
-------- --------
(61,471) (57,016)
-------- --------
$ 44,912 $ 67,515
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE
AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
4
<PAGE>
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------
JUNE 28, June 27,
1997 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 973 $ 381
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of intangibles 328 421
Amortization of deferred loan costs 44 152
Depreciation and amortization on property, plant and equipment 201 235
(Increases) decreases in assets:
Accounts receivable (462) 631
Inventories (1,013) 956
Prepaids and other (63) 162
Increases (decreases) in liabilities:
Accounts payable (175) (648)
Accrued liabilities (225) (817)
Income taxes payable 867 513
Interest payable -- 2,296
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Net cash provided by operating activities 476 4,282
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (107) (120)
Acquisition of Power Ten, net of cash acquired -- (17,266)
Non-compete agreements -- (240)
------- -------
Net cash used in investing activities (107) (17,626)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from preferred stock issuance -- 5,000
Proceeds from bank borrowings -- 15,000
Deferred financing costs -- (974)
Repayments on debt (1,034) --
Payments under capital leases (10) (7)
Recapitalization consideration -- (632)
------- -------
Net cash provided by (used in) financing activities (1,044) 18,387
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (676) 5,043
CASH AND CASH EQUIVALENTS, beginning of period 691 2,666
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 15 $ 7,709
------- -------
------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 321 $ 10
Cash paid for income taxes 7 25
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Preferred stock dividend-in-kind $ -- $ 253
Accretion of discount on preferred stock -- 42
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE
AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
5
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INCORPORATION AND COMPANY OPERATIONS
Elgar Holdings, Inc., a Delaware corporation (the "Company")
(formerly known as Carlyle-EEC Holdings, Inc.), manufactures and sells
programmable power supply units through its wholly owned subsidiary, Elgar
Electronics Corporation, to commercial and defense entities as well as to
governmental agencies. The Company's primary sales are within the United
States and Europe.
The Company was incorporated on March 27, 1996 and had no operations
from that date to April 3, 1996. On April 3, 1996, the Company acquired all
of the outstanding common stock of Elgar Electronics Corporation, a
California corporation (the "Predecessor" or "Elgar").
On January 2, 1998, the Company entered into an Agreement and Plan
of Merger (the "Recapitalization Agreement") pursuant to which the Company
was recapitalized (the "Recapitalization"). Pursuant to the Recapitalization
Agreement, 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 agreed to retain
approximately 15% of the common equity of the Company. In order to finance
the Recapitalization, the Company (i) issued $90 million of senior notes in a
debt offering, (ii) received $19 million in cash from an investor group for
common stock and (iii) received $10 million in cash for the issuance of
redeemable preferred stock. In connection with the Recapitalization, the
Company changed its name to Elgar Holdings, Inc. Elgar, as borrower, and the
Company, as guarantor, also entered into a new $15 million revolving credit
facility. Loans under the new facility are secured by substantially all of
the Company's assets and are guaranteed by the Company and secured by a
pledge of all the outstanding capital stock of Elgar. The credit agreement
governing the facility contains customary financial covenants and defined
events of default.
On May 29, 1998, pursuant to a Stock Purchase Agreement dated as of
May 5, 1998, Elgar acquired all of the issued and outstanding shares of
common stock of Power Ten for $17.8 million cash. The acquisition has been
accounted for as a purchase. In connection with the acquisition, Elgar
entered into non-compete agreements with the two former stockholders of Power
Ten who are currently members of Power Ten's management team. At closing,
Elgar paid each former stockholder $120,000 as consideration for their
agreement not to compete. The acquisition was financed by the issuance of
5,000 shares of Series B Convertible Preferred Stock for $5 million in cash
and borrowings of $15 million under the amended credit facility (see Note 3).
In connection with the Power Ten acquisition and the financing thereof, Elgar
recorded approximately $16.1 million of goodwill (representing the excess of
purchase price over the net assets acquired) and approximately $0.9 million
of deferred financing costs, both of which are included in intangible assets
as of June 27, 1998.
6
<PAGE>
Unaudited condensed pro-forma operating results for the three-month
period ended June 28, 1997 and June 27, 1998, assuming the Recapitalization and
the Power Ten acquisition occurred on March 30, 1997 and March 29, 1998,
respectively, and also assuming a 40% statutory tax rate, are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
JUNE 28, June 27,
1997 1998
---------- ---------
<S> <C> <C>
Net sales..................................................... $13,019 $17,176
Cost of sales................................................. 7,056 8,907
------- -------
Gross profit............................................. 5,963 8,269
Selling, general and administrative expense................... 2,253 2,821
Research and development and engineering expense.............. 1,203 1,673
Amortization expense.......................................... 652 637
------- -------
Operating income......................................... 1,855 3,138
Interest expense, net......................................... 2,740 2,665
------- -------
Income (loss) before income tax provision (benefit)...... (885) 473
Income tax provision (benefit)................................ (90) 442
------- -------
Net income (loss)............................................. $ (795) $ 31
------- -------
------- -------
</TABLE>
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 June 27, 1998 include the accounts of the Company and its
wholly owned subsidiary, Elgar, and the accounts of Elgar's wholly owned
subsidiary, Power Ten, from the date of Power Ten's acquisition on May 29,
1998. All significant intercompany accounts and transactions have been
eliminated. The accompanying financial statements for the three months ended
June 28, 1997 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
The Company operates and reports financial results on a fiscal year
of 52 or 53 weeks ending the Saturday closest to March 31. Interim periods
include 13 or 14 weeks ending the last Saturday in the quarter.
CASH EQUIVALENTS
Cash equivalents at March 28, 1998 and June 27, 1998 consist of cash
held in a money market account.
7
<PAGE>
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):
<TABLE>
<CAPTION>
MARCH 28, June 27,
1997 1998
------------ ------------
<S> <C> <C>
Raw materials................................................. $3,745 $3,736
Work-in-process............................................... 3,677 3,370
Finished goods................................................ 883 1,408
------ ------
Total.................................................... $8,305 $8,514
------ ------
------ ------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is 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
As of March 28, 1998, intangible assets represent the excess of
purchase price over net book value of assets acquired in connection with the
Company's acquisition of Elgar (approximately $19.7 million) and certain
financing costs incurred in the Recapitalization. As of June 27, 1998,
intangible assets also include agreements not to compete ($240,000), the
excess of purchase price over net assets acquired in connection with the
acquisition of Power Ten (approximately $16.1 million) and deferred financing
costs (approximately $0.9 million). 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 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
8
<PAGE>
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 June 27, 1998, sales to three customers
accounted for approximately 18%, 15% and 15% of the Company's net sales. In
the quarter ended June 28, 1997, sales to two customers accounted for
approximately 23% and 17% of the Company's net sales. No other customers
individually represented more than 10% of net sales in the first quarter of
fiscal 1999 or fiscal 1998. The Company performs ongoing credit evaluation of
its customers' financial condition. The Company 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 effect of which was immaterial to the consolidated
financial statements. The Company plans to adopt SFAS No. 131 during its
fiscal year ended April 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.
3. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT
SENIOR NOTES
In connection with the Recapitalization (see Note 1), 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
Senior Notes and entered into a new credit facility with a bank.
The Senior Notes bear interest at a rate of 9.875% per annum and
mature on February 1, 2008. Interest on the Senior Notes is payable
semi-annually, commencing on August 1, 1998.
At any time on or before February 1, 2003, the Company may redeem up
to 35% in aggregate principal amount of (i) the initial aggregate principal
amount of the Senior Notes and (ii) the initial principal amount of any
additional notes issued under the indent ure after the issue date, on one or
more occasions, with the net cash proceeds of one or more public equity
offerings at a redemption price of 109.875% of the principal amount thereof,
plus accrued and unpaid interest thereon to the redemption date, provided
that at least 65% of the sum of (i) the initial aggregate principal amount of
the Senior Notes and (ii) the initial aggregate principal amount of
additional notes remain outstanding immediately after
9
<PAGE>
redemption. The Senior Notes are redeemable by the Company at stated
redemption prices beginning in February 2003.
The Senior Notes are general unsecured obligations of the Company
and rank senior to all existing and future subordinated indebtedness of the
Company. The obligations of the Company as a guarantor of Elgar's obligations
under the bank credit facility are secured by substantially all of the assets
of the Company. Accordingly, such secured indebtedness effectively ranks
senior to the Senior Notes to the extent of such assets.
The Senior Notes restrict, among other things, the Company's ability
to incur additional indebtedness, pay dividends or make certain other
restricted payments, incur liens, sell preferred stock of subsidiaries, apply
net proceeds from certain asset sales, merge or consolidate with any other
person, sell, assign, transfer, lease, convey or otherwise dispose of
substantially all of the assets of the Company or enter into certain
transactions with affiliates. The Senior Notes are fully and unconditionally
guaranteed by Elgar and Power Ten. The only direct or indirect subsidiary of
the Company that is not a guarantor of the Senior Notes is insignificant to
the consolidated financial statements. In management's opinion, separate
financial statements of the guarantors have not been presented as they would
not be material to investors.
The Senior Notes were issued on February 3, 1998. As such, the
Company believes the fair value of the Senior Notes approximates the carrying
value of such debt at March 28, 1998 and June 27, 1998.
CREDIT FACILITY
In connection with Recapitalization, Elgar, as borrower, and the
Company, as guarantor, entered into a Loan and Security Agreement with a bank
to provide Elgar with a $15 million revolving credit facility which matures
on February 3, 2003. No amounts were outstanding under this credit facility
as of March 28, 1998 and June 27, 1998, respectively.
On May 29, 1998, in connection with the acquisition of Power Ten
(see Note 1), the Company amended its credit agreement with the bank to,
among other things, increase the available borrowings thereunder to $30
million by including a $15 million term facility and reconfirming the
revolving facility discussed above. The proceeds of the term facility of $15
million were used to finance a portion of the Power Ten acquisition.
Elgar's indebtedness under the agreement is secured by a first
priority security interest in substantially all of the Company's assets,
including the assets of Elgar and Power Ten.
Indebtedness under the agreement bears interest at a floating rate
of interest equal to, at Elgar's option, the Eurodollar rate for one, two,
three or six months, plus 2.75%, or the bank's prime rate plus a margin of
1.75%.
Advances under the agreement are limited to the lesser of (a) $15
million and (b)(i) 85% of eligible accounts receivable plus (ii) 60% of
eligible inventory minus (iii) the aggregate amount of all undrawn letters of
credit issued under the Credit Facility plus the aggregate amount of any
unreimbursed drawings under any outstanding letters of credit.
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
10
<PAGE>
earnings, before interest, taxes, depreciation and amortization (EBITDA)
ratios and minimum consoli dated EBITDA. As of March 28, 1998 and June 27,
1998, the Company was in compliance with all required covenants under the
credit facility.
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, for cash proceeds of $10 million. In connection
with such issuance, the Company also issued to the purchasers 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, 1999.
Dividends are payable to the holders of the redeemable preferred
stock at the annual rate per share of 10% times the sum of $1,000 and accrued
but unpaid dividends. Dividends shall be payable at the rate per share of
0.10 shares of redeemable 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 shall be fully cumulative and shall accrue on a quarterly
basis.
If the cash dividends payable on the redeemable preferred stock
shall have been in arrears and unpaid for four or more successive dividend
payment dates, then until the date on which all such dividends in arrears are
paid in full, dividends shall accrue and be payable to the holders at the
annual rate of 12% times the sum of $1,000 per share and accrued but unpaid
dividends thereon. Upon payment in full of all dividends in arrears, cash
dividends will thereafter be payable at the 10% annual rate set forth above.
There were no dividends in arrears as of March 28, 1998 or June 27, 1998.
Holders of shares of redeemable preferred stock shall be entitled to
receive the stated liquidation value of $1,000 per share, plus an amount per
share equal to any dividends accrued but unpaid, in the event of any
liquidation or dissolution of the Company. After payment of the full amount
of the liquidation preference, holders of shares of redeemable preferred
stock will not be entitled to any further participation in any distribution
of assets of the Company.
The Company may, at its option, redeem at any time, all or any part
of the shares of the redeemable preferred stock at a redemption price per
share equal to 100% of the liquidation preference on the date of redemption.
On August 3, 2008, the Company shall redeem any and all outstanding shares of
redeemable preferred stock at a redemption price per share equal to 100% of
the liquidation preference on the date of redemption.
Upon the occurrence of a change in control (as defined), the
redeemable preferred stock shall be redeemable at the option of the holders,
at a redemption price per share equal to 100% of the liquidation preference.
The holders of shares of redeemable preferred stock shall not be
entitled to any voting rights. However, without the consent of the holders of
at least 85% of the outstanding shares of redeemable preferred stock, the
Company may not change the powers or preferences of the redeemable preferred
stock, create, authorize or issue any shares of capital stock ranking senior
to or on a parity with the redeemable preferred stock or create, authorize or
issue any shares of capital stock constituting junior securities, unless
11
<PAGE>
such junior securities are subordinate in right of payment to the redeemable
preferred stock.
If any amount of cash dividends payable on the redeemable preferred
stock shall have been in arrears and unpaid for four or more successive
dividend payment dates, then the number of directors constituting the board
of directors shall increase, as defined, and the holders of the redeemable
preferred stock shall have the right to elect the newly-created directors.
If the Company fails to redeem shares of redeemable preferred stock
in accordance with the mandatory redemption provisions described above, then
the number of directors constituting the Board of Directors shall increase,
as defined, and the holders of the redeemable preferred stock shall have the
right to elect directors to fill the newly-created directorships.
CONVERTIBLE PREFERRED STOCK
In connection with the acquisition of Power Ten (see Note 1), the
Company issued 5,000 shares Convertible Preferred Stock, designated as Series
B Convertible Preferred Stock, for cash proceeds of $5 million.
Dividends are payable to the holders of the convertible preferred
stock at the annual rate per share of 6% times the sum of $1,000 and accrued
but unpaid dividends. Dividends shall be 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.
Holders of shares of convertible preferred stock shall be entitled
to receive the stated liquidation value of $1,000 per share, plus an amount
per share equal to any dividends accrued but unpaid without interest, in the
event of any liquidation or dissolution of the Company. After payment of the
full amount of the liquidation preference, holders of shares of convertible
preferred stock will not be entitled to any further participation in any
distribution of assets of the Company.
Holders of shares of convertible preferred stock will have the
right, at such holder's option, at any time following a Triggering Event (as
defined), to convert all or a portion of such shares into the Company's
common stock, excluding accrued dividends, at the conversion price of $10.00
per share, subject to adjustments pursuant to certain anti-dilution
provisions.
The Company may, at its option, redeem at any time, all or any part
of the shares of the redeemable preferred stock at a redemption price per
share equal to 100% of the liquidation preference on the date of redemption.
Upon the occurrence of a change in control (as defined), the
convertible preferred stock shall be redeemable at the option of the holders,
at a redemption price per share equal to 100% of the liquidation preference
on the date of redemption, including dividends accrued as defined.
The holders of shares of convertible preferred stock shall not be
entitled to any voting rights. However, without the consent of the holders of
at least 51% of the outstanding shares of convertible preferred stock, the
Company may not amend its Certificate of Incorporation in any way what would
adversely alter or change the powers, preferences or special rights of the
convertible preferred stock.
12
<PAGE>
5. COMMON STOCK
On February 3, 1998, immediately prior to the Recapitalization, the
Company effected a 9,340 to 1 stock split of the common stock to be
distributed in the form of a stock dividend and an increase in the number of
shares authorized from 1,000 to 9,340,000 shares. 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 reduced to 5,000,000 shares.
At March 28, 1998 and June 27, 1998, 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 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. As of June 27, 1998, the Company has
included interest expense in connection with the swap agreement in accrued
liabilities in the accompanying consolidated balance sheet.
7. SUBSEQUENT EVENTS
On July 14, 1998, the Board of Directors adopted the Elgar Holdings,
Inc. 1998 Stock Option Plan (the "Option Plan"). The maximum number of shares
of common stock that may be issued pursuant to awards granted under the
Option Plan is 265,374. On the same date, the Board of Directors authorized
the grant of options to purchase 226,000 shares of common stock.
13
<PAGE>
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 for Elgar
Holdings, Inc. (the "Company") included elsewhere in this Quarterly Report on
Form 10-Q.
The Company's wholly owned subsidiary, Elgar Electronics Corporation
("Elgar"), acquired Power Ten on May 29, 1998, for approximately $17,800,000
in cash. Power Ten's results of operations are included in the Company's
results of operations from the acquisition date.
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, 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-month periods
ended June 28, 1997 and June 27, 1998, with the results of Power Ten included
from its date of acquisition on May 29, 1998:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
June 28, 1997 June 27, 1998
------------- -------------
<S> <C> <C>
Net sales................................................... 100.0% 100.0%
Cost of sales............................................... 53.8 51.7
Gross profit.............................................. 46.2 48.3
Selling, general and administrative expense................. 16.9 16.3
Research and development and engineering expenses........... 9.2 9.9
Amortization expense........................................ 2.3 2.3
----- -----
Operating income.......................................... 16.9% 19.8%
----- -----
----- -----
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED JUNE 27, 1998 VERSUS THE THREE MONTHS ENDED
JUNE 28, 1997 FOR ELGAR HOLDINGS, INC.
NET SALES. Net sales for the quarter June 27, 1998 were $17.2
million, an increase of $4.2 million, or 32.3%, from net sales of $13.0
million for the quarter June 28, 1997. This increase was primarily due to a
$0.8 million increase in Space Systems sales, a $0.7 million increase in
sales of Sorensen-brand products, a $0.7 million increase in sales to the
U.S. Navy's CASS Program and the inclusion of $0.9 million of Power Ten sales
from its date of acquisition on May 29, 1998.
14
<PAGE>
The Company was recently notified by Racal Instruments, Inc., 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,
that the leading semiconductor manufacturer referred to above has decided to
cease orders for Elgar's current AT-8000 DC power supplies until anticipated
"next generation" technology is available in early 1999. Racal accounted for
approximately $17.7 million, or 28.3%, of the Company's total net sales in
fiscal l998, the substantial majority of which was attributable to the
semiconductor manufacturer. Management expects that revenues from Racal will
be significantly lower in fiscal 1999 than they were in fiscal 1998. Elgar's
prototype ATE system for this next-generation technology was delivered to the
end-user in August 1998 with production scheduled to commence in early
calendar 1999.
GROSS PROFIT. Gross profit for the quarter June 27, 1998 was $8.3
million, an increase of $2.3 million, or 38.3%, from gross profit of $6.0
million for the quarter June 28, 1997. As a percentage of net sales, gross
profit increased from 46.2% for the quarter June 28, 1997 to 48.3% for the
quarter June 27, 1998. The increase in gross profit was primarily
attributable to improved manufacturing efficiencies combined with increased
volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses were $2.8 million for the quarter ended June
27, 1998, an increase of $0.6 million, or 27.3%, from SG&A expenses of $2.0
million for the quarter June 28, 1997. SG&A expenses decreased as a
percentage of net sales from 16.9% for the quarter June 28, 1997 to 16.3% for
the quarter June 27, 1998. The increase in dollars was primarily due to
higher sales volume, which resulted in a $0.2 million increase in
commissions, $0.2 million of nonrecurring expenditures incurred in connection
with the acquisition of Power Ten and a $0.1 million increase in management
fees.
RESEARCH AND DEVELOPMENT AND ENGINEERING EXPENSES. Research and
development and engineering expenses were $1.7 million for the quarter June
27, 1998, an increase of $0.5 million, or 41.7%, from research and
development and engineering expenses of $1.2 million for the quarter June 28,
1997. The increase was due to a $0.2 million increase in labor costs (both
headcount and merit increases) and a decrease in customer-funded research and
development relative to overall research and development and engineering
expenses. As a percentage of net sales, research and development and
engineering expense increased from 9.2% for the quarter June 28, 1997 to 9.9%
for the quarter June 27, 1998.
AMORTIZATION EXPENSE. Amortization expense increased to $0.4 million
for the quarter June 27, 1998 from $0.3 million for the quarter June 28, 1997
due to one month of amortization expense incurred in connection with the
Company's acquisition of Power Ten.
OPERATING INCOME. Operating income was $3.4 million for the quarter
June 27, 1998, an increase of $1.2 million, or 54.5%, from operating income
of $2.2 million for the quarter June 28, 1997. Operating income increased as
a percentage of net sales from 16.9% for the quarter June 28, 1997 to 19.8%
for the quarter June 27, 1998, due to the factors discussed above.
15
<PAGE>
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 provided by the Company's operating activities for three
months ended June 27, 1998 was $4.3 million, an increase of $3.8 million from
cash flow of $0.5 million provided by operating activities in the three
months ended June 28, 1997. This increase was primarily attributable to a
$2.3 million increase in interest payable due to the Company's issuance of
$90 million principal amount of 9- 7/8% Senior Notes due 2008 (the "Notes")
on February 3, 1998 (the "Notes Offering"), a $0.9 million decrease in
inventory and a $0.6 million decrease in accounts receivable.
CAPITAL REQUIREMENTS. The Company's capital expenditures were
$120,000 for three months ended June 27, 1998, a slight increase from
$107,000 of such expenditures in the three months ended June 28, 1997.
SOURCES OF CAPITAL. Elgar is party to a credit facility with Bankers
Trust Company, as agent for the other lending institutions party thereto (the
"Credit Facility"), which provides for a $15.0 million revolving facility
(the "Revolving Facility") and a $15.0 million term facility (the "Term
Facility"). The Credit Facility matures on February 3, 2003. Loans made
pursuant to the Revolving Facility may be borrowed, repaid and reborrowed
from time to time until February 3, 2003, subject to the satisfaction of
certain conditions on the date of any such borrowing. Payments under the Term
Facility are pursuant to an amortization schedule with a final maturity date
of February 3, 2003. Indebtedness under the Credit Facility bears interest at
a floating rate equal to, at the Elgar's option, the Eurodollar Rate plus a
margin of 2.75%, or the Base Rate plus a margin of 1.75%. The margins are
subject to reduction as set forth in the Credit Agreement. Indebtedness under
the Credit Facility is (i) secured by a first priority security interest in
substantially all of the assets of the Company and its direct and indirect
subsidiaries, Elgar and Power Ten, respectively (including, without
limitation, accounts receivable, inventory, machinery, equipment, contracts
and contract rights, trademarks, copyrights, patents, license agreements and
general intangibles), (ii) guaranteed by the Company and Power Ten on a
senior basis and (iii) secured by a pledge of all of the outstanding capital
stock of Elgar and Power Ten. The Credit Facility contains customary
covenants restricting the Company's ability to, among other things, incur
additional indebtedness, create liens or other encumbrances, pay dividends or
make other restricted payments, make investments, loans and guarantees or
sell or otherwise dispose of a substantial portion of assets to, or merge or
consolidate with, another entity. The Credit Facility also contains a number
of financial covenants that require the Company to meet certain financial
ratios and tests and provide that a "change of control" will constitute an
event of default.
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 Credit Facility, will be adequate to meet its anticipated
requirements for the next 12 months and the foreseeable future for working
capital, interest payments, amortization of the Term Facility and capital
expenditures. Management also believes that these funds will provide it with
sufficient liquidity and capital resources for it to meet its current and
future financial obligations, including the payment of interest on the Notes,
as well as to provide funds for working capital, capital expenditures and
other needs. No assurance can be given, however, that this will be the case.
As a holding company with no operations or assets other than its ownership of
the capital stock of Elgar, the Company must rely on dividends and other
payments from
16
<PAGE>
Elgar to generate the funds necessary to meet its obligations, including the
payment of principal of and interest on the Notes. Although the payment of
dividends from Power Ten to Elgar and from Elgar to the Company may be
restricted by state corporate laws, there are no contractual restrictions
which prohibit Power Ten and Elgar from making such upstream distributions.
Depending upon its rate of growth and profitability, the Company may require
additional equity or debt financing to meet its working capital requirements
or capital equipment needs. There can be no assurance that additional
financing will be available when required, or if available, will be on terms
satisfactory to the Company. The Company's future operating performance and
ability to service or refinance the Notes and to repay, extend or refinance
indebtedness drawn under the Credit Facility will be subject to future
economic conditions and to financial, business and other factors, many of
which may be beyond the Company's control.
POWER TEN ACQUISITION. On May 29, 1998, the Company acquired all of
the outstanding capital stock of Power Ten for $17,800,000, subject to
certain post-closing working capital adjustments. The Company financed the
purchase price and certain transaction expenses with $15 million of proceeds
from the Term Facility and the issuance of $5 million in aggregate
liquidation value of Series B 6% Cumulative Convertible Preferred Stock.
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 updates have been installed and
tested, the business software update is expected to be installed and tested
during November 1998, and personal computer hardware and software
upgrades/replacements are being evaluated for conversion by the end of fiscal
1999. Other items such as the phone switch, bank capabilities and the outside
payroll system are being evaluated for conversion before the end of fiscal
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. Compliance
status from key suppliers will be 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.
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 most
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 service or equipment or convert to
alternate software as needed.
Based on the steps taken to date, the Company does not expect that
the year 2000 issue will materially affect its operations due to problems
encountered by its suppliers, customers or end-users for its products,
although no assurances can be given as to this.
17
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
EXHIBIT NO. DESCRIPTION
10.25 Third Amendment to Lease, dated July 15, 1998, by
and between The Irvine Company and Elgar
Electronics Corporation
27 Financial Data Schedule
(b) No current reports on Form 8-K were filed during the quarter
ended June 27, 1998.
18
<PAGE>
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: September 10, 1998 By: /s/ CHRISTOPHER W. KELFORD
-----------------------------------------
Christopher W. Kelford
Vice President--Finance, Chief Financial
Officer, Treasurer and Assistant Secretary
19
<PAGE>
EXHIBIT 10.25
THIRD AMENDMENT TO LEASE
I. PARTIES AND DATE.
This Third Amendment to Lease (the "Third Amendment") dated July 15,
1998, is by and between THE IRVINE COMPANY, as successor-in-interest to Carroll
Ridge Park, a California general partnership ("Lessor"), and ELGAR ELECTRONICS
CORPORATION, a California corporation ("Lessee").
II. RECITALS.
On February 1, 1984, Lessor and Lessee entered into a lease for space
in a building located at 9250 Brown Deer Road, San Diego, California
("Premises"), which lease was subsequently amended by a First Amendment to Lease
dated November 5, 1992, and by a Second Amendment to Lease dated March 11, 1998
(as amended, the "Lease").
Lessor and Lessee each desire to modify the Lease as set forth in "III.
MODIFICATIONS" next below.
III. MODIFICATIONS.
A. LATE RENTAL PAYMENTS. In the event Lessee has been late delivering
its monthly rental payments to Lessor on more than three (3) occasions during
any twelve (12) month period during the term of the Lease, then Tenant shall pay
to Landlord a late charge for each subsequent delinquent rental payment in an
amount equal to the greater of six percent (6%) of the delinquent payment, or
Two Hundred Fifty Dollars ($250.00). In connection with the assessment of such
late charge, Tenant acknowledges that the late payment by Tenant to Landlord of
rent will cause Landlord to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult and impracticable to
ascertain. Those costs may include, but are not limited to, administrative,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any ground lease, mortgage or trust deed covering the
Premises. Acceptance of a late charge by Landlord shall not constitute a waiver
of Tenant's default with respect to the overdue amount, nor shall it prevent
Landlord from exercising any of its other rights and remedies. Any payment
received after the tenth of the month is considered delinquent and therefore is
considered to be subject to a late charge.
B. CARPET REIMBURSEMENT/RENT CREDIT. As compensation for the carpet
installation necessary for the second floor premises, Lessor hereby agrees to
provide Lessee with a credit against the monthly rental next due and payable
following the full execution and delivery of this Third Amendment in the amount
of Seven Thousand Six Hundred Forty-Six Dollars and Seventy Cents ($7,646.70).
<PAGE>
IV. GENERAL.
A. EFFECT OF AMENDMENTS. The Lease shall remain in full force and
effect except to the extent that is modified by this Amendment.
B. ENTIRE AGREEMENT. This Amendment embodies the entire
understanding between Lessor and Lessee with respect to the modifications set
forth in "III. MODIFICATIONS" above and can be changed only by a writing
signed by Lessor and Lessee.
C. COUNTERPARTS. If this Amendment is executed in counterparts,
each is hereby declared to be an original; all, however, shall constitute but
one and the same amendment. In any action or proceeding, any photographic,
photostatic, or other copy of this Amendment may be introduced into evidence
without foundation.
D. DEFINED TERMS. All words commencing with initial capital
letters in this Amendment and defined in the Lease shall have the same
meaning in this Amendment as in the Lease, unless they are otherwise defined
in this Amendment.
E. CORPORATE AND PARTNERSHIP AUTHORITY. If Lessee is a corporation
or partnership, or is comprised of either or both of them, each individual
executing this Amendment for the corporation or partnership represents that
he or she is duly authorized to execute and deliver this Amendment on behalf
of the corporation or partnership and that this Amendment is binding upon the
corporation or partnership in accordance with its terms.
F. ATTORNEYS' FEES. The provisions of the Lease respecting
payment of attorneys' fees shall also apply to this Amendment.
V. EXECUTION.
Lessor and Lessee executed this Amendment on the date as set forth
in "I. PARTIES AND DATE" above.
LESSOR: LESSEE:
THE IRVINE COMPANY ELGAR ELECTRONICS CORPORATION,
a California corporation
By: /s/ Clarence W. Barker By: /s/ Kenneth R. Kilpatrick
------------------------------------- ---------------------------
President, Irvine Industrial Company, President and
a division of The Irvine Company Chief Executive Officer
By: /s/ Nancy E. Trujillo By: /s/ Christopher W. Kelford
------------------------------------- ---------------------------
Assistant Secretary Chief Financial Officer
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-28-1998 APR-03-1999
<PERIOD-START> MAR-30-1997 MAR-29-1998
<PERIOD-END> JUN-28-1997 JUN-27-1998
<CASH> 15 7,709
<SECURITIES> 0 0
<RECEIVABLES> 7,010 7,309
<ALLOWANCES> (190) (198)
<INVENTORY> 6,842 8,514
<CURRENT-ASSETS> 14,788 24,781
<PP&E> 3,514 5,257
<DEPRECIATION> (995) (2,319)
<TOTAL-ASSETS> 36,992 67,515
<CURRENT-LIABILITIES> 7,708 12,743
<BONDS> 0 90,000
0 8,772
0 5,000
<COMMON> 93 23
<OTHER-SE> 16,718 (62,039)
<TOTAL-LIABILITY-AND-EQUITY> 36,992 67,515
<SALES> 13,019 17,176
<TOTAL-REVENUES> 13,019 17,176
<CGS> 7,056 8,907
<TOTAL-COSTS> 3,399 4,491
<OTHER-EXPENSES> 328 421
<LOSS-PROVISION> 3 3
<INTEREST-EXPENSE> 386 2,442
<INCOME-PRETAX> 1,847 912
<INCOME-TAX> 874 531
<INCOME-CONTINUING> 973 381
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 973 381
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
