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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 January 2, 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 February 16, 1999, the number of shares outstanding of the
Registrant's Common Stock was 2,300,000.
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<PAGE>
ELGAR HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements
Consolidated Statements of Operations for the three
months and nine months ended December 27, 1997
(unaudited) and the three months and nine months
ended January 2, 1999
(unaudited)............................................ 3
Consolidated Balance Sheets as of March 28, 1998
and January 2, 1999 (unaudited)........................ 4
Consolidated Statements of Cash Flows for the nine
months ended December 27, 1997 (unaudited) and nine
months ended January 2, 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
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K....................... 16
</TABLE>
2
<PAGE>
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
DEC. 27, 1997 JAN. 2, 1999 DEC. 27, 1997 JAN. 2, 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net sales............................................. $17,533 $14,188 $46,615 $47,136
Cost of sales......................................... 8,758 7,865 24,325 25,939
------- ------ ------- --------
Gross profit...................................... 8,775 6,323 22,290 21,197
Selling, general and administrative expense........... 2,482 2,352 6,781 8,094
Research and development and engineering expenses..... 1,661 1,424 4,448 4,882
Amortization expense.................................. 328 612 985 1,663
------- ------ ------- --------
Operating income.................................. 4,304 1,935 10,076 6,558
Interest expense, net................................. 336 2,631 1,096 8,008
------- ------ ------- --------
Income (loss) before income tax provision (benefit)... 3,968 (696) 8,980 (1,450)
Income tax provision (benefit)........................ 2,139 (361) 4,410 (243)
------- ------ ------- --------
Net income (loss)................................. $ 1,829 $ (335) $ 4,570 $ (1,207)
------- ------ ------- --------
------- ------ ------- --------
</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>
MARCH 28, JAN. 2, 1999
1998(1) (UNAUDITED)
<S> <C> <C>
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,666 $ 6,507
Accounts receivable, net of allowance for doubtful accounts of
$197 and $171, respectively........................................................... 6,453 5,168
Inventories............................................................................. 8,305 9,095
Deferred tax assets..................................................................... 1,098 879
Prepaids and other...................................................................... 373 1,324
-------- --------
Total current assets................................................................ 18,895 22,973
PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated depreciation and
amortization of $1,643 and $2,779, respectively......................................... 2,952 2,599
INTANGIBLE ASSETS, net of accumulated amortization of
$2,711 and $4,910, respectively......................................................... 22,412 37,580
DEFERRED TAX ASSETS, net of current portion............................................... 653 653
-------- --------
$ 44,912 $ 63,805
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable........................................................................ $ 3,068 $ 3,164
Accrued liabilities..................................................................... 4,801 6,449
Current portion of long-term debt....................................................... -- 2,250
Current portion of capital lease obligations............................................ 17 15
-------- --------
Total current liabilities........................................................... 7,886 11,878
CAPITAL LEASE OBLIGATIONS, net of current portion......................................... 19 8
LONG-TERM DEBT, net of current portion.................................................... 90,000 101,750
-------- --------
Total liabilities................................................................... 97,905 113,636
-------- --------
SERIES A 10% CUMULATIVE REDEEMABLE PREFERRED STOCK,
no par value, 20,000 shares authorized; 10,000 shares issued and outstanding on March
28, 1998 and January 2, 1999, respectively.............................................. 8,478 9,406
-------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Series B 6% Cumulative Convertible Preferred Stock, no par value,
20,000 and 5,000 shares authorized, issued and outstanding on March 28, 1998
and January 2, 1999, 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 4,298
-------- --------
(61,471) (59,237)
-------- --------
$ 44,912 $ 63,805
-------- --------
-------- --------
</TABLE>
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(1) The balance sheet at March 28, 1998 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
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 NINE MONTHS ENDED
-------------------------------
DEC. 27, 1997 JAN. 2, 1999
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:\
Net income (loss)............................................................... $ 4,570 $ (1,207)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Amortization of intangibles................................................... 985 1,663
Amortization of deferred loan costs........................................... 132 536
Depreciation and amortization on property, plant and equipment................ 615 748
(Increases) decreases in assets:
Accounts receivable......................................................... (1,205) 2,542
Inventories................................................................. (2,420) 375
Prepaids and other.......................................................... (158) (882)
Deferred tax assets......................................................... 226 320
Increases (decreases) in liabilities:
Accounts payable............................................................ 355 (510)
Accrued liabilities......................................................... 553 (1,652)
Income taxes payable........................................................ 943 --
Interest payable............................................................. (61) 2,390
------- --------
Net cash provided by operating activities....................................... 4,535 4,323
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment...................................... (933) (294)
Acquisition of Power Ten, net of cash acquired.................................. -- (17,266)
Non-compete agreements.......................................................... -- (240)
------- --------
Net cash (used in) investing activities......................................... (933) (17,800)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from preferred stock issuance.......................................... -- 5,000
Proceeds from bank borrowings................................................... -- 15,000
Deferred financing costs........................................................ -- (1,037)
Repayments on debt.............................................................. (4,007) (1,000)
Payments under capital leases................................................... (28) (13)
Recapitalization consideration.................................................. -- (632)
------- --------
Net cash provided by (used in) financing activities (4,035) 17,318
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. (433) 3,841
CASH AND CASH EQUIVALENTS, beginning of period.................................... 691 2,666
------- --------
CASH AND CASH EQUIVALENTS, end of period.......................................... $ 258 $ 6,507
------- --------
------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................................................... $ 851 $ 5,147
Cash paid for income taxes...................................................... 3,225 427
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Preferred stock dividend-in-kind................................................ $ -- $ 799
Accretion of discount on preferred stock........................................ -- 129
</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"),
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 the 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 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 loss for the nine month
periods ended December 27, 1997 and January 2, 1999, 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>
NINE MONTHS ENDED
----------------------------
DEC. 27, 1997 JAN. 2, 1999
------------- ------------
<S> <C> <C>
Net sales............................... $54,027 $49,000
Net loss................................ $ (275) $(1,562)
</TABLE>
6
<PAGE>
ELGAR HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION/BASIS OF PRESENTATION
The accompanying consolidated financial statements as of and for the
three months and nine months ended January 2, 1999 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 and nine months ended December 27, 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 closest to the end of the quarter.
Results from operations for the three months and nine months ended January 2,
1999 are not necessarily indicative of the results to be expected for the
fiscal year ending April 3, 1999.
CASH EQUIVALENTS
Cash equivalents at March 28, 1998 and January 2, 1999 consist of cash
held in a money market account.
7
<PAGE>
ELGAR HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998 JAN. 2, 1999
-------------- ------------
<S> <C> <C>
Raw materials............................ $3,745 $4,151
Work-in-process.......................... 3,677 3,254
Finished goods........................... 883 1,690
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Total.............................. $8,305 $9,095
------ ------
------ ------
</TABLE>
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 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
8
<PAGE>
ELGAR HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 January 2, 1999, sales to two customers accounted
for approximately 20% and 19% of the Company's net sales. In the quarter
ended December 27, 1997, sales to two customers accounted for approximately
38% and 19% of the Company's net sales. In the nine months ended January 2,
1999, sales to two customers accounted for approximately 20% and 12% of the
Company's net sales. In the nine months ended December 27, 1997, sales to two
customers accounted for approximately 30% and 17% of the Company's net sales.
No other customers individually represented more than 10% of net sales in the
third 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 Company had no elements of comprehensive income during
the three months or nine months ended January 2, 1999. The Company plans to
adopt SFAS No. 131 during its fiscal year ending 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, 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, with the
first interest payment having been made on August 1, 1998.
9
<PAGE>
ELGAR HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 January 2, 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. As of January 2, 1999, Elgar was not in compliance with certain
financial covenants contained in the Credit Agreement.
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 above. The Company believes that it will be in compliance with
the covenants contained in the Credit Agreement, as amended, for its fiscal
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"). The Capital
Call Agreement requires the majority shareholder to make a capital
contribution to the Company upon the occurrence of certain events, including
the failure to comply with certain financial covenants contained in the
Credit Agreement. Upon receipt of any such contribution, the Company would
transfer the funds to Elgar for purposes of repaying outstanding indebtedness
under the Credit 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. 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 $5.0 million of capital to the Company upon the occurrence of
certain events, including the failure to comply with certain financial
covenants contained in the Credit Agreement, as amended.
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, 1998.
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.
CONVERTIBLE PREFERRED STOCK
10
<PAGE>
ELGAR HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the acquisition of Power Ten, 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 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.
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 January 2, 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 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 $6,777 and $10,077 in interest expense in its
consolidated statement of operations for the three and nine months ended
January 2, 1999, respectively.
7. STOCK OPTION PLAN
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. As of October 3, 1998 there were options outstanding to
purchase 227,000 shares of common stock. During the quarter ended January 2,
1999, the Company granted options to purchase 9,750 shares of common stock.
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
<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 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 and nine months
ended December 27, 1997 and January 2, 1999, with the results of Power Ten
included from its date of acquisition on May 29, 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DEC. 27, 1997 JAN. 2, 1999 DEC. 27, 1997 JAN. 2, 1999
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net sales...................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................. 50.0 55.4 52.2 55.0
----- ----- ----- -----
Gross profit............................... 50.0 44.6 47.8 45.0
Selling, general and administrative expense.... 14.1 16.6 14.6 17.2
Research and development and engineering
expenses..................................... 9.5 10.1 9.5 10.4
Amortization expense........................... 1.9 4.3 2.1 3.5
----- ----- ----- -----
Operating income........................... 24.5% 13.6% 21.6% 13.9%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED JANUARY 2, 1999 TO THE THREE MONTHS ENDED
DECEMBER 27, 1997
NET SALES. Net sales for the quarter ended January 2, 1999 were $14.2
million, a decrease of $3.3 million, or 18.9%, from net sales of $17.5
million for the quarter ended December 27, 1997. 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, AC products and the inclusion of the results of Power Ten.
In the first quarter of fiscal year 1999, the Company was 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
12
<PAGE>
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.
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 the latter part of calendar 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. Revenues from Racal were less than $0.1 million
for the quarter ended January 2, 1999 and $3.1 million for the nine months
ended January 2, 1999. As result of the conversion to the next-generation
product described above, the Company does not expect to book revenues from
Racal for sales to the semiconductor manufacturer during the remainder of
fiscal 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 anticipated sales in fiscal 2000.
GROSS PROFIT. Gross profit for the quarter ended January 2, 1999 was $6.3
million, a decrease of $2.5 million, or 28.4%, from gross profit of $8.8
million for the quarter ended December 27, 1997. As a percentage of net
sales, gross profit decreased from 50.0% for the quarter ended December 27,
1997 to 44.6% for the quarter ended January 2, 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 $2.4 million for the quarter ended
January 2, 1999, a decrease of $0.1 million, or 4.0%, from SG&A expenses of
$2.5 million for the quarter ended December 27, 1997. SG&A expenses increased
as a percentage of net sales from 14.1% for the quarter ended December 27,
1997 to 16.6% for the quarter ended January 2, 1999. The decrease in dollars
in SG&A was primarily due to a reduction in advertising expense, lower
commissions due to lower sales volume and lower levels of bonuses expected as
compared to the prior year.
RESEARCH AND DEVELOPMENT AND ENGINEERING EXPENSES. Research and
development and engineering expenses were $1.4 million for the quarter ended
January 2, 1999, a decrease of $0.3 million, or 17.6%, from research and
development and engineering expenses of $1.7 million for the quarter ended
December 27, 1997. As a percentage of net sales, research and development and
engineering expense increased from 9.5% for the quarter ended December 27,
1997 to 10.1% for the quarter ended January 2, 1999. The decrease in dollars
was due to lower labor, consulting and engineering material expense in the
quarter ended January 2, 1999 versus the quarter ended December 27, 1997.
AMORTIZATION EXPENSE. Amortization expense increased to $0.6 million for
the quarter ended January 2, 1999 from $0.3 million for the quarter ended
December 27, 1997. 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 $1.9 million for the quarter ended
January 2, 1999, a decrease of $2.4 million, or 55.8%, from operating income
of $4.3 million for the quarter ended December 27, 1997. Operating income
decreased as a percentage of net sales from 24.5% for the quarter ended
December 27, 1997 to 13.6% for the quarter ended January 2, 1999, due to the
factors discussed above.
INCOME TAXES. Income taxes for the three months ended January 2, 1999
contained a tax benefit of $361,000, compared to a tax provision of $2.1
million for the three months ended December 27, 1997. The Company's effective
tax rate was 51.9% for the three months ended January 2, 1999 and 53.9% for
the three months ended December 27, 1997. 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 R & D tax credits utilized by
the Company.
13
<PAGE>
COMPARISON OF THE NINE MONTHS ENDED JANUARY 2, 1999 TO THE NINE MONTHS
ENDED DECEMBER 27, 1997
NET SALES. Net sales for the nine months ended January 2, 1999 were $47.1
million, an increase of $0.5 million, or 1.1%, from net sales of $46.6
million for the nine months ended December 27, 1997. During the nine months
ended January 2, 1999, increases in (i) sales to the U.S. Navy's CASS
Program, (ii) sales of Sorensen-brand products and (iii) sales of GUPS
products and customer service revenues, along with the inclusion of the
results of Power Ten, were offset by a decrease in sales of programmable DC
products (primarily attributable to decreased sales to Racal).
GROSS PROFIT. Gross profit for the nine months ended January 2, 1999 was
$21.2 million, a decrease of $1.1 million, or 4.9%, from gross profit of
$22.3 million for the nine months ended December 27, 1997. As a percentage of
net sales, gross profit decreased from 47.8% for the nine months ended
December 27, 1997 to 45.0% for the nine months ended January 2, 1999. The
decrease in gross profit was primarily attributable to unfavorable product
mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses were $8.1
million for the nine months ended January 2, 1999, an increase of $1.3
million, or 19.1%, from SG&A expenses of $6.8 million for the nine months
ended December 27, 1997. SG&A expenses increased as a percentage of net sales
from 14.6% for the nine months ended December 27, 1997 to 17.2% for the nine
months ended January 2, 1999. The increase in dollars was primarily due to
the inclusion of $0.9 million of such expenses from Power Ten, $0.2 million
of nonrecurring expenditures incurred in connection with the acquisition of
Power Ten and merit increases.
RESEARCH AND DEVELOPMENT AND ENGINEERING EXPENSES. Research and
development and engineering expenses were $4.9 million for the nine months
ended January 2, 1999, an increase of $0.5 million, or 11.4%, from research
and development and engineering expenses of $4.4 million for the nine months
ended December 27, 1997. The increase was primarily due to the inclusion of
$0.4 million of such expense from Power Ten and a $0.1 million increase in
labor costs. As a percentage of net sales, research and development and
engineering expense increased from 9.5% for the nine months ended December
27, 1997 to 10.4% for the nine months ended January 2, 1999.
AMORTIZATION EXPENSE. Amortization expense increased to $1.7 million for
the nine months ended January 2, 1999 from $1.0 million for the nine months
ended December 27, 1997. This increase was due to seven months of
amortization expense incurred in connection with the Company's acquisition of
Power Ten.
OPERATING INCOME. Operating income was $6.6 million for the nine months
ended January 2, 1999, a decrease of $3.5 million, or 34.7%, from operating
income of $10.1 million for the nine months ended December 27, 1997.
Operating income decreased as a percentage of net sales from 21.6% for the
nine months ended December 27, 1997 to 13.9% for the nine months ended
January 2, 1999, due to the factors discussed above.
INCOME TAXES. Income taxes for the nine months ended January 2, 1999
contained a tax benefit of $243,000, compared to a tax provision of $4.4
million for the nine months ended December 27, 1997. The Company's effective
tax rate was 16,8% for the three months ended January 2, 1999 and 49.1% for
the three months ended December 27, 1997. The effective tax rate differs from
the statutory tax rate of 40.0%, primarily due to the non-deductibility of
goodwill for tax purposes realization of R & D tax credits utilized by the
Company.
14
<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 operating activities for the nine months ended
January 2, 1999 was $4.3 million, a decrease of $0.2 million from cash flow
of $4.5 million provided by operating activities for the nine months ended
December 27, 1997. This decrease was attributable to a decrease in net income
of $5.8 million, a decrease of $2.3 million in accruals, a decrease of $0.9
million in accounts payable and a decrease of $0.9 million in income tax
accrual, offset by a $3.7 million decrease in accounts receivable, a $2.8
million decrease in inventory, a $2.5 million increase in interest payable on
the Senior Notes and a $0.7 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, amortization of 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 $294,000
and $933,000 for the nine months ended January 2, 1999 and December 27, 1997,
respectively.
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 are
being evaluated for conversion by the end of fiscal 1999. 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
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 ($15,000 of
which has been incurred to date). 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. A contingency plan has not been
developed as the risk on remaining
15
<PAGE>
items is considered low. Should any issues arise which cannot be adequately
addressed and remedied, management will develop a contingency plan at that
point.
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, 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.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule
(b) No current reports on Form 8-K were filed during the quarter
ended January 2, 1999.
16
<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: February 16, 1999 By: /s/ CHRISTOPHER W. KELFORD
------------------------------
Christopher W. Kelford
Vice President--Finance, Chief Financial
Officer, Treasurer and Assistant Secretary
17
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