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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the fiscal year ended January 1, 2000
or
/ / Transition Report Pursuant to Section 13 or 15 (d) of Securities
Exchange Act of 1934 For the transition period from _____________ to
_____________
Commission File Number 333-55797
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 92121-2294
(Address of principal executive office) (Zip Code)
(858) 450-0085
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
9-7/8% Senior Notes Due 2008
Guarantees of 9-7/8% Senior Notes Due 2008
(Title of each class)
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 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 /_/
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of March 27, 2000, the number of outstanding shares of the registrant's
Common Stock was 2,300,000.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF OTHER REGISTRANTS
Address Including Zip Code and
Area Code and Telephone Number
Jurisdiction of IRS Employer of Principal
Name of Corporation Incorporation Identification Number Executive Offices
- ---------------------------------- ---------------- --------------------- --------------------------------
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Elgar Electronics Corporation California 33-0198753 9250 Brown Deer Road
San Diego, CA 92121-2294
(858) 450-0085
Power Ten California 94-2783211 120 Knowles Drive
Los Gatos, California 95032-1828
(408) 871-1700
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ELGAR HOLDINGS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED JANUARY 1, 2000
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CAPTION PAGE
PART I
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ITEM 1. BUSINESS........................................................................................1
ITEM 2. PROPERTIES.....................................................................................10
ITEM 3. LEGAL PROCEEDINGS..............................................................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................11
ITEM 6. SELECTED FINANCIAL DATA........................................................................12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................20
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................22
ITEM 11. EXECUTIVE COMPENSATION.........................................................................27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................32
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..................34
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PART I
ITEM 1. BUSINESS
IN THIS REPORT, THE "COMPANY," "EHI," "WE," "US" AND "OUR" REFER TO ELGAR
HOLDINGS, INC. AND ITS SUBSIDIARIES, UNLESS THE CONTEXT REQUIRES OTHERWISE.
OVERVIEW
We design and manufacture programmable power equipment and systems used to
test electronic equipment during development, manufacture and operation. With
three of the most recognized brand names and broadest product offerings in
fragmented industries, we are one of the largest manufacturers of programmable
power equipment in the United States. Our products are an integral component of
overall systems' testing conducted by a broad range of manufacturers and
end-users of electronic equipment to ensure product quality and performance.
Power testing is a critical procedure in a multitude of applications, including
satellites, weapons systems, semiconductor manufacturing and medical equipment,
which demand fault-free components.
We view our business in five principal product areas, which are:
-- programmable DC power, which is a type of programmable power supply
used to test products that require direct current ("DC") inputs, such
as components, printed circuit boards, semiconductors, medical
equipment, telecommunications equipment, avionics and numerous other
types of electronic products,
-- Solar Array Simulators (or "SAS"), which are used for extensive
testing of satellite systems throughout the manufacturing process and
just prior to launch,
-- the Consolidated Automated Support System ("CASS") Program for the
U.S. Navy (for which we provide programmable AC and DC, fixed DC and
power conditioning products),
-- programmable AC power, which is a type of programmable power supply
used to test alternating current ("AC") products such as avionics,
computers, DC power supplies, appliances and many other types of
electronic products, and
-- other products and services, which consist of (1) power conditioning
and uninterruptible power supply ("UPS") products, which supply
back-up power principally to military computer and communications
systems and oil exploration companies for data logging applications,
and (2) repair services and spare parts we provide to each of the
markets listed above.
As a holding company, we operate through our wholly owned subsidiary,
Elgar Electronics Corporation ("Elgar"), and its wholly owned subsidiary, Power
Ten ("Power Ten"), which we acquired in May 1998.
Industry Overview
Test and measurement ("T&M") products are used to evaluate the design
parameters, specifications and operation of a variety of electronic equipment in
the commercial, industrial and military sectors at the development,
manufacturing and/or deployment stages. The T&M market is fragmented with
numerous companies operating in several specialized segments. Within the overall
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testing market, we compete in numerous programmable power niches, including
programmable DC power, programmable AC power and satellite test systems.
Power supplies are critical in the production process for a number of
end-users that require a specified series of power conditions to evaluate
performance of components, subassemblies or end-products under real world
conditions. Power is conditioned and transformed into either an alternating
current ("AC"), which is similar to that coming from an outlet, or a direct
current ("DC"), which is similar in form to the power coming from a battery.
Programmable AC power supplies provide power which is converted to a form
that changes voltage continuously and are used to test devices that require
AC power such as computers, consumer appliances and avionics. The output can
be varied by computer program to determine susceptibility of a test item to
changes in voltage, frequency, electrical noise and phase angle. AC customers
include the military and appliance, computer and power supply manufacturers.
Programmable DC power supplies provide output with constant voltage and
are used to test or stress devices such as electronic printed circuit boards
and avionics that require DC input power. The output can be varied by
computer program to determine the susceptibility of test items to voltage and
current. The segment has a diverse customer base that includes component,
printed circuit board and computer manufacturers as well as the military.
Recently, original equipment manufacturers, or OEMs, have begun to purchase
and integrate programmable DC power supplies into their products for
applications which include medical treatment equipment, semiconductor wafer
manufacture and telecommunications.
In the early 1990s, military applications traditionally dominated the
market as the defense industry required sophisticated testing for the
deployment of increasingly complex weapons systems. In recent years, market
focus has shifted toward the industrial and consumer electronic industries.
Companies which primarily supplied equipment to the military and defense
industry have begun to focus on a different end-user base that includes the
telecommunications, transportation and satellite communication industries,
with the computer and telecommunications industries comprising the primary
markets driving growth.
Technological changes have prompted many industries to begin using
increasingly complex electronic equipment in products ranging from automotive
components to florescent lighting, necessitating greater purchases of power
supplies for testing. Demand has increased for test and measurement equipment
as growth in emerging market countries has lead to increased use of
electronics and electronic products within their economies. Additionally,
Japanese and European countries have generally been faster to adapt to
international standards with the consequence that U.S.-based firms have been
obligated to move in the same direction as their dependence on foreign sales
increases. Adoption of standardized requirements for electronics in the
European Community should provide future growth opportunities worldwide.
PRINCIPAL MARKETS AND PRODUCTS
Our programmable power and related products are used in a broad range
of commercial and military applications for the following purposes:
-- to test design parameters in the development of new electronic
equipment,
-- to test specifications during manufacturing of such
equipment,
-- to "burn-in" components in order to reduce the likelihood of failures
in the field,
-- to confirm the operation of electronic equipment once field-deployed,
and
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-- for selected OEM applications.
We capitalize on our in-house digital engineering expertise to develop
versatile programmable equipment that is flexible and adaptable in generating
various series of power conditions. While our products have a life expectancy
of at least five to ten years, technological advances and customers'
continual needs for more features drive growth in demand and generates repeat
sales.
We categorize our sales along five product areas, with net sales shown by
product area for the fiscal year ended January 1, 2000:
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NET SALES FOR FISCAL
YEAR ENDED JANUARY 1,
2000
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PRODUCT LINE $ (000S) % OF TOTAL
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Programmable DC Power.................... $27,001 48.2%
Solar Array Simulators................... 8,172 14.6
CASS Program............................. 9,772 17.4
Programmable AC Power.................... 6,361 11.3
Other Products and Services.............. 4,753 8.5
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Total................................ $56,059 100.0%
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PROGRAMMABLE DC POWER
Our programmable DC product line includes over 130 products which are
used by commercial companies and military programs for applications relating
to avionics, computer and communication equipment, semiconductor and product
burn-in, industrial process control, bench-top and research and development
equipment. Typical customers for our programmable DC products include Racal
Instruments ("Racal"), Applied Materials, Siemens, GenRad, Halliburton
Company, Lucent Technologies, Teradyne, Veeco Instruments, Noah Precision,
Hy-Cad Systems and Reliability Inc.
Our programmable DC products generate a wide range of dynamic DC
voltages and currents, providing the electrical power to test any type of DC
electronic equipment from semiconductors to automobile electronics. To reduce
"infant mortality" in the field, manufacturers of such electronic equipment
conduct tests during design and production and burn-in the equipment prior to
shipment to evaluate performance of the specific product or component during
all possible input power variations. In addition to use in testing equipment,
our programmable DC power products are also used by OEMs as power sources
within end products, as discussed elsewhere herein.
Through Racal, a systems integrator for test and measurement equipment,
we are the sole source supplier of programmable DC power equipment to a
leading semiconductor manufacturer for use in automatic test equipment
("ATE") systems for microprocessors. Since securing this business in
September 1996, our revenue from this relationship has increased from $3.2
million in our fiscal year ended March 29, 1997 to $17.7 million in our
fiscal year ended March 28, 1998 ("Fiscal 1998"). In May 1998, we were
notified by Racal that the semiconductor manufacturer had decided to cease
orders for our current AT-8000 DC power supplies until anticipated "next
generation" technology was developed. Our prototype ATE system for this
next-generation technology was delivered to the end-user in August 1998, and
we commenced delivering pre-production power supplies to the end-user in the
second quarter of 1999. In November 1999 we received an initial production
order from Racal for the next generation technology equipment. Revenues from
Racal were $0.4 million in the fiscal year ended January 1, 2000.
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To date, we have provided programmable power supplies to OEMs such as
Siemens Medical Systems for oncology devices, Applied Materials and Veeco
Instruments for semiconductor manufacturing equipment and Cellular One for
inclusion in telecommunications equipment.
Some existing and potential customers do not require products with the
power, sophistication and range of features as those which we produce.
Recognizing this, we have secured a supply arrangement with Good Will
Corporation of Taiwan and Chroma ATE, Inc. of Taiwan to manufacture less
sophisticated, lower priced programmable DC product and AC product under the
Elgar and Sorensen brand names, which are then resold through our
distribution channels. In addition, our purchase of Power Ten in May 1998 has
broadened our product line for high power programmable DC products.
We introduced our new programmable DC product to Racal in 1998. We also
introduced the DLM 4KW and the MML Loads in September 1999, and we expect to
introduce three additional new programmable DC products by the end of 2000.
These products include two ATE products and one burn-in product.
SOLAR ARRAY SIMULATORS
Given the significant cost involved in building, launching and insuring
satellites, fully testing units prior to launch is critical. With the
flexibility to generate any possible power scenario that solar panels may
produce in space, our fully integrated Solar Array Simulator test system
performs mission-critical power testing throughout the satellite
manufacturing process right up to launch. The SAS can be programmed to create
the output power forms associated with a wide variety of solar array
operating environments including direct solar illumination, spinning orbits,
an eclipse, aging of the solar array and many other conditions.
Based on contracts awarded and our understanding of our competition, we
believe we are one of the leading third-party sources for satellite ground
power test systems in the United States. Historically, most satellite
companies produced their own test equipment. However, satellite manufacturers
are looking to reduce costs and shorten production times as competition in
their industry intensifies and the demand for satellite production increases.
As a result, satellite manufacturers are purchasing test equipment from
third-party manufacturers who can provide more versatile equipment at a lower
cost. As third-party test systems continue to replace customers' in-house
developed systems, we believe that our SAS business potential is in its early
growth stages, as evidenced by the increase in revenues attributable to SAS
of $1.8 million in our fiscal 1994 to $8.2 million in the fiscal year ended
January 1, 2000. In early 1999, a major customer of our Solar Array Simulator
systems requested that we upgrade one of our SAS systems. Since this upgrade
required additional engineering efforts on our part and testing on the part
of the customer, deliveries of additional systems to the customer were
delayed. These delays adversely affected our net sales toward the latter part
of calendar 1999 and in early 2000. Due to the large dollar amount of each
SAS system we sell and the program nature of satellite manufacturing
requirements, our SAS revenues typically fluctuate throughout the year.
We introduced our Solar Array Simulator in 1993 and, in 1994, we were
awarded a major contract to supply solar array simulators, battery simulators
and telemetry components to Lockheed Martin, a subcontractor to Iridium Inc.,
Motorola's venture to develop a network of satellites to provide global
mobile telephone service. Today, we supply virtually every major U.S.
satellite program, including Lockheed Martin's Telstar 4, Stardust, MGS and
A2100; Motorola's Iridium; Loral's Intelsat 7, MCI and Tempo; TRW's EOS and
SMTS; and Hughes' HS601, HS702 and Galaxy. In addition, we have received
orders for SAS from European satellite manufacturers Matra Marconi Space,
Terma, European Space Agency and Alcatel ETCA.
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We plan to further increase our SAS business by selling complete ground
power test systems to our customers, such as systems we have shipped to
Hughes, from 1997 to the present, which include battery simulators,
programmable loads and ancillary telemetry, safety and other related
equipment.
CASS PROGRAM
The CASS Program is a long-term, high-priority U.S. Navy initiative
designed to replace the proliferation of customized ATE and related test
program sets for aircraft carriers, depots and test integration facilities
in order to significantly reduce operating costs. Through a state-of-the-art,
computer-controlled ATE station that tests avionics, the U.S. Navy has
achieved its goal of eliminating the proliferation of customized ATE and
reducing testing costs. Our role in the CASS Program is to supply the entire
power subsystem for the ATE stations, which consists of three types of power
supplies:
-- a power conditioner, battery charger and batteries which together
constitute an input power conditioning system as well as battery
back-up in case of power failure,
-- programmable AC and DC power supplies which provide the test stimulus
for avionics testing and
-- nonprogrammable DC power supplies which supply the internal ATE
station instruments with fixed supply voltages.
We are the sole source supplier of the power subsystem to Lockheed
Martin, the prime contractor for the CASS Program. Having delivered 525
systems to date, our current backlog for the CASS Program was $5.5 million as
of January 1, 2000. The Navy is also considering an expansion of the CASS
program to equip non-carrier ships. Based on its success, Lockheed Martin is
marketing CASS aggressively to selected foreign militaries. If Lockheed
Martin obtains any such business, this could represent additional
opportunities for revenue growth. Further, other branches of the military
have initiated programs similar to CASS, including the U.S. Army's
Intermediate Forward Test Equipment and the U.S. Air Force's deployable F-15
downsize program, both of which currently utilize our other standard products.
AC POWER
Our programmable AC products generate a wide range of dynamic AC
voltages, frequencies and currents, simulating all possible electrical power
waveforms. In addition to pure AC waveforms, our AC products are capable of
creating any distortion to the wave including noise, spikes, drop-outs and
shifts in phase angle. Like our DC products, our AC products are used to test
electronic equipment such as consumer appliances, computers, DC power
supplies and avionics, with the tests subjecting the equipment to all
possible power variations needed to evaluate performance of the specific
product or component.
Our leading AC product, the SmartWave-TM-, is widely recognized in the
industry as one of the most technologically advanced AC products on the
market. The AC power market, which has been dominated by military spending in
the past, is a small but steady and attractive niche for us. We believe that
we have one of the largest shares of this AC power market. We are currently
an incumbent on many major U.S. government ATE contracts.
Contracts with the United States government (whether directly or
indirectly) are subject to cancellation for default or convenience by the
government if deemed in its best interests. In addition, based on audits
conducted by the government with respect to its contracts, profits may be
renegotiated with respect to certain programs and contracts, as has recently
occurred with respect to certain aspects of the CASS Program. In the last
five years, we have not experienced any cancellations of a contract at the
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government's convenience (though we did experience one such cancellation in
1993). At no time have we experienced a government cancellation by default.
As 27.5% of our net sales in the fiscal year ended January 1, 2000 were made
directly or indirectly to the U.S. Government, a significant portion of our
business is subject to the government prerogatives described above.
In addition to providing AC power to the military markets, significant
commercial opportunities for AC power used to test equipment being sold to
the European Community have arisen as well. We introduced the European
Standards Tester ("EST") to test electronic equipment for compliance with the
new European (IEC) testing standards for electricity. In addition, we have
introduced two additional products for the European Community, which are the
True Wave (TW) and EW3001 (a product line extension).
OTHER PRODUCTS AND SERVICES
Other products and services comprises two components, which are:
-- power conditioning and uninterruptible power supply ("UPS") products,
and
-- customer service.
Our power conditioning and UPS product line includes a range of
instruments which are capable of providing precise AC output power regardless
of the input power distortions or drop-outs. This type of product is used in
critical applications where electrical power fluctuations could have severe
consequences, such as with field-support for military operations and back-up
for data logging in oil exploration missions. The Global Uninterruptible
Power Supply (GUPS-TM-), our principal product in this line, is designed to
handle any input power from anywhere in the world, including aircraft power,
and generates a clean AC output even when the input power is lost.
Additionally, we offer comprehensive customer service for all of our
product offerings through our in-house staff of seven customer service
technicians, two service administrators and two customer service engineers.
Our customer service organization provides global repair and spare parts for
all products we offer, and provides technical assistance to our international
distributors which are responsible for equipment repairs in their territories
and to customers who repair equipment in-house.
BACKLOG
Our backlog at January 1, 2000 was approximately $13.8 million, all of
which we expect to ship in calendar 2000. Our backlog was $18.4 million at
January 2, 1999. Our backlog consists of product orders for which a customer
purchase order has been received and accepted and which is scheduled for
shipment. Orders are subject to rescheduling or cancellation by the customer,
usually without penalty. Backlog also consists of customer-funded research
and development payable under support contracts with our customers and orders
for billable services. Because of possible changes in product delivery
schedules, cancellation of product orders and sales will sometimes reflect
orders shipped in the same month they are received, our backlog at any
particular date is not necessarily indicative of actual sales for any
succeeding period. Moreover, we do not believe that backlog is necessarily
indicative of our future results of operations or prospects.
RESEARCH AND DEVELOPMENT
At January 1, 2000, our engineering department consisted of 77 people,
48 of whom are engineers. Twenty-one of those engineers are actively involved
in new product development, with the remainder involved in support or
sustaining functions. The other 29 persons in the engineering
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organization include technicians, designers and drafters. As evidence of our
commitment to new product development, our research and development and
engineering expenses were $6.2 million in Fiscal 1998, $4.9 million for the
nine months ended January 2, 1999, $6.7 million for the fiscal year ended
January 2, 1999 and $5.9 million for the fiscal year ended January 1, 2000.
Customer-funded research and development comprised $0.3 million, $0.2
million, $0.2 million and $0.7 million of our overall research and
development expense incurred in Fiscal 1998, the nine months ended January 2,
1999, the fiscal year ended January 2, 1999 and for the fiscal year ended
January 1, 2000, respectively.
The development and introduction of new products has been and will
continue to be an essential part of our growth strategy to increase market
share and expand into new markets. Our current management team has had a
record of successful and profitable new product introductions, including the
SmartWave and the Solar Array Simulator products. These and other existing
products are considered superior in the marketplace due to their digital
capabilities, flexible format, high-quality engineering and long-term
reliability. Our in-house development efforts are focused on leveraging our
strong engineering capabilities to produce higher-end, more sophisticated
products utilizing digital technology. Management, in conjunction with the
sales force and engineering department, has demonstrated a strong ability to
identify potential product areas and create technical solutions.
COMPETITION
The principal competitive factors affecting the market for our products
include vendor and product reputation, price, architecture, functionality and
features, product performance specifications, ease of implementation and use,
quality of customer support and fast delivery. We believe that we have
competed effectively to date in all of our markets.
While the AC and DC markets are very competitive, we maintain an
excellent competitive position in each, with approximately 16% of the global
AC market (which we believe gives us the largest market share of this market)
and approximately 12% of the global DC market. Agilent, the company recently
spun-off from Hewlett-Packard, has the leading market share in the global DC
market, with an approximate 30% market share. Notwithstanding Agilent's
leading position in the global DC market, we have competed favorably with
Agilent in the past, such as with securing our test and measurement
semiconductor business, and believe we will continue to do so in the future.
Both markets are relatively fragmented, and most competitors are either small
businesses or noncore subsidiaries of much larger parent corporations.
The only currently viable competition for our Solar Array Simulators is
presented by "in-house" engineering staffs of individual spacecraft and
satellite manufacturers.
With respect to the CASS Program, we are currently the sole source
supplier of the product we supply to the CASS Program, and as such, we do not
face any competition at present with respect to this portion of our business.
SALES AND MARKETING
We sell our products principally through sales representatives in the
U.S. and through distributors internationally, with some direct sales to
specific customers and markets. Our sales organization includes 33 in-house
employees (23 of whom are in sales and marketing, eight in customer service
support, one in general and administrative and one outside consultant), as
well as over 70 representative/distributor companies with more than 300
salespeople worldwide. We believe that our sales network is one of our major
assets and a significant competitive advantage over the sales channels of
many of our competitors.
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Our in-house sales force includes nine sales managers who are each
responsible for working with customers and prospective customers to provide
existing or custom solutions to their needs. Our seven sales engineers, who
support the sales managers, representatives and customers, design solutions
according to customers' applications. In turn, these 16 sales professionals
are supported by an administrative staff of six people. Our sales and
marketing team also includes three marketing professionals who conduct
marketing research, create collateral material and training manuals,
coordinate the placement of advertising in appropriate trade journals and
other periodicals, as well as organize trade shows and perform general public
relations work.
We have strong relationships with the majority of our sales
representatives. In the U.S., we believe we have retained the services of the
top sales representative for our products in each region of the country.
Internationally, we believe we are represented by top-tier international
distributors in the regions where we sell our products. Our sales
representatives are essentially field extensions of our sales team, helping
to identify and pursue sales opportunities. As a result, the sales force,
including the representative network, has been instrumental in identifying
potential new product opportunities, thus helping to guide our research and
development efforts to the most promising areas. In an effort to maximize the
effectiveness of our domestic sales network, we have established a
Representative Board, comprised of the chief executives of five of our sales
representative organizations, that meets with management on a periodic basis
to discuss marketing strategy and execution of the marketing plan. Our sales
representatives sell a variety of non-competing, complementary test and
measurement products from a number of manufacturers to over 6,000 customers.
Only one sales representative accounted for 10% or more of our net sales in
the fiscal year ended January 1, 2000. Though domestic sales accounted for
approximately 91.4% of total net sales in the fiscal year ended January 1,
2000, we see potential markets for our products in the Asia-Pacific and
European regions, as well as an eventual market in Latin America.
MANUFACTURING
Our manufacturing facilities are organized and run efficiently with a
focus on quality, productivity and cost and inventory management, and our
manufacturing equipment is modern and allows for efficient and quality
production. We have designed and constructed our own in-house test stations
to speed production. At Elgar, operations management has identified four core
manufacturing competencies, and has redesigned the production floor to use
work cells and simplify material handling and assembly methodology based on
these competencies, which are:
-- wire harness/heatsink assembly,
-- magnetics (transformer assembly), -- low-volume printed circuit board
assembly and
-- final assembly and testing.
The redesign has allowed maximum productivity and leveraging of common
processes across product lines, since the majority of Elgar's products use
the same basic components. We have invested in semi-automated test processes
to reduce cycle times and labor costs and established cross-functional teams
to reduce procurement costs. These teams have identified and implemented
major product savings by selecting suppliers that have process methodologies
that support our mix and volume. These efforts have also reduced the need for
significant investment in working capital.
As part of our cost management program, we have outsourced certain
lower-end, high volume subassemblies of transformers and printed circuit
boards to two subcontract assembly plants in nearby
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Tijuana and Tecate, Mexico. All subcontract subassemblies are subjected to our
inspection and test process as assurance that quality expectations are met.
We have also implemented a "red light" quality assurance system which
has improved quality, reduced rework and obviated the need for some final
testing processes. The basic strategy of the "red light" system is to empower
front-line workers to identify a problem as early as possible during the
production process and stop the entire affected production line until the
problem is corrected. A cross-functional team is immediately dispatched to
diagnose and solve the problem. Any affected components are sent back in the
cycle to be fixed, and production is not allowed to resume until the problem
is corrected.
We have continued to focus on improving the manufacturing competencies
at Power Ten. Improved work flow, added semi-automatic test capabilities and
process changes have been made to reduce product lead times, reduce material
inventory and adding capacity for additional volume. Certain higher volume
assemblies will be moved from Power Ten's U.S. location to a lower cost
Mexico location, while the lower volume assemblies will continue to be
handled at Power Ten's manufacturing plant in Northern California.
SIGNIFICANT CUSTOMERS
Certain customers are material to our business and operations. In the
fiscal year ended January 1, 2000, Lockheed Martin, through various of its
operating units, accounted for approximately $10.7 million, or 19.0%, of
total net sales, and Hughes accounted for approximately $6.1 million, or
11.0%, of total net sales. During the fiscal year ended January 1, 2000, our
top five customers accounted for approximately $21.3 million of net sales,
representing 38.0% of our total net sales.
During the nine months ended January 2, 1999, Lockheed Martin, through
various of its operating units, accounted for approximately $9.4 million, or
20.0%, of our total net sales, and Hughes accounted for approximately $5.7
million, or 12.1%, of our total net sales.
In Fiscal 1998, Racal accounted for approximately $17.7 million, or
28.3%, of our total net sales, and Lockheed Martin, through various of its
operating units, accounted for approximately $11.5 million, or 18.4%, of our
total net sales.
Although we believe that we have strong, long-standing relationships
with our significant customers, the loss of any significant customer, or a
significant reduction in our business with any of them (as with the decrease
in revenues from Racal from Fiscal 1998 to the present) could have a material
adverse effect on our business, results of operations and financial condition.
EMPLOYEES
At January 1, 2000, we had 380 full-time employees, including 88
manufacturing personnel, 77 engineering personnel, 30 administrative
personnel, 24 sales and marketing personnel, eight customer service personnel
and 153 personnel involved in direct labor. No attempts to unionize any of
our employees have been made. We consider our employee relations to be good.
9
<PAGE>
INTELLECTUAL PROPERTY
We have trademarked our SmartWave and GUPS products and have been
operating under the Elgar and Sorensen trade names for over 30 years. In
addition to the protection offered by trademark laws and regulations, we rely
upon trade secret protection for our confidential and proprietary information
and technology.
ENVIRONMENTAL
We are subject to various evolving federal, state and local
environmental laws and regulations governing, among other things, emissions
to air, discharge to waters and the generation, handling, storage,
transportation, treatment and disposal of hazardous and non-hazardous
substances and wastes. These laws and regulations provide for substantial
fines and sanctions for violations and, in many cases, could require us to
remediate a site to meet applicable legal requirements. We are not aware of
any material environmental conditions affecting the properties where we
conduct our business.
ITEM 2. PROPERTIES
For Elgar's operations, which are based in San Diego, California, we
lease four facilities in close proximity totaling approximately 118,000
square feet, with lease terms expiring no sooner than 2001, which are used
for:
-- the design and production of Elgar's standard DC and AC products,
production for the CASS Program and administrative headquarters
(87,300 sq. ft.) (lease expires in December 2002),
-- the design and production of most Sorensen-brand products (14,600 sq.
ft.) (lease expires in April 2001),
-- digital engineering and accounting (7,100 sq. ft.) (lease expires in
September 2000) and
-- manufacturing of magnetics and PDU, a power conditioning product
(9,100 sq. ft.) (lease expires in April 2001).
For Power Ten's operations, which are based in Los Gatos, California
(11 miles southwest of San Jose), we utilize a 29,100 square foot facility
under a lease that expires in July 2002 (with an option for an additional
two-year period). We sublease 5,300 square feet of this space to an
unaffiliated party, with the term of the sublease expiring in July 2000.
We believe that our facilities are in good condition with substantial
capacity available for increased production of current product lines and new
product introductions. As a result, no substantial capital expenditures are
expected to be required to accommodate the projected revenue growth.
ITEM 3. LEGAL PROCEEDINGS
We are routinely involved in legal proceedings related to the ordinary
course of our business. We do not believe any such matters will have a
material adverse effect on us. We maintain property, general liability and
product liability insurance in amounts which we believe are consistent with
industry practices and adequate for our operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth quarter of
1999.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON EQUITY DIVIDENDS
Our Common Stock is not listed or traded on any exchange. At February 29,
2000, there were 28 holders of record of our Common Stock.
We have not paid any cash dividends on our Common Stock to date. We intend
to retain all future earnings for use in the development of our business and,
consequently, do not anticipate paying cash dividends in the foreseeable future.
The payment of all dividends will be at the discretion of our Board of Directors
and will depend upon, among other things, future earnings, operations, capital
requirements, our general financial condition, general business conditions and
the prior payment of cash dividends to the holders of our preferred stock. Our
ability to pay dividends to our stockholders, and the ability of our
subsidiaries to pay dividends to us, is restricted by the indenture governing
the $90.0 million principal amount of Senior Notes due 2008 (the "Senior Notes")
and the documents governing our credit facility.
RECENT SALES OF UNREGISTERED SECURITIES
In connection with our acquisition of Power Ten on May 29, 1998, EHI issued
and sold 5,000 shares of Series B 6% Cumulative Convertible Preferred Stock (the
"Series B Preferred Stock") for cash proceeds of $5.0 million. The purchasers of
the Series B Preferred Stock were those of our stockholders and warrantholders
who elected to participate in a pro rata subscription offering. Upon the
occurrence of certain triggering events, the holders of the Series B Preferred
Stock are entitled to convert such shares into our Common Stock at a price of
$10 per share.
In connection with the amendment of the credit agreement governing our
credit facility on February 12, 1999 and our majority shareholder's agreement,
in connection therewith, to make a capital contribution to us in the amount of
$4.0 million, in March 1999, EHI issued and sold 4,000 shares of Series C 6%
Cumulative Convertible Preferred Stock (the "Series C Preferred Stock") for cash
proceeds of $4.0 million. The purchasers of the Series C Preferred Stock were
those of our stockholders and warrantholders who elected to participate in a pro
rata subscription offering. Upon the occurrence of certain triggering events,
the holders of the Series C Convertible Preferred Stock are entitled to convert
such shares into our Common Stock at a price of $1.50 per share.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
NOTE REGARDING FISCAL YEAR ENDS: Our fiscal year end used to be the
Saturday closest to March 31. On March 24, 1999, we changed our fiscal year end
to the Saturday closest to December 31. Thus, the information presented below
for Fiscal 1998 and the nine month period ended December 27, 1997 contain an
overlap of approximately nine months (from March 30, 1997 to December 27, 1997).
Additionally, the information presented below for the year ended January 2, 1999
and Fiscal 1998 contain an overlap of approximately three months (from December
28, 1997 to March 28, 1998).
The selected consolidated financial data below (i) for the fiscal year
ended March 28, 1998, the nine month period ended January 2, 1999 and the fiscal
year ended January 1, 2000 and (ii) as of January 2, 1999 and January 1, 2000
have been derived from our consolidated financial statements which have been
audited by Arthur Andersen LLP, independent public accountants, and are included
in Item 14 of this report. The selected consolidated financial data below (i)
for the fiscal years ended April 3, 1996 and March 29, 1997 and (ii) as of April
3, 1996, March 29, 1997 and March 28, 1998 have been derived from our
consolidated financial statements which have been audited by Arthur Andersen
LLP, independent public accountants, but are not included in this report. The
selected consolidated financial data below as of and for the nine month period
ended December 27, 1997 and the fiscal year ended January 2, 1999 have been
derived from our unaudited consolidated financial statements, not presented
herein. The unaudited consolidated financial statements for each of the periods
referred to above include, in the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the results for the unaudited periods. The data below reflect the effect of our
recapitalization on February 3, 1998 (the "Recapitalization") and our
acquisition of Power Ten on May 29, 1998.
The information presented below is qualified in its entirety by, and should
be read in conjunction with, Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations, and Item 8. Consolidated
Financial Statements and Supplemental Data.
12
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR
(1) THE COMPANY
------------ ---------------------------------------------------------------------
F Y ENDED FISCAL YEAR ENDED NINE MONTHS ENDED FISCAL YEAR ENDED
--------- ----------------- ----------------- -----------------
APR. 3, MAR. 29, MAR. 28, DEC. 27, JAN. 2, JAN. 2, JAN. 1,
1996 1997 1998 1997 1999 1999 2000
------- -------- -------- --------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales..................... $42,309 $45,578 $62,496 $46,615 $47,136 $63,017 $56,059
Cost of sales................. 26,468 26,973 32,944 24,325 26,000 34,619 32,032
------- ------- ------- ------- ------- ------- -------
Gross profit.................. 15,841 18,605 29,552 22,290 21,136 28,398 24,027
Selling, general and
administrative expenses(2). 7,406 7,770 9,434 6,781 8,114 10,766 10,005
Research and development and
engineering expenses....... 4,168 3,973 6,242 4,448 4,912 6,707 5,851
Amortization expense(3)....... 2,149 1,314 1,314 985 1,663 1,991 2,432
------- ------- ------- ------- ------- ------- -------
Operating income.............. 2,118 5,548 12,562 10,076 6,447 8,934 5,739
Interest expense, net......... 3,578 1,839 3,341 1,096 8,008 10,253 10,458
------- ------- ------- ------- ------- ------- -------
Income (loss) before income
tax provision (benefit).... (1,460) 3,709 9,221 8,980 (1,561) (1,319) (4,719)
Income tax provision (benefit) 176 1,872 4,448 4,410 (191) (152) (536)
------- ------- ------- ------- ------- ------- -------
Net income (loss)............. $(1,636) $ 1,837 $ 4,773 $ 4,570 $(1,370) $(1,167) $(4,183)
======= ======= ======= ======= ======= ======= =======
OTHER DATA:
Operating cash flows.......... $ 2,192 $ 5,312 $ 7,462 $ 4,535 $ 4,323 $ 7,250 $(1,350)
Investing cash flows.......... (611) (14,593) (1,218) (933) (17,800) (18,085) (674)
Financing cash flows.......... (442) 9,499 (4,269) (4,035) 17,318 17,084 (4)
Depreciation.................. 785 806 883 615 748 1,024 888
Capital expenditures.......... 611 621 1,228 933 294 589 676
Ratio of combined earnings and
preferred stock dividends
to earnings(4)............. -- 2.97x 3.70x 8.76x -- -- --
OTHER NON-GAAP DATA:
Adjusted EBITDA(5)............ $ 5,052 $ 7,668 $15,118 $11,669 $ 9,100 $ 12,610 $9,158
Adjusted EBITDA margin(6)..... 11.9% 16.8% 24.2% 25.0% 19.3% 20.0% 16.3%
BALANCE SHEET DATA:(7)
Total assets.................. $37,891 $36,597 $ 44,912 $38,922 $ 63,754 $ 63,754 $ 58,545
Total debt.................... 19,676 15,216 90,000 11,211 104,000 104,000 100,000
Stockholders' equity (deficit) 14,000 15,837 (61,471) 20,407 (59,589) (59,589) (61,575)
</TABLE>
- -----------
(1) Presents certain data of our predecessor prior to its acquisition on April
3, 1996. Our predecessor changed its name to Elgar Holdings, Inc. in
connection with our recapitalization on February 3, 1998.
(2) In Fiscal 1998, selling, general and administrative expenses include
approximately $359 of nonrecurring expenditures relating to the
Recapitalization.
(3) Amortization expense of our predecessor represents the amortization of
goodwill associated with a prior acquisition of Elgar in 1989 and Elgar's
acquisition of Sorensen in 1994. Amortization expense of the Company
represents the amortization of goodwill associated with its acquisition on
April 3, 1996 and of Power Ten by Elgar on May 29, 1998.
(4) In calculating the ratio of earnings to fixed charges, earnings consist of
income (loss) before income tax provision (benefit), plus fixed charges.
Fixed charges consist of interest incurred (which includes amortization of
deferred financing costs) whether expensed or capitalized and a portion of
rental expense which management believes is a reasonable approximation of
an interest factor. In the fiscal years ended January 2, 1999 and January
1, 2000 and the nine months ended January 2, 1999, earnings were
insufficient to cover fixed charges by approximately $1,535,000, $5,286,000
and $1,776,000, respectively.
(5) Adjusted EBITDA is the sum of income (loss) before income taxes, interest,
depreciation and amortization expense. Adjusted EBITDA is presented because
we believe that it is a widely accepted financial indicator of a company's
ability to service indebtedness. However, adjusted EBITDA should not be
considered as an alternative to net income or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of a company's
operating performance or as a measure of liquidity. In Fiscal 1998,
adjusted EBITDA excludes the nonrecurring expenditures described in note
(2) above.
(6) Adjusted EBITDA margin is equal to Adjusted EBITDA divided by net sales for
the periods presented.
13
<PAGE>
(7) Balance sheet data as of April 3, 1996 reflect the allocation of the
purchase price associated with the acquisition of Elgar on April 3, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains certain forward-looking statements and information
relating to our business 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 our operations, are intended to identify
forward-looking statements. Such statements reflect our current views 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. 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. We do not intend to update these
forward-looking statements.
The following discussion and analysis should be read in conjunction with
"Selected Historical Consolidated Financial Data" and our consolidated financial
statements and the notes thereto included elsewhere in this report.
RESULTS OF OPERATIONS
The following table sets forth certain income statement information and
other data as a percentage of net sales for the periods indicated. Due to our
change in fiscal year end, the information presented below for Fiscal 1998 and
the nine month period ended December 27, 1997 contain an overlap of
approximately nine months (from March 30, 1997 to December 27, 1997).
Additionally, the information presented below for the year ended January 2, 1999
and Fiscal 1998 contain an overlap of approximately three months (from December
28, 1997 to March 28, 1998).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED FISCAL YEAR ENDED
------------------------------ ----------------- -----------------
APRIL 3, MARCH 29, MARCH 28, DEC. 27, JAN. 2, JAN. 2, JAN. 1,
1996(1) 1997 1998 1997 1999 1999 2000
-------- --------- --------- -------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................ 62.6 59.2 52.7 52.2 55.2 54.9 57.1
-------- --------- --------- -------- ------- ------- -------
Gross profit............................. 37.4 40.8 47.3 47.8 44.8 45.1 42.9
Selling, general and administrative
expenses(2)............................ 17.5 17.0 15.1 14.6 17.2 17.1 17.9
Research and development and engineering
expenses............................... 9.9 8.7 10.0 9.5 10.4 10.6 10.5
Amortization expense..................... 5.0 2.9 2.1 2.1 3.5 3.2 4.3
-------- --------- --------- -------- ------- ------- -------
Operating income......................... 5.0% 12.2% 20.1% 21.6% 13.7% 14.2% 10.2%
======== ========= ========= ======== ======= ======= =======
OTHER DATA:
Adjusted EBITDA % (3).................... 11.9% 16.8% 24.2% 25.0% 19.3% 20.0% 16.3%
</TABLE>
(1) Presents certain results of our predecessor prior to its acquisition on
April 3, 1996.
(2) In Fiscal 1998, selling, general and administrative expenses include
approximately $359 of nonrecurring expenditures relating to the
Recapitalization.
(3) Adjusted EBITDA for Fiscal 1998 excludes the nonrecurring expenditures
described in note (2) above.
14
<PAGE>
FISCAL YEAR ENDED JANUARY 1, 2000 VERSUS THE 12 MONTHS ENDED JANUARY 2, 1999
NET SALES. Net sales in our fiscal year ended January 1, 2000 ("Fiscal
1999") were $56.1 million, a decrease of $6.9 million, or 11.0%, from net sales
of $63.0 million in the 12-month period ended January 2, 1999 ("12 Months
1998"). This decrease was primarily attributable to a $6.3 million decrease in
sales to Racal of programmable DC products.
GROSS PROFIT. Gross profit in Fiscal 1999 was $24.0 million, a decrease of
$4.4 million, or 15.5%, from gross profit of $28.4 million in 12 Months 1998.
The decrease in gross profit was primarily attributable to a decrease in net
sales, as discussed above, and to a lesser extent, to a decrease in the gross
profit percentage. A decrease in the gross profit percentage from 45.1% to 42.9%
was primarily due to a less favorable mix of business and lower volume.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses were $10.0 million in Fiscal 1999, a decrease
of $0.8 million, or 7.4%, from SG&A expenses of $10.8 million in 12 Months 1998.
SG&A expenses increased as a percentage of net sales from 17.1% in 12 Months
1998 to 17.9% in Fiscal 1999. The decrease in dollars was primarily due to lower
sales volume, which generated $0.2 million less in commissions, along with $0.6
million of nonrecurring expenditures incurred in connection with the
Recapitalization included in 12 Months 1998 compared to zero in Fiscal 1999.
RESEARCH AND DEVELOPMENT AND ENGINEERING EXPENSES. Research and
development and engineering expenses in Fiscal 1999 were $5.9 million, a
decrease of $0.8 million, or 11.9%, from research and development and
engineering expenses of $6.7 million in 12 Months 1998. Research and development
and engineering expenses decreased as a percentage of net sales from 10.6% to
10.5%. The decrease in dollars and as a percentage of net sales was
predominately due to an increase in customer-funded research and development
expense in Fiscal 1999 compared to 12 Months 1998.
AMORTIZATION EXPENSE. Amortization expense was $2.4 million in Fiscal
1999, an increase of $0.4 million, or 20.0%, from amortization expense of $2.0
million in 12 Months 1998. Amortization expense is comprised of the amortization
of goodwill associated with the April 1996 acquisition of Elgar by Carlyle-EEC
Holdings, Inc, and the May 1998 acquisition of Power Ten by Elgar. The increase
was due to 12 Months 1998 only containing seven months of amortization expense
from the Power Ten acquisition, while Fiscal 1999 was a full year of
amortization expense.
OPERATING INCOME. Operating income was $5.7 million in Fiscal 1999, a
decrease of $3.2 million, or 36.0%, from operating income of $8.9 million in 12
Months 1998. Operating income decreased as a percentage of net sales from 14.2%
in 12 Months 1998 to 10.2% in Fiscal 1999. The decrease was due to the factors
set forth above.
INCOME TAXES. Income taxes for Fiscal 1999 contained a tax benefit of
$0.5 million, compared to a tax benefit of $0.2 million for 12 Months 1998. Our
effective tax rate was 11.4% for Fiscal 1999 and 11.5% for 12 Months 1998. Our
effective tax rate differs from the statutory tax rate of 40.0% primarily due to
the non-deductibility of goodwill for tax purposes and realization of research
and development tax credits which we utilize.
NINE MONTHS ENDED JANUARY 2, 1999 VERSUS 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,
15
<PAGE>
(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 $21.1 million, a decrease of $1.2 million, or 5.4%, 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 44.8% for the nine months ended January 2, 1999. The decrease in
gross profit was primarily attributable to unfavorable product mix.
SG&A 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 our acquisition of Power Ten.
OPERATING INCOME. Operating income was $6.4 million for the nine months
ended January 2, 1999, a decrease of $3.7 million, or 36.6%, 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 13.7% 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 $191,000, compared to a tax provision of $4.4 million
for the nine months ended December 27, 1997. Our effective tax rate was 12.2%
for the nine months ended January 2, 1999 and 49.1% for the nine 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 research and development tax credits which we utilize.
FISCAL YEAR ENDED MARCH 28, 1998 VERSUS FISCAL YEAR ENDED MARCH 29, 1997
NET SALES. Net sales in our fiscal year ended March 28, 1998 ("Fiscal
1998") were $62.5 million, an increase of $16.9 million, or 37.1%, from net
sales of $45.6 million in our fiscal year ended March 29, 1997 ("Fiscal 1997").
This increase was primarily attributable to a $13.6 million increase in sales
from the DC product line and a $3.3 million increase in SAS sales.
16
<PAGE>
GROSS PROFIT. Gross profit in Fiscal 1998 was $29.6 million, an
increase of $11.0 million, or 59.1%, from gross profit of $18.6 million in
Fiscal 1997. The increase in gross profit was primarily attributable to an
increase in net sales, as discussed above, and to a lesser extent, to an
increase in the gross profit percentage. An increase in the gross profit
percentage from 40.8% to 47.3% was primarily due to a more favorable mix of
business, improved manufacturing efficiencies and lower material costs.
SG&A EXPENSES. SG&A expenses were $9.4 million in Fiscal 1998, an
increase of $1.6 million, or 20.5%, from SG&A expenses of $7.8 million in Fiscal
1997. SG&A expenses decreased as a percentage of net sales from 17.0% in Fiscal
1997 to 15.1% in Fiscal 1998. The increase in dollars was primarily due to
higher sales volume, which generated an additional $0.6 million in commissions
and merit increases for employees, along with $0.4 million of nonrecurring
expenditures incurred in connection with the Recapitalization.
RESEARCH AND DEVELOPMENT AND ENGINEERING EXPENSES. Research and
development and engineering expenses in Fiscal 1998 were $6.2 million, an
increase of $2.2 million, or 55.0%, from research and development and
engineering expenses of $4.0 million in Fiscal 1997. Research and development
and engineering expenses increased as a percentage of net sales from 8.7% to
10.0%. The increase was due to an increase in engineering personnel of six
employees and a $0.5 million increase in fees paid to consultants primarily to
support SAS development.
AMORTIZATION EXPENSE. Amortization expense was $1.3 million in each of
Fiscal 1997 and Fiscal 1998. Amortization expense is comprised of the
amortization of goodwill associated with the April 1996 acquisition of Elgar by
Carlyle-EEC Holdings, Inc.
OPERATING INCOME. Operating income was $12.6 million in Fiscal 1998, an
increase of $7.1 million, or 129.1%, from operating income of $5.5 million in
Fiscal 1997. Operating income increased as a percentage of net sales from 12.2%
in Fiscal 1997 to 20.1% in Fiscal 1998. The increase was due to the factors set
forth above.
INCOME TAXES. Income taxes for Fiscal 1998 contained a tax provision of
$4.4 million, compared to a tax provision of $1.9 million for Fiscal 1997. Our
effective tax rate was 48.2% for Fiscal 1998 and 50.5% for Fiscal 1997. Our
effective tax rate differs from the statutory tax rate of 40.0% primarily due to
the non-deductibility of goodwill for tax purposes and realization of research
and development tax credits which we utilize.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW. Our principal uses of cash are to finance working capital,
debt service and capital expenditures. Historically, we have funded our
activities principally from working capital and a line of credit. Cash flow used
by operating activities for Fiscal 1999 was $(1.3) million, a decrease of $(8.6)
million from cash flow of $7.3 million provided by operating activities in 12
Months 1998. The decrease in cash flow provided by operating activities was
primarily attributable to a greater net loss and higher bond interest paid in
Fiscal 1999 compared to 12 Months 1998.
CAPITAL REQUIREMENTS. Our capital expenditures were $621,000 in Fiscal
1997, $1,228,000 in Fiscal 1998, $933,000 in the nine months ended December 27,
1997, $294,000 in the nine months ended January 2, 1999 and $676,000 in Fiscal
1999. The $639,000 decrease from the nine months ended December 27, 1997, to the
nine months ended January 2, 1999 was primarily attributable to facility
expansion undertaken during the nine months ended December 27, 1997. The
expenditures spent during Fiscal 1999 were primarily for new product support at
Elgar and Power Ten.
17
<PAGE>
SOURCES OF CAPITAL. 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 $15.0
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 $30.0 million by adding a $15.0 million
term facility (the "Term Facility," and collectively with the Revolving
Facility, the "Credit Facility") to the existing $15.0 million Revolving
Facility. We used all of the proceeds from the Term Facility to finance a
portion of the purchase price for Power Ten. Like the Revolving Facility, the
Term Facility matures on February 3, 2003.
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 $15.0
million to $5.0 million, certain financial covenants were amended, and the
Company and Elgar received a waiver for past noncompliance with certain
financial covenants. On March 24, 1999, the Credit Agreement was further amended
to reflect the change in the Company's fiscal year end from the Saturday closest
to March 31 to the Saturday closest to December 31. Elgar was in compliance with
financial covenants contained in the Credit Agreement as of January 1, 2000.
Effective March 10, 2000, Elgar and the Company entered into a Third Amendment
to the Credit Agreement in anticipation of not complying with the EBITDA and
fixed charge covenants for the quarter ending on or about March 31, 2000. In
addition to receiving waivers for any covenant violations both before and after
giving effect to the Third Amendment, the Third Amendment (i) resets the fixed
charge coverage ratio for the quarter ending closest to March 31, 2000 and for
following quarters and (ii) resets the minimum EBITDA levels for the quarter
ending closest to December 31, 1999 and for following quarters.
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. As of January 1, 2000,
we had not made any draws on the $5.0 million Revolving Facility available to
us.
Payments under the Term Facility are pursuant to an amortization
schedule with a final maturity date of February 3, 2003. In connection with our
amendment of the Credit Agreement, the $4.0 million of cash we received in
connection with our issuance and sale of 4,000 shares of Series C Preferred
Stock was applied to reduce the outstanding balance of the Term Facility from
$14.0 million to $10.0 million.
Indebtedness under the Credit Facility bears interest at a floating rate
equal to, at our 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. The effective interest rate on the Term Facility was
approximately 8.685% at January 1, 2000. See Item 7A. Quantitative and
Qualitative Disclosures About Market Risk.
Elgar's obligations under the Credit Facility are:
-- secured by a first priority security interest in substantially all of
the assets of EHI, Elgar and Power Ten (including, without limitation,
accounts receivable, inventory, machinery, equipment, contracts and
contract rights, trademarks, copyrights, patents, license agreements
and general intangibles),
-- guaranteed by EHI and Power Ten on a senior basis and
-- secured by a pledge of all of the outstanding capital stock of Elgar
and Power Ten.
18
<PAGE>
The Credit Facility contains customary covenants restricting our 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 us to meet certain
financial ratios and tests and provide that a "change of control" will
constitute an event of default.
Our principal uses of cash are for working capital requirements, debt
service requirements and capital expenditures. Based upon current and
anticipated levels of operations, we believe that our cash flow from operations,
together with amounts available under the Revolving Facility, will be adequate
to meet our anticipated requirements for the next 12 months for working capital,
interest payments, amortization of the Term Facility and capital expenditures.
No assurance can be given, however, that this will be the case. As a holding
company with no operations or assets other than our ownership of the capital
stock of Elgar, we must rely on dividends and other payments from Elgar to
generate the funds necessary to meet our obligations, including the payment of
principal of and interest on the Senior Notes. Although the payment of dividends
from Power Ten to Elgar and from Elgar to EHI 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 our growth
rate and profitability, we may require additional equity or debt financing to
meet our 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 us. Our future operating performance
and ability to service or refinance the Senior 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 our control.
POWER TEN ACQUISITION. On May 29, 1998, we acquired all of the outstanding
capital stock of Power Ten for $17.8 million. We financed the purchase price and
certain transaction expenses with $15.0 million of proceeds from the Term
Facility and the issuance of $5.0 million in aggregate liquidation value of
Series B Preferred Stock.
INFLATION AND GENERAL ECONOMIC CONDITIONS
Although we cannot accurately anticipate the effect of inflation on our
operations, we do not believe that inflation has had, or is likely in the
foreseeable future to have, a material impact on our results of operations. We
do not have a significant number of fixed-price contracts where we bear the risk
of cost increases. No contracts are booked which have shipments scheduled past
the next 12 months.
YEAR 2000 ISSUE
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 cause 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, we undertook a detailed review of all
of the significant operating systems, software applications and hardware used in
our operations. We also contacted our major suppliers in order to determine
their state of readiness. Our operating systems and business software updates
have been installed and tested, and personal computer hardware and software
upgrades/replacements have been converted. Other items such as the phone switch,
bank capabilities, outside insurance carriers and the outside payroll system
were evaluated and tested as appropriate. The
19
<PAGE>
cost to become year 2000 ready, including conversion of our business software
and upgrades of our personal computer hardware and software, totaled $60,000.
Compliance status from key suppliers was evaluated to determine whether we would
need to switch sources to ensure ongoing product/service availability. We have
not experienced any disruption in supply or become aware of any major problems
with any of our suppliers. We expect any future risk on remaining items to be
low.
We are not aware of any accelerated purchases in late 1999 by our customers
as a means of mitigating the risk of the year 2000 issue.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have only limited involvement in derivative financial instruments. We do
not hold or issue derivative financial instruments for trading purposes. Certain
amounts borrowed under our Credit Facility are at variable interest rates and we
are thus subject to market risk resulting from interest rate fluctuations. We
enter into interest rate swaps in part to alter interest rate exposures.
Interest rate swaps allow us to raise long-term borrowings at floating rates and
effectively swap them into fixed rates that are lower than those available to us
if fixed-rate borrowings were made directly. Under interest rate swaps, we agree
with another party to exchange, at specified intervals, the difference between
fixed-rate and floating-rate amounts calculated by reference to an agreed
notional principal amount. As of February 29, 2000, all but $2,500,000 of our
long-term bank debt was covered by this swap arrangement. Thus, our exposure
with respect to upward movements in interest rates is this portion of our bank
debt.
In addition, we are exposed to market risks related to fluctuations in
interest rates on our Senior Notes. For fixed rate debt such as the Senior
Notes, changes in interest rates generally affect the fair value of the debt
instrument. We do not have an obligation to repay the Senior Notes prior to
maturity in February 2008 and, as a result, interest-rate risk and changes in
fair value should not have a significant impact on us.
20
<PAGE>
The tables below provide information as of January 1, 2000 about our
derivative instruments and other financial instruments that are sensitive to
changes in interest rates.
LONG TERM BANK DEBT (VARIABLE RATE)
- -----------------------------------
<TABLE>
<S> <C>
Principal amount $10,000,000(1)
Variable interest rate 9.000%(2)
Maturity--tranche March 30, 2000
Maturity--loan February 3, 2003
Remaining principal payments:
2000 $1,250,000
2001 $3,750,000
2002 $4,000,000
2003 $1,000,000
</TABLE>
- -----------
(1) $7,500,000 of this amount is covered by the interest-rate swap arrangement
described below.
(2) Renewals are based on the Eurodollar Rate plus 2.75%.
INTEREST RATE SWAP ARRANGEMENT (FIXED RATE)
- -------------------------------------------
<TABLE>
<S> <C>
Parties The Company (fixed rate payor) and
Bankers Trust Company (floating rate
payor)
Notional amount $7,500,000
Fixed interest rate 5.83% (1)
Floating interest rate 6.18% for the current period (2)
Swap interest--fiscal year ended
January 1, 2000 $43,181 (3)
Commencement date June 24, 1998
Maturity date June 25, 2001
</TABLE>
- -----------
(1) As the fixed interest rate payor, we are required to pay a fixed rate of
5.83% per annum on the $7,500,000 notional amount, payable quarterly on
each March 24, June 24, September 24 and December 24.
(2) As the floating rate payor, Bankers Trust Company is required to pay a
floating rate of interest on the $7,500,000 notional amount, based on the
three-month London Interbank Offering Rate (LIBOR), payable quarterly on
each March 24, June 24, September 24 and December 24.
(3) In connection with the swap agreement, we recorded $43,181 of interest
expense for the fiscal year ended January 1, 2000.
SENIOR NOTES (FIXED RATE)
- -------------------------
<TABLE>
<S> <C>
Principal amount outstanding $90,000,000
Fixed interest rate 9.875%
Maturity date February 1, 2008
</TABLE>
21
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required in response to this Item are
listed under Item 14(a) of Part IV of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position of each person
who is one of our directors or executive officers as of January 1, 2000. Each
director holds office until the next annual meeting of the stockholders or until
his successor has been elected and qualified. Officers are elected by the Board
of Directors and serve at the discretion of the Board.
NAME AGE POSITIONS
- -------------------------------------------------------------------------------
Kenneth R. Kilpatrick......... 62 President and Chief Executive Officer,
EHI, Elgar and Power Ten; Director,
EHI, Elgar and Power Ten
Samuel A. Lewis............... 51 Vice President--Sales and Marketing,
Elgar
Christopher W. Kelford........ 49 Vice President--Finance, Chief Financial
Officer and Treasurer, EHI and Elgar
Normand E. Precourt........... 57 Vice President--Engineering, Elgar
Ronald A. Garrett............. 65 Vice President--Operations, Elgar
Daniel E. Donati.............. 42 Vice President--Program Management, Elgar
Thomas Erickson............... 56 Vice President--Human Resources, Elgar
Gerald D. Price............... 51 Vice President--Sales and Marketing,
Power Ten
David C. Hoffman.............. 48 Vice President--Engineering, Power Ten
Dr. John F. Lehman............ 57 Director, EHI and Elgar
Donald Glickman............... 66 Vice President, EHI and Elgar; Chairman
of the Board, EHI and Elgar;
Director, Power Ten
George Sawyer................. 68 Director, EHI and Elgar
Thomas G. Pownall............. 77 Director, EHI and Elgar
Oliver C. Boileau, Jr......... 72 Director, EHI and Elgar
Keith Oster................... 38 Secretary, EHI and Elgar; Director, EHI,
Elgar and Power Ten
Joseph A. Stroud.............. 44 Director, EHI and Elgar
William Paul.................. 63 Director, EHI and Elgar
Bruce D. Gorchow.............. 41 Director, EHI and Elgar
KENNETH R. KILPATRICK, who is President and Chief Executive Officer and a
director of EHI, Elgar and Power Ten, has been with Elgar since July 1991 in his
current position. Mr. Kilpatrick was appointed President and Chief Executive
Officer of EHI in May 1998 and Power Ten in June 1999. Prior to joining
22
<PAGE>
Elgar, Mr. Kilpatrick was President of Machine Industries, Inc., an aerospace
parts manufacturer, from 1989 to 1991, and with ACDC Electronics, a division of
Emerson Electric Co. and a manufacturer of fixed power supplies, from 1964 to
1989. After beginning as an Assistant General Manager of ACDC Electronics in
1964, Mr. Kilpatrick was appointed President of the company in 1972. Mr.
Kilpatrick is active in all aspects of Elgar's business.
SAMUEL A. LEWIS, Vice President--Sales and Marketing of Elgar, with 25
years of experience in the test and measurement equipment industry, including 19
years with Elgar, is responsible for leading Elgar's sales efforts. Mr. Lewis,
who began his career with Elgar in 1972, re-joined Elgar in January 1988 after
spending the prior six years as the North American Sales Manager for Wavetek
Corporation, a test and measurement company. At Wavetek, Mr. Lewis spearheaded
the creation of a central sales management organization, set up area sales
offices, and managed 18 representative organizations with 130 sales people.
Prior to beginning work with Wavetek in 1982, Mr. Lewis spent nine years with
Elgar in the positions of Customer Service Manager and National Sales Manager.
CHRISTOPHER W. KELFORD, Vice President--Finance, Chief Financial Officer
and Treasurer of EHI, Elgar and Power Ten, has been with Elgar since August
1990. Prior to joining Elgar, Mr. Kelford spent 12 years with TRW LSI Products,
Inc., a semiconductor manufacturer, advancing from Finance Manager to Controller
during that time. Mr. Kelford had significant experience in modernizing
information infrastructures, overseeing foreign operations and managing the due
diligence phases of five merger and acquisition transactions.
NORMAND E. PRECOURT, Vice President--Engineering of Elgar, has been with
Elgar since July 1990. Prior to that time, Mr. Precourt was with Cipher Data
Products, a computer peripherals company, advancing from Engineering Group
Leader to Vice President, Engineering Technology during that time.
RONALD A. GARRETT, Vice President--Operations of Elgar, joined Elgar in
June 1992. Prior to that time, Mr. Garrett directed major "start up" operations
at Sequent Computer, Memorex and the Automated Test System Division of John
Fluke Manufacturing. In addition, Mr. Garrett gained extensive background in
power electronics while serving as the senior manufacturing executive at both
ACDC Electronics and the Qualidyne Division of Lambda Power Systems. Mr. Garrett
is recognized for turnaround conversion of factory job shops to production
process control operations.
DANIEL E. DONATI, Vice President--Program Management of Elgar, joined Elgar
in September 1991 and is responsible for overseeing Elgar's Space Systems and
CASS Program operations. Prior to that time, Mr. Donati spent over 12 years with
Aerojet Electronics Systems and Walt Disney where he gained valuable program
management, operations and engineering experience.
THOMAS ERICKSON, Vice President--Human Resources of Elgar, joined Elgar in
October 1983. Prior to that time, he spent seven years at Solar Turbines as its
Human Resources Manager.
GERALD D. PRICE has been the Vice President--Sales and Marketing of Power
Ten since November 1998, having joined the Company with 20 years of experience
in the sales and marketing of semiconductor equipment. Prior to joining Power
Ten, Mr. Price spent the previous ten years in regional sales management
positions with Advanced Energy Industries, a manufacturer of power supplies used
by semiconductor equipment companies for generating plasma. Prior to that time,
Mr. Price spent ten years in product marketing management with Varian Associates
and KLA-Tencor, two companies heavily involved in the manufacture of capital
equipment used in semiconductor fabrication.
DAVID C. HOFFMAN has been the Vice President--Engineering of Power Ten
since April 1995. Mr. Hoffman has amassed 25 years of experience in the power
electronics industry. Prior to joining Power
23
<PAGE>
Ten in 1995, Mr. Hoffman was Director of Engineering at Netframe Systems, Inc.,
a manufacturer of network file servers. He founded Modular Power Corporation, a
producer of state-of-the-art 100kw interruptible power supplies. Before founding
Modular Power, Mr. Hoffman was manager of power systems at Trilogy Systems and
was applications manager at Siliconix, Inc. Mr. Hoffman has been awarded eight
patents for his engineering contributions in the power electronics industry.
DR. JOHN F. LEHMAN, who is a director of EHI and Elgar, is a Managing
General Partner of J.F. Lehman & Company ("Lehman"). Prior to founding Lehman in
1990, Dr. Lehman was an investment banker with PaineWebber, Incorporated from
1988 to 1990, and served as a Managing Director in Corporate Finance. Dr. Lehman
served for six years as Secretary of the Navy, was a member of the National
Security Council Staff, served as a delegate to the Mutual Balanced Force
Reductions negotiations and was the Deputy Director of the Arms Control and
Disarmament Agency. Dr. Lehman served as Chairman of the Board of Directors of
Sperry Marine, Inc., and is Chairman of the Board of Directors of Special
Devices, Incorporated; he is also a director of Ball Corporation, Burke
Industries, Inc., McCormick Selph Holdings, Inc. and ISO Inc. and is Chairman of
the Princess Grace Foundation, a director of OpSail Foundation and a trustee of
LaSalle College High School.
DONALD GLICKMAN, who is Chairman of the Board and a Vice President of
both EHI and Elgar and a director of Power Ten, is a Managing General Partner
of Lehman. From February 1998 to May 1998, Mr. Glickman was President of EHI.
Prior to joining Lehman, Mr. Glickman was a principal of the Peter J. Solomon
Company, a Managing Director of Shearson Lehman Brothers Merchant Banking
Group and Senior Vice President and Regional Head of The First National Bank
of Chicago. Mr. Glickman served as an armored cavalry officer in the Seventh
U.S. Army. Mr. Glickman is currently a director of the MSC Software
Corporation, General Aluminum Corporation, Special Devices, Incorporated,
Burke Industries, Inc., McCormick Selph Holdings, Inc. and Monroe Muffler
Brake, Inc. He is also a trustee of MassMutual Corporate Investors and Wolf
Trap Foundation for the Performing Arts.
GEORGE SAWYER, who is a director of EHI and Elgar, has been affiliated with
Lehman for the past nine years. From 1993 to 1995, Mr. Sawyer served as the
President and Chief Executive Officer of Sperry Marine, Inc. Prior to that time,
Mr. Sawyer held a number of prominent positions in private industry and in the
U.S. government, including serving as the President of John J. McMullen
Associates, the President and Chief Operating Officer of TRE Corporation,
Executive Vice President of General Dynamics Corporation, the Vice President of
International Operations for Bechtel Corporation and the Assistant Secretary of
the Navy for Shipbuilding and Logistics under Dr. Lehman. Mr. Sawyer is a
director of McCormick Selph Holdings, Inc., Special Devices, Incorporated and
Chairman of the Board of Burke Industries, Inc. and also serves on the Board of
Trustees of Webb Institute and the Board of Managers of the American Bureau of
Shipping.
THOMAS G. POWNALL, who became a director of EHI and Elgar in July 1998,
is a member of the investment advisory board of Lehman. Mr. Pownall was
Chairman of the Board of Directors of Martin Marietta Corporation from 1983
until 1992 and Chief Executive Officer of Martin Marietta from 1982 until his
retirement in 1988. Mr. Pownall joined Martin Marietta in 1963 as President
of its Aerospace Advanced Planning unit, became President of Aerospace
Operations and, in succession, Vice President then President and Chief
Operating Officer of Martin Marietta. Mr. Pownall is also a director of the
Titan Corporation, Burke Industries, Inc. and Special Devices, Incorporated,
Director Emeritus of Sundstrand Corporation, and is Chairman Emeritus of the
American-Turkish Council. He is also a director of the U.S. Naval Academy
Foundation and the Naval Academy Endowment Trust and a trustee of
Salem-Teikyo University.
24
<PAGE>
OLIVER C. BOILEAU, JR. became a director of EHI and Elgar in December 1998.
He joined Boeing Company in 1953 as a research engineer and progressed through
several technical and management positions and was named Vice President in 1968
and then President of Boeing Aerospace in 1973. In 1980, he joined General
Dynamics Corporation as President and a member of the Board of Directors. In
January 1988, Mr. Boileau was promoted to Vice Chairman. He retired in May 1988.
Mr. Boileau joined Northrop Grumman Corporation ("Northrop Grumman") in December
1989 as President and General Manager of the B-2 Division. He
also served as President and Chief Operating Officer of the Grumman Corporation,
a subsidiary of Northrop Grumman, and as a member of the Board of Directors of
Northrop Grumman. Mr. Boileau retired from Northrop Grumman in 1995. He is an
Honorary Fellow of the American Institute of Aeronautics and Astronautics, a
fellow of the Royal Aeronautical Society, a Senior Member of the Institute of
Electrical and Electronic Engineers, a member of the National Academy of
Engineering, the Board of Trustees of St. Louis University, and a Trustee of the
University of Wyoming Foundation. Mr. Boileau is also a director of Burke
Industries, Inc. and Special Devices, Incorporated.
KEITH OSTER, who is Secretary and a director of EHI and Elgar and a
director of Power Ten, is a General Partner of Lehman. Mr. Oster joined Lehman
in 1992 and is principally responsible for financial structuring and analysis.
Prior to joining Lehman, Mr. Oster was with the Carlyle Group, where he was
responsible for analyzing acquisition opportunities and arranging debt
financing, and was a Senior Financial Analyst with Prudential-Bache Capital
Funding, working in the Mergers, Acquisitions and Leveraged Buyout Department.
Mr. Oster is also a director of Burke Industries, Inc., McCormick Selph
Holdings, Inc. and Special Devices, Incorporated.
JOSEPH A. STROUD, who is a director of EHI and Elgar, is a General Partner
of Lehman. Mr. Stroud joined Lehman in 1996 and is responsible for managing the
financial and operational aspects of portfolio company value-enhancement. Prior
to joining Lehman, Mr. Stroud was the Chief Financial Officer of Sperry Marine,
Inc. from 1993 until the company was purchased by Litton Industries, Inc. in
1996. From 1989 to 1993, Mr. Stroud was Chief Financial Officer of the Accudyne
and Kilgore Corporations. Mr. Stroud is also a director of Burke Industries,
Inc., McCormick Selph Holdings, Inc. and Special Devices, Incorporated.
WILLIAM PAUL is a director of EHI and Elgar. Mr. Paul began his career with
United Technologies Corporation ("UTC") at its Sikorsky Aircraft division in
1955. Mr. Paul progressed through a succession of several technical and
managerial positions while at Sikorsky, including Vice President of Engineering
and Programs and Executive Vice President and Chief Operating Officer, and in
1983 was named President and Chief Executive Officer of Sikorsky Aircraft. In
1994, Mr. Paul was appointed as the Executive Vice President of UTC, Chairman of
UTC's international operations and became a member of UTC's management executive
committee. Mr. Paul retired from these positions in 1997 and remains a
consultant to UTC. Mr. Paul is a Fellow of the American Institute of Aeronautics
and a Fellow of the Royal Aeronautical Society. Mr. Paul is also a director of
Special Devices, Incorporated.
BRUCE D. GORCHOW, who is a director of EHI and Elgar, is a member of the
investment advisory board of Lehman. Since 1991, Mr. Gorchow has been Executive
Vice President of PPM America, Inc. In 1999, he became President of PPM America
Capital Partners, LLC. Prior to his position at PPM America, Mr. Gorchow was a
Vice President at Equitable Capital Management, Inc. Mr. Gorchow is also a
director of Global Imaging Systems, Inc., Leiner Health Products, Inc.,
Examination Management Services, Inc., Applied Process Solutions, Inc. and Burke
Industries, Inc. and is an investment advisor for several investment limited
partnerships.
25
<PAGE>
CERTAIN RIGHTS OF HOLDERS OF REDEEMABLE PREFERRED STOCK
Under certain circumstances, the holders of the Series A Redeemable
Preferred Stock may have the right to elect a majority of EHI's directors. See
"Certain Relationships and Related Transactions--Shareholders Agreement."
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Audit Committee of the Board of Directors is comprised
of Messrs. Pownall (Chairman), Sawyer, Paul and Oster. The Audit Committee makes
recommendations concerning the engagement of independent public accountants,
reviews with the independent public accountants the scope and results of the
audit engagement, approves professional services provided by the independent
public accountants, reviews the independence of the independent public
accountants, considers the range of audit and non-audit fees and reviews the
adequacy of our internal accounting controls.
HUMAN RESOURCES AND COMPENSATION COMMITTEE. THE HUMAN RESOURCES AND
Compensation Committee of the Board of Directors is comprised of Dr. Lehman
(Chairman) and Messrs. Glickman, Sawyer, Kilpatrick and Stroud. This committee
makes recommendations concerning the salaries and incentive compensation of our
employees and consultants.
THE STOCK OPTION COMMITTEE. The Stock Option Committee of the Board of
Directors is comprised of Dr. Lehman and Messrs. Glickman and Sawyer. This
committee oversees the issuance of options under our stock option plan.
THE EXECUTIVE COMMITTEE. The Executive Committee of the Board of Directors
is comprised of Dr. Lehman and Messrs. Glickman (Chairman), Pownall, Sawyer and
Kilpatrick. This committee has the ability to take action on behalf of the full
Board of Directors in certain circumstances.
26
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth for 1997, 1998 and 1999
the historical compensation for services to the Company of the Chief Executive
Officer and the four most highly compensated executive officers (the "Named
Executive Officers") for the fiscal year ended January 1, 2000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES ALL OTHER
SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(2) OPTIONS ($)
- ----------------------------------------- -------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Kenneth R. Kilpatrick................ 1999 $197,498 $83,742 80,000 --
President and Chief Executive 1998 184,995 125,000 44,000 --
Officer, EHI and Elgar 1997 181,251 102,900 -- --
Samuel A. Lewis...................... 1999 124,500 39,600 39,000 --
Vice President--Sales and Marketing 1998 117,000 52,700 21,000 --
of Elgar 1997 114,254 40,400 -- --
Gerald D. Price...................... 1999 121,327 49,220 15,000 --
Vice President--Sales and Marketing 1998 18,461 12,500 8,000 --
of Power Ten (3) 1997 -- -- -- --
Normand E. Precourt.................. 1999 129,997 36,953 38,000 --
Vice President--Engineering of 1998 120,994 54,500 19,000 --
Elgar 1997 118,498 42,100 -- --
David C. Hoffman..................... 1999 124,671 39,476 12,000 --
Vice President--Engineering of Power 1998 74,880 -- 6,000 --
Ten (4) 1997 -- -- -- --
</TABLE>
- --------------
(1) Perquisites and other personal benefits paid in the periods presented for
the Named Executive Officers aggregated less than the lesser of (i) $50,000
and (ii) 10% of the total annual salary and bonus set forth in the columns
entitled "Salary" and "Bonus" for each Named Executive Officer and,
accordingly, are omitted from the table as permitted by the rules of the
Commission.
(2) Annual bonuses are indicated for the year in which they were earned and
accrued except for Fiscal 1998 which represents an annualized amount for
the 12 month period ended January 2, 1999. Annual bonuses for any year are
generally paid in the following year.
(3) Mr. Price's employment with Power Ten commenced on November 2, 1998.
Compensation information is included from that date.
(4) Compensation information is included from May 29, 1998, the date Elgar
acquired Power Ten.
27
<PAGE>
OPTIONS GRANTED IN THE LAST FISCAL YEAR
Shown below is information concerning grants of options by the Company to
the Named Executive Officers in the fiscal year ended January 1, 2000:
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES PRICE PER EXPIRATION
NAME GRANTED(#) IN 1999 SHARE DATE
- ------------------------------------- ------------------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Kenneth R. Kilpatrick............. 36,000 17.6% $5.50 6/25/09
Samuel A. Lewis................... 18,000 8.8% $5.50 6/25/09
Gerald D. Price................... 7,000 3.4% $5.50 6/25/09
Normand E. Precourt............... 19,000 9.3% $5.50 6/25/09
David C. Hoffman.................. 6,000 2.9% $5.50 6/25/09
</TABLE>
AGGREGATE OPTION PURCHASES IN LAST FISCAL YEAR-END AND FISCAL YEAR-END OPTION
VALUES
The following table summarizes information with respect to the year-end
values of all options held by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS VALUE OF UNEXERCISED
SHARES AT FISCAL YEAR-END IN-THE-MONEY
ACQUIRED ON (#) EXERCISABLE/ OPTIONS AT FISCAL
NAME EXERCISE VALUE REALIZED UNEXERCISABLE YEAR-END ($)(1)
- ----------------------------------- -------------- ---------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Kenneth R. Kilpatrick............. 0 0 0/80,000 $0
Samuel A. Lewis................... 0 0 0/39,000 $0
Gerald D. Price................... 0 0 0/15,000 $0
Normand E. Precourt............... 0 0 0/38,000 $0
David C. Hoffman.................. 0 0 0/12,000 $0
</TABLE>
- --------------
(1) There is no public market for our Common Stock.
EMPLOYMENT AGREEMENTS
In connection with the Recapitalization, the Company entered into
employment agreements (each, an "Employment Agreement") with several key
executives. Generally, each Employment Agreement provides for the executive's
continued employment with the Company post-Recapitalization at an annual salary,
bonus and with such other employment-related benefits comparable to those
received by such executive immediately prior to the Recapitalization. Each
Employment Agreement may be terminated by either party upon 30 days' prior
written notice. If an executive is terminated without cause (as set forth in the
agreements) or for no reason at all, then the executive shall be entitled to
payment of his annual base salary for a period of one year following the date of
such termination. Each Employment Agreement contains provisions prohibiting the
executive, during the period of his employment with the Company and for two
years thereafter, from directly or indirectly engaging in competition with the
Company. Each Employment Agreement also contains provisions requiring the
executive to maintain the confidentiality of certain information related to the
Company.
28
<PAGE>
STOCK OPTION PLAN
As of January 1, 2000, there were options granted under the Elgar Holdings,
Inc. 1998 Stock Option Plan (the "Stock Option Plan") to purchase 439,100 shares
of Common Stock. All options have been granted at fair market value, or at a
premium thereto, on the date of grant. Options vest ratably over four years and
generally expire on the tenth anniversary of the date of grant. The Stock Option
Plan is administered by the Stock Option Committee, which is composed solely of
non-employee directors. The Stock Option Committee has the authority to
interpret the Stock Option Plan; to determine the terms and conditions of
options ("Options") granted under the Stock Option Plan; to prescribe, amend and
rescind the rules and regulations of the Stock Option Plan; and to make all
other determinations necessary or advisable for the administration of the Stock
Option Plan. Subject to limitations imposed by law, the Stock Option Committee
may amend or terminate the Stock Option Plan at any time and in any manner.
However, no such amendment or termination may deprive the recipient of an award
previously granted under the Stock Option Plan of any rights thereunder without
his or her consent. Under the Stock Option Plan, as amended, 489,763 shares of
Common Stock are reserved for issuance upon the exercise of options.
The Stock Option Plan provides for grants of incentive stock options
("ISOs") to employees (including officers and employee directors) which are
intended to qualify under the provisions of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and nonstatutory stock options to
nonemployee directors of the Company. The Stock Option Committee selects the
eligible persons to whom Options will be granted and determines the dates,
amounts, exercise prices, vesting periods and other relevant terms of the
Options, provided that the exercise price for each Option is determined by the
Stock Option Committee at a price per share not less than the fair market value
of Common Stock on the date of grant. Options granted under the Stock Option
Plan are generally not transferable during the life of the optionee.
Options granted under the Stock Option Plan to an employee may include a
provision conditioning or accelerating the receipt of benefits upon the
occurrence of specified events, such as a change of control of the Company or a
dissolution, liquidation, sale of substantially all of the property and assets
of the Company or other significant corporate transaction.
Options granted under the Stock Option Plan vest and become exercisable as
determined by the Stock Option Committee in its discretion. Options granted
under the Stock Option Plan may be exercised at any time after they vest and
before the expiration date determined by the Stock Option Committee, provided
that no Option may be exercised more than ten years after its grant. In the
absence of a specific agreement to the contrary, (i) if an optionee ceases to be
employed by the Company or one of its subsidiaries for any reason other than
death or disability, the optionee shall be entitled to exercise, for a period of
30 days after the date such optionee ceases to be such an employee, that number
of Options that were vested on such date and (ii) if an optionee dies or becomes
disabled while still an employee of the Company and its subsidiaries, such
optionee or his estate may exercise the option to the extent vested at the date
of death or disability and prior to the expiration of such option.
Options may be granted under the Stock Option Plan until the tenth
anniversary of its adoption, on which date the Stock Option Plan will terminate.
Although any Option that was duly granted prior to such date may thereafter be
exercised or settled in accordance with its terms, no shares of Common Stock may
be issued pursuant to any award on or after the twentieth anniversary of its
adoption.
29
<PAGE>
401(k) PLAN
We maintain a defined contribution 401(k) plan which covers all of our
full-time employees. The employees become eligible to participate in the 401(k)
plan at the beginning of the first quarter after hire. Participants may elect to
contribute up to 15% of their compensation to this plan, subject to Internal
Revenue Service limits. We match 40% of the first 6% of employee contributions.
COMPENSATION OF DIRECTORS
Other than Mr. Kilpatrick, directors receive a $15,000 annual retainer,
$1,500 for each board meeting attended ($500 for each committee meeting
attended) and reimbursement of reasonable expenses incurred in attending such
meetings. In addition, we pay Lehman certain fees for various management,
consulting and financial planning services, including assistance in strategic
planning, providing market and financial analyses, negotiating and structuring
financing and exploring expansion opportunities. See "Certain Relationships and
Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of our Common Stock as of February 29, 2000 by (i) each director, (ii) each of
the Named Executive Officers, (iii) all executive officers and directors as a
group and (iv) each person who is the beneficial owner of more than 5% of the
Common Stock.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER SHARES
NAME OF INDIVIDUAL OR ENTITY(1) OF SHARES(2) OUTSTANDING(3)
------------------------------- ------------ --------------
<S> <C> <C>
JFL-EEC(4)......................... 1,901,400 71.6%
John F. Lehman(5).................. 1,901,400 71.6
Donald Glickman(5)................. 1,901,400 71.6
George Sawyer(5)................... 1,901,400 71.6
Keith Oster(5)..................... 1,901,400 71.6
Joseph Stroud(5)................... 1,901,400 71.6
Thomas G. Pownall(6)............... -- --
Oliver C. Boileau, Jr.(7).......... -- --
William Paul(8).................... -- --
Bruce D. Gorchow(9)................ -- --
Kenneth R. Kilpatrick.............. 94,000(10) 3.5
Samuel A. Lewis.................... 56,500(10) 2.1
Gerald D. Price.................... 4,333(10) *
Normand E. Precourt................ 40,835(10) 1.5
David C. Hoffman................... 3,500(10) *
Jackson National Life Insurance
Company(11)...................... 278,750 10.5
All directors and executive
officers as a group (18 persons). 2,255,900(10) 81.3
</TABLE>
-----------
* Less than 1%
(1) The address of JFL-EEC and Messrs. Lehman, Glickman, Sawyer, Oster and
Stroud is 2001 Jefferson Davis Highway, Suite 607, Arlington, Virginia
22202. The address of Mr. Pownall is 1800 K Street, N.W., Suite 724,
Washington, D.C. 20006. The address of Mr. Boileau is 202 North
Brentwood Boulevard, Apt. 3A, St. Louis, Missouri 63105. The address
of Mr. Paul is 21 Springwood Drive, Trumbull, Connecticut
30
<PAGE>
06611. The address of Mr. Gorchow and Jackson National Life Insurance
Company ("Jackson National") is 225 West Wacker Drive, Chicago,
Illinois 60606.
(2) As used in this table, beneficial ownership means the sole or shared
power to vote, or to direct the voting of a security, or the sole or
shared power to dispose, or direct the disposition of, a security.
(3) Computed based upon the total number of shares of Common Stock
outstanding and the number of shares of Common Stock underlying
options or warrants held by that person exercisable within 60 days of
February 29, 2000. In accordance with Rule 13(d)-3 of the Exchange
Act, any Common Stock that will not be outstanding within 60 days of
February 29, 2000 that is subject to options or warrants exercisable
within 60 days of February 29, 2000 is deemed to be outstanding for
the purpose of computing the percentage of outstanding shares of the
Common Stock owned by the person holding such options or warrants, but
is not deemed to be outstanding for the purpose of computing the
percentage of outstanding shares of the Common Stock owned by any
other person.
(4) JFL-EEC is a Delaware limited liability company that is an affiliate
of Lehman. Through JFL-EEC, J.F. Lehman Equity Investors I, L.P.
("JFLEI"), also an affiliate of Lehman, beneficially owns 60.9% of the
Common Stock. Each of Messrs. Lehman, Glickman, Sawyer, Oster and
Stroud, either directly (whether through ownership interest or
position) or through one or more intermediaries, may be deemed to
control JFL-EEC, Lehman and JFLEI. Lehman and JFLEI may be deemed to
control the voting and disposition of the shares of the Common Stock
owned by JFL-EEC. Accordingly, for certain purposes, Messrs. Lehman,
Glickman, Sawyer, Oster and Stroud may be deemed to be beneficial
owners of the shares of Common Stock owned by JFL-EEC.
(5) Includes the shares beneficially owned by JFL-EEC, of which Messrs.
Lehman, Glickman, Sawyer, Oster and Stroud are affiliates.
(6) Mr. Pownall is a member of a limited partner of JFLEI and is on the
investment advisory board of Lehman.
(7) Mr. Boileau is a member of a limited partner of JFLEI.
(8) Mr. Paul is a member of a limited partner of JFLEI.
(9) Mr. Gorchow is on the investment advisory board of Lehman and is an
executive officer of PPM America, Inc., the agent for Jackson
National.
(10) Includes options exercisable within 60 days of February 29, 2000 for
the following persons and following numbers of shares: (i) 34,000
shares for Mr. Kilpatrick; (ii) 16,500 shares for Mr. Lewis; (iii)
4,333 shares for Mr. Price; (iv) 15,833 shares for Mr. Precourt;
(v) 3,500 shares for Mr. Hoffman; and (vi) 119,500 shares for all
directors and executive officers as a group.
(11) All shares are obtainable upon the exercise of warrants, which are
immediately exercisable. Some of the warrants are held by affiliates
of Jackson National. Jackson National is a noncontrolling member of
JFL-EEC.
31
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENT
Pursuant to the terms of a Management Agreement entered into among Lehman,
EHI and Elgar upon consummation of the Recapitalization (the "Management
Agreement"), (1) we paid Lehman a transaction fee in the amount of $1,000,000 in
connection with the Recapitalization and (2) we agreed to pay Lehman an annual
management fee of $500,000 that commenced accruing on February 3, 1998 and is
payable in advance on a semi-annual basis thereafter. As consideration for
services rendered in connection with the Power Ten acquisition, we paid Lehman
an acquisition fee of $425,000 pursuant to the Management Agreement. In
September 1998, we amended the Management Agreement with Lehman and concurrently
entered into a Management Services Agreement with Lehman, the combined effect of
which was to further delineate the management services to be provided by Lehman
and to reduce the term of the Management Agreement from ten years to five years.
SHAREHOLDERS AGREEMENT
In connection with the Recapitalization, the Company and JFL-EEC, the
Continuing Shareholders and, in their capacity as Warrantholders, Jackson
National, Indosuez Electronics Partners ("Indosuez") and Old Hickory Fund I,
L.L.C. ("Old Hickory") (collectively, the "Shareholders") entered into a
Shareholders Agreement (the "Shareholders Agreement"), the principal terms of
which are summarized below:
CERTAIN VOTING RIGHTS. Pursuant to the Shareholders Agreement, so long as
Jackson National holds in the aggregate Warrants and shares obtained upon
exercise of the Warrants representing at least seventy-five percent (75%) of the
Warrants initially issued to it, Jackson National shall have the right to
designate one Director. So long as the Common Stock held by the Non-Management
Continuing Shareholders constitutes in the aggregate at least five percent (5%)
of the issued and outstanding Common Stock, then the Non-Management Continuing
Shareholders shall have the right to designate one Director. Subject to the
rights of the holders of the Redeemable Preferred Stock to elect Directors upon
the occurrence of certain events pursuant to the Certificate of Designations
governing the Redeemable Preferred Stock, JFL-EEC is entitled to designate all
Directors of the Company not designated by Jackson National or the
Non-Management Continuing Shareholders.
RESTRICTIONS ON TRANSFER. The shares of the Common Stock held by each of
the parties to the Shareholders Agreement, and certain of their transferees, are
subject to restrictions on transfer. Shares of Common Stock may be transferred
only to certain related transferees, including, (i) in the case of individual
Shareholders, family members or their legal representatives or guardians, heirs
and legatees and trusts, partnerships and corporations the sole beneficiaries,
partners or shareholders, as the case may be, of which are family members, (ii)
in the case of partnership or limited liability company Shareholders, the
partners or members of such partnership or limited liability company, as the
case may be, (iii) in the case of corporate Shareholders, affiliates of such
corporation and (iv) transferees of shares sold in transactions complying with
the applicable provisions of the Right of First Offer or the Tag-Along or
Drag-Along Rights (as each term is defined below).
RIGHTS OF FIRST OFFER. If any Shareholder desires to transfer any shares of
the Common Stock or Warrants (other than pursuant to certain permitted
transfers), all other Shareholders have a right of first offer (the "Right of
First Offer") to purchase the shares or warrants (the "Subject Shares") upon
such terms and subject to such conditions as are set forth in a notice (a "First
Offer Notice") sent by the selling Shareholder to such other Shareholders. If
the Shareholders elect to exercise their Rights of First Offer
32
<PAGE>
with respect to less than all of the Subject Shares, EHI has a right to purchase
all of the Subject Shares that the Shareholders have not elected to purchase. If
the Shareholders receiving the First Offer Notice and EHI wish to exercise their
respective rights of first offer with respect to less than all of the Subject
Shares, the selling Shareholder may solicit offers to purchase all (but not less
than all) of the Subject Shares upon such terms and subject to such conditions
as are, in the aggregate, no less favorable to the selling Shareholder than
those set forth in the First Offer Notice.
SUBSCRIPTION OFFER WITH RESPECT TO PRIMARY ISSUANCES. The Shareholders
Agreement provides that EHI is not permitted to issue equity securities, or
securities convertible into equity securities, to any person unless EHI has
offered to issue to each of the other Shareholders, on a pro rata basis, an
opportunity to purchase such securities on the same terms, including price, and
subject to the same conditions as those applicable to such person.
TAG-ALONG RIGHTS. The Shareholders Agreement provides that, if the
Shareholders and EHI fail to exercise their respective rights of first refusal
with respect to all of the Subject Shares, the Shareholders have the right to
"tag along" (the "Tag-Along Right") upon the sale of the Common Stock by certain
Shareholders pursuant to a third-party offer.
DRAG-ALONG RIGHTS. The Shareholders Agreement provides that, subject to
certain conditions, if one or more Shareholders holding a majority of the Common
Stock (the "Majority Shareholders") propose to sell all of the Common Stock
owned by the Majority Shareholders, the Majority Shareholders have the right
(the "Drag-Along Right") to compel the other Shareholders to sell all of the
shares of Common Stock held by such other Shareholders upon the same terms and
subject to the same conditions as the terms and conditions applicable to the
sale by the Majority Shareholders.
REGISTERED OFFERINGS. The shares of Common Stock may be transferred in a
bona fide public offering for cash pursuant to an effective registration
statement (a "Registered Offering") without compliance with the provisions of
the Shareholders Agreement related to the Right of First Offer or the Tag-Along
or Drag-Along Rights.
LEGENDS. The shares of Common Stock subject to the Shareholders Agreement
bear a legend related to the Right of First Offer and the Tag-Along and
Drag-Along Rights, which legend will be removed when the shares of Common Stock
are, pursuant to the terms of the Shareholders Agreement, no longer subject to
the restrictions on transfer imposed by the Shareholders Agreement.
REGISTRATION RIGHTS. Pursuant to the terms of the Shareholders
Registration Rights Agreement, dated as of February 3, 1998, among the Company
and the Shareholders, JFL-EEC and certain other shareholders are entitled to one
"demand" and unlimited piggyback registration rights, subject to additional
customary rights and limitations.
TERM. The term of the Shareholders Agreement is 10 years from the Closing
Date, subject to earlier termination under certain conditions and upon certain
events.
REGISTRATION RIGHTS FOR WARRANTHOLDERS
The holders of the shares issuable upon exercise of the warrants are
entitled to one "demand" registration right at any time on or after the later of
(i) February 3, 2003 and (ii) the 181st day after completion of EHI's initial
public offering of its Common Stock, subject to additional customary rights and
limitations. In addition, holders of the shares issuable upon exercise of the
warrants are entitled to unlimited "piggyback" registration rights after the
date of EHI's initial public offering of its Common Stock, subject to customary
rights and limitations.
33
<PAGE>
MANAGEMENT PARTICIPATION IN THE RECAPITALIZATION
In connection with the Recapitalization, certain executive officers of
the Company and other members of management (41 individuals in the aggregate)
received consideration comprising an aggregate of approximately $9.2 million in
cash and a 9.4% interest in the Common Stock on a fully diluted basis.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
EHI's Certificate of Incorporation contains provisions eliminating the
personal liability of directors for monetary damages for breaches of their duty
of care, except in certain prescribed circumstances. EHI's Bylaws also provide
that directors and officers will be indemnified to the fullest extent authorized
by Delaware law, as it now stands or may in the future be amended, against all
expenses and liabilities reasonably incurred in connection with service for or
on behalf of the Company. EHI's Bylaws provide that the rights of directors and
officers to indemnification is not exclusive of any other right now possessed or
hereinafter acquired under any statute, agreement or otherwise.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) Consolidated Financial Statements:
The following consolidated financial statements of the Company are
included in response to Item 8 of this report.
<TABLE>
<CAPTION>
PAGE REFERENCE
FORM 10-K
--------------------
<S> <C>
Report of Independent Public Accountants.............................................. F-1
Consolidated Balance Sheets as of January 2, 1999 and January 1, 2000................. F-2
Consolidated Statements of Operations for the fiscal year ended March 28,
1998, the nine months ended January 2, 1999 and the fiscal year ended
January 1, 2000...................................................................
F-3
Consolidated Statements of Stockholders' Equity (Deficit) for the fiscal year
ended March 28, 1998, the nine months ended January 2, 1999 and the
fiscal year ended January 1, 2000................................................. F-4
Consolidated Statements of Cash Flows for the fiscal year ended March 28,
1998, the nine months ended January 2, 1999 and the fiscal year ended
January 1, 2000................................................................... F-5
Notes to Consolidated Financial Statements............................................ F-6
(a)(2) Consolidated Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts............................... S-1
</TABLE>
Schedules other than those listed above have been omitted since they
are either not required, not applicable or the information is otherwise
included.
(b) Reports on Form 8-K.
34
<PAGE>
None.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ ----------------------------------------------------------------
<S> <C>
1.1 Purchase Agreement, dated January 30, 1998, between the Company
and the Initial Purchaser(1)
2.1 Agreement and Plan of Merger, dated as of January 2, 1998, by
and among the Company, JFL-EEC LLC, JFL-EEC Merger Sub Co. and
T.C. Group, L.L.C.(1)
3.1 Amended and Restated Certificate of Incorporation of the
Company(1)
3.2 Certificate of Designations for the Series A 10% Cumulative
Redeemable Preferred Stock(1)
3.3 Certificate of Designations for the Series B 6% Cumulative
Convertible Preferred Stock(1)
3.4 Certificate of Designations for the Series C 6% Cumulative
Convertible Preferred Stock(2)
3.5 Amended and Restated Bylaws of the Company(1)
3.6 Articles of Incorporation of Elgar Electronics Corporation(1)
3.7 Bylaws of Elgar Electronics Corporation(1)
3.8 Articles of Incorporation of Power Ten(1)
3.9 Bylaws of Power Ten(1)
4.1 Indenture, dated as of February 3, 1998, between the Company and
United States Trust Company of New York(1)
4.2 First Supplemental Indenture, dated as of February 3, 1998,
among the Company, Elgar Electronics Corporation and United
States Trust Company of New York(1)
4.3 Second Supplemental Indenture, dated as of May 29, 1998, among
the Company, Elgar Electronics Corporation, Power Ten and United
States Trust Company of New York(1)
4.4 Form of Note (included in Exhibits 4.1 and 4.2)(1)
4.5 Registration Rights Agreement, dated February 3, 1998, between
the Company and the Holders of Old Notes(1)
4.6 Form of Warrant Certificate(1)
10.1 Assumption Agreement, dated as of February 3, 1998, between the
Company and Elgar Electronics Corporation, assuming, among other
things, the obligations of MergerCo under the Purchase Agreement
and the Registration Rights Agreement(1)
10.2 Investment Agreement, dated as of February 3, 1998, between the
Company and Series A preferred shareholders(1)
10.3 Shareholders Agreement, dated as of February 3, 1998, between
the Company and the shareholders(1)
10.4 Shareholders Registration Rights Agreement, dated as of February
3, 1998, between the Company and the shareholders(1)
10.5 Warrantholders' Registration Rights Agreement, dated as of
February 3, 1998, between the Company and the warrantholders(1)
10.6 Management Agreement, dated as of February 3, 1998, among the
Company, Elgar Electronics Corporation and J. F. Lehman &
Company(1)
</TABLE>
35
<PAGE>
<TABLE>
<S> <C>
10.7 Amendment No. 1 to Management Agreement, entered into on
September 15, 1998, effective as of February 3, 1998, among the
Company, Elgar Electronics Corporation and J. F. Lehman &
Company(4)
10.8 Management Services Agreement, entered into on September 15,
1998, effective as of February 3, 1998, among the Company, Elgar
Electronics Corporation and J. F. Lehman & Company(4)
10.9 Employment Agreement, dated as of May 29, 1998, between Elgar
Electronics Corporation and Joseph A. Varozza, Jr.(1)
10.10 Employment Agreement, dated as of May 29, 1998, between Elgar
Electronics Corporation and Vincent S. Mutascio(1)
10.11 Employment Agreement, dated as of February 3, 1998, between
Elgar Electronics Corporation and Kenneth R. Kilpatrick(1)
10.12 Form of Employment Agreement entered into between Elgar
Electronics Corporation and certain of its executive officers
(other than Kenneth R. Kilpatrick) on February 3, 1998(1)
10.13 Lease Agreement, dated February 1, 1984, between the Company and
Carroll Park Ridge, for the Company's principal facilities(1)
10.14 First Amendment to Lease, dated November 5, 1992, between RREEF
WEST-IV and the Company(1)
10.15 Second Amendment to Lease, dated February 12, 1998, between The
Irvine Company and the Company(1)
10.16 Third Amendment to Lease, dated July 2, 1998, between The Irvine
Company and the Company(3)
10.17 Amended and Restated Credit Agreement, dated as of February 3,
1998 and amended and restated as of May 29, 1998, among the
Company, Elgar Electronics Corporation and Bankers Trust
Company, as Agent(1)
10.18 First Amendment and Waiver, dated as of February 12, 1999, among
the Company, Elgar Electronics Corporation, the lenders party to
the Credit Agreement and Bankers Trust Company, as Agent(2)
10.19 Second Amendment, dated as of March 24, 1999, among the Company,
Elgar Electronics Corporation, the lenders party to the Credit
Agreement and Bankers Trust Company, as Agent(2)
10.20 Amended and Restated Pledge Agreement, dated as of February 3,
1998 and amended and restated as of May 29, 1998, among the
Company, Elgar Electronics Corporation and Bankers Trust
Company, as Pledgee and Collateral Agent(1)
10.21 Amended and Restated Security Agreement, dated as of February 3,
1998 and amended and restated as of May 29, 1998, among the
Company, Elgar Electronics Corporation, Power Ten and Bankers
Trust Company, as Collateral Agent(1)
10.22 Subsidiaries Guaranty, dated as of May 29, 1998, made by Power
Ten in favor of Bankers Trust Company, as Agent(1)
10.23 Amended and Restated Capital Call Agreement, dated as of May 29,
1998 and amended and restated as of February 12, 1999, among
J.F. Lehman Equity Investors L.P., the Company, Elgar
Electronics Corporation and Bankers Trust Company, as Agent(2)
10.24 Form of Term Loan Note(1)
10.25 Form of Revolving Note(1)
10.26 Form of Swingline Note(1)
10.27 Elgar Holdings, Inc. 1998 Stock Option Plan(2)
</TABLE>
36
<PAGE>
<TABLE>
<S> <C>
10.28 Form of Stock Option Agreement(1)
10.29 Third Amendment, dated as of March 10, 2000, among the Company,
Elgar Electronics Corporation, the lenders party to the Credit
Agreement and Bankers Trust Company, as Agent
12.1 Statement re: Computation of Ratios of Earnings to Fixed Charges
and Combined Fixed Charges and Preferred Stock Dividends
21.1 Subsidiaries of the Company(1)
27.1 Financial Data Schedule
</TABLE>
- ----------------
(1) Incorporated by reference to the registrant's Registration Statement on
Form S-4, File No. 333-557797, as filed with the Securities and
Exchange Commission on June 2, 1998, as amended on July 14, 1998, July
23, 1998 and July 29, 1998.
(2) Incorporated by reference to the Quarterly Report on Form 10-Q for the
quarter ended April 3, 1999, as filed with the Securities and Exchange
Commission on May 18, 1999.
(3) Incorporated by reference to the Quarterly Report on Form 10-Q for the
quarter ended June 27, 1998, as filed with the Securities and Exchange
Commission on September 11, 1998.
(4) Incorporated by reference to the Transition Report on Form 10-K for
the nine-month transitional period ended January 2, 1999, as filed with
the Securities and Exchange Commission on June 22, 1999.
No annual report or proxy material covering our last fiscal year has
been or will be sent to security holders of the Company.
37
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Elgar Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of ELGAR HOLDINGS,
INC. (a Delaware corporation) and subsidiaries (the "Company") as of January 2,
1999 and January 1, 2000, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the year ended March 28, 1998,
the nine month period ended January 2, 1999 and the year ended January 1, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Elgar Holdings, Inc.
and subsidiaries as of January 2, 1999 and January 1, 2000 , and the results of
their operations and their cash flows for the year ended March 28, 1998, the
nine month period ended January 2, 1999 and the year ended January 1, 2000, in
conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules, and is not part of the basic
consolidated financial statements. The schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states, in all material respects, the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Diego, California
January 21, 2000 (except with respect to the matter discussed
in Note 13, as to which the date is March 10, 2000)
F-1
<PAGE>
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1,
1999 2000
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 6,507 $ 4,479
Accounts receivable, net of allowance for doubtful
accounts of $171 and $152, respectively........... 5,168 7,253
Inventories, net.................................. 9,095 7,623
Deferred tax assets............................... 796 796
Prepaids and other................................ 1,356 984
------- --------
Total current assets............................ 22,922 21,135
PROPERTY, PLANT AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization of $2,337
and $3,093, respectively.......................... 2,599 2,343
INTANGIBLE ASSETS, net of accumulated amortization of
$4,910 and $8,076, respectively................... 37,580 34,414
DEFERRED TAX ASSETS, net of current portion......... 653 653
-------- --------
$ 63,754 $ 58,545
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.................................. $ 3,164 $ 1,748
Accrued liabilities............................... 6,750 7,665
Current portion of long-term debt................. 4,000 1,250
Current portion of capital lease obligations...... 15 -
-------- --------
Total current liabilities....................... 13,929 10,663
CAPITAL LEASE OBLIGATIONS, net of current portion... 8 -
LONG-TERM DEBT, net of current portion.............. 100,000 98,750
-------- --------
Total liabilities............................... 113,937 109,413
-------- --------
SERIES A 10% CUMULATIVE REDEEMABLE PREFERRED STOCK,
no par value, 20,000 shares authorized; 10,000
shares issued and outstanding..................... 9,406 10,707
-------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Series B 6% Cumulative Convertible Preferred Stock,
no par value, 5,000 shares authorized, issued and
outstanding...................................... 5,000 5,000
Series C 6% Cumulative Convertible Preferred Stock,
no par value, 0 and 4,000 shares authorized,
issued and outstanding, respectively............. -- 4,000
Common Stock, $.01 par value, 5,000,000 shares
authorized; 2,300,000 shares issued and outstanding 23 23
Additional paid-in capital........................ (68,558) (68,558)
Retained earnings (deficit)....................... 3,946 (2,040)
-------- --------
Total stockholders' equity.................... (59,589) (61,575)
-------- --------
$ 63,754 $ 58,545
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-2
<PAGE>
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 28, JANUARY 2, JANUARY 1,
1998 1999 2000
---------- ----------- ----------
<S> <C> <C> <C>
Net sales........................... $62,496 $47,136 $56,059
Cost of sales....................... 32,944 26,000 32,032
------- ------- ------
Gross profit..................... 29,552 21,136 24,027
Selling, general and
administrative expenses........... 9,434 8,114 10,005
Research and development and
engineering expenses.............. 6,242 4,912 5,851
Amortization expense................ 1,314 1,663 2,432
------- ------- -------
Operating income................. 12,562 6,447 5,739
Interest expense, net............... 3,341 8,008 10,458
------- ------- -------
Income (loss) before income tax
provision (benefit)............... 9,221 (1,561) (4,719)
Income tax provision (benefit)...... 4,448 (191) (536)
------- -------- --------
Net income (loss)................ $ 4,773 $(1,370) $(4,183)
======= ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
<PAGE>
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Series B Series C
Preferred Stock Preferred Stock Common Stock
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 29, 1997 -- $ -- $ -- 9,340,000 $ 93
Recapitalization of Company -- -- -- -- (8,941,400) (89)
Common stock warrants issued on
sale of preferred stock -- -- -- -- -- --
Issuance of common stock -- -- -- -- 1,901,400 19
Series A preferred stock
dividend-in-kind -- -- -- -- -- --
Accretion of discount on
Series A preferred stock -- -- -- -- -- --
Net income -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, March 28, 1998 -- -- -- -- 2,300,000 23
Recapitalization consideration -- -- -- -- -- --
Issuance of Series B
preferred stock 5,000 5,000 -- -- -- --
Series A preferred stock
dividend-in-kind -- -- -- -- -- --
Series B preferred stock
dividend accrual -- -- -- -- -- --
Accretion of discount on Series A
preferred stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, January 2, 1999 5,000 5,000 -- -- 2,300,000 23
----------- ----------- ----------- ----------- ----------- -----------
Issuance of Series C
preferred stock -- -- 4,000 4,000 -- --
Series A preferred stock
dividend-in-kind -- -- -- -- -- --
Series B preferred stock
dividend accrual -- -- -- -- -- --
Series C preferred stock
dividend accrual -- -- -- -- -- --
Accretion of discount on
Series A preferred stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, January 1, 2000 5,000 $ 5,000 4,000 $ 4,000 2,300,000 $ 23
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Additional Retained
Paid-In Earnings
Capital (Deficit) Total
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, March 29, 1997 $ 13,907 $ 1,837 $ 15,837
Recapitalization of Company (102,528) -- (102,617)
Common stock warrants issued on
sale of preferred stock 1,700 -- 1,700
Issuance of common stock 18,995 -- 19,014
Series A preferred stock
dividend-in-kind -- (150) (150)
Accretion of discount on
Series A preferred stock -- (28) (28)
Net income -- 4,773 4,773
----------- ----------- -----------
BALANCE, March 28, 1998 (67,926) 6,432 (61,471)
Recapitalization consideration (632) -- (632)
Issuance of Series B
preferred stock -- -- 5,000
Series A preferred stock
dividend-in-kind -- (799) (799)
Series B preferred stock
dividend accrual -- (189) (189)
Accretion of discount on Series A
preferred stock -- (128) (128)
Net loss -- (1,370) (1,370)
----------- ----------- -----------
BALANCE, January 2, 1999 (68,558) 3,946 (59,589)
----------- ----------- -----------
Issuance of Series C
preferred stock -- -- 4,000
Series A preferred stock
dividend-in-kind -- (1,135) (1,135)
Series B preferred stock
dividend accrual -- (316) (316)
Series C preferred stock
dividend accrual -- (186) (186)
Accretion of discount on
Series A preferred stock -- (166) (166)
Net loss -- (4,183) (4,183)
----------- ----------- -----------
BALANCE, January 1, 2000 $ (68,558) $ (2,040) $ (61,575)
=========== =========== ===========
</TABLE>
F-4
<PAGE>
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE
YEAR MONTHS YEAR
ENDED ENDED ENDED
MARCH 28, JANUARY 2, JANUARY 1,
1998 1999 2000
-------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ 4,773 $ (1,370) $ (4,183)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Amortization of intangibles............. 1,314 1,663 2,432
Amortization of deferred loan costs..... 83 536 734
Write-off of deferred loan costs........ 797 -- --
Depreciation and amortization on property,
plant and equipment................... 883 748 888
(Gain) loss on sale of property, plant and 23
equipment............................. (4) --
(Increases) decreases in assets:
Accounts receivable................... (94) 2,542 (2,085)
Inventories........................... (2,476) 375 1,472
Prepaids and other.................... (318) (914) 372
Deferred tax assets................... 107 403 --
Increases (decreases) in liabilities:
Accounts payable...................... 456 (510) (1,416)
Accrued liabilities................... 1,941 850 413
----------------------------------
Net cash provided by (used in)
operating activities............. 7,462 4,323 (1,350)
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,228) (294) (676)
Proceeds from sales of property, plant and
equipment................................ 10 -- 2
Acquisition of Power Ten, net of cash
acquired................................. -- (17,266) --
Non-compete agreements.................... -- (240) --
---------------------------------
Net cash used in investing
activities...................... (1,218) (17,800) (674)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issuance....... 19,014 -- --
Proceeds from preferred stock issuance.... 10,000 5,000 4,000
Issuance of senior notes.................. 90,000 -- --
Proceeds from borrowings.................. 580 15,000 --
Deferred financing costs.................. (5,414) (1,037) --
Repayment on debt......................... (15,796) (1,000) (4,000)
Payments under capital leases............. (36) (13) (4)
Recapitalization consideration............ (102,617) (632) --
-------------------------------
Net cash provided by (used in)
financing activities............. (4,269) 17,318 (4)
-------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. 1,975 3,841 (2,028)
CASH AND CASH EQUIVALENTS, beginning of
period.................................. 691 2,666 6,507
-------------------------------
CASH AND CASH EQUIVALENTS, end of period.... $ 2,666 $ 6,507 $ 4,479
===============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest.................... $ 1,140 $ 5,147 $9,826
Cash paid (received) for income taxes..... 4,450 427 (581)
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Series A preferred stock dividend-in-kind. $ 150 $ 799 $1,135
Series B and C preferred stock dividend
accrual.................................. -- 189 502
Accretion of discount on Series A preferred
stock.................................... 28 128 166
</TABLE>
F-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 subsidiaries, to commercial and defense entities as
well as to governmental agencies. The Company's primary sales are within the
United States and Europe. All of the Company's operations are in one business
segment, programmable power supplies.
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 ("Elgar") (the "Acquisition"). The Acquisition was accounted for as
a purchase and, accordingly, the purchase price of $33 million was allocated to
the assets acquired and liabilities assumed at their fair values. The excess of
purchase price over the net assets acquired of approximately $19.7 million was
recorded as goodwill, and is being amortized over 15 years on a straight line
basis. The acquisition was funded with $14 million in cash and the proceeds from
$19 million in term debt, which was paid off in connection with the
Recapitalization (as defined below).
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 and was first amended on February 12,
1999 (see Note 4).
Also in connection with this Recapitalization, the Company, a related
party, and certain Shareholders entered into a Shareholder Agreement. Within the
Shareholder Agreement is the subscription rights provision, among other
provisions. The subscription rights provide that the Company is not permitted to
issue equity securities, or securities convertible into equity securities, to
any person unless the Company has offered to issue to each of the other
Shareholders, on a pro rata basis, an opportunity to purchase such securities on
the same terms, including price, and subject to the same conditions as those
applicable to such person.
On May 29, 1998, pursuant to a Stock Purchase Agreement dated as of May 5,
1998, Elgar acquired all issued and outstanding shares of capital stock of Power
Ten, a California corporation, for $17.8 million in 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. 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 Notes 4 and
5). 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
F-6
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
acquired) and approximately $0.9 million of deferred financing costs, both
of which are included in intangible assets as of January 2, 1999 and January
1, 2000.
Unaudited condensed pro forma net sales and net income (loss) for the
fiscal year ended March 28, 1998 and the nine months ended January 2, 1999,
assuming the Recapitalization and the Power Ten acquisition occurred on March
30, 1997, and also assuming a 40% statutory tax rate, are as follows (in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
MARCH 28, JANUARY 2,
1998 1999
---------- -----------
<S> <C> <C>
Net sales.............. $72,572 $49,000
Net income (loss)...... $ 771 $(1,382)
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Elgar Electronics Corporation and
Elgar's wholly-owned subsidiary, Power Ten. All significant intercompany
accounts and transactions have been eliminated. The Company operated and reports
financial results on a fiscal year of 52 or 53 weeks ending the Saturday closest
to March 31. Accordingly, fiscal 1998 ended on March 28, 1998 and comprised 52
weeks. As disclosed on Form 8-K filed on March 26, 1999, the Company changed its
fiscal year end from the Saturday closest to March 31 to the Saturday closest to
December 31. Accordingly, the nine month transition period ended on January 2,
1999 and fiscal 1999 ended on January 1, 2000.
CASH EQUIVALENTS
Cash equivalents at January 2, 1999 and January 1, 2000 consist of a money
market account in a financial institution.
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>
JANUARY 2, JANUARY 1,
1999 2000
---------- ----------
<S> <C> <C>
Raw materials $4,151 $3,789
Work-in-process 3,254 2,482
Finished goods 1,690 1,352
------ -------
$9,095 $7,623
====== =======
</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.
F-7
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, plant and equipment and the related depreciable lives are as
follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1,
1999 2000
--------- ----------
<S> <C> <C>
ASSET TYPE/DEPRECIABLE LIFE
Machinery and equipment/4-6 years $3,428 $ 4,088
Leasehold improvements/lease term 694 749
Furniture and fixtures/4 years 449 443
Construction in progress 365 156
------- -------
4,936 5,436
Less: Accumulated depreciation
and amortization (2,337) (3,093)
------- -------
$2,599 $ 2,343
====== =======
</TABLE>
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 upon shipment of goods at which time title
passes to customers or when specified services are performed.
CUSTOMER-FUNDED RESEARCH AND DEVELOPMENT
The Company capitalizes certain costs associated with customer-funded
research and development. Revenue is recorded when earned under such projects
and costs incurred are charged to cost of sales. The amount of customer-funded
research and development was insignificant for the year ended March 28, 1998 and
the nine months ended January 2, 1999. Customer-funded research and development
was $0.7 million in the fiscal year ended January 1, 2000.
F-8
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK-BASED COMPENSATION ACCOUNTING
The Company accounts for stock-based compensation in accordance with the
provisions of SFAS No. 123, "Accounting for Stock-based Compensation." The
Company has elected to measure compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees" and has provided pro forma
disclosure as if the fair value based method prescribed by SFAS No. 123 had been
utilized.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Sales to two customers, in the aggregate, accounted for approximately
47%, 32% and 30% of the Company's total revenue for the fiscal year ended March
28, 1998, the nine months ended January 2, 1999 and the fiscal year ended
January 1, 2000, respectively. The Company performs ongoing credit evaluation of
its customers' financial condition. The Company maintains reserves for potential
credit losses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of certain of the Company's financial instruments,
including accounts receivable, accounts payable and accrued liabilities,
approximates fair value due to their short term nature.
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 nine
months ended January 2, 1999 or the fiscal years ended January 1, 2000 and March
28, 1998. The adoption of SFAS No. 131 did not have a material effect on the
Company as the Company operates in one business segment.
In March 1998, the Accounting Standards Executive Committee (AcSEC)
issued AICPA Statement of Position (SOP) 98-1, "Accounting for costs of computer
software developed or obtained for internal use." This statement provides
guidance on accounting for the costs of computer software developed or obtained
for internal use and identifies characteristics of internal-use software and
provides assistance in determining when computer software is for internal use.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998, with
earlier application permitted. The adoption of SOP 98-1 did not have a material
effect on the Company's consolidated financial position, results of operations,
or related disclosures thereto.
F-9
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 1998, the Accounting Standards Executive Committee (AcSEC)
issued AICPA Statement of Position (SOP) 98-5, "Reporting on the costs of
start-up activities." This statement provides guidance on financial reporting of
start-up costs and organization costs and requires that such costs of start-up
activities be expensed as incurred. SOP 98-5 is effective for fiscal years
beginning after December 15, 1998, with earlier application permitted. The
adoption of SOP 98-5 did not have a material effect on the Company's
consolidated financial position, results of operations, or related disclosures
thereto.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities", and, in June 1999, issued SFAS No. 137
"Accounting for Derivative Instrument and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." These statements establish accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. They require that an entity recognize
all derivatives as either assets or liabilities and measure those instruments at
fair value. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal
quarters of fiscal years beginning after June 15, 2000.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). This bulletin draws on existing accounting rules and provides specific
guidance on how those accounting rules should be applied to revenue recognition.
SAB 101 is effective for fiscal years beginning after December 15, 1999.
3. SUPPLEMENTARY FINANCIAL INFORMATION
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 2, 1999 JANUARY 1, 2000
------------------ ---------------
<S> <C> <C>
Payroll and related...................... $1,295 $2,066
Warranty reserve......................... 373 494
Commissions.............................. 325 368
Interest payable......................... 3,754 3,726
Dividends payable........................ 189 692
Other.................................... 814 319
------ ------
$6,750 $7,665
====== ======
</TABLE>
4. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT
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.
SENIOR NOTES
The Senior Notes bear interest at a rate of 9.875% per annum. Interest
on the Senior Notes is payable semi-annually, commencing on August 1, 1998. The
Senior Notes mature on February 1, 2008.
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 indenture after the issue date, on one or more
F-10
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 guaranteed by the Company's wholly owned subsidiary, Elgar.
Such guarantee is full and unconditional. 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. The Company believes
that the fair value of such debt as of January 2, 1999 and January 1, 2000 was
approximately $81 million and $63 million, respectively.
CREDIT FACILITY
In connection with the 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
January 2, 1999 and January 1, 2000.
On May 29, 1998, in connection with the acquisition of Power Ten (see
Note 1), the Company amended its credit facility with the bank to, among other
things, increase the available borrowings thereunder to $30 million by including
a $15 million term facility ("Term Notes"). The proceeds of the term facility of
$15 million were used to finance a portion of the Power Ten acquisition. On
January 2, 1999 and January 1, 2000, $14 million and $10 million, respectively,
was outstanding under these Term Notes.
Indebtedness of Elgar under this credit agreement is secured by a first
priority security interest in substantially all of the Company's assets.
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 2.50%, or the bank's prime rate plus a margin of 1.50%. 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,
F-11
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, the Company was not in compliance
with the required covenants under the credit facility.
On February 12, 1999, the Company and Elgar entered into a First
Amendment and Waiver to the credit agreement ("Amended and Restated Capital Call
Agreement"), pursuant to which, among other things, available borrowings under
the Revolving Facility were reduced from $15 million to $5 million, certain
financial covenants were amended, and the Company and Elgar received a waiver
for past noncompliance with the covenants referred to in the preceding
paragraph.
Elgar was in compliance with financial covenants contained in the
Credit Agreement as of January 1, 2000. Effective March 10, 2000, Elgar and the
Company entered into a Third Amendment to the Credit Agreement in anticipation
of not complying with the EBITDA and fixed charge covenants for the quarter
ending on or about March 31, 2000. In addition to receiving waivers for any
covenant violations both before and after giving effect to the Third Amendment,
the Third Amendment (i) resets the fixed charge coverage ratio for the quarter
ending closest to March 31, 2000 and for following quarters and (ii) resets the
minimum EBITDA levels for the quarter ending closest to December 31, 1999 and
for following quarters.
At January 2, 1999 and January 1, 2000, the Company's long-term debt
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1999 2000
-------------- -------------
<S> <C> <C>
Senior Notes due February 1, 2008 with an interest rate of
9.875% $ 90,000 $ 90,000
Term Notes due through February 3, 2003 with interest rates
ranging from 8.0% to 9.0% 14,000 10,000
-------------- -------------
104,000 100,000
Less: current portion 4,000 1,250
-------------- -------------
Long term portion $100,000 $ 98,750
============== =============
</TABLE>
Principal maturities under notes payable are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
2000 $ 1,250
2001 3,750
2002 4,000
2003 1,000
2004 --
Thereafter 90,000
-----------
Total $100,000
===========
</TABLE>
Interest expense related to the notes referred to above for the fiscal
year ended March 28, 1998, the nine months ended January 2, 1999 and the fiscal
year ended January 1, 2000 approximated $2.4 million, $6.7 million and $9.8
million, respectively.
F-12
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEFERRED FINANCING COSTS
In connection with the issuance of the Senior Notes and entering into
the credit facility agreement, the Company incurred debt issuance costs of
approximately $5.4 million that are being amortized to interest expense over the
term of the related debt. Accumulated amortization at January 2, 1999 and
January 1, 2000 is approximately $0.5 million and $1.1 million, respectively.
CAPITAL CALL AGREEMENT
In connection with amending the aforementioned credit agreement, the
Company, Elgar and the Company's majority shareholder entered into a capital
call agreement with Bankers Trust (the "Capital Call Agreement"). On February
12, 1999, in connection with entering into the First Amendment and Waiver to the
Credit Agreement, the majority shareholder agreed to make a capital contribution
to the Company by no later than March 31, 1999 in the amount of $4.0 million.
This contribution was made on March 30, 1999, at which time the Company
transferred the funds to Elgar for purposes of repaying outstanding indebtedness
under the Credit Agreement (see Note 5, Convertible Preferred Stock, below). In
addition, on February 12, 1999, the majority shareholder entered into an Amended
and Restated Capital Call Agreement with Bankers Trust pursuant to which, among
other things, the majority shareholder agreed to contribute up to an additional
$5.0 million of capital to the Company upon the occurrence of certain events,
including the Company's failure to comply with certain financial covenants
contained in the Amended and Restated Capital Call Agreement.
5. PREFERRED STOCK
REDEEMABLE PREFERRED STOCK
In connection with the Recapitalization, the Company issued 10,000
shares of redeemable preferred stock, designated as Series A 10% Cumulative
Redeemable Preferred Stock (the "Series A Preferred Stock"), for cash proceeds
of $10 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 January 2, 1999
and January 1, 2000.
Dividends are payable to the holders of the Series A Preferred Stock at
the annual rate per share of 10% times the sum of $1,000 and accrued but unpaid
dividends. Dividends shall be payable at the rate per share of 0.10 shares of
Series A Preferred Stock through January 31, 2001, and in cash on and after
April 30, 2001. Dividends are payable quarterly on January 31, April 30, July
31, and October 31 of each year, commencing April 30, 1998. Dividends shall be
fully cumulative and shall accrue on a quarterly basis.
If the cash dividends payable on the Series A 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 January 2, 1999 or January 1, 2000.
Holders of shares of Series A 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
F-13
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Series A 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 Series A
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 Series A
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 Series A 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 such junior securities are
subordinate in right of payment to the redeemable preferred stock.
If any amount of cash dividends payable on the Series A 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 Series A 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 of Series B 6% Cumulative Convertible Preferred
Stock (the "Series B Preferred Stock") for cash proceeds of $5.0 million.
In connection with entering into the First Amendment and Waiver to the
Credit Agreement (see Note 4), the Company's majority shareholder agreed to make
a capital contribution to the Company by no later than March 31, 1999 in the
amount of $4.0 million. In order to effectuate the contribution on March 30,
1999, the Company issued 4,000 shares of Series C 6% Cumulative Convertible
Preferred Stock (the "Series C Preferred Stock") for cash proceeds of $4.0
million. The offering, which was made in compliance with the subscription rights
contained in the Company's Shareholders Agreement, was completed on March 30,
1999 (See Note 1).
Dividends are payable to the holders of the Series B and Series C
Preferred Stock at the annual rate per share of 6%, respectively, times the sum
of $1,000 and accrued but unpaid dividends. For the Series B Preferred Stock,
dividends are payable semi-annually on April 30 and October 31. For the Series C
Preferred Stock, dividends are payable semi-annually on March 31 and September
30. These dividends are payable when and if declared by the Board of Directors
out of funds legally available therefor.
F-14
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the Series B and Series C 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 and $1.50 per share, respectively, subject to adjustments pursuant to
certain anti-dilution provisions. The conversion price on the Series C Preferred
Stock was established at a premium to fair market value on the date of issuance.
The holders of shares of convertible preferred 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 that would adversely alter or
change the powers, preferences or special rights of the convertible preferred
stock.
The Series B Preferred Stock and Series C Preferred Stock, which rank
on a parity with each other, rank junior to the Series A Preferred Stock.
6. 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 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 January 2, 1999 and January 1, 2000, a total of 353,744 shares of
common stock were reserved for issuance for the exercise of warrants at the
initial exercise price of $5.00 per share to the holders of the Series A
Preferred Stock. The exercise price and number of warrant shares are both
subject to adjustment in certain events.
7. DERIVATIVE FINANCIAL INSTRUMENTS
INTEREST RATE SWAP
The Company has only limited involvement in derivative financial
instruments and does not hold or issue them for trading purposes. Certain
amounts borrowed under the Company's Credit Facility are at variable interest
rates and the Company is thus subject to market risk resulting from interest
rate fluctuations. The Company enters into interest rate swaps in part to alter
interest rate exposures. Interest rate swaps allow the Company to raise
long-term borrowings at floating rates and effectively swap them into fixed
rates that are lower than those available to the Company if fixed-rate
borrowings were made directly. Under interest rate swaps, the Company agrees
with another party to exchange, at specified intervals, the difference between
fixed-rate and floating-rate amounts calculated by reference to an agreed
notional principal amount. The Company's exposure with respect to upward
movements in interest rates is with respect to this portion of its bank debt.
F-15
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Company is exposed to market risks related to
fluctuations in interest rates on the Senior Notes. For fixed rate debt such as
the Senior Notes, changes in interest rates generally affect the fair value of
the debt instrument. The Company does not have an obligation to repay the Senior
Notes prior to maturity in February 2008 and, as a result, interest-rate risk
and changes in fair value should not have a significant impact on the Company.
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 continues for the life of the related term loan agreement
balances, with the notional amounts of the swap decreasing as principal
decreases on the related loan agreement, terminating on June 25, 2001. The
notional amount of the swap was $7.5 million on January 2, 1999 and January 1,
2000. The Company receives 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 $10,068 and $43,181
in interest expense in its consolidated statements of operations for the nine
months ended January 2, 1999 and the fiscal year ended January 1, 2000.
8. STOCK-BASED COMPENSATION
STOCK OPTION PLAN
On July 15, 1998, Elgar Holdings, Inc. adopted the 1998 Stock Option
Plan (the "Option Plan"), which provides for the issuance of up to 265,374
shares of common stock pursuant to awards granted under the Option Plan. In
March 1999, the Company amended its Stock Option Plan to provide for the
issuance of up to 489,763 shares of common stock under the Option Plan. As of
January 1, 2000, there were options outstanding to purchase 439,100 shares of
common stock. All options have been granted at fair market value, or at a
premium thereof, on the date of grant, as determined by the Board of Directors.
Options vest ratably over four years and generally expire on the tenth
anniversary of the date of grant. In June 1999, the Company granted options to
purchase 205,100 shares of common stock with an exercise price of $5.50,
representing a premium to the fair market value on the date of grant.
The changes in the number of common shares under option for the nine
months ended January 2, 1999 and the fiscal year ended January 1, 2000 are
summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES AVERAGE PRICE
---------------- ----------------
<S> <C> <C>
Outstanding as of March 28, 1998 -- --
Granted 254,750 $15.00
Exercised -- --
Forfeited -- --
Outstanding as of January 2, 1999 254,750 $15.00
Granted 205,100 5.50
Exercised -- --
Forfeited (20,750) 15.00
-------- ---------
Outstanding as of January 1, 2000 439,100 $10.56
Exercisable as of January 1, 2000 110,942 $10.56
</TABLE>
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." These amounts are for disclosure
purposes only, and may not be representative of future calculations since
additional options may be granted in future years. If the
F-16
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company had recognized compensation cost for stock-based employee compensation
in accordance with the provisions of SFAS N0. 123, the Company's net loss would
have increased by approximately $36,000 and $74,000 for the nine months ended
January 2, 1999 and the fiscal year ended January 1, 2000, respectively. The
fair value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for the twelve months ended January 1, 2000: expected volatility of
0%; risk-free interest rate between 4.77 and 5.48 percent; expected option life
of 10 years; and no dividend yield.
9. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 28, 1998 JANUARY 2, 1999 JANUARY 1, 2000
-------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $3,753 $ (419) $ (493)
State 588 (74) (43)
------ ------- -------
4,341 (493) (536)
Deferred
Federal (286) 257 --
State 393 45 --
------ ------- -------
107 302 --
------ ------- -------
Provision (benefit) for
income taxes.......................... $4,448 $ (191) $ (536)
====== ======= ======
</TABLE>
The provision (benefit) for income taxes reconciles to the amounts
computed by applying the Federal statutory rate to income (loss) before taxes as
follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
MARCH 28, 1998 JANUARY 2, 1999 JANUARY 1, 2000
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed statutory tax 34.00% $3,135 (34.00)% $ (531) (34.00)% $(1,604)
State income taxes, net of
federal benefit........... 6.00% 552 (6.00)% (94) (3.00)% (142)
Permanent differences from
amortization of intangible
assets 5.70% 526 41.90% 654 20.20% 953
Increase in valuation
allowance -- -- -- -- 7.60% 357
Other 2.55% 235 6.80% 107 -- --
R&D credits -- -- (20.90)% (327) (2.10)% (100)
--------- --------- ------- ----- ------- ----
Provision (benefit) for
income taxes 48.25% $4,448 12.20% $ (191) 11.30% $ (536)
====== ====== ====== ======= ------- ========
</TABLE>
F-17
<PAGE>
ELGAR HOLDINGS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
JANUARY 2, 1999 JANUARY 1, 2000
------------------------ --------------------
<S> <C> <C>
Current deferred taxes
Section 163(j) interest carryforwards $ 436 $ 436
Other reserves 108 115
Accrued expenses 252 245
-------- --------
Total current deferred taxes 796 796
-------- --------
Noncurrent deferred taxes
Depreciation and UNICAP 204 238
Inventory reserves 355 500
Other 94 272
-------- --------
Valuation allowance -- (357)
-------- --------
Total noncurrent deferred taxes 653 653
-------- --------
Total deferred tax assets $1,449 $1,449
======== ========
</TABLE>
Management believes that realization of deferred tax assets is
uncertain. Accordingly, a valuation allowance has been recorded in the
accompanying consolidated financial statements.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is subject to various claims as a result of its ongoing
business activities. Management believes that the outcome of any such claims
will not have a material adverse effect on the Company's financial position or
results of operations.
LEASE COMMITMENTS
The Company leases its facilities and certain equipment under
non-cancelable operating leases that expire through 2004. The Company's primary
facility lease expires in 2002 and contains an option to extend the lease for
two additional five-year periods. Rent expense under operating leases amounted
to $807, $965 and $1,299 for the fiscal year ended March 28, 1998, the nine
month period ended January 2, 1999 and the fiscal year ended January 1, 2000,
respectively.
Minimum future lease payments as of January 1, 2000 under operating
leases are as follows (in thousands):
<TABLE>
<S> <C>
2000 $1,470
2001 1,341
2002 1,028
2003 52
2004 26
---------
Total $3,917
=========
</TABLE>
F-18
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEASE INCOME
The Company sub-leases certain of its office space for approximately
$7,300 per month. The Lease expires in July 2000. Future income expected under
the sublease is $43,000.
11. INCENTIVE COMPENSATION ARRANGEMENTS (DOLLARS IN THOUSANDS)
The Company instituted an employee bonus program on September 29, 1996
under which all non-management employees are paid bonuses based on the
achievement of certain performance criteria, as defined in the bonus program.
The Company incurred expenses of $480, $264 and $293 for the fiscal year ended
March 28, 1998, the nine month period ended January 2, 1999 and the fiscal year
ended January 1, 2000, respectively, under this compensation arrangement.
The Company also has a management incentive program under which the
management-level employees are paid incentives based on the achievement of
certain performance criteria. The Company incurred expenses of $467, $0 and $409
for the fiscal year ended March 28, 1998, the nine month period ended January 2,
1999 and the fiscal year ended January 1, 2000, respectively, under this
compensation arrangement.
The Company also maintains a defined contribution 401(k) plan (the
"Plan") for all of its employees. Those employees who participate in the Plan
are entitled to make contributions of up to 15 percent of their compensation,
limited by IRS statutory contribution limits. In addition to employee
contributions, the Company also contributes to the Plan by matching 40 percent
of employee contributions up to the first six percent of contributions. Amounts
contributed to the Plan by the Company were $226, $215 and $251 for the fiscal
year ended March 28, 1998, the nine month period ended January 2, 1999 and the
fiscal year ended January 1, 2000, respectively.
In connection with the Recapitalization (see Note 1), the Company
entered into employment agreements with certain of its officers and executives
that provide for stipulated annual salary payments. Termination of the
agreements may occur by either party upon 30 days prior written notice or in the
event of death or permanent disability. The agreements contain certain payment
provisions in the event the employee is terminated due to permanent disability
or in the event of death, conviction of a crime, or material breach or failure
to perform obligations under the agreements.
12. RELATED PARTY TRANSACTION
Pursuant to the terms of a Management Agreement entered into between
the Company and an affiliate of its principal shareholder (the "Management
Agreement"), the Company paid such affiliate a transaction fee in the amount of
$1.0 million in connection with the Recapitalization and $425,000 in connection
with the acquisition of Power Ten, and has also agreed to pay such affiliate an
annual management fee of $500,000 that commenced accruing on February 3, 1998
and is payable in advance on a semi-annual basis thereafter. In September 1998,
the Company and the affiliate amended the Management Agreement and concurrently
entered into a Management Services Agreement with the affiliate, the combined
effect of which was to further delineate the management services to be provided
by the affiliate and to reduce the term of the Management Agreement from ten
years to five years. Management fees expense under the Management Agreement,
Management Services Agreement and previous management agreements was $318, $375
and $500 for the fiscal year ended March 28, 1998 and the nine month period
ended January 2, 1999 and the fiscal year ended January 1, 2000, respectively.
F-19
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SUBSEQUENT EVENTS
Effective March 10, 2000, Elgar and the Company entered into a Third
Amendment to the Credit Agreement in anticipation of not complying with the
EBITDA and fixed charge covenants for the quarter ending on or about March 31,
2000. In addition to receiving waivers for any covenant violations both before
and after giving effect to the Third Amendment, the Third Amendment (i) resets
the fixed charge coverage ratio for the quarter ending closest to March 31, 2000
and for following quarters and (ii) resets the minimum EBITDA levels for the
quarter ending closest to December 31, 1999 and for following quarters.
F-20
<PAGE>
VALUATION AND QUALIFYING ACCOUNTS
ELGAR HOLDINGS, INC.
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND (a) END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
- --------------------------------------------------- --------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts (deducted from
accounts receivable) $171 $ 3 $ (22) $152
Fiscal year ended January 1, 2000
Nine Months Ended January 2, 1999 197 22 (48) 171
Fiscal year ended March 28, 1998 189 15 (7) 197
</TABLE>
- -----------
(a) Includes write-offs and reversals.
S-1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrants have duly caused this Report to be signed
on their behalf by the undersigned, thereunto duly authorized in the City of San
Diego, State of California on the 28th day of March, 2000.
ELGAR HOLDINGS, INC.
ELGAR ELECTRONICS CORPORATION
By: /s/ Kenneth R. Kilpatrick
--------------------------------------
Kenneth R. Kilpatrick
President and Chief Executive Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Kenneth R. Kilpatrick
------------------------------------ Director, President and Chief Executive March 28, 2000
Kenneth R. Kilpatrick Officer (Principal Executive Officer)
/s/ Christopher W. Kelford
------------------------------------ Vice President--Finance, Chief Financial March 28, 2000
Christopher W. Kelford Officer and Treasurer (Principal Financial
and Accounting Officer)
/s/ John F. Lehman
------------------------------------ Director March 28, 2000
John F. Lehman
/s/ Donald Glickman
------------------------------------ Director and Vice President March 28, 2000
Donald Glickman
/s/ George Sawyer
------------------------------------ Director March 28, 2000
George Sawyer
/s/ Keith Oster
------------------------------------ Director and Secretary March 28, 2000
Keith Oster
------------------------------------ Director March , 2000
Oliver C. Boileau, Jr.
------------------------------------ Director March , 2000
Thomas G. Pownall
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
------------------------------------ Director March , 2000
William Paul
/s/ Joseph A. Stroud
------------------------------------ Director March 28, 2000
Joseph A. Stroud
------------------------------------ Director March , 2000
Bruce D. Gorchow
</TABLE>
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Los
Gatos, State of California on the 28th day of March, 2000.
POWER TEN
By: /s/ Kenneth R. Kilpatrick
-------------------------------------
Kenneth R. Kilpatrick
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------ -------------------------------------------- ----------------
<S> <C> <C>
/s/ Kenneth R. Kilpatrick
- ------------------------------------------------ President and Chief Executive Officer, March 28, 2000
Kenneth R. Kilpatrick Director (Principal Executive Officer)
/s/ Christopher W. Kelford Vice President--Finance, Chief March 28, 2000
- ------------------------------------------------ Financial Officer and Treasurer
Christopher W. Kelford (Principal Financial and Accounting
Officer)
/s/ Donald Glickman Director and Vice President March 28, 2000
- ------------------------------------------------
Donald Glickman
/s/ Keith Oster
- ------------------------------------------------ Director and Vice President March 28, 2000
Keith Oster
</TABLE>
II-3
<PAGE>
THIRD AMENDMENT
THIRD AMENDMENT (this "Amendment"), dated as of March 10, 2000, among
ELGAR HOLDINGS, INC. ("Holdings"), ELGAR ELECTRONICS CORPORATION (the
"Borrower"), the lenders party to the Credit Agreement referred to below (the
"Banks"), and BANKERS TRUST COMPANY, as Agent (the "Agent"). All capitalized
terms used herein and not otherwise defined herein shall have the respective
meanings provided such terms in the Credit Agreement referred to below.
W I T N E S S E T H
WHEREAS, Holdings, the Borrower, the Banks and the Agent are parties to
a Credit Agreement, dated as of February 3, 1998 and amended and restated as
of May 29, 1998 (as amended, modified or supplemented to, but not including,
the date hereof, the "Credit Agreement");
WHEREAS, the parties hereto wish to amend certain provisions of the
Credit Agreement as herein provided; and
WHEREAS, subject to the terms and conditions of this Amendment, the
parties hereto agree as follows;
NOW, THEREFORE, it is agreed:
1. Section 9.07 of the Credit Agreement is hereby amended by deleting
the table appearing therein in its entirety and inserting the following new
table in lieu thereof:
"Fiscal Quarter
Ending Closest To Ratio
_________________ _____
March 31, 2000 0.77:1.00
June 30, 2000 0.78:1:00
September 30, 2000 0.86:1:00
December 31, 2000 0.94:1:00
March 31, 2001 1.40:1.00
June 30, 2001 1.50:1.00
September 30, 2001 1.60:1.00
December 31, 2001 1.70:1.00
March 31, 2002
and the last day of each
fiscal quarter thereafter 1:75:1.00"
2. Section 9.09 of the Credit Agreement is hereby amended by
deleting the table appearing therein in its entirety and inserting the
following new table in lieu thereof:
<PAGE>
"Fiscal Quarter
Ending Closest To Amount
_________________ ______
December 31, 1999 $2,210,000
March 31, 2000 $8,500,000
June 30, 2000 $9,000,000
September 30, 2000 $9,800,000
December 31, 2000 $10,500,000
March 31, 2001 $15,095,000
June 30, 2001 $15,250,000
September 30, 2001 $15,500,000
December 31, 2001 $16,000,000
March 31, 2002 $16,500,000
June 30, 2002 $17,000,000
September 30, 2002 $17,250,000
December 31, 2002 $17,500,000".
3. Section 11.01 of the Credit Agreement is hereby amended by
deleting the date "March 31, 2000" appearing in the definition of "Test
Period" and inserting in lieu thereof the date "December 31, 1999".
4. This Amendment shall become effective on the date (the "Third
Amendment Effective Date") when each of Holdings, the Borrower and the
Required Banks shall have signed a counterpart herof (whether the same or
different counterparts) and shall have delivered (including by way of
facsimile transmission) the same to the Agent at the Notice Office.
5. In order to induce the Banks to enter into this Amendment, each
of Holdings and the Borrower hereby represents and warrants that no Default
or Event of Default exists on the Third Amendment Effective Date, both before
and after giving effect to this Amendment.
6. This Amendment may be executed in any number of counterparts and
by the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of
which shall together constitute one and the same instrument. A complete set
of counterparts shall be delivered to the Borrower and the Agent.
7. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF
THE STATE OF NEW YORK.
8. From and after the Third Amendment Effective Date, all references
in the Credit Agreement and each of the other Credit Documents to the Credit
Agreement shall be deemed to be references to the Credit Agreement as
modified hereby.
-2-
<PAGE>
9. This Amendment is limited as specified and shall not constitute
a modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
* * *
-3-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the
date first above written.
ELGAR HOLDINGS, INC,
By: /s/ Kenneth R. Kilpatrick
-----------------------------
Name: Kenneth R. Kilpatrick
Title: President & CEO
ELGAR ELECTRONICS CORPORATION
By: /s/ Kenneth R. Kilpatrick
-----------------------------
Name: Kenneth R. Kilpatrick
Title: President & CEO
BANKERS TRUST COMPANY,
Individually and as Agent
By:
------------------------------
Name:
Title:
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the
date first above written.
ELGAR HOLDINGS, INC,
By:
-----------------------------
Name:
Title:
ELGAR ELECTRONICS CORPORATION
By:
-----------------------------
Name:
Title:
BANKERS TRUST COMPANY,
Individually and as Agent
By: /s/ Gina S. Thompson
------------------------------
Name:
Title: Director
<PAGE>
EXHIBIT 12.1
Computation of Ratios of Combined Earnings &
Preferred Stock Dividends to Earnings
(dollars in thousands)
<TABLE>
<CAPTION> 9 months Fiscal Year
Ended Ended Ended Ended
Jan. 2, Dec. 27, Jan. 1, Jan. 2,
FY96 FY97 FY98 1999 1997 2000 1999
----- ------ ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Expense(1) 3,540 1,830 3,345 8,177 1,108 10,614 10,414
Estimated interest portion
of rent expense 62 55 66 74 48 110 91
--- --- --- --- --- ---- --
Fixed Charges 3,602 1,885 3,411 8,251 1,157 10,723 10,505
Income (loss) before income tax (1,460) 3,710 9,221 (1,561) 8,980 (4,719) (1,320)
------- ------ ------ ------- ------ ------- -------
Earnings 2,142 5,595 12,632 6,690 10,137 6,004 9,185
Preferred stock dividend requirements(2) 0 0 0 (215) 0 (567) (215)
Combined earnings & preferred stock
dividends 2,142 5,595 12,632 6,475 10,137 5,437 8,970
Ratio of combined earnings & preferred
stock dividends to earnings 0.59 2.97 3.70 0.78 8.76 0.51 0.85
(1) INCLUDING AMORTIZATION OF DEFERRED
FINANCING COSTS
(2) AFTER TAX
Earnings insufficiency (1,460) 0 0 (1,776) 0 (5,286) (1,535)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JAN-01-2000
<CASH> 4,479
<SECURITIES> 0
<RECEIVABLES> 7,405
<ALLOWANCES> (152)
<INVENTORY> 7,623
<CURRENT-ASSETS> 21,135
<PP&E> 5,436
<DEPRECIATION> (3,093)
<TOTAL-ASSETS> 58,545
<CURRENT-LIABILITIES> 10,663
<BONDS> 90,000
10,707
9,000
<COMMON> 23
<OTHER-SE> (70,598)
<TOTAL-LIABILITY-AND-EQUITY> 58,545
<SALES> 56,059
<TOTAL-REVENUES> 56,059
<CGS> 32,032
<TOTAL-COSTS> 15,878
<OTHER-EXPENSES> 2,432
<LOSS-PROVISION> (22)
<INTEREST-EXPENSE> 10,458
<INCOME-PRETAX> (4,719)
<INCOME-TAX> (536)
<INCOME-CONTINUING> (4,183)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,183)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> MAR-29-1998
<PERIOD-END> JAN-02-1999
<CASH> 6,507
<SECURITIES> 0
<RECEIVABLES> 5,339
<ALLOWANCES> (171)
<INVENTORY> 9,095
<CURRENT-ASSETS> 22,922
<PP&E> 4,936
<DEPRECIATION> (2,337)
<TOTAL-ASSETS> 63,754
<CURRENT-LIABILITIES> 13,929
<BONDS> 90,000
9,406
5,000
<COMMON> 23
<OTHER-SE> (64,612)
<TOTAL-LIABILITY-AND-EQUITY> 63,754
<SALES> 47,136
<TOTAL-REVENUES> 47,136
<CGS> 26,000
<TOTAL-COSTS> 13,023
<OTHER-EXPENSES> 1,663
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 8,008
<INCOME-PRETAX> (1,561)
<INCOME-TAX> (191)
<INCOME-CONTINUING> (1,370)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,370)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-28-1998
<PERIOD-START> MAR-30-1997
<PERIOD-END> MAR-28-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 62,496
<TOTAL-REVENUES> 62,496
<CGS> 32,944
<TOTAL-COSTS> 15,683
<OTHER-EXPENSES> 1,314
<LOSS-PROVISION> (7)
<INTEREST-EXPENSE> 3,341
<INCOME-PRETAX> 9,221
<INCOME-TAX> 4,448
<INCOME-CONTINUING> 4,773
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,773
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
