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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 fiscal year ended
December 30, 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:
NONE
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. | | Not applicable.
As of March 29, 2001, the number of outstanding shares of the registrant's
Common Stock was 4,601,533.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
TABLE OF OTHER REGISTRANTS
Address Including Zip Code and
Jurisdiction of IRS Employer Area Code and Telephone Number of
Name of Corporation Incorporation Identification Number Principal Executive Offices
- ------------------- ---------------- --------------------- ---------------------------------
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
ELGAR HOLDINGS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 30, 2000
CAPTION PAGE
- ------- ----
PART I
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.....................................21
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................23
ITEM 11. EXECUTIVE COMPENSATION.........................................................................28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................33
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..................35
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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 are a leading designer and manufacturer of programmable power
supplies and systems for the telecommunications, semiconductors, measurement and
control, and defense markets. Power supplies convert one form of electric power,
such as alternating current ("AC") from a wall outlet, into another form of
electric power, such as direct current ("DC") used by most electronic products.
Programmable power supplies have increased application flexibility as they
convert a single input power level into various output power levels. Our
products are designed into original equipment manufacturer ("OEM") systems, or
utilized by the end customer in power reliability verification, product
acceptance, process control, or burn-in applications. We provide one of the
broadest product offerings in our industry. Our customers include such industry
leaders as Alcatel, Cisco, Lucent, Motorola, Advanced Energy, Siemens, American
Power Conversion, Halliburton and Lockheed Martin.
Elgar Electronics Corporation, our wholly owned subsidiary
("Elgar"), was founded in 1965 as a manufacturer of solid-state line
conditioners and frequency changers for the AC power test and measurement
market. By the early 1990's, we had become primarily an AC power supply
provider to the defense market with approximately $20 million in net sales.
Over the next several years we developed and executed a comprehensive plan to
expand our focus to target the large and diverse, commercial DC market. We
improved product quality through product redesign and clean-up, quality
systems improvement and ongoing employee training. We extended product
breadth through new product introductions, strategic alliances and
acquisitions of two DC power supply companies, Sorensen and Power Ten. We
also reduced delivery cycle times and established an industry-leading,
technical support and services capability, with extensive pre-sales support
and expert rack system integration consultation. This strategy proved to be
successful. In 2000, approximately 80% of our $65.8 million in net sales were
derived from commercial customers purchasing predominantly DC products.
MARKETS FOR OUR PRODUCTS
We sell our products into rapidly evolving end markets, with strong
long-term growth prospects. We supply a broad line of products to the
telecommunications, semiconductor and measurement and control markets, each of
which has experienced rapid growth as a result of significant technological
advancements and the build-out of the digital economy and its dependence on high
quality and reliable power.
o TELECOMMUNICATIONS - Increased build-out of the Internet
and optical and wireless communications networks is expected
to result in additional power solution demands.
o SEMICONDUCTOR - Advancements in semiconductor technology and
the increased volume of semiconductors integrated into
products is expected to stimulate demand for power solutions
in both front-end and back-end semiconductor manufacturer
equipment markets.
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o MEASUREMENT AND CONTROL - Increased sophistication and power
sensitivity of electronics serving both digital economy and
traditional economy applications is expected to drive demand
for high quality, programmable power supplies and services.
o DEFENSE - Testing of defense electronics, in particular,
avionics, has historically been a key market for our products.
We are well positioned to take advantage of new defense
opportunities using existing commercial products.
Our revenue attributable to each of these markets in the fiscal year
ended December 30, 2000 ("Fiscal 2000") was as follows (unaudited):
NET SALES FOR FISCAL 2000
---------------------------
MARKET $(000S) % OF TOTAL
- ------ ------- ----------
Telecommunications.................. $11,881 18.1%
Semiconductor....................... 15,044 22.9
Measurement & Control............... 25,461 38.7
Defense............................. 13,400 20.3
------ ----
Total........................... $65,786 100.0%
======= ======
PRODUCT APPLICATIONS
Our significant software and hardware engineering capabilities enable
us to address a wide range of complex applications in our target markets. We
design and manufacture power solutions used in critical applications that
require varied levels of power output and involve substantial engineering
complexity. Our products are used in applications such as:
o OEM - where our products are embedded into a system by our
customer which is in turn sold to the end customer.
o Test & Measurement ("T&M") - where our products are used to
verify that electronic equipment operates reliably under
varied levels of power input.
o Process Control - where our product is primarily used as a
power amplifying device in the control of a process.
o Reliability/burn in - where our power supplies are used to
provide power to devices to improve product reliability.
Burn-in applications are essential to verifying product
reliability and are used to screen for "infant mortality"
related failures in products.
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Applications within each of our target markets include:
TELECOMMUNICATIONS SEMICONDUCTOR MEASUREMENT & CONTROL DEFENSE
- ------------------------------ --------------------------- --------------------------- -------------------------------
o Powering amplifiers in o Temperature control o Laser diode design o Naval aircraft avionics
cellular base stations for wafer processing verification
o Central office support o Microprocessor o Powering x-ray o Weapons test
equipment validation systems for medical
applications
o Burn-in of DC - DC o Ion implantation o UPS systems for oil o UPS systems
converters control exploration
o Power testing of optical o Testing o Commercial avionics o Shipboard power
routers microprocessors testing distribution
o Cell phone testing o Semiconductor burn-in o Automotive electronics o Missile fire-control
testing systems
PRINCIPAL PRODUCTS
We have four principal product areas:
o PROGRAMMABLE DC POWER is a type of programmable power supply
used to power or test products that require DC inputs, such as
printed circuit boards, semiconductors, medical equipment,
telecommunications equipment, avionics and almost all other
types of electronic products;
o SYSTEMS INTEGRATION PRODUCTS AND SERVICES include both power
subsystem design, manufacture and integration, and space power
simulation systems. The power subsystem business is a natural
extension of the design and manufacturing capabilities
developed while producing complete space power simulation
systems over the past 13 years.
o PROGRAMMABLE AC POWER is a type of programmable power supply
used to power or test AC products such as avionics, computers,
DC power supplies, appliances and many other types of
electronic products; and
o OTHER PRODUCTS AND SERVICES, which consist of (1) power
conditioning and ruggedized 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, (2) 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) and (3) customer service,
consisting of repair services and spare parts.
3
We categorize our sales in these four principal product areas, with
net sales shown by product area for Fiscal 2000:
NET SALES FOR FISCAL 2000
----------------------------
PRODUCT LINE $ (000S) % OF TOTAL
- ------------ ------------ --------------
Programmable DC Power...................................... $41,035 62.4%
Systems Integration Products and Services.................. 5,676 8.6
Programmable AC Power...................................... 6,768 10.3
Other Products and Services................................ 12,307 18.5
------ ----
Total................................................ $65,786 100.0%
======= =====
PROGRAMMABLE DC POWER
Our broad line of programmable DC products are used by commercial
and military customers for a wide variety of applications including computer
and communications equipment, semiconductor burn-in, industrial process
control, avionics, bench-top equipment, and research and development
equipment. Customers for programmable DC products include Racal Instruments
("Racal"), Applied Materials, Siemens, GenRad, Halliburton Company, Cisco
Systems, Lucent Technologies, Teradyne, Veeco Instruments, Advanced Power,
Hy-Cad Systems and Reliability Inc.
Within the telecom market, our DC products are applied in test and
measurement, burn-in and OEM applications. Telecom DC product applications
include the testing of network equipment, DC-to-DC converters, satellites and
telecom components. These products are also used for the burn-in of DC-to-DC
converters and central office switches. OEM applications of our DC products
include supplying power to cellular base station and cable TV amplifiers and to
charge central office batteries.
In the semiconductor market, our DC products are mainly used in OEM
applications by customers such as Novellus, Applied Materials and Veeco
Instruments. Our power solutions are incorporated into semiconductor
manufacturing equipment, test stations and burn-in systems. 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.
Measurement and control applications are highly varied and include
power solutions for the medical equipment, computer, industrial automation,
consumer goods, commercial and space, and oil and gas markets. Our largest
customer in this market, Siemens, uses our DC power supplies in its oncology
treatment systems to create x-rays.
We offer 21 DC product lines under the SORENSEN, ELGAR and POWER TEN
brand names, ranging in power from 60 watts to 30kW. Most of our products are
produced in-house, although five lower priced programmable DC product lines,
which represent less than 5% of our revenue, are manufactured by others and
brand labeled SORENSEN. Our purchase of Power Ten in May 1998 broadened our
product offering with high-power, programmable DC products. We recently entered
the market for DC loads with a new product line, enabling us to achieve
incremental revenue by selling this product into our existing customer base
through the same sales channel.
SYSTEMS INTEGRATION PRODUCTS AND SERVICES
Systems integration products and services includes power subsystems
products and services and space power simulation systems. In Fiscal 2000, we
sold approximately 68% of our systems integration
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products and services to customers in the telecom market with the remainder
divided between the measurement and control and defense markets.
Because of the substantial power subsystem integration expertise we
have developed through our space power simulation work and the desire of
customers to outsource non-core engineering tasks, many OEMs, in-house test
engineering groups and contract manufacturers are beginning to rely on us to
provide the power subsystems component of complex integrated systems. We
introduced this service in 1999 and, as a result, have been able to secure
additional market share for our products by bundling them with our engineering
and manufacturing services into integrated power subsystems supplied to
customers. In addition to providing a new source of complementary business, we
benefit from these services by increasing customer loyalty and retention,
thereby differentiating us from our competition. Our subsystems integration
services include system design, power supply selection, power and thermal
management design, complete rack wiring, custom input and output cables, and
system controls ranging from rudimentary switches to custom Windows NT
application software. The customer is provided a complete turnkey system.
Systems integration products and services also includes our space power
simulation products. The space power system products are applied in test and
measurement applications to test satellites. 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 ("SAS") test system performs mission-critical power testing from
payload testing to final satellite testing inside a thermal vacuum chamber. 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 orbital profiles, an eclipse entry and exit, aging of the
solar array and many other conditions.
We believe that we are the leading non-captive source for satellite
ground power test systems in the United States. We introduced our second
generation Solar Array Simulator in 1993, and became the sole supplier of solar
array simulators, battery simulators and umbilical power systems to Lockheed
Martin and Motorola on the Iridium project. Today, with our turn-key power
systems and fourth generation SAS systems, we supply virtually every major U.S.
commercial, military and power subsystem development satellite manufacturer,
including Boeing, Hughes, Lockheed Martin, Space Systems Loral, TRW, Jet
Propulsion Lab, Motorola Space and Ball Aerospace. Additionally, we have
established a strong presence in Europe with customers such as Astrium (Matra
Marconi Space and DASA), Alenia Space, Alcatel, Terma and the European Space
Agency (ESA ESTEC).
AC POWER
Our programmable AC products generate a wide range of dynamic AC
voltages, frequencies, phase relationships 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 the incumbent on
many major U.S. government ATE contracts.
5
We offer 15 AC product lines under the ELGAR brand name, ranging in
power from 120VA to 712kVA. We recently introduced two additional products,
which are the ContinuousWave-Manual and ContinousWave-Programmable. These
products are used primarily in avionics and AC power components testing.
OTHER PRODUCTS AND SERVICES
Other products and services comprise three components, which are:
o Power conditioning and uninterruptible power supply ("UPS")
products;
o The CASS program; and
o Customer service.
UPS. 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.
CASS. The CASS program is a Navy/NAVAIR program developed to reduce the
required number of avionics custom automated test equipment ("ATE") systems
located on aircraft carriers, at depots and at test integration facilities. Our
role in the CASS program is to provide these ATE stations with power subsystems,
which consist of programmable AC and DC power supplies, a power conditioner and
fixed DC system supplies. We are the sole supplier of power subsystems to
Lockheed Martin, the prime contractor for the CASS program.
Having delivered 601 systems to date, we have been notified by
Lockheed Martin that the U.S. Navy is winding down the CASS Program, with
full-rate production to cease in 2002. After full-rate production ceases,
however, we will enter the sustaining phase for the program, where the
emphasis will be on small quantity orders, spares and service. The Navy is
also considering a limited expansion of the CASS program to equip non-carrier
ships. If Lockheed Martin obtains any such business, this could represent
additional opportunities for revenue growth. Further, other branches of the
military have programs similar to CASS, including the U.S. Army's Integrated
Family of Test Equipment, which currently utilizes our other standard
products.
CUSTOMER SERVICE. 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.
SIGNIFICANT CUSTOMERS
We sell our power supplies and systems to over 3,000 customers,
either directly or indirectly, through our distributors. Certain customers
are material to our business and operations. In Fiscal 2000, however, there
were no customers that represented more than 10% of total net sales. In
Fiscal 2000, our top ten customers accounted for approximately 38.0% of net
sales, down from 46.2% in Fiscal 1999. Lockheed Martin accounted for
approximately 19.0% of our total net sales in Fiscal 1999, down from 20.0% in
the nine months ended January 2, 1999. Hughes accounted for approximately
11.0% of our total net sales in Fiscal 1999, down from 12.1% in the nine
months ended January 2, 1999. No other customer accounted for 10% or more of
our net sales in fiscal 1999 or the nine months ended January 2, 1999.
6
COMPETITION
The power supply industry is extremely fragmented with approximately
1,000 manufacturers worldwide and 250 manufacturers in the United States. The
worldwide power supply market was estimated to be approximately $22 billion in
1999, with no single manufacturer holding more than a five percent market share
and only 15 manufacturers achieving more than $250 million in sales. The power
supply industry is currently experiencing a period of consolidation in response
to customers' desires to consolidate their supplier base and manufacturers'
desires to incorporate additional product lines and technologies.
We believe we sell more programmable power supplies in the United
States than any other provider except for Agilent. Most of our competitors
are either small private companies, which do not match the breadth of product
offerings, or non-core subsidiaries of much larger parent companies, which
tend to be less focused on the power solution market. We operate in a very
competitive environment across our DC and AC product lines and enjoy a less
competitive environment in our systems integration product and services
business. The principal competitive factors in the marketplace include vendor
and product reputation, fast delivery, price, product performance
specifications, functionality and features, ease of implementation and use,
and quality of customer support. We believe we are well positioned with
regard to these factors and have competed effectively in all of our target
markets.
SALES AND MARKETING
We sell our products through sales representatives in the U.S. and
through distributors internationally, with some direct sales to specific
customers and markets. Our sales organization includes 37 in-house employees (25
of whom are in sales and marketing, 10 in customer service support, one in
general and administrative and one who is an outside consultant), as well as
over 70 representative/distributor companies with more than 280 salespeople
worldwide. We believe that our sales network is one of our major assets and a
significant competitive advantage over our competitors.
Our in-house sales force includes ten sales managers who are each
responsible for working with customers and prospective customers to provide
existing or custom solutions to their needs. Our five sales engineers, who
support the sales managers, representatives and customers, design solutions
according to customers' applications. In turn, these 15 sales professionals are
supported by an administrative staff of seven 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. Only one sales
representative accounted for over 10% of our net sales in Fiscal 2000. Domestic
sales accounted for approximately 88.5% of total net sales in Fiscal 2000.
7
RESEARCH AND DEVELOPMENT
At December 30, 2000, our engineering department consisted of 71
people. As evidence of our commitment to new product development, our research
and development and engineering expenses were $4.9 million in the nine months
ended January 2, 1999, $5.9 million for Fiscal 1999 and $6.7 million for Fiscal
2000. Customer-funded research and development comprised $0.2 million, $0.7
million and $0.5 million of our overall research and development expense
incurred in the nine months ended January 2, 1999, Fiscal 1999 and Fiscal 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(TM)
and the SAS products. We have introduced six new products over our last six
fiscal quarters. 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.
MANUFACTURING
Our manufacturing facilities are organized and run efficiently with a
focus on quality, productivity and cost and inventory management. Our
manufacturing equipment is modern and allows for efficient and quality
production. We have designed and constructed our own in-house semi-automated
test stations to enhance productivity and ensure quality. Operations management
has identified four core manufacturing competencies which are:
o wire harness/heatsink assembly,
o magnetics (transformer assembly),
o low-volume printed circuit board assembly and
o final assembly and testing.
Operations has redesigned the production floor to use work cells and simplify
material handling and assembly methodology based on these competencies. 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.
Over the years, we have utilized selective vertical integration and a
focused factory approach to improve costs and mitigate delivery and quality
risks. We utilize cross-functional teams in new product development, design for
manufacturability, sustaining support and quality improvement initiatives while
supporting a foundation of employee empowerment and training. Our current
initiatives involve focused material cost reductions utilizing long-term
partnerships and high quality offshore suppliers. In addition, we have made
substantial investments in automated test equipment and through-hole and
surface-mount board assembly equipment. This equipment is being used to support
the implementation of Demand Flow Technology focused on reducing inventory and
manufacturing cycle-times.
As part of our cost management program, we have outsourced certain
lower-end, high volume transformers to a subcontract assembly plant in nearby
Tecate, Mexico. All subcontract subassemblies are subjected to our inspection
and test process as assurance that quality expectations are met.
We continue to focus on improving the manufacturing competencies at
Power Ten. We have improved work flow, added semi-automatic test capabilities
and made process changes to shrink product lead times and reduce inventory.
Currently, we are shifting the manufacture of all printed circuit board
assemblies from the Power Ten facility in Northern California to the Elgar
facility in San Diego to take advantage of recent investments in automated
assembly equipment.
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BACKLOG
Our backlog at December 30, 2000 was approximately $20.8 million, $20.1
million of which we expect to ship in 2001. Our backlog was $13.8 million at
January 1, 2000. 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.
EMPLOYEES
At December 30, 2000, we had 428 full-time employees, including 104
manufacturing personnel, 71 engineering personnel, 32 administrative personnel,
25 sales and marketing personnel, nine customer service personnel and 187
personnel involved in direct labor. No attempts to unionize any of our employees
have been made. We consider our employee relations to be good.
INTELLECTUAL PROPERTY
We have trademarked our SmartWave(TM) and GUPS(TM) products and we have
been operating under the ELGAR and SORENSEN trade names for over 30 years. The
Power Ten business has been using the POWER TEN trade name for over 15 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.
9
GOVERNMENT 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. In the last five
years, we have not experienced any cancellations or significant price
renegotiations of a contract at the government's convenience. At no time have
we experienced a government cancellation by default. As 19.6% of our net
sales in Fiscal 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.
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, which we use for:
o the design and production of Elgar's standard DC and AC products
and Sorensen-brand products, production for the CASS Program and
administrative headquarters (87,300 sq. ft.) (lease expires in
December 2002);
o digital engineering and accounting (7,100 sq. ft.) (lease expires
in September 2002);
o manufacturing of magnetics and PDU, a power conditioning product
(9,100 sq. ft.) (lease expires in April 2003); and
o stockroom and receiving for all products (9,100 sq. ft.) (lease
expires in December 2005).
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 2001.
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 2000.
10
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 March 1,
2001, there were 32 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 $5.00 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 $0.75 per share.
11
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below for the nine month
period ended January 2, 1999 and the fiscal years ended January 1, 2000 ("Fiscal
1999") and December 30, 2000 ("Fiscal 2000") and as of January 1, 2000 and
December 30, 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 for the fiscal years ended March 29, 1997 and March 28, 1998 and as
of 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 for the twelve month period ended January 2, 1999 have
been derived from our unaudited consolidated financial statements, not presented
herein. In March 1999, the Company changed its fiscal year from the Saturday
closest to March 31st to the Saturday closest to December 31st. This resulted in
the fiscal years ended March 28, 1998 and January 2, 1999 containing a
three-month overlap period, from December 28, 1997 to March 28, 1998. This
three-month overlap period included $15,881,000 of net sales and $203,000 of net
income. The nine-month period ended December 28, 1997 is also included in the
fiscal year ended March 28, 1998. The nine-month period included $46,615,000 of
net sales and $4,570,000 of net income. 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
FISCAL YEAR ENDED NINE MONTHS ENDED FISCAL YEAR ENDED
------------------------ ------------------------ ---------------------------------
MAR. 29, MAR. 28, DEC. 27, JAN. 2, JAN. 2, JAN. 1, DEC. 30,
1997 1998 1997 1999 1999 2000 2000
---------- ------------- ---------- ------------- ---------- ----------- ----------
(UNAUDITED) (UNAUDITED)
OPERATING DATA: (DOLLARS IN THOUSANDS)
Net sales..................... $45,578 $62,496 $46,615 $47,136 $63,017 $56,059 $65,786
Cost of sales................. 26,973 32,944 24,325 26,000 34,619 32,032 38,152
------ ------ ------ ------ ------ ------ ------
Gross profit.................. 18,605 29,552 22,290 21,136 28,398 24,027 27,634
Selling, general and
administrative expenses(1). 7,770 9,434 6,781 8,114 10,766 10,005 11,337
Research and development and
engineering expenses....... 3,973 6,242 4,448 4,912 6,707 5,851 6,675
Amortization expense(2)....... 1,314 1,314 985 1,663 1,991 2,432 2,435
------- ------- ------ ----- ------- ------- -----
Operating income.............. 5,548 12,562 10,076 6,447 8,934 5,739 7,187
Interest expense, net......... 1,839 3,341 1,096 8,008 10,253 10,458 10,544
------- ------- ------- ------ -------- -------- ------
Income (loss) before income
tax provision (benefit).... 3,709 9,221 8,980 (1,561) (1,319) (4,719) (3,357)
Income tax provision (benefit) 1,872 4,448 4,410 (191) (152) (536) 70
------ ------- ------- -------- ------ ------- --------
Net income (loss)............. $ 1,837 $ 4,773 $ 4,570 $ (1,370) $ (1,167) $ (4,183) $(3,427)
======= ======= ======= ========= ========= ========= ========
OTHER DATA:
Operating cash flows.......... $ 5,312 $ 7,462 $ 4,535 $ 4,323 $ 7,250 $(1,350) $(2,637)
Investing cash flows.......... (14,593) (1,218) (933) (17,800) (18,085) (674) (1,252)
Financing cash flows.......... 9,499 (4,269) (4,035) 17,318 17,084 (4) (366)
Depreciation.................. 806 883 615 748 1,024 888 923
Capital expenditures.......... 621 1,228 933 294 589 676 1,254
Ratio of combined earnings and
preferred stock dividends
to earnings(3)............. 2.97x 3.70x 8.76x -- -- -- --
OTHER NON-GAAP DATA:
Adjusted EBITDA(4)............ $ 7,668 $15,118 $11,669 $ 9,100 $ 12,610 $9,158 $10,523
Adjusted EBITDA margin(5)..... 16.8% 24.2% 25.0% 19.3% 20.0% 16.3% 16.0%
BALANCE SHEET DATA:
Total assets.................. $36,597 $44,912 $38,922 $ 63,754 $63,754 $58,545 $56,985
Total debt.................... 15,216 90,000 11,211 104,000 104,000 100,000 99,625
Stockholders' equity (deficit) 15,837 (61,471) 20,407 (59,589) (59,589) (61,575) (67,002)
- -----------
(1) In the year ended March 28, 1998 ("Fiscal 1998"), selling, general and administrative expenses include approximately
$359,000 of nonrecurring expenditures relating to the Recapitalization.
(2) Amortization expense represents the amortization of goodwill associated with the April 1996 acquisition of Elgar by
Carlyle-EEC Holdings, Inc., and our May 1998 acquisition of Power Ten.
(3) 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. Earnings were insufficient to cover fixed charges by approximately $1,776,000 in the
nine months ended January 2, 1999, $1,535,000 in the fiscal year ended January 1, 2000 and $3,935,000 in the fiscal year
ended December 30, 2000.
(4) 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
debt. 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 (1) above.
(5) Adjusted EBITDA margin is equal to Adjusted EBITDA divided by net sales for the periods presented.
13
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.
As a holding company, we operate through Elgar Electronics Corporation
and its wholly owned subsidiary, Power Ten.
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). The three-month overlap period included $15,881,000
of net sales and $203,000 of net income. The nine-month period ended December
28, 1997 is also included in the twelve-month fiscal year ended March 28, 1998.
The nine-month period included $46,615,000 of net sales and $4,570,000 of net
income.
FISCAL YEAR ENDED NINE MONTHS ENDED FISCAL YEAR ENDED
--------------------- ------------------- -----------------------------
MARCH 29, MARCH 28, DEC. 27, JAN. 2, JAN. 2, JAN. 1, DEC. 30,
1997 1998 1997 1999 1999 2000 2000
----------- ---------- --------- -------- ----------- -------- --------
STATEMENT OF OPERATIONS DATA: (unaudited) (unaudited)
Net sales............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................ 59.2 52.7 52.2 55.2 54.9 57.1 58.0
----- ----- ----- ----- ----- ----- ----
Gross profit......................... 40.8 47.3 47.8 44.8 45.1 42.9 42.0
Selling, general and administrative
expenses(1)........................ 17.0 15.1 14.6 17.2 17.1 17.9 17.2
Research and development and
engineering expenses............... 8.7 10.0 9.5 10.4 10.6 10.5 10.1
Amortization expense................. 2.9 2.1 2.1 3.5 3.2 4.3 3.7
----- ----- ----- ----- ----- ----- ----
Operating income..................... 12.2% 20.1% 21.6% 13.7% 14.2% 10.2% 10.9%
===== ===== ===== ===== ===== ===== =====
OTHER DATA:
Adjusted EBITDA %(2)................. 16.8% 24.2% 25.0% 19.3% 20.0% 16.3% 16.0%
- -----------
(1) The fiscal year ended January 2, 1999 includes approximately $359,000 of
nonrecurring expenditures relating to the Recapitalization.
14
(2) Adjusted EBITDA for the fiscal year ended January 2, 1999 excludes
the nonrecurring expenditures described in note (1) above.
FISCAL YEAR ENDED DECEMBER 30, 2000 VERSUS FISCAL YEAR ENDED JANUARY 1, 2000
NET SALES. Net sales in Fiscal 2000 were $65.8 million, an increase of
$9.7 million, or 17.3%, from net sales of $56.1 million in Fiscal 1999. This
increase was primarily attributable to an increase in sales of programmable DC
products, including sales of Sorensen and Power Ten products and sales to Racal,
partially offset by a decrease in sales of Other Products and Services. In
Fiscal 2000, sales of Power Ten products, which are part of the DC product line,
were $12.2 million, an increase of $4.6 million from Fiscal 1999 sales.
In Fiscal 2000, net sales attributable to the CASS Program, which are
included within Other Products and Services, were approximately $6.7 million. We
have been notified that the U.S. Navy is winding down the CASS Program, with
full-rate production to cease in the second half of 2002. After full-rate
production ceases, we expect that our net sales attributable to the CASS Program
will decrease fairly significantly as we enter the sustaining phase for the
program, where the emphasis will be on small quantity orders, spares and
service.
GROSS PROFIT. Gross profit in Fiscal 2000 was $27.6 million, an
increase of $3.6 million, or 15.0%, from gross profit of $24.0 million in Fiscal
1999. The increase in gross profit was mainly due to the increase in net sales
which resulted in a $4.2 million increase in gross profit, offset by a $0.6
million decrease in the gross profit margin due to a greater concentration of
sales of lower-margin products when compared to Fiscal 1999. In Fiscal 2000,
gross margins on Power Ten products were $6.0 million, an increase of $2.1
million from Fiscal 1999 gross margins.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses were $11.3 million in Fiscal 2000, an increase
of $1.3 million, or 13.0%, from SG&A expenses of $10.0 million in Fiscal 1999.
SG&A expenses decreased as a percentage of net sales from 17.9% in Fiscal 1999
to 17.2% in Fiscal 2000. The dollar increase was primarily due to higher sales
volume, generating higher commissions of $0.7 million, along with higher
advertising costs and sales and marketing expenses.
RESEARCH AND DEVELOPMENT AND ENGINEERING EXPENSES. Research and
development and engineering ("R&D&E") expenses in Fiscal 2000 were $6.7 million,
an increase of $0.8 million, or 13.6%, from R&D&E expenses of $5.9 million in
Fiscal 1999. R&D&E expenses decreased as a percentage of net sales from 10.5% to
10.1%. The increase in dollars was primarily due to higher compensation expense
and increased consulting and material costs at Power Ten, and to a decrease in
customer-funded research and development expense in Fiscal 2000 compared to
Fiscal 1999. A portion of the Company's R&D&E expenses have historically been
funded by customers and the costs associated with the support has been excluded
from R&D&E expenses and included in cost of sales.
AMORTIZATION EXPENSE. Amortization expense was $2.4 million in each of
Fiscal 2000 and Fiscal 1999. Amortization expense is comprised of the
amortization of goodwill associated with the April 1996 acquisition of Elgar by
Carlyle-EEC Holdings, Inc., and our May 1998 acquisition of Power Ten.
INTEREST EXPENSE. Net interest expense was $10.5 million in each of
Fiscal 2000 and Fiscal 1999. In connection with our swap agreement, on a net
basis we paid $43,000 of interest to our swap counterparty in Fiscal 1999, and
we received $49,000 in interest from our swap counterparty in Fiscal 2000. As of
December 30, 2000, all but $2,125,000 of our long-term bank debt was covered by
this swap arrangement.
15
OPERATING INCOME. Operating income was $7.2 million in Fiscal 2000, an
increase of $1.5 million, or 26.3%, from operating income of $5.7 million in
Fiscal 1999. Operating income increased as a percentage of net sales from 10.2%
in Fiscal 1999 to 10.9% in Fiscal 2000. The increase was due to the factors
discussed above.
INCOME TAXES. Income taxes for Fiscal 2000 contained a tax provision of
$0.1 million, compared to a tax benefit of $0.5 million for Fiscal 1999. Losses
generated in Fiscal 1999 resulted in carryback benefits that were reflected as a
benefit. Losses generated in Fiscal 2000 do not have a carryback benefit and
thus have not been recognized because future realization is uncertain.
NET LOSS. Net loss was $3.4 million in Fiscal 2000, an improvement of
$0.8 million, or 19.0%, from net loss of $4.2 million in Fiscal 1999. In order
to increase profitability, we have undertaken a number of initiatives to
increase sales across our multiple product lines. These include (1) increasing
marketing efforts to existing and new semiconductor end-market customers, (2)
introducing our value-added-integration services to high tech end customers, (3)
introducing over six new products to the marketplace and (4) initiating cost
reduction efforts in the manufacturing and procurement processes.
FISCAL YEAR ENDED JANUARY 1, 2000 VERSUS THE 12 MONTHS ENDED JANUARY 2, 1999
(UNAUDITED)
NET SALES. Net sales in 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. This decrease was primarily attributable to a $6.3
million decrease in sales to Racal of DC products, a $1.8 million decrease in
sales of AC products and a $1.7 million decrease in sales of Other Products and
Services. These decreases were partially offset by the inclusion of $3.7 million
of Power Ten sales in the seven-month period from the date of acquisition to
January 2, 1999.
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 the 12-month
period ended January 2, 1999. The additional $3.7 million of Power Ten sales
generated $2.0 million of gross profit for the seven-month period from the date
of acquisition to January 2, 1999. The decrease in gross profit was primarily
attributable to a 2.2 percent decrease in gross profit margin in Fiscal 1999
compared to the 12-month period ended January 2, 1999. The $6.9 million sales
decrease from the 12-month period ended January 2, 1999 to Fiscal 1999 resulted
in a $3.2 million decrease in gross profit. Gross profit in Fiscal 1999 was
positively impacted in the amount of $1.1 million by a greater concentration of
sales of higher-margin products in Fiscal 1999 than in the 12-month period ended
January 2, 1999.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES. 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 the 12-month period ended January 2, 1999. SG&A expenses
increased as a percentage of net sales from 17.1% in the 12-month period ended
January 2, 1999 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
our February 1998 recapitalization.
RESEARCH AND DEVELOPMENT AND ENGINEERING EXPENSES. R&D&E expenses in
Fiscal 1999 were $5.9 million, a decrease of $0.8 million, or 11.9%, from R&D&E
expenses of $6.7 million in the 12-month period ended January 2, 1999. R&D&E
expenses decreased as a percentage of net sales from 10.6% to 10.5%. A portion
of the Company's R&D&E expenses have historically been funded by customers and
the costs associated with the support has been excluded from R&D&E expenses and
included in cost of sales. The decrease in dollars and as a percentage of
16
net sales was predominately due to an increase in customer-funded research
and development expense in Fiscal 1999 compared to the 12-month period ended
January 2, 1999.
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 the 12-month period ended January 2, 1999. Amortization expense is
comprised of the amortization of goodwill associated with the April 1996
acquisition of Elgar by Carlyle-EEC Holdings, Inc, and our May 1998 acquisition
of Power Ten. The increase was due to the 12-month period ended January 2, 1999
only containing seven months of amortization expense from the Power Ten
acquisition as compared to a full year in Fiscal 1999.
INTEREST EXPENSE. Net interest expense was $10.5 million for Fiscal
1999, an increase of $0.2 million, or 1.9%, from net interest expense of $10.3
million in the 12-month period ended January 2, 1999. The increase was mainly
due to 12 months of interest expense on the Senior Notes in Fiscal 1999 compared
to only 11 months of such interest expense in the 12-month period ended January
2, 1999.
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 the
12-month period ended January 2, 1999. Operating income decreased as a
percentage of net sales from 14.2% in the 12-month period ended January 2, 1999
to 10.2% in Fiscal 1999. The decrease was due to the factors discussed 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 the 12-month period
ended January 2, 1999. Our effective tax rate was 11.4% for Fiscal 1999 and
11.5% for the 12-month period ended January 2, 1999. 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.
NET LOSS. Net loss was $4.2 million for Fiscal 1999, an increase of
$3.0 million from a net loss of $1.2 million in the 12-month period ended
January 2, 1999. The widening in net loss was principally due to a decrease in
sales volume. In response to this decrease in sales, we undertook, and continue
to undertake, a number of initiatives to increase sales across our multiple
product lines. These include (1) increasing marketing efforts to existing and
new semiconductor end-market customers, (2) introducing our
value-added-integration services to high tech end customers and (3) introducing
four new products to the marketplace.
NINE MONTHS ENDED JANUARY 2,1999 VERSUS NINE MONTHS ENDED DECEMBER 27, 1997
(UNAUDITED)
NET SALES. Net sales for the nine months ended January 2, 1999 were
$47.1 million, an increase of $0.5 million, or 1.1%, from net sales of $46.6
million for the nine months ended December 27, 1997. During the nine months
ended January 2, 1999, increases in (i) sales to the U.S. Navy's CASS Program,
(ii) sales of Sorensen-brand products and (iii) sales of GUPS products and
customer service revenues, along with the inclusion of the results of Power Ten,
which accounted for $3.7 million of sales in the nine-month period ended January
2, 1999, 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. Power Ten
contributed $2.0 million to gross profit during the nine-month period ended
January 2, 1999. The decrease in gross profit was primarily attributable to a
3.0 percent decrease in gross profit
17
margin in the nine months ended January 2, 1999 compared to the nine months
ended December 27, 1997. Gross profit in the nine month period ended January
2, 1999 also was negatively impacted in the amount of $1.4 million due to a
greater concentration of sales of lower-margin products when compared to the
nine months ended December 27, 1997.
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. R&D&E expenses were
$4.9 million for the nine months ended January 2, 1999, an increase of $0.5
million, or 11.4%, from R&D&E 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, R&D&E 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.
INTEREST EXPENSE. Net interest expense for the nine months ended
January 2, 1999 was $8.0 million, an increase of $6.9 million, from net interest
expense of $1.1 million in the nine months ended December 27, 1997. The increase
was due to $6.8 million of interest expense on the Senior Notes during the nine
months ended January 2, 1999 compared to no interest expense during the nine
months ended December 27, 1997, as the Senior Notes were not issued until
February 1998.
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.
NET INCOME (LOSS). Net loss was $1.4 million for the nine months ended
January 2, 1999, a decrease of $6.0 million from net income of $4.6 million in
the nine months ended December 27, 1997. Higher interest expense, a greater
concentration of sales of lower-margin products and $1.3 million of higher SG&A
were the primary reasons for the decrease in net income resulting in a net loss.
18
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW. Our principal uses of cash are for working capital
requirements, debt service requirements and capital expenditures. Based upon
current and anticipated levels of operations, and after giving effect to the
Fourth Amendment to our Credit Agreement discussed below, we believe that our
cash flow from operations, together with amounts available under our credit
facility, will be adequate to meet our anticipated requirements through 2001
for working capital, interest payments, amortization of our term loan 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 Elgar's capital stock, 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.
CAPITAL REQUIREMENTS. Our capital expenditures were $294,000 in the
nine months ended January 2, 1999, $676,000 in Fiscal 1999 and $1,254,000 in
Fiscal 2000. Our expenditures during Fiscal 2000 were primarily for capacity
expansion at Power Ten and new product support at Elgar.
SOURCES OF CAPITAL. We are party to a credit agreement with Bankers
Trust, as agent (the "Credit Agreement"), which we entered into in connection
with our February 1998 recapitalization. Elgar is the borrower under the Credit
Agreement and EHI is the guarantor. As amended, the Credit Agreement consists of
(1) a $5.0 million revolving credit facility (the "Revolving Facility") and (2)
a $15.0 million term facility (the "Term Facility," and collectively with the
Revolving Facility, the "Credit Facility"). We used all of the proceeds from the
Term Facility to finance a portion of the purchase price for Power Ten in May
1998. 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 December 30,
2000, the $5.0 million Revolving Facility was fully available to us. Payments
under the Term Facility are pursuant to an amortization schedule with a final
maturity date of February 3, 2003. The outstanding balance of the Term Facility
at December 30, 2000 was $9.6 million.
In March 2000, Elgar, EHI and Bankers Trust 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) reset the fixed charge coverage ratio for the quarter ending closest to
March 31, 2000 and for following quarters and (ii) reset the minimum EBITDA
levels for the quarter ending closest to December 31, 1999 and for following
quarters. Elgar was in compliance with the amended financial covenants
contained in the Credit Agreement as of December 30, 2000.
On March 27, 2001, Elgar, EHI and Bankers Trust entered into a
Fourth 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, 2001. In addition to receiving waivers for any covenant violations
both
19
before and after giving effect to the Fourth Amendment, the Fourth Amendment
(i) reset the fixed charge coverage ratio for the quarter ending closest to
March 31, 2001 and for following quarters, (ii) reset the minimum EBITDA
levels for the quarter ending closest to March 31, 2001 and for following
quarters, (iii) reset the leverage ratio for the quarter ending closest to
March 31, 2001 and for the following quarters, (iv) defers the $875,000
principal payment due on March 31, 2001 until December 31, 2001, (v) defers
the $875,000 principal payment due on June 30, 2001 as follows: $292,000 is
to be paid on March 31, 2002, $292,000 on June 30, 2002 and $291,000 on
September 30, 2002 and (vi) provides for Elgar to pay the banks an additional
50 basis points of interest on loans outstanding from and after March 27,
2001, as discussed below. The payments referenced in (iv) and (v) are in
addition to the currently scheduled principal payments.
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. Pursuant to the Fourth Amendment to the
Credit Agreement, Elgar is to pay the banks an additional 50 basis points of
interest on loans outstanding from and after March 27, 2001, with such
payment of additional interest to be made at maturity or upon earlier
repayment of the loans. The effective interest rate on the Term Facility was
approximately 9.43% at December 30, 2000. We entered into an interest rate
swap agreement in June 1998 that covers $7.5 million of our term loan. This
swap agreement terminates in June 2001. See Item 7A. Quantitative and
Qualitative Disclosures About Market Risk.
A substantial portion of the Company's interest expense is
attributable to the $90 million of Senior Notes outstanding at a fixed rate
of interest. These notes are due in February 2008. Thus, while the swap
agreement helps us manage our exposure to increases in interests rates, such
swap arrangements will not have an effect on our interest expense under the
fixed-rate Senior Notes.
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.
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.
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; BACKLOG
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
20
of cost increases. As of December 30, 2000, we had $0.7 million in backlog for
which shipments under those contracts are scheduled after December 31, 2001.
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.
As of December 30, 2000, $9,625,000 of outstanding borrowings under our credit
facility are at variable interest rates and 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 December 30, 2000, all but $2,125,000 of our long-term bank debt
was covered by this swap arrangement. Thus, our exposure with respect to upward
movements in interest rates is limited to this portion of our bank debt.
In addition, we are exposed to market risks related to fluctuations in
interest rates on our $90,000,000 of fixed-rate 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.
The tables below provide information as of December 30, 2000 about our
derivative instruments and other financial instruments that are sensitive to
changes in interest rates.
LONG TERM BANK DEBT (VARIABLE RATE)
- -----------------------------------
Principal amount $9,625,000(1)
Variable interest rate 9.43%(2)
Maturity--tranche March 29, 2001
Maturity--loan February 3, 2003
Remaining principal payments:
2001 $3,625,000
2002 $4,000,000
2003 $2,000,000
- -----------
(1) $7,500,000 of this amount is covered by the interest-rate swap arrangement
described below.
(2) Renewals are based on the Eurodollar Rate plus 2.75% for $8.75 million of
the principal amount and Base Rate plus 1.75% for $0.875 million of the
principal amount.
21
INTEREST RATE SWAP ARRANGEMENT (FIXED RATE)
- -------------------------------------------
Parties The Company (fixed rate payor) and Bankers Trust Company
(floating rate payor)
Notional amount $7,500,000
Fixed interest rate 5.83% (1)
Floating interest rate 6.46375% for the current period (2)
Swap interest income--fiscal year ended
December 30, 2000 $48,609 (3)
Commencement date June 24, 1998
Maturity date June 25, 2001
Approximate fair value at
December 30, 2000 $10,000
- -----------
(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 $48,609 of interest
income for the fiscal year ended December 30, 2000.
SENIOR NOTES (FIXED RATE)
- -------------------------
Principal amount outstanding $90,000,000
Fixed interest rate 9.875%
Maturity date February 1, 2008
22
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 December 30,
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....................... 63 President and Chief Executive Officer, EHI, Elgar and
Power Ten; Director, EHI, Elgar and Power Ten
Samuel A. Lewis............................. 52 Vice President--Sales and Marketing, Elgar
Christopher W. Kelford...................... 50 Vice President--Finance, Chief Financial Officer and
Treasurer, EHI and Elgar
Normand E. Precourt......................... 58 Vice President--Engineering, Elgar
John J. Santospirito........................ 60 Vice President--Operations, Elgar
Daniel E. Donati............................ 43 Vice President--Program Management, Elgar
Thomas Erickson............................. 57 Vice President--Human Resources, Elgar
Gerald D. Price............................. 52 Vice President--Sales and Marketing, Power Ten
David C. Hoffman............................ 49 Vice President--Engineering, Power Ten
Dr. John F. Lehman.......................... 58 Director, EHI and Elgar
Donald Glickman............................. 67 Vice President, EHI and Elgar; Chairman of the Board, EHI
and Elgar; Director, Power Ten
George Sawyer............................... 69 Director, EHI and Elgar
Thomas G. Pownall........................... 78 Director, EHI and Elgar
Oliver C. Boileau, Jr....................... 73 Director, EHI and Elgar
Stephen L. Brooks........................... 29 Secretary, EHI and Elgar; Director, EHI, Elgar
Joseph A. Stroud............................ 45 Director, EHI and Elgar
William Paul................................ 64 Director, EHI and Elgar
Bruce D. Gorchow............................ 42 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 Elgar, Mr. Kilpatrick was President of Machine Industries, Inc.,
an aerospace parts manufacturer, from
23
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 21
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.
JOHN J. SANTOSPIRITO, Vice President--Operations of Elgar, joined
Elgar in July 2000. Prior to that time, Mr. Santospirito was a senior
operations executive with GNP Computers from 1998 to 2000, with Artecon, Inc.
from 1996 to 1998, with Encad, Inc. from 1995-1996 and with
Scientific-Atlantic, Inc. from 1988 to 1995.
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 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 uninterruptible power supplies. Before founding
Modular Power, Mr. Hoffman was manager of power
24
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
Principal of J.F. Lehman & Company ("Lehman"). Prior to founding Lehman in 1991,
Dr. Lehman was an investment banker with PaineWebber, Incorporated from 1988 to
1991, 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.
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 Principal 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, Special Devices, Incorporated, Burke Industries, 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, is a Managing
Principal of Lehman, and 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 Blacklight Power, Inc. and Special Devices,
Incorporated and Chairman of the Board of Burke Industries, Inc.. He also
serves on the Board of Trustees of Webb Institute and the Mariners' Museum.
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.
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. He retired in May 1988. Mr. Boileau joined Northrop Grumman
Corporation ("Northrop Grumman") in
25
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.
STEPHEN L. BROOKS, who is Secretary and a director of EHI and Elgar,
is a Vice President of Lehman, having joined Lehman in 1998. Mr. Brooks's
responsibilities at Lehman include investment sourcing and execution as well
as the financial and capital market aspects of portfolio companies'
management. Prior to joining Lehman, Mr. Brooks was an investment banker with
Bowles Hollowell Conner & Co. from 1996 to 1998 where he was a founding
member of the firm's aerospace and defense merger and acquisition practice.
JOSEPH A. STROUD, who is a director of EHI and Elgar, is a Principal
of Lehman. Mr. Stroud formally joined Lehman in 1996 after having been
closely associated with the firm since 1992. Mr. Stroud 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. 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 those positions in 1997. Mr. Paul is a Fellow of the St. Vincent's
Medical Center and a presidential appointee to the United States Access
Board. 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., Elizabeth Arden Salon
and Spa Holdings, Inc., PPM America, Inc. and Burke Industries, Inc., and is
an investment advisor for several investment limited partnerships.
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."
26
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 Brooks. 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.
27
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth for 1998, 1999 and
2000 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 Fiscal 2000.
SUMMARY COMPENSATION TABLE
SECURITIES ALL OTHER
SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(2) OPTIONS ($)
- ------------------------------------- ------ -------- ------- ---------- ------------
Kenneth R. Kilpatrick................ 2000 $225,930 $103,850 160,000 --
President and Chief Executive 1999 197,498 83,742 80,000 --
Officer, EHI and Elgar 1998 184,995 125,000 44,000 --
Samuel A. Lewis...................... 2000 134,773 42,460 78,000 --
Vice President--Sales and Marketing 1999 124,500 39,600 39,000 --
of Elgar 1998 117,000 52,700 21,000 --
Gerald D. Price...................... 2000 126,352 46,057 50,000 --
Vice President--Sales and Marketing 1999 121,327 49,220 15,000 --
of Power Ten (3) 1998 18,461 12,500 8,000 --
Normand E. Precourt.................. 2000 141,777 44,620 76,000 --
Vice President--Engineering of 1999 129,997 36,953 38,000 --
Elgar 1998 120,994 54,500 19,000 --
David C. Hoffman..................... 2000 129,550 36,437 40,000 --
Vice President--Engineering of Power 1999 124,671 39,476 12,000 --
Ten (4) 1998 74,880 -- 6,000 --
- --------------
(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.
28
OPTIONS GRANTED IN THE LAST FISCAL YEAR
Shown below is information concerning grants of options by the Company
to the Named Executive Officers in Fiscal 2000:
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES PRICE PER EXPIRATION
NAME GRANTED(#) IN FY 2000 SHARE DATE
- ---------------------------------- ---------- ---------- -------- ----------
Kenneth R. Kilpatrick............. 0 -- -- --
Samuel A. Lewis................... 0 -- -- --
Gerald D. Price................... 8,000 5.4% $5.35 12/11/10
Normand E. Precourt............... 0 -- -- --
David C. Hoffman.................. 6,000 4.0% $5.35 12/11/10
AGGREGATE OPTION PURCHASES IN LAST FISCAL YEAR-END AND FISCAL YEAR END OPTION
VALUES
The following table summarizes information with respect to the year-end
values of all options held by the Named Executive Officers.
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS VALUE OF UNEXERCISED
SHARES AT FISCAL YEAR-END IN-THE-MONEY OPTIONS
ACQUIRED ON (#) EXERCISABLE/ AT FISCAL YEAR-END
NAME EXERCISE VALUE REALIZED UNEXERCISABLE ($)(1)
- ---------------------------------- ----------- -------------- ------------------- -------------------
Kenneth R. Kilpatrick............. 0 0 114,000/46,000 $0
Samuel A. Lewis................... 0 0 55,500/22,500 $0
Gerald D. Price................... 0 0 23,333/26,667 $0
Normand E. Precourt............... 0 0 53,833/22,167 $0
David C. Hoffman.................. 0 0 19,000/21,000 $0
- --------------
(1) Because there is no public market for our Common Stock, the information
called for by this column is not relevant or calculable.
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
29
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.
STOCK OPTION PLAN
As of December 30, 2000, there were outstanding options granted under
the Elgar Holdings, Inc. 1998 Stock Option Plan (the "Stock Option Plan") to
purchase 993,000 shares of Common Stock. All options have been granted at fair
value, or at a premium thereto, as determined by the Board of Directors of the
Company 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, 1,164,082 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.
30
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 March 1, 2001 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.
PERCENTAGE OF
NUMBER SHARES
NAME OF INDIVIDUAL OR ENTITY(1) OF SHARES(2) OUTSTANDING(3)
--------------------------------------------------- ----------- -------------
JFL-EEC(4)......................................... 3,802,800 66.7%
John F. Lehman(5).................................. 3,802,800 66.7
Donald Glickman(5)................................. 3,802,800 66.7
George Sawyer(5)................................... 3,802,800 66.7
Stephen L. Brooks(5)............................... 3,802,800 66.7
Joseph Stroud(5)................................... 3,802,800 66.7
Thomas G. Pownall(6)............................... -- --
Oliver C. Boileau, Jr.(7).......................... -- --
William Paul(8).................................... -- --
Bruce D. Gorchow(9)................................ -- --
Kenneth R. Kilpatrick.............................. 234,000(10) 4.1
Samuel A. Lewis.................................... 135,500(10) 2.4
Gerald D. Price.................................... 23,333(10) *
Normand E. Precourt................................ 103,833(10) 1.8
David C. Hoffman................................... 19,000(10) *
Jackson National Life Insurance Company(11)........ 557,500 9.8
All directors and executive officers
as a group (18 persons)......................... 4,191,300(10) 73.5
- -----------
* Less than 1%
(1) The address of JFL-EEC and Messrs. Lehman, Glickman, Sawyer, Brooks 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
31
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 March 1, 2001. In accordance with Rule 13(d)-3 of the Exchange
Act, any Common Stock that will not be outstanding within 60 days of
March 1, 2001 that is subject to options or warrants exercisable
within 60 days of March 1, 2001 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, Brooks
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, Brooks 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, Brooks 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 March 1, 2001 for the
following persons and following numbers of shares: (i) 114,000
shares for Mr. Kilpatrick; (ii) 55,500 shares for Mr. Lewis; (iii)
23,333 shares for Mr. Price; (iv) 53,833 shares for Mr. Precourt;
(v) 19,000 shares for Mr. Hoffman; and (vi) 207,500 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, which is a noncontrolling member of JFL-EEC.
32
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
33
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.
34
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.
PAGE REFERENCE FORM 10-K
------------------------
Report of Independent Public Accountants.............................................. F-1
Consolidated Balance Sheets as of January 1, 2000 and December 30, 2000............... F-2
Consolidated Statements of Operations for the nine months ended January 2,
1999 and the years ended January 1, 2000 and December 30, 2000.................... F-3
Consolidated Statements of Stockholders' Equity (Deficit) for the nine months
ended January 2, 1999 and the years ended January 1, 2000 and
December 30, 2000.................................................................
F-4
Consolidated Statements of Cash Flows for the nine months ended January 2, 1999
and the years ended January 1, 2000 and December 30, 2000......................... F-5
Notes to Consolidated Financial Statements............................................ F-6
(a)(2) Consolidated Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts............................... S-1
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.
None.
35
(c) Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------
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)
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)
36
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)
10.28 Form of Stock Option Agreement(1)
37
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(5)
10.30 Fourth Amendment, dated as of March 27, 2001, 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)
- -----------
(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.
(5) Incorporated by reference to the Annual Report on Form 10-K for the
fiscal year ended January 1, 2000, as filed with the Securities and
Exchange Commission on March 29, 2000.
No annual report or proxy material covering our last fiscal year has
been or will be sent to security holders of the Company.
38
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 1,
2000 and December 30, 2000, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the nine months ended
January 2, 1999 and the years ended January 1, 2000 and December 30, 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 financial statements referred to above present fairly, in
all material respects, the financial position of Elgar Holdings, Inc. and
subsidiaries as of January 1, 2000 and December 30, 2000, and the results of
their operations and their cash flows for the nine months ended January 2, 1999
and the years ended January 1, 2000 and December 30, 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
financial statements taken as a whole. Schedule II-Valuation and Qualifying
Accounts is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial
statements. The schedule has been subjected to the auditing procedures
applied in the audits of the basic 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 financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
San Diego, California
January 26, 2001
(except with respect to the
information included in
note 14, as to which the
date is March 27, 2001)
F-1
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JANUARY 1, DECEMBER 30,
2000 2000
--------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 4,479 $ 224
Accounts receivable, net of allowance for doubtful accounts of $152 and
$163, respectively....................................................... 7,253 10,252
Inventories............................................................... 7,623 10,700
Deferred tax assets....................................................... 796 615
Prepaids and other........................................................ 984 424
--------------- ---------------
Total current assets.................................................. 21,135 22,215
PROPERTY, PLANT AND EQUIPMENT, net ......................................... 2,343 2,690
INTANGIBLE ASSETS, net of accumulated amortization of $8,076 and $11,243,
respectively............................................................. 34,414 31,247
DEFERRED TAX ASSETS, net of current portion................................. 653 834
--------------- ---------------
$58,545 $56,986
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................................... $ 1,748 $ 3,379
Accrued liabilities....................................................... 7,665 8,858
Current portion of long-term debt......................................... 1,250 3,625
--------------- ---------------
Total current liabilities............................................. 10,663 15,862
LONG-TERM DEBT, net of current portion...................................... 98,750 96,000
--------------- ---------------
Total liabilities..................................................... 109,413 111,862
--------------- ---------------
SERIES A 10% CUMULATIVE REDEEMABLE PREFERRED STOCK,
no par value, 20,000 shares authorized; 10,000 shares issued and outstanding
10,707 12,126
--------------- ---------------
STOCKHOLDERS' DEFICIT:
Series B 6% Cumulative Convertible Preferred Stock, no par value, 5,000
shares authorized, issued and outstanding.............................. 5,000 5,000
Series C 6% Cumulative Convertible Preferred Stock, no par value, 4,000
shares authorized, issued and outstanding.............................. 4,000 4,000
Common Stock, $.01 par value, 15,000,000 shares authorized; 4,600,000 and
4,601,533 shares issued and outstanding, respectively.................. 46 46
Additional paid-in capital................................................ (68,581) (68,572)
Accumulated deficit....................................................... (2,040) (7,476)
--------------- ---------------
Total stockholders' deficit........................................ (61,575) (67,002)
--------------- ---------------
$ 58,545 $56,986
=============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
JANUARY 2, 1999 JANUARY 1, 2000 DECEMBER 30, 2000
--------------- --------------- -----------------
Net Sales................................... $47,136 $56,059 $65,786
Cost of sales............................... 26,000 32,032 38,152
--------------- --------------- -----------------
Gross profit............................ 21,136 24,027 27,634
Selling, general and administrative expenses 8,114 10,005 11,337
Research and development and engineering
expenses................................. 4,912 5,851 6,675
Amortization expense........................ 1,663 2,432 2,435
--------------- --------------- -----------------
Operating income........................ 6,447 5,739 7,187
Interest expense, net....................... 8,008 10,458 10,544
--------------- --------------- -----------------
Loss before income taxes (benefit).......... (1,561) (4,719) (3,357)
Income taxes (benefit) provision ........... (191) (536) 70
--------------- --------------- -----------------
Net loss................................ $ (1,370) $(4,183) $(3,427)
=============== =============== =================
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
RETAINED
SERIES B SERIES C ADDITIONAL EARNINGS
PREFERRED STOCK PREFERRED STOCK COMMON STOCK PAID-IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, March 28, 1998 -- $-- -- $-- 4,600,000 $46 $(67,949) $ 6,432 $(61,471)
Recapitalization consideration -- -- -- -- -- -- (632) -- (632)
Issuance of Series B preferred stock 5,000 5,000 -- -- -- -- -- -- 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 5,000 5,000 -- -- 4,600,000 46 (68,581) 3,946 (59,589)
Issuance of Series C preferred stock -- -- 4,000 4,000 -- -- -- -- 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 5,000 5,000 4,000 4,000 4,600,000 46 (68,581) (2,040) (61,575)
Exercise of stock options -- -- -- -- 1,533 -- 9 -- 9
Series A preferred stock dividend-in-kind -- -- -- -- -- -- -- (1,252) (1,252)
Series B preferred stock dividend accrual -- -- -- -- -- -- -- (335) (335)
Series C preferred stock dividend accrual -- -- -- -- -- -- -- (255) (255)
Accretion of discount on Series A preferred
stock -- -- -- -- -- -- -- (167) (167)
Net loss -- -- -- -- -- -- -- (3,427) (3,427)
----- -------- ----- -------- --------- ---- --------- -------- ---------
BALANCE, December 30, 2000 5,000 $ 5,000 4,000 $ 4,000 4,601,533 $ 46 $ (68,572) $ (7,476) $(67,002)
===== ======== ===== ======== ========= ==== ========= ======== =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
JANUARY 2, JANUARY 1, DECEMBER 30,
1999 2000 2000
----------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................... $ (1,370) $ (4,183) $ (3,427)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of intangibles............................... 1,663 2,432 2,435
Amortization of deferred loan costs....................... 536 734 732
Depreciation and amortization of property, plant and
equipment.............................................. 748 888 901
Loss on sale of property, plant and equipment............. -- 23 4
Changes in operating assets and liabilities, excluding
effects of acquisition:
Accounts receivable.................................... 2,542 (2,085) (2,999)
Inventories............................................ 375 1,472 (3,077)
Prepaids and other..................................... (914) 372 560
Deferred tax assets.................................... 403 -- --
Accounts payable....................................... (510) (1,416) 1,631
Accrued liabilities.................................... 850 413 603
----------- ------------ ------------
Net cash provided by (used in) operating
activities....................................... 4,323 (1,350) (2,637)
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.................... (294) (676) (1,254)
Proceeds from sales of property, plant and equipment.......... -- 2 2
Acquisition of Power Ten, net of cash acquired................ (17,506) -- --
----------- ------------ ------------
Net cash used in investing activities.............. (17,800) (674) (1,252)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from preferred stock issuance........................ 5,000 4,000 --
Proceeds from exercise of options............................. -- -- 9
Proceeds from borrowings...................................... 15,000 -- --
Deferred financing costs...................................... (1,037) -- --
Repayment on debt............................................. (1,000) (4,000) (375)
Payments under capital leases................................. (13) (4) --
Recapitalization consideration................................ (632) -- --
----------- ------------ ------------
Net cash provided by (used in) financing activities 17,318 (4) (366)
----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 3,841 (2,028) (4,255)
CASH AND CASH EQUIVALENTS, beginning of period.................. 2,666 6,507 4,479
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of period........................ $ 6,507 $ 4,479 $ 224
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................................ $ 5,147 $ 9,826 $ 9,843
Cash paid for income taxes.................................... 427 35 33
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Series A preferred stock dividend-in-kind..................... $ 799 $ 1,135 $ 1,252
Series B and C preferred stock dividend accrual............... 189 502 590
Accretion of discount on Series A preferred stock............. 128 166 167
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY OPERATIONS
Elgar Holdings, Inc., a Delaware corporation (the "Company")
manufactures and sells programmable power supply units through its direct and
indirect wholly owned subsidiaries, Elgar Electronics Corporation ("Elgar") and
Power Ten, for semiconductors, telecommunications, measurement and control, and
defense applications. The Company's primary sales are within the United States
and Europe.
In April 1996, the Company acquired all of the outstanding common stock
of Elgar Electronics 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).
In January 1998, the Company entered into an Agreement and Plan of
Merger (the "Recapitalization Agreement") pursuant to which the Company was
recapitalized on February 3, 1998 (the "Recapitalization"). Pursuant to the
Recapitalization Agreement, all shares of the predecessor company's
then-existing common stock, other than those retained by certain members of
management and certain other stockholders (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 May 1998, Elgar acquired all issued and outstanding shares of
capital stock of Power Ten 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 acquired) and approximately $0.9 million of
deferred financing costs, both of which are included in intangible assets as of
January 1, 2000 and December 30, 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its direct and indirect wholly owned subsidiaries, Elgar and
Power Ten. All significant intercompany accounts and transactions have been
eliminated in consolidation.
FISCAL YEAR
The Company operates and reports financial results on a fiscal year of
52 or 53 weeks. 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, results of operations presented in the accompanying financial
F-6
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
statements include the nine month transition period ended January 2, 1999 and
the years ended January 1, 2000 and December 30, 2000.
CASH AND CASH EQUIVALENTS
Cash equivalents at January 1, 2000 and December 30, 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.
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. Maintenance, repairs and
betterments are expensed as incurred.
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 asset and liability method in providing for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are established to recognize the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply in the years
in which temporary differences are expected to be recovered or settled. The
effects on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Current
income tax expense is the amount of income taxes expected to be payable in the
current year.
REVENUE RECOGNITION
For products, the Company recognizes revenue upon shipment of goods and
the passage of title to the customer. For services, the Company recognizes
revenue as the related services are performed. The
F-7
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company's revenue recognition policies are in accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101").
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. Customer-funded research and
development was insignificant for the nine months ended January 2, 1999, $0.7
million for the year ended January 1, 2000 and $0.5 million for the year ended
December 30, 2000.
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 accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of sales and expenses during
the reporting period. Actual results could differ from those estimates.
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 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 was amended in June 1999 by
SFAS No. 137 "Accounting for Derivative Instrument and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133", and in June 2000 by
SFAS No. 138 for "Accounting for Certain Derivative Instruments and Hedging
Activities, an amendment 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 with changes from fair value reflected in operations. The Company
adopted the provisions of SFAS No. 133, as amended by SFAS No. 137 and SFAS No.
138, in January 2001, and the effect of the adoption was immaterial to its
financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
SAB 101. This bulletin draws on existing accounting rules and provides specific
guidance on how those accounting rules should be applied to revenue recognition.
In June 2000, the SEC issued SAB 101B which deferred the
F-8
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
implementation of SAB 101 to the fourth quarter for fiscal years beginning after
December 15, 1999. The Company believes its accounting policies conform to the
provisions of SAB 101.
In July 2000, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF 00-10, "Accounting for Shipping and Handling Fees and Costs."
EITF 00-10 requires that all amounts billed to a customer in a sales transaction
related to shipping and handling, if any, represent revenue to the vendor and
should be classified as revenue. There has been no consensus at this time on the
treatment for the related costs. This EITF was effective in the fiscal year
ended December 30, 2000. The adoption of EITF 00-10 did not have a material
effect on the Company's consolidated financial statements, results of operations
or related disclosures thereto.
3. SUPPLEMENTARY FINANCIAL INFORMATION
Inventories are comprised of the following (in thousands):
JANUARY 1, 2000 DECEMBER 30, 2000
--------------- -----------------
Raw materials $3,789 $6,033
Work-in-process 2,482 3,230
Finished goods 1,352 1,437
------ -------
$7,623 $10,700
====== =======
Property, plant and equipment and the related depreciable lives are as
follows (in thousands):
JANUARY 1, 2000 DECEMBER 30, 2000
--------------- -----------------
ASSET TYPE/DEPRECIABLE LIFE
Machinery and equipment/4-6 years $ 4,088 $5,048
Leasehold improvements/lease term 749 966
Furniture and fixtures/4 years 443 666
Construction in progress 156 39
------- ------
5,436 6,719
Less: Accumulated depreciation and amortization (3,093) (4,029)
------- ------
$ 2,343 $ 2,690
======= ======
Accrued liabilities consist of the following (in thousands):
JANUARY 1, 2000 DECEMBER 30, 2000
--------------- -----------------
Payroll and related...................... $2,066 $2,341
Warranty reserve......................... 494 455
Commissions.............................. 368 477
Interest payable......................... 3,726 3,688
Dividends payable........................ 692 1,282
Other.................................... 319 615
------ ------
$7,665 $8,858
====== ======
4. CONCENTRATION OF CREDIT RISK
Sales to two customers, in the aggregate, accounted for approximately
32% and 30% of the Company's sales for the nine months ended January 2, 1999 and
the year ended January 1, 2000,
F-9
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
respectively. No individual customer represented greater than 10% of sales for
the year ended December 30, 2000. The Company performs ongoing credit evaluation
of its customers' financial condition. The Company maintains reserves for
potential credit losses.
5. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT
At January 1, 2000 and December 30, 2000, the Company's long-term debt
consisted of the following (in thousands):
JANUARY 1, DECEMBER 30,
2000 2000
--------------- --------------------
Senior Notes due February 1, 2008 with an interest rate of $ 90,000 $ 90,000
9.875%
Term Notes due through February 3, 2003 with interest rates
ranging from 8.0% to 11.25% 10,000 9,625
--------------- --------------------
100,000 99,625
Less: current portion (1,250) (3,625)
--------------- --------------------
Long term portion $98,750 $ 96,000
=============== ====================
Principal maturities under notes payable are as follows:
FISCAL YEAR AMOUNT
----------- -------------
2001 $ 3,625
2002 4,000
2003 2,000
2004 --
2005 --
Thereafter 90,000
-------------
Total $99,625
=============
The principal payments due on the term notes are due at the end of each
quarter. The payment due on December 31, 2000, a Sunday, was paid on January 2,
2001, the first business day of the next fiscal quarter. The current portion of
long-term debt includes the principal payments due on December 31, 2000, March
31, 2001, June 30, 2001 and September 30, 2001 as they are due to be paid on
January 2, 2001, April 2, 2001, July 2, 2001 and October 1, 2001, respectively.
The payment due December 31, 2001 is due to be paid on the first day of fiscal
year 2002, and therefore is included in the maturity table as due in fiscal
2002.
On March 27, 2001, Elgar and the Company entered into a Fourth
Amendment to the Credit Agreement that, among other things, deferred certain
principal payments under the term loan. See Note 14 below for a description
of that amendment.
Interest expense related to the $90 million of senior notes was
approximately $6.7 million for the nine months ended January 2, 1999 and $8.9
million for each of the fiscal years ended January 1, 2000 and December 30,
2000. Interest expense related to the term notes and revolving line of credit
was approximately $0.8 million for the nine months ended January 2, 1999 and
$0.9 million for each of the fiscal years ended January 1, 2000 and December
30, 2000.
F-10
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SENIOR NOTES
The Senior Notes bear interest at a rate of 9.875% per annum, payable
semi-annually on February 1st and August 1st, with a maturity date of 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 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 the notes was $63 million at January 1, 2000 and $55
million at December 30, 2000.
CREDIT FACILITY AND TERM NOTES
In 1998, 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 Facility which matures on February 3, 2003. No amounts were
outstanding under this revolving facility as of January 1, 2000 or December 30,
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.
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
F-11
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
minus (iii) the aggregate amount of all undrawn letters of credit issued under
the Credit Facility plus the aggregate amount of any unreimbursed drawings under
any outstanding letters of credit.
The credit agreement contains restrictions on the incurrence of debt,
the sale of assets, mergers, acquisitions and other business combinations,
voluntary prepayment of other debt of the Company, transactions with affiliates,
repurchase or redemption of stock from stockholders, and various financial
covenants, including covenants requiring the maintenance of fixed charge
coverage, and maximum debt to 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 the amended financial covenants contained
in the Credit Agreement as of January 1, 2000. In March 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) reset the fixed charge coverage ratio for the quarter
ending closest to March 31, 2000 and for following quarters and (ii) reset the
minimum EBITDA levels for the quarter ending closest to March 31, 2000 and for
following quarters.
Elgar was in compliance with financial covenants contained in the
Credit Agreement as of December 30, 2000. On March 27, 2001, Elgar and the
Company entered into a Fourth Amendment to the Credit Agreement. See Note 14
below for a description of that amendment.
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 $5.6 million that are being amortized to interest expense
over the term of the related debt. Accumulated amortization was approximately
$1.1 million at January 1, 2000 and $1.6 million at December 30, 2000.
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 6, 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.
F-12
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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 707,488 shares of the Company's common stock.
The Company has attributed a value of $1.7 million to the warrants, which is
included in additional paid-in-capital as of January 1, 2000 and December 30,
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 of 0.10 per share 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 1, 2000 or December 30, 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
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
F-13
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 5), 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 7).
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.
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
$5.00 per share for the Series B and $0.75 per share for the Series C,
respectively, subject to adjustments pursuant to certain anti-dilution
provisions. The Board of Directors established the conversion price on the
Series C Preferred Stock 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 in
terms of dividend payments and liquidation preferences.
F-14
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. COMMON STOCK
SHAREHOLDER AGREEMENT
The Company and its stockholders are party to a Shareholders Agreement.
Among other provisions, the Shareholders Agreement contains a provision
regarding subscription rights. This provision provides 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 stockholders party to the agreement, 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.
STOCK SPLIT
On June 5, 2000, the Company's Board of Directors effected a
two-for-one common stock split in the form of a stock dividend and increased the
number of shares authorized from 5,000,000 to 15,000,000. As a result of this
action, 2,300,000 shares were issued to shareholders of record on June 5, 2000.
The accompanying consolidated financial statements and related financial
information contained herein have been restated to give effect for the stock
split.
WARRANTS
At January 1, 2000 and December 30, 2000, the holders of Series A
Preferred Stock held warrants to purchase an aggregate of 707,488 shares of
common stock at an exercise price of $2.50 per share. The exercise price and
number of warrant shares are both subject to adjustment in certain events.
8. 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. 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 the portion of its variable-rate
bank debt that is not covered by the swap.
On June 22, 1998, the Company entered into an interest rate swap
agreement with a bank with a notional amount of $7.5 million. Under the swap
agreement, the Company is required to pay a fixed rate of 5.83% on each March
24, June 24, September 24 and December 24, commencing on September 24, 1998. The
swap agreement terminates on June 25, 2001. The notional amount of the swap was
$7.5 million on January 1, 2000 and December 30, 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 made net interest payments in the amounts of $10,000 for the nine months
ended January 2, 1999 and $43,000 for the year ended January 1, 2000, and
received a net interest payment of $49,000 for the year ended December 30, 2000.
The fair market value of the swap at December 30, 2000 was approximately
$10,000.
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
F-15
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
9. STOCK-BASED COMPENSATION
STOCK OPTION PLAN
On July 15, 1998, the Company adopted the 1998 Stock Option Plan (the
"Option Plan"), which provided for the issuance of up to 530,748 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
1,164,082 shares of common stock under the Option Plan. All options have been
granted at fair 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. The stock option
grants in both 1999 and 2000 were made at a premium to the fair value on the
date of grant. The options outstanding reflected in the table below have a
weighted-average remaining contractual life of 8.21 years. Option activity for
the nine months ended January 2, 1999 and the years ended January 1, 2000 and
December 30, 2000 is summarized as follows:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Outstanding as of March 28, 1998 -- --
Granted 509,500 $7.50
Exercised -- --
Forfeited -- --
--------- ----------------
Outstanding as of January 2, 1999 509,500 $7.50
Granted 410,200 2.75
Exercised -- --
Forfeited (41,500) 7.50
--------- ----------------
Outstanding as of January 1, 2000 878,200 $5.28
Granted 150,500 5.35
Exercised (1,533) 5.85
Forfeited (34,167) 5.29
--------- ----------------
Outstanding as of December 30, 2000 993,000 $5.29
Exercisable as of December 30, 2000 396,812 $5.29
The Company has adopted only the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," pertaining to disclosure. The
following amounts are shown for disclosure purposes only, and may not be
representative of future calculations since additional options may be granted in
future years. If the Company had recognized compensation cost for stock-based
employee compensation in accordance with the provisions of SFAS No. 123, the
Company's net loss would have increased by approximately $36,000 for the nine
months ended January 2, 1999, $395,000 for the year ended January 1, 2000 and
$365,000 for the year ended December 30, 2000. The fair value of these options
was estimated at the date of grant using an option-pricing model with the
following weighted-average assumptions for the above periods: expected
volatility of 0%; risk-free interest rate of 4.77, 5.48 and 5.76 percent for
the nine months ended January 2, 1999 and the years ended January 1, 2000 and
December 30, 2000, respectively; expected option life of 10 years; and no
dividend yield.
F-16
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
NINE MONTHS ENDED YEAR ENDED YEAR ENDED
JANUARY 2, 1999 JANUARY 1, 2000 DECEMBER 30, 2000
---------------------- ----------------------- ---------------------
Current
Federal $ (419) $ (493) $ 60
State (74) (43) 10
-------- ------- ----
(493) (536) 70
Deferred
Federal 257 -- --
State 45 -- --
-------- ------- ----
302 -- --
-------- ------- ----
Provision (benefit) for income taxes $ (191) $ (536) $ 70
======== ======= ====
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):
NINE MONTHS ENDED YEAR ENDED YEAR ENDED
JANUARY 2, 1999 JANUARY 1, 2000 DECEMBER 30, 2000
--------------------------- ----------------------------- ---------------------------
Computed statutory tax (34.00)% $(531) (34.00)% $(1,604) (34.00)% $(1,141)
State income taxes, net of
federal benefit (6.00)% (94) (3.00)% (142) (6.00)% (201)
Permanent differences from
amortization of intangible
assets 41.90% 654 20.20% 953 27.90% 938
Increase in valuation
allowance -- -- 7.60% 357 17.10% 574
Other 6.80% 107 -- -- -- --
R&D credits (20.90)% (327) (2.10)% (100) (3.00)% (100)
-------------- ------------ --------------- ------------- ------------- -------------
Provision (benefit) for
income taxes (12.20)% $ (191) (11.30)% $(536) 2.00% $70
============== ============ =============== ============= ============= =============
F-17
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):
JANUARY 1, 2000 DECEMBER 30, 2000
--------------- -----------------
Current deferred taxes
Section 163(j) interest carryforwards $ 436 $ 440
Accrued expenses 245 349
Other 115 167
Less Valuation Allowance -- (341)
------- ------
Total current deferred taxes 796 615
------- ------
Noncurrent deferred taxes
Depreciation and UNICAP 238 288
Inventory 500 609
Other 272 527
------- ------
Less: Valuation allowance (357) (590)
------- ------
Total non-current deferred taxes 653 834
------- ------
$1,449 $1,449
======= ======
Management believes that realization of a portion of the Company's
deferred tax assets is uncertain and, accordingly, has recorded a valuation
allowance.
11. 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 2005. 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 $965,000 for the nine months ended January 2, 1999, $1,299,000 for the year
ended January 1, 2000 and $1,488,000 for the year December 30, 2000.
Minimum future lease payments as of December 30, 2000 under operating
leases are as follows (in thousands):
YEAR OPERATING LEASES
--------------------- ------------------------
2001 $1,499
2002 1,188
2003 150
2004 126
2005 103
----------
$3,066
==========
F-18
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEASE INCOME
The Company sub-leases certain of its office space for approximately
$7,700 per month under a sublease expiring in July 2001. Future income expected
under the sublease is $50,000.
12. INCENTIVE COMPENSATION ARRANGEMENTS
The Company instituted an employee bonus program in 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 $264,000 for the nine months ended January 2, 1999,
$293,000 for the year ended January 1, 2000 and $521,000, for the year ended
December 30, 2000 under this compensation arrangement.
The Company has a management incentive program under which
management-level employees are paid incentives based on the achievement of
certain performance criteria. The Company incurred expenses of $409,000 for the
year ended January 1, 2000 and $470,000 for the year ended December 30, 2000
under this compensation arrangement. There was no expense associated with this
program for the nine months ended January 2, 1999.
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 $215,000 for the nine months ended
January 2, 1999, $251,000 for the year ended January 1, 2000 and $304,000 for
the year ended December 30, 2000.
The Company has 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.
13. 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") in connection with the Recapitalization, the Company paid the
affiliate a $425,000 transaction fee in connection with the Power Ten
acquisition, and is obligated to pay the affiliate a $500,000 annual management
fee in advance on a semi-annual basis. 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 were $375,000 for the nine months
ended January 2, 1999 and $500,000 in each of the years ended January 1, 2000
and December 30, 2000.
F-19
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SUBSEQUENT EVENT
On March 27, 2001, Elgar, the Company and Bankers Trust entered into
a Fourth 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, 2001. In addition to receiving waivers for any covenant violations
both before and after giving effect to the Fourth Amendment, the Fourth
Amendment (i) reset the fixed charge coverage ratio for the quarter ending
closest to March 31, 2001 and for following quarters, (ii) reset the minimum
EBITDA levels for the quarter ending closest to March 31, 2001 and for
following quarters, (iii) reset the leverage ratio for the quarter ending
closest to March 31, 2001 and for the following quarters, (iv) defers the
$875,000 principal payment due on March 31, 2001 until December 31, 2001, (v)
defers the $875,000 principal payment due on June 30, 2001 as follows:
$292,000 is to be paid on March 31, 2002, $292,000 on June 30, 2002 and
$291,000 on September 30, 2002, and (vi) provides for Elgar to pay the banks
an additional 50 basis points of interest on loans outstanding from and after
March 27, 2001, with the payment of this additional interest to be made at
maturity or upon earlier repayment of the loans. The payments referenced in
(iv) and (v) are in addition to the currently scheduled principal payments.
Indebtedness under the Credit Facility bears interest at a floating rate
equal to, at Elgar's option, the Eurodollar Rate plus a margin of 2.75%, or
the Base Rate plus a margin of 1.75%. Pursuant to the Fourth Amendment to the
Credit Agreement, Elgar is to pay the banks an additional 50 basis points of
interest on loans outstanding from and after March 27, 2001, with such
payment of additional interest to be made at maturity or upon earlier
repayment of the loans. Management believes that the Company will be in
compliance with the financial covenants contained in the Fourth Amendment to
the Credit Agreement through 2001.
F-20
VALUATION AND QUALIFYING ACCOUNTS
ELGAR HOLDINGS, INC.
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND (a) END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
- ---------------------------------------------- ------------ ----------- ----------- ----------
Allowance for doubtful accounts (deducted from
accounts receivable)
Year ended December 30, 2000 $152 21 (10) 163
Year ended January 1, 2000 171 3 (22) 152
Nine months ended January 2, 1999 197 22 (48) 171
- ----------------------
(a) INCLUDES WRITE-OFFS AND REVERSALS.
S-1
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 29th day of March, 2001.
ELGAR HOLDINGS, INC.
ELGAR ELECTRONICS CORPORATION
By: /s/ Kenneth R. Kilpatrick
--------------------------------------
Kenneth R. Kilpatrick
President and Chief Executive Officer
SIGNATURE TITLE DATE
/s/ Kenneth R. Kilpatrick Director, President and Chief Executive March 29, 2001
- ------------------------- Officer (Principal Executive Officer)
Kenneth R. Kilpatrick
/s/ Christopher W. Kelford Vice President--Finance, Chief Financial March 29, 2001
- ------------------------- Officer and Treasurer (Principal Financial
Christopher W. Kelford and Accounting Officer)
/s/ John F. Lehman Director March 29, 2001
- -------------------------
John F. Lehman
/s/ Donald Glickman Director and Vice President March 29, 2001
- -------------------------
Donald Glickman
/s/ George Sawyer Director March 29, 2001
- -------------------------
George Sawyer
/s/ Stephen L. Brooks Director and Secretary March 29, 2001
- -------------------------
Stephen L. Brooks
Director March , 2001
- -------------------------
Oliver C. Boileau, Jr.
/s/ Thomas G. Pownall Director March 29, 2001
- -------------------------
Thomas G. Pownall
/s/ William Paul Director March 29, 2001
- -------------------------
William Paul
SIGNATURE TITLE DATE
/s/ Joseph A. Stroud Director March 29, 2001
- ----------------------
Joseph A. Stroud
/s/ Bruce D. Gorchow Director March 29, 2001
- ----------------------
Bruce D. Gorchow
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 29th day of March, 2001.
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.
SIGNATURE TITLE DATE
- -------------------------------------------- -------------------------------------- ---------------
/s/ Kenneth R. Kilpatrick President and Chief Executive Officer, March 29, 2001
- -------------------------------------------- Director (Principal Executive Officer)
Kenneth R. Kilpatrick
Vice President--Finance, Chief Financial March 29, 2001
/s/ Christopher W. Kelford Officer and Treasurer (Principal Financial
- -------------------------------------------- and Accounting Officer)
Christopher W. Kelford
/s/ Donald Glickman Director and Vice President March 29, 2001
- --------------------------------------------
Donald Glickman