**UNITED STATES****SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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** **

**FORM 10-Q**

 
| **(Mark  One)**                                                                                                                                                                                    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                               |   |
| **ý**                                                                                                                                                                                         | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934, AS AMENDED** |
|                                                                                                                                                                                               |   |
| **For  the quarterly period ended September 28, 2002**                                                                                                                                             |
|                                                                                                                                                                                               |   |
| **OR**                                                                                                                                                                                             |
|                                                                                                                                                                                               |   |
| **o**                                                                                                                                                                                              | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                               |   |
| **For  the transition period  from             to             ** |
|                                                                                                                                                                                               |   |
| **Commission file number 1-333-55797**                                                                                                                                                             |

 

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| **ELGAR  HOLDINGS, INC.**                                                    |
|------------------------------------------------------------------------------|
| (Exact name of Registrant as specified in its charter)                       |
|                                                                         |   |   |
| **Delaware**                                                                 |   | **51-0373329** |
| (State or other  jurisdiction of  incorporation or organization)             |   | (I.R.S. Employer  Identification No.) |
|                                                                         |   |   |
| **9250 Brown Deer Road  San Diego, California**                              |   | **92121-2294** |
| (Address of Principal  Executive Offices)                                    |   | (Zip Code) |
|                                                                         |   |   |
| Registrant’s telephone number, including area code: **(858)  450-0085** |

 

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Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934, as amended, during the preceding 12 months (or for suchshorter 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  ý     No o

 

As of November 11, 2002, the number of sharesoutstanding of the Registrant’s Common Stock was 4,602,433.

 

 

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**ELGAR HOLDINGS, INC.**

** **

**QUARTERLY REPORT ON FORM 10-Q**

** **

**INDEX**

 
| **Part I**   | **Financial Information**                                                                                                                          |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                                               |
| Item 1       | Consolidated  Financial Statements                                                                                                                 |
|         |                                                                                                                                               |
|         | Consolidated  Statements of Operations for the three and nine months ended September 29,  2001 and September 28, 2002 (unaudited)   |
|         |                                                                                                                                               |
|         | Consolidated Balance Sheets  as of December 29, 2001 and September 28, 2002 (unaudited)                                                       |
|         |                                                                                                                                               |
|         | Consolidated  Statements of Cash Flows for the nine months ended September 29, 2001  (unaudited) and September 28, 2002 (unaudited) |
|         |                                                                                                                                               |
|         | Notes to  Consolidated Financial Statements (unaudited)                                                                                            |
|         |                                                                                                                                               |
| Item  2      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                        |
|         |                                                                                                                                               |
| Item  3      | Quantitative  and Qualitative Disclosures About Market Risk                                                                                        |
|         |                                                                                                                                               |
| Item 4       | Controls and  Procedures                                                                                                                           |
|         |                                                                                                                                               |
| **Part  II** | **Other  Information**                                                                                                                             |
|         |                                                                                                                                               |
| Item 5       | Other Information                                                                                                                                  |
|         |                                                                                                                                               |
| Item 6       | Exhibits and  Reports on Form 8-K                                                                                                                  |
|         |                                                                                                                                               |
|         | Signature  and Rule 13a-14 Certifications                                                                                                          |

 

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**PARTI.  FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

**ELGAR HOLDINGS, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited) (dollars in thousands)**

 
|                                            |   | **For the Three Months Ended** |   | **For the Nine Months Ended** |   |
|-------------------------------------------------|--------|--------------------------------|--------|-------------------------------|--------|
|                                            |   | **Sept. 29, 2001**             |   | **Sept. 28, 2002**            |   | **Sept. 29, 2001** |   | **Sept. 28, 2002** |   |
| Net sales                                       |   | $                              | 12,901 |                          | $      | 13,932 |   | $ | 45,506 |   | $ | 35,023 |   |
| Cost of sales                                   |   | 8,085                          |   | 8,228                         |   | 28,410 |   | 21,420 |   |
| Gross profit                                    |   | 4,816                          |   | 5,704                         |   | 17,096 |   | 13,603 |   |
| Selling, general  and administrative expenses   |   | 2,701                          |   | 2,476                         |   | 8,517 |   | 7,699 |   |
| Research,  development and engineering expenses |   | 1,462                          |   | 1,090                         |   | 4,754 |   | 3,667 |   |
| Amortization  expense                           |   | 609                            |   | 12                            |   | 1,826 |   | 36 |   |
| Operating income                                |   | 44                             |   | 2,126                         |   | 1,999 |   | 2,201 |   |
| Interest expense                                |   | 2,641                          |   | 3,023                         |   | 8,024 |   | 8,960 |   |
| Net loss                                        |   | $                              | (2,597 | )                             | $      | (897 | ) | $ | (6,025 | ) | $ | (6,759 | ) |

 

*Theaccompanying Notes to Consolidated Financial Statements are an integral part ofthese Financial Statements*

 

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**ELGAR HOLDINGS, INC. AND SUBSIDIARY**

**CONSOLIDATEDBALANCE SHEETS**

**(dollars in thousands)**

** **
|                                                                                                                               |   | **December  29, 2001** |       | **Sept. 28,  2002** |       |
|------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|---------------------|------------|
|                                                                                                                               |   |                   |       | **(unaudited)**     |       |
| **ASSETS**                                                                                                                         |   |                   |       |                |       |
| CURRENT ASSETS:                                                                                                                    |   |                   |       |                |       |
| Cash and cash  equivalents                                                                                                         |   | $                      | 2,063      |                | $          | 180 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $204 and $156,  respectively                                       |   | 6,942                  |       | 7,141               |       |
| Inventories                                                                                                                        |   | 9,580                  |       | 7,249               |       |
| Prepaids and  other                                                                                                                |   | 325                    |       | 275                 |       |
| Total current assets                                                                                                               |   | 18,910                 |       | 14,845              |       |
|                                                                                                                               |   |                   |       |                |       |
| PROPERTY, PLANT  AND EQUIPMENT, net                                                                                                |   | 2,674                  |       | 2,481               |       |
| GOODWILL, net of  accumulated amortization of $11,419                                                                              |   | 24,381                 |       | 24,381              |       |
| OTHER ASSETS,  net of accumulated amortization of $2,994 and $2,656, respectively                                                  |   | 3,697                  |       | 5,110               |       |
|                                                                                                                               |   | $                      | 49,662     | ** **          | $          | 46,817 | ** ** |
|                                                                                                                               |   |                   | ** ** |                | ** ** |
| **LIABILITIES AND  STOCKHOLDERS’ DEFICIT**                                                                                    |   |                   |       |                |       |
| CURRENT  LIABILITIES:                                                                                                              |   |                   |       |                |       |
| Accounts payable                                                                                                                   |   | $                      | 2,576      |                | $          | 2,434 |   |
| Accrued  liabilities                                                                                                               |   | 10,237                 |       | 9,547               |       |
| Line of credit                                                                                                                     |   | 5,015                  |       | —              |       |
| Current portion  of long-term debt                                                                                                 |   | 8,783                  |       | —              |       |
| Total current  liabilities                                                                                                         |   | 26,611                 |       | 11,981              |       |
|                                                                                                                               |   |                   |       |                |       |
| LONG-TERM DEBT,  net of current portion                                                                                            |   | 90,000                 |       | 110,000             |       |
| Total liabilities                                                                                                                  |   | 116,611                |       | 121,981             |       |
| SERIES A 10%  CUMULATIVE REDEEMABLE PREFERRED STOCK,  no par value, 20,000 shares authorized, 10,000 shares issued and outstanding |   | 12,405                 |       | 12,530              |       |
| 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, 4,602,433 shares issued and  outstanding                              |   | 46                     |       | 46                  |       |
| Additional  paid-in capital                                                                                                        |   | (68,567                | )          | (68,192             | )          |
| Accumulated  deficit                                                                                                               |   | (19,833                | )          | (28,548             | )          |
| Total  stockholders’ deficit                                                                                                  |   | (79,354                | )          | (87,694             | )          |
|                                                                                                                               |   | $                      | 49,662     |                | $          | 46,817 |   |

 

*Theaccompanying Notes to Consolidated Financial Statements are an integral part ofthese Financial Statements*

 

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**ELGARHOLDINGS, INC. AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(unaudited) (dollars in thousands)**

 
|                                                                         |   | **For the Nine Months Ended** |   |
|------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                         |   | **Sept. 29, 2001**            |   | **Sept. 28, 2002** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                       |   |                          |   |   |   |
| Net loss                                                                     |   | $                             | (6,025 | ) | $ | (6,759 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                          |   |   |   |
| Amortization of  goodwill                                                    |   | 1,826                         |   | — |   |
| Amortization of  deferred financing costs and non-compete agreements         |   | 550                           |   | 1,247 |   |
| Depreciation and  amortization on property, plant and equipment              |   | 687                           |   | 607 |   |
| Loss (gain) on  sales of property, plant and equipment                       |   | 38                            |   | (5 | ) |
| Contributed  management services                                             |   | —                        |   | 375 |   |
| Changes in  operating assets and liabilities:                                |   |                          |   |   |   |
| Accounts  receivable                                                         |   | 3,068                         |   | (199 | ) |
| Inventories                                                                  |   | (663                          | )      | 2,331 |   |
| Prepaids and  other                                                          |   | 159                           |   | 50 |   |
| Accounts payable                                                             |   | 215                           |   | (142 | ) |
| Accrued  liabilities                                                         |   | (3,444                        | )      | (2,521 | ) |
| Net cash used in  operating activities                                       |   | (3,589                        | )      | (5,016 | ) |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                       |   |                          |   |   |   |
| Purchases of  property, plant and equipment                                  |   | (1,052                        | )      | (415 | ) |
| Proceeds from  sales of property, plant and equipment                        |   | 4                             |   | 6 |   |
| Net cash used in  investing activities                                       |   | (1,048                        | )      | (409 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                       |   |                          |   |   |   |
| Proceeds from  exercise of stock options                                     |   | 5                             |   | — |   |
| Proceeds from  borrowings                                                    |   | 5,000                         |   | 20,800 |   |
| Repayment of  borrowings                                                     |   | (875                          | )      | (14,598 | ) |
| Bank overdraft                                                               |   | 286                           |   | — |   |
| Deferred  financing costs                                                    |   | —                        |   | (2,660 | ) |
| Net cash  provided by financing activities                                   |   | 4,416                         |   | 3,542 |   |
|                                                                         |   |                          |   |   |   |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                   |   | (221                          | )      | (1,883 | ) |
| CASH AND CASH  EQUIVALENTS, beginning of period                              |   | 224                           |   | 2,063 |   |
| CASH AND CASH  EQUIVALENTS, end of period                                    |   | $                             | 3      |   | $ | 180 |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                           |   |                          |   |   |   |
| Cash paid for  interest                                                      |   | $                             | 9,437  |   | $ | 9,901 |   |
|                                                                         |   |                          |   |   |   |
| NON-CASH  INVESTING AND FINANCING ACTIVITIES:                                |   |                          |   |   |   |
| Series A  preferred stock dividend-in-kind                                   |   | $                             | 113    |   | $ | — |   |
| Series A, B and  C preferred stock dividend accrual                          |   | 1,378                         |   | 1,831 |   |
| Accretion of  discount on Series A preferred stock                           |   | 125                           |   | 125 |   |

 

*Theaccompanying Notes to Consolidated Financial Statements are an integral part ofthese Financial Statements*

 

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**ELGARHOLDINGS, INC. AND SUBSIDIARY**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**(unaudited)**

 

**1. Company Operations**

 

Elgar Holdings, Inc., a Delaware corporation (the“Company”), manufactures and sells programmable power supply units through itswholly owned subsidiary, Elgar Electronics Corporation (“Elgar”), forcommercial and military applications. The Company’s primary sales are within the United States and Europe.  The Company operates in one businesssegment.

 

**2. Summary of Significant AccountingPolicies**

 

*Principlesof Consolidation/Basis of Presentation*

 

The accompanying consolidated financial statementsinclude the accounts of the Company and its wholly owned subsidiary,Elgar.  All significant intercompanyaccounts and transactions have been eliminated.  These financial statements have been prepared in accordance withaccounting principles generally accepted in the United States and with theinstructions to Form 10-Q.  The Companysuggests that these financial statements be read in conjunction with thefinancial statements and notes thereto included in the Company’s Form 10-K forthe fiscal year ended December 29, 2001. These financial statements include all adjustments (consisting of normalrecurring adjustments) that are, in the opinion of management, necessary for afair presentation of financial condition, results of operations and cash flowsfor such periods.

 

*InterimAccounting Periods*

 

The Company operates and reports financial results ona fiscal year of 52 or 53 weeks ending the Saturday closest to December31.  Interim periods include 13 or 14weeks ending the last Saturday closest to the end of the quarter.  Results of operations for the three and ninemonths ended September 28, 2002 are not necessarily indicative of the resultsto be expected for the Company’s fiscal year ending December 28, 2002.

 

*Use of Estimates*

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of sales andexpenses during the reporting period. Actual results could differ from those estimates.

 

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*Inventories*

 

Inventories, which include materials, direct labor andmanufacturing overhead, are stated at the lower of cost (first–in, first–out)or market and are comprised of the following (in thousands):

 
|            |   | **December 29, 2001** |   | **September 28, 2002** |   |
|-----------------|--------|-----------------------|--------|------------------------|--------|
| Raw materials   |   | $                     | 7,268  |                   | $      | 5,096 |   |
| Work-in-process |   | 1,261                 |   | 1,411                  |   |
| Finished goods  |   | 1,051                 |   | 742                    |   |
| Total           |   | $                     | 9,580  |                   | $      | 7,249 |   |

* *

*Other Assets*

 

Other assets, net of accumulatedamortization of $2,994 and $2,656, respectively, are comprised of the following(in thousands):

 
|                   |   | **December 29, 2001** |   | **September 28, 2002** |   |
|------------------------|--------|-----------------------|--------|------------------------|--------|
| Debt financing costs   |   | $                     | 3,630  |                   | $      | 5,079 |   |
| Non-compete agreements |   | 67                    |   | 31                     |   |
| Total                  |   | $                     | 3,697  |                   | $      | 5,110 |   |

* *

*Recent Accounting Pronouncements*

 

In June 2001, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards (“SFAS”) No. 141, “Business Combinations”.  This statement addresses financial accounting and reporting forbusiness combinations and supersedes Accounting Principles Board (“APB”)Opinion No. 16, “Business Combinations,” and SFAS No. 38, “Accounting forPreacquisition Contingencies of Purchased Enterprises.”  All business combinations in the scope ofthis statement are to be accounted for using one method, the purchasemethod.  The Company adopted theprovisions of SFAS No. 141 for all business combinations initiated afterJune 30, 2001.

 

In June 2001, the FASB issuedSFAS No. 142, “Goodwill and Other Intangible Assets”.  This statement addresses financial accounting and reporting foracquired goodwill and other intangible assets and supersedes AccountingPrinciples Board (“APB”) Opinion No. 17, “Intangible Assets.”  SFAS No. 142 addresses how intangibleassets that are acquired individually or with a group of other assets (but notthose acquired in a business combination) should be accounted for in financialstatements upon their acquisition.  Thisstatement also addresses how goodwill and other intangible assets should beaccounted for after they have been initially recognized in the financialstatements.  Upon adoption of SFASNo. 142, goodwill is no longer subject to amortization over its estimateduseful life.  The Company completed theinitial impairment test for goodwill as of December 30, 2001.  This test confirmed that the fair value ofthe Company exceeds the carrying value, and that no impairment loss needed tobe recognized upon adoption of SFAS No. 142.  The Company adopted SFAS No. 142 effective December 30,2001, the effect of which was to classify goodwill separately on theaccompanying consolidated balance sheets and to cease the amortization of suchgoodwill, which would have been $597,000 and $1,790,000 in the three and ninemonths ended September 28, 2002, respectively. Net loss

 

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for the three and nine months ended September 29,2001, excluding amortization of goodwill, would have been $2,000,000 and$4,235,000 compared to $2,597,000 and $6,025,000, respectively.

 

In August 2001, the FASB issuedSFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets.”  SFAS No. 144 addressesfinancial accounting and reporting for the impairment or disposal of long-livedassets. SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and theaccounting and reporting provisions of APB Opinion No. 30, “Reporting theResults of Operations—Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions,” for the disposal of a segment of a business (as previouslydefined in that opinion).  The Companyadopted SFAS No. 144 effective December 30, 2001.  The adoption of SFAS No. 144 did not have a material impact onthe Company’s financial position or results of operations.

 

In June 2002, the FASB issuedSFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities,” which addresses financial accounting and reporting for costsassociated with exit or disposal activities and supersedes Emerging Issues TaskForce (“EITF”) Issue 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated withan exit or disposal activity be recognized when the liability is incurred.  Under EITF Issue 94-3, a liability for anexit cost was recognized at the date of an entity’s commitment to an exitplan.  SFAS No. 146 alsoestablishes that the liability should initially be measured and recorded atfair value.  The Company will adopt theprovisions of SFAS No. 146 for exit or disposal activities that areinitiated after December 31, 2002.

 

**3. Concentrations of Credit Risk**

 

Sales to one customer accounted for approximately 16%and 19% of the Company’s net sales in the quarters ended September 28, 2002 andSeptember 29, 2001, respectively.  Inthe nine months ended September 28, 2002 and September 29, 2001, sales to onecustomer accounted for approximately 14% and 13% of the Company’s net sales,respectively.  No other customerindividually represented more than 10% of net sales in the three and nine monthsended September 28, 2002 and September 29, 2001.  The Company performs ongoing credit evaluation of its customers’financial condition, and maintains reserves for potential credit losses.

 

**4. Senior Notes and Credit Facilities**

 

*Senior Notes*

 

In February 1998, the Company issued $90.0million aggregate principal amount of Senior Notes due 2008 (the “SeniorNotes”).  The Senior Notes bear interestat a rate of 9.875% per annum, payable semi-annually on February 1st and August1st, and have a stated maturity of February 1, 2008.

 

The Senior Notes are general unsecured obligations ofthe Company and rank senior to all existing and future subordinatedindebtedness of the Company.  Theobligations of the Company as a guarantor of Elgar’s obligations under the NewCredit Facility (as defined below) are secured by substantially all of theassets of the Company.  Accordingly,such secured indebtedness effectively ranks senior to the Senior Notes to theextent of such assets.

 

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The Senior Notes restrict, among other things, theCompany’s ability to incur additional indebtedness, pay dividends or makecertain other restricted payments, incur liens, sell preferred stock ofsubsidiaries, apply net proceeds from certain asset sales, merge or consolidatewith any other person, sell, assign, transfer, lease, convey or otherwisedispose of substantially all of the assets of the Company or enter into certaintransactions with affiliates.  TheSenior Notes are fully and unconditionally guaranteed by the Company’s whollyowned subsidiary, Elgar.

 

*Old Credit Facility*

 

The Company and Elgar were party to a credit agreementwith Deutsche Bank Trust Company Americas, successor in interest to BankersTrust Company (“Deutsche Bank”), as agent and sole lender, that was enteredinto in connection with the Company’s February 1998 recapitalization.  On June 26, 2002, in connection withentering into the new credit facility described below, the Deutsche Bank creditfacility was repaid in full and terminated.

 

*New Credit Facility*

 

On June 26, 2002, the Company, Elgar, asborrower, and Ableco Finance LLC, as agent (“Ableco”), entered into a financingagreement (the “New Credit Facility”) that provides Elgar with (a) a$15,000,000 term loan (the “Term Loan”) that bears interest at a reference rateplus 5.50 percentage points, but in no event at a rate less than 10.25%, and(b) a revolving credit facility (the “Revolver”) not to exceed $10,000,000at any time that bears interest at a reference rate plus 3.00 percentagepoints, but in no event at a rate less than 7.75%.  The reference rate means the rate of interest publicly announcedby JPMorgan Chase Bank from time to time as its reference rate, base rate orprime rate.  Borrowings outstandingunder the New Credit Facility mature on June 25, 2006.

 

Indebtedness under theNew Credit Facility is (i) secured by a first priority security interestin substantially all of the assets of the Company and Elgar (including, withoutlimitation, accounts receivable, inventory, machinery, equipment, contracts andcontract rights, trademarks, copyrights, patents, license agreements andgeneral intangibles), (ii) guaranteed by the Company on a senior basis and(iii) secured by a pledge of all of the outstanding capital stock ofElgar.

 

The New Credit Facilitycontains customary covenants of the Company and Elgar, including, withoutlimitation, restrictions on (i) the incurrence of debt, (ii) the saleof assets, (iii) mergers, acquisitions and other business combinations,(iv) voluntary prepayment of other debt of the Company or Elgar,(v) transactions with affiliates, (vi) capital expenditures and(vii) investments, as well as prohibitions on the payment of certaindividends to, or, under certain circumstances, the repurchase or redemption ofstock from, stockholders.  In addition,the New Credit Facility requires the Company and Elgar to be in compliance withfinancial covenants pertaining to senior leverage ratios, fixed-charge ratios,capital expenditures and minimum levels of tangible net worth and EBITDA.  The New Credit Facility contains customaryevents of default, including those relating to breaches of the covenantsdiscussed above.

 

Advances under theRevolver are limited to the lesser of (a) $10.0 million and(b)(i) 85% of eligible accounts receivable, less a dilution reserve thatrelates to bad-debt write downs and discounts and advertising allowances paidto an account debtor, plus (ii) 60% of eligible inventory, less the amountof any reserves that Ableco may deem appropriate in the exercise of itsreasonable business judgment based upon its lending practices.  In addition, the New Credit Facilityprovides that it is a condition to any loan

 

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made under the Revolverthat, after giving effect to such loan, at least $1,000,000 of availabilityremains undrawn under the Revolver.

 

On June 26, 2002, Elgar used approximately$14.8 million of the proceeds from the Term Loan to repay in full theDeutsche Bank credit facility.  AtSeptember 28, 2002, the outstanding balance of the Revolver was $5.0 million,with an additional $2.7 million of borrowing capacity remaining under theformula described above, and the Term Loan was fully drawn.  The Company intends to use funds availableto it under the Revolver for working capital purposes and debt serviceobligations.

 

Under the terms of the New Credit Facility, Elgar paida $500,000 fee to Ableco at closing, and is obligated to pay Ableco (i) a$250,000 fee on the earliest of June 26, 2003, the date on which all of theobligations under the New Credit Facility are accelerated or the date on whichall of the obligations under the New Credit Facility are paid in full,(ii) a $187,500 fee on the earliest of June 26, 2004 or the date onwhich the obligations under the New Credit Facility are accelerated and(iii) a $187,500 fee on the earliest of June 26, 2005 or the date onwhich the obligations under the New Credit Facility are accelerated.

 

**5. Convertible Preferred Stock**

 

In connection with Elgar’s acquisition of Power Ten,the Company issued 5,000 shares of Series B 6% cumulative convertible preferredstock (the “Series B Preferred Stock”) for cash proceeds of$5.0 million.  This offering, whichwas made in compliance with the subscription rights contained in the Company’sshareholders agreement, was completed on May 29, 1998.

 

In connection with entering into an amendment to theold credit facility with Deutsche Bank, the Company’s majority stockholder madea $4.0 million capital contribution to the Company.  In order to effectuate the contribution, the Company issued 4,000shares of Series C 6% cumulative convertible preferred stock (the “Series CPreferred Stock”) for cash proceeds of $4.0 million.  This offering, which was made in compliancewith the subscription rights contained in the Company’s shareholders agreement,was completed on March 30, 1999.

 

Dividends are payable to the holders of the Series BPreferred Stock and Series C Preferred Stock at the annual rate per share of 6%times the sum of (x) $1,000 and (y) accrued but unpaid dividends.  For the Series B Preferred Stock, dividendsare payable semi-annually on April 30 and October 31.  For the Series C Preferred Stock, dividends are payablesemi-annually on March 31 and September 30. These dividends are payable when and if declared by the board ofdirectors out of funds legally available for such payment.  During the nine months ended September 28,2002 and September 29, 2001, the Company accrued $280,653 and $264,543,respectively, for dividends on the Series B Preferred Stock, and $213,093 and$200,856, respectively, for dividends on the Series C PreferredStock.  During the three months endedSeptember 28, 2002 and September 29, 2001, the Company accrued $94,779 and$89,337, respectively, for dividends on the Series B Preferred Stock, and$71,727 and $67,608, respectively, for dividends on the Series C PreferredStock.

 

**6. Series A Redeemable PreferredStock**

 

Dividends are payablequarterly to the holders of Series A cumulative redeemable preferred stock at10% per year unless the dividends are not paid for four consecutive quarters,in which case the dividends are payable at 12% per year.  The dividends were payable in-kind throughJanuary 31, 2001

 

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and in cashthereafter.  Under the terms of theindenture governing the Company’s $90.0 million of senior notes, the Company isprohibited from paying cash dividends unless its consolidated fixed chargecoverage ratio is at least 2.0 to 1.0. The Company does not anticipate that this ratio will equal or exceed 2.0to 1.0 during 2002.  As a result, theCompany has accrued dividends of $1,337,025 during the nine months endedSeptember 28, 2002 and $912,420 from February 1, 2001 to September 29,2001.  During the three months endedSeptember 28, 2002 and September 29, 2001, the Company accrued dividends of$462,483 and $346,447, respectively, on the Series A preferred stock.  The Company anticipates that it will continueto accrue dividends, rather than pay cash dividends, on the Series A preferredstock during the remainder of fiscal 2002.

 

**7. Related Party Transactions**

 

*Contributed Management Services*

 

In February 1998, the Company entered into amanagement agreement with J.F. Lehman & Company (“Lehman”), anaffiliate of the Company’s principal stockholder (the “ManagementAgreement”).  Under the terms of theManagement Agreement, the Company was obligated to pay Lehman a $500,000 annualmanagement fee in advance on a semi-annual basis.  In September 1998, the Company and Lehman amended the ManagementAgreement and concurrently entered into a management services agreement withLehman, the combined effect of which was to further delineate the managementservices to be provided by Lehman and to reduce the term of the ManagementAgreement from ten years to five years. Under the Company’s old credit facility with Deutsche Bank, the Companywas precluded from paying management fees to Lehman during recent periods whenDeutsche Bank had waived events of default, although Lehman continued toprovide management services to the Company during such times.  Under the New Credit Facility with Ableco,the Company is prohibited from paying management fees to Lehman, althoughLehman continues to provide these management services to the Company.  Beginning December 30, 2001, theCompany recorded the contributed management services as an expense and acorresponding capital contribution.  Thetotal amount of expense and additional paid-in capital recorded for theseservices during the three and nine months ended September 28, 2002 was $125,000and $375,000, respectively.

 

During the nine months ended September 28, 2002,the Company reimbursed Lehman $217,000 for expenses Lehman incurred inconnection with replacing the old credit facility with the New Credit Facilitywith Ableco.  Such amount wascapitalized and is included in deferred financing fees.  In addition, the Company reimbursed Lehman$109,000 for fees and expenses Lehman incurred to a third party executivesearch firm in connection with the hiring of Joseph Budano.  Mr. Budano became the Company’s ChiefExecutive Officer as of August 26, 2002.

 

*RacalInstruments*

 

Racal Instruments (“Racal”), a customer of theCompany, was acquired on November 2, 2001 by a group of investors thatincludes affiliates of the Company’s largest stockholder.  In addition, certain members of theCompany’s board of directors are also members of Racal’s board ofdirectors.  As a result, Racal isconsidered a related party.  Sales bythe Company to Racal were approximately $373,000 and $1,799,000 during the ninemonths ended September 28, 2002 and September 29, 2001, respectively.  During the three months ended September 28,2002 and September 29, 2001, sales by the Company to Racal were approximately$194,000 and $240,000, respectively.

 

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*Capital Call between J. F. Lehman Equity Investors I, L.P.and Ableco*

 

In conjunction with the New Credit Facility, the Company’smajority stockholder, J.F. Lehman Equity Investors I, L.P., entered into acapital call agreement with Ableco. Pursuant to the terms of this agreement, the majority stockholder agreedto participate in $3.0 million of the Term Loan on a *pari passu* basis with Ableco if the Company fails to meet aminimum EBITDA covenant for an initial test period, which consists of the thirdand fourth quarters of fiscal 2002. This agreement will terminate upon satisfactory evidence of performanceafter the initial test period.

 

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**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

The following discussion should be read in conjunctionwith the unaudited consolidated financial statements and notes thereto of theCompany included elsewhere herein.

 

This report contains certain forward-lookingstatements and information relating to the Company that are based on thebeliefs of management as well as assumptions made by, and information currentlyavailable to, management.  The words“anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends” andsimilar expressions, as they relate to the Company or its management, areintended to identify forward-looking statements.  Such statements reflect the current views of the Company, withrespect to future events and are subject to certain risks, uncertainties andassumptions, that could cause actual results to differ materially from thoseexpressed in any forward-looking statement, including, without limitation:competition from other manufacturers in the Company’s industry, loss of keyemployees and/or general economic conditions. Should one or more of these risks or uncertainties materialize, orshould underlying assumptions prove incorrect, actual results may varymaterially from those described herein as anticipated, believed, estimated orexpected.  The Company does not intendto update these forward-looking statements.

 

**Resultsof Operations**

 

The following table sets forth certain statement ofoperations information for the Company as a percentage of net sales for thethree and nine months ended September 29, 2001 and September 28, 2002:

 
|                                            |   | **Three  Months Ended** |       | **Nine  Months Ended** |   |
|-------------------------------------------------|--------|-------------------------|------------|------------------------|--------|
|                                            |   | **Sept. 29,  2001**     |       | **Sept. 28,  2002**    |   | **Sept. 29,  2001** |   | **Sept. 28,  2002** |   |
|                                            |   | **(unaudited)**         | ** ** | **(unaudited)**        |   |
| **Statement of Operations Data:**               |   |                    |       |                   |   |   |   |   |   |
| Net sales                                       |   | 100.0                   | %          | 100.0                  | %      | 100.0 | % | 100.0 | % |
| Cost of sales                                   |   | 62.7                    |       | 59.1                   |   | 62.4 |   | 61.2 |   |
| Gross profit                                    |   | 37.3                    |       | 40.9                   |   | 37.6 |   | 38.8 |   |
| Selling, general  and administrative expenses   |   | 20.9                    |       | 17.7                   |   | 18.7 |   | 22.0 |   |
| Research,  development and engineering expenses |   | 11.4                    |       | 7.8                    |   | 10.5 |   | 10.4 |   |
| Amortization  expense                           |   | 4.7                     |       | 0.1                    |   | 4.0 |   | 0.1 |   |
| Operating income                                |   | 0.3                     | %          | 15.3                   | %      | 4.4 | % | 6.3 | % |

 

*Comparisonof the Three Months Ended September 28, 2002 to the Three Months EndedSeptember 29, 2001*

 

*Netsales. *Net sales forthe quarter ended September 28, 2002 were $13.9 million, an increase of$1.0 million, or 7.8%, from net sales of $12.9 million for the quarterended September 29, 2001.  This increasewas primarily attributable to the gradual recovery in the economy.  In the quarter ended September 28, 2002,sales of Sorensen and Power Ten products, which are part of the programmable DCpower products, were $7.0 million, an increase of $1.4 million fromthe quarter ended September 29, 2001. Sales of the CASS Program products were $2.7 million, an increase of$0.5 million from the

 

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comparable period in the prior year. Partially offsetting these increases in the quarter endedSeptember 28, 2002, Space System product sales were $1.2 million, adecrease of $0.9 million from the quarter ended September 29, 2001.

 

*Grossprofit.*  Gross profitfor the quarter ended September 28, 2002 was $5.7 million, an increase of$0.9 million, or 18.8%, from gross profit of $4.8 million for thequarter ended September 29, 2001.  Theincrease in gross profit was partially a result of the increase in net sales whencompared to the quarter ended September 29, 2001.  The gross profit percentage for the quarter ended September 28,2002 was 40.9%, up from 37.3% for the quarter ended September 29, 2001. Thispercentage increase was partially due to the elimination of certain fixed costsas a result of the consolidation of the Power Ten operations with Elgar’soperations at the Company’s headquarters in San Diego and the implementation ofdemand flow technology, resulting in lower overall production costs whencompared to the quarter ended September 29, 2001.

 

*Selling,general & administrative expenses.*  Selling, general and administrative(“SG&A”) expenses were $2.5 million for the quarter ended September28, 2002, a decrease of $0.2 million, or 7.4%, from SG&A expenses of$2.7 million for the quarter ended September 29, 2001.  SG&A expenses decreased as a percentageof net sales from 20.9% in the quarter ended September 29, 2001 to 17.7% in thequarter ended September 28, 2002.  Thedollar decrease was primarily due to reductions to expenses in commissions andadvertising, and savings related to the Power Ten consolidation, partiallyoffset by additional costs incurred as a result of transitions in the chiefexecutive officer and chief financial officer positions.

 

*Research, development andengineering expenses.* Research, development and engineering (“RD&E”) expenses were $1.1million for the quarter ended September 28, 2002, a decrease of $0.4 million,or 26.7%, from RD&E expenses of $1.5 million for the quarter endedSeptember 29, 2001.  RD&E expensesdecreased as a percentage of net sales from 11.4% in the quarter endedSeptember 29, 2001 to 7.8% in the comparable 2002 period.  The decrease in dollars was primarily due tolower headcount and compensation expenses in research and development ascompared to the quarter ended September 29, 2001, and a result of the Power Tenconsolidation.

 

*Amortization expense.*  Amortization expense was $12,000 for thequarter ended September 28, 2002, a decrease of $0.6 million from amortizationexpense of $0.6 million for the quarter ended September 29, 2001.  Amortization expense in the quarter endedSeptember 28, 2002 related to non-compete agreements entered into with theformer owners of Power Ten, while amortization expense in the prior periodincluded amortization of goodwill associated with the April 1996 acquisition ofElgar by the predecessor to Elgar Holdings, Inc. and the May 1998acquisition of Power Ten, as well as $12,000 of expense relating to thenon-compete agreements.  Pursuant toSFAS No. 142, beginning December 30, 2001, goodwill is no longeramortized, which accounts for the differences between quarters.

 

*Operatingincome.*  Operatingincome was $2.1 million for the quarter ended September 28, 2002, an increaseof $2.1 million from operating income of $44,000 for the quarter endedSeptember 29, 2001.  Operating incomeincreased as a percentage of net sales from 0.3% for the quarter endedSeptember 29, 2001 to 15.3% for the quarter ended September 28, 2002, due tothe factors discussed above.

 

*Interestexpense. *Interestexpense was $3.0 million in the quarter ended September 28, 2002, an increaseof $0.4 million, or 15.4%, from interest expense of $2.6 million in the quarterended September 29, 2001.  Interestexpense increased as a percentage of net sales from 20.5% in the quarter endedSeptember 29, 2001 to 21.7% in the comparable 2002 period.  The increase in dollars was a result

 

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of both higher outstanding borrowings and higher interest rates onthose borrowing in the quarter ended September 28, 2002 as compared to theyear-earlier quarter.

 

*Incometaxes. *Income taxesfor both of the quarters ended September 28, 2002 and September 29, 2001were zero.  Losses generated in thesequarters do not have a carryback benefit and the resulting net operating losscarryforwards have not been recognized as a benefit because future realizationis uncertain.

 

*Netloss. *Net loss was$0.9 million in the quarter ended September 28, 2002, a decrease of$1.7 million, or 65.4%, from a net loss of $2.6 million for the quarterended September 29, 2001.  In order toimprove operating results, we have undertaken a number of initiatives, thebenefits of which have positively impacted our results for the quarter endedSeptember 28, 2002.  These includereduction of indirect headcount, initiating cost reduction efforts in themanufacturing and procurement processes, and the relocation of our Power Tenoperations to our San Diego facilities.

 

*Comparisonof the Nine Months Ended September 28, 2002 to the Nine Months Ended September29, 2001*

 

*Netsales. *Net sales forthe nine months ended September 28, 2002 were $35.0 million, a decrease of$10.5 million, or 23.1%, from net sales of $45.5 million for the ninemonths ended September 29, 2001.  Thisdecrease was primarily attributable to the overall decline in the economy andwas across virtually all product lines. In the nine months ended September 28, 2002, sales of Sorensen and PowerTen products, which are part of the programmable DC power products, were$14.7 million and $4.7 million, respectively, a decrease of$2.9 million and $1.7 million, respectively, from the nine monthsended September 29, 2001.  Sales ofother DC power products were $0.9 million, a decrease of $0.9 million from thecomparable period in the prior year.  Inthe nine months ended September 28, 2002, AC power product sales were $3.3million, a decrease of $1.0 million, and Space System product sales were $2.4million, a decrease of $2.7 million, from the nine months ended September 29,2001.

 

*Grossprofit.*  Gross profitfor the nine months ended September 28, 2002 was $13.6 million, a decreaseof $3.5 million, or 20.5%, from gross profit of $17.1 million for thenine months ended September 29, 2001. The decrease in gross profit was mainly due to the decrease in net saleswhen compared to the nine months ended September 29, 2001.  The gross profit percentage for the ninemonths ended September 28, 2002 was 38.8%, up from 37.6% for the nine monthsended September 29, 2001.  Thispercentage increase was partially due to the elimination of certain fixed costsas a result of the consolidation of the Power Ten operations with Elgar’soperations at the Company’s headquarters in San Diego and the implementation ofdemand flow technology.

 

*Selling,general & administrative expenses.*  SG&A expenses were $7.7 million forthe nine months ended September 28, 2002, a decrease of $0.8 million, or9.4%, from SG&A expenses of $8.5 million for the nine months endedSeptember 29, 2001.  SG&A expensesincreased as a percentage of net sales from 18.7% in the nine months endedSeptember 29, 2001 to 22.0% in the nine months ended September 28, 2002.  The dollar decrease was primarily due tolower sales volume resulting in $0.7 million in decreased commissionsexpense.  Other reductions to expenses,predominately related to savings from the Power Ten consolidation, were offsetby severance and recruitment-related costs, and transition costs in the chiefexecutive and chief financial officer positions.

 

*Research, development andengineering expenses.* RD&E expenses were $3.7 million for the nine months ended September28, 2002, a decrease of $1.1 million, or 22.9%, from RD&E expenses of$4.8 million for the nine months ended September 29, 2001.  RD&E expenses decreased as a percentage

 

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of net sales from 10.5%in the nine months ended September 29, 2001 to 10.4% in the comparable 2002period.  The decrease in dollars wasprimarily due to lower headcount and compensation expenses in research anddevelopment, mainly related to the Power Ten consolidation, as compared to thenine months ended September 29, 2001.

 

*Amortization expense.*  Amortization expense was $36,000 for thenine months ended September 28, 2002, a decrease of $1.8 million fromamortization expense of $1.8 million for the nine months ended September 29,2001.  Amortization expense in the ninemonths ended September 28, 2002 related to non-compete agreements entered intowith the former owners of Power Ten, while amortization expense in the priorperiod included amortization of goodwill associated with the April 1996acquisition of Elgar by the predecessor to Elgar Holdings, Inc. and theMay 1998 acquisition of Power Ten, as well as $36,000 of expense relatingto the non-compete agreements.  Pursuantto SFAS No. 142, beginning December 30, 2001, goodwill is no longeramortized, which accounts for the differences between the comparable periods.

 

*Operatingincome.*  Operatingincome was $2.2 million for the nine months ended September 28, 2002, anincrease of $0.2 million from operating income of $2.0 million forthe nine months ended September 29, 2001. Operating income increased as a percentage of net sales from 4.4% forthe nine months ended September 29, 2001 to 6.3% for the nine months endedSeptember 28, 2002, due to the factors discussed above.

 

*Interestexpense. *Interestexpense was $9.0 million in the nine months ended September 28, 2002, anincrease of $1.0 million, or 12.5%, from interest expense of $8.0 million inthe nine months ended September 29, 2001. Interest expense increased as a percentage of net sales from 17.6% inthe nine months ended September 29, 2001 to 25.6% in the comparable 2002 period.  The increase in dollars was a result ofhigher outstanding borrowings and higher interest rates on those borrowing inthe nine months ended September 28, 2002 as compared to the year-earlierperiod, together with an increase in the amortization of deferred loan costs of$550,000 due to the acceleration of outstanding borrowings under the Company’sformer Deutsche Bank facility and $150,000 of amendment fees payable toDeutsche Bank that were accrued and paid in the nine months ended September 28,2002.

 

*Incometaxes. *Income taxesfor the nine months ended September 28, 2002 and September 29, 2001 werezero.  Losses generated in these periodsdo not have a carryback benefit and the resulting net operating losscarryforwards have not been recognized as a benefit because future realizationis uncertain.

 

*Netloss. *Net loss was$6.8 million in the nine months ended September 28, 2002, an increasedloss of $0.8 million from a net loss of $6.0 million for the nine monthsended September 29, 2001.  In order toimprove operating results, we have undertaken a number of initiatives, asdiscussed in “Net Loss” for the three-month comparison above.

 

**Liquidity and Capital Resources**

 

*Uses and sources of capital*.  Our principal uses of cash are for workingcapital requirements, debt service requirements and capital expenditures.  Based upon current and anticipated levels ofoperations and access to funds under our New Credit Facility with Ableco, webelieve that our cash flow from operations, together with amounts availableunder our New Credit Facility, will be adequate to meet our anticipated cashrequirements for the next 12 months.  Noassurance can be given, however, that this will be the case.  As a holding company with no operations orassets other than our ownership of Elgar’s

 

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capital stock, we must rely on dividends and otherpayments from Elgar to generate the funds necessary to meet our obligations,including the payment of principal and interest on the Senior Notes.

 

The Company made an interest payment of approximately$4.5 million to the holders of the Senior Notes on August 1, 2002.

 

At September 28, 2002, the outstanding balance onthe Revolver was $5.0 million, with $2.7 million of additionalborrowing capacity under the Revolver as of that date.

 

*Capitalrequirements*.  TheCompany’s capital expenditures were $415,000 in the nine months ended September28, 2002, down from $1,052,000 in the nine months ended September 29,2001.  The Company expects to make$75,000 of capital expenditures in the last three months of fiscal 2002.

 

**Item 3.  Quantitative and Qualitative Disclosures About Market Risk**

 

We have had only limited involvement in derivativefinancial instruments in the past.  Wedo not hold or issue derivative financial instruments for tradingpurposes.  At September 28, 2002,$20,000,000 of outstanding borrowings under the New Credit Facility, includingletters of credit, was at variable interest rates.  We are subject to market risk resulting from interest ratefluctuations with respect to our variable-rate borrowings.  We had previously entered into an interestrate swap arrangement, which matured in June 2001, and we may consider enteringinto such arrangements in the future in order to alter interest rateexposures.  A one percentage pointincrease in interest rates would be expected to have an estimated impact on netloss and cash flows for next year of approximately $200,000 for thevariable-rate debt.

 

The tables below provide information at September 28,2002 about our financial obligations that are sensitive to changes in interestrates.

 

** **

 
| **Long-Term Lender Debt (Variable Rate)** |   |          |       |   |
|-------------------------------------------|--------|---------------|------------|--------|
| Principal amount                          |   | $             | 20,000,000 |   |
| Variable  interest rate                   |   | 9.63          | %(1)       |
| Maturity                                  |   | June 25, 2006 |       |
| Remaining  principal payments:            |   |          |       |
| June 25, 2006  (Term Loan)                |   | $             | 15,000,000 |   |
| June 25, 2006  (Revolver)                 |   | $             | 5,000,000  |   |

 

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(1)          At September 28, 2002,the applicable interest rate for the Term Loan was 10.25% and for the Revolverwas 7.75%, which results in a blended interest rate of 9.63%.

 

**Item 4.  Controls and Procedures**

 

Within the 90 days prior to the date of this report,the Company carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the Company’s chiefexecutive officer and chief financial officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedurespursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the chief executive officer and the chief financialofficer concluded that the Company’s disclosure controls and procedures areeffective in timely alerting them to material information relating to theCompany (including its consolidated subsidiary) required to be included in theCompany’s periodic

 

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SEC filings, and that there were no significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

**PART II    OTHER INFORMATION**

 

**Item5.  Other Information**

 

**ManagementChanges**

 

*Chief Financial Officer*

 

On September 16, 2002, John P. Mei was appointed asthe Company’s Chief Financial Officer. Mr. Mei, a certified public accountant, has held senior financialpositions in manufacturing companies producing similar products to those Elgarproduces within the test and measurement industry.  For the past four years, Mr. Mei worked at Acterna where hemost recently held the position of Group Controller for the MultimediaGroup.  Prior to that, Mr. Mei wasa Manager of Finance in General Electric’s Industrial Systems Division.  He began his financial career with Coopers& Lybrand’s audit practice.  Mr. Meireplaced Joseph A. Stroud, who was serving as interim chief financial officersince June 11, 2002.

 

*Chief Executive Officer*

 

On July 17, 2002, the Company hired Joseph Budanoto serve as its Chief Operating Officer until such time as Kenneth R.Kilpatrick, the current President and Chief Executive Officer of the Company,stepped down from those positions. Mr. Kilpatrick resigned as President and Chief Executive of theCompany effective August 26, 2002, but continues to serve on the Company’sBoard of Directors as its Vice Chairman. Effective August 26, 2002, Mr. Budano became the President andChief Executive Officer of the Company. Mr. Budano has held senior management positions in manufacturingcompanies producing similar products to those Elgar produces within the testand measurement industry.

 

**Item 6 .  Exhibits and Reports on Form 8-K**

 
|   | (a)    |   | Exhibits.                                                                                                                                                                                                                                                      |
|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                           |
|   | 10.1   |   | Employment Agreement, dated as of July 17,  2002, among Elgar Holdings, Inc., Elgar Electronics Corporation and Joseph  Budano                                                                                                                            |
|   |   |   |                                                                                                                                                                                                                                                           |
|   | 10.2   |   | Severance Agreement and General and Special Release,  dated as of August 26, 2002, between Elgar Electronics Corporation and  Kenneth R. Kilpatrick                                                                                                       |
|   |   |   |                                                                                                                                                                                                                                                           |
|   | 99.1   |   | Certification of the Chief Executive Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                           |
|   | 99.2   |   | Certification of the Chief Financial Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                           |
|   | (b)    |   | A current report on Form 8-K was filed on  July 15, 2002 announcing the entering into of the new credit facility  with Ableco Finance LLC, as agent.                                                                                                      |
|   |   |   |                                                                                                                                                                                                                                                           |
|   |   |   | A current report on Form 8-K was filed on  August 14, 2002 announcing that the Company had engaged Deloitte &  Touche LLP, independent public accountants, to audit its financial statements  for the fiscal year ending December 28, 2002. |
|        |        |        |                                                                                                                                                                                                                                                                |  |  |

 

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**SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, as amended, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|                                           | **ELGAR  HOLDINGS, INC.** |
|------------------------------------------------|---------------------------|
|                                           |                      |
|                                           |                      |
| Dated:   November 12, 2002 | By:                       | /s/ John P. Mei |
|                                           |                      | John P. Mei |
|                                           |                      | Chief Financial Officer |

 

**RULE13a-14 CERTIFICATIONS**

 

I, Joseph Budano, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Elgar Holdings, Inc. (the“Company”);

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Company as of,and for, the periods presented in this quarterly report;

 

4.                                       TheCompany’s other certifying officer and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the Company and we have:

 

(a)                                  designedsuch disclosure controls and procedures to ensure that material informationrelating to the Company, including its consolidated subsidiary, is made knownto us by others within those entities, particularly during the period in whichthis quarterly report is being prepared;

 

(b)                                 evaluatedthe effectiveness of the Company’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)                                  presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       TheCompany’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the Company’s auditors and the audit committee of theCompany’s board of directors:

 

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(a)                                  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the Company’s ability to record, process, summarize andreport financial data and have identified for the Company’s auditors anymaterial weaknesses in internal controls; and

 

(b)                                 anyfraud, whether or not material, that involves management or other employees whohave a significant role in the Company’s internal controls; and

 

6.                                       TheCompany’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: November 12, 2002 |
|------------------------------|
|                         |
|                         | /s/ Joseph Budano |   |
| Joseph Budano                |
| Chief Executive Officer      |

 

I, John P. Mei, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Elgar Holdings, Inc. (the“Company”);

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Company as of,and for, the periods presented in this quarterly report;

 

4.                                       TheCompany’s other certifying officer and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the Company and we have:

 

(a)                                  designedsuch disclosure controls and procedures to ensure that material informationrelating to the Company, including its consolidated subsidiary, is made knownto us by others within those entities, particularly during the period in whichthis quarterly report is being prepared;

 

(b)                                 evaluatedthe effectiveness of the Company’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)                                  presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

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5.                                       TheCompany’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the Company’s auditors and the audit committee of the Company’sboard of directors:

 

(a)                                  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the Company’s ability to record, process, summarize andreport financial data and have identified for the Company’s auditors anymaterial weaknesses in internal controls; and

 

(b)                                 anyfraud, whether or not material, that involves management or other employees whohave a significant role in the Company’s internal controls; and

 

6.                                       TheCompany’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: November 12, 2002 |
|------------------------------|
|                         |
|                         | /s/ John P. Mei |   |
| John P. Mei                  |
| Chief Financial Officer      |

 

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