**UNITED STATES**

**SECURITIES AND 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** |

 

**Forthe quarterly period ended March 30, 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                  **

**Commissionfile 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 checkmark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes ý   No o

As of May 13, 2002, thenumber of shares outstanding of the Registrant’s Common Stock was 4,602,433.

 

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** **

**ELGARHOLDINGS, INC.**

**QUARTERLY REPORT ON FORM 10-Q**

**INDEX**
| **Part I**  | **Financial  Information**                                                                                                   |   |
|-------------|------------------------------------------------------------------------------------------------------------------------------|--------|
|        |                                                                                                                         |   |
| Item 1      | Consolidated  Financial Statements                                                                                           |   |
|        |                                                                                                                         |   |
|        | Consolidated  Statements of Operations for the three months ended March 31, 2001  (unaudited) and March 30, 2002 (unaudited) |   |
|        |                                                                                                                         |   |
|        | Consolidated Balance Sheets  as of December 29, 2001 and March 30, 2002 (unaudited)                                          |   |
|        |                                                                                                                         |   |
|        | Consolidated  Statements of Cash Flows for the three months ended March 31, 2001  (unaudited) and March 30, 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 Risks                                                                 |   |
|        |                                                                                                                         |   |
| **Part II** | **Other Information**                                                                                                        |   |
|        |                                                                                                                         |   |
| Item  6     | Exhibits and Reports on Form 8-K                                                                                             |   |

** **

 

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**ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS**

**ELGARHOLDINGS, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited) (dollars in thousands)**
|                                              |   | **For the Three Months Ended** |   |
|---------------------------------------------------|--------|--------------------------------|--------|
|                                              |   | **March 31, 2001**             |   | **March 30, 2002** |   |
| Net sales                                         |   | $                              | 17,313 |   | $ | 10,030 |   |
| Cost of sales                                     |   | 10,826                         |   | 6,228 |   |
| Gross profit                                      |   | 6,487                          |   | 3,802 |   |
| Selling, general  and administrative expense      |   | 2,932                          |   | 2,519 |   |
| Research and  development and engineering expense |   | 1,524                          |   | 1,246 |   |
| Amortization  expense                             |   | 609                            |   | 12 |   |
| Operating income                                  |   | 1,422                          |   | 25 |   |
| Interest  expense, net                            |   | 2,673                          |   | 2,871 |   |
| Loss before  income taxes                         |   | (1,251                         | )      | (2,846 | ) |
| Income taxes                                      |   | —                         |   | — |   |
| Net loss                                          |   | $                              | (1,251 | ) | $ | (2,846 | ) |

 

*The accompanying Notes to Consolidated Financial Statementsare an integral part of these Financial Statements*

 

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**ELGAR HOLDINGS, INC. AND SUBSIDIARY**

**CONSOLIDATEDBALANCE SHEETS**

**(dollars in thousands)**
|                                                                                                                               |   | **December  29, 2001** |   | **March 30,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|---------------------|--------|
| **ASSETS**                                                                                                                         |   |                   |   | **(unaudited)**     |   |
| CURRENT ASSETS:                                                                                                                    |   |                   |   |                |   |
| Cash and cash  equivalents                                                                                                         |   | $                      | 2,063  |                | $      | 28 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $204 and $138,  respectively                                       |   | 6,942                  |   | 5,129               |   |
| Inventories                                                                                                                        |   | 9,580                  |   | 8,830               |   |
| Prepaids and  other                                                                                                                |   | 325                    |   | 316                 |   |
| Total current assets                                                                                                               |   | 18,910                 |   | 14,303              |   |
|                                                                                                                               |   |                   |   |                |   |
| PROPERTY, PLANT  AND EQUIPMENT, net                                                                                                |   | 2,674                  |   | 2,507               |   |
| GOODWILL, net of  accumulated amortization of $11,419                                                                              |   | 24,381                 |   | 24,381              |   |
| OTHER ASSETS,  net of accumulated amortization of $2,994 and $3,405, respectively                                                  |   | 3,697                  |   | 3,286               |   |
|                                                                                                                               |   | $                      | 49,662 |                | $      | 44,477 |   |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**                                                                                    |   |                   |   |                |   |
| CURRENT  LIABILITIES:                                                                                                              |   |                   |   |                |   |
| Accounts payable                                                                                                                   |   | $                      | 2,576  |                | $      | 2,229 |   |
| Accrued  liabilities                                                                                                               |   | 10,237                 |   | 7,779               |   |
| Bank overdraft                                                                                                                     |   | —                 |   | 123                 |   |
| Line of credit                                                                                                                     |   | 5,015                  |   | 5,815               |   |
| Current portion  of long-term debt                                                                                                 |   | 8,783                  |   | 8,783               |   |
| Total current  liabilities                                                                                                         |   | 26,611                 |   | 24,729              |   |
|                                                                                                                               |   |                   |   |                |   |
| LONG-TERM DEBT,  net of current portion                                                                                            |   | 90,000                 |   | 90,000              |   |
| Total  liabilities                                                                                                                 |   | 116,611                |   | 114,729             |   |
| SERIES A 10%  CUMULATIVE REDEEMABLE PREFERRED STOCK, no par value, 20,000 shares  authorized; 10,000 shares issued and outstanding |   | 12,405                 |   | 12,447              |   |
| 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                | )      | (68,442             | )      |
| Accumulated  deficit                                                                                                               |   | (19,833                | )      | (23,303             | )      |
| Total  stockholders’ deficit                                                                                                  |   | (79,354                | )      | (82,699             | )      |
|                                                                                                                               |   | $                      | 49,662 |                | $      | 44,477 |   |

** **

*The accompanying Notes to Consolidated Financial Statementsare an integral part of these Financial Statements*

* *

 

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**ELGAR HOLDINGS, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited) (dollars in thousands)**
|                                                                         |   | **For the Three Months Ended** |   |
|------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                         |   | **March 31, 2001**             |   | **March 30, 2002** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                       |   |                           |   |   |   |
| Net loss                                                                     |   | $                              | (1,251 | ) | $ | (2,846 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                           |   |   |   |
| Amortization of  goodwill                                                    |   | 597                            |   | — |   |
| Amortization of  deferred financing costs and non-compete agreements         |   | 195                            |   | 411 |   |
| Depreciation and  amortization on property, plant and equipment              |   | 246                            |   | 206 |   |
| Gain on sale of  property, plant and equipment                               |   | (2                             | )      | (4 | ) |
| Contributed  management services                                             |   | —                         |   | 125 |   |
| Changes in  operating assets and liabilities:                                |   |                           |   |   |   |
| Accounts  receivable                                                         |   | 1,285                          |   | 1,813 |   |
| Inventories                                                                  |   | (1,348                         | )      | 750 |   |
| Prepaids and  other                                                          |   | (138                           | )      | 9 |   |
| Accounts payable                                                             |   | 511                            |   | (347 | ) |
| Accrued  liabilities                                                         |   | (3,199                         | )      | (3,040 | ) |
| Net cash used in  operating activities                                       |   | (3,104                         | )      | (2,923 | ) |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                       |   |                           |   |   |   |
| Purchases of  property, plant and equipment                                  |   | (745                           | )      | (39 | ) |
| Proceeds from  sales of property, plant and equipment                        |   | 2                              |   | 4 |   |
| Net cash used in  investing activities                                       |   | (743                           | )      | (35 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                       |   |                           |   |   |   |
| Proceeds from  exercise of options                                           |   | 5                              |   | — |   |
| Repayments on  debt                                                          |   | (875                           | )      | — |   |
| Proceeds from  line of credit                                                |   | 4,000                          |   | 800 |   |
| Bank overdraft                                                               |   | 855                            |   | 123 |   |
| Net cash  provided by financing activities                                   |   | 3,985                          |   | 923 |   |
|                                                                         |   |                           |   |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                        |   | 138                            |   | (2,035 | ) |
| CASH AND CASH  EQUIVALENTS, beginning of period                              |   | 224                            |   | 2,063 |   |
| CASH AND CASH  EQUIVALENTS, end of period                                    |   | $                              | 362    |   | $ | 28 |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                           |   |                           |   |   |   |
| Cash paid for  interest                                                      |   | $                              | 4,675  |   | $ | 4,752 |   |
| Cash paid for  income taxes, net                                             |   | 80                             |   | 9 |   |
|                                                                         |   |                           |   |   |   |
| NON-CASH  INVESTING AND FINANCING ACTIVITIES:                                |   |                           |   |   |   |
| Series A  preferred stock dividend-in-kind                                   |   | $                              | 113    |   | $ | — |   |
| Series A, B and  C preferred stock dividend accrual                          |   | 377                            |   | 582 |   |
| Accretion of  discount on Series A preferred stock                           |   | 42                             |   | 42 |   |
| Contributed  management services                                             |   | —                         |   | 125 |   |

 

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

 

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**ELGAR HOLDINGS, INC. AND SUBSIDIARY**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**(unaudited)**

 

**1. Company Operations**

ElgarHoldings, Inc., a Delaware corporation (the “Company”), manufactures and sellsprogrammable power supply units through its wholly owned subsidiary, ElgarElectronics Corporation (“Elgar”), for commercial and militaryapplications.  The Company’s primarysales are within the United States and Europe. The Company operates in one business segment.

**2. Going Concern Assumptions**

The Company’s financialstatements have been prepared on a going concern basis, which contemplates therealization of assets and the satisfaction of liabilities in the normal courseof business.  The Company has incurrednet losses in each of its last three fiscal years, and has reported a net lossof $2.8 million for the quarter ended March 30, 2002.  The Company expects to incur a net loss infiscal 2002.

The Company believes thatits present cash balances will be sufficient to pay ongoing cash expenses onlyuntil approximately the end of the second quarter of 2002, and will not besufficient to repay the amounts outstanding under the Company’s credit facilityon June 28, 2002.  The Company hasbeen notified by Bankers Trust, the lender under its credit facility, of itsdesire to have the full amount of the outstanding loans under the creditfacility, plus accrued but unpaid interest, repaid on June 28, 2002.  The Company expects to generate positivecash flows from operations by the end of fiscal 2002.  However, given the Company’s current cash balances, expected cashrequirements for the credit facility repayment on June 28, 2002, the bond interestpayment on August 1, 2002 and ongoing operations after the second quarter, theCompany believes that it will be necessary for it to raise additional fundsbefore the end of the second quarter of 2002 in order for the Company tocontinue its operations.  Management iscurrently pursuing alternative financing sources, and has retained advisors tohelp the Company in this endeavor. Although the Company is currently in discussions with potentialfinancing sources and investors, there can be no assurance that the Companywill be able to obtain additional funding in the near future on acceptableterms, or at all.

If the Company wereunsuccessful in obtaining this additional financing, substantial doubt existsas to the Company’s ability to continue as a going concern.  The financial statements do not include anyadjustments relating to the recoverability and classification of assets andliabilities that might be necessary should the Company be unable to continue asa going concern. The Company’s continuation as a going concern is alsodependent upon its ability to generate sufficient cash flows to meet itsobligations on a timely basis, to obtain additional financing as may berequired, and ultimately to attain profitability.

**3. Summary of Significant AccountingPolicies**

*Principles of Consolidation/Basis ofPresentation*

The accompanying consolidated financial statements include the accountsof the Company and its wholly owned subsidiary, Elgar.  All significant intercompany accounts andtransactions have been eliminated. These financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States and with the instructions to Form 10-Q.  The Company suggests that these financial statements be read inconjunction with the financial statements and notes thereto included in theCompany’s Form 10-K for the fiscal year ended December 29, 2001.  These financial 

 

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statements includeall adjustments (consisting of normal recurring adjustments) which are, in theopinion of management, necessary for a fair presentation of financialcondition, results of operations and cash flows for such periods.

*Reclassifications*

Certain amounts included in the financial statements for fiscal 2001have been reclassified to conform to current year presentation.

*Interim Accounting Periods*

The Company operates and reports financial results on a fiscal year of52 or 53 weeks ending the Saturday closest to December 31.  Interim periods include 13 or 14 weeksending the last Saturday closest to the end of the quarter.  Results of operations for the three monthsended March 30, 2002 are not necessarily indicative of the results to beexpected for the Company’s fiscal year ending December 28, 2002.

*Use of Estimates*

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of sales and expenses duringthe reporting period. Actual results could differ from those estimates.

*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** |   | **March 30, 2002** |   |
|-----------------|--------|-----------------------|--------|--------------------|--------|
| Raw materials   |   | $                     | 7,268  |               | $      | 6,252 |   |
| Work-in-process |   | 1,261                 |   | 1,539              |   |
| Finished goods  |   | 1,051                 |   | 1,039              |   |
| Total           |   | $                     | 9,580  |               | $      | 8,830 |   |

*Recent Accounting Pronouncements*

InJune 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No.141, “Business Combinations” (“SFAS No. 141”). This statement addressesfinancial accounting and reporting for business combinations and supersedes APBOpinion No. 16, “Business Combinations,” and FASB Statement No. 38, “Accountingfor Preacquisition Contingencies of Purchased Enterprises.” All businesscombinations in the scope of this Statement are to be accounted for using onemethod, the purchase method. The Company adopted the provisions of SFAS No. 141for all business combinations initiated after June 30, 2001.

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InJune 2001, the FASB issued SFAS No. 142 “Goodwill and Other Intangible Assets”(“SFAS No. 142”).  This statementaddresses financial accounting and reporting for acquired goodwill and otherintangible assets and supersedes APB Opinion No. 17, “Intangible Assets.” SFASNo. 142 addresses how intangible assets that are acquired individually or witha group of other assets (but not those acquired in a business combination)should be accounted for in financial statements 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 SFAS No. 142 goodwill is no longer subject toamortization over its estimated useful life, which would have been $2,387,000 for the year 2002. Rather, goodwill will be subject to at least anannual assessment for impairment by applying a fair value test.  The Company is in the process of evaluatinghow the provisions of SFAS No. 142 will impact the carrying amounts ofgoodwill included in the accompanying consolidated financial statements as wellas determining whether or not impairment existed upon adoption under the newfair value model.  The Companyanticipates that it will complete its assessment of how to evaluate thegoodwill by the end of the second quarter of 2002 and will complete its fairvalue analysis, determine the amount of any identified impairment and recordsuch impairment by the end of fiscal 2002. The Company adopted SFASNo. 142 effective December 30, 2001, the effect of which wasto classify the goodwill separately on the accompanying consolidated balancesheets and to cease the amortization of such goodwill, which would have been$597,000 in the quarter ended March 30, 2002.

In August 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.”  SFAS No. 144 addresses financial accountingand reporting for the impairment or disposal of long-lived assets. SFAS No. 144supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be Disposed Of,” and the accounting and reportingprovisions of APB Opinion No. 30, “Reporting the Results ofOperations—Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions,” forthe disposal of a segment of a business (as previously defined in thatOpinion). The provisions of SFAS No. 144 are effective for financial statementsissued for fiscal years beginning after December 15, 2001, with earlyapplication encouraged and generally are to be applied prospectively. Theadoption of SFAS No. 144 did not have a material impact on the Company’sfinancial position or results of operations.

**4.Concentrations of Credit Risk**

No individual customer represented greater than 10% of net sales in thequarters ended March 30, 2002 and March 31, 2001.  The Company performs ongoing credit evaluation of its customers’financial condition.  The Companymaintains reserves for potential credit losses.

**5. Senior Notes and Credit Facility**

*SeniorNotes*

InFebruary 1998, the Company issued $90.0 million aggregate principal amountof Senior Notes due 2008 (the “Senior Notes”). The Senior Notes bear interest at a rate of 9.875% per annum, payablesemi-annually on February 1st and August 1st, and have a stated maturity ofFebruary 1, 2008.

TheSenior Notes are general unsecured obligations of the Company and rank seniorto all existing and future subordinated indebtedness of the Company. Theobligations of the Company as a guarantor of Elgar’s obligations under the bankcredit facility are secured by substantially all of the assets of theCompany.  Accordingly, such securedindebtedness effectively ranks senior to the Senior Notes to the extent of suchassets.

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TheSenior Notes restrict, among other things, the Company’s ability to incuradditional indebtedness, pay dividends or make certain other restrictedpayments, incur liens, sell preferred stock of subsidiaries, apply net proceedsfrom certain asset sales, merge or consolidate with any other person, sell,assign, transfer, lease, convey or otherwise dispose of substantially all ofthe assets of the Company or enter into certain transactions with affiliates.The Senior Notes are fully and unconditionally guaranteed by the Company’swholly owned subsidiary, Elgar.

*CreditFacility*

The Company and Elgar are party to a credit agreement with BankersTrust, as agent and sole lender (the “Credit Agreement”), that was entered intoin connection with the February 1998 recapitalization.  Elgar is the borrower under the CreditAgreement and the Company is the guarantor.

On January 31,2002, the Company, Elgar and Bankers Trust Company entered into a NinthAmendment and Waiver to the Credit Agreement. The Ninth Amendment calls for the full amount of the loans outstandingunder the Credit Agreement, plus accrued interest, to be repaid onJune 28, 2002, or sooner if there is an event of default declared byBankers Trust.  The Ninth Amendment alsorequires the Company to pay Bankers Trust amendment fees of up to $300,000,payable in installments.  In the NinthAmendment, Bankers Trust waived compliance with (i) the maximum leverageratio through January 31, 2002, and then deleted that covenant from theCredit Agreement, (ii) the fixed charge coverage ratio throughDecember 29, 2001, and then deleted that covenant from the CreditAgreement and (iii) the minimum consolidated EDITDA covenant throughDecember 29, 2001, and then reset the measurement periods for consolidatedEBITDA to begin on December 30, 2001 and end at the end of each ofFebruary, March, April and May 2002.  In addition, the Company agreed tolimit capital expenditures in the period from December 30, 2001 throughJune 28, 2002 to $500,000.  TheCompany was in compliance with the minimum EBITDA covenant for the period fromDecember 30, 2001 through March 30, 2002, and was also in compliancewith the capital expenditure covenant. Finally, under the Ninth Amendment, Bankers Trust increased theRevolving Facility from $5,000,000 to $6,700,000, but required interest to bepaid monthly, rather than quarterly, as was the case in prior periods.  As a result of the acceleration of the loanmaturity in the Ninth Amendment, the Company has changed the amortization ofthe unamortized deferred financing costs included in other assets on theconsolidated balance sheets to be fully amortized by the new loan maturity dateof June 28, 2002.  The impact tothe quarter ended March 30, 2002 of this change in estimate was an additional$216,000 of amortization which is reflected as interest expense.

As amended, the Credit Agreement consists of (1) a $6,700,000revolving credit facility (the “Revolving Facility”), of which $900,000 wasavailable to be drawn on March 30, 2002, and (2)  $8,783,000remaining of an original $15,000,000 term facility (the “Term Facility,” andcollectively with the Revolving Facility, the “Credit Facility”).  We used the proceeds from the Term Facilityto finance a portion of the purchase price for Power Ten in May 1998.  At March 30, 2002, the outstandingbalance of the Revolving Facility was $5,815,000, including $15,000 ofcapitalized interest, and the outstanding balance of the Term Facility was$8,783,000, including $33,000 of capitalized interest.

Indebtedness under the Credit Facility bears interestat a floating rate equal to, at Elgar’s option, the Eurodollar Rate plus amargin of 2.75%, or the Base Rate plus a margin of 1.75%.  Pursuant to an earlier amendment to theCredit Agreement, Elgar is to pay the banks an additional 50 basis points of 

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interest on loansoutstanding from and after March 27, 2001, with such payment of additionalinterest to be made at maturity or upon earlier repayment of the loans.

Indebtedness under the Credit Agreement is shown asshort-term debt in the balance sheet, while the $90.0 million of SeniorNotes is currently classified as long-term debt.  If the Company were not successful in paying-off the bank debt byJune 28, 2002, Elgar would be in violation of the Credit Agreement.  If that were to be the case and BankersTrust were to demand payment of the final maturity of the outstanding bankdebt, and if Elgar or the Company did not timely pay in full the amount sodemanded under the Credit Agreement, that would constitute an event of defaultunder the indenture governing the Senior Notes.  Accordingly, the Company would be required to classify the$90.0 million of Senior Notes as short-term debt in the balancesheet.  In this event, the maturity ofthe Senior Notes could also be accelerated.

**6. Convertible Preferred Stock**

Inconnection with Elgar’s acquisition of Power Ten, the Company issued 5,000shares of Series B 6% Cumulative Convertible Preferred Stock (the “Series BPreferred Stock”) for cash proceeds of $5.0 million.  This offering, which was made in compliancewith the subscription rights contained in the Company’s Shareholders Agreement,was completed on May 29, 1998.

In connection with entering into the first amendment to the creditagreement, the Company’s majority shareholder made a $4.0 million capitalcontribution to the Company.  In orderto effectuate the contribution, the Company issued 4,000 shares of Series C 6%Cumulative Convertible Preferred Stock (the “Series C Preferred Stock”) forcash proceeds of $4.0 million. This offering, which was made in compliance with the subscription rightscontained in the Company’s Shareholders Agreement, was completed on March 30,1999.

Dividends are payable to the holders of the Series B Preferred Stockand Series C Preferred Stock at the annual rate per share of 6% times the sumof (x) $1,000 and (y) accrued but unpaid dividends.  For the series B Preferred Stock, dividends are payablesemi-annually on April 30 and October 31. For the Series C Preferred Stock, dividends are payable semi-annually onMarch 31 and September 30.  Thesedividends are payable when and if declared by the Board of Directors out offunds legally available for such payment. During the three months ended March 30, 2002 and March 31, 2001, theCompany accrued $92,016 and $86,736 for dividends on the Series B PreferredStock, and $69,639 and $65,640 for dividends on the Series C Preferred Stock.

**7. SeriesA Redeemable Preferred Stock**

Dividends are payable quarterly to the holders ofSeries A cumulative redeemable preferred stock at 10% per year.  The dividends are payable in-kind throughJanuary 31, 2001 and in cash thereafter. Under the terms of the indenture governing the Company’s $90.0 millionof senior notes, the Company is prohibited from paying cash dividends unlessits consolidated fixed charge coverage ratio is at least 2.0 to 1.0.  The Company does not anticipate that thisratio will equal or exceed 2.0 to 1.0 during 2002.  As a result, the Company has accrued dividends of $420,591 duringthe three months ended March 30, 2002 and $224,148 from February 1, 2001 toMarch 31, 2001.  The Company anticipatesthat it will continue to accrue dividends, rather than pay cash dividends, onthe Series A preferred stock during the remainder of fiscal 2002.

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**8. Related Party Transactions**

*ContributedManagement Services*

InFebruary 1998, the Company entered into a Management Agreement withJ.F. Lehman & Company (“Lehman”), an affiliate of the Company’sprincipal shareholder (the “Management Agreement”).  Under the terms of the Management Agreement, the Company wasobligated to pay Lehman a $500,000 annual management fee in advance on asemi-annual basis.  In September 1998,the Company and Lehman amended the Management Agreement and concurrentlyentered into a Management Services Agreement with Lehman, the combined effectof which was to further delineate the management services to be provided byLehman and to reduce the term of the Management Agreement from ten years tofive years.  Recent amendments to theCompany’s Credit Agreementpreclude the Company from paying any management fees to Lehman for servicesrendered during the period that Bankers Trust is waiving events of default bythe Company.  However, Lehman continuesto provide such services to the Company. In periods beginning with the quarter ended March 30, 2002, the Companyis recording the contributed management services as an expense and as a capitalcontribution in accordance with the SEC’s Staff Accounting BulletinNo. 79.  The total amount ofexpense and additional paid in capital recorded for these services during thequarter ended March 30, 2002 was $125,000.

###### *Racal Instruments*

Racal Instruments, a significant customer of theCompany’s, was acquired on November 2, 2001 by a group of investors thatincludes affiliates of the Company’s largest shareholder.  In addition, certain members of the Company’sboard of directors are also members of Racal’s board of directors.  As a result, Racal is considered a relatedparty.  Sales by the Company to Racalwere approximately $107,000 and $849,000 during the three months ended March30, 2002 and March 31, 2001, respectively.

*CapitalCall between J. F. Lehman Equity Investors I., L.P. and Bankers Trust*

In December 2001, J.F. Lehman Equity Investors, I, L.P(“JFLEI”), an affiliate of our largest stockholder, deposited $5.0 million in acollateral account held by Bankers Trust in connection with earlier amendmentsand waivers to the Credit Agreement and a capital call agreement between JFLEIand Bankers Trust.  In January 2002, inconnection with the Ninth Amendment to the Credit Agreement, JFLEI deposited anadditional $1.7 million into another collateral account.  The $6.7 million in the collateralaccounts is for the benefit of Bankers Trust. The Company does not have any rights in these funds.

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| **ITEM 2****.** |   | **MANAGEMENT'S  DISCUSSION 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.

**Results of Operations**

The following table sets forth certain income statement information forthe Company as a percentage of net sales for the three months ended March 31,2001 and March 30, 2002:
|                                               |   | **Three  Months Ended** |   |
|----------------------------------------------------|--------|-------------------------|--------|
|                                               |   | **March 31,  2001**     |   | **March 30,  2002** |   |
|                                               |   | **(unaudited)**         |   |
| **Statement  of Operations Data:**                 |   |                    |   |   |   |
| Net sales                                          |   | 100.0                   | %      | 100.0 | % |
| Cost of sales                                      |   | 62.5                    |   | 62.1 |   |
| Gross profit                                       |   | 37.5                    |   | 37.9 |   |
| Selling, general  and administrative expenses      |   | 17.0                    |   | 25.1 |   |
| Research and  development and engineering expenses |   | 8.8                     |   | 12.5 |   |
| Amortization  expense                              |   | 3.5                     |   | 0.1 |   |
| Operating income                                   |   | 8.2                     | %      | 0.2 | % |

*Net sales. *Netsales for the quarter ended March 30, 2002 were $10.0 million, a decreaseof $7.3 million, or 42.2%, from net sales of $17.3 million for the quarterended March 31, 2001.  This decrease wasprimarily attributable to the overall decline in the economy and was acrossvirtually all product lines, the only exception being Customer Service sparesand repairs.  In the quarter ended March30, 2002, sales of Sorensen products and Power Ten products, which are part ofthe programmable DC power products, were $4.6 million and $1.4 million,respectively, a decrease of $3.5 million and $1.2 million,respectively, from the quarter ended March 31, 2001.  In the quarter ended March 30, 2002, CASS sales were $0.2million, a decrease of $0.8 million, and Space System product sales were $0.6million, a decrease of $0.7 million, from the quarter ended March 31,2001.  The Company is beginningproduction on the final phase of the CASS contract for the U.S. Navy, butexpects continuing follow on sales of spares and selective parts in futureperiods.

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*Gross profit.* Gross profit for the quarter ended March 30, 2002 was $3.8 million,a decrease of $2.7 million, or 41.5%, from gross profit of$6.5 million for the quarter ended March 31, 2001.  The decrease in gross profit was due to thedecrease in net sales when compared to the quarter ended March 31, 2001.  The gross profit percent was for the quarterended March 30, 2002 was 37.9%, an increase of 0.4% from gross profit percentof 37.5% for the quarter ended March 31, 2001. This small percentage increasewas the result of the Company reducing its fixed overhead costs during2001.  Margins are expected to continueto be higher in future periods due to the elimination of certain fixed costs asa result of the consolidation of the Power Ten operations with Elgar’soperations at our headquarters in San Diego.

*Selling, general &administrative expenses.*  Selling, general andadministrative (“SG&A”) expenses were $2.5 million for the quarterended March 30, 2002, a decrease of $0.4 million, or 13.8%, from SG&Aexpenses of $2.9 million for the quarter ended March 31, 2001.  SG&A expenses increased as a percentageof net sales from 17.0% in the quarter ended March 31, 2001 to 25.1% in thequarter ended March 30, 2002.  Thedollar decrease was primarily due to lower sales volume resulting in $0.4million in decreased commissions expense. Other reductions to expenses in selling, advertising, recruitment andadministration were offset by non-recurring costs related to the Power Ten consolidation.

*Research and development andengineering expenses.*  Research and development andengineering (“R&D&E”) expenses were $1.2 million for the quarter endedMarch 30, 2002, a decrease of $0.3 million, or 20.0%, from R&D&Eexpenses of $1.5 million for the quarter ended March 31, 2001.  R&D&E expenses increased as apercentage of net sales from 8.8% in the quarter ended March 31, 2001 to 12.5%in the comparable 2002 period.  Thedecrease in dollars was primarily due to lower headcount and compensation expensesin research and development as compared to the quarter ended March 31,2001.  The 3.7% increase in the quarterended March 30, 2002 versus the comparable 2001 period was due to the $7.3million decrease in sales (see above).

*Amortization expense.*  Amortizationexpense was $12,000 for the quarter ended March 30, 2002, a decrease of $0.6million from amortization expense of $0.6 million for the quarter ended March31, 2001.  Amortization expense in thequarter ended March 30, 2002 related to non-compete agreements enteredinto with the former owners of Power Ten, while amortization expense in theprior period included amortization of goodwill associated with the April 1996acquisition of Elgar by the predecessor to Elgar Holdings, Inc. and our 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, the Company is no longerrequired to amortize goodwill, which explains the differences between quarters.

*Operatingincome.*  Operating income was $25,000 for the quarterended March 30, 2002, a decrease of $1.4 million from operating income of$1.4 million for the quarter ended March 31, 2001.  Operating income decreased as a percentageof net sales from 8.2% for the quarter ended March 31, 2001 to 0.2% for thequarter ended March 30, 2002, due to the factors discussed above.

*Interest expense. *Net interestexpense was $2.9 million in the quarter ended March 30, 2002, an increase of$0.2 million, or 7.4%, from net interest expense of $2.7 million in the quarterended March 31, 2001.  Net interestexpense increased as a percentage of net sales from 15.4% in the quarter endedMarch 31, 2001 to 28.6% in the comparable 2001 period.  The increase in dollars was a result ofhigher outstanding borrowings on our revolving line of credit, partially offsetby lower interest rates on those borrowings, together with an increase in theamortization of deferred loan costs of $216,000 due to the acceleration of theloan maturity date and $50,000 of amendment fees payable to Bankers Trust thatwas accrued in the quarter ended March 30, 2002.

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*Income Taxes. *Income taxes for the quarters ended March 30, 2002 andMarch 31, 2001 were both zero.  Lossesgenerated in these quarters do not have a carryback benefit and thus have notbeen recognized because future realization is uncertain.

*Netloss.*Net losswas $2.8 million in the quarter ended March 30, 2002, an increased loss of $1.5million from a net loss of $1.3 million for the quarter ended March 31,2001.  In order to improve operatingresults, we have undertaken a number of initiatives to increase sales acrossour multiple product lines.  Theseinclude reduction of indirect headcount, initiating cost reduction efforts inthe manufacturing and procurement processes, and the relocation of our PowerTen operations to our San Diego facilities.

**Liquidityand Capital Resources**

*Uses and Sources of Capital*.  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 Ninth Amendment and Waiver to Credit Agreement entered into on January 31, 2002 (the “Ninth Amendment”), we believe that our cash flow from operations, together with amounts available under our credit facility, will be adequate to meet our anticipated cash requirements through the end of the second quarter of 2002, but will not be sufficient to repay the amounts outstanding under our credit facility on June 28, 2002.  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.

We have been notified byBankers Trust, the lender under our credit facility, of its desire to have thefull amount of the outstanding loans under the credit facility, plus accruedbut unpaid interest, repaid on June 28, 2002.  As of March 30, 2002, the outstanding principal amount ofthe loans under the credit facility was $14,598,000.  In order for us to repay the facility and to meet other futuredebt service and working capital requirements, we will need to obtain othersources of funding.  Management iscurrently pursuing alternative financing sources, and has retained advisors tohelp the Company in this endeavor. Although the Company is currently in discussions with potentialfinancing sources and investors, there can be no assurance that additionalfinancing will be available on terms satisfactory to us.  If we are unsuccessful in obtaining thisadditional financing, substantial doubt exists as to our ability to continue asa going concern.

The Company is requiredto make an interest payment of approximately $4.5 million to the holdersof the Senior Notes on August 1, 2002. The Ninth Amendment also requires the Company to pay Bankers Trustamendment fees of up to $300,000, payable in installments.

*CapitalRequirements*.  The Company’s capital expenditures were$39,000 in the three months ended March 30, 2002 and $745,000 in the threemonths ended March 31, 2001.  TheCompany has minimized its expenditures during the three months ended March 30,2002 due to cash availability and certain restrictions under the NinthAmendment to the Credit Facility.

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**ITEM3****.**  **QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS**

We have had only limitedinvolvement in derivative financial instruments in the past.  We do not hold or issue derivative financialinstruments for trading purposes.  AtMarch 30, 2002, $14,598,000 of outstanding borrowings under the CreditFacility, including letters of credit, was at variable interest rates.  We are subject to market risk resulting frominterest rate fluctuations 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 rate exposures.  In general, interest rate swaps allow acompany to raise long-term borrowings at floating rates and effectively swapthem into fixed rates that are lower than those available if fixed-rateborrowings were made directly.  Underinterest rate swaps, a company agrees with another party to exchange, atspecified intervals, the difference between fixed-rate and floating-rateamounts calculated by reference to an agreed notional principal amount.  At March 30, 2002, none of our debt wascovered by interest-rate swap arrangements.

The tables below provideinformation as of March 30, 2002 about our derivative instruments and otherfinancial instruments that are sensitive to changes in interest rates.

** **
| **Long-Term Bank Debt (Variable Rate)**          |   |                                     |   |
|--------------------------------------------------|--------|------------------------------------------|--------|
| Principal amount                                 |   | $14,598,000                              |   |
| Variable  interest rate                          |   | 5.18%(1)                                 |   |
| Maturity—tranche                            |   | April 4, 2002 through June 28, 2002 |   |
| Maturity—loan  and capitalized interest (2) |   | June 28, 2002                            |   |
| Remaining  principal payments:                   |   |                                     |   |
| June 28, 2002  (term debt)                       |   | $8,783,000                               |   |
| June 28, 2002  (revolving line of credit)        |   | $5,815,000                               |   |

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(1)          Indebtednessunder the Credit Facility bears interest at a floating rate equal to, atElgar’s option, the Eurodollar Rate plus a margin of 2.75%, or the Base Rateplus a margin of 1.75%.  Pursuant to theFourth Amendment to the Credit Agreement, Elgar is to pay the banks anadditional 50 basis points of interest on loans outstanding from and afterMarch 27, 2001, with such payment of additional interest to be made at maturityor upon earlier repayment of the loans.

(2)          The Seventh Amendment and Waiver to Credit Agreementcapitalized as principal the interest from March 27, 2001 through December 19,2001, which amounted to $47,615. Additional PIK Interest will continue to accrue from December 20, 2001through loan maturity.

 

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**PART II****         OTHERINFORMATION**

## **ITEM 6.**             EXHIBITS AND REPORTS ON FORM 8-K.

 
| (a)              |            | Exhibits.                                                                           |
|------------------|-----------------|-------------------------------------------------------------------------------------|
|             |
| **Exhibit  No.** | **Description** |
|             | None            |
|             |
| (b)              |            | No current  reports on Form 8-K were filed during the quarter ended March 30, 2002. |
|                  |                 |                                                                                     |  |

 

# **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:  May  13, 2002 | By:                       | /s/ Christopher W. Kelford |
|                       |                      | Christopher W. Kelford |
|                       |                      | Vice President-Finance, Chief Financial |
|                       |                      | Officer, Treasurer and Assistant Secretary |

 

 

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