**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 
| **(Mark  One)**                                                                                                                                                                           |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **x**                                                                                                                                                                                     | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934, AS AMENDED** |
|                                                                                                                                                                                      |
| **For  the quarterly period ended June 29, 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.**

(Exactname 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 August 14, 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 six months ended June 30, 2001  (unaudited) and June 29, 2002 (unaudited) |
|         |                                                                                                                               |
|         | Consolidated Balance Sheets  as of December 29, 2001 and June 29, 2002 (unaudited)                                                 |
|         |                                                                                                                               |
|         | Consolidated Statements  of Cash Flows for the six months ended June 30, 2001 (unaudited) and June 29,  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                                                                        |
|         |                                                                                                                               |
| **Part  II** | **Other  Information**                                                                                                             |
|         |                                                                                                                               |
| Item 5       | Other Information                                                                                                                  |
|         |                                                                                                                               |
| Item 6       | Exhibits and  Reports on Form 8-K                                                                                                  |

 

2

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**PARTI  FINANCIAL INFORMATION**

 

**Item1.    Financial Statements**

 

**ELGAR HOLDINGS, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
|                                               |   | **For the Three Months Ended** |   | **For the Six Months Ended** |   |
|----------------------------------------------------|--------|--------------------------------|--------|------------------------------|--------|
|                                               |   | **June 30, 2001**              |   | **June 29, 2002**            |   | **June 30, 2001** |   | **June 29, 2002** |   |
| Net sales                                          |   | $                              | 15,291 |                         | $      | 11,062 |   | $ | 32,604 |   | $ | 21,091 |   |
| Cost of sales                                      |   | 9,498                          |   | 6,964                        |   | 20,324 |   | 13,192 |   |
| Gross profit                                       |   | 5,793                          |   | 4,098                        |   | 12,280 |   | 7,899 |   |
| Selling, general  and administrative expenses      |   | 2,883                          |   | 2,704                        |   | 5,815 |   | 5,223 |   |
| Research and  development and engineering expenses |   | 1,767                          |   | 1,331                        |   | 3,291 |   | 2,577 |   |
| Amortization  expense                              |   | 609                            |   | 12                           |   | 1,218 |   | 24 |   |
| Operating income                                   |   | 534                            |   | 51                           |   | 1,956 |   | 75 |   |
| Interest expense                                   |   | 2,710                          |   | 3,066                        |   | 5,383 |   | 5,937 |   |
| Net loss                                           |   | $                              | (2,176 | )                            | $      | (3,015 | ) | $ | (3,427 | ) | $ | (5,862 | ) |

 

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

 

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**ELGAR HOLDINGS, INC. AND SUBSIDIARY**

**CONSOLIDATED BALANCE SHEETS**

**(dollars in thousands)**

** **
|                                                                                                                               |   | **December  29, 2001** |   | **June 29,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|--------------------|--------|
|                                                                                                                               |   |                   |   | **(unaudited)**    |   |
| **ASSETS**                                                                                                                         |   |                   |   |               |   |
| CURRENT ASSETS:                                                                                                                    |   |                   |   |               |   |
| Cash and cash  equivalents                                                                                                         |   | $                      | 2,063  |               | $      | 350 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $204 and $161,  respectively                                       |   | 6,942                  |   | 5,710              |   |
| Inventories                                                                                                                        |   | 9,580                  |   | 8,425              |   |
| Prepaids and  other                                                                                                                |   | 325                    |   | 345                |   |
| Total current assets                                                                                                               |   | 18,910                 |   | 14,830             |   |
|                                                                                                                               |   |                   |   |               |   |
| PROPERTY, PLANT  AND EQUIPMENT, net                                                                                                |   | 2,674                  |   | 2,339              |   |
| GOODWILL, net of  accumulated amortization of $11,419                                                                              |   | 24,381                 |   | 24,381             |   |
| OTHER ASSETS,  net of accumulated amortization of $2,994 and $2,159, respectively                                                  |   | 3,697                  |   | 5,142              |   |
|                                                                                                                               |   | $                      | 49,662 |               | $      | 46,692 |   |
|                                                                                                                               |   |                   |   |               |   |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**                                                                                    |   |                   |   |               |   |
| CURRENT  LIABILITIES:                                                                                                              |   |                   |   |               |   |
| Accounts payable                                                                                                                   |   | $                      | 2,576  |               | $      | 2,683 |   |
| Accrued  liabilities                                                                                                               |   | 10,237                 |   | 11,272             |   |
| Line of credit                                                                                                                     |   | 5,015                  |   | —             |   |
| Current portion  of long-term debt                                                                                                 |   | 8,783                  |   | —             |   |
| Total current  liabilities                                                                                                         |   | 26,611                 |   | 13,955             |   |
|                                                                                                                               |   |                   |   |               |   |
| LONG-TERM DEBT,  net of current portion                                                                                            |   | 90,000                 |   | 106,500            |   |
| Total  liabilities                                                                                                                 |   | 116,611                |   | 120,455            |   |
| SERIES A 10%  CUMULATIVE REDEEMABLE PREFERRED STOCK, no par value, 20,000 shares  authorized; 10,000 shares issued and outstanding |   | 12,405                 |   | 12,489             |   |
| 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                | )      | (68,317            | )      |
| Accumulated  deficit                                                                                                               |   | (19,833                | )      | (26,981            | )      |
| Total  stockholders’ deficit                                                                                                  |   | (79,354                | )      | (86,252            | )      |
|                                                                                                                               |   | $                      | 49,662 |               | $      | 46,692 |   |

 

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

 

4

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**ELGAR HOLDINGS, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

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

 
|                                                                         |   | **For the Six Months Ended** |   |
|------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                         |   | **June 30, 2001**            |   | **June 29, 2002** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                       |   |                         |   |   |   |
| Net loss                                                                     |   | $                            | (3,427 | ) | $ | (5,862 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                         |   |   |   |
| Amortization of  goodwill                                                    |   | 1,193                        |   | — |   |
| Amortization of  deferred financing costs and non-compete agreements         |   | 391                          |   | 947 |   |
| Depreciation and  amortization on property, plant and equipment              |   | 455                          |   | 409 |   |
| Loss (gain) on  sale of property, plant and equipment                        |   | 41                           |   | (4 | ) |
| Contributed  management services                                             |   | —                       |   | 250 |   |
| Changes in  operating assets and liabilities:                                |   |                         |   |   |   |
| Accounts  receivable                                                         |   | 2,175                        |   | 1,232 |   |
| Inventories                                                                  |   | (1,691                       | )      | 1,155 |   |
| Prepaids and  other                                                          |   | 92                           |   | (20 | ) |
| Accounts payable                                                             |   | (572                         | )      | 107 |   |
| Accrued  liabilities                                                         |   | (746                         | )      | (167 | ) |
| Net cash used in  operating activities                                       |   | (2,089                       | )      | (1,953 | ) |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                       |   |                         |   |   |   |
| Purchases of  property, plant and equipment                                  |   | (1,010                       | )      | (70 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                       |   |                         |   |   |   |
| Proceeds from  exercise of options                                           |   | 5                            |   | — |   |
| Proceeds from  borrowings                                                    |   | 5,000                        |   | 17,300 |   |
| Repayment of  borrowings                                                     |   | (875                         | )      | (14,598 | ) |
| Deferred  financing costs                                                    |   | —                       |   | (2,392 | ) |
| Net cash  provided by financing activities                                   |   | 4,130                        |   | 310 |   |
|                                                                         |   |                         |   |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                        |   | 1,031                        |   | (1,713 | ) |
| CASH AND CASH  EQUIVALENTS, beginning of period                              |   | 224                          |   | 2,063 |   |
| CASH AND CASH  EQUIVALENTS, end of period                                    |   | $                            | 1,255  |   | $ | 350 |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                           |   |                         |   |   |   |
| Cash paid for  interest                                                      |   | $                            | 4,961  |   | $ | 5,124 |   |
|                                                                         |   |                         |   |   |   |
| NON-CASH  INVESTING AND FINANCING ACTIVITIES:                                |   |                         |   |   |   |
| Series A  preferred stock dividend-in-kind                                   |   | $                            | 113    |   | $ | — |   |
| Series A, B and  C preferred stock dividend accrual                          |   | 874                          |   | 1,202 |   |
| Accretion of  discount on Series A preferred stock                           |   | 84                           |   | 84 |   |

 

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

 

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**ELGARHOLDINGS, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED 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 andEurope.  The Company operates in onebusiness segment.

 

**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 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 statements include alladjustments (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.

 

*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 sixmonths ended June 29, 2002 are not necessarily indicative of the results to beexpected for the Company’s fiscal year ending December 28, 2002.

 

*Use ofEstimates*

 

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 and expensesduring 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** |   | **June 29, 2002** |   |
|-----------------|--------|-----------------------|--------|-------------------|--------|
| Raw materials   |   | $                     | 7,268  |              | $      | 5,470 |   |
| Work-in-process |   | 1,261                 |   | 1,723             |   |
| Finished goods  |   | 1,051                 |   | 1,232             |   |
| Total           |   | $                     | 9,580  |              | $      | 8,425 |   |

* *

*Recent Accounting Pronouncements*

 

In June 2001, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards (“SFAS”) No. 141, “Business Combinations”. This statement addressesfinancial accounting and reporting for business combinations and supersedesAccounting Principles Board (“APB”) Opinion No. 16, “Business Combinations,”and SFAS No. 38, “Accounting for Preacquisition Contingencies of PurchasedEnterprises.” All business combinations in the scope of this statement are tobe accounted for using one method, the purchase method.  The Company adopted the provisions of SFASNo. 141 for all business combinations initiated after June 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. 142addresses how intangible assets that are acquired individually or with a groupof other assets (but not those acquired in a business combination) should beaccounted for in financial statements upon their acquisition. This statementalso addresses how goodwill and other intangible assets should be accounted forafter they have been initially recognized in the financial statements.  Upon adoption of SFAS No. 142, goodwill isno longer subject to amortization over its estimated useful life.  The Company completed the initialimpairment test for goodwill as of December 30, 2001. This test confirmed thatthe fair value of the Company exceeds the carrying value, and that noimpairment loss needed to be recognized upon adoption of SFAS No. 142.  TheCompany adopted SFAS No. 142 effective December 30, 2001, the effectof which was to classify the goodwill separately on the accompanyingconsolidated balance sheets and to cease the amortization of such goodwill,which would have been $597,000 and $1,193,000 in the three and six months endedJune 29, 2002, respectively.  Netloss for the three and six months ended June 30, 2001, excludingamortization of goodwill, would have been $1,579,000 and $2,234,000 compared to$2,176,000 and $3,427,000, 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

 

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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 Company adopted SFAS No.144 effective December 30, 2001.  Theadoption of SFAS No. 144 did not have a material impact on the Company’sfinancial 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 18%and 14% of the Company’s net sales in the quarters ended June 29, 2002 and June30, 2001, respectively.  In the sixmonths ended June 29, 2002 and June 30, 2001, sales to one customer accountedfor approximately 13% and 10% of the Company’s net sales, respectively.  No other customer individually representedmore than 10% of net sales in the three and six months ended June 29, 2002 andJune 30, 2001.  The Company performsongoing credit evaluation of its customers’ financial condition, and maintainsreserves for potential credit losses.

 

**4. Senior Notes and Credit Facilities**

 

*SeniorNotes*

 

In February 1998, the Company issued $90.0 millionaggregate principal amount of Senior Notes due 2008 (the “Senior Notes”).  The Senior Notes bear interest at a rate of9.875% per annum, payable semi-annually on February 1st and August 1st, andhave 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. The obligations of the Company as a guarantor ofElgar’s obligations under the New Credit Facility (as defined below) aresecured by substantially all of the assets of the Company.  Accordingly, such secured indebtednesseffectively ranks senior to the Senior Notes to the extent of such assets.

 

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. The Senior Notes are fully and unconditionallyguaranteed by the Company’s wholly owned subsidiary, Elgar.

 

8

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*OldCredit 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.

 

*NewCredit 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 percentage points,but in no event at a rate less than 7.75%. The reference rate means the rate of interest publicly announced byJPMorgan Chase Bank from time to time as its reference rate, base rate or primerate.  Borrowings outstanding under theNew Credit Facility mature on June 25, 2006.

 

Indebtedness underthe New Credit Facility is (i) secured by a first priority securityinterest in substantially all of the assets of the Company and Elgar(including, without limitation, accounts receivable, inventory, machinery,equipment, contracts and contract rights, trademarks, copyrights, patents,license agreements and general intangibles), (ii) guaranteed by theCompany on a senior basis and (iii) secured by a pledge of all of theoutstanding capital stock of Elgar.

 

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 made under the Revolver that, aftergiving effect to such loan, at least $1,000,000 of availability remains undrawnunder 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.  At June29, 2002, the outstanding balance of the Revolver was $1.5 million, with anadditional $6.6 million of borrowing capacity remaining under the formuladescribed above, and the Term Loan was fully drawn.  The Company intends to use funds

 

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available to it under the Revolver for working capital purposes anddebt service obligations.

 

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 six months ended June 29,2002 and June 30, 2001, the Company accrued $185,874 and $175,206,respectively, for dividends on the Series B Preferred Stock, and $141,366 and$133,248, respectively, for dividends on the Series C PreferredStock.  During the three months endedMarch 30, 2002 and March 31, 2001, the Company accrued $92,016 and $86,736,respectively, for dividends on the Series B Preferred Stock, and $69,639 and$65,640, respectively, for dividends on the Series C Preferred Stock.

 

**6. Series A Redeemable PreferredStock**

 

Dividends are payablequarterly to the holders of Series A cumulative redeemable preferred stock at12% per year.  The dividends are payablein-kind through January 31, 2001 and in cash thereafter.  Under the terms of the indenture governingthe Company’s $90.0 million of senior notes, the Company is prohibited frompaying cash dividends unless its consolidated fixed charge coverage ratio is atleast 2.0 to 1.0.  The Company does notanticipate that this ratio will equal or exceed 2.0 to 1.0 during 2002.  As a result, the Company has accrueddividends of $874,542 during the six months ended June 29, 2002 and$565,973 from February 1, 2001 to June 30, 2001.  During the three months ended March 30, 2002 and March 31, 2001,the Company accrued dividends of $420,591 and $224,148, respectively.  The Company anticipates that it willcontinue to accrue dividends, rather than pay cash dividends, on the Series Apreferred stock during the remainder of fiscal 2002.

 

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**7. Related Party Transactions**

 

*ContributedManagement Services*

 

In February 1998, the Company entered into a ManagementAgreement with J.F. Lehman & Company (“Lehman”), an affiliate of theCompany’s principal stockholder (the “Management Agreement”).  Under the terms of the Management Agreement,the Company was obligated to pay Lehman a $500,000 annual management fee inadvance on a semi-annual basis.  InSeptember 1998, the Company and Lehman amended the Management Agreement andconcurrently entered into a Management Services Agreement with Lehman, thecombined effect of which was to further delineate the management services to beprovided by Lehman and to reduce the term of the Management Agreement from tenyears to five years.  Under theCompany’s old credit facility with Deutsche Bank, the Company was precludedfrom paying management fees to Lehman during recent periods when Deutsche Bankhad waived events of default.  Lehmanhas continued to provide management services to the Company.  Under the New Credit Facility with Ableco,the Company is prohibited from paying management fees to Lehman.  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 six months ended June 29, 2002 was $125,000 and$250,000, respectively.

 

During the three months ended June 29, 2002, theCompany reimbursed Lehman $217,000 for expenses Lehman incurred in connectionwith replacing the old credit facility with Deutsche Bank with the New CreditFacility with 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, the current ChiefOperating Officer who will become the Company’s Chief Executive Officereffective August 26, 2002.

 

*RacalInstruments*

 

Racal Instruments (“Racal”), a significant customer ofthe Company, 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 of directors.  As a result, Racal is considered a relatedparty.  Sales by the Company to Racalwere approximately $180,000  and$1,559,000 during the six months ended June 29, 2002 and June 30, 2001,respectively.  During the three monthsended March 30, 2002 and March 31, 2001, sales by the Company toRacal were approximately $107,000 and $849,000, respectively.

 

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

 

In conjunction with the New Credit Facility, theCompany’s majority stockholder, J.F. Lehman Equity Investors I, L.P.,entered into a Capital Call Agreement with Ableco.  Pursuant to the terms of this agreement, the majority stockholderagreed to participate in $3.0 million of the Term Loan on a *pari passu* basis with Ableco if theCompany fails to meet a minimum EBITDA covenant for an initial test period,which consists of the third and fourth quarters of fiscal 2002.  This agreement will terminate uponsatisfactory evidence of performance after 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” and similar expressions,as they relate to the Company or its management, are intended to identifyforward-looking statements.  Suchstatements reflect the current views of the Company, with respect to futureevents and are subject to certain risks, uncertainties and assumptions, thatcould cause actual results to differ materially from those expressed in anyforward-looking statement, including, without limitation: competition fromother manufacturers in the Company’s industry, loss of key employees and/orgeneral economic conditions.  Should oneor more of these risks or uncertainties materialize, or should underlyingassumptions prove incorrect, actual results may vary materially from thosedescribed herein as anticipated, believed, estimated or expected.  The Company does not intend to update theseforward-looking statements.

 

**Resultsof Operations**

 

The following table sets forth certain statement ofoperations information for the Company as a percentage of net sales for the threeand six months ended June 30, 2001 and June 29, 2002:

 
|                                               |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|----------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                               |   | **June 30,  2001**      |   | **June 29,  2002**    |   | **June 30,  2001** |   | **June 29,  2002** |   |
|                                               |   | **(unaudited)**         |   | **(unaudited)**       |   |
| **Statement of Operations Data:**                  |   |                    |   |                  |   |   |   |   |   |
| Net sales                                          |   | 100.0                   | %      | 100.0                 | %      | 100.0 | % | 100.0 | % |
| Cost of sales                                      |   | 62.1                    |   | 63.0                  |   | 62.3 |   | 62.5 |   |
| Gross profit                                       |   | 37.9                    |   | 37.0                  |   | 37.7 |   | 37.5 |   |
| Selling, general  and administrative expenses      |   | 18.9                    |   | 24.4                  |   | 17.9 |   | 24.8 |   |
| Research and  development and engineering expenses |   | 11.5                    |   | 12.0                  |   | 10.1 |   | 12.2 |   |
| Amortization  expense                              |   | 4.0                     |   | 0.1                   |   | 3.7 |   | 0.1 |   |
| Operating income                                   |   | 3.5                     | %      | 0.5                   | %      | 6.0 | % | 0.4 | % |

 

*Comparisonof the Three Months Ended June 30, 2001 to the Three Months Ended June 29, 2002*

* *

*Netsales. *Net sales forthe quarter ended June 29, 2002 were $11.1 million, a decrease of$4.2 million, or 27.5%, from net sales of $15.3 million for the quarterended  June 30, 2001.  This decrease was primarily attributable tothe overall decline in the economy and was across all product lines.  In the quarter ended June 29, 2002, sales ofPower Ten products, which are part of the programmable DC power products, were$1.4 million, a decrease of $0.9 million from the quarter ended June30, 2001.  Sales of other DC powerproducts were $5.1 million, a decrease of $1.0 million from the

 

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comparable period in the prior year. In the quarter ended June 29, 2002, Space System product sales were $0.6million, a decrease of $1.1 million from the quarter ended June 30, 2001.

* *

*Grossprofit.*  Gross profitfor the quarter ended June 29, 2002 was $4.1 million, a decrease of$1.7 million, or 29.3%, from gross profit of $5.8 million for thequarter ended June 30, 2001.  Thedecrease in gross profit was primarily due to the decrease in net sales whencompared to the quarter ended June 30, 2001. The gross profit percentage for the quarter ended June 29, 2002 was37.0%, a decrease of 0.9% from a gross profit percentage of 37.9% for thequarter ended June 30, 2001. This small percentage decrease was primarily theresult of inventory write downs. Margins are expected to be higher in future periods due to theelimination of certain fixed costs as a result of the consolidation of thePower Ten operations with Elgar’s operations at the Company’s headquarters inSan Diego.

* *

*Selling,general & administrative expenses.*  Selling, general and administrative(“SG&A”) expenses were $2.7 million for the quarter ended June 29,2002, a decrease of $0.2 million, or 6.9%, from SG&A expenses of$2.9 million for the quarter ended June 30, 2001.  SG&A expenses increased as a percentageof net sales from 18.9% in the quarter ended June 30, 2001 to 24.4% in thequarter ended June 29, 2002.  The dollardecrease was primarily due to lower sales volume resulting in $0.3 million indecreased commissions expense.  Otherreductions to expenses in selling, advertising and administration were offsetby non-recurring costs related to the Power Ten consolidation and severance andrecruitment-related costs.

* *

*Research and development andengineering expenses.* Research and development and engineering (“R&D&E”) expenses were$1.3 million for the quarter ended June 29, 2002, a decrease of $0.5 million,or 27.8%, from R&D&E expenses of $1.8 million for the quarterended June 30, 2001.  R&D&Eexpenses increased slightly as a percentage of net sales from 11.5% in thequarter ended June 30, 2001 to 12.0% 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 June 30, 2001, and a result of the Power Tenconsolidation.

* *

*Amortization expense.*  Amortization expense was $12,000 for thequarter ended June 29, 2002, a decrease of $0.6 million from amortization expenseof $0.6 million for the quarter ended June 30, 2001.  Amortization expense in the quarter ended June 29, 2002 relatedto non-compete agreements entered into with the former owners of Power Ten,while amortization expense in the prior period included amortization ofgoodwill associated with the April 1996 acquisition of Elgar by the predecessorto Elgar Holdings, Inc. and the May 1998 acquisition of Power Ten, as wellas $12,000 of expense relating to the non-compete agreements.  Pursuant to SFAS No. 142, beginningDecember 30, 2001, goodwill is no longer amortized, which accounts for thedifferences between quarters.

* *

*Operatingincome.*  Operatingincome was $0.1 million for the quarter ended June 29, 2002, a decrease of$0.4 million from operating income of $0.5 million for the quarterended June 30, 2001.  Operating incomedecreased as a percentage of net sales from 3.5% for the quarter ended June 30,2001 to 0.5% for the quarter ended June 29, 2002, due to the factors discussedabove.

* *

*Interestexpense. *Interestexpense was $3.1 million in the quarter ended June 29, 2002, an increase of$0.4 million, or 14.8%, from interest expense of $2.7 million in the quarterended June 30, 2001.  Interestexpense increased as a percentage of net sales from 17.7% in the quarter endedJune 30, 2001 to 27.7% in the comparable 2002 period.  The increase in dollars was a result of higher outstandingborrowings on our revolving line of credit, partially offset by lower interestrates on those borrowings, together with an increase in the amortization ofdeferred loan costs of $334,000 due to the acceleration of

 

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outstanding borrowings under the Company’s former Deutsche Bankfacility and $100,000 of amendment fees payable to Deutsche Bank that wereaccrued and paid in the quarter ended June 29, 2002.

* *

*IncomeTaxes. *Income taxesfor both of the quarters ended June 29, 2002 and June 30, 2001 were zero.  Losses generated in these quarters do nothave a carryback benefit and thus have not been recognized because futurerealization is uncertain.

* *

*Netloss.*Net loss was $3.0 million in the quarter ended June 29,2002, an increased loss of $0.8 million from a net loss of $2.2 million for thequarter ended June 30, 2001.  In orderto improve operating results, we have undertaken a number of initiatives.  These include reduction of indirectheadcount, initiating cost reduction efforts in the manufacturing andprocurement processes, and the relocation of our Power Ten operations to ourSan Diego facilities.

 

*Comparison of the Six Months EndedJune 30, 2001 to the Six Months Ended June 29, 2002*

* *

*Netsales. *Net sales forthe six months ended June 29, 2002 were $21.1 million, a decrease of$11.5 million, or 35.3%, from net sales of $32.6 million for the sixmonths ended June 30, 2001.  Thisdecrease was primarily attributable to the overall decline in the economy andwas across virtually all product lines. In the six months ended June 29, 2002, sales of Sorensen products andPower Ten products, which are part of the programmable DC power products, were$9.6 million and $2.8 million, respectively, a decrease of$3.9 million and $2.1 million, respectively, from the six monthsended June 30, 2001.  Sales ofother DC power products were $0.6 million, a decrease of $1.1 million from thecomparable period in the prior year.  Inthe six months ended June 29, 2002, CASS sales were $2.0 million, a decrease of$1.0 million, and Space System product sales were $1.2 million, a decrease of$1.8 million, from the six months ended June 30, 2001.  The Company is beginning production on thefinal phase of the CASS contract for the U.S. Navy, but expects continuingfollow on sales of spares and selective parts in future periods.

 

*Grossprofit.*  Gross profitfor the six months ended June 29, 2002 was $7.9 million, a decrease of$4.4 million, or 35.8%, from gross profit of $12.3 million for thesix months ended June 30, 2001.  Thedecrease in gross profit was due to the decrease in net sales when compared tothe six months ended June 30, 2001.  Thegross profit percentage for the six months ended June 29, 2002 was 37.5%, aslight decrease of 0.2% from a gross profit percentage of 37.7% for the sixmonths ended June 30, 2001.  Margins areexpected to be higher in future periods due to the elimination of certain fixedcosts as a result of the consolidation of the Power Ten operations with Elgar’soperations at the Company’s headquarters in San Diego.

 

*Selling,general & administrative expenses.*  SG&A expenses were $5.2 million forthe six months ended June 29, 2002, a decrease of $0.6 million, or 10.3%,from SG&A expenses of $5.8 million for the six months ended June 30,2001.  SG&A expenses increased as apercentage of net sales from 17.9% in the six months ended June 30, 2001 to24.8% in the six months ended June 29, 2002. The dollar decrease was primarily due to lower sales volume resulting in$0.7 million in decreased commissions expense. Other reductions to expenses in selling, advertising and administration wereoffset by non-recurring costs related to the Power Ten consolidation andseverance and recruitment-related costs.

 

*Research and development andengineering expenses.* R&D&E expenses were $2.6 million for the six months ended June29, 2002, a decrease of $0.7 million, or 21.2%, from R&D&Eexpenses of $3.3 million for the six months ended June 30, 2001.  R&D&E expenses increased as apercentage of net sales from 10.1% in the six months ended June 30, 2001to 12.2% in the comparable 2002 period. The

 

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decrease in dollars wasprimarily due to lower headcount and compensation expenses in research anddevelopment as compared to the six months ended June 30, 2001.  The 2.1% increase as a percentage of sales inthe six months ended June 29, 2002 versus the comparable 2001 period was due tothe $11.5 million decrease in sales, as discussed above.

 

*Amortization expense.*  Amortization expense was $24,000 for the sixmonths ended June 29, 2002, a decrease of $1.2 million from amortizationexpense of $1.2 million for the six months ended June 30, 2001.  Amortization expense in the six months endedJune 29, 2002 related to non-compete agreements entered into with the formerowners of Power Ten, while amortization expense in the prior period includedamortization of goodwill associated with the April 1996 acquisition of Elgar bythe predecessor to Elgar Holdings, Inc. and the May 1998 acquisition ofPower Ten, as well as $24,000 of expense relating to the non-compete agreements.  Pursuant to SFAS No. 142, beginningDecember 30, 2001, goodwill is no longer amortized, which accounts for thedifferences between the comparable periods.

 

*Operatingincome.*  Operatingincome was $0.1 million for the six months ended June 29, 2002, a decrease of$1.9 million from operating income of $2.0 million for the six monthsended June 30, 2001.  Operating incomedecreased as a percentage of net sales from 6.0% for the six months ended June30, 2001 to 0.4% for the six months ended June 29, 2002, due to the factorsdiscussed above.

 

*Interestexpense. *Interestexpense was $6.0 million in the six months ended June 29, 2002, an increase of$0.6 million, or 11.1%, from interest expense of $5.4 million in the six monthsended June 30, 2001.  Interestexpense increased as a percentage of net sales from 16.5% in the six monthsended June 30, 2001 to 28.2% in the comparable 2002 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 $550,000 due to the acceleration ofoutstanding borrowings under the Company’s former Deutsche Bank facility and$150,000 of amendment fees payable to Deutsche Bank that were accrued and paidin the six months ended June 29, 2002.

 

*IncomeTaxes. *Income taxesfor the six months ended June 29, 2002 and June 30, 2001 were zero.  Losses generated in these periods do nothave a carryback benefit and thus have not been recognized because futurerealization is uncertain.

 

*Netloss. *Net loss was$5.9 million in the six months ended June 29, 2002, an increased loss of $2.5million from a net loss of $3.4 million for the six months ended June 30,2001.  In order to improve operatingresults, we have undertaken a number of initiatives, as discussed 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 operatinglosses, working capital requirements, debt service requirements and capitalexpenditures.  Based upon current andanticipated levels of operations and access to funds under our New CreditFacility with Ableco, we believe that our cash flow from operations, togetherwith amounts available under our New Credit Facility, will be adequate to meetour anticipated cash requirements for the next 12 months.  No assurance can be given, however, thatthis will be the case.  As a holdingcompany with no operations or assets other than our ownership of Elgar’scapital stock, we must rely on dividends and other payments from Elgar togenerate the funds necessary to meet our obligations, including the payment ofprincipal and interest on the Senior Notes.

 

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The Company made an interest payment of approximately$4.5 million to the holders of the Senior Notes on August 1, 2002.  The Company used $3.5 million from theRevolver to make this payment, resulting in an outstanding balance of$5.0 million under the Revolver at August 1, 2002.

 

*CapitalRequirements*.  TheCompany’s capital expenditures were $74,000 in the six months ended June 29,2002 and $1,012,000 in the six months ended June 30, 2001.  The Company expects to make $400,000 ofcapital expenditures in the last six months of 2002.

 

**Recent Accounting Pronouncements**

 

In June 2001, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards (“SFAS”) No. 141, “Business Combinations”. This statement addressesfinancial accounting and reporting for business combinations and supersedesAccounting Principles Board (“APB”) Opinion No. 16, “Business Combinations,”and SFAS No. 38, “Accounting for Preacquisition Contingencies of PurchasedEnterprises.” All business combinations in the scope of this statement are tobe accounted for using one method, the purchase method.  The Company adopted the provisions of SFASNo. 141 for all business combinations initiated after June 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 APB Opinion No.17, “Intangible Assets.” SFAS No. 142 addresses how intangible assets that areacquired individually or with a group of other assets (but not those acquiredin a business combination) should be accounted for in financial statements upontheir acquisition. This statement also addresses how goodwill and otherintangible assets should be accounted for after they have been initiallyrecognized in the financial statements. Upon adoption of SFAS No. 142, goodwill is no longer subject toamortization over its estimated useful life. The Company completed the initial impairment test for goodwill asof December 30, 2001. This test confirmed that the fair value of the Companyexceeds the carrying value, and that no impairment loss needed to be recognizedupon adoption of SFAS No. 142.  The Company adopted SFAS No. 142effective December 30, 2001, the effect of which was to classify thegoodwill separately on the accompanying consolidated balance sheets and tocease the amortization of such goodwill, which would have been $597,000 and$1,193,000 in the three and six months ended June 29, 2002, respectively.Net loss for the three and six months ended June 30, 2001, excludingamortization of goodwill, would have been $1,579,000 and $2,234,000 compared to$2,176,000 and $3,427,000, 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.

 

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In June 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities,” which addresses financialaccounting and reporting for costs associated with exit or disposal activitiesand supersedes Emerging Issues Task Force (“EITF”) Issue 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).”  SFAS No. 146 requires that a liability for acost associated with an exit or disposal activity be recognized when theliability is incurred.  Under EITF Issue94-3, a liability for an exit cost was recognized at the date of an entity’scommitment to an exit plan.  SFAS No.146 also establishes that the liability should initially be measured andrecorded at fair value.  The Companywill adopt the provisions of SFAS No. 146 for exit or disposal activities thatare initiated after December 31, 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 June 29, 2002, $16,500,000of outstanding borrowings under the New Credit Facility, including letters ofcredit, was at variable interest rates. We are subject to market risk resulting from interest rate fluctuationswith respect to our variable-rate borrowings. We had previously entered into an interest rate swap arrangement, whichmatured in June 2001, and we may consider entering into such arrangements inthe future in order to alter interest rate exposures.  A one percentage point increase in interest rates would beexpected to have an estimated impact on net loss and cash flows for next yearof approximately $165,000 for the variable-rate debt.

 

The tables below provide information at June 29,2002 about our financial obligations that are sensitive to changes in interestrates.

 

**Long-Term Lender Debt (Variable Rate)**

 
| Principal amount                          |   | $             | 16,500,000 |   |
|-------------------------------------------|--------|---------------|------------|--------|
| Variable  interest rate                   |   | 10.02         | %(1)       |
| Maturity                                  |   | June 25, 2006 |       |
| Remaining  principal payments:            |   |          |       |
| June 25, 2006  (term debt)                |   | $             | 15,000,000 |   |
| June 25, 2006  (revolving line of credit) |   | $             | 1,500,000  |   |

 

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(1)          At June 29, 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 10.02%.

 

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**PART II OTHER INFORMATION**

 

**Item5.  Other Information**

 

**ManagementChanges**

 

*ChiefFinancial Officer*

 

On June 11, 2002, Christopher W. Kelford, theChief Financial Officer of the Company, voluntarily resigned from the Companyto take a similar position with another San Diego-area corporation.  Joseph A. Stroud, a director of the Companysince 1998 and an affiliate of the Company’s largest shareholder, J.F. LehmanEquity Investors I, L.P. (“JFLEI”), has been appointed to replaceMr. Kelford as the Company’s Chief Financial Officer.  Mr. Stroud has held a number of seniorfinancial and operational roles in various companies owned or controlled byJFLEI as well as with other companies not affiliated with JFLEI.

 

*ChiefExecutive 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,steps down from those positions. Mr. Kilpatrick will be retiring and resigning as President andChief Executive of the Company effective August 26, 2002, but willcontinue to serve on the Company’s Board of Directors as its ViceChairman.  Effective August 26, 2002, Mr. Budanowill become the President and Chief Executive Officer of the Company.  Mr. Budano has held senior managementpositions in manufacturing companies producing similar products to those Elgarproduces within the test and measurement industry.  A one-time charge of approximately $444,000 was accrued in thequarter ended June 29, 2002 relating to remaining payments underMr. Kilpatrick’s employment agreement and executive search fees forMr. Budano.

 

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

 
| (a)    |   | Exhibits.                                                                                                                                                                                                                                                                                                                                           |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                |
| 10.1   |   | Financing Agreement, dated as of June 26, 2002, by  and among Elgar Holdings, Inc., Elgar Electronics Corporation, the financial  institutions party thereto, Ableco Finance LLC, as administrative agent and  Ableco Finance LLC, as collateral agent (incorporated by reference from the  Form 8-K filed by the Registrant on July 15, 2002) |
|   |   |                                                                                                                                                                                                                                                                                                                                                |
| 10.2   |   | Security Agreement, dated as of June 26, 2002, by  and among Elgar Electronics Corporation, Elgar Holdings, Inc. and Ableco  Finance LLC.                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                |
| 10.3   |   | Patent Security Agreement, dated as of June 26,  2002, by and between Elgar Electronics Corporation and Ableco Finance LLC.                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                |
| 10.4   |   | Trademark Security Agreement, dated as of June 26,  2002, by and between Elgar Electronics Corporation and Ableco Finance LLC.                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                |
| 10.5   |   | Stock Pledge Agreement, dated as of June 26, 2002,  by and among Elgar Holdings, Inc., Elgar Electronics Corporation and Ableco  Finance LLC.                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                |
| 10.6   |   | Intercompany Subordination Agreement, dated as of  June 26, 2002, by and among Elgar Holdings, Inc., Elgar Electronics  Corporation and Ableco Finance LLC.                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                |
| 10.7   |   | Capital Call Agreement, dated as of June 26, 2002,  by and among J.F. Lehman Equity Investors I, L.P., Ableco Finance LLC, as  collateral agent and Ableco Finance LLC, as administrative agent.                                                                                                                                                    |
|        |        |                                                                                                                                                                                                                                                                                                                                                     |  |  |

 

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| (b) |   | A current report on Form 8-K was filed on  June 14, 2002 announcing the dismissal of Arthur Andersen LLP as  independent public accountants and the resignation of the Company’s chief  financial officer. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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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:   August 19, 2002 | By:                       | /s/  Joseph A. Stroud |
|                          |                      | Joseph A. Stroud |
|                          |                      | Chief Financial Officer |

 

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