** **

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-K**

| **(Mark  One)** |
|-----------------|
| **ý**      | **Annual Report pursuant to Section 13 or 15  (d) of the Securities Exchange Act of 1934** |
|            | **For  fiscal year ended December 28, 2002** |
| **or**          |
| ** ̈**      | **Transition Report Pursuant to Section 13 or  15 (d) of Securities Exchange Act of 1934** |
|            | **For  the transition period from                 to               ** |

** **

**CommissionFile Number 333-55797**

 

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** **

**ELGAR HOLDINGS, INC.**

(Exact name of Registrantas 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 principalexecutive office)                                      (Zip Code)

** **

**(858) 450-0085**

(Registrant’s telephonenumber, including area code)

 

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Securities registeredpursuant to Section 12(b) of the Act:

**None**

 

Securities registeredpursuant to Section 12(g) of the Act:

**None**

 

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 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  ̈       No ý

 

                             Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K.   ̈ Not applicable.

 

                             Indicate by check mark whether theregistrant is an accelerated filer (as defined in Exchange Act Rule12b-2).  Yes  ̈      No ý

 

                             As of April 22, 2003, the number ofoutstanding shares of the registrant’s Common Stock was 4,602,433.

 

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**Table ofOther Registrants**

 
| **Name of Corporation**       |   | **Jurisdiction  of Incorporation** |   | **IRS  Employer  Identification Number** |   | **Address  Including Zip Code and**

**Area Code  and Telephone**

**Number of  Principal**

**Executive  Offices** |   |
|-------------------------------|--------|------------------------------------|--------|------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|--------|
|                          |   |                               |   |                                     |   |                                                                                                                |   |
| Elgar Electronics Corporation |   | California                         |   | 33-0198753                               |   | 9250 Brown Deer Road

San Diego, CA  92121-2294

(858) 450-0085                                                     |   |

 

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**ElgarHoldings, Inc.Index to Annual Report on Form 10-K for Fiscal Year Ended December 28, 2002**

** **
| **Caption**   |                                                                                        |   |
|---------------|---------------------------------------------------------------------------------------------|--------|
|          | PART I                                                                                      |   |
|          |                                                                                        |   |
| ITEM 1.  | BUSINESS                                                                                    |   |
|          |                                                                                        |   |
| ITEM 2.  | PROPERTIES                                                                                  |   |
|          |                                                                                        |   |
| ITEM 3.  | LEGAL PROCEEDINGS                                                                           |   |
|          |                                                                                        |   |
| ITEM 4.  | SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS                                        |   |
|          |                                                                                        |   |
|          | PART II                                                                                     |   |
|          |                                                                                        |   |
| ITEM 5.  | MARKET FOR REGISTRANT’S COMMON EQUITY AND  RELATED STOCKHOLDER MATTERS                 |   |
|          |                                                                                        |   |
| ITEM 6.  | SELECTED FINANCIAL DATA                                                                     |   |
|          |                                                                                        |   |
| ITEM 7.  | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   |
|          |                                                                                        |   |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                                 |   |
|          |                                                                                        |   |
| ITEM 8.  | CONSOLIDATED FINANCIAL STATEMENTS AND  SUPPLEMENTARY DATA                                   |   |
|          |                                                                                        |   |
| ITEM 9.  | CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE       |   |
|          |                                                                                        |   |
|          | PART III                                                                                    |   |
|          |                                                                                        |   |
| ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE  REGISTRANT                                         |   |
|          |                                                                                        |   |
| ITEM 11. | EXECUTIVE COMPENSATION                                                                      |   |
|          |                                                                                        |   |
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT                             |   |
|          |                                                                                        |   |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS                                             |   |
|          |                                                                                        |   |
|          | PART IV                                                                                     |   |
|          |                                                                                        |   |
| ITEM 14. | CONTROLS AND PROCEDURES                                                                     |   |
|          |                                                                                        |   |
| ITEM 15. | EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND  REPORTS ON FORM 8-K              |   |
|          |                                                                                        |   |
| RULE 13a-14   | CERTIFICATIONS                                                                              |   |

 

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**PART I**

**ITEM 1.****                            ****BUSINESS**

 

*                                               **In this report, the “Company,” “EHI,” “we,” “us” and “our”refer to Elgar Holdings, Inc. and its wholly owned subsidiary, ElgarElectronics Corporation, unless the context requires otherwise.*

 

**Overview**

 

                                                We are a leading designer andmanufacturer of programmable power supplies and systems for commercial andmilitary applications.  Power suppliesconvert one form of electric power, such as alternating current (“AC”) from awall outlet, into another form of electric power, such as direct current (“DC”)used by most electronic products. Programmable power supplies have increased application flexibility asthey convert a single input power level into various output power levels.  Our products are designed into originalequipment manufacturer (“OEM”) systems, or utilized by the end customer inpower reliability verification, product acceptance, process control, or burn-inapplications.  We provide one of thebroadest product offerings in our industry. Our customers include such industry leaders as Boeing, Loral, BAESystems, Hewlett-Packard, Dell, Northrup Grumman, Litton, Motorola, AdvancedEnergy, Siemens, Novellus Systems, Seagate Technology, Halliburton and LockheedMartin.

 

                                                Elgar Electronics Corporation, our whollyowned subsidiary (“Elgar”), was founded in 1965 as a manufacturer ofsolid-state line conditioners and frequency changers for the AC power test andmeasurement market.  By the early1990’s, we had become primarily an AC power supply provider to the defensemarket with approximately $20 million in net sales. Over the next severalyears we developed and executed a comprehensive plan to expand our focus totarget the large and diverse, commercial DC market.  We improved product quality through product redesign andclean-up, quality systems improvement and ongoing employee training.  We extended product breadth through newproduct introductions, strategic alliances and acquisitions of two DC powersupply companies, Sorensen and Power Ten. We also reduced delivery cycle times and established anindustry-leading, technical support and services capability, with extensivepre-sales support and expert rack system integration consultation.  This strategy proved to be successful.  For our fiscal years 2000, 2001 and 2002approximately 80.0%, 91.5% and 83.8% of our sales, respectively, were derivedfrom diversified commercial customers.

 

**ProductApplications**

 

                                                Our significant software and hardwareengineering capabilities enable us to address a wide range of complexapplications in our target markets.  Wedesign and manufacture power solutions used in critical applications thatrequire varied levels of power output and involve substantial engineeringcomplexity.  Our products are used inapplications such as:

 

•                 Test & Measurement (“T&M”) — where ourproducts are used to verify that electronic equipment operates reliably undervaried levels of power input;

 

•                 OEM — where our products are embedded into a system byour customer which is in turn sold to the end customer;

 

•                 Process Control — where our products are primarilyused as power amplifying devices in the control of a process; and

 

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•                 Reliability/burn in — where our power supplies areused to provide power to devices to improve product reliability.  Burn-in applications are essential toverifying product reliability and are used to screen for “infant mortality”related failures in products.

 

                                                Applications within each of our targetmarkets include:

 
| **AC Power**                                                                                                                      |   | **Programmable DC**                                                                                                                                                                                                                                                                       |   | **Systems Integration**                                                                                                                                                   |   | **Power Conditioning**                                                                                                                                                                                                                              |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • Avionics testing

• Computer final test

• Lighting testing

• Power supply testing

• Weapons testing |   | •     Components testing

•     Computer printed circuit boards

•     Ion implantation systems

•     Oncology equipment

•     Microprocessor test systems |   | •     GPS satellite testing

•     Automotive electronics testing

•     Utility power control |   | •     Military communications backup

•     Power distribution for shipboard computers

•     Training systems

•     Unmanned aircraft control |

** **

**Principal Products**

 

                                                We have four principal product areas:

 

•                 *Programmable DC Power* is a type of programmable power supplyused to power or test products that require DC inputs, such as printed circuitboards, semiconductors, medical equipment, telecommunications equipment,avionics and almost all other types of electronic products;

 

•                 *Systems Integration Products andServices* includeboth power subsystem design, manufacture and integration, and space powersimulation systems.  The power subsystembusiness is a natural extension of the design and manufacturing capabilitiesdeveloped while producing complete space power simulation systems over the past15 years;

 

•                 *Programmable AC Power* is a type of programmable power supplyused to power or test AC products such as avionics, computers, DC powersupplies, appliances and many other types of electronic products; and

 

•                 *Other Products and Services*, which consist of (1) powerconditioning and ruggedized uninterruptible power supply (“UPS”) products,which supply back-up power principally to military computer and communicationssystems and oil exploration companies for data logging applications,(2) the Consolidated Automated Support System (“CASS”) Program for theU.S. Navy (for which we provide programmable AC and DC, fixed DC and powerconditioning products) and (3) customer service, consisting of repairservices and spare parts.

 

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                                                We categorize our sales in these fourprincipal product areas, with net sales shown by product area for our fiscalyear ended December 28, 2002 (“Fiscal 2002”) as follows (the amounts belowexclude $194,000 of shipping revenue in 2002):

 

|                                      |   | **Net Sales  for Fiscal 2002** |       |
|-------------------------------------------|--------|--------------------------------|------------|
| **Product Line**                          |   | **$**                          | **(000s)** |   | **% of Total** |   |
| Programmable DC Power                     |   | $                              | 27,719     |   | 57.6 | % |
| Systems Integration Products and Services |   | 2,957                          |       | 6.1 |   |
| Programmable AC Power                     |   | 5,281                          |       | 11.0 |   |
| Other Products and Services               |   | 12,204                         |       | 25.3 |   |
| Total                                     |   | $                              | 48,161     |   | 100.0 | % |

*** ***

***                       ******ProgrammableDC Power***

 

                                                Our broad line of programmable DCproducts is used by commercial and military customers for a wide variety ofapplications including computer and communications equipment, semiconductorburn-in, industrial process control, avionics, bench-top equipment, andresearch and development equipment. Customers for programmable DC productsinclude Racal Instruments (“Racal”), Applied Materials, Siemens, HalliburtonCompany, BAE Systems, Teradyne, Veeco Instruments, Hewlett-Packard and AdvancedPower and Reliability Inc.  Our DCproducts are applied in test and measurement, burn-in and OEMapplications.  DC product applicationsinclude the testing of laser printer heads, DC-to-DC converters, satellites andelectronic components.  These productsare also used for the burn-in of DC-to-DC converters and semiconductors.  OEM applications of our DC products includesupplying power to medical equipment and cable TV amplifiers.  Our DC products are mainly used in OEMapplications by customers such as Novellus, Applied Materials and Veeco Instruments.  Our power solutions are incorporated intosemiconductor manufacturing equipment, microprocessor test stations and burn-insystems.  Through Racal, a systemsintegrator for test and measurement equipment, we are the sole source supplierof programmable DC power equipment to a leading semiconductor manufacturer foruse in the Racal automatic test equipment (“ATE”) systems for testingmicroprocessors.  Measurement andcontrol applications are highly varied and include power solutions for themedical equipment, automotive, computer, industrial automation, consumer goods,commercial avionics and space, and oil and gas markets.

 

                                                We offer 20 DC product lines under the *Sorensen*,*Elgar*and *PowerTen* brand names, ranging in power from 60 watts to 30kw.  Most of our products are produced in-house,although five lower priced programmable DC product lines that represented lessthan 3.0% of our revenue in Fiscal 2002, are manufactured by others and brandlabeled *Sorensen*.  Our purchase of Power Ten in May 1998broadened our product offering with high-power, programmable DC products.  We recently entered the market for DC loadswith a new product line, enabling us to achieve incremental revenue by sellingthis product into our existing customer base through the same sales channel.

 

***                       ******SpacePower Simulator Products***

 

                                                Our space power simulation products areapplied in test and measurement applications to test satellites.  Given the significant cost involved inbuilding, launching and insuring satellites, fully testing units prior tolaunch is critical.  With theflexibility to generate any possible power scenario that solar panels mayproduce in space, our fully integrated Solar Array Simulator (“SAS”) testsystem performs mission-critical power testing from payload testing to finalsatellite testing inside a thermal vacuum chamber.  The SAS can be programmed to create the output power formsassociated with a wide variety

 

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of solar array operatingenvironments including direct solar illumination, spinning orbital profiles, aneclipse entry and exit, aging of the solar array and many other conditions.

 

                                                We believe that we are the leadingnon-captive source for satellite ground power test systems in the UnitedStates.  With our turn-key power systemsand fourth generation SAS systems, we supply virtually every major U.S.commercial, military and power subsystem development satellite manufacturer,including Boeing/Hughes, Lockheed Martin, Space Systems Loral, TRW, JetPropulsion Lab and Ball Aerospace. Additionally, we have established a strong presence in Europe withcustomers such as Astrium (Matra Marconi Space and DASA), Alenia Space,Alcatel, Terma and the European Space Agency (ESA ESTEC), and we have recentlyentered the Japanese market by securing an order with NEC Toshiba Space.

 

                                                In addition, we also provide BatterySimulator Systems that simulate spacecraft flight batteries in all powerconditions, including charge and discharge.

 

***                       ******ProgrammableAC Power***

 

                                                Our programmable AC products generate awide range of dynamic AC voltages, frequencies, phase relationships andcurrents, simulating all possible electrical power waveforms. In addition topure AC waveforms, our SmartWaveTM products are capable of creating anydistortion to the wave including noise, spikes, drop-outs and shifts in phaseangle. Like our DC products, our AC products are used to test electronicequipment such as consumer appliances, computers, DC power supplies andavionics, with the tests subjecting the equipment to all possible power variationsneeded to evaluate performance of the specific product or component.

 

                                                Our leading AC product, the SmartWaveTM,is widely recognized in the industry as one of the most technologicallyadvanced AC products on the market.  TheAC power market, which has been dominated by military spending in the past, isa small but steady and attractive niche for us. We believe that we have one ofthe largest shares of the AC power market. We are currently the incumbent on many significant U.S. government ATEcontracts.

 

                                                We offer 15 AC product lines under the *Elgar*brand name, ranging in power from 120VA to 712kVA.  In 2000, to address the low-cost market, we introduced theContinuousWaveTM—Manual and ContinousWaveTM—Programmable product lines, which areused primarily in avionics and AC power components testing.

 

***                      ******OtherProducts and Services***

 

                                                Other products and services comprisethree components, which are:

 

•                 power conditioning and uninterruptible power supply(“UPS”) products;

 

•                 the CASS program; and

 

•                 customer service.

 

                                                *UPS*. Our power conditioning and UPS product line includes a range of instrumentswhich are capable of providing precise AC output power regardless of the inputpower distortions or drop-outs. This type of product is used in criticalapplications where electrical power fluctuations could have severeconsequences, such as with field-support for military operations and back-upfor data logging in oil exploration missions. The Global Uninterruptible PowerSupply (GUPSTM), our principal product in this line, is designed to handle anyinput power from anywhere in the world, including aircraft power, and generatesa clean AC output even when the input power is lost.

 

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*                                               **CASS*. The CASS program is a Navy/NAVAIR program developed to reduce therequired number of avionics custom automated test equipment systems located onaircraft carriers, at depots and at test integration facilities.  Our role in the CASS program is to providethese ATE stations with power subsystems, which consist of programmable AC andDC power supplies, a power conditioner and fixed DC system supplies.  We are the sole supplier of power subsystemsto Lockheed Martin, the prime contractor for the CASS program.  We have delivered 611 systems under theprogram to date.

 

                                                Although full-rate production on the CASSprogram ceased in the fourth quarter of 2002, we are now in the sustainingphase for the program, where the emphasis is on small quantity orders, sparesand service.  We understand that theU.S. Navy is considering a limited expansion of the CASS program to equip non-carrierships.  If this were to occur, andLockheed Martin were to obtain any such business, this could representadditional opportunities for our revenue growth.  Further, other branches of the military have programs similar toCASS, including the U.S. Army’s Integrated Family of Test Equipment, whichcurrently utilizes our other standard products.

 

                                                *Customer Service*. We offer comprehensive customer service for all of our product offeringsthrough our in-house staff of ten customer service technicians, two serviceadministrators and four customer service engineers.  Our customer service organization provides global repair andspare parts for all products we offer, and provides technical assistance to ourinternational distributors that are responsible for equipment repairs in theirterritories and to customers who repair equipment in-house.

 

**Significant Customers**

 

                                                We sell our power supplies and systems toover 2,500 customers, both directly and indirectly through distributors.  Certain customers are material to ourbusiness and operations.  In Fiscal2002, one customer, Lockheed Martin, accounted for approximately 15.3% of ourtotal net sales, up from 13.7% in Fiscal 2001. Boeing/Hughes accounted for approximately 7.7% of our total net sales inFiscal 2002, down from 10.2% in our fiscal year ended December 29, 2001(“Fiscal 2001”).  No other customeraccounted for 10% or more of our net sales in Fiscal 2002, Fiscal 2001 or ourfiscal year ended December 30, 2000 (“Fiscal 2000”).  In Fiscal 2002, our top ten customersaccounted for approximately 41.7% of net sales, down slightly from 42.1% inFiscal 2001.

 

**Competition**

 

                                                With the exception of Agilent, asignificant competitor, we believe we sell more programmable switch-mode powersupplies in the United States than any other provider.  Most of our competitors are either smallprivate companies, which do not match the breadth of product offerings, ornon-core subsidiaries of much larger parent companies, which tend to be lessfocused on the power solution market. We operate in a very competitive environment across our DC and ACproduct lines and enjoy a less competitive environment in our systemsintegration product and services business. The principal competitive factors in our markets include vendor and productreputation, fast delivery, price, product performance specifications,functionality and features, ease of implementation and use, and quality ofcustomer support.  We believe we arewell positioned with regard to these factors and compete effectively in all ofour target markets.

 

**Sales and Marketing**

 

                                                We sell our products through salesrepresentatives in the U.S. and through distributors internationally, with somedirect sales to specific customers and markets.  Our sales organization includes 20 employees plus two outsideconsultants, as well as approximately 45 representative/distributor

 

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companies with more than200 salespeople worldwide.  We believethat our sales network is one of our major assets and provides us with asignificant competitive advantage.

 

                                                Our in-house sales force includes ninesales managers who are each responsible for working with customers andprospective customers to provide existing or custom solutions to their needs.Our four sales engineers, who support the sales managers, representatives andcustomers, design solutions according to customers’ applications. In turn,these 13 sales professionals are supported by two program managers and anadministrative staff of three people. Our sales and marketing team alsoincludes two marketing professionals who conduct marketing research, createcollateral material and training manuals, coordinate the placement ofadvertising in appropriate trade journals and other periodicals, as well asorganize trade shows and perform general public relations work.

 

                                                We have strong relationships with themajority of our sales representatives. In the U.S., we believe we have retainedthe services of the top sales representative for our products in each region ofthe country.  Internationally, we areexpanding our efforts in Europe and Asia by adding additional sales personnelwhile at the same time utilizing advertising and trade shows to increaseawareness of our products. Our sales representatives are essentially fieldextensions of our sales team, helping to identify and pursue salesopportunities. As a result, the sales force, including the representativenetwork, has been instrumental in identifying potential new productopportunities, thus helping to guide our research and development efforts tothe most promising areas.

 

                                                In an effort to maximize theeffectiveness of our domestic sales network, we have established arepresentative board, comprised of the chief executives of five of our salesrepresentative organizations, that meets with management on a periodic basis todiscuss marketing strategy and execution of the marketing plan.

 

                                                Only one sales representative accountedfor over 10% of our net sales in Fiscal 2002, Fiscal 2001 or Fiscal 2000.

 

                                                Domestic sales accounted forapproximately 88.8%, 89.1% and 87.6% of total net sales in Fiscal 2000, Fiscal2001 and Fiscal 2002, respectively.

 

**Research, Development and Engineering**

 

                                                At December 28, 2002, our engineeringdepartment consisted of 52 people.  Ourresearch, development and engineering expenses were $6.7 million for Fiscal2000, $6.2 million for Fiscal 2001 and $4.8 million for Fiscal 2002.  Customer-funded research and developmentcomprised $0.5 million, $0.3 million and $0.4 million of our overall researchand development expenditures incurred in Fiscal 2000,****Fiscal 2001 and Fiscal 2002,respectively.

 

                                                The development and introduction of newproducts has been and will continue to be an essential part of our growthstrategy to increase market share and expand into new markets.  We have had a record of successful andprofitable new product introductions, including the SmartWaveTM and the SolarArray Simulator products.  These andother products are considered superior in the marketplace due to their digitalcapabilities, flexible format, high quality engineering and long-termreliability. Our in-house development efforts are focused on leveraging ourstrong engineering capabilities to produce higher-end, more sophisticatedproducts utilizing digital technology. Management, in conjunction with thesales force and engineering department, has demonstrated a strong ability toidentify potential product areas and create technical solutions.

 

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**Manufacturing**

 

                                                Our manufacturing facilities areorganized and run efficiently with a focus on quality, speed and response, costand inventory management.  Ourmanufacturing equipment is modern and allows for efficient and quality production.We have designed and constructed our own in-house semi-automated test stationsto enhance productivity and ensure quality. Operations management hasidentified three core manufacturing competencies, which are:

 

•                 magnetics (transformer assembly);

 

•                 supply chain management; and

 

•                 lean manufacturing.

 

                                                Operations has redesigned the productionfloor to use lean manufacturing techniques and simplify material handling andassembly methodology based on these competencies.  The redesign has allowed maximum productivity and leveraging ofcommon processes across product lines, as the majority of Elgar’s products usethe same basic components.

 

                                                Over the years we have utilized selectivevertical integration and a focused factory approach to improve costs andmitigate delivery and quality risks. We utilize cross-functional teams in newproduct development, design for manufacturability, sustaining support andquality improvement initiatives while supporting a foundation of employeeempowerment and training. Our current initiatives involve focused material costreductions utilizing long-term partnerships and high quality offshoresuppliers. In addition, we have made substantial investments in automated testequipment and through-hole and surface-mount board assembly equipment. Thisequipment is being used to support the implementation of Demand Flow Technologyto build high quality products in the shortest production time and at thelowest cost.

 

                                                As part of our cost management program,we have outsourced certain low volume and all high volume transformers tosubcontractors in Mexico and India.  Wehave also subcontracted high volume sheet metal items to Asia.  All subcontractors are subjected to ourinspection and test process as assurance that quality expectations will be met.

 

                                                Over the last two fiscal years, we havemade a concerted effort to improve our competitive positioning by reducing leadtimes and improving profit margins.  Aspart of this effort, we improved our work flow, added semi-automated testcapabilities and made process and engineering improvements.

 

**Backlog**

 

                                                Our backlog at December 28, 2002 wasapproximately $6.2 million, all of which we expect to ship in 2003.  Our backlog was $10.7 million at December29, 2001.  Backlog consists of productorders for which a customer purchase order has been received and accepted andwhich is scheduled for shipment. Orders are subject to rescheduling orcancellation by the customer, usually without penalty. Backlog also consists ofcustomer-funded research and development payable under support contracts withour customers and orders for billable services. Because of possible changes inproduct delivery schedules, cancellation of product orders, and the fact thatsales will sometimes reflect orders shipped in the same month they are received,our backlog at any particular date is not necessarily indicative of actualsales for any succeeding period. Moreover, we do not believe that backlog isnecessarily indicative of our future results of operations or prospects.

 

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**Employees**

 

                                                At December 28, 2002, we had 317full-time employees (of which 11 were temporary employees), including 64manufacturing personnel, 52 engineering personnel, 21 administrative personnel,21 sales and marketing personnel, seven customer service personnel and 152personnel involved in direct labor.  Noattempts to unionize any of our employees have been made. We consider ouremployee relations to be good.

 

**IntellectualProperty**

 

                                                We have trademarked our SmartWaveTM,ContinuousWaveTM, TrueWaveTM and GUPSTM products and we have been operating underthe *Elgar*and *Sorensen*trade names for over 30 years. The Power Ten business has been using the *Power Ten*trade name for over 15 years. Inaddition to the protection offered by trademark laws and regulations, we relyupon trade secret protection for our confidential and proprietary informationand technology.

 

**Environmental**

 

                                                We are subject to various evolvingfederal, state and local environmental laws and regulations governing, amongother things, emissions to air, discharge to waters and the generation,handling, storage, transportation, treatment and disposal of hazardous andnon-hazardous substances and wastes. These laws and regulations provide forsubstantial fines and sanctions for violations and, in many cases, couldrequire us to remediate a site to meet applicable legal requirements. We arenot aware of any material environmental conditions affecting the propertieswhere we conduct our business.

 

**GovernmentContracts**

 

                                                Contracts with the United StatesGovernment (whether directly or indirectly) are subject to cancellation fordefault or convenience by the government if deemed in its best interests. Inaddition, based on audits conducted by the government with respect to itscontracts, pricing may be negotiated with respect to certain programs andcontracts.  In the last five years, wehave not had any major contracts canceled by the government for reasons ofconvenience or default. As 20.0%, 8.5% and 16.2% of our net sales in Fiscal2000, Fiscal 2001 and Fiscal 2002 were made directly or indirectly to the U.S.Government, a significant portion of our business is subject to the governmentprerogatives described above.

 

**ITEM 2.****                            ****PROPERTIES**

 

                                                For Elgar’s operations, which are basedin San Diego, California, we lease three facilities in close proximity totalingapproximately 110,300 square feet, which we use for:

 

•                  the design and production of Elgar’s standard DC andAC products and Sorensen-brand products, production for the CASS Program, PowerTen and administrative headquarters (92,100 sq. ft.) (lease expires in December2007);

 

•                  manufacturing of magnetics and power distributionunits, which are power conditioning products (9,100 sq. ft.) (lease expires inJuly 2003); and

 

•                  stockroom and receiving for all products (9,100 sq.ft.) (lease expires in December 2005).

 

                                                Prior to our consolidation of Power Ten’soperations with Elgar’s, Power Ten utilized a 29,100 square foot facility inLos Gatos, California under a lease that expired in July 2002.  We subleased 5,300 square feet of this spaceto an unaffiliated party.  Efforts tofind a tenant to sublease the remaining 23,800

 

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square feet for theremainder of the term were unsuccessful. The lease and the sublease expired in July 2002.

 

                                                We believe that our facilities are ingood condition with substantial capacity available for increased production ofcurrent product lines and new product introductions. As a result, nosubstantial capital expenditures are expected to be required to accommodate theprojected revenue growth.

 

**ITEM 3.****                            ****LEGAL PROCEEDINGS**

 

                                                We are routinely involved in legalproceedings related to the ordinary course of our business. We do not believeany such matters will have a material adverse effect on us. We maintainproperty, general liability and product liability insurance in amounts that webelieve are consistent with industry practices and adequate for our operations.

 

**ITEM 4.****                            ****SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

                                                No matters were submitted to a vote ofsecurity holders in the fourth quarter of 2002.

 

**PART II**

 

**ITEM 5.****                            ****MARKET FOR REGISTRANT’S COMMON EQUITYAND RELATED STOCKHOLDER MATTERS**

 

                                                Common Equity Dividends

 

                                                Our common stock is not listed or tradedon any exchange.  At March 1, 2003,there were 32 holders of record of our common stock.

 

                                                We have not paid any cash dividends onour common stock to date.  We intend toretain any future earnings for use in the development of our business and,consequently, do not anticipate paying cash dividends in the foreseeablefuture.  The payment of any cashdividends will be at the discretion of our Board of Directors and will dependupon, among other things, future earnings, operations, capital requirements,our general financial condition, general business conditions, restrictions inour debt agreements and the prior payment of cash dividends to the holders ofour preferred stock.  Our ability to paydividends to our stockholders, and the ability of our subsidiary to paydividends to us, is restricted by the indenture governing the $90.0 millionprincipal amount of Senior Notes due 2008 (the “Senior Notes”) and thedocuments governing our credit facility.

 

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**ITEM 6.****                            ****SELECTED FINANCIAL DATA**

 

**SelectedHistorical Consolidated Financial Data**

 

                                                The selected consolidated financial dataas of and for the fiscal year ended December 28, 2002 (“Fiscal 2002”) presentedbelow have been derived from our consolidated financial statements that havebeen audited by Deloitte & Touche LLP, independent public accountants, andare included in Item 15 of this report. The selected consolidated financial data for the fiscal years endedDecember 29, 2001 (“Fiscal 2001”) and December 30, 2000 (“Fiscal 2000”) and asof December 29, 2001 presented below have been derived from ourconsolidated financial statements that have been audited by Arthur AndersenLLP, and are included in Item 15 of this report.  The selected consolidated financial data as of December 30,2000, as of and for the fiscal year ended January 1, 2000 and as of andfor the nine-month period ended January 2, 1999 presented below have beenderived from our consolidated financial statements that have been audited byArthur Andersen LLP, but are not included in this report.  The selected consolidated financial data asof and for the year ended January 2, 1999 have been derived from ourunaudited consolidated financial statements that are not included in thisreport.

 

                                                In March 1999, the Company changed itsfiscal year from the Saturday closest to March 31st to the Saturday closest toDecember 31st, which is the reason why information is presented below both forthe nine months ended January 2, 1999, which is derived from auditedfinancial statements, and the 12 months ended January 2, 1999, which isderived from unaudited financial statements.

 

                                                The unaudited consolidated financialstatements presented below include, in the opinion of management, alladjustments, consisting of normal recurring adjustments, necessary for a fairpresentation of the results for the unaudited period.

 

                                                The information presented below isqualified in its entirety by, and should be read in conjunction with, Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations, andItem 8. Consolidated Financial Statements and Supplemental Data.

 

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|                                                                      |   | **Nine  Months Ended** |   | **Fiscal  Year Ended** |   |
|---------------------------------------------------------------------------|--------|------------------------|--------|------------------------|--------|
|                                                                      |   | **Jan. 2,  1999**      |   | **Jan. 2,**

**1999**  |   | **Jan. 1,**

**2000** |   | **Dec. 30,**

**2000** |   | **Dec. 29,  2001** |   | **Dec. 28,**

**2002** |   |
|                                                                      |   |                   |   | **(unaudited)**        |   |   |   |   |   |   |   |   |   |
| **Operating  Data:**                                                      |   |                   |   |                   |   |   |   |   |   |   |   |   |   |
| Net sales                                                                 |   | $                      | 47,136 |                   | $      | 63,017 |   | $ | 56,059 |   | $ | 65,786 |   | $ | 58,696 |   | $ | 48,355 |   |
| Cost of sales                                                             |   | 26,000                 |   | 34,619                 |   | 32,032 |   | 38,152 |   | 36,443 |   | 28,999 |   |
| Gross profit                                                              |   | 21,136                 |   | 28,398                 |   | 24,027 |   | 27,634 |   | 22,253 |   | 19,356 |   |
| Selling, general and administrative expenses                              |   | 8,114                  |   | 10,766                 |   | 10,005 |   | 11,337 |   | 11,741 |   | 9,943 |   |
| Research, development and engineering expenses                            |   | 4,912                  |   | 6,707                  |   | 5,851 |   | 6,675 |   | 6,170 |   | 4,793 |   |
| Amortization expense (1)                                                  |   | 1,663                  |   | 1,991                  |   | 2,432 |   | 2,435 |   | 2,435 |   | 48 |   |
| Operating income                                                          |   | 6,447                  |   | 8,934                  |   | 5,739 |   | 7,187 |   | 1,907 |   | 4,572 |   |
| Interest expense                                                          |   | 8,008                  |   | 10,253                 |   | 10,458 |   | 10,544 |   | 10,642 |   | 11,980 |   |
| Loss before income taxes                                                  |   | (1,561                 | )      | (1,319                 | )      | (4,719 | ) | (3,357 | ) | (8,735 | ) | (7,408 | ) |
| Income tax provision (benefit)                                            |   | (191                   | )      | (152                   | )      | (536 | ) | 70 |   | 1,449 |   | 3⁄4 |   |
| Net loss                                                                  |   | $                      | (1,370 | )                      | $      | (1,167 | ) | $ | (4,183 | ) | $ | (3,427 | ) | $ | (10,184 | ) | $ | (7,408 | ) |
|                                                                      |   |                   |   |                   |   |   |   |   |   |   |   |   |   |
| **Other Data:**                                                           |   |                   |   |                   |   |   |   |   |   |   |   |   |   |
| Operating cash flows (uses)                                               |   | $                      | 4,323  |                   | $      | 7,250 |   | $ | (1,350 | ) | $ | (2,637 | ) | $ | (1,206 | ) | $ | (3,477 | ) |
| Investing cash flows (uses)                                               |   | (17,800                | )      | (18,085                | )      | (674 | ) | (1,252 | ) | (1,085 | ) | (431 | ) |
| Financing cash flows (uses)                                               |   | 17,318                 |   | 17,084                 |   | (4 | ) | (366 | ) | 4,130 |   | 3,542 |   |
| Depreciation                                                              |   | 748                    |   | 1,024                  |   | 888 |   | 901 |   | 896 |   | 810 |   |
| Amortization of intangibles                                               |   | 2,199                  |   | 3,276                  |   | 3,166 |   | 3,167 |   | 3,169 |   | 1,547 |   |
| Capital expenditures                                                      |   | 294                    |   | 589                    |   | 676 |   | 1,254 |   | 1,093 |   | 437 |   |
| Ratio of combined earnings and preferred stock  dividends to earnings (2) |   | —                 |   | —                 |   | — |   | — |   | — |   | — |   |
|                                                                      |   |                   |   |                   |   |   |   |   |   |   |   |   |   |
| **Other Non-GAAP Data:**                                                  |   |                   |   |                   |   |   |   |   |   |   |   |   |   |
| Adjusted EBITDA (3)                                                       |   | $                      | 9,100  |                   | $      | 12,610 |   | $ | 9,158 |   | $ | 10,523 |   | $ | 5,418 |   | $ | 5,751 |   |
| Adjusted EBITDA margin (4)                                                |   | 19.3                   | %      | 20.0                   | %      | 16.3 | % | 16.0 | % | 9.2 | % | 11.9 | % |
|                                                                      |   |                   |   |                   |   |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                                                   |   |                   |   |                   |   |   |   |   |   |   |   |   |   |
| Total assets                                                              |   | $                      | 63,754 |                   | $      | 63,754 |   | $ | 58,545 |   | $ | 56,985 |   | $ | 49,662 |   | $ | 47,414 |   |
| Total debt                                                                |   | 104,000                |   | 104,000                |   | 100,000 |   | 99,625 |   | 103,798 |   | 110,000 |   |
| Stockholders’ deficit                                                |   | (59,589                | )      | (59,589                | )      | (61,575 | ) | (67,002 | ) | (79,354 | ) | (88,907 | ) |

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(1)             Amortization expense represents theamortization of goodwill and non-compete agreements associated with the April1996 acquisition of Elgar by Carlyle-EEC Holdings, Inc., and our May 1998acquisition of Power Ten.  The Companystopped amortizing goodwill in Fiscal 2002 pursuant to the adoption ofStatement of Financial Account Standards No. 142, “Goodwill and OtherIntangible Assets”.

 

(2)             In calculating the ratio of earnings tofixed charges, earnings consist of loss before income taxes plus fixedcharges.  Fixed charges consist ofinterest incurred (which includes amortization of deferred financing costs)whether expensed or capitalized and a portion of rental expense whichmanagement believes is a reasonable approximation of an interest factor.  Earnings were insufficient to cover fixedcharges by approximately $1,776,000 in the nine months ended January 2, 1999,$1,535,000 in the year ended January 2, 1999, $5,286,000 in the fiscal yearended January 1, 2000, $3,935,000 in the fiscal year ended December 30, 2000,$10,360,000 in the fiscal year ended December 29, 2001 and $9,886,000 in thefiscal year ended December 28, 2002.

 

(3)             Adjusted EBITDA is the sum of loss beforeincome taxes, interest, depreciation and amortization expense. Adjusted EBITDAis presented because we believe that it is a widely accepted financialindicator of a company’s ability to service debt. However, adjusted EBITDAshould not be considered as an alternative to net income or to cash flows fromoperating activities, as determined in accordance with generally acceptedaccounting principles, and should not be construed as an indication of acompany’s operating performance or as a measure of liquidity.

 

(4)             Adjusted EBITDA margin is equal toAdjusted EBITDA divided by net sales for the periods presented.

 

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**ITEM 7.****                            ****MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

                                                This report contains certain forward-lookingstatements and information relating to our business 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 our operations, are intended to identifyforward-looking statements.  Suchstatements reflect our current views with respect to future events and aresubject to certain risks, uncertainties and assumptions that could cause actualresults to differ materially from those expressed in any forward-lookingstatement.  Should one or more of theserisks or uncertainties materialize, or should underlying assumptions proveincorrect, actual results may vary materially from those described herein asanticipated, believed, estimated or expected. We do not intend to update these forward-looking statements.

 

                                                The following discussion and analysisshould be read in conjunction with “Selected Historical Consolidated FinancialData” and our consolidated financial statements and the notes thereto includedelsewhere in this report.

 

                                                As a holding company, we operate throughour wholly owned subsidiary, Elgar Electronics Corporation.

 

**Recent Developments**

 

                        *Exchange Agreement*

 

                                                On April 16, 2003, we entered into anExchange Agreement (the “Exchange Agreement”) with J.F. Lehman EquityInvestors I, L.P. (“JFL”), Jackson National Life Insurance Company, Old HickoryFund I, L.L.C., Indosuez Electronics Partners (collectively, the “ConsentingStockholders”) and OCM/GFI Power Opportunities Fund, L.P. and OCM PrincipalOpportunities Fund II, L.P. (collectively, the “Oaktree Entities”), in theircapacity as holders, directly or indirectly, of 73% of the Company’soutstanding Senior Notes.  The ExchangeAgreement requires the Company to make an exchange offer and consentsolicitation to the holders of its $90,000,000 of 9-7/8% Senior Notes, askingsuch holders to exchange their Senior Notes for an aggregate of(i) $60,000,000 of 9% senior notes due February 1, 2008 (the “New Notes”),(ii) $30,000,000 in stated liquidation value of Series D 10.5% seniorcumulative redeemable preferred stock due February 1, 2008 (the “New PreferredStock”) and (iii) 750,000 shares of new common stock, representing,without giving effect to the transactions described in the immediatelysucceeding paragraph, 75% of the Company’s common stock to be outstanding uponcompletion of the restructuring transactions. The Exchange Agreement contemplates that the exchange offer may offerthe holders of Senior Notes (other than the Oaktree Entities, JFL or any oftheir affiliates) the option to have their Senior Notes repurchased by theCompany, for an amount of cash to be determined, rather than exchanged for the basketof securities described above.  Wecurrently contemplate that the exchange offer will commence on or aboutMay 15, 2003, although that is subject to change.

 

                                                In addition, the Exchange Agreementrequires JFL to make an additional investment in the Company of not less than$4,800,000 in exchange for which it would receive, upon completion of therestructuring, $6,400,000 of New Notes, $3,200,000 in stated liquidation valueof additional New Preferred Stock and 80,000 shares of new common stock (to theextent JFL increases its investment in the Company, which it is permitted to doup to $6,000,000, the amount of securities it would obtain upon completion ofthe restructuring would increase proportionately).  Until the restructuring occurs, JFL’s $4,800,000 investment willbe used as collateral for the Bridge Notes discussed below.

 

                As provided in the Exchange Agreement, in connectionwith the exchange offer, the Company will solicit consents from tenderingnoteholders to approve (i) certain modifications to the existing indenturefor the Senior Notes that will remove from the indenture many of theprotections for holders of the Senior Notes and (ii) a prepackagedbankruptcy of the Company in the event the exchange offer is not consummated,which prepackaged bankruptcy would seek to replicate the successful completionof the restructuring as described in the Exchange Agreement to the greatestdegree possible, except with respect to the possible cash repurchase of SeniorNotes by the Company, which is not contemplated as part of the prepackagedbankruptcy plan, and subject to such changes as may be required underapplicable bankruptcy laws in order to make the plan of reorganizationthereunder confirmable.

 

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                                                Upon issuance of the New Notes, NewPreferred Stock and common stock as described above, through an amendment tothe Company’s charter to be effected immediately prior to the completion of therestructuring, (a) the Company’s currently outstanding shares of Series Apreferred stock would be converted into (i) an aggregate of $3,500,000 instated liquidation value of New Preferred Stock and (ii) 125,000 shares ofnew common stock, and (b) the Company’s currently outstanding shares ofcommon stock and Series B and Series C convertible preferred stock would beconverted into an aggregate of 125,000 shares of new common stock, with theallocation of those shares of new common stock to be made pro rata on anas-converted basis, assuming the shares of Series B and Series C preferredstock had been converted into common stock immediately prior to therestructuring.

 

                                                The Exchange Agreement also contemplatesthe extension of a bridge loan and the repayment of the Company’s creditfacility with Ableco Finance, LLC (“Ableco”), as described immediately below.

 

                        *Bridge Loan*

 

                                                On April 16, 2003, in connection withentering into the Exchange Agreement, the Company and Elgar entered into a loanagreement (the “Bridge Notes”) with the Oaktree Entities in the amount of$25,000,000, bearing interest at 10% per annum, payable monthly in arrears, andsecured by substantially all assets of the Company.  The Bridge Notes mature on the earlierof (i) completion of the restructuring transactions contemplated bythe Exchange Agreement and (ii) August 1, 2003.

 

                                                On the same date, Elgar usedapproximately $20.6 million of the proceeds from the Bridge Notes to repayin full its credit facility with Ableco, which facility was thereafterterminated.  After the payment of feesand expenses related to the Exchange Agreement and Bridge Notes, Elgar retainedabout $3.2 million of proceeds from the Bridge Notes for cash reserve andworking capital purposes.

 

                                                Upon completion of the transactionscontemplated by the Exchange Agreement, unless the Bridge Notes are repaid withthe proceeds of a new third-party credit facility, any amounts that remainoutstanding under the Bridge Notes would be exchanged for a term note of likeamount bearing interest at the greater of 12% or a rate of interest equal to areference rate plus 8% (the “Term Note”). The Term Note would have a stated maturity of August 1, 2007, would besecured by substantially all of the assets of the Company and would have thebenefit of quarterly sinking fund payments of $1,000,000, with the first suchpayment by Elgar due on November 1, 2003. To the extent the Company refinances a portion of the Term Notesubsequent to the closing of the exchange described above, the Oaktree Entitieshave agreed under certain circumstances to exchange their interests in the TermNotes for participations in such replacement financing.

 

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**Results of Operations**

 

                                                The following table sets forth certainstatement of operations information and other data as a percentage of net salesfor the fiscal years indicated.

** **

|                                                |   | **Fiscal  Year Ended**  |   |
|-----------------------------------------------------|--------|-------------------------|--------|
|                                                |   | **Dec . 30,**

**2000** |   | **Dec. 29,**

**2001** |   | **Dec. 28,**

**2002** |   |
| **Statement of Operations Data:**                   |   |                    |   |   |   |   |   |
| Net sales                                           |   | 100.0                   | %      | 100.0 | % | 100.0 | % |
| Cost of sales                                       |   | 58.0                    |   | 62.1 |   | 60.0 |   |
| Gross profit                                        |   | 42.0                    |   | 37.9 |   | 40.0 |   |
| Selling, general and administrative expenses        |   | 17.3                    |   | 20.0 |   | 20.5 |   |
| Research, development and engineering expenses      |   | 10.1                    |   | 10.5 |   | 9.9 |   |
| Amortization of goodwill and non-compete agreements |   | 3.7                     |   | 4.1 |   | 0.1 |   |
| Operating income                                    |   | 10.9                    | %      | 3.3 | % | 9.5 | % |
|                                                |   |                    |   |   |   |   |   |
| **Other Data:**                                     |   |                    |   |   |   |   |   |
| Adjusted EBITDA%                                    |   | 16.0                    | %      | 9.2 | % | 11.9 | % |

* *

*Fiscal Year Ended December 28, 2002 Versus Fiscal Year EndedDecember 29, 2001*

 

                                                *Net sales*.  Net sales inFiscal 2002 were $48.4 million, a decrease of $10.3 million, or 17.5%, from netsales of $58.7 million in Fiscal 2001. This decrease, which was across virtually all product lines, wasprimarily attributable to the overall decline in the economy, but was also dueto a $1.8 million, or 28%, decrease in sales directly or indirectly tosemiconductor manufacturers.  In Fiscal2002, sales of Sorensen and Power Ten programmable DC power products were$19.7 million and $6.2 million, respectively, a decrease of$1.4 million and $1.0 million, respectively, from Fiscal 2001 levels.  In Fiscal 2002, sales of other DC powerproducts were $1.8 million, a decrease of $0.7 million from Fiscal 2001,and AC power product sales were $5.3 million, a decrease of $0.8 million.  Space system product sales were $3.0 millionin Fiscal 2002, a decrease of $5.3 million from Fiscal 2001, principally due todecreased sales to Boeing Satellite Systems and, to a lesser degree, SpaceSystems/Loral.  In Fiscal 2002, salesattributable to the U.S. Navy’s CASS program were down $1.0 million compared toFiscal 2001, as the final phase of the contract was completed in the fourthquarter of Fiscal 2002.

 

                                                *Gross profit*.  Gross profitin Fiscal 2002 was $19.4 million, a decrease of $2.9 million, or 13.0%, fromgross profit of $22.3 million in Fiscal 2001. The decrease in gross profit was mainly due to the decrease in net salesthat resulted in a $3.9 million volume decrease in gross profit when comparedto Fiscal 2001, partially offset by a favorable gross margin increase.  The gross profit percentage for Fiscal 2002was 40.0%, an increase of 2.1%, from 37.9% for Fiscal 2001.  This percentage increase was mainly due tothe elimination 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 and the implementation of demand flow technology and other cost andefficiency savings.

 

                                                *Selling, general and administrative expenses*. Selling, general and administrative (“SG&A”) expenses were $9.9million in Fiscal 2002, a decrease of $1.8 million, or 15.4%, from SG&Aexpenses of $11.7 million in Fiscal 2001. SG&A expenses increased slightly as a percentage of net sales from20.0% in Fiscal 2001 to 20.5% in Fiscal 2002. The dollar decrease was primarily due to approximately $1.4 millionin savings resulting from the consolidation of Power Ten’s operations and$0.6 million in

 

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lower commissionsexpense, partially offset by increased costs associated with recruiting andhiring new chief executive and chief financial officers during Fiscal 2002.

 

                                                *Research, development and engineering expenses*. Research, development and engineering (“RD&E”) expenses in Fiscal2002 were $4.8 million, a decrease of $1.4 million, or 22.6%, from RD&E expensesof $6.2 million in Fiscal 2001. RD&E expenses also decreased as a percentage of net sales from 10.5%to 9.9%.  The decreases were due tolower headcount in our RD&E department, resulting in lower compensationexpense, and approximately $0.8 million in savings resulting from theconsolidation of Power Ten’s operations.

 

                                                *Amortization of goodwill and non-compete agreements*. Amortization expense was $48,000 in Fiscal 2002, a decrease of$2.4 million from Fiscal 2001 levels. Amortization expense in Fiscal 2002 related to non-compete agreementsentered into with the former owners of Power Ten, while amortization expense inthe prior period included amortization of goodwill associated with the April1996 acquisition of Elgar by the predecessor to Elgar Holdings, Inc. and theMay 1998 acquisition of Power Ten, as well as $48,000 of expense relatingto the non-compete agreements.  Pursuantto SFAS No. 142, beginning December 30, 2001, goodwill is no longeramortized, which accounts for the difference between the comparable periods.

 

                                                *Operating income*.  Operatingincome was $4.6 million in Fiscal 2002, an increase of $2.7 million, or142.1%, from operating income of $1.9 million in Fiscal 2001.  Operating income increased as a percentageof net sales from 3.3% in Fiscal 2001 to 9.5% in Fiscal 2002.  The increase was due to the factorsdiscussed above.  To minimize thenegative impact due to the lower sales volume, management realized cost savingsresulting from consolidating the Power Ten operations into Elgar’s San Diegofacility and the implementation of demand flow technology into themanufacturing operations.

 

                                                *Interest expense. *Interest expense was $12.0 million in Fiscal 2002, anincrease of $1.4 million, or 13.2%, from interest expense of $10.6 millionin Fiscal 2001.  Interest expenseincreased as a percentage of net sales from 18.2% in Fiscal 2001 to 24.8% inthe comparable Fiscal 2002 period.  Theincrease in dollars was a result of higher outstanding borrowings and higherinterest rates on those borrowing in Fiscal 2002 as compared to theyear-earlier period, together with $0.7 million in amendment fees and anincrease in the amortization of deferred financing costs due to theacceleration of outstanding borrowings under the Company’s former Deutsche Bankfacility recognized in Fiscal 2002.

 

                                                *Income taxes. *Income taxes for Fiscal 2002 were zeroand for Fiscal 2001 were $1.5 million. Losses generated in these periods do not have a carryback benefit andthe resulting net operating loss carryforwards have not been recognized as abenefit because future realization is uncertain.  A full valuation reserve was established in Fiscal 2001 onthe deferred tax asset balance of $1.4 million due to a change in management’sassessment that the realization of these deferred tax assets was uncertain.

 

                                                *Net loss. *Net loss was $7.4 million in Fiscal 2002, a$2.8 million improvement from a net loss of $10.2 million in Fiscal 2001,due to the factors discussed above.           Inorder to improve operating results, we have undertaken a number of initiatives,the benefits of which have positively impacted our results for Fiscal2002.  These include (1) aconsolidation of our sales representatives and distributors to market all threeof our name brands:  Elgar, Sorensen andPower Ten, (2) an increased emphasis on European and other internationalsales; (3) the introduction of various new products and product lineextensions and (4) continued cost reduction efforts through the reductionof indirect headcount, increasing efficiencies in the manufacturing andprocurement processes, and the relocation of our Power Ten operations to ourSan Diego facilities.

 

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*Fiscal Year Ended December 29, 2001 Versus Fiscal Year EndedDecember 30, 2000*

 

                                                *Net sales*.  Net sales inFiscal 2001 were $58.7 million, a decrease of $7.1 million, or 10.8%, from netsales of $65.8 million in Fiscal 2000. This decrease was primarily attributable to a decrease in sales ofprogrammable DC power products, predominately sales of Power Ten products andsales to Racal, and sales of Sorensen products, partially offset by an increasein sales of space systems products.  InFiscal 2001, sales of Power Ten products were $7.2 million, a decrease of$5.0 million from Fiscal 2000 sales, due to a significant decrease insales to semiconductor manufacturers. In Fiscal 2001, net sales attributable to Racal were down approximately$3.0 million compared to Fiscal 2000, also due to a decrease in sales to thesemiconductor manufacturers.  Sales ofspace systems products in Fiscal 2001 were $8.3 million, an increase of $3.9million from Fiscal 2000, principally due to increased sales to BoeingSatellite Systems and, to a lesser degree, Space Systems/Loral.

 

                                                *Gross profit*.  Gross profitin Fiscal 2001 was $22.3 million, a decrease of $5.3 million, or 19.2%, fromgross profit of $27.6 million in Fiscal 2000. The decrease in gross profit was mainly due to the decrease in net saleswhich resulted in a $3.0 million decrease in gross profit, and partly as resultof a decrease in the gross margin due to higher overall production costs whencompared to Fiscal 2000.

 

                                                *Selling, general and administrative expenses*. SG&A expenses were $11.7 million in Fiscal 2001, an increase of $0.4million, or 3.5%, from SG&A expenses of $11.3 million in Fiscal 2000.  SG&A expenses increased as a percentageof net sales from 17.3% in Fiscal 2000 to 20.0% in Fiscal 2001.  The dollar increase was primarily due to$1.0 million of costs associated with the Power Ten operations’ consolidation,partially offset by lower advertising costs and sales and marketing expenses inFiscal 2001 compared to Fiscal 2000.

 

                                                *Research, development and engineering expenses*. RD&E expenses in Fiscal 2001 were $6.2 million, a decrease of$0.5 million, or 7.5%, from RD&E expenses of $6.7 million in Fiscal2000.  RD&E expenses increased as apercentage of net sales from 10.1% to 10.5%. The decrease in dollars was primarily due to lower headcount andcompensation expense in Fiscal 2001 compared to Fiscal 2000, and to a decreasein customer-funded research and development expense in Fiscal 2001 compared toFiscal 2000.  A portion of the Company’sRD&E expenses has historically been funded by customers and the costsassociated with the support has been excluded from RD&E expenses andincluded in cost of sales.

 

                                                *Amortization of goodwill and non-compete agreements*. Amortization expense was $2.4 million in each of Fiscal 2001 and Fiscal2000.  Amortization expense is comprisedof the amortization of goodwill and non-compete agreements associated with theApril 1996 acquisition of Elgar by Carlyle-EEC Holdings, Inc., and our May 1998acquisition of Power Ten.

 

                                                *Operating income*.  Operatingincome was $1.9 million in Fiscal 2001, a decrease of $5.3 million, or 73.6%,from operating income of $7.2 million in Fiscal 2000.  Operating income decreased as a percentage of net sales from10.9% in Fiscal 2000 to 3.3% in Fiscal 2001. The decrease was due to the factors discussed above.  Management initiated a series of costsavings actions which included consolidating the Sorensen and Power Tenoperations into Elgar’s San Diego facility in the second and third quarters of2001, respectively, negotiating raw material price reductions and acquiringautomation equipment to shorten production times, reduce scrap and lower thelabor content of our products.

 

                                                *Interest expense. *Interest expense was $10.6 million in Fiscal 2001, anincrease of $0.1 million, or 1.0%, from interest expense of $10.5 millionin Fiscal 2000.  Interest expenseincreased as a percentage of net sales from 16.0% in Fiscal 2000 to 18.2% inthe comparable Fiscal 2001 period.  Theincrease in dollars was a result of higher outstanding borrowings on ourrevolving line of credit partially offset by lower interest rates on borrowingsunder our credit facility.

 

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                                                *Income taxes. *Income taxes for Fiscal 2001 and Fiscal2000 were $1,449,000 and $70,000, respectively.  Losses generated in these periods do not have a carryback benefitand thus have not been recognized because future realization is uncertain.  A full valuation reserve was establishedduring Fiscal 2001 on the deferred tax asset balance of $1.4 milliondue to a change in management’s assessment that the realization of thesedeferred tax assets was uncertain.

 

                                                *Net loss.*Net loss was $10.2 million in Fiscal2001, an increased loss of $6.8 million from a net loss of $3.4 million inFiscal 2000, due to the factors discussed above.

 

**Liquidityand Capital Resources**

 

                        *Uses of Cash*

 

                                                Our principal uses of cash are for debtservice requirements, working capital requirements and capitalexpenditures.  As a holding company withno operations or assets other than our ownership of Elgar’s capital stock, werely on dividends and other payments from Elgar to generate the funds necessaryto meet our obligations, including the semi-annual interest payments of$4.4 million on the Senior Notes. In turn, Elgar relies on cash flow from operations together with fundsavailable to it under its senior secured credit facility with Ableco Finance,LLC (“Ableco”), to dividend funds to us.

 

                                                On each of August 1, 2002 andFebruary 1, 2003, the Company made interest payments of approximately$4.4 million to the holders of the Senior Notes.

 

                        *Sources of Cash*

 

                                                Elgar’s principal sources of capital arecash flow from operations together with funds available to it under its seniorsecured credit facility with Ableco.  Inturn, Elgar dividends funds to enable us to meet our debt service requirements.

 

                                                On June 26, 2002, the Company,Elgar, as borrower, and Ableco, as agent, entered into a financing agreement(the “Ableco Facility”) that provided Elgar with (a) a $15,000,000 termloan (the “Term Loan”) that bears interest at a reference rate plus 5.50percentage points, but in no event at a rate less than 10.25%, and (b) arevolving credit facility not to exceed $10,000,000 outstanding at any time(the “Revolver”) that bears interest at a reference rate plus 3.00 percentagepoints, but in no event at a rate less than 7.75%.  The reference rate means the rate of interest publicly announcedby JPMorgan Chase Bank from time to time as its reference rate, base rate orprime rate.  Interest is payable monthlyon both the Term Loan and the Revolver. Borrowings outstanding under the Ableco Facility have a stated maturitydate of June 25, 2006.

 

                                                Advances under the Revolver are limitedto the lesser of (a) $10.0 million and (b)(i) 85% of eligibleaccounts receivable, less a dilution reserve that relates to bad-debt writedowns and discounts and advertising allowances paid to an account debtor, plus(ii) 60% of eligible inventory, less the amount of any reserves thatAbleco may deem appropriate in the exercise of its reasonable business judgmentbased upon its lending practices.  Inaddition, the Ableco Facility provides that it is a condition to any loan madeunder the Revolver that, after giving effect to such loan, at least $1,000,000of availability remains undrawn under the Revolver.  In effect, this provision reduces the maximum amount outstandingat any time to $9,000,000.

 

                                                Elgar paid a $500,000 fee to Ableco atclosing, and is obligated to pay Ableco (i) a $250,000 fee on the earliestof June 26, 2003, the date on which all of the obligations under the AblecoFacility are accelerated or the date on which all of the obligations under theAbleco Facility are paid in full, (ii) a

 

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$187,500 fee on theearliest of June 26, 2004 or the date on which the obligations under theAbleco Facility are accelerated and (iii) a $187,500 fee on the earliestof June 26, 2005 or the date on which the obligations under the AblecoFacility are accelerated.

 

                                                At December 28, 2002, the Term Loanwas fully drawn and the Revolver had an outstanding balance of $5.0 million,resulting in an additional $3.8 million of borrowing capacity remainingunder the formula described above.

 

                                                As discussed under “—Recent Developments”above, the Ableco Facility terminated on April 16, 2003 after it wasrepaid in full with the proceeds of the Bridge Notes.  After repayment of the Ableco Facility and the payment of feesand expenses related to the Exchange Agreement and the Bridge Notes, Elgarretained approximately $3.2 million of proceeds from the Bridge Notes forcash reserve and working capital purposes. See “—Recent Developments” above.

 

                                                Upon completion of the transactionscontemplated by the Exchange Agreement and based upon current and anticipatedlevels of operations, as well as additional funds available under the BridgeNotes, we believe that our cash resources will be adequate to meet ouranticipated cash requirements through the fiscal year ending January 3,2004 (“Fiscal 2003”).  No assurance canbe given, however, that this will be the case.

 

                        *Capital Expenditures*

 

                                                Our capital expenditures were $1,254,000in Fiscal 2000, $1,093,000 in Fiscal 2001 and $437,000 in Fiscal 2002.  Our expenditures during Fiscal 2002 wereprimarily for new test and burn-in capabilities in connection with the PowerTen consolidation.  We have budgeted$600,000 for capital expenditures for fiscal 2003, to be used principally formanufacturing automation.

 

**Critical Accounting Policies and Estimates**

 

                                                The methods, estimates and judgments weuse in applying the accounting policies most critical to our financialstatements have a significant impact on the results we report in our financialstatements.  The U.S. Securities andExchange Commission has defined the most critical accounting policies as theones that are most important to the portrayal of our financial condition andresults, and require us to make our most difficult and subjective judgments,often as a result of the need to make estimates of matters that are inherentlyuncertain.  Based on this definition,our critical policies and estimates include the evaluation of goodwill andother intangible assets for impairment, doubtful account allowances, inventoryreserves and warranty reserves.  Below,we discuss these policies further, as well as the estimates and judgmentsinvolved.  We also have other keyaccounting policies, including policies for revenue recognition.  We believe that these other policies eitherdo not generally require us to make estimates and judgments that are as difficultor as subjective, or it is less likely that they would have a material impacton our reported financial position or results of operations for a givenperiod.  For additional information seeNote 3 “Summary of Significant Accounting Policies” in our consolidatedfinancial statements included in Item 15 of this report.  Although we believe that our estimates andassumptions are reasonable, they are based upon information presentlyavailable.  Actual results may differsignificantly from our estimates, and our estimates could be different usingdifferent assumptions or conditions.

 

                        *Goodwill and OtherAssets*

 

                                                Goodwill represents the excess ofpurchase price over net book value of assets acquired in connection withacquisitions.  Other assets represent (1) deferredfinancing costs incurred in connection with our February 1998recapitalization and entering into the Ableco Facility in June 2002 and

 

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(2) agreements notto compete relating to the Power Ten acquisition.  We are amortizing the components of other assets on astraight-line basis over their estimated useful lives, ranging from four to 10years.  The debt issuance costs weincurred in connection with issuing the Senior Notes and entering into theAbleco Facility are subject to this amortization policy.  The original amount of debt issuance costsbeing amortized was approximately $7.5 million and the accumulated amortizationwas approximately $2.7 million as of December 28, 2002, and the amount ofamortization that was recorded in Fiscal 2002 was approximately $1.5 million,of which $559,000 related to accelerated amortization from our prior creditfacility.

 

                                                We periodically re-evaluate the originalassumptions and rationale utilized in the establishment of the carrying valueand estimated useful lives of these assets. The criteria we use for these evaluations include management’s estimateof the assets’ continuing ability to generate income from operations andpositive cash flows in future periods as well as the strategic significance ofthe intangible assets to our business activity.

 

                        *Doubtful Accounts*

 

                                                We maintain allowances for doubtfulaccounts based on our estimate of losses that will result from the inability ofour customers to pay us and for the refusal of customers to pay us because ofdisputes regarding our products and services. If the financial condition of a customer were to deteriorate, resultingin their inability to make payments to us, or if a customer were dissatisfiedwith our products or services resulting in their refusal to make payments tous, additional allowances may be required. Significant increases in required reserves may occur in the future ifthere is a continued decline in the general economic environment that negativelyaffects the financial condition of our customers or an increase in the numberof customers that are dissatisfied with our products or services.

 

                        *Inventory Reserves*

 

                                                We periodically re-evaluate all inventoryfor potential excess and obsolete material. We reserve excess material based on a percentage of the inventory thatis deemed to be in excess of one year’s forecast demand, while we reserveobsolete inventory at 100% of carrying value. We also periodically adjust our standard costs for material purchasecosts, labor hours and wage rates, and overhead burden applied.  We reserve for these standard cost changesbased on a combined estimate of the future inventory change.

 

                        *Warranty Reserves*

 

                                                We periodically re-evaluate warrantyliability to ensure that the liability recorded at period end is sufficient tocover future claims for repair or replacement of product.  The reserve balance takes into account thewarranty period of the product, which ranges from one year to five years.

 

**Inflation and General Economic Conditions; Backlog**

 

                                                Although we cannot accurately anticipatethe effect of inflation on our operations, we do not believe that inflation hashad, or is likely in the foreseeable future to have, a material impact on ourresults of operations.  We do not have asignificant number of fixed-price contracts where we bear the risk of costincreases.  As of December 28, 2002, wehad no backlog for which shipments under those contracts are scheduled afterDecember 31, 2003.

 

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**Recent Accounting Pronouncements**

 

                                                In June 2001, theFASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”.  This statement addresses financialaccounting and reporting for acquired goodwill and other intangible assets andsupersedes Accounting Principles Board (“APB”) Opinion No. 17, “IntangibleAssets.”  SFAS No. 142 addresseshow intangible assets that are acquired individually or with a group of otherassets (but not those acquired in a business combination) should be accountedfor in financial statements upon their acquisition.  This statement also addresses how goodwill and other intangibleassets should be accounted for after they have been initially recognized in thefinancial statements.  Upon adoption ofSFAS No. 142, goodwill is no longer subject to amortization over itsestimated useful life but is instead subject to periodic testing forimpairment.  The Company completed itsinitial impairment test for goodwill as of December 30, 2001.  This test confirmed that the fair value ofthe Company exceeds the carrying value, and that no goodwill impairment lossneeded to be recognized upon adoption of SFAS No. 142.  The Company adopted SFAS No. 142effective December 30, 2001, the effect of which was to classify goodwillseparately on the accompanying consolidated balance sheets and to cease theamortization of such goodwill, which would have amounted to $2,387,000 ofamortization expense for Fiscal 2002. Net loss for Fiscal 2002, including amortization of goodwill, would havebeen $9,795,000, compared to $7,408,000.

 

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

 

                                                In June 2002, theFASB issued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities,” which addresses financial accounting and reporting forcosts associated with exit or disposal activities and supersedes EmergingIssues Task Force (“EITF”) Issue 94-3, “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs 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.

 

                                                In November 2002,the FASB issued Financial Interpretation No. 45 (“FIN 45”), “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” FIN 45 requires that a guarantor must recognize, at the inception of aguarantee, a liability for the fair value of the obligation that it hasundertaken in issuing a guarantee.  FIN45 also addresses the disclosure requirements that a guarantor must include inits financial statements for guarantees issued, including matters such ascommercial product warranties.  Thedisclosure requirements in this interpretation are effective for financialstatements ending after December 15, 2002. The initial recognition and measurement provisions of thisinterpretation are applicable on a prospective basis to guarantees issued ormodified after December 31, 2002.  Wehave not completed our evaluation of FIN 45 and we have not assessed theimpact the adoption may have on our financial position or results of

 

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operations.  Refer to Note 3 of the ConsolidatedFinancial Statements for the additional disclosure information as required byFIN 45.

 

**ITEM 7A.****                   ****QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

                                                We have had only limited involvement inderivative financial instruments in the past. We do not hold or issue derivative financial instruments for tradingpurposes.  We are subject to market riskresulting from interest rate fluctuations with respect to our variable-rateborrowings.  At December 28, 2002, all$20,000,000 of our outstanding borrowings under the Ableco Facility was atvariable interest rates.  A onepercentage point increase in interest rates would be expected to have anestimated impact on net loss and cash flows in fiscal 2003 of approximately$100,000.  At December 28, 2002,the blended interest rate on our $20,000,000 of debt outstanding under theAbleco Facility was 9.625%.

 

**ITEM 8.****                            ****CONSOLIDATED FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

                                                The consolidated financial statementsrequired in response to this Item are listed under Item 15(a) of PartIV of this Report.

 

**ITEM 9.****                            ****CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

                                                As disclosed in our Current Reports onForm 8-K filed on June 14, 2002 and August 14, 2002, respectively,the Company terminated Arthur Andersen LLP as its independent publicaccountants in June 2002 and engaged Deloitte & Touche LLP inAugust 2002 as its independent public accountants to audit its financialstatements as of and for the fiscal year ended December 28, 2002.

 

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**PART III**

 

**ITEM 10.****                     ****DIRECTORS AND EXECUTIVE OFFICERS OFTHE REGISTRANT**

 

                                                The following table sets forth the name,age and position of each person who is one of our directors or executiveofficers as of December 28, 2002.  Eachdirector holds office until the next annual meeting of the stockholders oruntil his successor has been elected and qualified.  Officers are elected by the Board of Directors and serve at thediscretion of the Board.

 
| **Name**               |   | **Age** |   | **Positions**                                                        |
|------------------------|--------|---------|--------|----------------------------------------------------------------------|
| Joseph A. Budano       |   | 41      |   | President  and Chief Executive Officer, EHI and Elgar                |
| John  P. Mei           |   | 37      |   | Vice  President-Finance, Chief Financial Officer, EHI and Elgar      |
| Samuel A. Lewis        |   | 54      |   | Vice  President-Sales, Elgar                                         |
| Normand  E. Precourt   |   | 60      |   | Vice  President-Engineering, Elgar                                   |
| John  J. Santospirito  |   | 62      |   | Vice  President-Operations, Elgar                                    |
| Daniel  E. Donati      |   | 45      |   | Vice President-Program  Management, Elgar                            |
| Thomas  Erickson       |   | 59      |   | Vice President-Human  Resources, Elgar                               |
| Dr.  John F. Lehman    |   | 60      |   | Director,  EHI and Elgar                                             |
| Donald  Glickman       |   | 69      |   | Vice  President, EHI and Elgar; Chairman of the Board, EHI and Elgar |
| Kenneth  R. Kilpatrick |   | 65      |   | Vice  Chairman of the Board, EHI and Elgar                           |
| George  Sawyer         |   | 71      |   | Director,  EHI and Elgar                                             |
| Thomas  G. Pownall     |   | 81      |   | Director,  EHI and Elgar                                             |
| Oliver C. Boileau, Jr. |   | 75      |   | Director,  EHI and Elgar                                             |
| Stephen  L. Brooks     |   | 31      |   | Director  and Secretary, EHI and Elgar                               |
| Joseph  A. Stroud      |   | 47      |   | Director,  EHI and Elgar                                             |
| William  Paul          |   | 66      |   | Director,  EHI and Elgar                                             |
| Bruce  D. Gorchow      |   | 44      |   | Director,  EHI and Elgar                                             |
| Tig  H. Krekel         |   | 49      |   | Director,  EHI and Elgar                                             |

* *

*                                               **Joseph Budano*****has been our President and Chief ExecutiveOfficer since August 26, 2002, when our former President and ChiefExecutive Officer, Kenneth R. Kilpatrick, retired as an officer of theCompany.  From July 17, 2002 untilAugust 26, 2002, Mr. Budano served as our Chief OperatingOfficer.  Prior to joining us, Mr.Budano founded Acuity Consulting, a consulting firm focused on business plandevelopment and funding for early-stage companies, which he ran from April 2001to June 2002.  From April 2000 to March2001, Mr. Budano served as the Group President, Multi-Media Group, for ActernaCorporation, a Maryland-based producer of communications test instruments andsystems.  From June 1996 toApril 2000, Mr. Budano served as the Senior Vice President, North AmericanOperations, for Wavetek Wandel & Golterman, also a producer ofcommunications test instruments and systems, which merged into Acterna inMay 2000.  From March 1994 toJune 1996, he served as Vice President and General Manager of theCommunications Division of Wavetek, which merged with Wandel & Golterman inOctober 1998.  Prior****to joining Wavetek, Mr. Budano workedas a management consultant for The Boston Consulting Group from 1991 to 1994,and before that worked as Engineering Manager for Motorola’s Land MobileProducts sector from 1983 to 1989.

 

                                                *John P. Mei*****has been our Vice President—Finance and Chief Financial Officer sinceSeptember 16, 2002.  Prior tojoining us, Mr. Mei worked at Acterna Corporation since January 26, 1999,

 

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where he most recentlyheld the position of Group Controller for the Multimedia Group.  Prior to that time, Mr. Mei was aManager of Finance in General Electric’s Industrial Systems Division.  He began his financial career with Coopers& Lybrand’s audit practice.  Mr. Meiis a certified public accountant.

 

                                                *Samuel A. Lewis*, Vice President—Sales of Elgar, with over 25 years ofexperience in the test and measurement equipment industry, including 22 yearswith Elgar, is responsible for leading Elgar’s sales efforts. Mr. Lewis, whobegan his career with Elgar in 1972, re-joined Elgar in January 1988 afterspending the prior six years as the North American Sales Manager for WavetekCorporation, a test and measurement company. At Wavetek, Mr. Lewis spearheadedthe creation of a central sales management organization, set up area salesoffices, and managed 18 representative organizations with 130 sales people.Prior to beginning work with Wavetek in 1982, Mr. Lewis spent nine years withElgar in the positions of Customer Service Manager and National Sales Manager.

 

                                                *Normand E. Precourt*, Vice President—Engineering of Elgar, has been withElgar since July 1990. Prior to that time, Mr. Precourt was with Cipher DataProducts, a computer peripherals company, advancing from Engineering GroupLeader to Vice President, Engineering Technology during that time.

 

                                                *John J. Santospirito,* Vice President—Operations of Elgar,joined Elgar in July 2000.  Prior tothat time, Mr. Santospirito was a senior operations executive with GNPComputers from 1998 to 2000, with Artecon, Inc. from 1996 to 1998, with Encad,Inc. from 1995-1996 and with Scientific-Atlantic, Inc. from 1988 to 1995.

 

                                                *Daniel E. Donati*, Vice President—Program Management of Elgar, joinedElgar in September 1991 and is responsible for overseeing Elgar’s Space Systemsand CASS Program operations. Prior to that time, Mr. Donati spent over 12 yearswith Aerojet Electronics Systems and Walt Disney where he gained valuableprogram management, operations and engineering experience.

 

                                                *Thomas Erickson*, Vice President—Human Resources of Elgar, joinedElgar in October 1983. Prior to that time, he spent seven years at SolarTurbines as its Human Resources Manager.

 

                                                *Dr. John F. Lehman*, who is a director of EHI and Elgar, is a ManagingPrincipal of J.F. Lehman & Company (“Lehman”). Prior to foundingLehman in 1991, Dr. Lehman was an investment banker with PaineWebberIncorporated from 1988 to 1991, and served as a Managing Director in CorporateFinance. Dr. Lehman served for six years as Secretary of the Navy, was a memberof the National Security Council Staff, served as a delegate to the MutualBalanced Force Reductions negotiations and was the Deputy Director of the ArmsControl and Disarmament Agency.  Dr. Lehmanserved as Chairman of the Board of Directors of Sperry Marine, Inc., and isChairman of the Board of Directors of Special Devices, Incorporated, OAOTechnology Solutions, Inc. and Racal Instruments, Inc.  Dr. Lehman is also a director of BallCorporation and ISO Inc. and is Chairman of the Princess Grace Foundation, adirector of OpSail Foundation and a trustee of LaSalle College High School.

 

                                                *Donald Glickman*, who is Chairman of the Board and a Vice President ofboth EHI and Elgar, is a Managing Principal of Lehman.  From February 1998 to May 1998, Mr. Glickmanwas President of EHI. Prior to joining Lehman, Mr. Glickman was a principal ofthe Peter J. Solomon Company, a Managing Director of Shearson Lehman BrothersMerchant Banking Group and Senior Vice President and Regional Head of The FirstNational Bank of Chicago. Mr. Glickman served as an armored cavalry officer inthe Seventh U.S. Army. Mr. Glickman is currently a director of the MSC SoftwareCorporation, Special Devices, Incorporated, Racal Instruments, Inc. and MonroeMuffler Brake, Inc.  He is also atrustee of MassMutual Corporate Investors and MM Participation Investors.

 

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                                                *Kenneth R. Kilpatrick*, who is Vice Chairman of the Board of EHI and Elgar,was President and Chief Executive Officer of Elgar from July 1991 untilAugust 26, 2002, and the President and Chief Executive Officer of EHI fromMay 1998 until August 26, 2002. Prior to joining Elgar, Mr. Kilpatrick was President of MachineIndustries, Inc., an aerospace parts manufacturer, from 1989 to 1991, and withACDC Electronics, a division of Emerson Electric Co. and a manufacturer offixed power supplies, from 1964 to 1989. After beginning as an Assistant General Manager of ACDC Electronics in1964, Mr. Kilpatrick was appointed President of the company in 1972.  Mr. Kilpatrick remains active in all aspectsof Elgar’s business.

 

                                                *George Sawyer*, who is a director of EHI and Elgar, is a ManagingPrincipal of Lehman, and has been affiliated with Lehman for the past elevenyears. From 1993 to 1996, Mr. Sawyer served as the President and ChiefExecutive Officer of Sperry Marine, Inc. Prior to that time, Mr. Sawyer held anumber of prominent positions in private industry and in the U.S. government,including serving as the President of John J. McMullen Associates, thePresident and Chief Operating Officer of TRE Corporation, Executive VicePresident of General Dynamics Corporation, the Vice President of InternationalOperations for Bechtel Corporation and the Assistant Secretary of the Navy forShipbuilding and Logistics under Dr. Lehman. Mr. Sawyer is a director ofBlacklight Power, Inc., Racal Instruments, Inc., OAO Technology Solutions,Inc., American Automar, Inc. and Special Devices, Incorporated.  He also serves on the Board of Trustees ofWebb Institute and the Mariners’ Museum.

 

                                                *Thomas G. Pownall*, who became a director of EHI and Elgar in July 1998,is a member of the investment advisory board of Lehman. Mr. Pownall wasChairman of the Board of Directors of Martin Marietta Corporation from 1983until 1992 and Chief Executive Officer of Martin Marietta from 1982 until hisretirement in 1988.  Mr. Pownall joinedMartin Marietta in 1963 as President of its Aerospace Advanced Planning unit,became President of Aerospace Operations and, in succession, Vice Presidentthen President and Chief Operating Officer of Martin Marietta. Mr. Pownallis also a director of the Titan Corporation and Special Devices, Incorporated,Director Emeritus of Sundstrand Corporation, and is Chairman Emeritus of theAmerican-Turkish Council.  He is also adirector of the U.S. Naval Academy Foundation and the Naval Academy EndowmentTrust and a trustee of Salem-Teikyo University.

 

                                                *Oliver C. Boileau, Jr.* became a director of EHI and Elgar in December1998.  He joined Boeing Company in 1953as a research engineer and progressed through several technical and managementpositions and was named Vice President in 1968 and then President of BoeingAerospace in 1973.  In 1980, he joinedGeneral Dynamics Corporation as President and a member of the Board ofDirectors.  He retired in May 1988.  Mr. Boileau joined Northrop GrummanCorporation (“Northrop Grumman”) in December 1989 as President and GeneralManager of the B-2 Division.  He alsoserved as President and Chief Operating Officer of the Grumman Corporation, asubsidiary of Northrop Grumman, and as a member of the Board of Directors ofNorthrop Grumman.  Mr. Boileauretired from Northrop Grumman in 1995. He is an Honorary Fellow of the American Institute of Aeronautics andAstronautics, a fellow of the Royal Aeronautical Society, a Senior Member ofthe Institute of Electrical and Electronic Engineers, a member of the NationalAcademy of Engineering, the Board of Trustees of St. Louis University, anda Trustee of the University of Wyoming Foundation.  Mr. Boileau is also a director of Special Devices,Incorporated.

 

                                                *Stephen L. Brooks,* who is Secretary and a director of EHIand Elgar, is a Vice President of Lehman, having joined Lehman in 1998.  Mr. Brooks’s responsibilities at Lehmaninclude investment sourcing and execution as well as the financial and capitalmarket aspects of portfolio companies’ management.  Prior to joining Lehman, Mr. Brooks was an investment banker withBowles Hollowell Conner & Co. from 1996 to 1998 where he was a foundingmember of the firm’s aerospace and defense mergers and acquisitionpractice.  Mr. Brooks is currently adirector of Racal Instruments, Inc.

 

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                                                *Joseph A. Stroud*, who is a director of EHI and Elgar, has been amember and limited partner of various affiliates of J.F. Lehman & Companysince 1992.  In June 2000,Mr. Stroud was appointed as the Chief Financial Officer and Chief OperatingOfficer of Burke Industries, Inc., charged with guiding Burke through abankruptcy proceeding, which concluded successfully.  Mr. Stroud held those positions with Burke until 2002.  Mr. Stroud was the Executive Vice President,Chief Financial Officer and Chief Operating Officer of Special Devices, Incorporatedfrom 1998 to 2000, and an Executive Vice President from 2000 to 2001.  Mr. Stroud was the Chief Financial Officerof Sperry Marine, Inc. from 1993 until the company was purchased by LittonIndustries, Inc. in 1996.  From 1989 to1993, Mr. Stroud was Chief Financial Officer of the Accudyne and KilgoreCorporations.  Mr. Stroud is also adirector of Burke Industries, Inc. and Special Devices, Incorporated.

 

                                                *William Paul* is a director of EHI and Elgar. Mr. Paul began hiscareer with United Technologies Corporation (“UTC”) at its Sikorsky Aircraftdivision in 1955. Mr. Paul progressed through a succession of several technicaland managerial positions while at Sikorsky, including Vice President ofEngineering and Programs and Executive Vice President and Chief OperatingOfficer, and in 1983 was named President and Chief Executive Officer ofSikorsky Aircraft. In 1994, Mr. Paul was appointed as the Executive VicePresident of UTC, Chairman of UTC’s international operations and became amember of UTC’s management executive committee. Mr. Paul retired from thosepositions in 1997. Mr. Paul is a Member of the Board of St. Vincent’s MedicalCenter and a presidential appointee to the United States Access Board. Mr. Paulis also a director of Special Devices, Incorporated.

 

                                                *Bruce D. Gorchow*, who is a director of EHI and Elgar, is a member ofthe investment advisory board of Lehman. Since 1991, Mr. Gorchow has beenExecutive Vice President of PPM America, Inc. In 1999, he became President of PPM America Capital Partners, LLC.  Prior to his position at PPM America, Mr.Gorchow was a Vice President at Equitable Capital Management, Inc.Mr. Gorchow is also a director of Global Imaging Systems, Inc., LeinerHealth Products, Inc., Examination Management Services, Inc., Elizabeth ArdenSalon and Spa Holdings, Inc. and PPM America, Inc., and is an investmentadvisor for several investment limited partnerships.

 

                                                *Tig H. Krekel*, who is a director of EHI and Elgar, isthe former President of Boeing Satellite Systems and former President and ChiefExecutive Officer of Hughes Space and Communications, the world’s largestmanufacturer of commercial communications satellites.  Mr. Krekel also served as a Senior Vice President and member ofthe Executive Committee of Hughes Electronics Corporation.  Before joining Hughes in 1999, Mr. Krekelwas the President and Chief Executive Officer of AlliedSignal’s $3.0 billionAerospace Equipment Systems group, which served the commercial transport, regionalairline, general aviation, military and space markets.  Prior to joining Allied Signal, Mr. Krekelserved in senior executive positions at Decair Corporation, anaviation/aerospace holding company, Poloron Products, a diversifiedmanufacturing concern and Jet America, a domestic and international aircarrier.  He holds an Airline TransportPilot’s license and has more than 3,000 hours of flight time in jet androtary-wing aircraft.  Mr. Krekel spentfive years as a Naval Officer holding various assignments including nuclearengineering duty on the aircraft carrier USS Enterprise, and aide in the officeof the Chief of Naval Operations at the Pentagon.  Mr. Krekel graduated from the U.S. Naval Academy with a B.S. inMechanical Engineering and from the U.S. Naval Nuclear Power School as a licensednuclear engineer.  Additionally, heearned a M.B.A. from the Stanford Graduate School of Business withconcentration in finance and international strategic management.  Mr. Krekel is a National Trustee of the Boysand Girls Club of America and a director of Derco Aerospace, Inc. and RacalInstruments, Inc.

 

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**CertainRights of Holders of Redeemable Preferred Stock**

 

                                                Under certain circumstances, the holdersof the Series A Redeemable Preferred Stock may have the right to elect amajority of EHI’s directors. See “Certain Relationships and RelatedTransactions—Shareholders Agreement.”

 

**Committeesof the Board of Directors**

 

                                                *Audit Committee*.  The AuditCommittee of the Board of Directors is comprised of Messrs. Boileau (Chairman),Paul, Sawyer, Pownall and Brooks. The Audit Committee makes recommendationsconcerning the engagement of independent public accountants, reviews with theindependent public accountants the scope and results of the audit engagement,approves professional services provided by the independent public accountants,reviews the independence of the independent public accountants, considers therange of audit and non-audit fees and reviews the adequacy of our internalaccounting controls.

 

                                                *Human Resources and Compensation Committee*. The Human Resources and Compensation Committee of the Board of Directorsis comprised of Dr. Lehman (Chairman) and Messrs. Glickman, Sawyer, Kilpatrickand Stroud. This committee makes recommendations concerning the salaries andincentive compensation of our employees and consultants.

 

                                                *The Stock Option Committee*.  The StockOption Committee of the Board of Directors is comprised of Dr. Lehman andMessrs. Glickman and Sawyer. This committee oversees the issuance of optionsunder our stock option plan.

 

                                                *The Executive Committee*.  TheExecutive Committee of the Board of Directors is comprised of Dr. Lehman andMessrs. Glickman (Chairman), Pownall, Sawyer and Budano. This committee has theability to take action on behalf of the full Board of Directors in certaincircumstances.

 

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**ITEM 11.****                     ****EXECUTIVE COMPENSATION**

 

                The following summary compensation table sets forthfor 2000, 2001 and 2002 the historical compensation for services to the Companyof the current and former Chief Executive Officer and the four other mosthighly compensated executive officers for Fiscal 2002 (collectively, the “NamedExecutive Officers”).

 

**Summary Compensation Table**

** **
| **Name and Principal Position**                                                        |   | **Year**         |   | **Salary  ($)**           |           | **Bonus  ($)(3)**       |           | **Securities  Underlying Options** |           | **All Other  Compensation ($)(4)** |   |
|----------------------------------------------------------------------------------------|--------|------------------|--------|---------------------------|----------------|-------------------------|----------------|------------------------------------|----------------|------------------------------------|--------|
| Joseph A. Budano (1)  President and Chief Executive Officer, EHI and Elgar             |   | 2002             |   | 105,878                   |  

  | 50,000                  |  

  | —                             |  

  | —                             |   |
| Kenneth R. Kilpatrick (2)  Former President and Chief Executive Officer, EHI and Elgar |   | 2002

2001

2000 |   | 248,422

234,014

225,930 |  

  | 78,170

—

103,850 |  

  | —

160,000

160,000           |  

  | —

—

—             |   |
| Normand E. Precourt  Vice President-Engineering of Elgar                               |   | 2002

2001

2000 |   | 145,749

145,018

141,777 |  

  | 33,585

—

44,620  |  

  | —

76,000

76,000             |  

  | —

—

—             |   |
| Samuel A. Lewis  Vice President-Sales and Marketing  of  Elgar                    |   | 2002

2001

2000 |   | 138,244

138,008

134,773 |  

  | 32,081

—

42,460  |  

  | —

78,000

78,000             |  

  | —

—

—             |   |
| John J. Santospirito  Vice President-Operations of Elgar                               |   | 2002

2001

2000 |   | 125,610

125,589

55,317  |  

  | 28,954

—

19,230  |  

  | —

35,000

35,000             |  

  | —

—

—             |   |

----

(1)         Mr. Budano’s employment with the Companybegan on July 16, 2002.

 

(2)         Mr. Kilpatrick resigned as the Presidentand Chief Executive Officer of the Company and Elgar effective August 26,2002.

 

(3)         Annual bonuses are indicated for the yearin which they were earned.  Annualbonuses for any year are generally paid in the following year.  With the exception of Mr. Budano,bonuses granted for 2002 related to consummating the refinancing of Elgar’sprior credit facility with the Ableco Facility.  Mr. Budano’s bonus was in the nature of a signing bonus containedin his employment agreement.

 

(4)         Perquisites and other personal benefitspaid in the periods presented for the Named Executive Officers aggregated lessthan the lesser of (i) $50,000 and (ii) 10% of the total annual salary andbonus set forth in the columns entitled “Salary” and “Bonus” for each NamedExecutive Officer and, accordingly, are omitted from the table as permitted bythe rules of the Commission.

 

**Options Granted in the Last Fiscal Year**

 

                                                There were no grants of options to theNamed Executive Officers in Fiscal 2002.

 

**Aggregate Option Purchases in Last Fiscal Year-End and FiscalYear End Option Values**

 

                                                The Named Executive Officers did not holdany options at fiscal year-end, as the Company’s stock option plan, and alloptions grants thereunder, were terminated effective November 15, 2002.

 

27

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**Employment,Severance and Bonus Agreements**

 

                        *Kenneth R. Kilpatrick*

 

                                                Effective August 26, 2002, KennethR. Kilpatrick resigned as the President and Chief Executive Officer of theCompany and Elgar.  In connectiontherewith, Mr. Kilpatrick entered into a Severance Agreement and Generaland Special Release with Elgar, dated the same date (the “SeveranceAgreement”).  In the SeveranceAgreement, Elgar agreed to continue Mr. Kilpatrick’s salary throughDecember 31, 2002, and to continue his health benefits and automobileallowance through that date as well.  Inaddition, Elgar agreed to pay Mr. Kilpatrick a bonus of $78,170 relating to thework Mr. Kilpatrick performed in refinancing Elgar’s former creditfacility with the Ableco Facility.  TheSeverance Agreement further provides that Mr. Kilpatrick will remain on theboards of both the Company and Elgar in the capacity of Vice Chairman, and forthat service will receive the standard annual retainer paid to non-executivedirectors of $15,000.  Finally, both Mr.Kilpatrick and Elgar released any claims for previous actions or inactions theymight have against the other (including affiliates of Elgar).  Mr. Kilpatrick remains bound by theconfidentiality, non-solicitation and non-compete agreements contained in hisemployment agreement.

 

                        *Joseph Budano —Employment Agreement*

 

                                                Effective July 17, 2002, JosephBudano entered into an Employment Agreement, dated as of that date, with theCompany and Elgar, as amended on April 15, 2003 (the “Budano Agreement”),pursuant to which Mr. Budano currently serves as the President and ChiefExecutive Officer of the Company and Elgar. The term of the Budano Agreement is indefinite, although either partymay terminate on 30 days’ prior written notice.  Mr. Budano’s annual salary is $250,000, although that may beincreased by the Board from time to time. Mr. Budano received a commencement bonus of $25,000, and anadditional bonus of $25,000 when he became President and Chief ExecutiveOfficer on August 26, 2002.  Mr.Budano will be eligible to receive annual performance bonuses at the discretionof the Board.  The Company agreed toreimburse Mr. Budano for up to $20,000 of relocation expenses, grossed-up tocover any tax expense Mr. Budano realizes as the result of such reimbursement.

 

                                                If the Company terminates the BudanoAgreement without cause, or Mr. Budano terminates for good reason,Mr. Budano will be entitled to the continuation of salary and benefits fora period of 12 months thereafter.  If,however, Mr. Budano is terminated within 12 months following a change of control,as defined, then the terms of Mr. Budano’s severance compensation will be asdescribed below.  A change of controlwill not be deemed to occur in connection with any transaction in which theholders of the Company’s debt securities exchange those securities forconsideration involving the Company’s equity securities.

 

                                                If the Company terminates the BudanoAgreement without cause within 12 months after a change of control, and thechange of control occurs (i) on or before July 17, 2003,Mr. Budano will be entitled to the continuation of salary and benefits fora period of six months following his termination, (ii) after July 17,2003 but on or before July 17, 2004, Mr. Budano will be entitled tothe continuation of salary and benefits for a period of nine months followinghis termination or (iii) after July 17, 2004, Mr. Budano will beentitled to the continuation of salary and benefits for a period of 12 monthsfollowing his termination.

 

                                                Mr. Budano has agreed to non-solicit andnon-compete provisions that survive for a year after termination of theagreement, and to standard confidentiality obligations.

 

28

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                        *Joseph Budano — BonusAgreement*

 

                                                In March 2003, the Company enteredinto a bonus agreement with Mr. Budano that would provide for the payment tohim of $135,000 if the Company’s obligations under its $90 million ofSenior Notes are restructured as contemplated by the Exchange Agreement.  In order for Mr. Budano to receive thispayment, which is payable ratably over six months, the restructuring must becompleted on or prior to August 2, 2003.

 

                        *John P. Mei —Employment Agreement*

 

                                                On December 30, 2002, but effectiveSeptember 16, 2002, John P. Mei entered into an Employment Agreement withthe Company and Elgar, as amended on April 15, 2003 (the “Mei Agreement”),pursuant to which Mr. Mei currently serves as the Chief Financial Officerof the Company and Elgar.  Mr. Meireplaced our former Chief Financial Officer, Christopher Kelford, who resignedfrom that position in June 2002 to take a similar position with anotheremployer.  The term of the Mei Agreementis indefinite, although either party may terminate on 30 days’ prior writtennotice.  Mr. Mei’s annual salary is$140,000, although that may be increased by the Board from time to time.  Mr. Mei received a commencement bonusof $10,000, and he will be eligible to receive annual performance bonuses atthe discretion of the Board.  TheCompany agreed to reimburse Mr. Mei for certain prescribed relocation expenses,grossed-up to cover any tax expense Mr. Mei realizes as the result of suchreimbursement.  In Fiscal 2002, thoserelocation expenses paid or reimbursed on behalf of Mr. Mei, as grossed up,amounted to $14,208.  If, prior toSeptember 16, 2003, the Company terminates the Mei Agreement for cause orMr. Mei terminates without good reason, Mr. Mei will be obligated toreimburse the Company for a *pro rata*portion of such relocation expenses, based on the number of days employed bythe Company divided by 365.

 

                                                In addition, the Company has agreed toextend a $60,000 relocation loan to Mr. Mei within seven days of the dateon which he closes on the purchase of a home in the San Diego area.  Mr. Mei has yet to borrow these funds.  This loan will accrue interest at an annualrate of 7%.  One third of the principalamount, or $20,000, shall be forgiven if Mr. Mei remains employed with theCompany on September 16, 2003.  Onehalf of the remaining principal amount, or $20,000, shall be forgiven if Mr.Mei remains employed with the Company on September 16, 2004.  If Mr. Mei remains employed with the Companyon September 16, 2005, the remainder of the principal amount and allaccrued interest on the loan shall be forgiven.  If, on the other hand, prior to September 16, 2005, theCompany terminates the Mei Agreement for cause or Mr. Mei terminates withoutgood reason, then Mr. Mei shall promptly repay in full all outstandingprincipal and accrued interest on the loan. If, prior to September 16, 2005, the Company terminates the MeiAgreement other than for cause or Mr. Mei terminates for good reason, then, asof the date of termination, the outstanding principal balance and accruedinterest thereon shall be forgiven.

 

                                                If the Company terminates the MeiAgreement without cause, or Mr. Mei terminates for good reason, Mr. Meiwill be entitled to the continuation of salary and benefits for a period of 12months thereafter.

 

                                                Mr. Mei has agreed to non-solicit andnon-compete provisions that survive for a year after termination of theagreement, and to standard confidentiality obligations.

 

                        *John Mei — BonusAgreement*

 

                                                In March 2003, the Company enteredinto a bonus agreement with Mr. Mei that would provide for the payment to himof $40,000 if the Company’s obligations under its $90 million of SeniorNotes are restructured as contemplated by the Exchange Agreement.  In order for Mr. Mei to receive thispayment,

 

29

----

 

which is payable ratablyover six months, the restructuring must be completed on or prior toAugust 2, 2003.

 

**StockOption Plan**

 

                                                As of December 28, 2002, the stock optionplan has been cancelled.  Each formerholder of options under the plan agreed to the termination of their optiongrant.  The Company intends to implementa new management incentive plan for the benefit of its key employees at sometime in the near future.

 

**401(k)Plan**

 

                                                We maintain a defined contribution 401(k)plan that covers all of our full-time employees.  The employees become eligible to participate in the 401(k) planat the beginning of the first quarter after hire.  Participants may elect to contribute up to 15% of theircompensation to this plan, subject to Internal Revenue Service limits.  We currently match 40% of the first 6% ofcompensation contributed.

 

**Compensationof Directors**

 

                                                Directors receive a $15,000 annualretainer, $1,500 for each board meeting attended ($500 for each committeemeeting attended) and reimbursement of reasonable expenses incurred inattending such meetings.

 

30

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**ITEM 12.****                     ****SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

 

                                                The following table sets forth certaininformation regarding the ownership of our common stock as of March 1, 2002 by(i) each director, (ii) each of the Named Executive Officers,(iii) all executive officers and directors as a group and (iv) eachperson who is the beneficial owner of more than 5% of the Common Stock.

 

| **Name of Individual or Entity(1)**                                      |   | **Number**

**of  Shares(2)** |   | **Percentage  of**

**Shares**

**Outstanding(3)** |   |
|--------------------------------------------------------------------------|--------|-------------------------------|--------|----------------------------------------------------|--------|
| JFL-EEC LLC(4)                                                           |   | 3,802,800                     |   | 82.6                                               | %      |
| John F. Lehman(5)                                                        |   | 3,802,800                     |   | 82.6                                               |   |
| Donald Glickman(5)                                                       |   | 3,802,800                     |   | 82.6                                               |   |
| George Sawyer(5)                                                         |   | 3,802,800                     |   | 82.6                                               |   |
| Stephen L. Brooks(5)                                                     |   | 3,802,800                     |   | 82.6                                               |   |
| Joseph Stroud(5)                                                         |   | 3,802,800                     |   | 82.6                                               |   |
| Thomas G. Pownall(6)                                                     |   | —                        |   | —                                             |   |
| Oliver C. Boileau, Jr.(7)                                                |   | —                        |   | —                                             |   |
| William Paul(8)                                                          |   | —                        |   | —                                             |   |
| Bruce D. Gorchow(9)                                                      |   | —                        |   | —                                             |   |
| Tig H. Krekel(10)                                                        |   | —                        |   | —                                             |   |
| Joseph Budano                                                            |   | —                        |   | —                                             |   |
| Kenneth R. Kilpatrick                                                    |   | 120,000                       |   | 2.6                                                |   |
| Samuel A.  Lewis                                                         |   | 80,000                        |   | 1.7                                                |   |
| Normand E. Precourt                                                      |   | 50,000                        |   | 1.1                                                |   |
| John J. Santospirito                                                     |   | —                        |   | —                                             |   |
| Jackson National Life  Insurance Company(11)                             |   | 557,500                       |   | 10.8                                               |   |
| All directors and executive  officers  as a group (18 persons) |   | 4,152,800                     |   | 90.2                                               |   |

----

*                       Less than 1%

 

(1)                The address of JFL-EEC and Messrs.Lehman, Glickman, Sawyer, Brooks and Stroud is 2001 Jefferson Davis Highway,Suite 607, Arlington, Virginia 22202. The address of Mr. Pownall is 1800 K Street, N.W., Suite 724,Washington, D.C. 20006.  The address ofMr. Boileau is 202 North Brentwood Boulevard, Apt. 3A, St. Louis, Missouri63105.  The address of Mr. Paul is 21Springwood Drive, Trumbull, Connecticut 06611. The address of Mr. Gorchow and Jackson National Life Insurance Company(“Jackson National”) is 225 West Wacker Drive, Suite 1200, Chicago, Illinois60606.  The address of Mr. Krekel is 2Via Pergela, Rancho Palos Verdes, California 90275.

 

(2)                As used in this table, beneficialownership means the sole or shared power to vote, or to direct the voting of asecurity, or the sole or shared power to dispose, or direct the disposition of,a security.

 

(3)                Computed based upon the total number ofshares of Common Stock outstanding on March 1, 2003 (4,602,433) and thenumber of shares of Common Stock underlying options or warrants held by thatperson exercisable within 60 days of March 1, 2003.  In accordance with Rule 13(d)-3 of theExchange Act, any Common Stock that will not be outstanding within 60 days ofMarch 1, 2003 that is subject to options or warrants exercisable within 60 daysof March 1, 2003 is deemed to be outstanding for the purpose of computing thepercentage of outstanding shares of the Common Stock owned by the personholding such

 

31

----

 

                              options or warrants, but is not deemed to beoutstanding for the purpose of computing the percentage of outstanding sharesof the Common Stock owned by any other person.

 

(4)                JFL-EEC LLC is a Delaware limitedliability company that is an affiliate of J.F. Lehman & Company.  Through JFL-EEC, J.F. Lehman EquityInvestors I, L.P. (“JFLEI”), also an affiliate of J.F. Lehman & Company,beneficially owns 71.7% of the Common Stock. Each of Messrs. Lehman, Glickman, Sawyer, Brooks and Stroud, either directly(whether through ownership interest or position) or through one or moreintermediaries, may be deemed to control JFL-EEC, J.F. Lehman and JFLEI.  J.F. Lehman and JFLEI may be deemed tocontrol the voting and disposition of the shares of the Common Stock owned byJFL-EEC. Accordingly, for certain purposes, Messrs. Lehman, Glickman, Sawyer,Brooks and Stroud may be deemed to be beneficial owners of the shares of CommonStock owned by JFL-EEC.

 

(5)                Includes the shares beneficially owned byJFL-EEC, of which Messrs. Lehman, Glickman, Sawyer, Brooks and Stroud areaffiliates.

 

(6)                Mr. Pownall is a member of a limitedpartner of JFLEI and is on the investment advisory board of J.F. Lehman.

 

(7)                Mr. Boileau is a member of a limitedpartner of JFLEI.

 

(8)                Mr. Paul is a member of a limited partnerof JFLEI.

 

(9)                Mr. Gorchow is on the investment advisoryboard of J.F. Lehman and is President of PPM AmericaCapital Partners, the agentfor Jackson National.

 

(10)          Mr. Krekel is a member of a limitedpartner of JFLEI.

 

(11)          All shares are obtainable upon the exerciseof warrants with an exercise price of $2.50 per share, which are immediatelyexercisable.  Some of the warrants areheld by affiliates of Jackson National, which is a non-controlling member ofJFL-EEC.

 

32

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**ITEM 13.****                     ****CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

**Management Agreement; Contributed Management Services**

 

                                                In February 1998, the Companyentered into a management agreement with J.F. Lehman & Company, anaffiliate of the Company’s principal stockholder (the “ManagementAgreement”).  Under the terms of theManagement Agreement, the Company was obligated to pay Lehman a $500,000 annualmanagement fee in advance on a semi-annual basis.  In September 1998, the Company and Lehman amended the ManagementAgreement and concurrently entered into a management services agreement withLehman, the combined effect of which was to further delineate the managementservices to be provided by Lehman and to reduce the term of the ManagementAgreement from ten years to five years. The Management Agreement terminated on February 3, 2003.

 

                                                Under the Company’s old credit facilitywith Deutsche Bank, the Company was precluded from paying management fees toLehman during recent periods when Deutsche Bank had waived events of default,although Lehman continued to provide management services to the Company duringsuch times.  Under the Ableco Facility,the Company was prohibited from paying management fees to Lehman, although Lehmancontinued to provide those management services to the Company.  Beginning December 30, 2001, theCompany recorded the contributed management services as an expense and acorresponding capital contribution.  Thetotal amount of expense and additional paid-in capital recorded for theseservices during Fiscal 2002 was $500,000.

 

                                                During Fiscal 2002, the Companyreimbursed Lehman $217,000 for expenses Lehman incurred in connection withreplacing the old credit facility with the Ableco Facility.  Such amount was capitalized and is includedin deferred financing fees.  Inaddition, the Company reimbursed Lehman $109,000 for fees and expenses Lehmanincurred to a third party executive search firm in connection with the hiringof Joseph Budano.

 

**Shareholder Agreement**

 

                                                The holders of the Company’s common stockand warrants to purchase common stock are party to a Shareholder Agreement,dated as of February 3, 1998, as amended (the “Shareholder Agreement”),the principal terms of which are summarized below:

 

                                                *Certain Voting Rights*.  Pursuant tothe Shareholder Agreement, so long as Jackson National holds in the aggregatewarrants and shares obtained upon exercise of the warrants representing atleast 75% of the warrants initially issued to it, Jackson National shall havethe right to designate one director. Subject to the rights of the holders of the Series A 10% CumulativeRedeemable Preferred Stock (the “Redeemable Preferred Stock”) to electdirectors upon the occurrence of certain events pursuant to the certificate ofdesignations governing the Redeemable Preferred Stock, JFL-EEC is entitled todesignate all directors of the Company not designated by Jackson National.

 

                                                *Restrictions on Transfer*.  The sharesof the common stock held by each of the parties to the Shareholder Agreement,and certain of their transferees, are subject to restrictions on transfer.  Shares of common stock may be transferredonly to certain related transferees, including, (i) in the case ofindividual shareholders, family members or their legal representatives orguardians, heirs and legatees and trusts, partnerships and corporations thesole beneficiaries, partners or shareholders, as the case may be, of which arefamily members, (ii) in the case of partnership or limited liabilitycompany shareholders, the partners or members of such partnership or limitedliability company, as the case may be, (iii) in the case of corporateshareholders, affiliates of such corporation and (iv) transferees ofshares sold in transactions

 

33

----

 

complying with theapplicable provisions of the Right of First Offer or the Tag-Along orDrag-Along Rights (as each term is defined below).

 

                                                *Rights of First Offer*.  If anyshareholder desires to transfer any shares of the common stock or warrants(other than pursuant to certain permitted transfers), all other shareholdershave a right of first offer (the “Right of First Offer”) to purchase the sharesor warrants (the “Subject Shares”) upon such terms and subject to suchconditions as are set forth in a notice (a “First Offer Notice”) sent by theselling shareholder to such other shareholders.  If the shareholders elect to exercise their Rights of First Offerwith respect to less than all of the Subject Shares, the Company has a right topurchase all of the Subject Shares that the shareholders have not elected topurchase.  If the shareholders receivingthe First Offer Notice and the Company wish to exercise their respective rightsof first offer with respect to less than all of the Subject Shares, the sellingshareholder may solicit offers to purchase all (but not less than all) of theSubject Shares upon such terms and subject to such conditions as are, in theaggregate, no less favorable to the selling shareholder than those set forth inthe First Offer Notice.

 

                                                *Tag-Along Rights*.  TheShareholder Agreement provides that, if the shareholder and the Company fail toexercise their respective rights of first refusal with respect to all of theSubject Shares, the shareholders have the right to “tag along” (the “Tag-AlongRight”) upon the sale of the common stock by certain shareholders pursuant to athird-party offer.

 

                                                *Drag-Along Rights*.  TheShareholder Agreement provides that, subject to certain conditions, if one ormore shareholders holding a majority of the common stock (the “MajorityShareholders”) propose to sell all of the common stock owned by the MajorityShareholders, the Majority Shareholders have the right (the “Drag-Along Right”)to compel the other shareholders to sell all of the shares of common stock heldby such other shareholders upon the same terms and subject to the sameconditions as the terms and conditions applicable to the sale by the MajorityShareholders.

 

                                                *Subscription Offer With Respect to Primary Issuances*. The Shareholder Agreement provides that subject to certain exceptions,the Company is not permitted to issue equity securities, or securitiesconvertible into equity securities, to any person unless the Company hasoffered to issue to each of the other shareholders, on a pro rata basis, anopportunity to purchase such securities on the same terms, including price, andsubject to the same conditions as those applicable to such person.

 

                                                *Registered Offerings*.  The sharesof common stock may be transferred in a bona fide public offering for cashpursuant to an effective registration statement (a “Registered Offering”)without compliance with the provisions of the Shareholder Agreement related tothe Right of First Offer or the Tag-Along or Drag-Along Rights.

 

                                                *Term*.  The term of the ShareholderAgreement is 10 years from the Closing Date, subject to earlier terminationunder certain conditions and upon certain events.

 

**Shareholder Registration Rights Agreement**

 

                                                Pursuant to the terms of the ShareholdersRegistration Rights Agreement, dated as of February 3, 1998, among the Companyand the holders of its common stock, JFL-EEC and certain other shareholders areentitled to one “demand” and unlimited piggyback registration rights, subjectto additional customary rights and limitations.

 

34

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**Registration Rights for Warrantholders**

 

                                                The holders of the shares issuable uponexercise of the warrants are entitled to one “demand” registration right at anytime on or after the later of (i) February 3, 2003 and (ii) the 181st day aftercompletion of the Company ‘s initial public offering of its common stock,subject to additional customary rights and limitations.  In addition, holders of the shares issuableupon exercise of the warrants are entitled to unlimited “piggyback”registration rights after the date of the Company ‘s initial public offering ofits common stock, subject to customary rights and limitations.

 

**Indemnification of Officers and Directors**

 

                                                The Company ‘s Certificate ofIncorporation contains provisions eliminating the personal liability ofdirectors for monetary damages for breaches of their duty of care, except incertain prescribed circumstances.  TheCompany ‘s Bylaws also provide that directors and officers will be indemnifiedto the fullest extent authorized by Delaware law, as it now stands or may inthe future be amended, against all expenses and liabilities reasonably incurredin connection with service for or on behalf of the Company.  The Company ‘s Bylaws provide that therights of directors and officers to indemnification is not exclusive of anyother right now possessed or hereinafter acquired under any statute, agreementor otherwise.

 

**Racal Instruments**

 

                                                Racal Instruments (“Racal”), a customerof the Company, was acquired on November 2, 2001 by a group of investorsthat includes affiliates of J.F. Lehman Equity Investors I, L.P.(“JFLEI”).  In addition, certain membersof the Company’s board of directors are also members of Racal’s board ofdirectors.  As a result, Racal isconsidered a related party.  Sales bythe Company to Racal were approximately $1,984,000 and $530,000 during Fiscal2001 and Fiscal 2002, respectively.

 

35

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**PART IV**

 

**ITEM 14.****                     ****CONTROLS AND PROCEDURES**

 

                                                Within the 90 days prior to the date ofthis report, the Company carried out an evaluation, under the supervision andwith the participation of the Company’s management, including the Company’schief executive officer and chief financial officer, of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedurespursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the chief executive officer and the chieffinancial officer concluded that the Company’s disclosure controls andprocedures are effective in timely alerting them to material informationrelating to the Company (including its consolidated subsidiary) required to beincluded in the Company’s periodic SEC filings, and that there were nosignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

**ITEM 15.****                     ****EXHIBITS, CONSOLIDATED FINANCIALSTATEMENT SCHEDULES, AND REPORTS ON FORM 8-K**

 

(a)(1)                    Consolidated Financial Statements:

 

                                                The following consolidated financialstatements of the Company are included in response to Item 8 of thisreport.

 
| Independent Auditors’ Report (Deloitte & Touche LLP)                                                                                |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                         |   |
| Report of Independent Public Accountants  (Arthur Andersen LLP)                                                                              |   |
|                                                                                                                                         |   |
| Consolidated Balance Sheets as of  December 29, 2001 and December 28, 2002                                                                   |   |
|                                                                                                                                         |   |
| Consolidated Statements of Operations for  the years ended  December 30, 2000,  December 29, 2001 and December 28, 2002                 |   |
|                                                                                                                                         |   |
| Consolidated Statements of Stockholders’  Deficit for the years ended  December  30, 2000, December 29, 2001 and December 28, 2002 |   |
|                                                                                                                                         |   |
| Consolidated Statements of Cash Flows for  the years ended December 30, 2000, December 29, 2001 and December 28, 2002                        |   |
|                                                                                                                                         |   |
| Notes to Consolidated Financial  Statements                                                                                                  |   |

 

(a)(2) ConsolidatedFinancial Statement Schedules:

 
|                                                  Schedule II-Valuation and Qualifying Accounts |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

 

                                                Schedules other than the one listed abovehave been omitted since they are either not required, not applicable or theinformation is otherwise included.

 

(b)                                 Reports on Form 8-K.

 

                                                None.

 

36

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(c)                                  Exhibits

** **
| **Exhibit No.** |   | **Description**                                                                                                                                                                                                                               |
|-----------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1             |   | Purchase Agreement,  dated January 30, 1998, between the Company and the Initial Purchaser(1)                                                                                                                                                 |
|            |   |                                                                                                                                                                                                                                          |
| 2.1             |   | Agreement and Plan of  Merger, dated as of January 2, 1998, by and among the Company, JFL-EEC LLC,  JFL-EEC Merger Sub Co. and T.C. Group, L.L.C.(1)                                                                                          |
|            |   |                                                                                                                                                                                                                                          |
| 3.1             |   | Amended and Restated  Certificate of Incorporation of the Company(1)                                                                                                                                                                          |
|            |   |                                                                                                                                                                                                                                          |
| 3.2             |   | Certificate of  Designations for the Series A 10% Cumulative Redeemable Preferred Stock(1)                                                                                                                                                    |
|            |   |                                                                                                                                                                                                                                          |
| 3.3             |   | Certificate of  Designations for the Series B 6% Cumulative Convertible Preferred Stock(1)                                                                                                                                                    |
|            |   |                                                                                                                                                                                                                                          |
| 3.4             |   | Certificate  of Designations for the Series C 6% Cumulative Convertible Preferred Stock(2)                                                                                                                                                    |
|            |   |                                                                                                                                                                                                                                          |
| 3.5             |   | Amended and Restated  Bylaws of the Company(1)                                                                                                                                                                                                |
|            |   |                                                                                                                                                                                                                                          |
| 3.6             |   | Articles of  Incorporation of Elgar Electronics Corporation(1)                                                                                                                                                                                |
|            |   |                                                                                                                                                                                                                                          |
| 3.7             |   | Bylaws of Elgar  Electronics Corporation(1)                                                                                                                                                                                                   |
|            |   |                                                                                                                                                                                                                                          |
| 3.8             |   | Articles of  Incorporation of Power Ten(1)                                                                                                                                                                                                    |
|            |   |                                                                                                                                                                                                                                          |
| 3.9             |   | Bylaws  of Power Ten(1)                                                                                                                                                                                                                       |
|            |   |                                                                                                                                                                                                                                          |
| 4.1             |   | Indenture, dated as of  February 3, 1998, between the Company and United States Trust Company of New  York(1)                                                                                                                                 |
|            |   |                                                                                                                                                                                                                                          |
| 4.2             |   | First Supplemental  Indenture, dated as of February 3, 1998, among the Company, Elgar Electronics  Corporation and United States Trust Company of New York(1)                                                                                 |
|            |   |                                                                                                                                                                                                                                          |
| 4.3             |   | Second Supplemental  Indenture, dated as of May 29, 1998, among the Company, Elgar Electronics  Corporation, Power Ten and United States Trust Company of New York(1)                                                                         |
|            |   |                                                                                                                                                                                                                                          |
| 4.4             |   | Form of Note (included  in Exhibits 4.1 and 4.2)(1)                                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                          |
| 4.5             |   | Registration Rights  Agreement, dated February 3, 1998, between the Company and the Holders of Old  Notes(1)                                                                                                                                  |
|            |   |                                                                                                                                                                                                                                          |
| 4.6             |   | Form of Warrant  Certificate(1)                                                                                                                                                                                                               |
|            |   |                                                                                                                                                                                                                                          |
| 10.1            |   | Assumption Agreement,  dated as of February 3, 1998, between the Company and Elgar Electronics  Corporation, assuming, among other things, the obligations of MergerCo under  the Purchase Agreement and the Registration Rights Agreement(1) |
|            |   |                                                                                                                                                                                                                                          |
| 10.2            |   | Investment Agreement,  dated as of February 3, 1998, between the Company and Series A preferred  shareholders(1)                                                                                                                              |
|            |   |                                                                                                                                                                                                                                          |
| 10.3            |   | Shareholders Agreement,  dated as of February 3, 1998, between the Company and the shareholders(1)                                                                                                                                            |
|            |   |                                                                                                                                                                                                                                          |
| 10.4            |   | Shareholders  Registration Rights Agreement, dated as of February 3, 1998, between the  Company and the shareholders(1)                                                                                                                       |
|            |   |                                                                                                                                                                                                                                          |
| 10.5            |   | Warrantholders’  Registration Rights Agreement, dated as of February 3, 1998, between the  Company and the warrantholders(1)                                                                                                             |
|            |   |                                                                                                                                                                                                                                          |
| 10.6            |   | Management Agreement,  dated as of February 3, 1998, among the Company, Elgar Electronics  Corporation and J. F. Lehman & Company(1)                                                                                                      |
|            |   |                                                                                                                                                                                                                                          |
| 10.7            |   | Amendment No. 1 to  Management Agreement, entered into on September 15, 1998, effective as of  February 3, 1998, among the Company, Elgar Electronics Corporation and J. F.  Lehman & Company(3)                                          |
|            |   |                                                                                                                                                                                                                                          |

 

37

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| 10.8   |   | Management Services  Agreement, entered into on September 15, 1998, effective as of February 3,  1998, among the Company, Elgar Electronics Corporation and J.F. Lehman  & Company(3)                                                             |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                       |
| 10.9   |   | Employment Agreement,  dated as of February 3, 1998, between Elgar Electronics Corporation and  Kenneth R. Kilpatrick(1)                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                       |
| 10.10  |   | Form of Employment  Agreement entered into between Elgar Electronics Corporation and certain of  its executive officers (other than Kenneth R. Kilpatrick) on February 3,  1998(1)                                                                         |
|   |   |                                                                                                                                                                                                                                                       |
| 10.11  |   | Lease Agreement, dated  February 1, 1984, between the Company and Carroll Park Ridge, for the  Company’s principal facilities(1)                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                       |
| 10.12  |   | First Amendment to  Lease, dated November 5, 1992, between RREEF WEST-IV and the Company(1)                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                       |
| 10.13  |   | Second Amendment to  Lease, dated February 12, 1998, between The Irvine Company and the Company(1)                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                       |
| 10.14  |   | Third Amendment to  Lease, dated July 2, 1998, between The Irvine Company and the Company(4)                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                       |
| 10.15  |   | Severance Agreement and  General and Special Release, dated as of August 26, 2002, between Elgar  Electronics Corporation and Kenneth R. Kilpatrick(5)                                                                                                |
|   |   |                                                                                                                                                                                                                                                       |
| 10.16  |   | Employment Agreement,  dated as of July 17, 2002, among Elgar Holdings, Inc., Elgar Electronics  Corporation and Joseph Budano(5)                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                       |
| 10.17  |   | Employment Agreement,  dated as of December 30, 2002 but effective as of September 16,  2002, among Elgar Holdings, Inc., Elgar Electronics Corporation and John P.  Mei                                                                         |
|   |   |                                                                                                                                                                                                                                                       |
| 10.18  |   | 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(6) |
|   |   |                                                                                                                                                                                                                                                       |
| 10.19  |   | Security Agreement,  dated as of June 26, 2002, by and among Elgar Electronics Corporation, Elgar  Holdings, Inc. and Ableco Finance LLC(7)                                                                                                                |
|   |   |                                                                                                                                                                                                                                                       |
| 10.20  |   | Patent Security  Agreement, dated as of June 26, 2002, by and between Elgar Electronics  Corporation and Ableco Finance LLC(7)                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                       |
| 10.21  |   | Trademark Security  Agreement, dated as of June 26, 2002, by and between Elgar Electronics  Corporation and Ableco Finance LLC(7)                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                       |
| 10.22  |   | Stock Pledge Agreement,  dated as of June 26, 2002, by and among Elgar Holdings, Inc., Elgar  Electronics Corporation and Ableco Finance LLC(7)                                                                                                            |
|   |   |                                                                                                                                                                                                                                                       |
| 10.23  |   | Intercompany  Subordination Agreement, dated as of June 26, 2002, by and among Elgar  Holdings, Inc., Elgar Electronics Corporation and Ableco Finance LLC(7)                                                                                              |
|   |   |                                                                                                                                                                                                                                                       |
| 10.24  |   | 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(7)                                                        |
|   |   |                                                                                                                                                                                                                                                       |
| 12.1   |   | Statement  re:  Computation of Ratios of Earnings  to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                       |
| 21.1   |   | Subsidiaries  of the Company                                                                                                                                                                                                                               |

----

(1)         Incorporated by reference to theregistrant’s Registration Statement on Form S-4, FileNo. 333-557797, as filed with the Securities and Exchange Commission onJune 2, 1998, as amended on July 14, 1998, July 23, 1998 and July 29, 1998.

 

38

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(2)         Incorporated by reference to theQuarterly Report on Form 10-Q for the quarter ended April 3, 1999, as filedwith the Securities and Exchange Commission on May 18, 1999.

 

(3)         Incorporated by reference to theTransition Report on Form 10-K for the nine-month transitional period endedJanuary 2, 1999, as filed with the Securities and Exchange Commission on June22, 1999.

 

(4)         Incorporated by reference to theQuarterly Report on Form 10-Q for the quarter ended June 27, 1998, as filedwith the Securities and Exchange Commission on September 11, 1998.

 

(5)         Incorporated by reference to theQuarterly Report on Form 10-Q for the quarter ended September 28, 2002, asfiled with the Securities and Exchange Commission on November 12, 2002.

 

(6)         Incorporated by reference to the CurrentReport on Form 8-K filed with the Securities and Exchange Commission onJuly 15, 2002.

 

(7)         Incorporated by reference to theQuarterly Report on Form 10-Q for the quarter ended June 29, 2002, asfiled with the Securities and Exchange Commission on August 19, 2002.

 

                                                No annual report or proxy materialcovering our last fiscal year has been or will be sent to security holders ofthe Company.

 

39

----

 

**INDEPENDENTAUDITORS’ REPORT**

 

To the Stockholders andBoard of Directors of

Elgar Holdings, Inc.

 

We have audited theaccompanying consolidated balance sheet of Elgar Holdings, Inc. and subsidiary(the “Company”) as of December 28, 2002, and the related consolidatedstatements of operations, stockholders’ deficit, and cash flows for the yearthen ended.  Our audit also included the2002 financial statement schedule listed in the Index at Item 15.  These financial statements and financial statementschedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon the 2002 financial statements and financial statement schedule based on ouraudit.  The financial statements andfinancial statement schedules as of December 29, 2001, and for the years endedDecember 30, 2000 and December 29, 2001, before the inclusion of the additionaldisclosures discussed in Note 3 to the financial statements, were audited byother auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financialstatements and stated that such 2000 and 2001 financial statement schedules,when considered in relation to the 2000 and 2001 basic financial statementstaken as a whole, presented fairly, in all material respects, the informationset forth therein, in their report dated February 22, 2002, which included anexplanatory paragraph relating to the Company’s ability to continue as a goingconcern.

 

We conducted our audit inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, the 2002consolidated financial statements present fairly, in all material respects, thefinancial position of Elgar Holdings, Inc. and subsidiary as of December 28,2002, and the results of their operations and their cash flows for the yearthen ended, in conformity with accounting principles generally accepted in theUnited States of America.  Also, in ouropinion, the 2002 financial statement schedule, when considered in relation tothe 2002 basic consolidated financial statements taken as a whole, presentsfairly, in all material respects, the information set forth therein.

 

As discussed in Note 3 tothe financial statements, the Company changed its method of accounting forgoodwill as of December 30, 2001 to conform to Statement of FinancialAccounting Standards No. 142, *Goodwill andOther Intangible Assets* (“SFAS No. 142”).

 

As discussed above, thefinancial statements of the Company as of December 29, 2001, and for the yearsended December 30, 2000 and December 29, 2001, were audited by other auditorswho have ceased operations.  Asdescribed in Note 3 to the financial statements, these financial statementshave been revised to include the transitional disclosures required by SFAS No.142, which was adopted by the Company as of December 30, 2001.  Our audit procedures with respect to thedisclosures in Note 3 to the financial statements with respect to 2000 and 2001included i) agreeing the previously reported net loss to the previously issuedfinancial statements and agreeing the adjustment to reported net loss,representing amortization expense recognized in those years related to goodwillthat is no longer being amortized as a result of initially applying SFAS No.142, to the Company’s underlying records obtained from management, and ii)proving the mathematical accuracy of the reconciliation of adjusted net loss toreported net loss.  In our opinion, thedisclosures for 2000 and 2001 are appropriate. However, we were 

 

F-1

----

 

not engaged to audit,review, or apply any procedures to the 2000 or 2001 financial statements of theCompany other than with respect to such disclosures and, accordingly, we do notexpress an opinion or any other form of assurance on the 2000 or 2001 financialstatements taken as a whole.

 

/s/ Deloitte & ToucheLLP

 

San Diego, California

April 17, 2003

 

F-2

----

 

                                                The following report is a copy of areport previously issued by Arthur Andersen LLP (“Andersen”), which report hasnot been reissued by Andersen.

 

**REPORTOF INDEPENDENT PUBLIC ACCOUNTANTS**

 

To Elgar Holdings, Inc.:

 

We have audited theaccompanying consolidated balance sheets of ELGAR HOLDINGS, INC. (a Delawarecorporation) and subsidiaries (the “Company”) as of December 30, 2000 andDecember 29, 2001, and the related consolidated statements of operations,stockholders’ deficit and cash flows for the years ended January 1, 2000,December 30, 2000 and December 29, 2001. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United States.Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Elgar Holdings, Inc. and subsidiaries as ofDecember 30, 2000 and December 29, 2001, and the results of their operationsand their cash flows for the years ended January 1, 2000, December 30, 2000 andDecember 29, 2001, in conformity with accounting principles generally acceptedin the United States.

 

The accompanyingfinancial statements have been prepared assuming that the Company will continueas a going concern.  As discussed inNote 2 to the financial statements, the Company has suffered losses fromoperations and expects that losses may continue in 2002.  In addition, certain of the Company’s debtis due on June 28, 2002, and the existing cash balances at December 29, 2001plus management’s forecast operating cash flows for Fiscal 2002 are notexpected to be sufficient to pay off the debt when it comes due.  Therefore, the Company will be required torestructure or obtain additional sources of funding to replace the existingdebt and provide sufficient operating cash flow for the remainder of Fiscal2002.  There can be no assurances thatthe Company will be successful in restructuring or securing such additionalfinancing.  If it should beunsuccessful, substantial doubt exists regarding the Company’s ability tocontinue as a going concern. Management’s plans in regard to these matters arealso described in Note 2. The consolidated financial statements do not include anyadjustments relating to the recoverability and classification of asset carryingamounts or the amount and classification of liabilities that might resultshould the Company be unable to continue as a going concern.

 

F-3

----

 

Our audits were made forthe purpose of forming an opinion on the basic financial statements taken as awhole.  Schedule II-Valuation andQualifying Accounts is presented for purposes of complying with the Securitiesand Exchange Commission’s rules, and is not part of the basic financialstatements. The schedule has been subjected to the auditing procedures appliedin the audits of the basic financial statements and, in our opinion, fairlystates in all material respects the financial data required to be set forththerein in relation to the basic financial statements taken as a whole.

 

/s/ Arthur Andersen LLP

 

ARTHUR ANDERSEN LLP

San Diego, California

February 22, 2002

 

F-4

----

 

**ELGAR HOLDINGS, INC. AND SUBSIDIARY**

**CONSOLIDATED BALANCE SHEETS**

**(dollars in thousands)**

** **
|                                                                                                                              |   | **December  29,  2001** |   | **December  28,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
| **ASSETS**                                                                                                                        |   |                    |   |                    |   |
| CURRENT ASSETS:                                                                                                                   |   |                    |   |                    |   |
| Cash and cash equivalents                                                                                                         |   | $                       | 2,063  |                    | $      | 1,697 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $204 and $163, respectively                                       |   | 6,942                   |   | 7,330                   |   |
| Inventories                                                                                                                       |   | 9,580                   |   | 6,627                   |   |
| Prepaids and other                                                                                                                |   | 325                     |   | 269                     |   |
| Total current assets                                                                                                              |   | 18,910                  |   | 15,923                  |   |
|                                                                                                                              |   |                    |   |                    |   |
| PROPERTY, PLANT AND EQUIPMENT, net                                                                                                |   | 2,674                   |   | 2,300                   |   |
| GOODWILL, net of accumulated amortization of $11,419                                                                              |   | 24,381                  |   | 24,381                  |   |
| OTHER ASSETS, net of accumulated amortization of  $2,994 and $2,955, respectively                                                 |   | 3,697                   |   | 4,810                   |   |
|                                                                                                                              |   | $                       | 49,662 |                    | $      | 47,414 |   |
|                                                                                                                              |   |                    |   |                    |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’  DEFICIT**                                                                                   |   |                    |   |                    |   |
|                                                                                                                              |   |                    |   |                    |   |
| CURRENT LIABILITIES:                                                                                                              |   |                    |   |                    |   |
| Accounts payable                                                                                                                  |   | $                       | 2,576  |                    | $      | 1,432 |   |
| Accrued liabilities                                                                                                               |   | 10,237                  |   | 12,317                  |   |
| Line of credit                                                                                                                    |   | 5,015                   |   | —                  |   |
| Current portion of long-term debt                                                                                                 |   | 8,783                   |   | —                  |   |
| Total current liabilities                                                                                                         |   | 26,611                  |   | 13,749                  |   |
|                                                                                                                              |   |                    |   |                    |   |
| LONG-TERM DEBT, net of current portion                                                                                            |   | 90,000                  |   | 110,000                 |   |
| Total liabilities                                                                                                                 |   | 116,611                 |   | 123,749                 |   |
| COMMITMENTS AND CONTINGENCIES (Notes 12 and 13)                                                                                   |   |                    |   |                    |   |
|                                                                                                                              |   |                    |   |                    |   |
| SERIES A 10% CUMULATIVE REDEEMABLE PREFERRED STOCK,  no par value, 20,000 shares authorized; 13,449 shares issued and outstanding |   | 12,405                  |   | 12,572                  |   |
|                                                                                                                              |   |                    |   |                    |   |
| 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                 | )      | (68,067                 | )      |
| Accumulated deficit                                                                                                               |   | (19,833                 | )      | (29,886                 | )      |
| Total stockholders’ deficit                                                                                                  |   | (79,354                 | )      | (88,907                 | )      |
|                                                                                                                              |   | $                       | 49,662 |                    | $      | 47,414 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

F-5

----

 

**ELGAR HOLDINGS, INC. AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(dollars inthousands)**

** **
|                                                |   | **Year Ended  December 30,  2000** |   | **Year Ended  December 29,  2001** |   | **Year Ended  December 28,**

**2002** |   |
|-----------------------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|----------------------------------------|--------|
| Net sales                                           |   | $                                  | 65,786 |                               | $      | 58,696                                 |   | $ | 48,355 |   |
| Cost of sales                                       |   | 38,152                             |   | 36,443                             |   | 28,999                                 |   |
| Gross profit                                        |   | 27,634                             |   | 22,253                             |   | 19,356                                 |   |
| Selling, general and administrative expenses        |   | 11,337                             |   | 11,741                             |   | 9,943                                  |   |
| Research, development and engineering expenses      |   | 6,675                              |   | 6,170                              |   | 4,793                                  |   |
| Amortization of goodwill and non-compete agreements |   | 2,435                              |   | 2,435                              |   | 48                                     |   |
| Operating income                                    |   | 7,187                              |   | 1,907                              |   | 4,572                                  |   |
| Interest expense                                    |   | 10,544                             |   | 10,642                             |   | 11,980                                 |   |
| Loss before income taxes                            |   | (3,357                             | )      | (8,735                             | )      | (7,408                                 | )      |
| Provision for income taxes                          |   | 70                                 |   | 1,449                              |   | —                                 |   |
| Net loss                                            |   | $                                  | (3,427 | )                                  | $      | (10,184                                | )      | $ | (7,408 | ) |

** **

The accompanying notesare an integral part of these consolidated financial statements.

 

F-6

----

 

**ELGAR HOLDINGS, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT**

**(dollars in thousands)**

** **
|                                               |   | **Series B  Preferred Stock** |   | **Series C  Preferred Stock** |   | **Common  Stock**  |   |               |   |               |   |               |   |
|----------------------------------------------------|--------|-------------------------------|--------|-------------------------------|--------|--------------------|--------|--------------------|--------|--------------------|--------|--------------------|--------|
|                                               |   | **No. of  Shares**            |   | **Dollar  Amount**            |   | **No. of  Shares** |   | **Dollar  Amount** |   | **No. of  Shares** |   | **Dollar  Amount** |   | **Additional  Paid—**

**In Capital** |   | **Accumulated**

**Deficit** |   | **Total** |   |
| BALANCE, January 1, 2000                           |   | 5,000                         |   | $                             | 5,000  |               | 4,000  |               | $      | 4,000              |   | 4,600,000          |   | $ | 46 |   | $ | (68,581 | ) | $ | (2,040 | ) | $ | (61,575 | ) |
| Exercise of stock options                          |   | —                        |   | —                        |   | —             |   | —             |   | 1,533              |   | —             |   | 9 |   | — |   | 9 |   |
| Series A preferred stock  dividend-in-kind         |   | —                        |   | —                        |   | —             |   | —             |   | —             |   | —             |   | — |   | (1,252 | ) | (1,252 | ) |
| Series B preferred stock  dividend accrual         |   | —                        |   | —                        |   | —             |   | —             |   | —             |   | —             |   | — |   | (335 | ) | (335 | ) |
| Series C preferred stock  dividend accrual         |   | —                        |   | —                        |   | —             |   | —             |   | —             |   | —             |   | — |   | (255 | ) | (255 | ) |
| Accretion of discount on  Series A preferred stock |   | —                        |   | —                        |   | —             |   | —             |   | —             |   | —             |   | — |   | (167 | ) | (167 | ) |
| Net loss                                           |   | —                        |   | —                        |   | —             |   | —             |   | —             |   | —             |   | — |   | (3,427 | ) | (3,427 | ) |
|                                               |   |                          |   |                          |   |               |   |               |   |               |   |               |   |   |   |   |   |   |   |
| BALANCE, December 30, 2000                         |   | 5,000                         |   | 5,000                         |   | 4,000              |   | 4,000              |   | 4,601,533          |   | 46                 |   | (68,572 | ) | (7,476 | ) | (67,002 | ) |
| Exercise of stock options                          |   | —                        |   | —                        |   | —             |   | —             |   | 900                |   | —             |   | 5 |   | — |   | 5 |   |
| Series A preferred stock  dividend-in-kind         |   | —                        |   | —                        |   | —             |   | —             |   | —             |   | —             |   | — |   | (113 | ) | (113 | ) |
| Series A preferred stock  dividend accrual         |   | —                        |   | —                        |   | —             |   | —             |   | —             |   | —             |   | — |   | (1,268 | ) | (1,268 | ) |
| Series B preferred stock  dividend accrual         |   | —                        |   | —                        |   | —             |   | —             |   | —             |   | —             |   | — |   | (355 | ) | (355 | ) |
| Series C preferred stock dividend  accrual         |   | —                        |   | —                        |   | —             |   | —             |   | —             |   | —             |   | — |   | (271 | ) | (271 | ) |
| Accretion of discount on  Series A preferred stock |   | —                        |   | —                        |   | —             |   | —             |   | —             |   | —             |   | — |   | (166 | ) | (166 | ) |
| Net loss                                           |   | —                        |   | —                        |   | —             |   | —             |   | —             |   | —             |   | — |   | (10,184 | ) | (10,184 | ) |
|                                               |   |                          |   |                          |   |               |   |               |   |               |   |               |   |   |   |   |   |   |   |
| BALANCE, December 29, 2001                         |   | 5,000                         |   | 5,000                         |   | 4,000              |   | 4,000              |   | 4,602,433          |   | 46                 |   | (68,567 | ) | (19,833 | ) | (79,354 | ) |
| Contributed management  services                   |   | —                        |   | —                        |   | —             |   | —             |   | —             |   | —             |   | 500 |   | — |   | 500 |   |
| Series A preferred stock  dividend accrual         |   | —                        |   | —                        |   | —             |   | —             |   | —             |   | —             |   | — |   | (1,814 | ) | (1,814 | ) |
| Series B preferred stock  dividend accrual         |   | —                        |   | —                        |   | —             |   | —             |   | —             |   | —             |   | — |   | (377 | ) | (377 | ) |
| Series C preferred stock  dividend accrual         |   | —                        |   | —                        |   | —             |   | —             |   | —             |   | —             |   | — |   | (287 | ) | (287 | ) |
| Accretion of discount on  Series A preferred stock |   | —                        |   | —                        |   | —             |   | —             |   | —             |   | —             |   | — |   | (167 | ) | (167 | ) |
| Net loss                                           |   | —                        |   | —                        |   | —             |   | —             |   | —             |   | —             |   | — |   | (7,408 | ) | (7,408 | ) |
| BALANCE, December 28, 2002                         |   | 5,000                         |   | $                             | 5,000  |               | 4,000  |               | $      | 4,000              |   | 4,602,433          |   | $ | 46 |   | $ | (68,067 | ) | $ | (29,886 | ) | $ | (88,907 | ) |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

F-7

----

 

**ELGAR HOLDINGS, INC. AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(dollars inthousands)**

** **
|                                                                         |   | **Year Ended  December 30, 2000** |   | **Year Ended  December 29, 2001** |   | **Year Ended  December 28, 2002** |   |
|------------------------------------------------------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                        |   |                              |   |                              |   |                              |   |
| Net loss                                                                     |   | $                                 | (3,427 | )                                 | $      | (10,184                           | )      | $ | (7,408 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |   |                              |   |                              |   |                              |   |
| Amortization of goodwill                                                     |   | 2,387                             |   | 2,387                             |   | —                            |   |
| Amortization of deferred financing costs and  non-compete agreements         |   | 780                               |   | 782                               |   | 1,547                             |   |
| Depreciation and amortization of property, plant and  equipment              |   | 901                               |   | 896                               |   | 810                               |   |
| Loss (gain) on sale of property, plant and equipment                         |   | 4                                 |   | 205                               |   | (5                                | )      |
| Contributed management services                                              |   | —                            |   | —                            |   | 500                               |   |
| Provision for deferred income taxes                                          |   | —                            |   | 1,449                             |   | —                            |   |
| Changes in operating assets and liabilities:                                 |   |                              |   |                              |   |                              |   |
| Accounts receivable                                                          |   | (2,999                            | )      | 3,310                             |   | (388                              | )      |
| Inventories                                                                  |   | (3,077                            | )      | 1,120                             |   | 2,953                             |   |
| Prepaids and other assets                                                    |   | 560                               |   | 99                                |   | 56                                |   |
| Accounts payable                                                             |   | 1,631                             |   | (803                              | )      | (1,144                            | )      |
| Accrued liabilities                                                          |   | 603                               |   | (467                              | )      | (398                              | )      |
| Net cash used in operating activities                                        |   | (2,637                            | )      | (1,206                            | )      | (3,477                            | )      |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                        |   |                              |   |                              |   |                              |   |
| Purchases of property, plant and equipment                                   |   | (1,254                            | )      | (1,093                            | )      | (437                              | )      |
| Proceeds from sales of property, plant and equipment                         |   | 2                                 |   | 8                                 |   | 6                                 |   |
| Net cash used in investing activities                                        |   | (1,252                            | )      | (1,085                            | )      | (431                              | )      |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                        |   |                              |   |                              |   |                              |   |
| Proceeds from exercise of stock options                                      |   | 9                                 |   | 5                                 |   | —                            |   |
| Proceeds from borrowings                                                     |   | —                            |   | 5,000                             |   | 22,000                            |   |
| Repayments of borrowings                                                     |   | (375                              | )      | (875                              | )      | (15,798                           | )      |
| Deferred financing costs                                                     |   | —                            |   | —                            |   | (2,660                            | )      |
| Net cash provided by (used in) financing activities                          |   | (366                              | )      | 4,130                             |   | 3,542                             |   |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                         |   | (4,255                            | )      | 1,839                             |   | (366                              | )      |
| CASH AND CASH EQUIVALENTS, beginning of year                                 |   | 4,479                             |   | 224                               |   | 2,063                             |   |
| CASH AND CASH EQUIVALENTS, end of year                                       |   | $                                 | 224    |                              | $      | 2,063                             |   | $ | 1,697 |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                            |   |                              |   |                              |   |                              |   |
| Cash paid for interest                                                       |   | $                                 | 9,843  |                              | $      | 9,674                             |   | $ | 10,378 |   |
|                                                                         |   |                              |   |                              |   |                              |   |
| NON-CASH INVESTING AND FINANCING ACTIVITIES:                                 |   |                              |   |                              |   |                              |   |
| Series A preferred stock dividend-in-kind                                    |   | $                                 | 1,252  |                              | $      | 113                               |   | $ | — |   |
| Series A, B and C preferred stock dividend accrual                           |   | 590                               |   | 1,894                             |   | 2,478                             |   |
| Accretion of discount on Series A preferred stock                            |   | 167                               |   | 166                               |   | 167                               |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

F-8

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**ELGAR HOLDINGS, INC. AND SUBSIDIARY**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**1. Company Operations**

 

                                                Elgar Holdings, Inc., a Delawarecorporation (the “Company”), manufactures and sells programmable power supplyunits through its wholly owned subsidiary, Elgar Electronics Corporation(“Elgar”), for commercial and military applications.  The Company’s primary sales are within the United States andEurope.  The Company operates in onebusiness segment.

 

                                                In April 1996, the Company acquired allof the outstanding common stock of Elgar (the “Acquisition”). The Acquisitionwas accounted for as a purchase and, accordingly, the purchase price of $33million was allocated to the assets acquired and liabilities assumed at theirfair values. The excess of purchase price over the net assets acquired ofapproximately $19.7 million was recorded as goodwill.  The acquisition was funded with $14 million in cash and theproceeds from $19 million in term debt, which was paid off in connection withthe Recapitalization (as defined below).

 

                                                In January 1998, the Company entered intoan Agreement and Plan of Merger (the “Recapitalization Agreement”) pursuant towhich the Company was recapitalized on February 3, 1998 (the“Recapitalization”). Pursuant to the Recapitalization Agreement, all shares ofthe predecessor company’s then-existing common stock, other than those retainedby certain members of management and certain other stockholders (the“Continuing Stockholders”), were converted into the right to receive cash basedupon a formula.  The ContinuingStockholders agreed to retain approximately 15% of the common equity of theCompany. In order to finance the Recapitalization, the Company (i) issued $90million of senior notes in a debt offering, (ii) received $19 million in cashfrom JFLEI for common stock and (iii) received $10 million in cash for theissuance of redeemable preferred stock.

 

                                                In May 1998, Elgar acquired all issuedand outstanding shares of capital stock of Power Ten for $17.8 million incash.  The acquisition has beenaccounted for as a purchase.  In connectionwith the acquisition, Elgar entered into non-compete agreements with the twoformer stockholders of Power Ten.  Atclosing, Elgar paid each former stockholder $120,000 as consideration for theiragreement not to compete.  Theacquisition was financed by the issuance of 5,000 shares of Series Bconvertible preferred stock for $5 million in cash and borrowings of $15million under a former credit facility. In connection with the Power Ten acquisition, Elgar recordedapproximately $16.1 million of goodwill (representing the excess of purchaseprice over the net assets acquired).

 

**2.  Liquidity and Capital Resources**

 

                        *For the Fiscal YearEnded December 29, 2001*

 

                                                The Company’s financial statements forthe year ended December 29, 2001 (“Fiscal 2001”) were prepared on a goingconcern basis, which contemplates the realization of assets and thesatisfaction of liabilities in the normal course of business.  As shown in the Company’s financialstatements during the years ended December 30, 2000 and December 29, 2001, theCompany incurred losses of $3.4 million, and $10.2 million, respectively.  The Company expected to continue to incurlosses during the year ended December 28, 2002 (“Fiscal 2002”).

 

                                                As of December 29, 2001, the Companybelieved that its cash balances were sufficient to pay ongoing cash expensesonly until approximately the end of the second quarter of Fiscal 2002, andwould not be sufficient to repay the amounts outstanding under the Company’sold credit facility due on June 28, 2002. The Company had been notified by Bankers Trust, the lender under the oldcredit facility, of its desire to have the full amount of the outstanding loansunder the old credit facility, plus accrued but unpaid interest, repaid onJune 28, 2002.  The Companyexpected to generate positive cash flows from operations by the end of Fiscal2002.  However, given the Company’s cashbalances at the end of Fiscal 

 

F-9

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2001, expected cashrequirements for the old credit facility repayment on June 28, 2002, theinterest payment on Senior Notes due August 1, 2002 and ongoing operationsafter the second quarter, the Company believed it would be necessary for it toraise additional funds before the end of the second quarter of Fiscal 2002 inorder for the Company to continue its operations.  Management pursued alternative financing sources subsequent toDecember 29, 2001.

 

                                                Due to the uncertainty as of December 29,2001 of securing alternative financing sources, substantial doubt existed as tothe Company’s ability to continue as a going concern.  The financial statements did not include any adjustments relatingto the recoverability and classification of assets and liabilities that mightbe necessary had the Company been unable to continue as a going concern.  The Company’s continuation as a goingconcern was also dependent upon its ability to generate sufficient cash flowsto meet its obligations on a timely basis, to obtain additional financing asmay be required, and ultimately to attain profitability.

 

                        *For the Fiscal YearEnded December 28, 2002*

 

                                                As more fully described in Note 6, onJune 26, 2002 the Company obtained alternative financing through AblecoFinance, LLC (“Ableco”).  ThroughoutFiscal 2002, using a combination of operating cash flows and funds availableunder its revolving credit facility with Ableco, the Company was able togenerate sufficient cash flows to meet its obligations as they were due,including interest payments on the Senior Notes.

 

                        *Events Subsequent to theFiscal Year Ended December 28, 2002*

 

                                    *Exchange Agreement*

 

                                                On April 16, 2003, the Company enteredinto an Exchange Agreement (the “Exchange Agreement”) with J.F. LehmanEquity Investors I, L.P. (“JFL”), Jackson National Life Insurance Company, OldHickory Fund I, L.L.C., Indosuez Electronics Partners (collectively, the“Consenting Stockholders”) and OCM/GFI Power Opportunities Fund, L.P. and OCMPrincipal Opportunities Fund II, L.P. (collectively, the “Oaktree Entities”),in their capacity as holders, directly or indirectly, of 73% of the Company’soutstanding Senior Notes.  The ExchangeAgreement requires the Company to make an exchange offer and consentsolicitation to the holders of its $90,000,000 of 9-7/8% Senior Notes, askingsuch holders to exchange their Senior Notes for an aggregate of(i) $60,000,000 of 9% senior notes due February 1, 2008 (the “New Notes”),(ii) $30,000,000 in stated liquidation value of Series D 10.5% seniorcumulative redeemable preferred stock due February 1, 2008 (the “New PreferredStock”) and (iii) 750,000 shares of new common stock, representing,without giving effect to the transactions described in the immediatelysucceeding paragraph, 75% of the Company’s common stock to be outstanding uponcompletion of the restructuring transactions. The Exchange Agreement contemplates that the exchange offer may offerthe holders of Senior Notes (other than the Oaktree Entities, JFL or any oftheir affiliates) the option to have their Senior Notes repurchased by theCompany, for an amount of cash to be determined, rather than exchanged for thebasket of securities described above. The Company currently contemplates that the exchange offer will commenceon or about May 15, 2003, although that is subject to change.

 

                                                In addition, the Exchange Agreementrequires JFL to make an additional investment in the Company of not less than$4,800,000 in exchange for which it would receive, upon completion of therestructuring, $6,400,000 of New Notes, $3,200,000 in stated liquidation valueof additional New Preferred Stock and 80,000 shares of new common stock (to theextent JFL increases its investment in the Company, which it is permitted to doup to $6,000,000, the amount of securities it would obtain upon 

 

F-10

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completion of therestructuring would increase proportionately). Until the restructuring occurs, JFL’s $4,800,000 investment will be usedas collateral for the Bridge Notes discussed below.

 

                As provided in the Exchange Agreement, in connectionwith the exchange offer, the Company will solicit consents from tenderingnoteholders to approve (i) certain modifications to the existing indenturefor the Senior Notes that will remove from the indenture many of theprotections for holders of the Senior Notes and (ii) a prepackagedbankruptcy of the Company in the event the exchange offer is not consummated,which prepackaged bankruptcy would seek to replicate the successful completionof the restructuring as described in the Exchange Agreement to the greatestdegree possible, except with respect to the possible cash repurchase of SeniorNotes by the Company, which is not contemplated as part of the prepackagedbankruptcy plan, and subject to such changes as may be required underapplicable bankruptcy laws in order to make the plan of reorganizationthereunder confirmable.

 

                                                Upon issuance of the New Notes, NewPreferred Stock and common stock as described above, through an amendment tothe Company’s charter to be effected immediately prior to the completion of therestructuring, (a) the Company’s currently outstanding shares of Series Apreferred stock would be converted into (i) an aggregate of $3,500,000 instated liquidation value of New Preferred Stock and (ii) 125,000 shares ofnew common stock, and (b) the Company’s currently outstanding shares ofcommon stock and Series B and Series C convertible preferred stock would beconverted into an aggregate of 125,000 shares of new common stock, with theallocation of those shares of new common stock to be made pro rata on anas-converted basis, assuming the shares of Series B and Series C preferredstock had been converted into common stock immediately prior to therestructuring.

 

                                                The Exchange Agreement also contemplatesthe extension of a bridge loan and the repayment of the Company’s creditfacility with Ableco Finance, LLC (“Ableco”), as described immediately below.

 

                                   *Bridge Loan*

 

                                                On April 16, 2003, in connection withentering into the Exchange Agreement, the Company and Elgar entered into a loanagreement (the “Bridge Notes”) with the Oaktree Entities in the amount of$25,000,000, bearing interest at 10% per annum, payable monthly in arrears, andsecured by substantially all assets of the Company.  The Bridge Notes mature on the earlier of (i) completionof the restructuring transactions contemplated by the Exchange Agreement and(ii) August 1, 2003.

 

                                                On the same date, Elgar usedapproximately $20.6 million of the proceeds from the Bridge Notes to repayin full its credit facility with Ableco, which facility was thereafterterminated.  After the payment of feesand expenses related to the Exchange Agreement and Bridge Notes, Elgar retainedabout $3.2 million of proceeds from the Bridge Notes for cash reserve andworking capital purposes.

 

                                                Upon completion of the transactionscontemplated by the Exchange Agreement, unless the Bridge Notes are repaid withthe proceeds of a new third-party credit facility, any amounts that remainoutstanding under the Bridge Notes would be exchanged for a term note of likeamount bearing interest at the greater of 12% or a rate of interest equal to areference rate plus 8% (the “Term Note”). The Term Note would have a stated maturity of August 1, 2007, would besecured by substantially all of the assets of the Company and would have thebenefit of quarterly sinking fund payments of $1,000,000, with the first suchpayment by Elgar due on November 1, 2003. To the extent the Company refinances a portion of the Term Notesubsequent to the closing of the exchange described above, the Oaktree Entitieshave agreed under certain circumstances to exchange their interests in the TermNotes for participations in such replacement financing.

 

                                                Upon completion of the transactionscontemplated by the Exchange Agreement and based upon current and anticipatedlevels of operations, as well as additional funds available under the BridgeNotes, the Company believes that its cash resources will be adequate to meetits anticipated cash requirements through the year ending January 3, 2004 (“Fiscal2003”).

 

F-11

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**3.Summary of Significant Accounting Policies**

 

                        *Principles ofConsolidation*

 

                                                The accompanying consolidated financialstatements include the accounts of the Company and its wholly owned subsidiary,Elgar. All significant intercompany accounts and transactions have beeneliminated in consolidation.

 

                        *Fiscal Year*

 

                                                The Company operates and reportsfinancial results on a fiscal year of 52 or 53 weeks that ends on the Saturdayclosest to December 31.

 

                        *Cash and Cash Equivalents*

 

                                                Cash equivalents at December 29, 2001 andDecember 28, 2002 consist of money market accounts in a financial institution.

 

                        *Inventories*

 

                                                Inventories, which include materials,direct labor and manufacturing overhead, are stated at the lower of cost(first-in, first-out) or market.

 

                        *Property, Plant and Equipment*

 

                                                Property, plant and equipment is recordedat cost. Depreciation of property, plant and equipment is provided using thestraight-line method over the estimated useful lives of the related assets.Maintenance and repairs are expensed as incurred.

 

                        *Goodwill and Other Assets*

 

                                                Goodwill represents the excess ofpurchase price over net book value of assets acquired in connection withacquisitions and was amortized on a straight-line basis over its estimateduseful life of 15 years through December 29, 2001.  Effective December 30, 2001, under the provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other IntangibleAssets”, goodwill is no longer amortized. Other assets, as reflected on the Company’s balance sheet, consist ofdeferred financing costs incurred in connection with the Recapitalization, thenon-compete agreements relating to the Power Ten acquisition and theJune 2002 refinancing of Elgar’s prior credit facility with a new creditfacility.  The components of otherassets are being amortized on a straight-line basis over their estimateduseful lives, ranging from 4 to 10 years.

 

                                                The Company periodically re-evaluates theoriginal assumptions and rationale utilized in the establishment of thecarrying value and estimated useful lives of these assets. The criteria usedfor these evaluations include management’s estimate of the assets’ continuingability to generate income from operations and positive cash flows in futureperiods as well as the strategic significance of the intangible assets to theCompany’s business activity.

 

                        *Inventory Reserves*

 

                                                We periodically re-evaluate all inventoryfor potential excess and obsolete material. We reserve excess material based on a percentage of the inventory thatis deemed to be in excess of one year’s 

 

F-12

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forecast demand, while wereserve obsolete inventory at 100% of carrying value.  We also periodically adjust our standard costs for materialpurchase costs, labor hours and wage rates, and overhead burden applied.  We reserve for these standard cost changesbased on a combined estimate of the future inventory change.

 

                        *Warranty*

 

                                                In the normal course of business, theCompany issues product warranties of one to five years for specific productlines and provides for the estimated future warranty cost in the period inwhich the sale is recorded.  The Companyprovides for the estimate of warranty cost based on contract terms andhistorical warranty loss experience that is periodically adjusted for recentand actual experience.  Because warrantyestimates are forecasts that are based on the best available information,claims costs may differ from amounts provided. Adjustments to initial obligations for warranties are made as changes inthe obligations become reasonably estimable. The following is an analysis of the product warranty accrual in for theyear ended December 28, 2002 (in thousands):

 

| Balance at beginning of year |   | $    | 490    |   |
|------------------------------|--------|------|--------|--------|
| Provisions                   |   | 914  |   |
| Usage                        |   | (931 | )      |
| Balance at end of year       |   | $    | 473    |   |

* *

*                       **Income Taxes*

 

                                                The Company accounts for income taxes inaccordance with SFAS No. 109, “Accounting for Income Taxes,” which requires theuse of the asset and liability method in providing for income taxes.  Under the asset and liability method,deferred tax assets and liabilities are established to recognize the future taxconsequences attributable to differences between the financial statement carryingamounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply in the years in whichtemporary differences are expected to be recovered or settled. The effects ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date.  A valuation allowance is recorded fordeferred tax assets when their realization is not reasonably assured.

 

                        *Revenue Recognition*

 

                                                For sales of products, the Companyrecognizes revenue upon shipment of goods and the passage of title to thecustomer.  For sales of services, theCompany recognizes revenue as the related services are performed.  The Company’s revenue recognition policiesare in accordance with Securities and Exchange Commission Staff AccountingBulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”).

 

                        *Customer-Funded Research and Development*

 

                                                The Company capitalizes certain costsassociated with customer-funded research and development. Revenue is recordedwhen earned under such projects and costs incurred are charged to cost ofsales. Customer-funded research and development was $0.5 million for the yearended December 30, 2000 (“Fiscal 2000”), $0.3 million for the year endedDecember 29, 2001 (“Fiscal 2001”) and $0.4 million for the year endedDecember 28, 2002 (“Fiscal 2002”).

 

F-13

----

 

                        *Stock-Based Compensation Accounting*

 

                                                The Company accounts for stock-basedcompensation in accordance with the provisions of SFAS No. 123, “Accounting forStock-based Compensation.”  The Companyhas elected to measure compensation expense for its stock-based employeecompensation plans using the intrinsic value method prescribed by AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees,” and has provided pro forma disclosure as if the fair value basedmethod prescribed by SFAS No. 123 had been utilized.

 

                        *Use of Estimates*

 

                                                The preparation of financial statementsin conformity with accounting principles generally accepted in the UnitedStates requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of sales and expenses during the reporting period. Actual results coulddiffer from those estimates.

 

                        *Fair Value of Financial Instruments*

 

                                                The carrying value of the Company’saccounts receivable, accounts payable and accrued liabilities approximates fairvalue due to their short term nature. The carrying amount of the term loan and revolver under the AblecoFacility approximates fair value because the actual interest rates do notsignificantly differ from current rates offered for similar instruments.

 

                        *Recent Accounting Pronouncements*

 

                                                In June 2001, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 142, “Goodwilland Other Intangible Assets”.  Thisstatement addresses financial accounting and reporting for acquired goodwilland other intangible assets and supersedes Accounting Principles Board (“APB”)Opinion No. 17, “Intangible Assets.” SFAS No. 142 addresses how intangible assets that are acquiredindividually or with a group of other assets (but not those acquired in abusiness combination) should be accounted for in financial statements upontheir acquisition.  This statement alsoaddresses 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, goodwillis no longer subject to amortization over its estimated useful life but isinstead subject to periodic testing for impairment.  The Company completed its initial impairment test for goodwill asof December 30, 2001.  This testconfirmed that the fair value of the Company exceeds the carrying value, andthat no goodwill impairment loss needed to be recognized upon adoption of SFASNo. 142.  The Company adopted SFASNo. 142 effective December 30, 2001, the effect of which was toclassify goodwill separately on the accompanying consolidated balance sheetsand to cease the amortization of such goodwill, which would have amounted to$2,387,000 of amortization expense for Fiscal 2002.  Net loss for Fiscal 2002, including amortization of goodwill,would have been $9,795,000, compared to $7,408,000.  In Fiscal 2001 and 2000, goodwill amortization expense was$2,387,000 each year.  Net loss forFiscal 2001 and 2000 excluding amortization of goodwill would have been$7,797,000 and $1,040,000, respectively, compared to $10,184,000 and$3,427,000, respectively.

 

                                                In August 2001, theFASB issued SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets.”  SFAS No. 144addresses financial accounting and reporting for the impairment or disposal oflong-lived assets. SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairmentof Long-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 and 

 

F-14

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Transactions,”for the 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, theFASB issued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities,” which addresses financial accounting and reporting forcosts associated with exit or disposal activities and supersedes EmergingIssues Task Force (“EITF”) Issue 94-3, “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs 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.

 

                                                In November 2002,the FASB issued Financial Interpretation No. 45 (“FIN 45”), “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” FIN 45 requires that a guarantor must recognize, at the inception of aguarantee, a liability for the fair value of the obligation that it hasundertaken in issuing a guarantee.  FIN45 also addresses the disclosure requirements that a guarantor must include inits financial statements for guarantees issued, including matters such asproduct warranties.  The Company adoptedthe additional disclosure requirements in this interpretation effective forFiscal 2002.  The initial recognitionand measurement provisions of this interpretation are applicable on aprospective basis to guarantees issued or modified after December 31,2002.  The Company has not completed itsevaluation of FIN 45 and has not assessed the impact  it may have on its financial position or results of operations.

 

**4. Balance Sheet Details**

 

                                                Inventories are comprised of thefollowing (in thousands):

 

|            |   | **December  29, 2001** |   | **December  28, 2002** |   |
|-----------------|--------|------------------------|--------|------------------------|--------|
| Raw materials   |   | $                      | 7,268  |                   | $      | 5,078 |   |
| Work-in-process |   | 1,261                  |   | 767                    |   |
| Finished goods  |   | 1,051                  |   | 782                    |   |
|            |   | $                      | 9,580  |                   | $      | 6,627 |   |

 

F-15

----

 

Property, plant andequipment and the related depreciable lives are as follows (in thousands):

 

|                                            |   | **December  29, 2001** |   | **December  28, 2002** |   |
|-------------------------------------------------|--------|------------------------|--------|------------------------|--------|
| Asset Type/Depreciable Life                     |   |                   |   |                   |   |
| Machinery and equipment/4-6 years               |   | $                      | 5,850  |                   | $      | 6,127 |   |
| Leasehold improvements/lease term               |   | 893                    |   | 929                    |   |
| Furniture and fixtures/4 years                  |   | 466                    |   | 481                    |   |
| Construction in progress                        |   | 35                     |   | 107                    |   |
|                                            |   | 7,244                  |   | 7,644                  |   |
| Less: Accumulated depreciation and amortization |   | (4,570                 | )      | (5,344                 | )      |
|                                            |   | $                      | 2,674  |                   | $      | 2,300 |   |

 

                                                During Fiscal 2001, the Company disposedof fixed assets associated with the closure of the Power Ten productionfacilities that had an acquisition cost of approximately $244,000 andaccumulated depreciation of $81,000 (see Note 15).

 

                                                Accrued liabilities consist of thefollowing (in thousands):

 

|                |   | **December  29, 2001** |   | **December  28, 2002** |   |
|---------------------|--------|------------------------|--------|------------------------|--------|
| Payroll and related |   | $                      | 1,201  |                   | $      | 1,199 |   |
| Warranty reserve    |   | 490                    |   | 473                    |   |
| Commissions         |   | 357                    |   | 380                    |   |
| Interest payable    |   | 3,843                  |   | 3,767                  |   |
| Dividends payable   |   | 3,176                  |   | 5,654                  |   |
| Other               |   | 1,170                  |   | 844                    |   |
|                |   | $                      | 10,237 |                   | $      | 12,317 |   |

** **

**5. Concentration of Risk**

 

                                                Sales to two customers, in the aggregate,accounted for approximately 12%, 24% and 23% of the Company’s sales for Fiscal2000, Fiscal 2001 and Fiscal 2002, respectively.  One customer represented greater than 10% of sales for Fiscal2002 and two customers each represented greater than 10% of sales for Fiscal2001.  No customer represented greaterthan 10% of sales for Fiscal 2000.  Interms of accounts receivable at year end, one customer represented 11% ofaccounts receivable as of December 30, 2000, and two customers represented 26%and 20% of accounts receivable as of December 29, 2001, and one customerrepresented 20% of accounts receivable as of December 28, 2002.  The Company performs ongoing creditevaluation of its customers’ financial condition.  The Company maintains reserves for potential credit losses.

 

F-16

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**6. Long-Term Debt and Revolving Line of Credit**

 

                                                At December 29, 2001 and December 28,2002, the Company’s long-term debt consisted of the following (in thousands):

** **

|                                                                                                 |   | **December  29,**

**2001** |   | **December  28,**

**2002** |   |
|------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
| Senior Notes due February 1, 2008 with an interest  rate of 9.875%                                   |   | $                           | 90,000 |                        | $      | 90,000 |   |
| Revolving line of credit due June 28, 2002 with  an interest rate ranging from 5.25% to 7.1875% |   | 5,015                       |   | —                      |   |
| Revolving credit facility due June 25, 2006  with an interest rate of 7.75%                     |   | —                      |   | 5,000                       |   |
| Term note due June 28, 2002 with an interest rate of  5.9375%                                        |   | 8,783                       |   | —                      |   |
| Term loan due June 25, 2006 with an interest rate of  10.25%                                         |   | —                      |   | 15,000                      |   |
|                                                                                                 |   | 103,798                     |   | 110,000                     |   |
| Less:   current portion                                                                         |   | (13,798                     | )      | —                      |   |
| Long-term portion                                                                                    |   | $                           | 90,000 |                        | $      | 110,000 |   |

 

                                                Principal maturities of long-term debtobligations as of December 28, 2002 are as follows (in thousands):

 

| **Fiscal Year**      |   | **Amount** |    |
|----------------------|--------|------------|---------|
| 2003                 |   | $          | —  |   |
| 2004                 |   | —     |    |
| 2005                 |   | —     |    |
| 2006                 |   | 20,000     |    |
| 2007                 |   | —     |    |
| Thereafter           |   | 90,000     |    |
| Total long-term debt |   | $          | 110,000 |   |

 

                                                Interest expense related to the$90 million of senior notes****wasapproximately $8.9 million for each of Fiscal 2000, Fiscal 2001 and Fiscal2002.  Interest expense related to theterm notes and revolving lines of credit was approximately $0.9 millionfor Fiscal 2000, $1.0 million for Fiscal 2001 and $1.4 million for Fiscal2002.

 

                        *Senior Notes*

 

                                                The Senior Notes, which were issued onFebruary 3, 1998, bear interest at a rate of 9.875% per annum, payablesemi-annually on February 1st and August 1st, and have a maturity date ofFebruary 1, 2008.

 

                                                At any time on or before February 1,2003, the Company may redeem up to 35% in aggregate principal amount of (i) theinitial aggregate principal amount of the Senior Notes and (ii) the initialprincipal amount of any additional notes issued under the indenture after theissue date, on one or more occasions, with the net cash proceeds of one or morepublic equity offerings at a redemption price of 109.875% of the principalamount thereof, plus accrued and unpaid interest thereon to the redemptiondate, provided that at least 65% of the sum of (i) the initial aggregateprincipal amount of the Senior 

 

F-17

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Notes and (ii) theinitial aggregate principal amount of additional notes remain outstandingimmediately after redemption. The Senior Notes are redeemable by the Company atstated redemption prices beginning in February 2003.

 

                                                The Senior Notes are general unsecuredobligations of the Company and rank senior to all existing and futuresubordinated indebtedness of the Company. The obligations of the Company as aguarantor of Elgar’s obligations under the credit facility are secured bysubstantially all of the assets of the Company. Accordingly, such securedindebtedness effectively ranks senior to the Senior Notes to the extent of suchassets.

 

                                                The Senior Notes restrict, among otherthings, the Company’s ability to incur additional indebtedness, pay dividendsor make certain 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 guaranteed by the Company’swholly owned subsidiary, Elgar. Such guarantee is full and unconditional.  Separate financial statements of theguarantors have not been presented as they would not, in management’s opinion,be material to investors.

 

                                                In accordance with SFAS No. 107, theCompany is supplying the following data regarding its Senior Notes.  On December 28, 2002, Deutsche BankGlobal Markets Research indicated a bid price of 24% of par for the SeniorNotes, equaling a price of $240 per $1,000 par note.  On December 29, 2001, Deutsche Bank Global Markets Researchindicated a bid price of 32% of par for the Senior Notes, equaling a price of$320 per $1,000 par note.

 

                        *Old Credit Facility*

 

                                                The Company and Elgar were party to acredit agreement with Deutsche Bank Trust Company Americas, successor in interestto Bankers Trust Company (“Deutsche Bank”), as agent and sole lender, which wasentered into in connection with the Company’s February 1998recapitalization.  On June 26,2002, in connection with entering into the new credit facility described below,the Deutsche Bank credit facility was repaid in full and terminated.

 

                        *Ableco Facility*

 

                                                On June 26, 2002, the Company,Elgar, as borrower, and Ableco Finance, LLC, as agent (“Ableco”), entered intoa financing agreement (the “Ableco Facility”) that provided Elgar with(a) a $15,000,000 term loan (the “Term Loan”) that bears interest at areference rate plus 5.50 percentage points, but in no event at a rate less than10.25%, and (b) a revolving credit facility (the “Revolver”) not to exceed$10,000,000 outstanding at any time that bears interest at a reference rateplus 3.00 percentage points, but in no event at a rate less than 7.75%.  The reference rate means the rate ofinterest publicly announced by JPMorgan Chase Bank from time to time as itsreference rate, base rate or prime rate. Interest is payable monthly on both the Term Loan and the Revolver.  Borrowings outstanding under the AblecoFacility have a stated maturity date of June 25, 2006.

 

                                                Indebtedness under the Ableco Facility is(i) secured by a first priority security interest in substantially all ofthe assets of the Company and Elgar (including, without limitation, accountsreceivable, inventory, machinery, equipment, contracts and contract rights,trademarks, copyrights, patents, license agreements and general intangibles),(ii) guaranteed by the Company on a senior basis and (iii) secured bya pledge of all of the outstanding capital stock of Elgar.

 

F-18

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                                                The Ableco Facility contains customarycovenants of the Company and Elgar, including, without limitation, restrictionson (i) the incurrence of debt, (ii) the sale of 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 Ableco 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 Ableco Facility contains customaryevents of default, including those relating to breaches of the covenantsdiscussed above.

 

                                                Advances under the Revolver are limitedto the lesser of (a) $10.0 million and (b)(i) 85% of eligibleaccounts receivable, less a dilution reserve that relates to bad-debt writedowns and discounts and advertising allowances paid to an account debtor, plus(ii) 60% of eligible inventory, less the amount of any reserves thatAbleco may deem appropriate in the exercise of its reasonable business judgmentbased upon its lending practices.  Inaddition, the Ableco Facility provides that it is a condition to any loan madeunder the Revolver that, after giving effect to such loan, at least $1,000,000of availability remains undrawn under the Revolver.  In effect, this provision reduces the maximum amount outstandingat any time to $9,000,000.

 

                                                On June 26, 2002, Elgar usedapproximately $14.8 million of the proceeds from the Term Loan to repay infull the Deutsche Bank credit facility. At December 28, 2002, the outstanding balance of the Revolver was $5.0million, with an additional $3.0 million of borrowing capacity remainingunder the formula described above, and the Term Loan was fully drawn.  The Company intends to use funds availableto it under the Revolver for working capital purposes and debt serviceobligations.

 

                                                Under the terms of the Ableco Facility,Elgar paid a $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 allof the obligations under the Ableco Facility are accelerated or the date onwhich all of the obligations under the Ableco 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 Ableco Facility are accelerated and(iii) a $187,500 fee on the earliest of June 26, 2005 or the date onwhich the obligations under the Ableco Facility are accelerated.

 

                        *Deferred Financing Costs*

 

                                                In connection with the issuance of theSenior Notes and entering into the Ableco Facility, the Company incurred debtissuance costs of $4.9 million and $2.7 million, respectively, that are beingamortized to interest expense over the term of the related debt.  The accumulated amortization associated withthe Senior Notes was approximately $1,925,000 at December 29, 2001 and$2,400,000 at December 28, 2002. The accumulated amortization associated with the Ableco Facility wasapproximately $339,000 at December 28, 2002. Remaining unamortized costs at December 29, 2001 of $674,000 associatedwith entering into the Company’s prior credit facility with Deutsche Bank wereamortized over the remaining term of that facility, which matured onJune 28, 2002.

 

                        *CapitalCall Agreement*

 

                                                In conjunction with entering into the AblecoFacility, an affiliate of the Company’s majority stockholder, JFLEI, enteredinto a capital call agreement with Ableco. Pursuant to the terms of this agreement, JFLEI agreed to participate in$3.0 million of the Term Loan on a *paripassu* basis with Ableco if the Company failed to meet a minimumEBITDA covenant for an initial test period, which consisted of the third andfourth quarters of Fiscal 2002.  Thisagreement terminated upon satisfactory performance subsequent to the initialtest period.

 

F-19

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**7. Preferred Stock**

 

                        *Redeemable Preferred Stock*

 

                                                In connection with the Recapitalization,the Company issued 10,000 shares of redeemable preferred stock, designated asSeries A 10% Cumulative Redeemable Preferred Stock (the “Series A PreferredStock”), for cash proceeds of $10 million. In connection with such issuance, the Company also issued to thepurchasers warrants to purchase 707,488 shares of the Company’s common stock.The Company has attributed a value of $1.7 million to the warrants, whichis included in additional paid-in capital as of December 29, 2001 and December28, 2002.

 

                                                Dividends are payable quarterly to theholders of Series A Preferred Stock at the annual rate of 10% times the sum of$1,000 per share and accrued but unpaid dividends.  Dividends are payable quarterly on January 31, April 30,July 31, and October 31 of each year. Dividends are fully cumulative and accrue on a quarterly basis.

 

                                                The dividends were payable in-kindthrough January 31, 2001 and in cash thereafter.  Under the terms of the indenture governing the Senior Notes, theCompany is prohibited from paying cash dividends unless its consolidated fixedcharge coverage ratio is at least 2.0 to 1.0. The Company has not met this ratio while cash dividends have beenpayable on the Series A Preferred Stock, and it does not anticipate that thisratio will equal or exceed 2.0 to 1.0 during fiscal 2003.

 

                                                If the cash dividends payable on theSeries A Preferred Stock have been in arrears and unpaid for four or moresuccessive dividend payment dates, then until the date on which all suchdividends in arrears are paid in full, dividends would accrue and be payable tothe holders at the annual rate of 12% times the sum of $1,000 per share andaccrued but unpaid dividends thereon. Upon payment in full of all dividends in arrears, cash dividends willthereafter be payable at the 10% annual rate set forth above.  As of December 28, 2002, cash dividends fromFebruary 1, 2001 through December 28, 2002 were in arrears.

 

                                                Holders of shares of Series A PreferredStock would be entitled to receive the stated liquidation value of $1,000 pershare, plus an amount per share equal to any dividends accrued but unpaid, inthe event of any liquidation or dissolution of the Company. After payment ofthe full amount of the liquidation preference, holders of shares of redeemablepreferred stock would not be entitled to any further participation in anydistribution of assets of the Company.

 

                                                The Company may, at its option, redeem atany time, all or any part of the shares of the Series A Preferred Stock at aredemption price per share equal to 100% of the liquidation preference on thedate of redemption. On August 3, 2008, the Company will be required to redeemany and all then-outstanding shares of Series A Preferred Stock at a redemptionprice per share equal to 100% of the liquidation preference on the date ofredemption.

 

                                                Upon the occurrence of a change incontrol (as defined), the Series A Preferred Stock would be redeemable at theoption of the holders, at a redemption price per share equal to 100% of theliquidation preference.

 

                                                The holders of shares of Series APreferred Stock are not entitled to any voting rights. However, without theconsent of the holders of at least 85% of the outstanding shares of redeemablepreferred stock, the Company may not change the powers or preferences of theredeemable preferred stock, create, authorize or issue any shares of capitalstock ranking senior to or on a parity with the redeemable preferred stock orcreate, authorize or issue any shares of capital stock constituting juniorsecurities, unless such junior securities are subordinate in right of paymentto the redeemable preferred stock.

 

F-20

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                                                If any amount of cash dividends payableon the Series A Preferred Stock have been in arrears and unpaid for four ormore successive dividend payment dates, then the number of directorsconstituting the Board of Directors would increase, and the holders of theredeemable preferred stock would have the right to fill the newly createddirectorships.

 

                                                If the Company fails to redeem shares ofSeries A Preferred Stock in accordance with the mandatory redemption provisionsdescribed above, then the number of directors constituting the Board ofDirectors would increase, and the holders of the redeemable preferred stockwould have the right to elect directors to fill the newly created directorshipsin order to give the holders of the Series A Preferred Stock majority controlof the Board of Directors.

 

                        *Convertible Preferred Stock*

 

                                                In connection with the acquisition ofPower Ten (see Note 1), the Company issued 5,000 shares of Series B 6%Cumulative Convertible Preferred Stock (the “Series B Preferred Stock”) forcash proceeds of $5.0 million.  Theoffering was completed on May 28, 1998.

 

                                                On March 30, 1999, the Company issued4,000 shares of Series C 6% Cumulative Convertible Preferred Stock (the “SeriesC Preferred Stock”) for cash proceeds of $4.0 million.  The offering was completed on March 30,1999.

 

                                                Dividends are payable to the holders ofthe Series B and Series C Preferred Stock at the annual rate per share of 6%times the sum of $1,000 and 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, dividendsare payable semi-annually on March 31 and September 30.  These dividends are payable when and ifdeclared by the Board of Directors out of funds legally available therefor.

 

                                                Holders of shares of the convertiblepreferred stock would be entitled to receive the stated liquidation value of$1,000 per share, plus an amount per share equal to any dividends accrued butunpaid without interest, in the event of any liquidation or dissolution of theCompany.  After payment of the fullamount of the liquidation preference, holders of shares of the convertiblepreferred stock would not be entitled to any further participation in any distributionof assets of the Company.

 

                                                Holders of shares of the Series B andSeries C Preferred Stock would have the right, at such holder’s option, at anytime following a triggering event (as defined), to convert all or a portion ofsuch shares into the Company’s common stock, excluding accrued dividends, atthe conversion price of $5.00 per share for the Series B and $0.75 per sharefor the Series C, subject to adjustments pursuant to certain anti-dilutionprovisions.

 

                                                The holders of shares of convertiblepreferred are not entitled to any voting rights.  However, without the consent of the holders of at least 51% ofthe outstanding shares of the Series B and Series C Preferred Stock, votingseparately as a class, the Company may not amend its Certificate ofIncorporation in any way that would adversely alter or change the powers,preferences or special rights of the Series B or Series C Preferred Stock,respectively.

 

                                                The Series B Preferred Stock and Series CPreferred Stock, which rank on a parity with each other, rank junior to theSeries A Preferred Stock in terms of dividend payments and liquidationpreferences.

 

F-21

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**8. Common Stock**

 

                        *Shareholder Agreement*

 

                                                The Company and the holders of its commonstock and warrants to purchase its common stock are party to a ShareholderAgreement.  Among other provisions, theShareholder Agreement contains a provision regarding subscription rights.  This provision provides that subject tocertain exceptions, the Company is not permitted to issue equity securities, orsecurities convertible into equity securities, to any person unless the Companyhas offered to issue to each of the other stockholders party to the agreement,on a pro rata basis, an opportunity to purchase such securities on the sameterms, including price, and subject to the same conditions as those applicableto such person.

 

                        *Stock Split*

 

                                                On June 5, 2000, the Company’s Board ofDirectors effected a two-for-one common stock split in the form of a stockdividend and increased the number of shares authorized from 5,000,000 to15,000,000. As a result of this action, 2,300,000 shares were issued tostockholders of record on June 5, 2000. The accompanying consolidated financial statements and related financialinformation contained herein have been restated to give effect to the stocksplit.

 

                        *Warrants*

 

                                                At December 29, 2001 and December 28,2002, the holders of Series A Preferred Stock held warrants to purchase anaggregate of 707,488 shares of common stock at an exercise price of $2.50 pershare.  The exercise price and number ofwarrant shares are both subject to anti-dilution adjustment in certainevents.  In the Exchange Agreement, theholders of the warrants agreed to cancel all of the warrants immediately priorto consummation of the restructuring contemplated by the Exchange Agreement.

 

**9. Derivative Financial Instruments**

 

                        *Interest Rate Swap*

 

                                                The Company has had only limitedinvolvement in derivative financial instruments in the past.  The Company does not hold or issuederivative financial instruments for trading purposes.  The Company is, however, subject to marketrisk resulting from interest rate fluctuations with respect to itsvariable-rate borrowings.  At December28, 2002, all $20,000,000 of Elgar’s outstanding borrowings under the AblecoFacility was at variable interest rates. A one percentage point increase in interest rates would be expected tohave an estimated impact on net loss and cash flows in fiscal 2003 ofapproximately $100,000.

 

                                                In connection with an interest rate swapagreement that was in place pursuant to the Company’s prior credit facilitywith Deutsche Bank, the Company has included settlement income of $48,609 andsettlement expense of $7,238 in interest expense in its consolidated statementsof operations for Fiscal 2000 and Fiscal 2001, respectively.

 

**10. Stock-Based Compensation**

 

                        *Stock Option Plan*

 

                                                On July 15, 1998, the Companyadopted the 1998 Stock Option Plan (the “Option Plan”), which provided for theissuance of up to 530,748 shares of common stock pursuant to awards grantedunder the 

 

F-22

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Option Plan.  In March 1999, the Company amended its StockOption Plan to provide for the issuance of up to 1,164,082 shares of commonstock under the Option Plan.  Alloptions were granted at fair value, or at a premium thereof, on the date ofgrant, as determined by the Board of Directors.  Options vest ratably over three or four years and generallyexpire on the tenth anniversary of the date of grant.  Effective November 15, 2002, with the consent of each holderof an outstanding option grant, theCompany terminated the Option Plan and all outstanding option grantsthereunder.

 

                                                Option activity for the years endedDecember 30, 2000, December 29, 2001 and December 28, 2002 is summarized asfollows:

 

|                                |   | **Number of  Shares** |   | **Weighted  Average  Exercise Price** |   |
|-------------------------------------|--------|-----------------------|--------|---------------------------------------|--------|
| Outstanding as of January 1, 2000   |   | 878,200               |   | $                                     | 5.28   |   |
| Granted                             |   | 150,500               |   | 5.35                                  |   |
| Exercised                           |   | (1,533                | )      | 5.85                                  |   |
| Forfeited                           |   | (34,167               | )      | 5.29                                  |   |
| Outstanding as of December 30, 2000 |   | 993,000               |   | 5.29                                  |   |
| Granted                             |   | 32,800                |   | 5.35                                  |   |
| Exercised                           |   | (900                  | )      | 5.35                                  |   |
| Forfeited                           |   | (128,100              | )      | 5.30                                  |   |
| Outstanding as of December 29, 2001 |   | 896,800               |   | 5.30                                  |   |
| Granted                             |   | —                |   | —                                |   |
| Exercised                           |   | —                |   | —                                |   |
| Terminated                          |   | (896,800              | )      | 5.30                                  |   |
| Outstanding as of December 28, 2002 |   | —                |   | n/a                                   |   |
| Exercisable as of December 28, 2002 |   | —                |   | n/a                                   |   |
|                                     |        |                       |        |                                       |        |  |

 

                                                The Company has adopted only theprovisions of SFAS No. 123, “Accounting for Stock-Based Compensation,”pertaining to disclosure. The following amounts are shown for disclosurepurposes only, and may not be representative of future calculations sinceadditional options may be granted in future years. If the Company hadrecognized compensation cost for stock-based employee compensation in accordancewith the provisions of SFAS No. 123, the Company’s net loss would haveincreased by approximately $365,000 for Fiscal 2000, zero for Fiscal 2001 andzero for Fiscal 2002.  The fair value ofthese options was estimated at the date of grant using an option-pricing modelwith the following weighted-average assumptions for the above periods:  expected volatility of 0%; risk-freeinterest rate of 5.76%, a range of 4.60% to 5.42% for Fiscal 2000 and Fiscal2001, respectively; expected option life of 10 years; and no dividend yield.

 

F-23

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**11. Income Taxes**

 

                                                The provision for income taxes consistsof the following (in thousands):

 

|                       |   | **Fiscal  Year Ended** |   |
|----------------------------|--------|------------------------|--------|
|                       |   | **Dec. 30,  2000**     |   | **Dec. 29,  2001** |   | **Dec. 28,  2002** |   |
| Current:                   |   |                   |   |   |   |   |   |
| Federal                    |   | $                      | 60     |   | $ | — |   | $ | — |   |
| State                      |   | 10                     |   | — |   | — |   |
|                       |   | 70                     |   | — |   | — |   |
| Deferred:                  |   |                   |   |   |   |   |   |
| Federal                    |   | —                 |   | 776 |   | — |   |
| State                      |   | —                 |   | 673 |   | — |   |
|                       |   | —                 |   | 1,449 |   | — |   |
| Provision for income taxes |   | $                      | 70     |   | $ | 1,449 |   | $ | — |   |

 

                                                The provision for income taxes reconcilesto the amounts computed by applying the Federal statutory rate to loss beforeincome taxes as follows (dollars in thousands):

** **
|                                                          |   | **Fiscal  Year Ended** |   |
|---------------------------------------------------------------|--------|------------------------|--------|
|                                                          |   | **December  30, 2000** |   | **December  29, 2001** |   | **December  28, 2002** |   |
| Computed statutory income tax benefit                         |   | (34.00                 | )%     | $ | (1,141 | ) | (34.00 | )% | $ | (2,965 | ) | (34.00 | )% | $ | (2,518 | ) |
| State income taxes, net of federal benefit                    |   | (6.00                  | )%     | (201 | ) | (6.00 | )% | (523 | ) | (3.00 | )% | (222 | ) |
| Permanent differences from amortization of  intangible assets |   | 27.90                  | %      | 938 |   | 11.00 | % | 955 |   | 0.00 | % | — |   |
| Increase in valuation allowance                               |   | 17.10                  | %      | 574 |   | 55.60 | % | 4,849 |   | 37.96 | % | 2,812 |   |
| Other                                                         |   | —                 |   | — |   | (6.58 | )% | (567 | ) | 2.14 | % | 158 |   |
| R&D credits                                               |   | (3.00                  | )%     | (100 | ) | (3.40 | )% | (300 | ) | (3.10 | )% | (230 | ) |
| Provision for income taxes                                    |   | 2.00                   | %      | $ | 70 |   | 16.62 | % | $ | 1,449 |   | 0.00 | % | $ | — |   |

 

F-24

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                                                The tax effects of temporary differencesthat give rise to significant portions of the net deferred tax assets are asfollows (in thousands):

 
|                                            |   | **December  30,  2000** |   | **December  29,  2001** |   | **December  28,  2002** |   |
|-------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|-------------------------|--------|
| Current deferred taxes                          |   |                    |   |                    |   |                    |   |
| Section 163(j) interest carryforwards           |   | $                       | 440    |                    | $      | 440                     |   | $ | 440 |   |
| Inventory                                       |   | —                  |   | —                  |   | 738                     |   |
| Accrued expenses                                |   | 349                     |   | 471                     |   | 271                     |   |
| Other                                           |   | 167                     |   | 708                     |   | 272                     |   |
| Less:   valuation allowance                |   | (341                    | )      | (1,619                  | )      | (1,721                  | )      |
| Total current deferred taxes                    |   | 615                     |   | —                  |   | —                  |   |
| Noncurrent deferred taxes                       |   |                    |   |                    |   |                    |   |
| Depreciation and UNICAP                         |   | 288                     |   | 270                     |   | 674                     |   |
| Other                                           |   | 609                     |   | 708                     |   | —                  |   |
| Net operating loss and tax credit carryforwards |   | 527                     |   | 3,183                   |   | 6,197                   |   |
| Less:   valuation allowance                |   | (590                    | )      | (4,161                  | )      | (6,871                  | )      |
| Total non-current deferred taxes                |   | 834                     |   | —                  |   | —                  |   |
|                                            |   | $                       | 1,449  |                    | $      | —                  |   | $ | — |   |

 

                                                During Fiscal 2001, management determinedthat as a result of projected losses, realization of the deferred tax assetswas uncertain.  Thus, the Company hasrecorded a full valuation allowance against the deferred tax assets.  As of December 28, 2002, the Company had afederal income tax net operating loss carryforward of approximately $8.6million that will begin to expire in 2006 for federal income tax purposes.

 

**12. Commitments and Contingencies**

 

                        *Litigation*

 

                                                The Company is subject to various claimsas a result of its ongoing business activities. Management believes that theoutcome of any such claims will not have a material adverse effect on theCompany’s financial position or results of operations.

 

                        *Lease Commitments*

 

                                                The Company leases its facilities andcertain equipment under non-cancelable operating leases that expire through2007. The Company’s primary facility lease expires in 2007 and contains anoption to extend the lease for two additional five-year periods. Rent expenseunder operating leases amounted to $1,488,000 for Fiscal 2000, $1,660,000 forFiscal 2001 and $1,051,000 for Fiscal 2002.

 

F-25

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                                                Minimum future lease payments as ofDecember 28, 2002 under operating leases are as follows (in thousands):

 

| 2003  |   | $   | 944    |   |
|-------|--------|-----|--------|--------|
| 2004  |   | 875 |   |
| 2005  |   | 885 |   |
| 2006  |   | 814 |   |
| 2007  |   | 821 |   |
| Total |   | $   | 4,339  |   |

** **

**13. Incentive Compensation Arrangements**

 

                                                The Company instituted an employee bonusprogram in 1996 under which all non-management employees are paid bonuses basedon the achievement of certain performance criteria, as defined in the bonusprogram.  The Company incurred expensesof $521,000 for Fiscal 2000 and $28,000 for Fiscal 2001 under thisarrangement.  The Company did not incurany bonuses under this arrangement in Fiscal 2002.  However, the Company incurred expenses of $51,000 in Fiscal 2002related to discretionary bonuses.

 

                                                The Company has a management incentiveprogram under which management-level employees are paid incentives based on theachievement of certain performance criteria. The Company incurred expenses of $470,000 for Fiscal 2000 under thisarrangement.  The Company did not incurany bonuses under this arrangement in Fiscal 2001 or Fiscal 2002.

 

                                                The Company also maintains a definedcontribution 401(k) plan (the “Plan”) for all of its employees. Those employeeswho participate in the Plan are entitled to make contributions of up to 15% oftheir compensation, limited by IRS statutory contribution limits. In additionto employee contributions, the Company contributes to the Plan by matching 40%of employee contributions up to the first 6% of compensation contributed.Amounts contributed to the Plan by the Company were $304,000 for Fiscal 2000,$285,000 for Fiscal 2001 and $265,000 for Fiscal 2002.

 

                                                The Company has entered into employmentagreements with certain of its officers and executives that provide forstipulated annual salary payments. Typically, termination of the agreements may occur by either party upon30 days prior written notice or in the event of death or permanentdisability.  The agreements containcertain payment provisions in the event the employee is terminated due topermanent disability or in the event of death, conviction of a crime, ormaterial breach or failure to perform obligations under the agreements, andsome contain provisions providing for certain payments if the employee isterminated after a change of control.

 

**14. Related Party Transactions**

 

                        *Contributed Management Services*

 

                                                In February 1998, the Companyentered into a management agreement with J.F. Lehman & Company, anaffiliate of the Company’s principal stockholder (the “ManagementAgreement”).  Under the terms of the ManagementAgreement, the Company was obligated to pay Lehman a $500,000 annual managementfee in advance on a semi-annual basis. In September 1998, the Company and Lehman amended the ManagementAgreement and concurrently entered into a management services agreement withLehman, the combined effect of which was to further delineate the managementservices to be 

 

F-26

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provided by Lehman and toreduce the term of the Management Agreement from ten years to five years.  The Management Agreement terminated onFebruary 3, 2003.

 

                                                Under the Company’s old credit facilitywith Deutsche Bank, the Company was precluded from paying management fees toLehman during recent periods when Deutsche Bank had waived events of default,although Lehman continued to provide management services to the Company duringsuch times.  Under the Ableco Facility,the Company was prohibited from paying management fees to Lehman, althoughLehman continued to provide those management services to the Company.  Beginning December 30, 2001, theCompany recorded the contributed management services as an expense and acorresponding capital contribution.  Thetotal amount of expense and additional paid-in capital recorded for theseservices during Fiscal 2002 was $500,000.

 

                                                During Fiscal 2002, the Companyreimbursed Lehman $217,000 for expenses Lehman incurred in connection withreplacing the old credit facility with the Ableco Facility.  Such amount was capitalized and is includedin deferred financing costs.  In addition,the Company reimbursed Lehman $109,000 for fees and expenses Lehman incurred toa third party executive search firm in connection with the hiring of JosephBudano as President and Chief Executive Officer.

 

                        *RelocationLoan to John P. Mei, the Chief Financial Officer*

 

                                                Under an employment agreement enteredinto on December 10, 2002 with John P. Mei, but effective as ofSeptember 16, 2002 (the “Mei Agreement”), the Company agreed to extend a$60,000 relocation loan to Mr. Mei within seven days of the date on whichhe closes on the purchase of a home in the San Diego area.  This loan will accrue interest at an annualrate of 7%.  One third of the principalamount, or $20,000, will be forgiven if Mr. Mei remains employed with theCompany on September 16, 2003.  Onehalf of the remaining principal amount, or $20,000, will be forgiven if Mr. Meiremains employed with the Company on September 16, 2004.  If Mr. Mei remains employed with the Companyon September 16, 2005, the remainder of the principal amount and allaccrued interest on the loan will be forgiven. However, if prior to September 16, 2005, the Company terminates theMei Agreement for cause or Mr. Mei terminates without good reason, thenMr. Mei will be required to promptly repay in full all outstanding principaland accrued interest on the loan.  If,prior to September 16, 2005, the Company terminates the Mei Agreementother than for cause or Mr. Mei terminates for good reason, then, as of thedate of termination, the outstanding principal balance and accrued interestthereon shall be forgiven.  Mr. Meihas yet to borrow these funds.

 

                        *Racal Instruments*

 

                                                Racal Instruments (“Racal”), a customerof the Company, was acquired on November 2, 2001 by a group of investorsthat includes affiliates of J.F. Lehman & Company.  In addition, certain members of theCompany’s board of directors are also members of Racal’s board ofdirectors.  As a result, Racal isconsidered a related party.  Sales bythe Company to Racal were approximately $1,984,000 and $530,000 during Fiscal2001 and Fiscal 2002, respectively.

 

                        *Capital Call Agreement between J. F. Lehman Equity InvestorsI, L.P. and Ableco*

 

                                                In conjunction with entering into theAbleco Facility, an affiliate of the Company’s majority stockholder,J.F. Lehman Equity Investors I, L.P. (“JFLEI”), entered into a capitalcall agreement with Ableco.  Pursuant tothe terms of this agreement, JFLEI agreed to participate in $3.0 million of theTerm Loan on a *pari passu* basiswith Ableco if the Company failed to meet a minimum EBITDA covenant for aninitial test period, which consisted of the third and fourth quarters of Fiscal2002.  This agreement was terminatedupon satisfactory performance during the initial test period.

 

F-27

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**15. Power Ten Consolidation**

 

                                                InJuly 2001, the Company decided to move its Power Ten operations fromNorthern California to its San Diego facilities.  In connection with the move, the Company incurred expensestotaling $1,002,000 in Fiscal 2001 consisting of lease abandonment costs of$413,000, severance costs of $229,000, fixed asset disposals of $162,000,travel costs of $104,000 and other costs totaling $94,000.  As of December 29, 2001, the Company hadaccrued expenses relating to the consolidation of Power Ten’s operationstotaling $350,000, of which $299,000 was for lease abandonment costs and$51,000 for severance.  All of theseexpenses were paid prior to the lease expiration on the former Power Tenfacility in July 2002.  Power Ten was mergedwith and into Elgar Electronics Corporation effective January 1, 2002, asthe Power Ten legal entity was no longer required due to the consolidation ofPower Ten’s operations with Elgar’s in San Diego.

 

F-28

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**SCHEDULE II**

 

**VALUATION AND QUALIFYING ACCOUNTS**

 

**ELGAR HOLDINGS, INC. AND SUBSIDIARY**

**(in thousands)**

** **
| **Description**                                                      |   | **Balance at  Beginning of Year** |   | **Net  Additions (Reductions) Included in Costs and Expenses** |   | **Deductions** |   | **Balance at  End of Year** |   |
|----------------------------------------------------------------------|--------|-----------------------------------|--------|----------------------------------------------------------------|--------|----------------|--------|-----------------------------|--------|
| Allowance for doubtful  accounts (deducted from accounts receivable) |   |                              |   |                                                           |   |           |   |                        |   |
| Year ended December 28, 2002                                         |   | $                                 | 204    |                                                           | $      | (11            | )      | $                           | (30    | ) | $ | 163 |   |
| Year ended December 29, 2001                                         |   | 163                               |   | 77                                                             |   | (36            | )      | 204                         |   |
| Year ended December 30, 2000                                         |   | 152                               |   | 21                                                             |   | (10            | )      | 163                         |   |
|                                                                      |        |                                   |        |                                                                |        |                |        |                             |        |  |  |  |  |

 

A-1

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**SIGNATURES**

 

                                                Pursuant to the requirements of Section13 or 15(d) of the Securities Exchange Act of 1934, the Registrants have dulycaused this Report to be signed on their behalf by the undersigned, thereunto dulyauthorized in the City of San Diego, State of California on the 22nd day ofApril, 2003.

 
|   | ELGAR HOLDINGS, INC.           |
|--------|--------------------------------|
|   | ELGAR ELECTRONICS  CORPORATION |
|   |                           |
|   |                           |   |
|   | By:                            | /s/ Joseph Budano |
|   |                           | Joseph Budano |
|   |                           | President and Chief  Executive Officer |
|   |                           |   |
|   |                           |   |
|   | By:                            | /s/ John P. Mei |
|   |                           | John P. Mei |
|   |                           | Vice  President—Finance, Chief Financial Officer

and  Treasurer |

 

 
| **Signature**         |   | **Title**                                                                                      |   | **Date**                                   |
|-----------------------|--------|------------------------------------------------------------------------------------------------|--------|--------------------------------------------|
|                  |   |                                                                                           |   |                                       |
| /s/ Joseph Budano     |   | President and Chief  Executive Officer (Principal Executive Officer)                           |   | April 22, 2003                             |
| Joseph Budano         |   |
|                  |   |                                                                                           |   |                                       |
| /s/ John P. Mei       |   | Vice  President-Finance, Chief Financial Officer (Principal Financial and  Accounting Officer) |   | April 22, 2003                             |
| John P. Mei           |   |
|                  |   |                                                                                           |   |                                       |
| /s/ John F. Lehman    |   | Director                                                                                       |   | April 22, 2003                             |
| John F. Lehman        |   |                                                                                           |   |                                       |
|                  |   |                                                                                           |   |                                       |
| /s/ Donald Glickman   |   | Director and Vice  President                                                                   |   | April 22, 2003                             |
| Donald Glickman       |   |                                                                                           |   |                                       |
|                  |   |                                                                                           |   |                                       |
|                  |   | Director                                                                                       |   | April     ,  2003 |
| Kenneth R. Kilpatrick |   |                                                                                           |   |                                       |
|                  |   |                                                                                           |   |                                       |
| /s/ George Sawyer     |   | Director                                                                                       |   | April 22, 2003                             |
| George Sawyer         |   |                                                                                           |   |                                       |
|                  |   |                                                                                           |   |                                       |
|                  |   | Director and Secretary                                                                         |   | April     ,  2003 |
| Stephen L. Brooks     |   |                                                                                           |   |                                       |

 

S-1

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| **Signature**               |   | **Title** |   | **Date**                                   |
|-----------------------------|--------|-----------|--------|--------------------------------------------|
|                        |   |      |   |                                       |
| /s/ Oliver C. Boileau,  Jr. |   | Director  |   | April 22, 2003                             |
| Oliver C. Boileau, Jr.      |   |      |   |                                       |
|                        |   |      |   |                                       |
| /s/ Thomas G. Pownall       |   | Director  |   | April 22, 2003                             |
| Thomas G. Pownall           |   |      |   |                                       |
|                        |   |      |   |                                       |
| /s/ William Paul            |   | Director  |   | April 22, 2003                             |
| William Paul                |   |      |   |                                       |
|                        |   |      |   |                                       |
| /s/ Joseph A. Stroud        |   | Director  |   | April 22, 2003                             |
| Joseph A. Stroud            |   |      |   |                                       |
|                        |   |      |   |                                       |
|                        |   | Director  |   | April     ,  2003 |
| Bruce D. Gorchow            |   |      |   |                                       |
|                        |   |      |   |                                       |
| /s/ Tig H. Krekel           |   | Director  |   | April 22, 2003                             |
| Tig H. Krekel               |   |      |   |                                       |

 

S-2

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**RULE 13a-14 CERTIFICATIONS**

 

I, Joseph Budano, certifythat:

 

1.                                        I have reviewed this annual report onForm 10-K of Elgar Holdings, Inc. (the “Company”);

 

2.                                        Based on my knowledge, this annual reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.                                        Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the Company as of, and for, the periods presentedin this annual report;

 

4.                                        The Company’s other certifying officerand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Companyand we have:

 

(a)                                designed such disclosure controls andprocedures to ensure that material information relating to the Company,including its consolidated subsidiary, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

(b)                               evaluated the effectiveness of theCompany’s disclosure controls and procedures as of a date within 90 days priorto the filing date of this annual report (the “Evaluation Date”); and

 

(c)                                presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                                        The Company’s other certifying officerand I have disclosed, based on our most recent evaluation, to the Company’sauditors and the audit committee of the Company’s board of directors:

 

(a)                                all significant deficiencies in thedesign or operation of internal controls which could adversely affect theCompany’s ability to record, process, summarize and report financial data andhave identified for the Company’s auditors any material weaknesses in internalcontrols; and

 

(b)                               any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theCompany’s internal controls; and

 

6.                                        The Company’s other certifying officerand I have indicated in this annual report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
|                 | /s/ Joseph Budano                      |
|----------------------|----------------------------------------|
| Date: April 22, 2003 | Joseph Budano

Chief Executive Officer |

 

S-3

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I, John P. Mei, certifythat:

 

1.                                        I have reviewed this annual report onForm 10-K of Elgar Holdings, Inc. (the “Company”);

 

2.                                        Based on my knowledge, this annual reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.                                        Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the Company as of, and for, the periods presentedin this annual report;

 

4.                                        The Company’s other certifying officerand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Companyand we have:

 

(a)                                designed such disclosure controls andprocedures to ensure that material information relating to the Company,including its consolidated subsidiary, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

(b)                               evaluated the effectiveness of theCompany’s disclosure controls and procedures as of a date within 90 days priorto the filing date of this annual report (the “Evaluation Date”); and

 

(c)                                presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                                        The Company’s other certifying officerand I have disclosed, based on our most recent evaluation, to the Company’sauditors and the audit committee of the Company’s board of directors:

 

(a)                                all significant deficiencies in thedesign or operation of internal controls which could adversely affect theCompany’s ability to record, process, summarize and report financial data andhave identified for the Company’s auditors any material weaknesses in internalcontrols; and

 

(b)                               any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theCompany’s internal controls; and

 

6.                                        The Company’s other certifying officerand I have indicated in this annual report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
|                 | /s/ John P. Mei                      |
|----------------------|--------------------------------------|
| Date: April 22, 2003 | John P. Mei

Chief Financial Officer |

 

S-4

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