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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For fiscal year ended December 29, 2001
or

For the transition period from                              to                             

Commission File Number 333-55797

ELGAR HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)

9250 Brown Deer Road, San Diego, California 92121-2294
(Address of principal executive office) (Zip Code)

(858) 450-0085
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
None

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o Not applicable.

        As of March 29, 2002, the number of outstanding shares of the registrant's Common Stock was 4,602,433.

DOCUMENTS INCORPORATED BY REFERENCE
None.

Table of Other Registrants

Elgar Holdings, Inc.
Index to Annual Report On Form 10-K for Fiscal Year Ended December 29, 2001

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PART I

ITEM 1. BUSINESS

        In this report, the "Company," "EHI," "we," "us" and "our" refer to Elgar Holdings, Inc. and its subsidiaries, unless the context requires otherwise.

Overview

        We are a leading designer and manufacturer of programmable power supplies and systems for commercial and military applications. Power supplies convert one form of electric power, such as alternating current ("AC") from a wall outlet, into another form of electric power, such as direct current ("DC") used by most electronic products. Programmable power supplies have increased application flexibility as they convert a single input power level into various output power levels. Our products are designed into original equipment manufacturer ("OEM") systems, or utilized by the end customer in power reliability verification, product acceptance, process control, or burn-in applications. We provide one of the broadest product offerings in our industry. Our customers include such industry leaders as Alcatel, Boeing, Cisco, Loral, Northrup Grumman, Litton, Lucent, Motorola, Advanced Energy, Siemens, American Power Conversion, Halliburton and Lockheed Martin.

        Elgar Electronics Corporation, our wholly owned subsidiary ("Elgar"), was founded in 1965 as a manufacturer of solid-state line conditioners and frequency changers for the AC power test and measurement market. By the early 1990's, we had become primarily an AC power supply provider to the defense market with approximately $20 million in net sales. Over the next several years we developed and executed a comprehensive plan to expand our focus to target the large and diverse, commercial DC market. We improved product quality through product redesign and clean-up, quality systems improvement and ongoing employee training. We extended product breadth through new product introductions, strategic alliances and acquisitions of two DC power supply companies, Sorensen and Power Ten. We also reduced delivery cycle times and established an industry-leading, technical support and services capability, with extensive pre-sales support and expert rack system integration consultation. This strategy proved to be successful. For our fiscal years 1999, 2000 and 2001, approximately 72.5%, 80.0% and 91.5% of our sales, respectively, were derived from diversified commercial customers.

Product Applications

        Our significant software and hardware engineering capabilities enable us to address a wide range of complex applications in our target markets. We design and manufacture power solutions used in critical applications that require varied levels of power output and involve substantial engineering complexity. Our products are used in applications such as:

•

Test & Measurement ("T&M")—where our products are used to verify that electronic equipment operates reliably under varied levels of power input;



•

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



•

Process Control—where our product is primarily used as a power amplifying device in the control of a process; and



•

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

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        Applications within each of our target markets include:

Principal Products

        We have four principal product areas:

•

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



•

Systems Integration Products and Services include both power subsystem design, manufacture and integration, and space power simulation systems. The power subsystem business is a natural extension of the design and manufacturing capabilities developed while producing complete space power simulation systems over the past 14 years;



•

Programmable AC Power is a type of programmable power supply used to power or test AC products such as avionics, computers, DC power supplies, appliances and many other types of electronic products; and



•

Other Products and Services, which consist of (1) power conditioning and ruggedized uninterruptible power supply ("UPS") products, which supply back-up power principally to military computer and communications systems and oil exploration companies for data logging applications, (2) the Consolidated Automated Support System ("CASS") Program for the U.S. Navy (for which we provide programmable AC and DC, fixed DC and power conditioning products) and (3) customer service, consisting of repair services and spare parts.

        We categorize our sales in these four principal product areas, with net sales shown by product area for our fiscal year ended December 29, 2001 ("Fiscal 2001") as follows (the amounts below exclude $307,000 of shipping revenue in 2001):

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Programmable DC Power

        Our broad line of programmable DC products is used by commercial and military customers for a wide variety of applications including computer and communications equipment, semiconductor burn-in, industrial process control, avionics, bench-top equipment, and research and development equipment. Customers for programmable DC products include Racal Instruments ("Racal"), Applied Materials, Siemens, Halliburton Company, Cisco Systems, Lucent Technologies, Teradyne, Veeco Instruments, Advanced Power and Reliability Inc. On November 2, 2001, Racal was acquired by a group of investors that includes affiliates of our largest shareholder.

        Our DC products are applied in test and measurement, burn-in and OEM applications. DC product applications include the testing of laser printer heads, DC-to-DC converters, satellites and electronic components. These products are also used for the burn-in of DC-to-DC converters and semiconductors. OEM applications of our DC products include supplying power to medical equipment and cable TV amplifiers. Our DC products are mainly used in OEM applications by customers such as Novellus, Applied Materials and Veeco Instruments. Our power solutions are incorporated into semiconductor manufacturing equipment, microprocessor test stations and burn-in systems. Through Racal, a systems integrator for test and measurement equipment, we are the sole source supplier of programmable DC power equipment to a leading semiconductor manufacturer for use in the Racal automatic test equipment ("ATE") systems for testing microprocessors. Measurement and control applications are highly varied and include power solutions for the medical equipment, automotive, computer, industrial automation, consumer goods, commercial avionics and space, and oil and gas markets. Our largest customer in this market, Siemens, uses our DC power supplies in its oncology treatment systems to create x-rays.

        We offer 20 DC product lines under the Sorensen, Elgar and Power Ten brand names, ranging in power from 60 watts to 30kW. Most of our products are produced in-house, although five lower priced programmable DC product lines, which represented less than 6.0% of our revenue in Fiscal 2001, are manufactured by others and brand labeled Sorensen. Our purchase of Power Ten in May 1998 broadened our product offering with high-power, programmable DC products. We recently entered the market for DC loads with a new product line, enabling us to achieve incremental revenue by selling this product into our existing customer base through the same sales channel.

Systems Integration Products and Services

        Systems integration products and services includes power subsystems products and services and space power simulation systems. Because of the substantial power subsystem integration expertise we have developed through our space power simulation work and the desire of customers to outsource non-core engineering tasks, many OEMs, in-house test engineering groups and contract manufacturers are beginning to rely on us to provide the power subsystems component of complex integrated systems. We introduced this service in 1999 and, as a result, have been able to secure additional market share for our products by bundling them with our engineering and manufacturing services into integrated power subsystems supplied to customers. In addition to providing a new source of complementary business, we benefit from these services by increasing customer loyalty and retention, thereby differentiating us from our competition. Our subsystems integration services include system design, power supply selection, power and thermal management design, complete rack wiring, custom input and output cables, and system controls ranging from rudimentary switches to custom Windows NT application software. The customer is provided a complete turnkey system.

        Systems integration products and services also includes our space power simulation products, which are applied in test and measurement applications to test satellites. Given the significant cost involved in building, launching and insuring satellites, fully testing units prior to launch is critical. With the flexibility to generate any possible power scenario that solar panels may produce in space, our fully

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integrated Solar Array Simulator ("SAS") test system performs mission-critical power testing from payload testing to final satellite testing inside a thermal vacuum chamber. The SAS can be programmed to create the output power forms associated with a wide variety of solar array operating environments including direct solar illumination, spinning orbital profiles, an eclipse entry and exit, aging of the solar array and many other conditions.

        We believe that we are the leading non-captive source for satellite ground power test systems in the United States. We introduced our third generation Solar Array Simulator in 1995, and were the sole supplier of solar array simulators, battery simulators and umbilical power systems to Lockheed Martin and Motorola on the Iridium project. Today, with our turn-key power systems and fourth generation SAS systems, we supply virtually every major U.S. commercial, military and power subsystem development satellite manufacturer, including Boeing/Hughes, Lockheed Martin, Space Systems Loral, TRW, Jet Propulsion Lab, Motorola Space and Ball Aerospace. Additionally, we have established a strong presence in Europe with customers such as Astrium (Matra Marconi Space and DASA), Alenia Space, Alcatel, Terma and the European Space Agency (ESA ESTEC), and we have recently entered the Japanese market by securing an order with NT Space.

AC Power

        Our programmable AC products generate a wide range of dynamic AC voltages, frequencies, phase relationships and currents, simulating all possible electrical power waveforms. In addition to pure AC waveforms, our SmartWave™ products are capable of creating any distortion to the wave including noise, spikes, drop-outs and shifts in phase angle. Like our DC products, our AC products are used to test electronic equipment such as consumer appliances, computers, DC power supplies and avionics, with the tests subjecting the equipment to all possible power variations needed to evaluate performance of the specific product or component.

        Our leading AC product, the SmartWave™, is widely recognized in the industry as one of the most technologically advanced AC products on the market. The AC power market, which has been dominated by military spending in the past, is a small but steady and attractive niche for us. We believe that we have one of the largest shares of the AC power market. We are currently the incumbent on many significant U.S. government ATE contracts.

        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 the ContinuousWave™—Manual and ContinousWave™—Programmable product lines, which are used primarily in avionics and AC power components testing.

Other Products and Services

        Other products and services comprise three 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 instruments which are capable of providing precise AC output power regardless of the input power distortions or drop-outs. This type of product is used in critical applications where electrical power fluctuations could have severe consequences, such as with field-support for military operations and back-up for data logging in oil exploration missions. The Global Uninterruptible Power Supply (GUPS™), our principal product in this line, is designed to handle any input power from anywhere in the world, including aircraft power, and generates a clean AC output even when the input power is lost.

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        CASS.    The CASS program is a Navy/NAVAIR program developed to reduce the required number of avionics custom automated test equipment ("ATE") systems located on aircraft carriers, at depots and at test integration facilities. Our role in the CASS program is to provide these ATE stations with power subsystems, which consist of programmable AC and DC power supplies, a power conditioner and fixed DC system supplies. We are the sole supplier of power subsystems to Lockheed Martin, the prime contractor for the CASS program.

        Having delivered 602 systems to date, we have been notified by Lockheed Martin that the U.S. Navy is winding down the CASS Program, with full-rate production to cease in the fourth quarter of 2002. After full-rate production ceases, however, we will enter the sustaining phase for the program, where the emphasis will be on small quantity orders, spares and service. We understand that the U.S. Navy is considering a limited expansion of the CASS program to equip non-carrier ships. If this were to occur, and Lockheed Martin were to obtain any such business, this could represent additional opportunities for our revenue growth. Further, other branches of the military have programs similar to CASS, including the U.S. Army's Integrated Family of Test Equipment, which currently utilizes our other standard products.

        Customer Service.    Additionally, we offer comprehensive customer service for all of our product offerings through our in-house staff of six customer service technicians, three service administrators and six customer service engineers. Our customer service organization provides global repair and spare parts for all products we offer, and provides technical assistance to our international distributors which are responsible for equipment repairs in their territories and to customers who repair equipment in-house.

Significant Customers

        We sell our power supplies and systems to over 2,500 customers, both directly and indirectly through distributors. Certain customers are material to our business and operations. In Fiscal 2001, two customers represented more than 10% of total net sales. In Fiscal 2001, our top ten customers accounted for approximately 42.1% of net sales, up from 38.2% in our fiscal year ended December 30, 2000 ("Fiscal 2000"). Lockheed Martin accounted for approximately 13.7% of our total net sales in Fiscal 2001, up from 9.2% in Fiscal 2000. Hughes accounted for approximately 10.2% of our total net sales in Fiscal 2001, up from 3.3% in Fiscal 2000. No other customer accounted for 10% or more of our net sales in Fiscal 2001 or Fiscal 2000.

Competition

        We believe we sell more programmable power supplies in the United States than any other provider except for Agilent. Most of our competitors are either small private companies, which do not match the breadth of product offerings, or non-core subsidiaries of much larger parent companies, which tend to be less focused on the power solution market. We operate in a very competitive environment across our DC and AC product lines and enjoy a less competitive environment in our systems integration product and services business. The power supply industry is currently experiencing a period of consolidation in response to customers' desires to consolidate their supplier base and manufacturers' desires to incorporate additional product lines and technologies.

        The principal competitive factors in the marketplace include vendor and product reputation, fast delivery, price, product performance specifications, functionality and features, ease of implementation and use, and quality of customer support. We believe we are well positioned with regard to these factors and have competed effectively in all of our target markets.

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Sales and Marketing

        We sell our products through sales representatives in the U.S. and through distributors internationally, with some direct sales to specific customers and markets. Our sales organization includes 37 employees (22 of whom are in sales and marketing, 15 in customer service support, and one in general and administrative plus an outside consultant), as well as approximately 65 representative/distributor companies with more than 280 salespeople worldwide. We believe that our sales network is one of our major assets and a significant competitive advantage over our competitors.

        Our in-house sales force includes 11 sales managers who are each responsible for working with customers and prospective customers to provide existing or custom solutions to their needs. Our six sales engineers, who support the sales managers, representatives and customers, design solutions according to customers' applications. In turn, these 17 sales professionals are supported by an administrative staff of four people. Our sales and marketing team also includes two marketing professionals who conduct marketing research, create collateral material and training manuals, coordinate the placement of advertising in appropriate trade journals and other periodicals, as well as organize trade shows and perform general public relations work.

        We have strong relationships with the majority of our sales representatives. In the U.S., we believe we have retained the services of the top sales representative for our products in each region of the country. Internationally, we believe we are represented by top-tier international distributors in the regions where we sell our products. Our sales representatives are essentially field extensions of our sales team, helping to identify and pursue sales opportunities. As a result, the sales force, including the representative network, has been instrumental in identifying potential new product opportunities, thus helping to guide our research and development efforts to the most promising areas. In an effort to maximize the effectiveness of our domestic sales network, we have established a representative board, comprised of the chief executives of five of our sales representative organizations, that meets with management on a periodic basis to discuss marketing strategy and execution of the marketing plan. Only one sales representative accounted for over 10% of our net sales in Fiscal 2001. Domestic sales accounted for approximately 91.4%, 88.8% and 89.1% of total net sales in Fiscal 1999, Fiscal 2000 and Fiscal 2001, respectively.

Research and Development

        At December 29, 2001, our engineering department consisted of 65 people. As evidence of our commitment to new product development, our research and development and engineering expenses were $5.9 million for Fiscal 1999, $6.7 million for Fiscal 2000 and $6.2 million for Fiscal 2001. Customer-funded research and development comprised $0.7 million, $0.5 million and $0.3 million of our overall research and development expense incurred in Fiscal 1999, Fiscal 2000 and Fiscal 2001, respectively.

        The development and introduction of new products has been and will continue to be an essential part of our growth strategy to increase market share and expand into new markets. Our current management team has had a record of successful and profitable new product introductions, including the SmartWave™and the Solar Array Simulator products. These and other products are considered superior in the marketplace due to their digital capabilities, flexible format, high-quality engineering and long-term reliability. Our in-house development efforts are focused on leveraging our strong engineering capabilities to produce higher-end, more sophisticated products utilizing digital technology. Management, in conjunction with the sales force and engineering department, has demonstrated a strong ability to identify potential product areas and create technical solutions.

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Manufacturing

        Our manufacturing facilities are organized and run efficiently with a focus on quality, productivity and cost and inventory management. Our manufacturing equipment is modern and allows for efficient and quality production. We have designed and constructed our own in-house semi-automated test stations to enhance productivity and ensure quality. Operations management has identified four core manufacturing competencies which are:

•

wire harness/heatsink assembly,



•

magnetics (transformer assembly),



•

low-volume printed circuit board assembly and



•

final assembly and testing.

        Operations has redesigned the production floor to use lean manufacturing techniques and simplify material handling and assembly methodology based on these competencies. The redesign has allowed maximum productivity and leveraging of common processes across product lines, as the majority of Elgar's products use the same basic components.

        Over the years we have utilized selective vertical integration and a focused factory approach to improve costs and mitigate delivery and quality risks. We utilize cross-functional teams in new product development, design for manufacturability, sustaining support and quality improvement initiatives while supporting a foundation of employee empowerment and training. Our current initiatives involve focused material cost reductions utilizing long-term partnerships and high quality offshore suppliers. In addition, we have made substantial investments in automated test equipment and through-hole and surface-mount board assembly equipment. This equipment is being used to support the implementation of Demand Flow Technology focused on reducing inventory and manufacturing cycle-times.

        As part of our cost management program, we have outsourced certain lower-end, high volume transformers to a subcontract assembly plant in nearby Tecate, Mexico. All subcontract subassemblies are subjected to our inspection and test process as assurance that quality expectations are met.

        During Fiscal 2001, we improved our work flow, added semi-automated test capabilities and made process and engineering improvements to reduce manufacturing lead times and improve product margins.

Power Ten Plant Consolidation

        In the third quarter of 2001, we consolidated our Power Ten and Elgar manufacturing operations by moving Power Ten's production and manufacturing operations from Northern California to our San Diego headquarters. In connection with the closure, we have incurred certain shut-down costs, including employee termination costs, lease termination costs and costs associated with moving machinery, equipment and personnel to San Diego. We expect that the actions we have taken to consolidate the manufacturing and production facilities will provide us with significant ongoing cost savings.

Backlog

        Our backlog at December 29, 2001 was approximately $10.7 million, all of which we expect to ship in 2002. Our backlog was $20.8 million at December 30, 2000. Backlog consists of product orders for which a customer purchase order has been received and accepted and which is scheduled for shipment. Orders are subject to rescheduling or cancellation by the customer, usually without penalty. Backlog also consists of customer-funded research and development payable under support contracts with our customers and orders for billable services. Because of possible changes in product delivery schedules,

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cancellation of product orders, and sales will sometimes reflect orders shipped in the same month they are received, our backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. Moreover, we do not believe that backlog is necessarily indicative of our future results of operations or prospects.

Employees

        At December 29, 2001, we had 360 full-time employees (of which 44 were temporary employees), including 78 manufacturing personnel, 65 engineering personnel, 28 administrative personnel, 22 sales and marketing personnel, nine customer service personnel and 158 personnel involved in direct labor. No attempts to unionize any of our employees have been made. We consider our employee relations to be good.

Intellectual Property

        We have trademarked our SmartWave™, ContinuousWave™, TrueWave™ and GUPS™ products and we have been operating under the Elgar and Sorensen trade names for over 30 years. The Power Ten business has been using the Power Ten trade name for over 15 years. In addition to the protection offered by trademark laws and regulations, we rely upon trade secret protection for our confidential and proprietary information and technology.

Environmental

        We are subject to various evolving federal, state and local environmental laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of hazardous and non-hazardous substances and wastes. These laws and regulations provide for substantial fines and sanctions for violations and, in many cases, could require us to remediate a site to meet applicable legal requirements. We are not aware of any material environmental conditions affecting the properties where we conduct our business.

Government Contracts

        Contracts with the United States government (whether directly or indirectly) are subject to cancellation for default or convenience by the government if deemed in its best interests. In addition, based on audits conducted by the government with respect to its contracts, profits may be renegotiated with respect to certain programs and contracts. In the last five years, we have not experienced any cancellations or significant price renegotiations of a contract at the government's convenience. At no time have we experienced a government cancellation by default. As 27.5%, 20.0% and 8.5% of our net sales in Fiscal 1999, Fiscal 2000 and Fiscal 2001 were made directly or indirectly to the U.S. Government, a significant portion of our business is subject to the government prerogatives described above.

ITEM 2. PROPERTIES

        For Elgar's and Power Ten's operations, which are based in San Diego, California, we lease five facilities in close proximity totaling approximately 118,000 square feet, which we use for:

•

the design and production of Elgar's standard DC and AC products and Sorensen-brand products, production for the CASS Program, Power Ten and administrative headquarters (92,100 sq. ft.) (lease expires in December 2002);



•

digital engineering (4,900 sq. ft.) (lease expires in September 2002);



•

record storage and accounting (2,300 sq. ft.) (lease expires in January 2003);

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•

manufacturing of magnetics and PDU, a power conditioning product (9,100 sq. ft.) (lease expires in July 2003); and



•

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

        Prior to our consolidation of Power Ten's operations with Elgar's, Power Ten utilized a 29,100 square foot facility in Los Gatos, California under a lease that expires in July 2002. We sublease 5,300 square feet of this space to an unaffiliated party, with the term of the sublease also expiring in July 2002. Efforts to find a tenant to sublease the remaining 23,800 square feet for the remainder of the term were unsuccessful. The 23,800 square feet is not currently being used, and will be turned back in to the owner in July 2002.

        We believe that our facilities are in good condition with substantial capacity available for increased production of current product lines and new product introductions. As a result, no substantial capital expenditures are expected to be required to accommodate the projected revenue growth.

ITEM 3. LEGAL PROCEEDINGS

        We are routinely involved in legal proceedings related to the ordinary course of our business. We do not believe any such matters will have a material adverse effect on us. We maintain property, general liability and product liability insurance in amounts which we believe are consistent with industry practices and adequate for our operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted to a vote of security holders in the fourth quarter of 2001.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Common Equity Dividends

        Our common stock is not listed or traded on any exchange. At March 1, 2002, there were 35 holders of record of our common stock.

        We have not paid any cash dividends on our common stock to date. We intend to retain all future earnings for use in the development of our business and, consequently, do not anticipate paying cash dividends in the foreseeable future. The payment of all dividends will be at the discretion of our Board of Directors and will depend upon, among other things, future earnings, operations, capital requirements, our general financial condition, general business conditions and the prior payment of cash dividends to the holders of our preferred stock. Our ability to pay dividends to our stockholders, and the ability of our subsidiaries to pay dividends to us, is restricted by the indenture governing the $90.0 million principal amount of Senior Notes due 2008 (the "Senior Notes") and the documents governing our credit facility.

Recent Sales of Unregistered Securities

        In March 1999, EHI issued and sold 4,000 shares of Series C 6% Cumulative Convertible Preferred Stock (the "Series C Preferred Stock") for cash proceeds of $4.0 million. The purchasers of the Series C Preferred Stock were those of our stockholders and warrantholders who elected to participate in a pro rata subscription offering. Upon the occurrence of certain triggering events, the holders of the Series C Convertible Preferred Stock are entitled to convert such shares into our Common Stock at a price of $0.75 per share.

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ITEM 6. SELECTED FINANCIAL DATA

Selected Historical Consolidated Financial Data

        The selected consolidated financial data below for the fiscal years ended January 1, 2000 ("Fiscal 1999"), December 30, 2000 ("Fiscal 2000") and December 29, 2001 ("Fiscal 2001) and as of December 30, 2000 and December 29, 2001 have been derived from our consolidated financial statements which have been audited by Arthur Andersen LLP, independent public accountants, and are included in Item 14 of this report. The selected consolidated financial data below for the fiscal years ended March 28, 1998 and the nine-month period ended January 2, 1999 and as of March 28, 1998 and January 2, 1999 have been derived from our consolidated financial statements which have been audited by Arthur Andersen LLP, independent public accountants, but are not included in this report. The selected consolidated financial data below as of and for the nine-month period ended December 27, 1997 and the twelve-month period ended January 2, 1999 have been derived from our unaudited consolidated financial statements, not presented herein.

        In March 1999, the Company changed its fiscal year from the Saturday closest to March 31st to the Saturday closest to December 31st. This resulted in the fiscal years ended March 28, 1998 and January 2, 1999 containing a three-month overlap period, from December 28, 1997 to March 28, 1998. This three-month overlap period included $15,881,000 of net sales and $203,000 of net income. The nine-month period ended December 28, 1997 is also included in the fiscal year ended March 28, 1998. The nine-month period included $46,615,000 of net sales and $4,570,000 of net income.

        The unaudited consolidated financial statements for each of the periods referred to above include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited periods. The data below reflect the effect of our recapitalization on February 3, 1998 (the "Recapitalization") and our acquisition of Power Ten on May 29, 1998.

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        The information presented below is qualified in its entirety by, and should be read in conjunction with, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8. Consolidated Financial Statements and Supplemental Data.

(1)

In the year ended March 28, 1998 ("Fiscal 1998"), selling, general and administrative expenses include approximately $359,000 of nonrecurring expenditures relating to the Recapitalization.

(2)

Amortization expense represents the amortization of goodwill associated with the April 1996 acquisition of Elgar by Carlyle-EEC Holdings, Inc., and our May 1998 acquisition of Power Ten.

(3)

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

(4)

Adjusted EBITDA is the sum of income (loss) before income taxes, interest, depreciation and amortization expense. Adjusted EBITDA is presented because we believe that it is a widely accepted financial indicator of a company's ability to service debt. However, adjusted EBITDA should not be considered as an alternative to net income or to cash flows from operating activities, as determined in accordance with generally accepted accounting principles, and should not be construed as an indication of a company's operating performance or as a measure of liquidity. In Fiscal 1998, adjusted EBITDA excludes the nonrecurring expenditures described in note (1) above.

(5)

Adjusted EBITDA margin is equal to Adjusted EBITDA divided by net sales for the periods presented.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        This report contains certain forward-looking statements and information relating to our business that are based on the beliefs of management as well as assumptions made by and information currently available to management. The words "anticipates," "believes," "estimates," "expects," "plans," "intends" and similar expressions, as they relate to our operations, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed in any forward-looking statement. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. We do not intend to update these forward-looking statements.

        The following discussion and analysis should be read in conjunction with "Selected Historical Consolidated Financial Data" and our consolidated financial statements and the notes thereto included elsewhere in this report.

        As a holding company, we operate through Elgar Electronics Corporation.

Results of Operations

        The following table sets forth certain income statement information and other data as a percentage of net sales for the periods indicated.

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

        Net sales.    Net sales in Fiscal 2001 were $58.7 million, a decrease of $7.1 million, or 10.8%, from net sales of $65.8 million in Fiscal 2000. This decrease was primarily attributable to a decrease in sales of programmable DC power products, predominately sales of Power Ten products and sales to Racal, and sales of Sorensen products, partially offset by an increase in sales of space systems products. In Fiscal 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 in sales 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 the semiconductor manufacturers. Sales of space systems products in Fiscal 2001 were $8.3 million, an increase of $3.9 million from Fiscal 2000, principally due to increased sales to Boeing Satellite Systems and, to a lesser degree, Space Systems/Loral.

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        Gross profit.    Gross profit in Fiscal 2001 was $22.3 million, a decrease of $5.3 million, or 19.2%, from gross profit of $27.6 million in Fiscal 2000. The decrease in gross profit was mainly due to the decrease in net sales which resulted in a $3.0 million decrease in gross profit, and partly as result of a decrease in the gross margin due to higher overall production costs when compared to Fiscal 2000. The lower margins in Fiscal 2001 are expected to improve in future periods due to the elimination of certain fixed costs as a result of the consolidation of the Power Ten operations with Elgar's operations at our headquarters in San Diego.

        Selling, general & administrative expenses.    Selling, general and administrative ("SG&A") expenses were $11.7 million in Fiscal 2001, an increase of $0.4 million, or 3.5%, from SG&A expenses of $11.3 million in Fiscal 2000. SG&A expenses increased as a percentage of 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 in Fiscal 2001 compared to Fiscal 2000.

        Research and development and engineering expenses.    Research and development and engineering (R&D&E) expenses in Fiscal 2001 were $6.2 million, a decrease of $0.5 million, or 7.5%, from R&D&E expenses of $6.7 million in Fiscal 2000. R&D&E expenses increased as a percentage of net sales from 10.1% to 10.5%. The decrease in dollars was primarily due to lower headcount and compensation expense in Fiscal 2001 compared to Fiscal 2000, and to a decrease in customer-funded research and development expense in Fiscal 2001 compared to Fiscal 2000. A portion of the Company's R&D&E expenses has historically been funded by customers and the costs associated with the support has been excluded from R&D&E expenses and included in cost of sales.

        Amortization expense.    Amortization expense was $2.4 million in each of Fiscal 2001 and Fiscal 2000. Amortization expense is comprised of the amortization of goodwill associated with the April 1996 acquisition of Elgar by Carlyle-EEC Holdings, Inc., and our May 1998 acquisition of Power Ten.

        Operating income.    Operating income 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 from 10.9% in Fiscal 2000 to 3.3% in Fiscal 2001. The decrease was due to the factors discussed above. To minimize the negative impact due to the lower sales volume, management initiated a series of cost savings actions. These included consolidating the Sorensen and Power Ten operations into Elgar's San Diego facility in the second and third quarters of 2001, respectively, negotiating raw material price reductions and acquiring automation equipment to shorten production times, reduce scrap and lower the labor content of our products.

        Interest expense.    Net interest expense was $10.6 million in Fiscal 2001, an increase of $0.1 million, or 1.0%, from net interest expense of $10.5 million in Fiscal 2000. Net interest expense increased as a percentage of net sales from 16.0% in Fiscal 2000 to 18.2% in the comparable Fiscal 2001 period. The increase in dollars was a result of higher outstanding borrowings on our revolving line of credit partially offset by lower interest rates on borrowings under our credit facility.

        Income taxes.    Income taxes for Fiscal 2001 and Fiscal 2000 were $1,449,000 and $70,000, respectively. Losses generated in these periods do not have a carryback benefit and thus have not been recognized because future realization is uncertain. A full valuation reserve was set up on the deferred tax asset balance of $1,449,000 due to a change in management's assessment that the realization of these deferred tax assets was uncertain.

        Net loss.    Net loss was $10.2 million in Fiscal 2001, an increased loss of $6.8 million from a net loss of $3.4 million in Fiscal 2000, due to the factors discussed above. In order to improve operating results, we have undertaken a number of initiatives to increase sales across our multiple product lines. These include (1) introducing our value-added-integration services to high-tech end customers,

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(2) introducing various product line extensions to our products and (3) initiating cost reduction efforts in the manufacturing and procurement processes, including the relocation of our Power Ten operations to our San Diego facilities.

Fiscal Year Ended December 30, 2000 Versus Fiscal Year Ended January 1, 2000

        Net sales.    Net sales in Fiscal 2000 were $65.8 million, an increase of $9.7 million, or 17.3%, from net sales of $56.1 million in Fiscal 1999. This increase was primarily attributable to an increase in sales of programmable DC products, including sales of Sorensen and Power Ten products and sales to Racal, partially offset by a decrease in sales of Other Products and Services. In Fiscal 2000, sales of Power Ten products, which are part of the DC product line, were $12.2 million, an increase of $4.6 million from Fiscal 1999 sales.

        In Fiscal 2000, net sales attributable to the CASS Program, which are included within Other Products and Services, were approximately $6.7 million. We have been notified that the U.S. Navy is winding down the CASS Program, with full-rate production to cease in the fourth quarter of 2002. After full-rate production ceases, we expect that our net sales attributable to the CASS Program will decrease fairly significantly as we enter the sustaining phase for the program, where the emphasis will be on small quantity orders, spares and service.

        Gross profit.    Gross profit in Fiscal 2000 was $27.6 million, an increase of $3.6 million, or 15.0%, from gross profit of $24.0 million in Fiscal 1999. The increase in gross profit was mainly due to the increase in net sales which resulted in a $4.2 million increase in gross profit, offset by a $0.6 million decrease in the gross profit margin due to a greater concentration of sales of lower-margin products when compared to Fiscal 1999. In Fiscal 2000, gross margins on Power Ten products were $6.0 million, an increase of $2.1 million from Fiscal 1999 gross margins.

        Selling, general & administrative expenses.    SG&A expenses were $11.3 million in Fiscal 2000, an increase of $1.3 million, or 13.0%, from SG&A expenses of $10.0 million in Fiscal 1999. SG&A expenses decreased as a percentage of net sales from 17.9% in Fiscal 1999 to 17.3% in Fiscal 2000. The dollar increase was primarily due to higher sales volume, generating higher commissions of $0.7 million, along with higher advertising costs and sales and marketing expenses.

        Research and development and engineering expenses.    R&D&E expenses in Fiscal 2000 were $6.7 million, an increase of $0.8 million, or 13.6%, from R&D&E expenses of $5.9 million in Fiscal 1999. R&D&E expenses decreased as a percentage of net sales from 10.5% to 10.1%. The increase in dollars was primarily due to higher compensation expense and increased consulting and material costs at Power Ten, and to a decrease in customer-funded research and development expense in Fiscal 2000 compared to Fiscal 1999.

        Amortization expense.    Amortization expense was $2.4 million in each of Fiscal 2000 and Fiscal 1999. Amortization expense is comprised of the amortization of goodwill associated with the April 1996 acquisition of Elgar by Carlyle-EEC Holdings, Inc., and our May 1998 acquisition of Power Ten.

        Interest expense.    Net interest expense was $10.5 million in each of Fiscal 2000 and Fiscal 1999. In connection with our swap agreement, on a net basis we paid $43,000 of interest to our swap counterparty in Fiscal 1999, and we received $49,000 in interest from our swap counterparty in Fiscal 2000. As of December 30, 2000, all but $2,125,000 of our long-term bank debt was covered by this swap arrangement.

        Operating income.    Operating income was $7.2 million in Fiscal 2000, an increase of $1.5 million, or 26.3%, from operating income of $5.7 million in Fiscal 1999. Operating income increased as a percentage of net sales from 10.2% in Fiscal 1999 to 10.9% in Fiscal 2000. The increase was due to the factors discussed above.

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        Income taxes.    Income taxes for Fiscal 2000 contained a tax provision of $0.1 million, compared to a tax benefit of $0.5 million for Fiscal 1999. Losses generated in Fiscal 1999 resulted in carryback benefits that were reflected as a benefit. Losses generated in Fiscal 2000 do not have a carryback benefit and thus have not been recognized because future realization is uncertain.

        Net loss.    Net loss was $3.4 million in Fiscal 2000, an improvement of $0.8 million, or 19.0%, from net loss of $4.2 million in Fiscal 1999, due to the factors discussed above.

Liquidity and Capital Resources

Overview

        Our principal uses of cash are for working capital requirements, debt service requirements and capital expenditures. Based upon current and anticipated levels of operations, and after giving effect to the Ninth Amendment and Waiver to Credit Agreement entered into on January 31, 2002 (the "Ninth Amendment"), as discussed below, we believe that our cash flow from operations, together with amounts available under our credit facility, will be adequate to meet our anticipated cash requirements through the end of the second quarter of 2002, but will not be sufficient to repay the amounts outstanding under our credit facility on June 28, 2002, as discussed below. No assurance can be given, however, that this will be the case. As a holding company with no operations or assets other than our ownership of Elgar's capital stock, we must rely on dividends and other payments from Elgar to generate the funds necessary to meet our obligations, including the payment of principal of and interest on the Senior Notes.

        We have been notified by Bankers Trust, the lender under our credit facility, of its desire to have the full amount of the outstanding loans under the credit facility, plus accrued but unpaid interest, repaid on June 28, 2002. At March 28, 2002, the outstanding principal amount of the loans under the credit facility was $14,597,615. In order for us to repay the facility and to meet other future debt service and working capital requirements, we will need to obtain other sources of funding. Management is currently pursuing alternative financing sources, and has recently retained advisors to help the Company in this endeavor. There can be no assurance that additional financing will be available on terms satisfactory to us. If we are unsuccessful in obtaining this additional financing, substantial doubt exists as to our ability to continue as a going concern.

Sources of Capital

        We are party to a credit agreement with Bankers Trust, as agent and sole lender (the "Credit Agreement"), which we entered into in connection with our February 1998 recapitalization. Elgar is the borrower under the Credit Agreement and EHI is the guarantor. As amended, the Credit Agreement consists of (1) a $6,700,000 revolving credit facility (the "Revolving Facility"), of which $900,000 was available to be drawn on March 28, 2002, and (2) a $15,000,000 term facility (the "Term Facility," and collectively with the Revolving Facility, the "Credit Facility"). We used the proceeds from the Term Facility to finance a portion of the purchase price for Power Ten in May 1998. At December 29, 2001, the outstanding balance of the Revolving Facility was $5,015,000, including $15,000 of capitalized interest, and the outstanding balance of the Term Facility was $8,783,000, including $33,000 of capitalized interest. At February 1, 2002, after making an additional draw on the Revolving Facility, the outstanding balance on the Revolving Facility was $5,815,000, including $15,000 of capitalized interest.

        Indebtedness under the Credit Facility bears interest at a floating rate equal to, at our option, the Eurodollar Rate plus a margin of 2.75%, or the Base Rate plus a margin of 1.75%. Pursuant to an earlier amendment to the Credit Agreement, Elgar is to pay Bankers Trust an additional 50 basis points of interest on loans outstanding from and after March 27, 2001, with such payment of additional interest to be made at maturity or upon earlier repayment of the loans. The effective interest rate on the Term Facility was approximately 5.94% at December 29, 2001. We entered into an interest rate

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swap agreement in June 1998 that covered $7.5 million of our term loan. This swap agreement terminated in June 2001. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

        Elgar's obligations under the Credit Facility are:

•

secured by a first priority security interest in substantially all of the assets of EHI and Elgar (including, without limitation, accounts receivable, inventory, machinery, equipment, contracts and contract rights, trademarks, copyrights, patents, license agreements and general intangibles);



•

guaranteed by EHI on a senior basis; and



•

secured by a pledge of all of the outstanding capital stock of Elgar.

        The Credit Facility contains covenants restricting our ability to, among other things, incur additional indebtedness, create liens or other encumbrances, pay dividends or make other restricted payments, make investments, loans and guarantees or sell or otherwise dispose of a substantial portion of assets to, or merge or consolidate with, another entity. The Credit Facility also contains a number of financial covenants that require us to meet certain financial ratios and tests. If we were to be in default under these covenants and Bankers Trust were to demand the final maturity of the outstanding bank debt, and we did not timely pay in full the amount so demanded under the Credit Facility, that would constitute an event of default under the indenture governing the $90 million of our senior notes that are outstanding (the "Senior Notes").

        The most recent amendment and waiver to the Credit Facility was the Ninth Amendment, which we entered into with Bankers Trust on January 31, 2002. The Ninth Amendment calls for the full amount of the loans outstanding under the Credit Facility, plus accrued interest, to be repaid on June 28, 2002, or sooner if there is an event of default declared by Bankers Trust. At March 28, 2002, the outstanding principal amount of the loans under the Credit Facility was $14,597,615. The Ninth Amendment also requires us to pay Bankers Trust an amendment fee of up to $300,000, payable in installments. In the Ninth Amendment, Bankers Trust waived compliance with (i) the maximum leverage ratio through January 31, 2002, and then deleted that covenant from the Credit Agreement, (ii) the fixed charge coverage ratio through December 29, 2001, and then deleted that covenant from the Credit Agreement and (iii) the minimum consolidated EDITDA covenant through December 29, 2001, and then reset the measurement periods for consolidated EBITDA to begin on December 30, 2001 and end at the end of each of February, March, April and May 2002. In addition, we agreed to limit capital expenditures in the period from December 30, 2001 through June 28, 2002 to $500,000. Finally, under the Ninth Amendment, Bankers Trust increased the Revolving Facility from $5,000,000 to $6,700,000, but required interest to be paid monthly, rather than quarterly, as was the case in prior periods.

        A substantial portion of our interest expense is attributable to the $90 million of 9.875% Senior Notes that are due in 2008. Interest is payable semi-annually on the Senior Notes on each February 1st and August 1st.

Capital Expenditures

        Our capital expenditures were $676,000 in the year ended January 1, 2000, $1,254,000 in Fiscal 2000 and $1,093,000 in Fiscal 2001. Our expenditures during Fiscal 2001 were primarily for new surface mount manufacturing capability and the consolidation of all manufacturing into one building in connection with the Power Ten consolidation. We have budgeted $500,000 for capital expenditures for fiscal 2002, to be used principally for manufacturing test stations.

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Critical Accounting Policies

Revenue Recognition

        For products, we recognize revenue upon shipment of goods and the passage of title to the customer. For services, we recognize revenue as the related services are performed. Our revenue recognition policies are in accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements".

Intangibles and Other Intangible Assets

        Intangible assets represent (1) the excess of purchase price over net book value of assets acquired in connection with acquisitions, (2) deferred financing costs incurred in connection with our February 1998 recapitalization and May 1998 acquisition of Power Ten and (3) agreements not to compete relating to the Power Ten acquisition. We are amortizing the components of intangible assets on a straight-line basis over their estimated useful lives, ranging from five to 15 years. The debt issuance costs we incurred in connection with issuing the Senior Notes and entering into the Credit Facility are subject to this amortization policy. The original amount of debt issuance costs being amortized was approximately $6.5 million, the accumulated amortization was approximately $2.8 million, and the amount of amortization that was booked in Fiscal 2001 was approximately $725,000.

        We periodically re-evaluate the original assumptions and rationale utilized in the establishment of the carrying value and estimated useful lives of these assets. The criteria we use for these evaluations include management's estimate of the assets' continuing ability to generate income from operations and positive cash flows in future periods as well as the strategic significance of the intangible assets to our business activity.

Doubtful Accounts

        We maintain allowances for doubtful accounts based on our estimate of losses that will result from the inability of our customers to pay us and for the refusal of customers to pay us because of disputes regarding our products and services. If the financial condition of a customer were to deteriorate, resulting in their inability to make payments to us, or if a customer were dissatisfied with our products or services resulting in their refusal to make payments to us, additional allowances may be required. Significant increases in required reserves may occur in the future if there is a continued decline in the general economic environment that negatively affects the financial condition of our customers or an increase in the number of customers that are dissatisfied with our products or services.

Inventory Reserves

        We periodically re-evaluate all inventory for potential excess and obsolete material. We reserve excess material based on a percentage of the inventory that is deemed to be in excess of one year's forecast demand, while we reserve obsolete inventory at 100% of carrying value.

Warranty Reserves

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

Inflation and General Economic Conditions; Backlog

        Although we cannot accurately anticipate the effect of inflation on our operations, we do not believe that inflation has had, or is likely in the foreseeable future to have, a material impact on our

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results of operations. We do not have a significant number of fixed-price contracts where we bear the risk of cost increases. As of December 29, 2001, we had no backlog for which shipments under those contracts are scheduled after December 31, 2002.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We have had only limited involvement in derivative financial instruments in the past. We do not hold or issue derivative financial instruments for trading purposes. At December 29, 2001, $13,798,000 of outstanding borrowings under the Credit Facility, including letters of credit, were at variable interest rates. We are subject to market risk resulting from interest rate fluctuations with respect to our variable-rate borrowings. We had previously entered into an interest rate swap arrangement, which matured in June 2001, and we may consider entering into such arrangements in the future in order to alter interest rate exposures. In general, interest rate swaps allow a company to raise long-term borrowings at floating rates and effectively swap them into fixed rates that are lower than those available if fixed-rate borrowings were made directly. Under interest rate swaps, a company agrees with another party to exchange, at specified intervals, the difference between fixed-rate and floating-rate amounts calculated by reference to an agreed notional principal amount. At December 29, 2001, none of our debt was covered by interest-rate swap arrangements.

        The tables below provide information as of December 29, 2001 about our financial instruments that are sensitive to changes in interest rates.

(1)

Indebtedness under the Credit Facility bears interest at a floating rate equal to, at Elgar's option, the Eurodollar Rate plus a margin of 2.75%, or the Base Rate plus a margin of 1.75%. Pursuant to the Fourth Amendment to the Credit Agreement, Elgar is to pay the banks an additional 50 basis points of interest on loans outstanding from and after March 27, 2001, with such payment of additional interest to be made at maturity or upon earlier repayment of the loans.

(2)

The Seventh Amendment and Waiver to Credit Agreement capitalized as principal the interest from March 27, 2001 through December 19, 2001, which amounted to $47,615 ("Capitalized PIK Interest"). Additional PIK Interest will continue to accrue from December 20, 2001 through loan maturity (see Footnote 6 in the notes to financial statements for further discussion on PIK Interest).

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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The consolidated financial statements required in response to this Item are listed under Item 14(a) of Part IV of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The following table sets forth the name, age and position of each person who is one of our directors or executive officers as of December 29, 2001. Each director holds office until the next annual meeting of the stockholders or until his successor has been elected and qualified. Officers are elected by the Board of Directors and serve at the discretion of the Board.

        Kenneth R. Kilpatrick, who is President and Chief Executive Officer and a director of EHI, Elgar and Power Ten, has been with Elgar since July 1991 in his current position. Mr. Kilpatrick was appointed President and Chief Executive Officer of EHI in May 1998 and Power Ten in June 1999. Prior to joining Elgar, Mr. Kilpatrick was President of Machine Industries, Inc., an aerospace parts manufacturer, from 1989 to 1991, and with ACDC Electronics, a division of Emerson Electric Co. and a manufacturer of fixed power supplies, from 1964 to 1989. After beginning as an Assistant General Manager of ACDC Electronics in 1964, Mr. Kilpatrick was appointed President of the company in 1972. Mr. Kilpatrick is active in all aspects of Elgar's business.

        Samuel A. Lewis, Vice President—Sales and Marketing of Elgar, with 25 years of experience in the test and measurement equipment industry, including 21 years with Elgar, is responsible for leading

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Elgar's sales efforts. Mr. Lewis, who began his career with Elgar in 1972, re-joined Elgar in January 1988 after spending the prior six years as the North American Sales Manager for Wavetek Corporation, a test and measurement company. At Wavetek, Mr. Lewis spearheaded the creation of a central sales management organization, set up area sales offices, and managed 18 representative organizations with 130 sales people. Prior to beginning work with Wavetek in 1982, Mr. Lewis spent nine years with Elgar in the positions of Customer Service Manager and National Sales Manager.

        Christopher W. Kelford, Vice President—Finance, Chief Financial Officer and Treasurer of EHI, Elgar and Power Ten, has been with Elgar since August 1990. Prior to joining Elgar, Mr. Kelford spent 12 years with TRW LSI Products, Inc., a semiconductor manufacturer, advancing from Finance Manager to Controller during that time. Mr. Kelford had significant experience in modernizing information infrastructures, overseeing foreign operations and managing the due diligence phases of five merger and acquisition transactions.

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

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

        Daniel E. Donati, Vice President—Program Management of Elgar, joined Elgar in September 1991 and is responsible for overseeing Elgar's Space Systems and CASS Program operations. Prior to that time, Mr. Donati spent over 12 years with Aerojet Electronics Systems and Walt Disney where he gained valuable program management, operations and engineering experience.

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

        Gerald D. Price has been the Vice President—Sales and Marketing of Power Ten since November 1998, having joined the Company with 20 years of experience in the sales and marketing of semiconductor equipment. Prior to joining Power Ten, Mr. Price spent the previous ten years in regional sales management positions with Advanced Energy Industries, a manufacturer of power supplies used by semiconductor equipment companies for generating plasma. Prior to that time, Mr. Price spent ten years in product marketing management with Varian Associates and KLA-Tencor, two companies heavily involved in the manufacture of capital equipment used in semiconductor fabrication.

        David C. Hoffman has been the Vice President—Engineering of Power Ten since April 1995. Mr. Hoffman has amassed 25 years of experience in the power electronics industry. Prior to joining Power Ten in 1995, Mr. Hoffman was Director of Engineering at Netframe Systems, Inc., a manufacturer of network file servers. He founded Modular Power Corporation, a producer of state-of-the-art 100kW uninterruptible power supplies. Before founding Modular Power, Mr. Hoffman was manager of power systems at Trilogy Systems and was applications manager at Siliconix, Inc. Mr. Hoffman has been awarded eight patents for his engineering contributions in the power electronics industry.

        Dr. John F. Lehman, who is a director of EHI and Elgar, is a Managing Principal of J.F. Lehman & Company ("Lehman"). Prior to founding Lehman in 1991, Dr. Lehman was an investment banker with PaineWebber, Incorporated from 1988 to 1991, and served as a Managing Director in Corporate Finance. Dr. Lehman served for six years as Secretary of the Navy, was a member of the National Security Council Staff, served as a delegate to the Mutual Balanced Force Reductions negotiations and was the Deputy Director of the Arms Control and Disarmament Agency. Dr. Lehman served as

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Chairman of the Board of Directors of Sperry Marine, Inc., and is Chairman of the Board of Directors of Special Devices, Incorporated, OAO Technology Solutions, Inc. and Racal Instruments, Inc. Dr. Lehman is also a director of Ball Corporation, Burke Industries, Inc. and ISO Inc. and is Chairman of the Princess Grace Foundation, a director of OpSail Foundation and a trustee of LaSalle College High School.

        Donald Glickman, who is Chairman of the Board and a Vice President of both EHI and Elgar and a director of Power Ten, is a Managing Principal of Lehman. From February 1998 to May 1998, Mr. Glickman was President of EHI. Prior to joining Lehman, Mr. Glickman was a principal of the Peter J. Solomon Company, a Managing Director of Shearson Lehman Brothers Merchant Banking Group and Senior Vice President and Regional Head of The First National Bank of Chicago. Mr. Glickman served as an armored cavalry officer in the Seventh U.S. Army. Mr. Glickman is currently a director of the MSC Software Corporation, Special Devices, Incorporated, Burke Industries, Inc., Racal Instruments, Inc. and Monroe Muffler Brake, Inc. He is also a trustee of MassMutual Corporate Investors and MM Participation Investors.

        George Sawyer, who is a director of EHI and Elgar, is a Managing Principal of Lehman, and has been affiliated with Lehman for the past eleven years. From 1993 to 1996, Mr. Sawyer served as the President and Chief Executive Officer of Sperry Marine, Inc. Prior to that time, Mr. Sawyer held a number of prominent positions in private industry and in the U.S. government, including serving as the President of John J. McMullen Associates, the President and Chief Operating Officer of TRE Corporation, Executive Vice President of General Dynamics Corporation, the Vice President of International Operations for Bechtel Corporation and the Assistant Secretary of the Navy for Shipbuilding and Logistics under Dr. Lehman. Mr. Sawyer is a director of Blacklight Power, Inc., Racal Instruments, Inc. and Special Devices, Incorporated and Chairman of the Board of Burke Industries, Inc. He also serves on the Board of Trustees of Webb Institute and the Mariners' Museum.

        Thomas G. Pownall, who became a director of EHI and Elgar in July 1998, is a member of the investment advisory board of Lehman. Mr. Pownall was Chairman of the Board of Directors of Martin Marietta Corporation from 1983 until 1992 and Chief Executive Officer of Martin Marietta from 1982 until his retirement in 1988. Mr. Pownall joined Martin Marietta in 1963 as President of its Aerospace Advanced Planning unit, became President of Aerospace Operations and, in succession, Vice President then President and Chief Operating Officer of Martin Marietta. Mr. Pownall is also a director of the Titan Corporation, Burke Industries, Inc. and Special Devices, Incorporated, Director Emeritus of Sundstrand Corporation, and is Chairman Emeritus of the American-Turkish Council. He is also a director of the U.S. Naval Academy Foundation and the Naval Academy Endowment Trust and a trustee of Salem-Teikyo University.

        Oliver C. Boileau, Jr. became a director of EHI and Elgar in December 1998. He joined Boeing Company in 1953 as a research engineer and progressed through several technical and management positions and was named Vice President in 1968 and then President of Boeing Aerospace in 1973. In 1980, he joined General Dynamics Corporation as President and a member of the Board of Directors. He retired in May 1988. Mr. Boileau joined Northrop Grumman Corporation ("Northrop Grumman") in December 1989 as President and General Manager of the B-2 Division. He also served as President and Chief Operating Officer of the Grumman Corporation, a subsidiary of Northrop Grumman, and as a member of the Board of Directors of Northrop Grumman. Mr. Boileau retired from Northrop Grumman in 1995. He is an Honorary Fellow of the American Institute of Aeronautics and Astronautics, a fellow of the Royal Aeronautical Society, a Senior Member of the Institute of Electrical and Electronic Engineers, a member of the National Academy of Engineering, the Board of Trustees of St. Louis University, and a Trustee of the University of Wyoming Foundation. Mr. Boileau is also a director of Burke Industries, Inc. and Special Devices, Incorporated.

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        Stephen L. Brooks, who is Secretary and a director of EHI and Elgar, is a Vice President of Lehman, having joined Lehman in 1998. Mr. Brooks's responsibilities at Lehman include investment sourcing and execution as well as the financial and capital market aspects of portfolio companies' management. Prior to joining Lehman, Mr. Brooks was an investment banker with Bowles Hollowell Conner & Co. from 1996 to 1998 where he was a founding member of the firm's aerospace and defense mergers and acquisition practice. Mr. Brooks is currently a director of Racal Instruments, Inc.

        Joseph A. Stroud, who is a director of EHI and Elgar, has been a member and limited partner of various affiliates of J.F. Lehman & Company since 1992. Mr. Stroud was the Chief Financial Officer of Sperry Marine, Inc. from 1993 until the company was purchased by Litton Industries, Inc. in 1996. From 1989 to 1993, Mr. Stroud was Chief Financial Officer of the Accudyne and Kilgore Corporations. Mr. Stroud is also a director of Burke Industries, Inc. and Special Devices, Incorporated.

        William Paul is a director of EHI and Elgar. Mr. Paul began his career with United Technologies Corporation ("UTC") at its Sikorsky Aircraft division in 1955. Mr. Paul progressed through a succession of several technical and managerial positions while at Sikorsky, including Vice President of Engineering and Programs and Executive Vice President and Chief Operating Officer, and in 1983 was named President and Chief Executive Officer of Sikorsky Aircraft. In 1994, Mr. Paul was appointed as the Executive Vice President of UTC, Chairman of UTC's international operations and became a member of UTC's management executive committee. Mr. Paul retired from those positions in 1997. Mr. Paul is a Member of the Board of St. Vincent's Medical Center and a presidential appointee to the United States Access Board. Mr. Paul is also a director of Special Devices, Incorporated.

        Bruce D. Gorchow, who is a director of EHI and Elgar, is a member of the investment advisory board of Lehman. Since 1991, Mr. Gorchow has been Executive Vice President of PPM America, Inc. In 1999, he became President of PPM America Capital Partners, LLC. Prior to his position at PPM America, Mr. Gorchow was a Vice President at Equitable Capital Management, Inc. Mr. Gorchow is also a director of Global Imaging Systems, Inc., Leiner Health Products, Inc., Examination Management Services, Inc., Elizabeth Arden Salon and Spa Holdings, Inc., PPM America, Inc. and Burke Industries, Inc., and is an investment advisor for several investment limited partnerships.

        Tig H. Krekel, who is a director of EHI and Elgar, is the former President of Boeing Satellite Systems and former President and Chief Executive Officer of Hughes Space and Communications, the world's largest manufacturer of commercial communications satellites. Mr. Krekel also served as a Senior Vice President and member of the Executive Committee of Hughes Electronics Corporation. Before joining Hughes in 1999, Mr. Krekel was the President and Chief Executive Officer of AlliedSignal's $3.0 billion Aerospace Equipment Systems group, which served the commercial transport, regional airline, general aviation, military and space markets. Prior to joining Allied Signal, Mr. Krekel served in senior executive positions at Decair Corporation, an aviation/aerospace holding company, Poloron Products, a diversified manufacturing concern and Jet America, a domestic and international air carrier. He holds an Airline Transport Pilot's license and has more than 3,000 hours of flight time in jet and rotary-wing aircraft. Mr. Krekel spent five years as a Naval Officer holding various assignments including nuclear engineering duty on the aircraft carrier USS Enterprise, and aide in the office of the Chief of Naval Operations at the Pentagon. Mr. Krekel graduated from the U.S. Naval Academy with a B.S. in Mechanical Engineering and from the U.S. Naval Nuclear Power School as a licensed nuclear engineer. Additionally, he earned a M.B.A. from the Stanford Graduate School of Business with concentration in finance and international strategic management. Mr. Krekel is a National Trustee of the Boys and Girls Club of America and a director of Derco Aerospace, Inc. and Racal Instruments, Inc.

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Certain Rights of Holders of Redeemable Preferred Stock

        Under certain circumstances, the holders of the Series A Redeemable Preferred Stock may have the right to elect a majority of EHI's directors. See "Certain Relationships and Related Transactions—Shareholders Agreement."

Committees of the Board of Directors

        Audit Committee.    The Audit Committee of the Board of Directors is comprised of Messrs. Paul (Chairman), Sawyer, Pownall and Brooks. The Audit Committee makes recommendations concerning the engagement of independent public accountants, reviews with the independent public accountants the scope and results of the audit engagement, approves professional services provided by the independent public accountants, reviews the independence of the independent public accountants, considers the range of audit and non-audit fees and reviews the adequacy of our internal accounting controls.

        Human Resources and Compensation Committee.    The Human Resources and Compensation Committee of the Board of Directors is comprised of Dr. Lehman (Chairman) and Messrs. Glickman, Sawyer, Kilpatrick and Stroud. This committee makes recommendations concerning the salaries and incentive compensation of our employees and consultants.

        The Stock Option Committee.    The Stock Option Committee of the Board of Directors is comprised of Dr. Lehman and Messrs. Glickman and Sawyer. This committee oversees the issuance of options under our stock option plan.

        The Executive Committee.    The Executive Committee of the Board of Directors is comprised of Dr. Lehman and Messrs. Glickman (Chairman), Pownall, Sawyer and Kilpatrick. This committee has the ability to take action on behalf of the full Board of Directors in certain circumstances.

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ITEM 11. EXECUTIVE COMPENSATION

        The following summary compensation table sets forth for 1999, 2000 and 2001 the historical compensation for services to the Company of the Chief Executive Officer and the four most highly compensated executive officers (the "Named Executive Officers") for Fiscal 2001.

SUMMARY COMPENSATION TABLE

(1)

Annual bonuses are indicated for the year in which they were earned. Annual bonuses for any year are generally paid in the following year.

(2)

Perquisites and other personal benefits paid in the periods presented for the Named Executive Officers aggregated less than the lesser of (i) $50,000 and (ii) 10% of the total annual salary and bonus set forth in the columns entitled "Salary" and "Bonus" for each Named Executive Officer and, accordingly, are omitted from the table as permitted by the rules of the Commission.

Options Granted in the Last Fiscal Year

        There were no grants of options to the Named Executive Officers in Fiscal 2001.

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

        The following table summarizes information with respect to the year-end values of all options held by the Named Executive Officers.

(1)

Because there is no public market for our common stock, the information called for by this column is not relevant or calculable.

Employment Agreements

        In connection with the Recapitalization, the Company entered into employment agreements (each, an "Employment Agreement") with several key executives. Generally, each Employment Agreement provides for the executive's continued employment with the Company post-Recapitalization at an annual salary, bonus and with such other employment-related benefits comparable to those received by such executive immediately prior to the Recapitalization. Each Employment Agreement may be terminated by either party upon 30 days' prior written notice. If an executive is terminated without cause (as set forth in the agreements) or for no reason at all, then the executive shall be entitled to payment of his annual base salary for a period of one year following the date of such termination. Each Employment Agreement contains provisions prohibiting the executive, during the period of his employment with the Company and for two years thereafter, from directly or indirectly engaging in competition with the Company. Each Employment Agreement also contains provisions requiring the executive to maintain the confidentiality of certain information related to the Company.

Stock Option Plan

        As of December 29, 2001, there were outstanding options granted under the Elgar Holdings, Inc. 1998 Stock Option Plan (the "Stock Option Plan") to purchase 896,800 shares of common stock. All options have been granted at fair value, or at a premium thereto, as determined by the Board of Directors of the Company on the date of grant. Options vest ratably over three or four years and generally expire on the tenth anniversary of the date of grant. The Stock Option Plan is administered by the Stock Option Committee, which is composed solely of non-employee directors. The Stock Option Committee has the authority to interpret the Stock Option Plan; to determine the terms and conditions of options granted under the Stock Option Plan; to prescribe, amend and rescind the rules and regulations of the Stock Option Plan; and to make all other determinations necessary or advisable for the administration of the Stock Option Plan. Subject to limitations imposed by law, the Stock Option Committee may amend or terminate the Stock Option Plan at any time and in any manner. However, no such amendment or termination may deprive the recipient of an award previously granted under the Stock Option Plan of any rights thereunder without his or her consent. Under the Stock Option Plan, as amended, 1,164,082 shares of common stock are reserved for issuance upon the exercise of options.

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        The Stock Option Plan provides for grants of incentive stock options ("ISOs") to employees (including officers and employee directors) which are intended to qualify under the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and nonstatutory stock options to nonemployee directors of the Company. The Stock Option Committee selects the eligible persons to whom options will be granted and determines the dates, amounts, exercise prices, vesting periods and other relevant terms of the options, provided that the exercise price for each option is determined by the Stock Option Committee at a price per share not less than the fair market value of common stock on the date of grant. Options granted under the Stock Option Plan are generally not transferable during the life of the optionee.

        Options granted under the Stock Option Plan to an employee may include a provision conditioning or accelerating the receipt of benefits upon the occurrence of specified events, such as a change of control of the Company or a dissolution, liquidation, sale of substantially all of the property and assets of the Company or other significant corporate transaction.

        Options granted under the Stock Option Plan vest and become exercisable as determined by the Stock Option Committee in its discretion. Options granted under the Stock Option Plan may be exercised at any time after they vest and before the expiration date determined by the Stock Option Committee, provided that no option may be exercised more than ten years after its grant. In the absence of a specific agreement to the contrary, (i) if an optionee ceases to be employed by the Company or one of its subsidiaries for any reason other than death or disability, the optionee shall be entitled to exercise, for a period of 30 days after the date such optionee ceases to be such an employee, that number of options that were vested on such date and (ii) if an optionee dies or becomes disabled while still an employee of the Company and its subsidiaries, such optionee or his estate may exercise the option to the extent vested at the date of death or disability and prior to the expiration of such option.

        Options may be granted under the Stock Option Plan until the tenth anniversary of its adoption, on which date the Stock Option Plan will terminate. Although any option that was duly granted prior to such date may thereafter be exercised or settled in accordance with its terms, no shares of common stock may be issued pursuant to any award on or after the twentieth anniversary of its adoption.

401(k) Plan

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

Compensation of Directors

        Other than Mr. Kilpatrick, directors receive a $15,000 annual retainer, $1,500 for each board meeting attended ($500 for each committee meeting attended) and reimbursement of reasonable expenses incurred in attending such meetings. In addition, we pay J.F. Lehman & Company certain fees for various management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analyses, negotiating and structuring financing and exploring expansion opportunities. See "Certain Relationships and Related Transactions." Recent amendments to our Credit Facility preclude the Company from paying any management fees to Lehman and its affiliates for services rendered during the period that Bankers Trust is waiving events of default by the Company. However, Lehman continues to provide such services to the Company.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

*

Less than 1%

(1)

The address of JFL-EEC and Messrs. Lehman, Glickman, Sawyer, Brooks and Stroud is 2001 Jefferson Davis Highway, Suite 607, Arlington, Virginia 22202. The address of Mr. Pownall is 1800 K Street, N.W., Suite 724, Washington, D.C. 20006. The address of Mr. Boileau is 202 North Brentwood Boulevard, Apt. 3A, St. Louis, Missouri 63105. The address of Mr. Paul is 21 Springwood Drive, Trumbull, Connecticut 06611. The address of Mr. Gorchow and Jackson National Life Insurance Company ("Jackson National") is 225 West Wacker Drive, Suite 1200, Chicago, Illinois 60606. The address of Mr. Krekel is 2 Via Pergela, Rancho Palos Verdes, California 90275.

(2)

As used in this table, beneficial ownership means the sole or shared power to vote, or to direct the voting of a security, or the sole or shared power to dispose, or direct the disposition of, a security.

(3)

Computed based upon the total number of shares of Common Stock outstanding and the number of shares of Common Stock underlying options or warrants held by that person exercisable within 60 days of March 1, 2002. In accordance with Rule 13(d)-3 of the Exchange Act, any Common Stock that will not be outstanding within 60 days of March 1, 2002 that is subject to options or warrants exercisable within 60 days of March 1, 2002 is deemed to be outstanding for the purpose of computing the percentage of outstanding shares of the Common Stock owned by the person holding such options or warrants, but is not deemed to be outstanding for the purpose of computing the percentage of outstanding shares of the Common Stock owned by any other person.

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(4)

JFL-EEC is a Delaware limited liability company that is an affiliate of Lehman. Through JFL-EEC, J.F. Lehman Equity Investors I, L.P. ("JFLEI"), also an affiliate of Lehman, beneficially owns 61.5% of the Common Stock. Each of Messrs. Lehman, Glickman, Sawyer, Brooks and Stroud, either directly (whether through ownership interest or position) or through one or more intermediaries, may be deemed to control JFL-EEC, Lehman and JFLEI. Lehman and JFLEI may be deemed to control the voting and disposition of the shares of the Common Stock owned by JFL-EEC. Accordingly, for certain purposes, Messrs. Lehman, Glickman, Sawyer, Brooks and Stroud may be deemed to be beneficial owners of the shares of Common Stock owned by JFL-EEC.

(5)

Includes the shares beneficially owned by JFL-EEC, of which Messrs. Lehman, Glickman, Sawyer, Brooks and Stroud are affiliates.

(6)

Mr. Pownall is a member of a limited partner of JFLEI and is on the investment advisory board of Lehman.

(7)

Mr. Boileau is a member of a limited partner of JFLEI.

(8)

Mr. Paul is a member of a limited partner of JFLEI.

(9)

Mr. Gorchow is on the investment advisory board of Lehman and is President of PPM AmericaCapital Partners, the agent for Jackson National.

(10)

Mr. Krekel is a member of a limited partner of JFLEI.

(11)

Includes   options exercisable within 60 days of March 1, 2002 for the following persons and following numbers of shares: (i) 160,000 shares for Mr. Kilpatrick; (ii) 78,000 shares for Mr. Lewis; (iii) 37,000 shares for Mr. Price; (iv) 76,000 shares for Mr. Precourt; (v) 30,000 shares for Mr. Hoffman; and (vi) 174,750 shares for all others as a group.

(12)

All   shares are obtainable upon the exercise of warrants, which are immediately exercisable. Some of the warrants are held by affiliates of Jackson National, which is a non-controlling member of JFL-EEC.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Management Agreement

        Pursuant to the terms of a Management Agreement entered into among Lehman, EHI and Elgar upon consummation of the Recapitalization (the "Management Agreement"), (1) we paid Lehman a transaction fee in the amount of $1,000,000 in connection with the Recapitalization and (2) we agreed to pay Lehman an annual management fee of $500,000 that commenced accruing on February 3, 1998 and is payable in advance on a semi-annual basis thereafter. As consideration for services rendered in connection with the Power Ten acquisition, we paid Lehman an acquisition fee of $425,000 pursuant to the Management Agreement. In September 1998, we amended the Management Agreement with Lehman and concurrently entered into a Management Services Agreement with Lehman, the combined effect of which was to further delineate the management services to be provided by Lehman and to reduce the term of the Management Agreement from ten years to five years. Recent amendments to our Credit Facility preclude the Company from paying any management fees to Lehman and its affiliates for services rendered during the period that Bankers Trust is waiving events of default by the Company. However, Lehman continues to provide such services to the Company.

Shareholders Agreement

        In connection with the Recapitalization, the Company and JFL-EEC, the Continuing Shareholders and, in their capacity as Warrantholders, Jackson National, Indosuez Electronics Partners ("Indosuez") and Old Hickory Fund I, L.L.C. ("Old Hickory") (collectively, the "Shareholders") entered into a Shareholders Agreement (the "Shareholders Agreement"), the principal terms of which are summarized below:

        Certain Voting Rights.    Pursuant to the Shareholders Agreement, so long as Jackson National holds in the aggregate warrants and shares obtained upon exercise of the warrants representing at least seventy-five percent (75%) of the warrants initially issued to it, Jackson National shall have the right to designate one Director. So long as the common stock held by the Non-Management Continuing Shareholders constitutes in the aggregate at least five percent (5%) of the issued and outstanding common stock, then the Non-Management Continuing Shareholders shall have the right to designate one Director. Subject to the rights of the holders of the Redeemable Preferred Stock to elect Directors upon the occurrence of certain events pursuant to the Certificate of Designations governing the Redeemable Preferred Stock, JFL-EEC is entitled to designate all Directors of the Company not designated by Jackson National or the Non-Management Continuing Shareholders.

        Restrictions on Transfer.    The shares of the common stock held by each of the parties to the Shareholders Agreement, and certain of their transferees, are subject to restrictions on transfer. Shares of common stock may be transferred only to certain related transferees, including, (i) in the case of individual Shareholders, family members or their legal representatives or guardians, heirs and legatees and trusts, partnerships and corporations the sole beneficiaries, partners or shareholders, as the case may be, of which are family members, (ii) in the case of partnership or limited liability company Shareholders, the partners or members of such partnership or limited liability company, as the case may be, (iii) in the case of corporate Shareholders, affiliates of such corporation and (iv) transferees of shares sold in transactions complying with the applicable provisions of the Right of First Offer or the Tag-Along or Drag-Along Rights (as each term is defined below).

        Rights of First Offer.    If any Shareholder desires to transfer any shares of the common stock or warrants (other than pursuant to certain permitted transfers), all other Shareholders have a right of first offer (the "Right of First Offer") to purchase the shares or warrants (the "Subject Shares") upon such terms and subject to such conditions as are set forth in a notice (a "First Offer Notice") sent by the selling Shareholder to such other Shareholders. If the Shareholders elect to exercise their Rights of

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First Offer with respect to less than all of the Subject Shares, EHI has a right to purchase all of the Subject Shares that the Shareholders have not elected to purchase. If the Shareholders receiving the First Offer Notice and EHI wish to exercise their respective rights of first offer with respect to less than all of the Subject Shares, the selling Shareholder may solicit offers to purchase all (but not less than all) of the Subject Shares upon such terms and subject to such conditions as are, in the aggregate, no less favorable to the selling Shareholder than those set forth in the First Offer Notice.

        Subscription Offer With Respect to Primary Issuances.    The Shareholders Agreement provides that EHI is not permitted to issue equity securities, or securities convertible into equity securities, to any person unless EHI has offered to issue to each of the other Shareholders, on a pro rata basis, an opportunity to purchase such securities on the same terms, including price, and subject to the same conditions as those applicable to such person.

        Tag-Along Rights.    The Shareholders Agreement provides that, if the Shareholders and EHI fail to exercise their respective rights of first refusal with respect to all of the Subject Shares, the Shareholders have the right to "tag along" (the "Tag-Along Right") upon the sale of the common stock by certain Shareholders pursuant to a third-party offer.

        Drag-Along Rights.    The Shareholders Agreement provides that, subject to certain conditions, if one or more Shareholders holding a majority of the common stock (the "Majority Shareholders") propose to sell all of the common stock owned by the Majority Shareholders, the Majority Shareholders have the right (the "Drag-Along Right") to compel the other Shareholders to sell all of the shares of common stock held by such other Shareholders upon the same terms and subject to the same conditions as the terms and conditions applicable to the sale by the Majority Shareholders.

        Registered Offerings.    The shares of common stock may be transferred in a bona fide public offering for cash pursuant to an effective registration statement (a "Registered Offering") without compliance with the provisions of the Shareholders Agreement related to the Right of First Offer or the Tag-Along or Drag-Along Rights.

        Legends.    The shares of common stock subject to the Shareholders Agreement bear a legend related to the Right of First Offer and the Tag-Along and Drag-Along Rights, which legend will be removed when the shares of common stock are, pursuant to the terms of the Shareholders Agreement, no longer subject to the restrictions on transfer imposed by the Shareholders Agreement.

        Registration Rights.    Pursuant to the terms of the Shareholders Registration Rights Agreement, dated as of February 3, 1998, among the Company and the Shareholders, JFL-EEC and certain other shareholders are entitled to one "demand" and unlimited piggyback registration rights, subject to additional customary rights and limitations.

        Term.    The term of the Shareholders Agreement is 10 years from the Closing Date, subject to earlier termination under certain conditions and upon certain events.

Registration Rights for Warrantholders

        The holders of the shares issuable upon exercise of the warrants are entitled to one "demand" registration right at any time on or after the later of (i) February 3, 2003 and (ii) the 181st day after completion of EHI's initial public offering of its common stock, subject to additional customary rights and limitations. In addition, holders of the shares issuable upon exercise of the warrants are entitled to unlimited "piggyback" registration rights after the date of EHI's initial public offering of its common stock, subject to customary rights and limitations.

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Indemnification of Officers and Directors

        EHI's Certificate of Incorporation contains provisions eliminating the personal liability of directors for monetary damages for breaches of their duty of care, except in certain prescribed circumstances. EHI's Bylaws also provide that directors and officers will be indemnified to the fullest extent authorized by Delaware law, as it now stands or may in the future be amended, against all expenses and liabilities reasonably incurred in connection with service for or on behalf of the Company. EHI's Bylaws provide that the rights of directors and officers to indemnification is not exclusive of any other right now possessed or hereinafter acquired under any statute, agreement or otherwise.

Racal Instruments

        Racal Instruments, a significant customer of ours, was acquired on November 2, 2001 by a group of investors that includes affiliates of our largest shareholder. In addition, certain members of our board of directors are also members of Racal's board of directors. As a result, Racal is considered a related party. Sales by us to Racal were approximately $803,000, $4,977,000 and $1,984,000 during Fiscal 1999, Fiscal 2000 and Fiscal 2001, respectively.

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PART IV

ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1)    Consolidated Financial Statements:

        The following consolidated financial statements of the Company are included in response to Item 8 of this report.

        Schedules other than those listed above have been omitted since they are either not required, not applicable or the information is otherwise included.

(b)

Reports on Form 8-K.

        None.

(c)

Exhibits

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34

35

(1)

Incorporated by reference to the registrant's Registration Statement on Form S-4, File No. 333-557797, as filed with the Securities and Exchange Commission on June 2, 1998, as amended on July 14, 1998, July 23, 1998 and July 29, 1998.

(2)

Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended April 3, 1999, as filed with the Securities and Exchange Commission on May 18, 1999.

(3)

Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended June 27, 1998, as filed with the Securities and Exchange Commission on September 11, 1998.

(4)

Incorporated by reference to the Transition Report on Form 10-K for the nine-month transitional period ended January 2, 1999, as filed with the Securities and Exchange Commission on June 22, 1999.

(5)

Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended January 1, 2000, as filed with the Securities and Exchange Commission on March 29, 2000.

(6)

Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended December 30, 2000, as filed with the Securities and Exchange Commission on March 29, 2001.

(7)

Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, as filed with the Securities and Exchange Commission on August 14, 2001.

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(8)

Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended September 29, 2001, as filed with the Securities and Exchange Commission on November 19, 2001.

        No annual report or proxy material covering our last fiscal year has been or will be sent to security holders of the Company.

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Elgar Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of ELGAR HOLDINGS, INC. (a Delaware corporation) and subsidiaries (the "Company") as of December 30, 2000 and December 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 the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

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

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered losses from operations and expects that losses may continue in 2002. In addition, certain of the Company's debt is due on June 28, 2002, and the existing cash balances at December 29, 2001 plus management's forecast operating cash flows for Fiscal 2002 are not expected to be sufficient to pay off the debt when it comes due. Therefore, the Company will be required to restructure or obtain additional sources of funding to replace the existing debt and provide sufficient operating cash flow for the remainder of Fiscal 2002. There can be no assurances that the Company will be successful in restructuring or securing such additional financing. If it should be unsuccessful, substantial doubt exists regarding the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II-Valuation and Qualifying Accounts is presented for purposes of complying with the Securities and Exchange Commission's rules, and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

/s/  ARTHUR ANDERSEN LLP      

ARTHUR ANDERSEN LLP
San Diego, California
February 22, 2002

F-1

ELGAR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

F-2

ELGAR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

F-3

ELGAR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

(dollars in thousands, except share amounts)