-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LP/ddnnKtng9+rxfUr8suAyQ+vpNPE7tY1PWGhhciONkVzYJMt8j3R9bsvdxsGVg 6DU2ooIcNeJxVfgb+zDm/g== 0000892569-98-000823.txt : 19980331 0000892569-98-000823.hdr.sgml : 19980331 ACCESSION NUMBER: 0000892569-98-000823 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 25 FILED AS OF DATE: 19980327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHASE METRICS INC CENTRAL INDEX KEY: 0001015717 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-48817 FILM NUMBER: 98577159 BUSINESS ADDRESS: STREET 1: O STREET 2: 10260 SORRENTO VALLEY ROAD CITY: SA DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6195521115 MAIL ADDRESS: STREET 2: 10260 SORRENTO VALLEY ROAD CITY: SAN DIEGO STATE: CA ZIP: 92121 S-4 1 FORM S-4 AS FILED ON MARCH 27, 1998 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 1998 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PHASE METRICS, INC. AIR BEARINGS, INCORPORATED APPLIED ROBOTIC TECHNOLOGIES, INC. HELIOS, INCORPORATED SANTA BARBARA METRIC, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 3572 33-0328048 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
------------------------ 10260 SORRENTO VALLEY ROAD SAN DIEGO, CALIFORNIA 92121 (619) 646-4800 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ JOHN F. SCHAEFER CHAIRMAN AND CHIEF EXECUTIVE OFFICER PHASE METRICS, INC. 10260 SORRENTO VALLEY ROAD SAN DIEGO, CALIFORNIA 92121 (619) 646-4800 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPY TO: GREG T. WILLIAMS, ESQ. BROBECK, PHLEGER & HARRISON LLP 4675 MACARTHUR COURT, SUITE 1000 NEWPORT BEACH, CALIFORNIA 92660 (714) 752-7535 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. ------------------------ If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE ================================================================================================================================ PROPOSED PROPOSED TITLE OF EACH CLASS AMOUNT MAXIMUM MAXIMUM AMOUNT OF SECURITIES TO BE OFFERING AGGREGATE OF REGISTRATION TO BE REGISTERED REGISTERED PRICE PER NOTE(2) OFFERING PRICE(2) FEE(2) - -------------------------------------------------------------------------------------------------------------------------------- 10 3/4% New Senior Notes due 2005............... $110,000,000(1) 100% $110,000,000 $32,450 - -------------------------------------------------------------------------------------------------------------------------------- New Note Guarantees for the 10 3/4% New Senior Notes due 2005(3)............................. $0 0% $0 $0 ================================================================================================================================
(1) Includes New Note Guarantees of the New Senior Notes due 2005 by Applied Robotic Technologies, Inc., Helios Incorporated, Santa Barbara Metric, Inc. and Air Bearings Incorporated, each a wholly-owned subsidiary of the Registrant. (2) Pursuant to Rule 457(f)(2) of the Securities Act of 1933, as amended, the registration fee has been estimated based on the book value of the securities to be received by Registrant in exchange for the securities to be issued hereunder in the Exchange Offer described herein. (3) Pursuant to Rule 457(n) of the Securities Act of 1933, as amended, no registration fee is required with respect to the New Note Guarantees. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 EXPLANATORY NOTE This Registration Statement covers the registration of an aggregate principal amount of $110,000,000 of new 10 3/4% Senior Notes due 2005 (the "New Notes") of Phase Metrics, Inc. (the "Company") and the guarantees related thereto that may be exchanged (the "Exchange Offer") for equal principal amounts of the Company's outstanding 10 3/4% Senior Notes due 2005 (the "Notes") and the guarantees related thereto. This Registration Statement also covers the registration of the New Notes and the guarantees related thereto for resale by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") in market-making transactions. The complete Prospectus relating to the Exchange Offer (the "Exchange Offer Prospectus") follows immediately after this Explanatory Note. Following the Exchange Offer Prospectus beginning on page B-1 are certain pages and sections of a prospectus relating solely to any market-making transactions by DLJ (along with the relevant pages of the Exchange Offer Prospectus, the "Market-Making Prospectus"), including an alternate front cover page, an alternate section entitled "Risk Factors -- Absence of Active Trading Market" to be used in lieu of the section entitled "Risk Factors -- Absence of Trading Market; Restrictions on Transfers," an alternate section entitled "Use of Proceeds" and an alternate section entitled "Plan of Distribution." In addition, the Market-Making Prospectus will not include the following sections (or the information set forth under the captions for such sections) of the Exchange Offer Prospectus: "Prospectus Summary -- The Note Offering" and "-- The Exchange Offer," "Risk Factors -- Compliance with Exchange Offer Procedures; Restrictions on Resales," "The Exchange Offer" and "Certain United States Federal Tax Considerations." All other sections of the Exchange Offer Prospectus will be included in the Market-Making Prospectus. 3 PROSPECTUS OFFER TO EXCHANGE ALL OUTSTANDING 10 3/4% SENIOR NOTES DUE 2005 ($110,000,000 PRINCIPAL AMOUNT OUTSTANDING) FOR NEW 10 3/4% SENIOR NOTES DUE 2005 ($110,000,000 PRINCIPAL AMOUNT) OF [PHASE METRICS LOGO] ------------------------ The Exchange Offer Will Expire At 12:00 Midnight, New York City Time, On , 1998, Unless Extended ------------------------ Phase Metrics, Inc., a Delaware corporation (the "Company"), hereby offers (the "Exchange Offer"), upon the terms and subject to the conditions set forth in this Prospectus and the accompanying Letter of Transmittal (the "Letter of Transmittal"), to exchange up to an aggregate principal amount of $110,000,000 of its new 10 3/4% Senior Notes due 2005 (the "New Notes") for an equal principal amount of its outstanding 10 3/4% Senior Notes due 2005 (the "Notes"), in integral multiples of $1,000. The New Notes will be senior unsecured obligations of the Company and are substantially identical (including principal amount, interest rate, maturity and redemption rights) to the Notes for which they may be exchanged pursuant to this Exchange Offer, except that (i) the offering and sale of the New Notes will have been registered under the Securities Act of 1933, as amended (the "Securities Act") and (ii) holders of New Notes will not be entitled to certain rights under the Registration Rights Agreement of the Company and Applied Robotic Technologies, Inc., Helios, Incorporated, Air Bearings, Incorporated and Santa Barbara Metric, Inc., all of which are California corporations and wholly-owned subsidiaries of the Company (together with any future other subsidiary of the Company that executes a New Note Guarantee, the "Subsidiary Guarantors") dated as of January 30, 1998 (the "Registration Rights Agreement"). The New Notes will be fully and unconditionally guaranteed on a senior unsecured basis (the "New Note Guarantees") by, and will be joint and several obligations of the Subsidiary Guarantors. The Notes have been, and the New Notes will be, issued under an Indenture dated as of January 30, 1998 (the "Indenture"), among the Company, the Subsidiary Guarantors and State Street Bank and Trust Company, as trustee (the "Trustee"). See "Description of New Notes." There will be no proceeds to the Company from this Exchange Offer; however, pursuant to the Registration Rights Agreement, the Company will bear certain offering expenses. ------------------------ SEE "RISK FACTORS" COMMENCING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER NOTES IN THE EXCHANGE OFFER. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is , 1998. 4 The Company will accept for exchange any and all Notes which are validly tendered on or prior to 12:00 midnight New York City time, on , 1998, unless the Exchange Offer is extended (the "Expiration Date"). Tenders of Notes may be withdrawn at any time prior to 12:00 midnight, New York City time, on the Expiration Date; otherwise such tenders are irrevocable. State Street Bank and Trust Company will act as exchange agent with respect to the Notes (in such capacity, the "Exchange Agent") in connection with the Exchange Offer. The Exchange Offer is not conditioned upon any minimum principal amount of Notes being tendered for exchange, but is otherwise subject to certain customary conditions. Notes may be tendered only in denominations of $1,000 and any integral multiple thereof. See "The Exchange Offer." The Notes were initially sold by the Company on January 30, 1998 (the "Note Closing") in transactions not registered under the Securities Act of 1933, as amended (the "Securities Act") in reliance upon the exemption provided in Section 4(2) thereof (the "Note Offering"). The Notes were subsequently resold to qualified institutional buyers in reliance upon Rule 144A under the Securities Act and to persons outside the United States in reliance on Regulation S under the Securities Act. Accordingly, the Notes may not be reoffered, resold or otherwise transferred in the United States unless registered under the Securities Act or unless an applicable exemption from the registration requirements of the Securities Act is available. The New Notes are being offered hereunder in order to satisfy certain obligations of the Company and the Subsidiary Guarantors under the Registration Rights Agreement. See "The Exchange Offer." The New Notes will bear interest from January 30, 1998, the date of issuance of the Notes that may be tendered in exchange for the New Notes, at a rate equal to 10 3/4% per annum. Interest on the New Notes will be payable semiannually on February 1 and August 1 of each year, commencing August 1, 1998. The New Notes are redeemable at the option of the Company, in whole or in part, at any time on or after February 1, 2002, at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages (as defined herein), if any, thereon to the date of redemption. See "Summary -- Summary of Terms of New Notes." Prior to February 1, 2001, up to 33% of the initially outstanding aggregate principal amount of New Notes (and any Notes which remain outstanding after the Exchange Offer) will be redeemable at the option of the Company from the net proceeds of a public sale of the Company's Common Stock ("Common Stock") at a price of 110.75% of the principal amount of the New Notes (and any Notes which remain outstanding after the Exchange Offer), together with accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption; provided, that at least 67% of the initially outstanding aggregate principal amount of New Notes (and any Notes which remain outstanding after the Exchange Offer) remains outstanding immediately after such redemption. Upon the occurrence of a Change of Control (as defined herein), each Holder (as defined herein) of New Notes may require the Company to repurchase all or a portion of such Holder's New Notes at 101% of the aggregate principal amount of the New Notes, together with accrued and unpaid interest and Liquidated Damages, if any, to the date of repurchase. There can be no assurance that sufficient funds will be available at the time of any Change of Control to make any required repurchase of New Notes. See "Risk Factors -- Payment Upon a Change of Control" and "Description of New Notes -- Repurchase at the Option of Holders -- Change of Control." The New Notes will be senior unsecured obligations of the Company and will rank pari passu in right of payment to all existing and future senior indebtedness of the Company and senior in right of payment to all existing and future subordinated indebtedness of the Company. The New Notes will be effectively subordinated, however, to all secured obligations of the Company, including any borrowings under the New Credit Facility (as defined herein) to the extent of the assets securing such obligations. The New Notes will be fully and unconditionally guaranteed under the New Note Guarantees on a joint and several basis by the Subsidiary Guarantors. The New Note Guarantees will be senior unsecured obligations of the Subsidiary Guarantors and will rank pari passu in right of payment to all existing and future senior indebtedness of the Subsidiary Guarantors. The New Note Guarantees will be effectively subordinated, however, to all secured obligations of the Subsidiary Guarantors, including the guarantees of the Subsidiary Guarantors in favor of the lenders under the New Credit Facility, to the extent of the assets securing such obligations. As of December 31, 1997, the New Notes and the New Note Guarantees would have been effectively subordinated to approximately ii 5 $3.2 million of secured obligations of the Company and the Subsidiary Guarantors on an as adjusted basis giving effect to the Note Offering and the application of the net proceeds therefrom. The Notes have been, and the New Notes are expected to be, approved for trading in The Private Offerings, Resale and Trading through Automated Linkages ("PORTAL") Market of the National Association of Securities Dealers, Inc. Based on interpretations of the staff of the SEC set forth in no-action letters issued to third parties, the Company believes that any New Notes issued pursuant to the Exchange Offer in exchange for Notes may be offered for resale, resold and otherwise transferred by any holder thereof (other than any holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act; provided, that such New Notes are acquired in the ordinary course of such holder's business and that such holder does not intend to participate in a distribution of such New Notes. Each broker-dealer ("Participating Broker-Dealer") that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with the initial resale of such New Notes to third parties. The Letter of Transmittal delivered with this Prospectus states that by so acknowledging and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of New Notes received in exchange for Notes where such new Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that for a period of one year after the consummation of the Exchange Offer, it will make this Prospectus available to any Participating Broker-Dealer for use in connection with any such resale. See "Plan of Distribution." Any broker-dealer who is an affiliate of the Company may not rely on the SEC staff's no-action letters referenced above and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the New Notes. Any Holder who tenders in the Exchange Offer with the intention to participate, or for purpose of participating, in a distribution of the New Notes also may not rely on the position of the staff of the SEC enunciated in the no-action letters referenced above and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the New Notes. Failure to comply with such requirements in such instance may result in such Holder incurring liability under the Securities Act for which the Holder is not indemnified by the Company. The Company does not intend to list the New Notes on any securities exchange, or to seek admission thereof to trading in the National Association of Securities Dealers Automated Quotation System. Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") has advised the Company that it intends to make a market in the New Notes; however, DLJ is not obligated to do so and any market-making may be discontinued at any time. As a result, the Company cannot determine whether an active trading market will develop for the New Notes. To the extent that a market for the New Notes develops, their market value will depend on market conditions (such as yields on alternative investments), general economic conditions, the Company's financial condition and other conditions. Such conditions might cause the New Notes, to the extent that they are actively traded, to trade at a significant discount from their face value. See "Risk Factors -- Absence of Trading Market; Restrictions on Transfer." ANY NOTES NOT TENDERED AND ACCEPTED IN THE EXCHANGE OFFER WILL REMAIN OUTSTANDING. TO THE EXTENT ANY NOTES ARE TENDERED AND ACCEPTED IN THE EXCHANGE OFFER, A HOLDER'S ABILITY TO SELL UNTENDERED NOTES COULD BE ADVERSELY AFFECTED. FOLLOWING CONSUMMATION OF THE EXCHANGE OFFER, THE HOLDERS OF NOTES WILL CONTINUE TO BE SUBJECT TO THE EXISTING RESTRICTIONS UPON TRANSFER THEREOF AND THE COMPANY WILL HAVE FULFILLED ITS PRINCIPAL OBLIGATIONS UNDER THE REGISTRATION RIGHTS AGREEMENT. HOLDERS iii 6 OF NOTES WHO DO NOT TENDER THEIR NOTES GENERALLY WILL NOT HAVE ANY FURTHER REGISTRATION RIGHTS UNDER THE REGISTRATION RIGHTS AGREEMENT OR OTHERWISE. SEE "THE EXCHANGE OFFER -- CONSEQUENCES OF FAILURE TO EXCHANGE." This Prospectus, together with the Letter of Transmittal, is being sent to all registered holders of Notes as of , 1998. The Company will not receive any proceeds from the Exchange Offer. No underwriter is being used in connection with the Exchange Offer. NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE NEW NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE NEW NOTES TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "SEC" or the "Commission") a Registration Statement on Form S-4 under the Securities Act for the registration of the New Notes offered hereby (the "Registration Statement"). This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain items of which are contained in exhibits and schedules to the Registration Statement as permitted by the rules and regulations of the SEC. For further information with respect to the Company or the New Notes offered hereby, reference is made to the Registration Statement, including the exhibits and schedules thereto, which may be inspected without charge at the public reference facility maintained by the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and copies of which may be obtained from the SEC at prescribed rates. Statements made in this Prospectus concerning the contents of any document referred to herein are not necessarily complete. With respect to each such document filed with the SEC as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM PHASE METRICS, INC., 10260 SORRENTO VALLEY ROAD, SAN DIEGO, CALIFORNIA 92121, (619) 646-4800. The Company is subject to the periodic reporting and other information requirements of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). The Company has agreed that, whether or not it is required to do so by the rules and regulations of the Commission, for so long as any of the New Notes remain outstanding, it will furnish to the holders of the New Notes and to the extent permitted by applicable law or regulation, file with the Commission following the consummation of the Exchange Offer (i) all quarterly and annual financial information required to be contained in a filing with the Commission on Forms 10-Q and 10-K, including for each a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with respect to the annual financial statements only, a report thereon by the Company's independent auditors and (ii) all reports required to be filed with the Commission on Form 8-K. iv 7 In addition, for so long as any of the New Notes remain outstanding, the Company has agreed to make available to any prospective purchaser of the New Notes or beneficial owner of the New Notes, in connection with any sale thereof, the information required by Rule 144A(d)(4) under the Securities Act. Documents and other information filed by the Company with the SEC may also be inspected and copied at the public reference facilities of the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at the web site maintained by the SEC (http://www.sec.gov) and at the regional offices of the SEC located at 7 World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may also be obtained from the Public Reference Section of the SEC, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at its public reference facilities in New York, New York and Chicago, Illinois at prescribed rates. v 8 SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Company's Consolidated Financial Statements and related Notes thereto, appearing elsewhere in this Prospectus. This Prospectus may contain forward-looking statements, including, without limitation, the Company's future product development plans, future demand for the Company's process and production-test equipment and the effect that certain market conditions may have on the Company's future operating results. Forward-looking statements necessarily involve risks and uncertainties. Market conditions and the Company's actual results may differ materially from the market conditions and results discussed in these statements. Factors that might cause such a difference include, without limitation, those discussed in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and those discussed elsewhere in this Prospectus. The market share and competitive position data contained in this Prospectus are based upon industry sources and Company estimates. Although such data is inherently imprecise, based on its understanding of the markets in which the Company competes, management believes that such data is generally indicative of the Company's relative market share and competitive position. Unless the context otherwise requires, all references to the "Company" and "Phase Metrics" refer to Phase Metrics, Inc. and its consolidated subsidiaries. The definition of certain terms may be found in the Glossary beginning on page A-1. THE COMPANY Phase Metrics is the leading supplier of technologically advanced process and production-test equipment for the data storage industry. The Company's systems are used primarily by manufacturers of disk drives, thin-film disks and read/write heads to manage and improve their respective product yields by analyzing product and process quality at critical stages in their production processes. The ability to rapidly achieve and maintain yield improvements is one of the most important determinants of profitability in the highly competitive disk drive and disk drive component industries. The Company was formed in 1989 as a single product supplier to the data storage industry. In the last three years, the Company has significantly expanded its product line through the acquisition of seven specialized suppliers of complementary systems for the disk drive and disk drive component industries. These acquisitions and an aggressive internal research and development program have provided the Company with (i) a significant research and development effort focused exclusively on the process and production-test equipment market, (ii) a broad technological base and product line with applications throughout the disk drive and disk drive component production chains and (iii) a global infrastructure capable of providing world-wide customer service and support. The Company has achieved significant increases in net sales and adjusted EBITDA (as defined in footnotes 2 and 5 in "Summary Selected Consolidated Financial Data") since 1994, while cash used for operating activities has increased. From 1994 through 1997, the Company's net sales grew from $20.1 million to $184.7 million and adjusted EBITDA grew from $2.8 million to $26.2 million. These increases resulted primarily from the growth of the markets for the Company's products, the Company's acquisitions, the Company's successful introduction of new products and management's initiatives to improve productivity. Absent additional significant acquisitions, however, the Company does not expect net sales and adjusted EBITDA to continue to grow at the rates experienced over the last several years. Cash used for operating activities increased from $2.0 million for 1994 to $6.4 million for 1997 due to the net loss in 1997, an increase in income taxes receivable and prepaid expenses and other assets, larger increases year over year in deferred income taxes and inventories, offset by increase in depreciation, amortization and writedowns of intangible assets, interest on convertible subordinated notes, purchased in-process research and development, extraordinary loss net of income taxes and accounts receivable, a decrease in accounts payable and a larger decrease year over year in customer deposits, accrued expenses and other liabilities. Net income of $1.6 million in 1994 decreased to a net loss of $5.5 million in 1997 due to significant increases in sales and related gross profit, offset by increased research and development expenses, selling, general and administrative expenses, amortization and write-downs of intangible assets and interest expense. See "Summary Selected Consolidated Financial Data." 1 9 Demand for data storage process and production-test equipment is driven by the overall demand for disk drives and disk drive components, rapid advances in data storage technology, and yield management challenges and margin pressure facing data storage manufacturers. The ever increasing need for greater data storage capacity is driven predominantly by the development of more storage intensive software, the emergence of computer networks within the enterprise and the overall increase in computer use. As storage capacity demands increase, the demand for high performance disk drives and replacement or removable drives increases. While technological advancements are enabling manufacturers to produce significantly higher capacity disk drives with faster data access speeds and greater transfer rates, they are also presenting significant challenges and increasing the complexity of the manufacturing process. The growing complexity of data storage manufacturing is in turn increasing test and production times per product and creating pressure on manufacturing costs. Accordingly, there is greater demand for process and production-test equipment that is able to keep pace with advancing data storage technologies, while enhancing manufacturing yields. The Company's production-test systems include media certifiers, glide testers, optical scanners and flying height and quasi-static magnetoresistive ("MR") head testers which provide in-line testing, measurement and analysis throughout the manufacturing process, enabling manufacturers to detect defects and make real-time process improvement decisions that can significantly impact product yields, time-to-market, profitability and return on investment. The Company's process systems include servowriters, disk burnishers and disk laser texturizers which perform manufacturing process functions. The Company also provides integrated automation systems for the disk drive, disk and read/write head certification and manufacturing processes. The Company's products are driven by extensive proprietary software and electronic hardware, optical and laser systems, and mechanical componentry. The Company sells its systems throughout the world primarily through its direct sales force. A substantial majority of the Company's sales are made to domestic data storage companies with production facilities in the United States as well as Singapore, Malaysia and other parts of Southeast Asia. The Company believes that over 80% of the purchasing decisions for its products are made by individuals based in the United States. The Company's customers include substantially all of the world's leading data storage manufacturers, including Fujitsu, HMT, IBM, Iomega, Komag, Samsung, Seagate, StorMedia and Trace. FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES, SEE "RISK FACTORS." COMPETITIVE STRENGTHS The Company believes that it possesses key competitive strengths that have enabled it to become the leading supplier of technologically advanced process and production-test equipment for the data storage industry. These competitive strengths include: Broad Product Line and Extensive Technology Base. The Company believes that it is a technological leader in designing, manufacturing and servicing process and production-test systems that perform critical applications throughout the disk drive and disk drive component production processes. These systems contain a significant amount of proprietary software, sophisticated electronics and high precision mechanics. As evidence of its technological leadership, the Company believes it was the first to market with systems incorporating numerous important new technologies, including: (i) in 1993, the first testing system capable of accurately measuring the flying height of a read/write head below one microinch; (ii) in 1995, the first disk (media) certifier with integrated optical defect scanning and also the first certifier with digital glide certification; (iii) in 1996, the first family of MR head testers to address each stage of the manufacturing process for the rapidly growing MR head market and (iv) in 1997, the first disk drive servowriter to incorporate non-contact, optical encoder positioning technology. The Company currently holds 27 patents in the United States, with an additional 72 patent applications pending in the United States and nine pending overseas. Largest World-Wide Installed Base of Systems. Based in part on published industry data, the Company believes it has the largest world-wide installed base of process and production-test systems serving the data storage industry. The Company is able to leverage this installed base by selling these customers additional 2 10 systems as well as upgrades to existing systems to address rapidly changing industry requirements. The Company believes that such upgrades are becoming an increasingly important source of revenue for the Company. Focused Research and Development. In response to rapidly changing technical requirements in the data storage industry and to maintain its technological leadership, the Company is continually engaged in efforts to improve its systems and introduce innovative products and technologies. With approximately 200 engineers focused on research and development, the Company believes that it maintains the largest engineering group in the world focusing on technological solutions for data storage manufacturers. Moreover, in 1996, the Company formed an advanced research department focused exclusively on developing and procuring critical technologies for next-generation systems. In 1997, the Company invested approximately $43.6 million in its research and development efforts and expects to continue to devote significant resources toward maintaining its technological leadership. Extensive Global Infrastructure. In addition to its extensive sales and customer service and support infrastructure in the United States, since the beginning of 1996 the Company has established sales and customer service and support offices in Japan, South Korea, Singapore, Thailand and Taiwan. The Company believes that substantial growth opportunities exist for sales of its systems to domestic and foreign-based customers for use in their manufacturing facilities located in Southeast Asia. Therefore, the Company currently has 40 dedicated customer service and support engineers and technicians in Southeast Asia, which the Company believes is the largest foreign-based group of customer service and support personnel of any domestic supplier of process and production-test equipment to the data storage industry. Experienced Management Team With Significant Ownership. The Company's Chairman and Chief Executive Officer, John F. Schaefer, and its Vice President, Finance and Chief Financial Officer, R. Joseph Saunders, joined the Company in November 1994. Working with Arthur J. Cormier, the founder and previous President of the Company, the Company assembled a group of experienced officers, middle managers and senior technologists. Mr. Cormier is currently serving as a director of and consultant to the Company. This senior management team has grown the Company's sales, both internally and through acquisitions, from approximately $20.1 million in 1994 to approximately $184.7 million in 1997. As of February 28, 1998, the Company's directors and officers and their respective affiliates beneficially own approximately 86.6% of the Company's capital stock. Demonstrated Ability to Integrate Acquisitions. In order to expand its operations and capitalize on the growing demand for process and production-test equipment for the data storage industry, since November 1994, the Company's management team has acquired seven specialized suppliers of process and production-test systems or technologies. The Company believes that it has successfully integrated each of these acquisitions into its operations. GROWTH STRATEGY The Company believes that it is well-positioned to grow future revenue and cash flow. The key elements of the Company's growth strategy are as follows: Maintain Leadership in Core Technologies. The Company intends to remain a technological leader in its markets by continuing to work with customers, academic institutions and independent third parties to identify emerging data storage technology trends early in the development process and contribute to the development of standards related to process and production-test for the data storage industry. Because the Company's systems are integral to its customers' manufacturing processes, the Company believes that it is well-positioned to utilize its research and development resources to partner with its customers in the development of next-generation products. Leverage Installed Base of Systems. The Company intends to leverage its installed base of systems by selling new systems to existing customers and by continuing to develop and aggressively market system upgrade solutions in response to rapidly changing industry requirements. In addition, because data storage manufacturers are required to focus increasingly on their own core competencies, the Company believes that 3 11 there is a significant opportunity to increase its sales by supplying certain process and production-test equipment to data storage manufacturers that currently develop such systems internally. Leverage and Expand Global Infrastructure. Due to its extensive global service and support infrastructure, the Company believes it is well-positioned to increase productivity and profitability. In particular, the Company believes that it will be able to leverage the significant investment it has made in establishing a sales and customer service and support infrastructure in Southeast Asia to capitalize on the increasing activity in the data storage industry in that region. As data storage manufacturers require equipment suppliers to support their increasingly global operations, the Company intends to continue to expand its world-wide service and support network. Pursue Complementary Acquisitions. As with many other industries, data storage manufacturers are increasingly attempting to rationalize their vendor bases. As a result, there has been an increasing trend toward consolidation of data storage equipment suppliers. The Company intends to continue to capitalize on this trend by completing complementary acquisitions of additional product lines, technologies and related businesses. The Company believes that its market leadership position and demonstrated ability to successfully integrate strategic acquisitions will continue to attract additional strategic opportunities. THE REFINANCING In connection with the Note Offering, Phase Metrics refinanced (the "Refinancing") all of its then-existing term loan and revolving credit indebtedness under its then-existing credit facility (the "Former Credit Facility"). The net proceeds from the Note Offering, together with existing cash and $1.6 million in initial borrowings (the "Initial Draw") under its current revolving credit facility (the "New Credit Facility") with Fleet National Bank and Imperial Bank (the "Lenders") which it entered into simultaneously with the Note Closing were used to repay all outstanding indebtedness under the Former Credit Facility as well as the expenses related to the Note Offering and the Refinancing. See "Use of Proceeds." The New Credit Facility provides the Company with up to $25.0 million of revolving credit, subject to certain conditions, which limit could be increased to $40.0 million at the sole discretion of the Lenders. See "Description of Indebtedness -- New Credit Facility." At February 28, 1998, the Company had approximately $17.0 million of borrowing availability under the New Credit Facility. Borrowings under the New Credit Facility are secured by substantially all of the existing and future assets of the Company (other than the real estate owned by the Company in San Diego, California on which its headquarters is located) and are guaranteed on a secured basis by all Subsidiary Guarantors. Accordingly, all borrowings under the New Credit Facility and the secured guarantees of the Subsidiary Guarantors in favor of the Lenders effectively rank senior to the indebtedness evidenced by the New Notes, to the extent of the assets securing such obligations. ------------------------ The Company commenced operations in 1989 and was recapitalized in 1994 in connection with the acquisition of two companies. The Company's principal executive offices are located at 10260 Sorrento Valley Road, San Diego, California 92121, and its telephone number is (619) 646-4800. ------------------------ Phase Metrics is a trademark of the Company. This Prospectus includes other trademarks of the Company and trademarks of other companies. 4 12 THE NOTE OFFERING THE NOTES................................. The Notes were sold by the Company at the Note Closing on January 30, 1998 and were subsequently resold to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to persons in transactions outside the United States in reliance on Regulation S under the Securities Act. REGISTRATION RIGHTS AGREEMENT............. In connection with the Note Offering, the Company entered into the Registration Rights Agreement, which grants holders of the Notes certain exchange and registration rights, which generally terminate upon the consummation of this Exchange Offer. THE EXCHANGE OFFER SECURITIES OFFERED........................ $110.0 million in aggregate principal amount of the Company's new 10 3/4% Senior Notes due 2005. THE EXCHANGE OFFER........................ $1,000 principal amount of New Notes in exchange for each $1,000 principal amount of the Notes issued in the Note Offering. As of the date hereof, $110.0 million aggregate principal amount of Notes are outstanding. EXPIRATION DATE........................... 12:00 midnight, New York City time on , 1998, unless the Exchange Offer is extended (which in no event shall be more than days from such date), in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. INTEREST ON THE NEW NOTES AND THE NOTES... The New Notes will bear interest from January 30, 1997, the date of issuance of the Notes that may be tendered in exchange for the New Notes. Accordingly, holders of Notes that are accepted for exchange will not receive interest on the Notes that is accrued but unpaid at the time of tender, but such interest will be payable on the first interest payment date on the New Notes after the Expiration Date. CONDITIONS TO THE EXCHANGE OFFER.......... The Exchange Offer is subject to certain customary conditions, which may be waived by the Company. PROCEDURES FOR TENDERING NOTES............ Each holder of Notes wishing to accept the Exchange Offer must complete, sign and date the relevant accompanying Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with the Notes and any other required documentation to the Exchange Agent at the address set forth in the Letter of Transmittal. The enclosed Letter of Transmittal should be used to tender Notes. By executing the Letter of Transmittal, each holder will represent to the Company that, among other things, the holder or the person receiving such New Notes, whether or not such person is the holder, is acquiring the New Notes in the ordinary course of business and that neither the holder nor any such other person has any intention or arrangement or other understanding with any person to participate in a distribution of such New Notes. In lieu of physical delivery of the certificates representing Notes, tendering holders may transfer Notes pursuant to the procedure for book-entry transfer as set forth under "The Exchange Offer -- Procedures for Tendering."
5 13 SPECIAL PROCEDURES FOR BENEFICIAL OWNERS.................................. Any beneficial owner whose Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such beneficial owner's own behalf, such beneficial owner must, prior to completing and executing the Letter of Transmittal and delivering its Notes, either make appropriate arrangements to register ownership of the Notes in such beneficial owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. GUARANTEED DELIVERY PROCEDURES............ Holders of Notes who wish to tender their Notes and whose Notes are not immediately available or who cannot deliver their Notes (or, in the alternative, comply with the procedures for book-entry transfer), the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date must tender their Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer -- Guaranteed Delivery Procedures." WITHDRAWAL RIGHTS......................... Tenders may be withdrawn at any time prior to 12:00 midnight, New York City time, on the Expiration Date pursuant to the procedures described under "The Exchange Offer -- Terms of the Exchange Offer." ACCEPTANCE OF NOTES AND DELIVERY OF NEW NOTES................................... The Company will accept for exchange any and all Notes that are properly tendered in the Exchange Offer prior to 12:00 midnight, New York City time, on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." FEDERAL INCOME TAX CONSEQUENCES........... The issuance of the New Notes to holders of the Notes pursuant to the terms set forth in this Prospectus will not constitute an exchange for federal income tax purposes. Consequently, no gain or loss would be recognized by holders of the Notes upon receipt of the New Notes. See "Certain Federal Income Tax Consequences of the Exchange Offer." USE OF PROCEEDS........................... There will be no proceeds to the Company from the exchange of Notes pursuant to the Exchange Offer.
6 14 EFFECT ON HOLDERS OF NOTES................ As a result of the making of this Exchange Offer, the Company will have fulfilled its principal obligations under the Registration Rights Agreement, and holders of Notes who do not tender their Notes will generally not have any further registration rights under the Registration Rights Agreement or otherwise. Such holders will continue to hold the untendered Notes and will be entitled to all the rights and subject to all the limitations applicable thereto under the Indentures and Registration Rights Agreement, except to the extent such rights or limitations, by their terms, terminate or cease to have further effectiveness as a result of the Exchange Offer. All untendered Notes will continue to be subject to certain restrictions on transfer. Accordingly, if any Notes are tendered and accepted in the Exchange Offer, the trading market, if any, for the untendered Notes could be adversely affected. EXCHANGE AGENT............................ State Street Bank and Trust Company is serving as Exchange Agent in connection with the Exchange Offer. See "The Exchange Offer -- Exchange Agent."
SUMMARY OF TERMS OF NEW NOTES The form and terms of the New Notes are the same as the form and terms of the Notes (which they will replace) except that (i) the New Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof and (ii) holders of the New Notes generally will not be entitled to further registration rights under the Registration Rights Agreement. The New Notes will evidence the same debt as the Notes and will be entitled to the benefits of the Indenture. See "Description of New Notes." SECURITIES OFFERED........................ $110.0 million in aggregate principal amount of the Company's 10 3/4% Senior Notes due 2005. MATURITY DATE............................. February 1, 2005. INTEREST RATE AND PAYMENT DATES........... The New Notes will bear interest at the rate of 10 3/4% per annum, payable semiannually in arrears on February 1 and August 1 of each year, commencing August 1, 1998. OPTIONAL REDEMPTION....................... The New Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after February 1, 2002, in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of redemption. In addition, at any time prior to February 1, 2001, the Company may redeem up to 33% of the initially outstanding aggregate principal amount of New Notes at a redemption price equal to 110.75% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of redemption, with the net proceeds of a Public Equity Offering; provided, that at least 67% of the initially outstanding aggregate principal amount of New Notes remains outstanding immediately after the occurrence of such redemption. See "Description of New Notes -- Optional Redemption."
7 15 CHANGE OF CONTROL......................... Upon the occurrence of a Change of Control, each holder of New Notes will have the right to require the Company to repurchase all or any part of such holder's New Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. See "Description of New Notes -- Repurchase at the Option of Holders -- Change of Control." There can be no assurance that, in the event of a Change of Control, the Company would have sufficient funds to repurchase all New Notes tendered. See "Risk Factors -- Payment Upon a Change of Control." RANKING................................... The New Notes will be senior unsecured obligations of the Company and will rank pari passu in right of payment with all existing and future senior indebtedness of the Company and senior in right of payment to all existing and future subordinated indebtedness of the Company. The New Notes will be effectively subordinated, however, to all secured obligations of the Company, including the Company's borrowings, if any, under the New Credit Facility, to the extent of the assets securing such obligations. As of December 31, 1997 the Notes and the Note Guarantees were effectively subordinated to approximately $3.2 million of secured obligations of the Company and the Subsidiary Guarantors on an as adjusted basis giving effect to the Note Offering and the application of the net proceeds therefrom. See "Risk Factors -- Effective Subordination; Encumbrances on Assets." NEW NOTE GUARANTEES....................... The New Notes will be fully and unconditionally guaranteed on a joint and several basis by all Subsidiary Guarantors. The New Note Guarantees will be senior unsecured obligations of the Subsidiary Guarantors and will rank pari passu in right of payment to all existing and future senior indebtedness of the Subsidiary Guarantors. The New Note Guarantees will be effectively subordinated to all secured obligations of the Subsidiary Guarantors, including the guarantees of such Subsidiary Guarantors in favor of the Lenders under the New Credit Facility, to the extent of the assets securing such obligations. CERTAIN COVENANTS......................... The Indenture related to the New Notes will contain certain covenants that will limit, among other things, the ability of the Company to (i) pay dividends, redeem capital stock or make certain other restricted payments or investments; (ii) incur additional indebtedness or issue preferred equity interests; (iii) merge, consolidate or sell all or substantially all of its assets; (iv) create liens on assets and (v) enter into certain transactions with affiliates or related persons. See "Description of New Notes -- Certain Covenants."
8 16 FORM AND DENOMINATION..................... The New Notes will be represented by U.S. Global Notes and Regulation S Permanent Global Notes in fully registered form, deposited with a custodian for and registered in the name of a nominee of the Depositary. Beneficial interests in the U.S. Global Notes will be shown on, and transfers thereof will be effected through, records maintained by the Depositary and its Participants. The Regulation S Permanent Global Notes will be deposited with the Trustee as custodian for the Depositary, and beneficial interests therein may be held through Euroclear, Cedel Bank or any other Depositary Participant. See "Description of New Notes -- Book-Entry; Delivery; Form and Transfer." REGISTRATION RIGHTS....................... In certain limited circumstances under the Registration Rights Agreement, the Company and the Subsidiary Guarantors will be required to provide a shelf registration statement (the "Shelf Registration Statement") to cover resales of the New Notes by the holders thereof. If the Company and the Subsidiary Guarantors fail to satisfy their registration obligations under the Registration Rights Agreement, the Company will be required to pay certain Liquidated Damages (as defined herein) to the holders of New Notes under certain circumstances.
9 17 SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA The following table presents summary selected consolidated financial data of the Company for the periods indicated. The summary selected consolidated statement of operations data for the years ended December 31, 1995, 1996 and 1997 is derived from the Company's audited Consolidated Financial Statements included elsewhere in this Prospectus. The summary selected consolidated balance sheet data as of December 31, 1997 is derived from the Company's audited Consolidated Financial Statements included elsewhere in this Prospectus and is presented on a historical and an as adjusted basis to give effect to the Note Offering and the Initial Draw, and the application of the net proceeds therefrom as if such transactions had occurred on such date. The following financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company's Consolidated Financial Statements and related Notes thereto included elsewhere herein and the other information contained in this Prospectus.
YEAR ENDED DECEMBER 31, -------------------------------- 1995(1) 1996(1) 1997 (IN THOUSANDS, EXCEPT RATIOS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales................................................. $116,894 $190,773 $184,660 Gross profit.............................................. 52,128 86,912 83,366 Operating expenses........................................ 40,161 98,332 81,131 Income (loss) from operations............................. 11,967 (11,420) 2,235 Net income (loss)......................................... 4,669 (11,990) (5,544) OTHER DATA: Cash provided by (used for) operating activities.......... $ 18,300 $(21,402) $ (6,392) Cash used for investing activities........................ (11,102) (45,316) (17,169) Cash provided by (used for) financing activities.......... (3,099) 64,439 23,883 EBITDA(2)................................................. 27,864 21,533 24,107 Acquisition related earnouts(3)........................... 1,380 3,781 2,049 Purchased in-process research and development(4).......... -- 13,935 -- Adjusted EBITDA(5)........................................ 29,244 39,249 26,156 Depreciation, amortization and write-downs of intangible assets.................................................. 15,897 32,953 21,872 Capital expenditures...................................... 9,135 24,564 17,091 Ratio of earnings to fixed charges(6)..................... 1.4x -- 0.2x
DECEMBER 31, 1997 -------------------------- ACTUAL AS ADJUSTED (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................. $ 2,977 $ 1,220 Working capital........................................... 66,075 65,459 Total assets.............................................. 154,730 156,450 Long-term debt, including current portion................. 121,057 124,116 Redeemable preferred stock................................ 9,237 9,237 Stockholders' deficit..................................... (17,873) (18,871)
- --------------- (1) Between June 1995 and December 1996, the Company completed six acquisitions, including Helios, Incorporated ("Helios") in June 1995, Applied Robotic Technologies, Inc. ("ART") in July 1995, certain net assets of Tahoe Instruments ("Tahoe") in July 1995, Air Bearings, Incorporated ("ABI") in January 1996, Santa Barbara Metric, Inc. ("SBM") in December 1996 and a portion of the business of Kirell Development, Inc. ("Kirell") in December 1996. See Notes 1 and 3 of Notes to Consolidated Financial Statements. Each of these acquisitions was accounted for as a purchase for financial reporting purposes, and, as a result, the Company's Consolidated Statements of Operations include the operating results of Helios, ART, Tahoe, ABI, SBM and a portion of the business of Kirell from their respective acquisition dates. (2) EBITDA represents income (loss) from operations before depreciation and amortization and write-downs of intangibles. EBITDA is presented because management believes it is a commonly accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income (loss) as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. The Company understands that, while EBITDA is frequently used by securities analysts in the evaluation of companies, EBITDA as used herein is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. 10 18 (3) Reflects earnout costs incurred by the Company in connection with the acquisitions of Helios, ART, Tahoe and ABI. See Note 9 of Notes to Consolidated Financial Statements. The combined stated maximum obligations under the material arrangements totaled $14.1 million, of which $10.2 million had been earned as of December 31, 1997. (4) The Company expensed certain research and development projects that had not reached technological feasibility and had no alternative future use, primarily in connection with the acquisitions of ABI, SBM and a portion of the business of Kirell. See Note 3 of Notes to Consolidated Financial Statements. (5) Adjusted EBITDA represents EBITDA (see footnote 2 above) before acquisition related earnouts and purchased in-process research and development expense. (6) For purposes of determining this ratio, earnings consist of income (loss) before income taxes (benefit) and extraordinary items. Fixed charges consist of interest expense, a portion of operating lease rental expense that is representative of the interest factor (deemed to be one-third of operating lease rental expense) and dividends on preferred stock. For the year ended December 31, 1996, earnings were inadequate to cover fixed charges by $22.8 million. 11 19 RISK FACTORS In addition to the other information contained in this Prospectus, the following Risk Factors should be considered carefully before tendering Notes in the Exchange Offer. SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS In connection with the Note Offering, the Company incurred a significant amount of indebtedness. At December 31, 1997, the Company had indebtedness of $121.1 million. As a result of the Note Offering, the Refinancing and Initial Draw, the Company's indebtedness, on an as adjusted basis at December 31, 1997, would have increased by $3.0 million to $124.1 million. At February 28, 1998, the Company had approximately $17.0 million of borrowing availability under the New Credit Facility. Subject to certain limitations, the Company may also incur additional indebtedness in the future under the terms of the Indenture related to the New Notes and the New Credit Facility. See "Capitalization," "Description of Indebtedness -- New Credit Facility" and "Description of New Notes." The Company's ability to make scheduled payments of principal and interest on, or to refinance, its indebtedness (including the New Notes), and to fund its operations, including planned capital expenditures and research and development expenses, depends on its future performance and financial results, which, to a certain extent, are subject to general conditions in the data storage industry as well as general economic, financial, competitive and other factors that are beyond its control. For the year ended December 31, 1996, earnings were inadequate to cover fixed charges by $22.8 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." There can be no assurance, however, that the Company's business will generate adequate cash flow or that any growth can be achieved. If the Company is unable to generate sufficient cash flow from operations in the future to service its debt and operate its business, including making necessary capital expenditures, the Company may be required to refinance all or a portion of its existing debt, including the New Notes, to sell assets or to obtain additional financing. There can be no assurance that any such action would be accomplished on terms acceptable to the Company or at all. The Company's high level of debt will have several important effects on its future operations, including, but not limited to, (i) making it more difficult for the Company to satisfy its obligations with respect to the New Notes, (ii) increasing the Company's vulnerability to general adverse economic and industry conditions, (iii) limiting the Company's ability to obtain additional financing to fund future working capital, capital expenditures, research and development and other general corporate requirements, (iv) requiring the dedication of a substantial portion of the Company's cash flow from operations to the payment of principal of, and interest on, its indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures, research and development or other operating needs and uses and (v) limiting the Company's flexibility in planning for, or reacting to, changes in its business. RESTRICTIVE FINANCING COVENANTS The New Credit Facility and the Indenture related to the New Notes contain a number of covenants that will significantly restrict the operations of the Company, such as the ability of the Company to incur indebtedness, make prepayments of certain indebtedness, pay dividends, make investments, engage in transactions with stockholders and affiliates, create liens, sell assets and engage in mergers and other consolidations. In addition, the Company is required to comply with specified financial ratio tests under the New Credit Facility, including maximum leverage and minimum interest coverage, net worth, cash flow and profitability. There can be no assurance that the Company will be able to comply with such conditions, covenants or restrictions in the future. The Company's ability to comply with such conditions, covenants and restrictions may be affected by events beyond its control, including prevailing economic and financial conditions and general conditions in the data storage industry. The breach of any such covenants or restrictions would result in a default under the New Credit Facility that would permit the Lenders thereunder to declare all amounts outstanding thereunder to be immediately due and payable, together with accrued and unpaid 12 20 interest, and terminate its commitments to make further extensions of credit thereunder. See "Description of Indebtedness -- New Credit Facility." EFFECTIVE SUBORDINATION; ENCUMBRANCES ON ASSETS Under the New Credit Facility, the Company granted to the Lenders security interests in substantially all of its current and future assets (other than the real estate owned by the Company in San Diego, California on which its headquarters is located), including a pledge of all or a portion of the issued and outstanding shares of capital stock of the Company's material subsidiaries. In the event of a default thereunder (whether as a result of the failure to comply with a payment or other covenant, a cross-default, or otherwise), the Lenders will have a prior secured claim on the capital stock of the Subsidiary Guarantors and substantially all of the assets of the Company and the Subsidiary Guarantors. As a result, the secured assets of the Company and the Subsidiary Guarantors would be available to pay obligations on the New Notes and the New Note Guarantees only after borrowings under the New Credit Facility and other secured indebtedness, if any, have been paid in full. If the Lenders under the New Credit Facility should attempt to foreclose on their collateral, the Company's financial condition and the value of the New Notes and the New Note Guarantees would be materially adversely affected. See "Description of Indebtedness -- New Credit Facility." At December 31, 1997, on an as adjusted basis after giving effect to the Note Offering (and the application of the estimated net proceeds thereof), the New Notes and the New Note Guarantees would have been effectively subordinated to approximately $3.2 million of secured obligations of the Company and the Subsidiary Guarantors. In addition, if the Company incurs any additional senior indebtedness which would rank pari passu in right of payment with the New Notes, and even if such indebtedness were not secured, the holder of such debt would be entitled to share ratably with the holders of the New Notes in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of the Company. This may have the effect of reducing the amount of proceeds available to pay to holders of the New Notes upon the occurrence of any such events. RECENT NET LOSSES; RETAINED DEFICIT; CASH USED BY OPERATING ACTIVITIES The Company had net losses of approximately $12.0 million and $5.5 million for 1996 and 1997, respectively. Such losses and accrual of certain preferred stock dividends and accretion for the redemption value of such preferred stock have contributed to a retained deficit of approximately $23.2 million as of December 31, 1997. In addition, the Company used cash for operating activities of approximately $21.4 million and $6.4 million for 1996 and 1997, respectively. There can be no assurance that the Company will achieve profitability or that it will generate positive cash flow from operating activities in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." FLUCTUATIONS IN OPERATING RESULTS The Company's operating results have fluctuated in the past and the Company expects that its operating results will continue to fluctuate in the future from quarter to quarter and year to year. These fluctuations have resulted from a number of factors, including the size, timing and rescheduling or cancellation of orders from, and shipments to, major customers; the timing of introductions of new products and product enhancements by the Company or its competitors; the Company's ability to develop, introduce and market new, technologically advanced products; the cyclicality of the data storage industry; the rescheduling of capital expenditures by the Company's customers; variations in the Company's customer base and product mix; the level of any significant volume pricing discounts provided by the Company; the availability and cost of key production materials and components; the Company's ability to effectively manage its inventory and to control costs; the financial stability of major customers; the Company's success in expanding its operations overseas; personnel changes; expenses associated with acquisitions; fluctuations in amortization and write-downs of intangible assets; foreign currency exchange rate fluctuations and general economic factors in the United States and certain foreign countries, including Japan, South Korea, Singapore, Malaysia and other parts of Southeast Asia. 13 21 In addition to the foregoing, the Company's period-to-period operating results may fluctuate in the future due to the rescheduling or cancellation of specific orders by its major customers. The Company expects order delays and reschedulings to occur in the future. Because the Company must incur expenses and purchase inventory based on anticipated and actual customer orders, any significant delay, rescheduling or cancellation of such orders would have a material adverse effect on the Company's operating results. For example, during the second and third quarters of 1997, the Company increased its inventory substantially in anticipation of satisfying expected demand from three of the Company's largest customers. A significant portion of this anticipated demand has not materialized to date due primarily to overcapacity of certain process and production-test equipment at these customers. This contributed to net sales for 1997 of $184.7 million compared to $190.8 million in 1996. In addition, these circumstances contributed to the Company's $26.2 million of adjusted EBITDA (as defined in footnotes 2 and 5 in "Summary Selected Consolidated Financial Data") for 1997 which amount was $13.0 million lower than the $39.2 million of adjusted EBITDA for 1996. Cash used for operating activities decreased from $21.4 million in 1996 to $6.4 million in 1997 due to a smaller net loss, smaller increases year over year in deferred income taxes, inventories and income taxes receivable and a decrease in prepaid expenses and other assets offset by decreases in depreciation, amortization and writedown of intangible assets, purchased in-process research and development, an increase in accounts receivable and larger decreases year over year in accounts payable and customer deposits, accrued expenses and other liabilities. A net loss of $12.0 million in 1996 decreased to a net loss of $5.5 million in 1997 related primarily to decreases in amortization and write-downs of intangible assets and purchased in-process research and development expenses, offset by increases in research and development and interest expense. See "Summary Selected Consolidated Financial Data." The Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indicators of future performance. Quarterly results in the future may fluctuate due to the factors discussed above or other factors. Further, the Company's historical operating results for 1993 through 1997 are not necessarily indicative of future performance for any particular period in light of the Company's acquisition activity during those periods. There can be no assurance that any past revenue growth or past results of operations will continue. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON AND CYCLICALITY OF DATA STORAGE INDUSTRY The Company's business depends almost entirely upon capital expenditures by manufacturers of disk drives and disk drive components, which in turn depend upon market demand for their products. The data storage industry is cyclical and historically has experienced varying growth rates and periods of oversupply causing higher than anticipated inventory levels and intense price competition. The disk drive industry is currently experiencing continuing weakness in demand for its products, as well as increased competition resulting in significant price decreases. This in turn causes reduced demand for and pricing pressures on capital equipment used in the disk drive and disk drive component production processes, including the type of equipment sold by the Company. In addition, since the third quarter of 1997, certain of the Company's customers delayed purchases of certain of the Company's products due to overcapacity of certain process and production-test equipment at these customers. In the event the weakness in demand for disk drives continues or customers continue to delay the purchase of the Company's products, the Company's business, financial condition and results of operations would be materially adversely affected. The Company's future operating results will continue to be heavily dependent on capital expenditures by manufacturers of disk drives and disk drive components. In this regard, several major manufacturers of disk drives and disk drive components have recently announced earnings that fell below expectations. These earnings announcements have been accompanied by reduced earnings expectations for future periods. There can be no assurance that these announcements do not indicate the beginning of a slowdown in the growth of the data storage industry. The Company's business, results of operations and financial condition have been adversely affected by previous downturns in the data storage industry. No assurance can be given that the Company's sales and operating results will not continue to be adversely affected by periodic downturns in 14 22 world-wide capital equipment expenditures by data storage companies. Any such slowdown would have a material adverse effect on the Company's business, operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RAPID TECHNOLOGICAL CHANGE The data storage industry is characterized by rapid technological changes and evolving industry standards. The Company's customers strive to introduce new products and enhancements frequently, with relatively short product life cycles, typically between nine and 18 months. In addition, the Company's customers often develop multiple products simultaneously, such that new products could be introduced as frequently as every three months. New product introductions by the Company's customers typically result in new technological challenges for the Company, both with respect to its installed base and with respect to next generation products. As a result, the Company must continue to enhance its existing products and develop and manufacture new products with improved capabilities. This has required and will continue to require substantial investments by the Company in research and development. Although the Company continually develops new products, there can be no assurance that the Company will be able to accurately anticipate technological advances in the disk drive market and develop products incorporating such advances in a timely manner or at all. The Company's failure to develop, manufacture and market new or enhanced products, would have a material adverse effect on its business, financial condition and results of operations. The Company is highly dependent on its close working relationships with certain of its key customers to advance its technologies. The termination of any one of these key relationships for any reason could have a material adverse effect on the Company's ability to anticipate and develop necessary technological changes to its products. The Company's customers are constantly striving to improve their production processes, including improving the manufacturing of substrates, the deposition of material on the substrate, the finish processing of magnetic media, and head fabrication. To the extent that the Company's customers can improve product quality by modifying their own design and internal production processes without the need to add process and production-test equipment, demand for the Company's equipment would likely decline. Further, unless the Company is able to effectively respond to such changes, manufacturing process changes for disk drives, disks and read/write heads could also have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that future technological innovations will not reduce demand for disk drives. Competing technologies to disk drive based data storage do exist, including solid state memory (flash memory), tape memory and re-writable optical technology (CD and DVD technology). Although the current core technology for rotating magnetic disk drive data storage has been the predominant technology in the industry for many years, it is likely that some day this technology will be replaced by an alternate technology. There can be no assurance that the Company's products will be adaptable to any successor technology. The Company's business, financial condition and results of operations could be materially adversely affected by any significant migration toward technology that would replace disk drives as a computer data storage medium. During 1995 and continuing through the first six months of 1997, the Company experienced significant development and design problems and delays during the attempted introduction of its MC950 series next generation disk certifier product. These development and design problems diverted significant research and development resources which could have been utilized for the development of new products and various enhancements for other products. There can be no assurance that the Company will not experience the same or similar problems with future introductions of new products or enhancements. CUSTOMER CONCENTRATION There are a relatively small number of data storage manufacturers throughout the world and the Company derives a significant portion of its net sales from a relatively small number of customers. The Company expects that its dependence on relatively few key customers will continue in the future. Approximately 52.2%, 45.0% and 51.0% of the Company's net sales in 1995, 1996 and 1997, respectively, were 15 23 derived from sales to the Company's three largest customers in each of those periods. Even though the Company's customer mix will likely change from period to period in the future, Seagate Technology, Inc. ("Seagate"), Komag Incorporated ("Komag"), HMT Technology ("HMT"), Iomega Corporation ("Iomega") and Trace Storage Technology USA Corporation ("Trace") have historically accounted for a significant portion of the Company's net sales. For 1995, 1996 and 1997, Seagate accounted for 25.0%, 19.0% and 18.0%, respectively, of net sales; Komag accounted for 10.7%, 14.5% and 15.9%, respectively, of net sales; HMT accounted for 4.4%, 5.2% and 17.1%, respectively, of net sales; Iomega accounted for 16.5%, 7.9% and 1.9%, respectively, of net sales and Trace accounted for 6.8%, 11.5% and 4.4%, respectively, of net sales. If net sales to these or any other significant customer of the Company were to decrease in any material amount in the future, the Company's business, results of operations and financial condition would be materially adversely affected. In general, the Company's customers do not enter into long-term purchase agreements with the Company. If completed orders are not replaced on a timely basis by new orders from the same or other customers, the Company's net sales would be materially adversely affected. In addition, the loss of a key customer; any reduction in orders from any key customer or the rescheduling or cancellation of a significant order from a key customer, including reductions, delays or cancellations due to customer departures from recent buying patterns; or economic or competitive conditions in the disk drive industry could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company has not to date incurred significant bad debt expense as a result of the failure of any of its customers. However, there can be no assurance that the Company will not face greater difficulty in the future in collecting receivables or be required to offer more favorable payment terms, particularly in a period of reduced demand for disk drives. Any failure to collect or delay in collecting receivables could have a material adverse effect on the Company's business, operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." There has been a trend toward consolidation in the disk drive industry and the Company expects this trend to continue. Certain of the Company's customers have in the past and may in the future acquire competitors or be acquired by competitors, causing further consolidation in the disk drive industry. Previous acquisitions in the disk drive industry have often caused the purchasing departments of the combined companies to reevaluate their purchasing decisions. There can be no assurance that such acquisitions will not result in a change in a current customer's purchasing habits, including a loss of the customer, a decrease in orders from that customer or a rescheduling or cancellation of orders previously made by a customer. Moreover, acquisitions involving existing customers may cause the concentration of the Company's customer revenues to increase thereby increasing the Company's dependence on fewer customers. COMPETITION The disk drive process and production-test equipment industry is highly competitive. In each of the Company's product lines, the Company faces substantial competition from established merchant suppliers of process and production-test equipment, some of which have greater financial, engineering, manufacturing, research and development and marketing resources than the Company. For example, the Company faces competition from General Disk for servowriters; Hitachi DECO and Sony Techtronics for disk certifiers; Swan Instruments for MR head testers; Zygo Corporation for flying height testers, Technastar for automation technology and Guzik Technical for spin-stands. Historically, there has also been competition from entrepreneurs with focused market knowledge and new technology. The Company also experiences intense competition world-wide from Hitachi DECO, a large, full-line manufacturer of process and production-test equipment. Hitachi DECO, a subsidiary of Hitachi Limited Japan, has substantially greater financial, technical, marketing, manufacturing, research and development and other resources than the Company. The Company also experiences competition from other full-line and partial-line manufacturers of process and production-test equipment. There can be no assurance that the Company's competitors will not develop enhancements to, or future generations of, competitive products that will offer price or performance features superior to the Company's products, or that new competitors will not enter the Company's markets. Finally, as many of the Company's competitors are based in foreign countries, they have cost structures and equipment 16 24 prices based on foreign currencies. Accordingly, currency fluctuations could cause the Company's dollar-priced products to be less competitive than its competitors' products priced in other currencies. Many of the Company's competitors are investing heavily in the development of new and enhanced products aimed at applications currently addressed by the Company's products. The Company expects its competitors to continue to improve the design and performance of their products and to introduce new products with competitive price/performance characteristics. Competitive pressures often necessitate price reductions which can adversely affect operating results. The Company will be required to make a continued high level of investment in product development and research, sales and marketing and ongoing customer service and support to remain competitive. There can be no assurance that the Company will have sufficient resources to continue to make such investments or that the Company will be able to achieve the technological advances necessary to maintain its competitive position. The Company believes that its future success will be dependent, in part, upon its ability to compete successfully in the Japanese, South Korean and Southeast Asian markets. The Company's largest competitor, Hitachi DECO, is headquartered in Japan which gives it a competitive advantage over the Company in that market to the extent buying decisions are influenced by Hitachi DECO's local presence. In addition, the Company's ability to compete in Japan, South Korea and Southeast Asia in the future is dependent upon continuing free trade between these countries and the United States, the continuing ability of the Company to develop in a timely manner products that meet the technical requirements of its foreign customers, and the continuing ability of the Company to develop and maintain satisfactory relationships with leading companies in the data storage industry in these areas. Moreover, the Company's sales in these areas will be affected by the overall economies of Japan, South Korea and Southeast Asia. In addition to the competition the Company faces from other merchant manufacturers of process and production-test equipment, most of the Company's customers develop at least a portion of their own process and production-test equipment needs internally, especially servowriters and read/write head test equipment. Accordingly, the Company must compete against the internal development efforts of this captive market. Manufacturers within this captive market are often reluctant to change their production lines to incorporate merchant-supplied process and production-test technology. Moreover, it is possible that with the rapid changes in data storage technology, the development of new process and production-test equipment will be so closely linked to the Company's customers' product development cycles that certain customers and potential customers will find it more efficient to develop their own process and production-testing equipment needs internally, thereby placing the Company at a competitive disadvantage. Because of the foregoing competitive factors, there can be no assurance that the Company will be able to compete successfully in the future. Increased competitive pressure could cause the Company to lower prices for its products, thereby adversely affecting the Company's business, financial condition and results of operations. PRODUCT CONCENTRATION The Company derives its revenues primarily from sales of its process and production-test systems and parts for such systems. The Company's products can generally be categorized into four principal areas: (i) disk (media) testing and processing, (ii) read/write head testing, (iii) disk drive testing and processing and (iv) automation. The Company derives a significant portion of its net sales from a relatively small number of products. In 1995, 1996 and 1997, the Company derived approximately 44.0%, 47.0% and 58.9% of its net sales, respectively, from sales of its media certifier products (excluding parts and service), with the MG250 series constituting a majority of the Company's media certifier sales over each of these periods. In June 1997, the Company introduced its MC950 series media certifier products. The Company expects that net sales from its media certifier products, including its MG250 series and its MC950 series, will continue to account for a substantial portion of the Company's total net sales in the foreseeable future. Any material reduction in demand for its media certifier products would have a material adverse effect on the Company's business, results of operations and financial condition. 17 25 DEPENDENCE ON PROPRIETARY TECHNOLOGY The Company's success is heavily dependent upon the establishment and maintenance of proprietary technologies. Although the Company attempts to protect its intellectual property rights through patents, copyrights, trade secrets and other measures, there can be no assurance that the steps taken by the Company to protect its proprietary technologies will be adequate to prevent misappropriation by third parties or will be adequate under the laws of some foreign countries, which may not protect the Company's proprietary rights to the same extent as do laws of the United States. In addition, others could "reverse engineer" the Company's products in order to determine their method of operation and introduce competing products or develop competing technology independently. Any such adverse circumstances could have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company does not believe any of its products or proprietary rights infringe the rights of third parties, there can be no assurance that infringement claims will not be asserted against the Company in the future. Any such claims, with or without merit, could divert the attention of management, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, or at all. If infringement were established, the Company could be required to pay damages or be enjoined from making, using or selling the infringing product. Likewise, there can be no assurance that a third party's product, if infringing on the Company's proprietary rights, may be prevented from doing so without litigation. Any of the foregoing could have a material adverse effect on the Company's business, financial condition and results of operations. No assurance can be given that the claims allowed on any patents held by the Company will be sufficiently broad to protect the Company's technology. Moreover, there can be no assurance that any patent owned by the Company will not be invalidated, deemed unenforceable, circumvented or challenged, that the rights granted thereunder will provide competitive advantages to the Company or that any of the Company's pending or future patent applications will be issued with claims of the scope sought by the Company, if at all. Furthermore, there can be no assurance that others will not develop similar products, duplicate the Company's products or design around the patents owned by the Company. In addition, there can be no assurance that foreign intellectual property laws or the Company's agreements will protect the Company's intellectual property rights in any foreign country. Any failure to protect the Company's intellectual property rights could have a material adverse effect on the Company's business, financial condition and results of operations. The Company requires each of its employees to enter into a proprietary rights and non-disclosure agreement in which the employee agrees to maintain the confidentiality of all proprietary information of the Company and, subject to certain exceptions, to assign to the Company all rights in any proprietary information or technology made or contributed by the employee during his or her employment. In addition, the Company regularly enters into non-disclosure agreements with third parties, such as consultants, potential joint venture partners and customers. In spite of these precautions, it may be possible for third parties to copy, develop or otherwise obtain and use the Company's proprietary technology without authorization or to develop similar technology independently. MANUFACTURING RISKS The Company's products have a large number of components and are highly complex. The Company has experienced and may in the future experience manufacturing delays due to technical difficulties. In addition, many of the Company's products must be semi-customized to meet individual product specification requirements. The customization of a customer order may require new technical capabilities not previously incorporated successfully into the Company's products. As a result, the Company may be unable to complete the customized development or technical specifications of its customers in a timely manner. Any significant failure in this regard would have a material adverse effect on the Company's business, financial condition and results of operations as well as its customer relationships. In addition, due to the semi-customized nature of many of the Company's products, the Company has in the past and may in the future incur substantial unanticipated costs in a product's development and production, such as increased cost of components due to 18 26 expediting charges, other purchasing inefficiencies and greater than expected engineering, quality control, installation, upgrade, post-installation service and support and warranty costs which cannot be passed on to the customer. The occurrence of any of such events in the future could materially adversely affect the Company's business, financial condition and results of operations. In certain instances the Company relies on a single source or a limited group of suppliers for certain components and subassemblies used in its products. Although the Company seeks to reduce its dependence on sole and limited source suppliers, the partial or complete loss of these sources could have at least a temporary material adverse effect on the Company's results of operations and damage customer relationships due to the complexity of the products they supply and the significant amount of time required to qualify new suppliers. In addition, long lead times are often required to obtain critical components and subassemblies used in certain of the Company's products from these and other suppliers which could impede the Company's ability to quickly respond to changes in demand and product specifications. Shortages of critical components and subassemblies to manufacture the Company's products have occurred in the past and there can be no assurance that shortages will not occur in the future, or that materials will be available without longer lead times. In addition, the manufacture and timely delivery of products by the Company is often dependent on the ability of certain suppliers to deliver subassemblies and other components in a timely manner. The failure of such suppliers to deliver these components in a timely manner may delay the delivery of products by the Company until alternative sourcing could be developed. There can be no assurance that an alternative source could be located in time to avoid penalties or cancellation of the Company's product orders. If a significant order or orders were cancelled for this reason it could have a material adverse effect on the Company's business, financial condition and results of operations. Further, a significant increase in the price of one or more components used to produce the Company's products would increase the cost of producing the Company's products. See "Business -- Manufacturing." The Company conducts its manufacturing activities at its facilities in San Diego, Fremont, Concord and Hayward, California. The Company's manufacturing facilities are located in seismically active areas. A major catastrophe (such as an earthquake or other natural disaster) or other long-term disruption in the Company's manufacturing activities could result in a prolonged interruption of the Company's business. See "Business -- Manufacturing." RISKS ASSOCIATED WITH ACQUISITIONS While the Company currently has no commitments, agreements or understandings with respect to any future acquisitions, its business strategy includes the expansion of its business, products lines and technology through acquisitions. The Company regularly reviews various acquisition prospects, including companies, technologies or products complementary to the Company's business and periodically engages in discussions regarding such possible acquisitions. Acquisitions involve numerous risks, including evaluating new technologies; difficulties in the assimilation of the operations, products, personnel and cultures of the acquired companies; the ability to manage geographically remote units; the diversion of management's attention from other day-to-day business concerns; risks of entering markets in which the Company has limited or no direct experience and the potential loss of key employees of the acquired companies. In addition, acquisitions may result in dilutive issuances of equity securities; the incurrence of additional debt; reduction of existing cash balances; amortization expenses related to goodwill and other intangible assets and other charges to operations that may materially adversely affect the Company's results of operations. Moreover, there can be no assurance that any equity or debt financings proposed in connection with any acquisition would be available to the Company on acceptable terms or at all, when, and if, suitable strategic acquisition opportunities arise. Although management expects to carefully analyze any opportunity before committing the Company's resources, there can be no assurance that any acquisition that is completed will result in long-term benefits to the Company or its stockholders or that Phase Metrics' management will be able to manage effectively the resulting business. See "Business -- Competition." The Company recorded write-downs totaling approximately $11.9 million and $2.0 million for 1996 and 1997, respectively, related to impairment losses on certain purchased technology recorded primarily in 19 27 connection with the Company's acquisitions of ART and certain assets of Cambrian and ABI. Such impairment losses were generally the result of post-acquisition technological changes that were developed independent of purchased technologies, causing a decline in the carrying values of such purchased technologies. There can be no assurance that such impairments will not occur in the future or that future acquisitions will not result in similar write-downs of acquired assets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 1 of Notes to Consolidated Financial Statements. CAPITAL NEEDS The Company believes that, in order to achieve its long-term strategic objectives and maintain and enhance its competitive position, it will need additional financial resources over the next several years to fund acquisitions, service debt, make capital expenditures, fund working capital and pay for research and development. The Company has added significant manufacturing capacity and increased its fixed costs over the past two years while expanding its facilities in Concord, Fremont and San Diego, California, and continues to invest in new technologies and its international infrastructure. The Company's fixed costs may also increase if the Company elects to expand its infrastructure in South Korea, Japan, other parts of Asia, or other locations. Any liquidity deficiency in the future could delay or change management's plans for the Company including curtailing its acquisition strategy, capital expenditures, facilities expansion and research and development expenditures, which could materially adversely affect the ability of the Company to service its debt (including indebtedness under the New Notes) and its business, financial condition and results of operations. Upon completion of the Exchange Offer, the Company will continue to have limited cash resources and significant future obligations. The precise amount and timing of the Company's funding needs cannot be determined at this time and will depend upon a number of factors, including the market demand for the Company's products, the availability of strategic opportunities, the progress of the Company's product development efforts, technological challenges that must be overcome in connection with existing and future products, the Company's inventory management and the Company's management of its cash and accounts payable. The Company may not be able to obtain additional financing as needed on acceptable terms or at all. If the Company is unable to obtain sufficient capital, it could be required to curtail its acquisition strategy, capital expenditures, facilities expansion and research and development expenditures, which could materially adversely affect the Company's business, financial condition and results of operations. See "Use of Proceeds," "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." DEPENDENCE UPON KEY PERSONNEL The Company's future performance depends in significant part upon the continued service of its key technical and senior management personnel. The Company is dependent on its ability to identify, hire, train, retain and motivate high quality personnel, especially highly skilled engineers involved in the ongoing developments required to develop and enhance the Company's products and introduce new and enhanced future products and applications. The industry in which the Company competes is characterized by a high level of employee mobility and aggressive recruiting of skilled personnel. The Company's employees may terminate their employment with the Company at any time. Accordingly, there can be no assurance that any of the Company's current employees will continue to work for the Company. Loss of services of key employees could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Employees." INTERNATIONAL OPERATIONS The Company's sales and operating activities outside of the United States are subject to inherent risks, including fluctuations in the value of the United States dollar relative to foreign currencies, tariffs, quotas, taxes and other market barriers, political, economic and monetary instability, restrictions on the export or import of technology, potentially limited intellectual property protection, difficulties in staffing and managing international operations and potentially adverse tax consequences. There can be no assurance that any of these 20 28 factors will not have a material adverse effect on the Company's business, financial condition or results of operations. In addition, although substantially all of the Company's export sales to date have been denominated in United States dollars, such sales may not be denominated in dollars in the future. As a result, currency exchange fluctuations in countries where the Company does business could have a material adverse effect on the Company's business, financial condition and results of operations. In this regard, several Asian countries including South Korea, Japan and Thailand, have recently experienced significant economic downturns and significant declines in the value of their currencies relative to the U.S. dollar. Due to these conditions, it is possible that certain of the Company's customers will delay, reschedule or cancel significant current or future orders for the Company's products. If any such orders are delayed, rescheduled or cancelled, the Company's business, financial condition and results of operations would be adversely affected. ENVIRONMENTAL REGULATIONS The Company is subject to a variety of governmental regulations relating to the use, storage, discharge, handling, emission, generation, manufacture, treatment and disposal of toxic or other hazardous substances, chemicals, materials or waste. Any failure to comply with current or future regulations could result in civil penalties or criminal fines being imposed on the Company, or its officers, directors or employees, suspension of production, alteration of its manufacturing process or cessation of operations. Such regulations could require the Company to acquire expensive remediation or abatement equipment or to incur expenses to comply with environmental regulations. Any failure by the Company to properly manage the use, disposal or storage of, or adequately restrict the release of, hazardous or toxic substances could subject the Company to significant liabilities. CONCENTRATION OF STOCK OWNERSHIP The Company's directors and officers and their respective affiliates beneficially own approximately 86.6% of the Company's capital stock. As a result, these stockholders, acting together, would be able to effectively control all matters requiring approval by the stockholders of the Company, including the election of directors and approval of significant corporate transactions. These stockholders are parties to a Securityholders Agreement which, among other provisions, requires such stockholders to vote their shares of capital stock for certain nominees for directors of the Company. See "Management," "Certain Transactions" and "Principal Stockholders." FRAUDULENT CONVEYANCE CONSIDERATIONS Under applicable provisions of federal bankruptcy law or comparable provisions of state fraudulent transfer laws, if, among other things, the Company or any Subsidiary Guarantor, at the time it incurred the indebtedness evidenced by the New Notes or the New Note Guarantees, as the case may be, (i)(a) was or is insolvent or rendered insolvent by reason of such occurrence or (b) was or is engaged in a business or transaction for which the assets remaining with the Company or such Subsidiary Guarantor constituted unreasonably small capital or (c) intended or intends to incur, or believed or believes that it would incur, debts beyond its ability to pay such debts as they mature and (ii) the Company or such Subsidiary Guarantor received or receives less than reasonably equivalent value or fair consideration for the incurrence of such indebtedness or providing such guarantees, then the New Notes and the New Note Guarantees could be voided or claims in respect of the New Notes or the New Note Guarantees could be subordinated to all other debts of the Company or such Subsidiary Guarantor, as the case may be. In addition, the payment of interest and principal of the Company pursuant to the New Notes or the payment of amounts by a Subsidiary Guarantor pursuant to a New Note Guarantee could be voided and required to be returned to the person making such payment, or to a fund for the credit of the creditors of the Company or such Subsidiary Guarantor, as the case may be. The measures of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any proceeding with respect to the foregoing. Generally, however, the Company or a Subsidiary Guarantor would be considered insolvent if (i) the sum of its debts, including contingent liabilities, were greater than the saleable value of all of its assets at a fair valuation or if the present fair saleable value of its 21 29 assets were less than the amount that would be required to pay its probable liabilities on its existing debts, including contingent liabilities, as they become absolute and mature or (ii) it could not pay its debts as they become due. On the basis of historical financial information, recent operating history as discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other factors, the Company and each Subsidiary Guarantor believes that, after giving effect to the indebtedness incurred in connection with the Note Offering, it was not insolvent, did not have unreasonably small capital for the business in which it was engaged and had not incurred debts beyond its ability to pay debts as they mature. There can be no assurance, however, as to what standard a court would apply in making such determinations or that a court would agree with the Company's or such Subsidiary Guarantor's conclusions. PAYMENT UPON A CHANGE OF CONTROL The Indenture provides that, upon the occurrence of a Change of Control, the Company will be required to make an offer to repurchase all of the New Notes issued and then outstanding under the Indenture at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. See "Description of New Notes -- Repurchase at the Option of Holders -- Change of Control." Any Change of Control under the Indenture would also constitute a default under the New Credit Facility. Therefore, upon the occurrence of a Change of Control, the Lenders under the New Credit Facility would have the right to accelerate their loans and holders of the New Notes would have the right to require the Company to repurchase their New Notes. See "Description of Indebtedness -- New Credit Facility." If a Change of Control were to occur, it is unlikely that the Company would be able to repay all of its obligations under the New Credit Facility, the New Notes and any other indebtedness that may become payable in such event without refinancing its obligations thereunder. There can be no assurance that the Company would be able to obtain any such financing on commercially reasonable terms, or at all, and consequently no assurance can be given that the Company would be able to repurchase any of the New Notes upon a Change of Control. ABSENCE OF TRADING MARKET; RESTRICTIONS ON TRANSFERS The Notes are currently owned by a relatively small number of beneficial owners. The Notes have not been registered under the Securities Act and will be subject to restrictions on transferability to the extent that they are not exchanged for New Notes. The New Notes will constitute a new issue of securities with no established trading market. Although the New Notes will generally be permitted to be resold or otherwise transferred by holders who are not affiliates of the Company without compliance with the registration requirements under the Securities Act, the Company does not intend to list the New Notes on any securities exchange or to seek admission thereof to trading in the National Association of Securities Dealers Automated Quotation System. Although DLJ has advised the Company that it currently intends to make a market in the New Notes, DLJ is not obligated to do so and may discontinue such market making at any time without notice. In addition, such market making activity will be subject to the limits imposed by the Exchange Act. If a trading market does not develop or is not maintained, holders of the New Notes may experience difficulty in reselling the New Notes or may be unable to sell them at all. If a market for the New Notes develops, any such market may be discontinued at any time. Accordingly, there can be no assurance as to the development or liquidity of any market for the New Notes. COMPLIANCE WITH EXCHANGE OFFER PROCEDURES; RESTRICTIONS ON RESALES Issuance of the New Notes in exchange for Notes pursuant to the Exchange Offer will be made only after a timely receipt by the Exchange Agent of such Notes, a properly completed and duly executed Letter of Transmittal and all other required documents. Therefore, holders of the Notes desiring to tender such Notes in exchange for New Notes should allow sufficient time to ensure timely delivery. The Company is under no duty to give notification of defects or irregularities with respect to any tender of Notes for exchange. Notes that are not tendered or are tendered but not accepted will, following the consummation of the Exchange Offer, 22 30 continue to be subject to the existing restrictions upon transfer thereof and, upon the Expiration Date, the principal registration rights under the Registration Rights Agreement generally will terminate. In addition, any holder of Notes who tenders in the Exchange Offer for the purpose of participating in or otherwise intends to participate in a distribution of the New Notes will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the New Notes to third parties. Each Participating Broker-Dealer that receives New Notes for its own account in exchange for Notes, where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities must acknowledge that it will deliver a prospectus in connection with the initial resale of such New Notes to third parties. To the extent that Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Notes could be adversely affected. See "The Exchange Offer" and "Plan of Distribution." YEAR 2000 The Company is assessing the readiness of its internal computer systems, its products and its vendors for handling the Year 2000 issue. The Company does not believe that the costs of any actions required as a result of such assessment will have a material adverse effect on the Company's business, financial condition or results of operations. There can be no assurance, however, that the Company will successfully implement the correct solutions or that there will be no delay in or increased costs associated with the Company's Year 2000 readiness programs. The Company's inability to successfully implement such changes could have a material adverse effect on the Company's business, financial condition or results of operations. 23 31 THE EXCHANGE OFFER The following discussion sets forth or summarizes what the Company believes are the material terms of the Exchange Offer, including those set forth in the Letter of Transmittal distributed with this Prospectus. This summary is qualified in its entirety by reference to the full text of the documents related to the Exchange Offer, copies of which are filed as exhibits to the Registration Statement of which this Prospectus is a part, and are incorporated by reference herein. PURPOSE AND EFFECT OF THE EXCHANGE OFFER The Notes were sold by the Company on January 30, 1997, and were subsequently resold to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain persons in transactions outside the United States in reliance on Regulation S under the Securities Act. In connection with the Note Offering, the Company entered into the Registration Rights Agreement on the date of the Note Closing, which requires, among other things, the Company and the Subsidiary Guarantors to (i) file with the SEC a Registration Statement under the Securities Act with respect to an issue of new notes of the Company identical in all material respects to the Notes, (ii) use their best efforts to cause such Registration Statement to become effective under the Securities Act and (iii) upon the effectiveness of that Registration Statement, offer to the holders of the Notes the opportunity to exchange their Notes for a like principal amount of New Notes, which would be issued without a restrictive legend and may be reoffered and resold by the Holder without restrictions or limitations under the Securities Act (other than any such holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act). A copy of the Registration Rights Agreement has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The term "Holder" as used in this Prospectus means any person in whose name the Notes are registered on the books of the Company or Trustee, or any other person who has obtained a properly completed bond power from the registered holder. Because the Exchange Offer is for any and all Notes, the number of Notes tendered and exchanged in the Exchange Offer will reduce the principal amount of Notes outstanding. Following the consummation of the Exchange Offer, Holders of the Notes who did not tender their Notes generally will not have any further registration rights under the Registration Rights Agreement, and such Notes will continue to be subject to certain restrictions on transfer. The Notes are currently eligible for sale pursuant to Rule 144A through the PORTAL System of the National Association of Securities Dealers, Inc. Because the Company anticipates that most Holders of Notes will elect to exchange such Notes for New Notes due to the absence of restrictions on the resale of New Notes under the Securities Act, the Company anticipates that the liquidity of the market for any untendered Notes remaining after the consummation of the Exchange Offer may be substantially limited. TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in this Prospectus and in the Letter of Transmittal, the Company will accept any and all Notes validly tendered and not withdrawn prior to 12:00 midnight, New York City time, on the Expiration Date. The Company will issue $1,000 principal amount of New Notes in exchange for each $1,000 principal amount of outstanding Notes accepted in the Exchange Offer. Holders may tender some or all of their Notes pursuant to the Exchange Offer. Notes may be tendered only in integral multiples of $1,000. The form and terms of the New Notes are the same as the form and terms of the Notes except that (i) the New Notes have been registered under the Securities Act and hence will not bear legends restricting the transfer thereof and (ii) the holders of the New Notes generally will not be entitled to any further rights under the Registration Rights Agreement, which rights generally will terminate upon consummation of the Exchange Offer. The New Notes will evidence the same debt as the Notes and will be entitled to the benefits of the Indenture. Holders of Notes do not have any appraisal or dissenters' rights under the Delaware General Corporation Law or the Indenture in connection with the Exchange Offer. The Company intends to conduct the Exchange 24 32 Offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations of the SEC thereunder, including Rule 14e-1 thereunder. The Company shall be deemed to have accepted validly tendered Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering Holders for the purpose of receiving the New Notes from the Company. If any tendered Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, the certificates for any such unaccepted Notes will be returned, without expense, to the tendering Holder thereof as promptly as practicable after the Expiration Date. Holders who tender Notes in the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of Notes pursuant to the Exchange Offer. The Company will pay all charges and expenses, other than transfer taxes in certain circumstances, in connection with the Exchange Offer. See "-- Fees and Expenses." EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "Expiration Date" shall mean 12:00 midnight, New York City time, on , 1998, unless the Company, in its sole discretion, extends the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. To extend the Exchange Offer, the Company will notify the Exchange Agent of any extension by oral or written notice, followed by a public announcement thereof no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. The Company reserves the right, in its reasonable judgment, (i) to delay accepting any Notes, to extend the Exchange Offer or to terminate the Exchange Offer if any of the conditions set forth below under "-- Conditions" shall not have been satisfied, by giving oral or written notice of such delay, extension or termination to the Exchange Agent or (ii) to amend the terms of the Exchange Offer in any manner. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by a public announcement thereof. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendment by means of a supplement to this Prospectus that will be distributed to the registered Holders, and, depending upon the significance of the amendment and the manner of disclosure to the registered Holders, the Company will extend the Exchange Offer for five to ten business days if the Exchange Offer would otherwise expire during such five to ten business-day period. If the Company does not consummate the Exchange Offer, or, in lieu thereof, the Company does not file and cause to become effective a resale shelf registration for the New Notes within the time periods set forth in the Registration Rights Agreement, Liquidated Damages will accrue and be payable on the New Notes either temporarily or permanently. See "Description of New Notes -- Registration Rights; Liquidated Damages." INTEREST ON NEW NOTES The New Notes will bear interest from January 30, 1998, the date of the Note Closing. Accordingly, Holders of Notes that are accepted for exchange will not receive interest that is accrued but unpaid on the Notes at the time of tender, but such interest will be payable on the New Notes on the first interest payment date after the Expiration Date. Interest on the New Notes will be payable semiannually on each February 1 and August 1, commencing on August 1, 1998. PROCEDURES FOR TENDERING Only a Holder of Notes may tender such Notes in the Exchange Offer. To tender in the Exchange Offer, a Holder must complete, sign and date the enclosed Letter of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed if required by the Letter of Transmittal and mail or otherwise deliver such 25 33 Letter of Transmittal or such facsimile, together with the Notes and any other required documents, to the Exchange Agent so as to be received by the Exchange Agent at the address set forth below prior to 12:00 midnight, New York City time, on the Expiration Date. The Letter of Transmittal must be used to tender Notes. Delivery of the Notes may be made by book-entry transfer in accordance with the procedures described below. Confirmation of such book-entry transfer must be received by the Exchange Agent prior to the Expiration Date. By executing the Letter of Transmittal, each Holder will make to the Company the representation set forth below in the second paragraph under the heading "-- Resale of New Notes." The tender by a Holder and the acceptance thereof by the Company will constitute an agreement between such Holder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS. Any beneficial owner whose Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered Holder promptly and instruct such registered Holder to tender on such beneficial owner's behalf. Signatures on the Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution (as defined below) unless the Notes tendered pursuant thereto are tendered (i) by a registered Holder who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. In the event that signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution"). If the Letter of Transmittal is signed by a person other than the registered Holder of any Notes listed therein, such Notes must be endorsed or accompanied by a properly completed bond power, signed by such registered Holder as such registered Holder's name appears on such Notes with the signature thereon guaranteed by an Eligible Institution. If the Letter of Transmittal or any Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by the Company, evidence satisfactory to the Company of their authority to so act must be submitted with the Letter of Transmittal. The Company understands that the Exchange Agent will make a request promptly after the date of this Prospectus to establish accounts with respect to the Notes at the Depository for the purpose of facilitating the Exchange Offer, and subject to the establishment thereof, any financial institution that is a participant in the Depository's system may make book-entry delivery of the Notes by causing the Depository to transfer such Notes into the Exchange Agent's account with respect to the Notes in accordance with the Depository's procedures for such transfer. Although delivery of the Notes may be effected through book-entry transfer into the Exchange Agent's account at the Depository, an appropriate Letter of Transmittal properly completed and duly executed with any required signature guarantee and all other required documents must in each case be transmitted to and received or confirmed by the Exchange Agent at its address set forth below on or prior to 26 34 the Expiration Date, or, if the guaranteed delivery procedures described below are complied with, within the time period provided under such procedures. Delivery of documents to the Depository does not constitute delivery to the Exchange Agent. All questions as to the validity, form, eligibility (including time of receipt), acceptance of tendered Notes and withdrawal of tendered Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Notes not properly tendered or any Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right to waive any defects, irregularities or conditions of tender as to particular Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Notes must be cured within such time as the Company shall determine. Although the Company intends to notify Holders of defects or irregularities with respect to tenders of Notes, none of the Company, the Exchange Agent or any other person shall incur any liability for failure to give such notification. Tenders of Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering Holders, unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Notes and (i) whose New Notes are not immediately available, (ii) who cannot deliver their Notes, the Letter of Transmittal or any other required documents to the Exchange Agent or (iii) who cannot complete the procedures for book-entry transfer, prior to the Expiration Date, may effect a tender if: (a) the tender is made through an Eligible Institution; (b) prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder, the certificate number(s) of such Notes and the principal amount of Notes tendered, stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the Expiration Date, the Letter of Transmittal (or facsimile thereof), together with the certificates(s) representing the Notes (or a confirmation of book-entry transfer of such Notes into the Exchange Agent's account at the Depository) and any other documents required by the Letter of Transmittal, will be deposited by the Eligible Institution with the Exchange Agent; and (c) such properly completed and executed Letter of Transmittal (or facsimile thereof), as well as the certificate(s) representing all tendered Notes in proper form for transfer (or a confirmation of book-entry transfer of such Notes into the Exchange Agent's account at the Depository) and all other documents required by the Letter of Transmittal, are received by the Exchange Agent within three New York Stock Exchange trading days after the Expiration Date. Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be sent to Holders who wish to tender their Notes according to the guaranteed delivery procedures set forth above. WITHDRAWALS OF TENDERS Except as otherwise provided herein, tenders of Notes may be withdrawn at any time prior to 12:00 midnight New York City time, on the Expiration Date. To withdraw a tender of Notes in the Exchange Offer, a written or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth herein prior to 12:00 midnight New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Notes to be withdrawn (the "Depositor"), (ii) identify the Notes to be withdrawn 27 35 (including the certificate number(s) and principal amount of such Notes, or, in the case of Notes transferred by book-entry transfer, the name and number of the account at the Depository to be credited), (iii) be signed by the Holder in the same manner as the original signature on the Letter of Transmittal by which such Notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the Trustee with respect to the Notes register the transfer of such Notes into the name of the person withdrawing the tender and (iv) specify the name in which any such Notes are to be registered, if different from that of the Depositor. All questions as to the validity, form and eligibility (including time or receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no New Notes will be issued with respect thereto unless the Notes so withdrawn are validly retendered. Any Notes which have been tendered but which are withdrawn will be returned to the Holder thereof without cost to such Holder as soon as practicable after withdrawal or termination of the Exchange Offer. Properly withdrawn Notes may be retendered by following one of the procedures described above under "-- Procedures for Tendering" at any time prior to the Expiration Date. CONDITIONS Notwithstanding any other term of the Exchange Offer, the Company shall not be required to accept for exchange, or to exchange New Notes for any Notes, and may terminate or amend the Exchange Offer as provided herein before the acceptance of such Notes, if any law, statute, rule, regulation or interpretation by the staff of the SEC is proposed, adopted or enacted, which, in the reasonable judgment of the Company, might materially impair the ability of the Company to proceed with the Exchange Offer or materially impair the contemplated benefits of the Exchange Offer to the Company. If the Company determines in its reasonable judgment that any of the conditions are not satisfied, the Company may (i) refuse to accept any Notes and return all tendered Notes to the tendering Holders, (ii) extend the Exchange Offer and retain all Notes tendered prior to the expiration of the Exchange Offer, subject, however, to the rights of Holders to withdraw such Notes or (iii) waive such unsatisfied conditions with respect to the Exchange Offer and accept all properly tendered Notes which have not been withdrawn. If such waiver constitutes a material change to the Exchange Offer, the Company will promptly disclose such waiver by means of a supplement to this Prospectus that will be distributed to the registered Holders, and, depending upon the significance of the waiver and the manner of disclosure to the registered Holders, the Company will extend the Exchange Offer for a period of five to ten business days if the Exchange Offer would otherwise expire during such five to ten business-day period. EXCHANGE AGENT State Street Bank and Trust Company will act as Exchange Agent for the Exchange Offer. Questions and requests for assistance, requests for additional copies of this Prospectus or of the Letter of Transmittal for the Notes and requests for copies of a Notice of Guaranteed Delivery should be directed to the Exchange Agent, addressed as follows: By Registered or Certified Mail, Overnight Mail or Courier Service or in Person by Hand: The Exchange Agent State Street Bank and Trust Company of California, N.A. 633 West 5th Street, 12th Floor Los Angeles, California 90071 Attention: Jeanie Mar By Facsimile: (213) 362-7357 28 36 FEES AND EXPENSES The expenses of soliciting tenders will be borne by the Company. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telephone, facsimile or in person by officers and regular employees of the Company and its affiliates. The Company has not retained any dealer-manager in connection with the Exchange Offer and will not make any payments to brokers or other persons soliciting acceptances of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse the Exchange Agent for its reasonable out-of-pocket expenses in connection therewith and pay other registration expenses, including fees and expenses of the Trustee, SEC filing fees, blue sky fees, legal expenses and printing and distribution expenses. The Company will pay all transfer taxes, if any, applicable to the exchange of the Notes pursuant to the Exchange Offer. If, however, certificates representing the New Notes or the Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be issued in the name of, any person other than the registered Holder of the Notes tendered, or if tendered Notes are registered in the name of any person other than the person signing the Letter of Transmittal, or if a transfer tax is imposed for any reason other than the exchange of the Notes for New Notes pursuant to the Exchange Offer as provided herein, then the amount of any such transfer taxes (whether imposed on the registered Holder or any other person) will be payable by the tendering Holder. ACCOUNTING TREATMENT The New Notes will be recorded at the same carrying value as the Notes, which is the aggregate principal amount of the Notes, as reflected in the Company's accounting records on the date of exchange. Accordingly, no gain or loss for accounting purposes will be recognized in connection with the Exchange Offer. The expenses of the Exchange Offer will be amortized over the term of the New Notes. RESALE OF NEW NOTES Based on interpretations by the staff of the SEC set forth in no-action letters issued to third parties, the Company believes that New Notes issued pursuant to the Exchange Offer in exchange for Notes may be offered for resale, resold and otherwise transferred by any Holder of such New Notes (other than any such Holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act; provided, that such New Notes are acquired in the ordinary course of such Holder's business and such Holder does not intend to participate, and has no arrangement or understanding with any person to participate, in a distribution of such New Notes. Any Holder who tenders in the Exchange Offer with the intention to participate, or for the purpose of participating, in a distribution of the New Notes may not rely on the position of the staff of the SEC enunciated in Exxon Capital Holdings Corporation (available April 13, 1989), Morgan Stanley & Co., Incorporated (available June 5, 1991) and Shearman & Sterling (available July 2, 1993), or similar no-action letters, but rather must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Any such resale transaction should be covered by an effective registration statement containing the selling securityholder's information required by Item 507 or 508 of Regulation S-K of the Securities Act, as applicable. In addition, each broker-dealer that receives New Notes for its own account in exchange for Notes, where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, may be a statutory underwriter and must acknowledge in the Letter of Transmittal that it will deliver a prospectus in connection with any resale of New Notes. By tendering in the Exchange Offer, each Holder will represent to the Company that, among other things, (i) the New Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is a Holder, (ii) neither the Holder nor any such other person has an arrangement or understanding with any person to participate in a distribution of such New Notes and (iii) the Holder and such other person acknowledge that if they participate in the Exchange Offer for the purpose of distributing the New Notes (a) they must, in the absence 29 37 of an exemption therefrom, comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the New Notes and cannot rely on the no-action letters referenced above and (b) failure to comply with such requirements in such instance could result in such Holder incurring liability under the Securities Act for which such Holder is not indemnified by the Company. Further, by tendering in the Exchange Offer, each Holder that may be deemed an "affiliate" (as defined under Rule 405 of the Securities Act) of the Company will represent to the Company that such Holder understands and acknowledges that the New Notes may not be offered for resale, resold or otherwise transferred by that Holder without registration under the Securities Act or an exemption therefrom. As set forth above, affiliates of the Company are not entitled to rely on the no-action letters referenced above with respect to resales of the New Notes without compliance with the registration and prospectus delivery requirements of the Securities Act. In connection with the Note Offering, the Company entered into the Registration Rights Agreement pursuant to which the Company agreed to file and maintain, subject to certain limitations, a registration statement that would allow DLJ to engage in market-making transactions with respect to the New Notes. The Company has agreed to bear all registration expenses incurred under such agreement, including printing and distribution expenses, reasonable fees of counsel, blue sky fees and expenses, reasonable fees of independent accountants in connection with the preparation of comfort letters, and SEC and the National Association of Securities Dealers, Inc. filing fees and expenses. CONSEQUENCES OF FAILURE TO EXCHANGE As a result of the making of this Exchange Offer, the Company will have fulfilled its principal obligations under the Registration Rights Agreement, and Holders of Notes who do not tender their Notes generally will not have any further rights under the Registration Rights Agreement. Accordingly, any Holder of Notes that does not exchange that Holder's Notes for New Notes will continue to hold Notes and will be entitled to all the rights and limitations applicable thereto under the Indenture, except to the extent that such rights or limitations, by their terms, terminate or cease to have further effectiveness as a result of the Exchange Offer. The Notes that are not exchanged for New Notes pursuant to the Exchange Offer will remain restricted securities. Accordingly, such Notes may be resold only (i) to the Company (upon redemption thereof or otherwise), (ii) pursuant to an effective registration statement under the Securities Act, (iii) so long as the Notes are eligible for resale pursuant to Rule 144A, to a qualified institutional buyer within the meaning of Rule 144A under the Securities Act in a transaction meeting the requirements of Rule 144A, (iv) outside the United States to a foreign person pursuant to the exemption from the registration requirements of the Securities Act provided by Regulation S thereunder, (v) pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available) or (vi) to an institutional accredited investor in a transaction exempt from the registration requirements of the Securities Act, in each case in accordance with any applicable securities laws of any State of the United States. See "Risk Factors -- Absence of Trading Market; Restrictions on Transfer." OTHER Participation in the Exchange Offer is voluntary and Holders should carefully consider whether to accept. Holders of the Notes are urged to consult their financial and tax advisors in making their own decision on what action to take. The Company may in the future seek to acquire any untendered Notes in open market or privately negotiated transactions, through subsequent exchange offers or otherwise. The Company has no present plans to acquire any Notes that are not tendered in the Exchange Offer or to file a registration statement to assist in making resales of any untendered Notes. 30 38 THE REFINANCING The Note Offering was part of a plan to refinance all of Phase Metrics' then-existing term loan and revolving credit indebtedness under its Former Credit Facility and to make available to the Company additional cash for working capital and certain capital expenditures. At February 28, 1998, the Company had approximately $17.0 million of borrowing availability under the New Credit Facility. Borrowings under the New Credit Facility are secured by substantially all of the existing and future assets of the Company (other than the real estate owned by the Company in San Diego, California on which its headquarters is located) and are guaranteed on a secured basis by all Subsidiary Guarantors. Accordingly, all borrowings under the New Credit Facility and the secured guarantees of the Subsidiary Guarantors in favor of the Lenders will effectively rank senior to the indebtedness evidenced by the New Notes, to the extent of the assets securing such obligations. USE OF PROCEEDS There will be no proceeds to the Company from the Exchange Offer. The net proceeds to the Company from the sale of the Notes were approximately $105.9 million (after deducting discounts and commissions and Note Offering expenses payable by the Company). The Company used all of such net proceeds, together with the Initial Draw of approximately $1.6 million under the New Credit Facility, to repay in full its then-existing term loan and revolving credit indebtedness under the Former Credit Facility, including all accrued interest thereunder to the date of repayment, and all expenses related to the Refinancing. 31 39 CAPITALIZATION The following table sets forth, as of December 31, 1997, the capitalization of the Company and the capitalization of the Company as adjusted to reflect the Refinancing and the Note Offering (and the application of the net proceeds thereof). See "The Refinancing" and "Use of Proceeds."
DECEMBER 31, 1997 ------------------------- ACTUAL AS ADJUSTED (DOLLARS IN THOUSANDS) Cash and cash equivalents................................... $ 2,977 $ 1,220 ======== ======== Debt (including current portion): Existing term loan........................................ $ 79,200 $ -- Existing revolving credit facility........................ 30,700 -- New Credit Facility(1).................................... -- 2,959 Senior Notes due 2005..................................... -- 110,000 Convertible Subordinated Notes............................ 8,000 8,000 Capital lease obligations................................. 3,157 3,157 -------- -------- Total debt (including current portion)............ 121,057 124,116 Series B redeemable preferred stock, $.0001 par value, 192,864 shares authorized, issued and outstanding (liquidation preference of $10,578)....................... 9,237 9,237 Stockholders' deficit: Series A preferred stock, $.0001 par value, 412,500 shares authorized, issued and outstanding (liquidation preference of $9,000).................................. 3 3 Common stock, $.0001 par value, 70,000,000 shares authorized; 5,627,431 shares issued and outstanding................ 6,090 6,090 Retained deficit(2)....................................... (23,166) (24,164) Accumulated translation adjustment........................ (800) (800) -------- -------- Total stockholders' deficit....................... (17,873) (18,871) -------- -------- Total capitalization......................... $112,421 $114,482 ======== ========
- --------------- (1) The Company had, at February 28, 1998, approximately $17.0 million of borrowing availability under the New Credit Facility. See "Description of Indebtedness -- New Credit Facility." The January 30, 1998 Initial Draw under the New Credit Facility was approximately $1.6 million. (2) The change in retained deficit results from the write off of $1.0 million of previously deferred financing fees, net of taxes, related to the Existing Credit Facility. 32 40 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated statement of operations data for the years ended December 31, 1995, 1996 and 1997, and the selected consolidated balance sheet data as of December 31, 1996 and 1997, are derived from the Company's audited Consolidated Financial Statements included elsewhere in this Prospectus. The selected consolidated statement of operations data for the years ended December 31, 1993 and 1994, and the selected consolidated balance sheet data as of December 31, 1993, 1994 and 1995 are derived from the Company's audited Consolidated Financial Statements not included in this Prospectus. The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and related Notes thereto included elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, -------------------------------------------------- 1993 1994(1) 1995(1) 1996(1) 1997 (IN THOUSANDS, EXCEPT RATIOS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales................................................ $6,141 $ 20,064 $116,894 $190,773 $184,660 Gross profit............................................. 3,172 10,099 52,128 86,912 83,366 Operating expenses(2).................................... 2,821 8,530 40,161 98,332 81,131 Income (loss) from operations............................ 351 1,569 11,967 (11,420) 2,235 Interest expense......................................... -- 651 5,625 8,448 11,573 Income (loss) before income taxes and extraordinary items.................................................. 361 943 6,193 (19,842) (9,812) Income tax (benefit) expense(3).......................... -- (611) 1,524 (8,974) (4,268) Income (loss) before extraordinary items................. 361 1,554 4,669 (10,868) (5,544) Extraordinary loss, net of income taxes.................. -- -- -- (1,122) -- Net income (loss)........................................ 361 1,554 4,669 (11,990) (5,544) OTHER DATA: Cash provided by (used for) operating activities......... 387 (1,994) 18,300 (21,402) (6,392) Cash used for investing activities....................... (122) (22,266) (11,102) (45,316) (17,169) Cash provided by (used for) financing activities......... (10) 24,455 (3,099) 64,439 23,883 EBITDA(4)................................................ 420 2,782 27,864 21,533 24,107 Acquisition related earnouts(5).......................... -- -- 1,380 3,781 2,049 Purchased in-process research and development(6)......... -- -- -- 13,935 -- Adjusted EBITDA(7)....................................... 420 2,782 29,244 39,249 26,156 Depreciation, amortization and write-downs of intangible assets................................................. 69 1,213 15,897 32,953 21,872 Capital expenditures..................................... 122 293 9,135 24,564 17,091 Ratio of earnings to fixed charges(8).................... 11.3x 1.6x 1.4x -- 0.2x DECEMBER 31, -------------------------------------------------- 1993 1994 1995 1996 1997 (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................ $ 732 $ 917 $ 5,016 $ 2,737 $ 2,977 Working capital.......................................... 204 (15,616) (5,774) 42,681 66,075 Total assets............................................. 2,531 49,609 119,896 154,013 154,730 Long-term debt, including current portion................ 43 28,200 30,239 96,020 121,057 Redeemable preferred stock............................... -- 314 3,314 6,314 9,237 Stockholders' equity (deficit)(3)........................ 395 (310) 3,592 (9,031) (17,873)
- --------------- (1) In November 1994, the Company acquired ProQuip and certain net assets of Cambrian. Between June 1995 and December 1996, the Company completed six additional acquisitions, including Helios in June 1995, ART in July 1995, certain net assets of Tahoe in July 1995, ABI in January 1996, SBM in December 1996 and a portion of the business of Kirell in December 1996. See Notes 1 and 3 of Notes to Consolidated Financial Statements. Each of these acquisitions was accounted for as a purchase for financial reporting purposes, and, as a result, the Company's consolidated statements include the operating results of ProQuip, Cambrian, Helios, ART, Tahoe, ABI, SBM and a portion of the business of Kirell from their respective acquisition dates. (2) Includes restructuring costs in connection with the acquisitions of ProQuip and Cambrian. The Company incurred approximately $1.0 million of restructuring costs in 1994, primarily related to the elimination of duplicate facilities and information systems. (3) Prior to the Recapitalization (as defined herein), the Company was an S Corporation for 1994 income tax purposes and, as such, taxable income and losses were passed on to the sole stockholder of the Company as cash distributions. Had the Company been a C corporation, assuming a combined statutory 33 41 income tax rate of 41%, income tax expense would have been approximately $.1 million and $.4 million for 1993 and 1994, respectively. The Company has not declared or paid any cash dividends subsequent to its conversion to a C Corporation and does not anticipate paying any cash dividends in the foreseeable future. See "Certain Transactions." (4) EBITDA represents income (loss) from operations before depreciation and amortization and write downs of intangibles. EBITDA is presented because management believes it is a commonly accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income (loss) as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. The Company understands that, while EBITDA is frequently used by securities analysts in the evaluation of companies, EBITDA as used herein is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. (5) Reflects earnout costs incurred by the Company in connection with the acquisitions of Helios, ART, Tahoe and ABI. See Note 9 of Notes to Consolidated Financial Statements. The combined stated maximum obligations under the material arrangements totaled $14.1 million, of which $10.2 million had been earned as of December 31, 1997. (6) The Company expensed certain research and development projects that had not reached technological feasibility and had no alternative future use, primarily in connection with the acquisitions of ABI, SBM and a portion of the business of Kirell. See Note 3 of Notes to Consolidated Financial Statements. (7) Adjusted EBITDA represents EBITDA (see footnote 4 above) before acquisition related earnouts and purchased in-process research and development expense. (8) For purposes of determining this ratio, earnings consist of income (loss) before income taxes (benefits) and extraordinary items. Fixed charges consist of interest expense, a portion of operating lease rental expense that is representative of the interest factor (deemed to be one-third of operating lease rental expense) and dividends on preferred stock. For the year ended December 31, 1996, earnings were inadequate to cover fixed charges by $22.8 million. 34 42 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company commenced operations in 1989 as a specialized merchant supplier of production-test equipment for the data storage industry. From its inception to November 1994, the Company was primarily engaged in developing and selling its flying height tester systems to read/write head manufacturers. In order to expand its operations and capitalize on the growing demand for process and production-test equipment for the data storage industry, in November 1994 the Company completed the Recapitalization and commenced a series of acquisitions of other specialized suppliers of process and production-test equipment. In November 1994, the Company acquired ProQuip and Cambrian, suppliers of advanced process and production-test equipment for disks and read/write heads. In June 1995, the Company acquired Helios, a supplier of advanced servowriter and other related equipment used in the production of disk drives. In July 1995, the Company acquired both ART, a supplier of advanced integrated automation systems for process and production-test equipment, and Tahoe, a developer of advanced quasi-static MR head testers used for testing MR read/write heads. In January 1996, the Company acquired ABI, a supplier of advanced air bearing spindles and other related components used in the Company's products and by others. In December 1996, the Company acquired both SBM, a developer of advanced spinstands and micropositioner equipment and technology used by data storage manufacturers, and a portion of the business of Kirell, a supplier of advanced laser texturizers used in the production of disks. See "Certain Transactions -- Recapitalization." The Company accounted for each of its acquisitions as a purchase, and, as a result, the Company's consolidated statements of operations include the operating results of the acquired businesses from their respective dates of acquisition. In connection with certain of the acquisitions, the Company agreed to make earnout payments based on future sales of certain products acquired in the acquisitions. The combined stated maximum obligations under the material arrangements totaled $14.1 million, of which $3.3 million was considered certain and, accordingly, allocated to the original purchase price, and the remainder of which is being charged to compensation expense as incurred. Of the $14.1 million obligation, $10.2 million had been earned as of December 31, 1997. The remaining $3.9 million will be paid depending on actual sales of the defined products. Also, in connection with the acquisitions, the Company recorded capitalized intangible assets totaling $61.2 million. Capitalized intangible assets consist primarily of purchased technology and are being amortized over approximately three years from the respective acquisition dates. The net book value of such capitalized intangible assets was $5.0 million as of December 31, 1997. There are a relatively small number of data storage manufacturers throughout the world. The Company derives a significant portion of its net sales from a relatively small number of customers and expects such dependence on relatively few key customers to continue in the future. Approximately 52.2%, 45.0% and 51.0% of the Company's net sales in 1995, 1996 and 1997, respectively, were derived from sales to the Company's three largest customers in each of those periods. Even though the Company's customer mix will likely change from period to period in the future, Seagate, Komag, HMT, Iomega and Trace have historically accounted for a significant portion of the Company's net sales. For 1995, 1996 and 1997, Seagate accounted for 25.0%, 19.0% and 18.0%, respectively, of net sales; Komag accounted for 10.7%, 14.5% and 15.9%, respectively, of net sales; HMT accounted for 4.4%, 5.2% and 17.1%, respectively, of net sales; Iomega accounted for 16.5%, 7.9% and 1.9%, respectively, of net sales and Trace accounted for 6.8%, 11.5% and 4.4%, respectively, of net sales. If net sales to these or any other significant customer of the Company were to decrease in any material amount in the future, the Company's business, results of operations and financial condition would be materially adversely affected. The Company has no long-term contracts with its customers, and, in general, the Company's customers may cancel, change or reschedule their orders with limited or no penalty. The Company's customers often submit master purchase orders against which they release specific product orders from time to time, often with little lead time. Any cancellation, reduction, rescheduling or significant delay of anticipated or actual orders from significant customers could have a material adverse effect on the Company's business, results of 35 43 operations and financial condition. Each of the Company's customers has some unique product specification requirements which requires the Company to provide semi-customized products. As a result, per unit sales prices for the Company's products will generally vary by customer and sales order. If production costs with respect to the customization work are underestimated, there could be an adverse impact on the Company's gross profits. In addition, the Company's products often require post-installation, on-site customization and integration in order to tailor products to customer specifications. Revenue and corresponding expenses for significant post-installation services are recognized in the period such services are provided. Inaccurate estimation of such on-site service costs could have a material adverse effect on the Company's business, results of operations and financial condition. The Company derives its revenues primarily from sales of its process and production-test systems and parts for such systems. The Company's products can generally be categorized into four principal areas: (i) disk (media) testing and processing, (ii) read/write head testing, (iii) disk drive testing and processing and (iv) automation. The Company derives a significant portion of its net sales from a relatively small number of products. In 1995, 1996 and 1997, the Company derived approximately 44.0%, 47.0% and 58.9% of its net sales, respectively, from sales of its media certifier products (excluding parts and service), with the MG250 series constituting a majority of the Company's media certifier sales over each of these periods. However, since its introduction in June 1997, sales of the Company's MC950 series media certifier products have become an increasingly higher percentage of its media certifier product sales. Moreover, the Company expects that net sales from its media certifier products, including its MG250 series and its MC950 series, will continue to account for a substantial portion of the Company's total net sales in the foreseeable future. Any significant reduction in demand for its media certifier products would have a material adverse effect on the Company's business, results of operations and financial condition. The Company's operating results have fluctuated in the past and the Company expects that its operating results will continue to fluctuate in the future from quarter to quarter and year to year. These fluctuations have resulted from a number of factors including the size and timing of orders from, and shipments to, major customers; the timing of introductions of new products and product enhancements by the Company or its competitors; the Company's ability to develop, introduce and market new, technologically advanced products; the cyclicality of the data storage industry; the rescheduling of capital expenditures by the Company's customers; variations in the Company's customer base and product mix; the level of any significant volume pricing discounts provided by the Company; the availability and cost of key production materials and components; the Company's ability to effectively manage its inventory and to control costs; the financial stability of major customers; the Company's success in expanding its operations overseas; personnel changes; expenses associated with acquisitions; fluctuations in amortization and write-downs of intangible assets; exchange rate fluctuations and general economic factors. In addition to the foregoing, the Company's period-to-period operating results may fluctuate in the future due to the rescheduling or cancellation of specific orders by its major customers. The Company expects order delays and reschedulings to occur in the future. Because the Company must incur expenses and purchase inventory based on anticipated and actual customer orders, any significant delay, rescheduling or cancellation of such orders would have a material adverse effect on the Company's operating results. For example, during the second and third quarters of 1997, the Company increased its inventory substantially in anticipation of satisfying expected demand from three of the Company's largest customers. A significant portion of this anticipated demand has not materialized to date due to overcapacity of certain process and production-test equipment at these customers. This contributed to net sales for 1997 of $184.7 million compared to $190.8 million for 1996. Moreover, adjusted EBITDA (as defined in footnotes 4 and 7 in "Selected Consolidated Financial Data") for 1997 was $26.2 million compared to $39.2 million of adjusted EBITDA for 1996. Cash used for operating activities decreased from $21.4 million in 1996 to $6.4 million in 1997 due to a smaller net loss, smaller increases year over year in deferred income taxes, inventories and income taxes receivable and a decrease in prepaid expenses and other assets, offset by decreases in depreciation, amortization and write-downs of intangible assets, purchased in-process research and development, an increase in accounts receivable and larger decreases year over year in accounts payable and customer deposits, accrued expenses and other liabilities. A net loss of $12.0 million in 1996 decreased to a net loss of $5.5 million 36 44 in 1997 related primarily to decreases in amortization and write-downs of intangible assets and purchased in-process research and development expenses, offset by increases in research and development and interest expense. See "Selected Consolidated Financial Data." The Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indicators of future performance. Quarterly results in the future may fluctuate due to the factors discussed above or other factors. Further, the Company's historical operating results for any past period are not necessarily indicative of future performance for any particular period in light of the Company's acquisition activity during those periods. 37 45 RESULTS OF OPERATIONS The following tables set forth for the periods indicated certain consolidated statement of operations data in dollars, as well as such data expressed as a percentage of net sales:
YEAR ENDED DECEMBER 31, -------------------------------- 1995 1996 1997 (IN THOUSANDS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales................................................... $116,894 $190,773 $184,660 Cost of sales............................................... 64,766 103,861 101,294 -------- -------- -------- Gross profit.............................................. 52,128 86,912 83,366 Operating expenses: Research and development.................................. 11,372 31,110 43,572 Selling, general and administrative....................... 15,695 24,631 22,968 Amortization and write-downs of intangibles............... 13,094 28,656 14,591 Purchased in-process research and development............. -- 13,935 -- -------- -------- -------- Income (loss) from operations............................... 11,967 (11,420) 2,235 Interest expense............................................ 5,625 8,448 11,573 Other (income) expense -- net............................... 149 (26) 474 -------- -------- -------- Income (loss) before income taxes and extraordinary items... 6,193 (19,842) (9,812) Income tax (benefit) expense................................ 1,524 (8,974) (4,268) -------- -------- -------- Income (loss) before extraordinary items.................... 4,669 (10,868) (5,544) Extraordinary loss, net of income taxes..................... -- (1,122) -- -------- -------- -------- Net income (loss)........................................... $ 4,669 $(11,990) $ (5,544) ======== ======== ======== OTHER DATA: Cash flows provided by (used for) operating activities...... $ 18,300 $(21,402) $ (6,392) Cash flows used for investing activities.................... (11,102) (45,316) (17,169) Cash flows provided by (used for) financing activities...... (3,099) 64,439 23,883 EBITDA(1)................................................... 27,864 21,533 24,107 Adjusted EBITDA(1).......................................... 29,244 39,249 26,156
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales................................................... 100.0% 100.0% 100.0% Cost of sales............................................... 55.4 54.4 54.9 ------- -------- -------- Gross profit.............................................. 44.6 45.6 45.1 Operating expenses: Research and development.................................. 9.7 16.3 23.6 Selling, general and administrative....................... 13.4 12.9 12.4 Amortization and write-downs of intangibles............... 11.2 15.0 7.9 Purchased in-process research and development............. -- 7.3 -- ------- -------- -------- Income (loss) from operations............................... 10.2 (6.0) 1.2 Interest expense............................................ 4.8 4.4 6.3 Other (income) expense -- net............................... 0.1 -- .3 ------- -------- -------- Income (loss) before income taxes and extraordinary items... 5.3 (10.4) (5.3) Income tax (benefit) expense................................ 1.3 (4.7) (2.3) ------- -------- -------- Income (loss) before extraordinary items.................... 4.0 (5.7) (3.0) Extraordinary loss, net of income taxes..................... -- (0.6) -- ------- -------- -------- Net income (loss)........................................... 4.0 (6.3) (3.0) ======= ======== ======== OTHER DATA: Cash flows provided by (used for) operating activities...... 15.7% (11.2)% (3.5)% Cash flows used for investing activities.................... (9.5) (23.8) (9.3) Cash flows provided by (used for) financing activities (2.7) (33.8) 12.9 EBITDA(1)................................................... 23.8 11.3 13.1 Adjusted EBITDA(1).......................................... 25.0 20.6 14.2
- --------------- (1) See "Selected Consolidated Financial Data" for definitions of EBITDA and Adjusted EBITDA. 38 46 Net Sales Net sales consist primarily of revenue from sales of the Company's process and production-test equipment and, to a lesser extent, related upgrades and parts. Net sales decreased 3.2% from $190.8 million for 1996 to $184.7 million for 1997. This decrease was primarily due to decreased sales of the Company's servowriter and automation systems, which was partially offset by increased sales of media certification systems over these periods. Net sales increased 63.2% from $116.9 million for 1995 to $190.8 million for 1996. This increase was due primarily to increased sales of the Company's media certifier systems and automation systems for 1996 compared to 1995. Approximately one-half of this increase in net sales for 1996 was attributable to the effect of the Company's 1995 acquisitions of Helios, ART and Tahoe and the inclusion of their net sales for the entire 1996 period and the Company's acquisition of ABI and the inclusion of its net sales from the date of its acquisition in January 1996. Gross Profit Cost of sales includes material costs, direct labor and overhead costs related to the production and delivery of the Company's products, in addition to warranty and other service costs. Gross profit decreased from $86.9 million for 1996 to $83.4 million for 1997. Gross profit as a percentage of net sales ("gross margin") decreased from 45.6% for 1996 to 45.1% for 1997. The Company is unable to control with any degree of certainty its product sales mix from period to period and therefore the Company's gross margin in future periods may fluctuate from those achieved in past periods. In any period when the Company experiences an unfavorable product sales mix and/or is required to provide significant volume pricing discounts, the Company's gross margin may decrease. Gross profit increased from $52.1 million for 1995 to $86.9 million for 1996. Gross margin increased from 44.6% for 1995 to 45.6% for 1996. The increased gross margin was primarily due to a more favorable product sales mix and certain volume production efficiencies achieved for 1996 compared to 1995. This increase was partially offset by the impact of volume pricing offered by the Company. Research and Development Expense Research and development expense consists primarily of salaries and related costs of personnel and contract labor, project materials and other costs associated with the Company's ongoing research and product development. Research and development expense increased from $31.1 million for 1996 to $43.6 million for 1997. Research and development expense as a percentage of net sales increased from 16.3% for 1996 to 23.6% for 1997. This increase was primarily the result of increased purchases and use of project materials and increased personnel related to significant design improvements for existing products, and research and development related to new and next generation products. The Company anticipates that it will continue to devote a significant amount of financial resources to research and product development for the foreseeable future. Research and development expense increased from $11.4 million for 1995 to $31.1 million for 1996. Research and development expense as a percentage of net sales increased from 9.7% for 1995 to 16.3% for 1996. This increase was attributable to the effect of the Company's 1995 acquisitions of Helios, ART and Tahoe and the inclusion of their research and development expenses for the entire 1996 period and the Company's acquisition of ABI and the inclusion of its research and development expense from the date of its acquisition in January 1996. Selling, General and Administrative Expense Selling, general and administrative expense primarily consists of salaries and related personnel costs, including certain acquisition related earnout costs incurred in connection with the Company's acquisitions of Helios, ART, Tahoe and ABI. See Note 9 of Notes to Consolidated Financial Statements. Selling, general and administrative expense decreased from $24.6 million for 1996 to $23.0 million for 1997. Selling, general 39 47 and administrative expense as a percentage of net sales decreased from 12.9% for 1996 to 12.4% for 1997. The decrease in absolute dollars was principally due to the payment of $1.5 million in special, one-time bonuses to certain senior executive officers of the Company in December of 1996 and lower earnout costs of $2.0 million incurred for 1997 compared to $3.8 million for 1996, which were offset by increased personnel costs. Selling, general and administrative expense increased from $15.7 million for 1995 to $24.6 million for 1996. Selling, general and administrative expense as a percentage of net sales decreased from 13.4% for 1995 to 12.9% for 1996 due to increased net sales over these periods. The increase in absolute dollars for 1996 was primarily attributable to (i) the effect of the Company's 1995 acquisitions of Helios, ART and Tahoe and the inclusion of their selling, general and administrative expenses for the entire 1996 period and the Company's acquisition of ABI and the inclusion of its selling, general and administrative expense from the date of its acquisition in January 1996; (ii) the payment of $1.5 million in special, one-time bonuses to certain senior executive officers of the Company in December 1996 and (iii) higher earnout costs of $3.8 million incurred for 1996 compared to $1.4 million for 1995. Amortization and Write-Downs of Intangibles Amortization and write-downs of intangibles primarily consist of the amortization of intangible assets, including intangible assets acquired in connection with the acquisitions of ProQuip, Cambrian, Helios, ART and ABI (principally purchased technology and covenants not to compete) and write-downs related to the impairment of such assets. See Notes 1 and 3 of Notes to Consolidated Financial Statements. Amortization and write-downs of intangibles decreased from $28.7 million for 1996 to $14.6 million for 1997. This decrease was the result of write-downs to fair value in 1996 related to impairment of certain intangible assets recorded in connection with the Company's acquisitions of ART and Cambrian, partially offset by write-downs to fair value in 1997, related to impairment of certain intangible assets recorded in connection with the Company's acquisition of ABI. Such impairments were generally the result of post-acquisition technological changes that were developed independent of purchased technologies causing a decline in the carrying values of such purchased technologies. Amortization and write-downs of intangibles increased from $13.1 million for 1995 to $28.7 million for 1996, reflecting the result of (i) a full year of 1996 amortization expense related to intangible assets recorded in connection with the Company's June and July 1995 acquisitions of Helios, ART and a portion of the business of Tahoe, (ii) 1996 amortization expense related to intangible assets recorded in connection with the Company's January 1996 acquisition of ABI and (iii) write-downs to fair value related to impairment of certain intangible assets recorded in connection with the Company's acquisitions of ART and Cambrian. Such impairment was generally the result of post-acquisition technological changes that were developed independent of purchased technologies causing a decline in the carrying values of such purchased technologies. Purchased In-Process Research and Development In connection with certain of the Company's acquisitions in 1996, the Company acquired research and development projects that had not reached technical feasibility and had no probable alternative future uses. The amount allocated to purchased in-process research and development for the acquisition of ABI was based on an independent third party valuation and was expensed as of the date of the acquisition. Purchased in-process research and development expense related to the Company's acquisition of ABI was $11.0 million for 1996. Purchased in-process research and development expense relating, in substantial part, to the Company's acquisition of ABI, SBM and a portion of the business of Kirell was $13.9 million for all of 1996. Interest Expense Interest expense increased from $5.6 million for 1995 to $8.4 million for 1996 and to $11.6 million for 1997. These increases primarily reflect the increased debt levels outstanding during the respective periods. 40 48 Income Taxes Income tax expense (benefit) was $1.5 million for 1995, $(9.0) million for 1996 and $(4.3) million for 1997, equating to effective income tax (benefit) rates of 24.6%, (45.2%) and (43.5%), respectively, for such periods. For these periods, the effective income tax rates differed from the applicable statutory rates due primarily to utilization of income tax credits available for research and development expenses and, for 1995 and 1996, to foreign sales. Extraordinary Items Extraordinary items, net of income taxes, were $1.1 million for 1996, and consisted of the write-off of unamortized debt issuance costs in connection with the refinancing of the Company's then-existing credit agreements in January and December 1996, respectively. Cash Flow from Operating Activities Cash flow from operating activities is computed based on net income (loss) plus depreciation, amortization and write-downs of intangibles assets, purchased in-process research and development costs and changes in assets and liabilities. Cash used for operating activities decreased from $21.4 million in 1996 to $6.4 million in 1997 due to a smaller net loss, smaller increases year over year in deferred income taxes, inventories and income taxes receivable and a decrease in prepaid expenses and other assets, offset by decreases in depreciation, amortization and writedown of intangible assets, purchased in-process research and development, an increase in accounts receivable and larger decreases year over year in accounts payable and customer deposits, accrued expenses and other liabilities. Cash provided by (used for) operating activities decreased from $18.3 million provided in 1995 to $21.4 million used in 1996 due to the 1996 net loss, decreases in accounts payable and customer deposits, accrued expenses and other liabilities, an increase in income tax receivable, as well as larger increases year over year in deferred income taxes, prepaid expenses and other assets offset by increases in depreciation, amortization and writedown of intangible assets and purchased in-process research and development and a decrease in accounts receivable. EBITDA and Adjusted EBITDA EBITDA represents income (loss) from operations before depreciation and amortization and write downs of intangibles. Adjusted EBITDA represents EBITDA before acquisition related earnouts and purchased in-process research and development expense. EBITDA and Adjusted EBITDA are presented because management believes EBITDA is a commonly accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA and Adjusted EBITDA are not intended to represent cash flows for the period, nor have they been presented as an alternative to operating income (loss) as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. Adjusted EBITDA decreased from $39.2 million for 1996 to $26.2 million for 1997. This decrease resulted primarily from an increase in research and development expense, partially offset by decreases in gross profit and selling, general and administrative expenses. Adjusted EBITDA increased from $29.2 million for 1995 to $39.2 million for 1996. This increase was due to increased gross profit, partially offset by increased research and development and selling, general and administrative expenses. 41 49 LIQUIDITY AND CAPITAL RESOURCES Since the Recapitalization in November 1994, the Company has financed its capital requirements through (i) sales of common and preferred stock, (ii) term and revolving debt under certain credit facilities and (iii) cash generated by operations in 1995. Following this Exchange Offer, the Company's principal sources of liquidity will be cash flow from operations and borrowing availability under the New Credit Facility. The Company's principal requirements for cash will be debt service requirements, capital expenditures and working capital. The New Credit Facility provides the Company with up to $25.0 million of revolving credit, subject to certain conditions, which limit could be increased to $40.0 million at the sole discretion of the Lenders. Borrowing availability under the New Credit Facility is based on a borrowing base test that includes 75% of the Company's eligible receivables. If the Company meets certain financial tests, the borrowing base test will be increased to 80% of the Company's eligible receivables and will be expanded to include 25% of the Company's eligible inventory (subject to a cap of $10.0 million). At February 28, 1998, the Company had approximately $17.0 million of borrowing availability under the New Credit Facility. Indebtedness under the New Credit Facility matures in January 2001. The Initial Draw under the New Credit Facility was approximately $1.6 million. Borrowings under the New Credit Facility bear interest, at the Company's option, based on LIBOR (as defined herein) plus 3.0% or a base rate (based on the prime rate) plus 1.0%. The Company's obligations under the New Credit Facility are secured by substantially all of the Company's current and future assets (other than the real estate owned by the Company in San Diego, California on which its headquarters is located), including a pledge of the capital stock of all of its direct and indirect subsidiaries, subject to certain limitations with respect to foreign subsidiaries. In addition, the Subsidiary Guarantors have guaranteed on a secured basis the obligations of the Company under the New Credit Facility. Accordingly, all borrowings under the New Credit Facility and the guarantees of the Subsidiary Guarantors in favor of the Lenders effectively rank senior to indebtedness under the New Notes, to the extent of the assets securing such obligations. The New Credit Facility contains customary covenants and events of default, including substantial restrictions on the Company's ability to incur additional indebtedness. See "The Refinancing" and "Description of Indebtedness -- New Credit Facility." As of December 31, 1997, the Company's outstanding indebtedness included $109.9 million under the Former Credit Facility, $8.0 million under its Convertible Subordinated Notes and approximately $3.2 million of capital lease obligations. The $109.9 million of indebtedness was refinanced with the Notes, which bear interest at 10.75%, and the Initial Draw. At December 31, 1997, the Company had $6.1 million of accrued interest on indebtedness outstanding on the Convertible Subordinated Notes. The Convertible Subordinated Notes (including all accrued interest thereon) are convertible into 5,142,720 shares of Common Stock at the option of the holders thereof and will automatically convert upon the consummation of an initial public offering of the Company's Common Stock. See "Description of Indebtedness -- Convertible Subordinated Notes." Cash used for investing activities was $45.3 million in 1996 and consisted of cash used in connection with the acquisitions of ABI, SBM and a portion of the business of Kirell as well as investments in property and equipment. Cash used for investing activities was $17.2 million in 1997 and consisted of purchases of property and equipment. Cash provided by financing activities was $64.4 million in 1996 and consisted of the net proceeds from the Company's January 1996 and December 1996 refinancings of its then-existing credit facilities, as well as the sale-lease back of the Company's information and telecommunications systems. Cash provided by financing activities was $23.9 million in 1997 and consisted of the net proceeds from the Company's existing revolving credit facility. The Company plans approximately $6.0 million in capital expenditures during the next 12 months. The Company has no material outstanding commitments with respect to such planned expenditures. The Company believes the net proceeds from the Note Offering, together with cash generated from operations, borrowing availability under the New Credit Facility and existing cash balances will be adequate to fund its operations for at least the next 12 months. While operating activities may provide cash in certain 42 50 periods, continued expansion of the Company's operations may require additional sources of financing. The Company may also from time to time consider additional acquisitions of complementary businesses, products or technologies, which may require additional financing. Additional sources of funding could include additional debt and/or equity financings. Upon completion of this Exchange Offer, the Company will continue to have limited capital resources and significant future obligations and expects that it will require additional capital to support future growth, if any. The existence of certain restrictive covenants in the New Credit Facility and the Indenture for the New Notes may inhibit the Company's ability to raise additional financing. There can be no assurance that the Company will be able to obtain alternative sources of financing on favorable terms, if at all, at such time or times as the Company may require such capital. See "Risk Factors -- Substantial Leverage; Ability to Service Indebtedness." 43 51 BUSINESS The Company is the world's leading supplier of technologically advanced process and production-test equipment for the data storage industry. The Company's systems are used primarily by manufacturers of disk drives and disk drive components (disks and read/write heads) at critical stages of their production processes. The Company's systems, substantially all of which incorporate significant amounts of proprietary technology and are software intensive, include (i) media certifiers, burnishers, glide height testers, optical scanners and laser texturizers which are used in the production of thin-film disks (media), (ii) servowriters and electronic testers used in the production of disk drives and high capacity disk cartridges, (iii) flying height testers and quasi-static magnetoresistive ("MR") head testers used in the production of read/write heads and (iv) integrated automation systems for the disk drive, disk and read/write head test and manufacturing processes. The Company's production-test systems (e.g., media certifiers, glide testers, flying height testers and quasi-static MR head testers) are designed to provide in-line testing, measurement and analysis throughout the manufacturing process, enabling manufacturers to detect defects, sort products by performance grade and make real-time process improvement decisions that can significantly impact product yields, time-to-market, profitability and return on investment. The Company's process systems (e.g., servowriters, disk burnishers and disk laser texturizers) perform precise manufacturing process functions. Phase Metrics' customers include substantially all of the world's leading data storage companies. INDUSTRY BACKGROUND The increasing demand for process and production-test equipment for the data storage industry is driven by three primary factors: (i) the overall demand for disk drives and disk drive components; (ii) rapid advances in data storage technology and (iii) yield management challenges and margin pressure facing data storage manufacturers. Demand for Disk Drives and Disk Drive Components Demand for PCs and workstations and the growing use of network servers is stimulating strong demand for disk drives and disk drive components. According to International Data Corporation ("IDC"), combined world-wide shipments of PCs, workstations and servers are expected to reach approximately 91 million units in 1998, growing to approximately 116 million units by 2000. Moreover, unit growth rates for disk drives and disk drive components are expected to exceed unit growth rates for PCs, workstations and servers, due to a variety of factors, including the rapidly increasing demand for high performance replacement disk drives and high-capacity, removable-disk storage devices. Increasing demand for greater data storage capacity is further stimulating unit sales growth in disk drives and disk drive components. Factors contributing to this increasing demand for greater storage capacity include: - The development of more storage intensive operating systems and larger software "suites" - The continuing migration to networked architectures with greater storage requirements - Demand for more storage intensive software applications such as data warehousing, digital image storing, enhanced graphics, multimedia and video on demand - Rapidly increasing Internet usage, including the ready availability of data-intensive files which can be downloaded to a user's disk drive Stimulated by these underlying market drivers, unit shipments of disk drives and disk drive components have been growing rapidly over the past ten years. According to IDC, world-wide shipments of hard disk drives are expected to reach approximately 150 million units in 1998, growing to approximately 209 million units by 2000. In addition, according to DISK/TREND, Inc., world-wide shipments of high-capacity, removable-disk drives are expected to reach approximately 18 million units in 1998, growing to approximately 32 million units by 2000. Strong world-wide demand for disk drives has resulted in a growing demand for disks and read/write heads. According to TrendFOCUS, Inc. ("TrendFOCUS"), the number of disks and 44 52 read/write heads produced is expected to reach approximately 449 million and 868 million units, respectively, in 1998, growing to approximately 602 million and 1,204 million units, respectively, in 2000. The increasing demand for disk drives, disks and read/write heads requires manufacturers to expand their production capacity. Based on industry data, the Company believes that major disk drive and disk drive component manufacturers spent approximately $2.2 billion in 1997 on expanding their facilities and purchasing capital equipment to increase production capacity. Disk Drive Technology The principal components of a hard disk drive are disks (media), read/write heads, spindle, actuator mechanics and electronics. Today, each disk drive typically contains from one to ten disks that are attached to a spindle/motor assembly. The read/write head is a small magnetic transducer that, when the disk is spinning, "flies" just above the disk surface. Data are written on data storing tracks on the disk when the disk drive's electronics send current pulses to the head. These pulses cause the magnetic layer within the disk and under the recording head to become magnetized, resulting in the storage of data on the disk. During the read-back process, as the read/write head scans over the disk, magnetic flux from the disk is picked up by the head and induces an electrical current which is converted into voltage. The voltage is then transformed into digital data by the disk drive's electronics. Recently introduced, high-capacity, removable-disk storage devices operate under substantially the same principals with the added benefit of disk removability and portability. The following diagram illustrates the principal components of a disk drive: Disk Drive Diagram Technological Change The performance characteristics of disk drives are continually advancing which in turn are requiring concurrent advancements in process and production-test equipment technology. The critical performance characteristics of a disk drive are: (i) capacity -- the amount of data stored, measured in megabytes or gigabytes; (ii) transfer rate -- the speed with which data can be transferred between the disk drive and computer, measured in megabits per second and (iii) access speed -- the time it takes to locate data on the disk, measured in milliseconds. Demand for greater storage capacity, faster transfer rates and faster access speeds, all within the same or smaller form factors, has resulted in rapid and constant advances in disk drive technology. In general, disk drive capacity can be improved by increasing the areal density of data on a disk. According to the International Disk Drive Equipment and Materials Association ("IDEMA"), areal density has been growing at an average compound rate of approximately 60% per year since 1991. Areal density is the amount of data (bits) that can be stored in a square inch on the disk and is determined by multiplying track density (tracks per inch) by average bit density on each inch of track (bits per inch). Therefore, the capacity of a disk drive can be increased by increasing the number of tracks on the disk and/or increasing the number 45 53 of bits of data in an inch of track. Lower head flying heights over the disk surface area are necessary to achieve the small bit sizes required by increasing areal density. The lower the head flies above the disk surface, the more accurately the head can read the magnetic signal, allowing a smaller magnetized region on the track to store each bit of data. Accordingly, the flying height of read/write heads on very high areal density capacity disk drives has been reduced to less than one microinch in some cases. In addition to increasing the capacity of a disk by increasing areal density, the transfer rate and access time performance characteristics of a disk drive can be improved by rotating the disk at a faster rate. In disk drives today, the spindle/motor assembly rotates the disk at 4,500 to 10,000 revolutions per minute, compared to 3,600 to 7,200 revolutions per minute less than three years ago. Although increases in areal density and improved disk drive performance characteristics have resulted in significant advancements for disk drives, demand for even greater performance enhancements is continually stimulating development and introduction of entirely new disk drive technologies. This is evidenced by the recent introduction of MR heads. MR heads are significantly more sensitive than inductive heads in reading data from disks with higher areal densities. As a result, disk drive, disk and read/write head manufacturers are rapidly transitioning to MR technologies. According to TrendFOCUS, MR heads represented only 12% of the overall head market in 1995, but are expected to grow to approximately 55% of the overall head market in 1997 and over 90% by 1999. While technological advancements are enabling manufacturers to produce significantly higher capacity disk drives with greater transfer rates and faster access times, they are also presenting significant technological challenges and increasing the complexity of manufacturing processes. For example, the ability of disk manufacturers to produce disks capable of higher areal densities is directly related to manufacturers' ability to control critical disk attributes such as (i) increasing the magnetic strength or "coercivity" of a disk by providing higher quality magnetic domains and thereby reducing the potential for "noise"; (ii) limiting surface imperfections to reduce the amount of unusable space on a disk and (iii) controlling smoothness and flatness to allow for lower head flying heights without head/disk contact. In addition, even though smaller read/write heads facilitate increasing areal densities, they are more easily damaged and are more difficult to manufacture. MR heads in particular are difficult to manufacture because of their small size and the presence of the delicate MR element which is highly sensitive to electro-static discharge. Faster access speeds and greater transfer rates require both advanced channel technology to improve data communications and increasing disk rotation speeds. As a result of these complexities, disk drive and disk drive component manufacturers are installing increasingly sophisticated manufacturing processes. The growing complexity of disk drive manufacturing is in turn increasing test and production times per product and creating pressure on manufacturing costs. These trends have resulted in greater demand for sophisticated process and production-test equipment. Yield Management As data storage technology advances and manufacturing processes become more complex, maximizing yield is increasingly critical to the data storage industry. The ability to rapidly achieve and maintain high product yield is one of the most important determinants of profitability in this highly competitive industry. However, as disk drives and disk drive components are designed within more precise tolerances, product yield becomes more sensitive to increasingly smaller irregularities in the manufacturing process. Manufacturers must therefore rely on yield management and process monitoring equipment to improve their product yields and remain competitive. Process and production-test equipment enables manufacturers to increase yield more quickly when a product is new and improve a product's time to volume. In addition, early detection of defects in the manufacturing process with the use of production-test equipment allows manufacturers to improve yield through the availability of test data and on-line analysis capabilities that enable real-time process improvements. Moreover, production processes in the data storage industry involve numerous sequential costly process steps. Production-test equipment enables manufacturers to identify non-conforming products early in the manufacturing process, thus avoiding additional costly manufacturing steps and/or the addition of expensive componentry which is later scrapped. These pressures have also resulted in increased demand for process and production-test equipment. 46 54 Market for Process and Production-Test Equipment Major manufacturers of disk drives and disk drive components require a variety of high precision process and production-test equipment. These technologically advanced products combine significant amounts of software with high precision electro-mechanical componentry to provide real-time, high throughput processing and production management capabilities. Process equipment is used by manufacturers to perform manufacturing processes within increasingly precise tolerances enabling the production of higher performance data storage devices. Such process equipment includes servowriters for writing servo tracks on nearly completed disk drives, burnishers for removing bumps from the surface of a disk and laser texturizers for providing required bumps on a portion of a disk's surface to prevent "stiction," namely the head sticking to the surface of a disk. Production-test equipment is used by manufacturers to perform precise inline testing, measurement and analysis throughout the manufacturing process enabling manufacturers to detect defects and make real-time production improvement decisions that can significantly impact customers' product yield and profitability. Production-test equipment is also used in research and development laboratories. Production-test equipment includes media certifiers to verify the magnetic integrity of a disk and an optical media scanner to verify the physical integrity of the disk surface, flying height testers to determine the height a head flies above a disk and quasi-static MR head testers to measure MR head characteristics. The process and production-test equipment market for the data storage industry is served by both merchant suppliers as well as the "captive" or internal departments of data storage companies that develop and manufacture process and production-test equipment for their own use. Historically, disk drive and disk drive component manufacturers developed much of their own process and production-test equipment internally and purchased a lesser amount of such equipment from merchant suppliers. As the production process becomes more complex and production capacity becomes more expensive to build and maintain, however, data storage manufacturers are focusing more on their own core competencies -- product design and production -- to remain competitive. This in turn has caused increasing reliance on merchant suppliers of process and production-test equipment. The enabling tools developed by such merchant suppliers allow disk drive and disk drive component manufacturers to incorporate more advanced production techniques into their manufacturing processes and more accurately measure the conformity of component parts of the disk drive to their specifications. The growing demand for digital data storage capacity and the increasing complexity of data storage technology and related manufacturing challenges have caused demand for process and production-test equipment to grow rapidly in recent years. According to Peripheral Research Corporation, merchant suppliers are expected to sell approximately $484 million of process and production-test equipment to the data storage industry in 1998, growing to approximately $616 million in 1999. The process and production-test equipment industry was characterized by a relatively fragmented group of specialized independent equipment suppliers. These suppliers often had limited technological competence and narrow product offerings. In addition, most of these specialized suppliers lacked the critical mass to support extensive research and development programs and world-wide customer service and support. As data storage manufacturers focus more on their own core competencies in an increasingly global marketplace they are increasingly seeking process and production-test capital equipment suppliers that can play a strategic role in their ongoing product development and manufacturing processes and at the same time provide world-wide service and support. COMPETITIVE STRENGTHS The Company believes that it possesses key competitive strengths that have enabled it to become the leading supplier of technologically advanced process and production-test equipment for the data storage industry. These competitive strengths include: Broad Product Line and Extensive Technology Base. The Company believes that it is a technological leader in designing, manufacturing and servicing process and production-test systems that perform critical applications throughout the disk drive and disk drive component production processes. These systems contain a significant amount of proprietary software, sophisticated electronics, and high precision mechanics. As evidence of its technological leadership, the Company believes it was the first to market with systems 47 55 incorporating numerous important new technologies, including (i) in 1993, the first testing system capable of accurately measuring the flying height of a read/write head below one microinch; (ii) in 1995, the first disk (media) certifier with integrated optical defect scanning and also the first certifier with digital glide certification; (iii) in 1996, the first family of MR head testers to address each stage of the manufacturing process for the rapidly growing MR head market and (iv) in 1997, the first disk drive servowriter to incorporate non-contact, laser positioning technology. The Company currently holds 27 patents in the United States, with an additional 72 patent applications pending in the United States. The Company also holds a number of foreign patents and has filed a number of foreign patent applications. Largest World-Wide Installed Base of Systems. Based in part on published industry data, the Company believes it has the largest world-wide installed base of process and production-test systems serving the data storage industry. The Company is able to leverage this installed base by selling these customers additional systems, as well as upgrades to existing systems to address rapidly changing industry requirements. The Company believes that such upgrades are becoming an increasingly important source of revenue for the Company. Focused Research and Development. In response to rapidly changing technical requirements in the data storage industry and to maintain its technological leadership, the Company is continually engaged in efforts to improve its systems and introduce innovative products and technologies. With approximately 200 engineers focused on research and development, the Company believes that it maintains the largest engineering group in the world focusing on technological solutions for data storage manufacturers. Moreover, in 1996, the Company formed an advanced research department focused exclusively on developing and procuring critical technologies for next-generation systems. In 1997, the Company invested approximately $43.6 million in its research and development efforts and expects to continue to devote significant resources toward maintaining its technological leadership. Extensive Global Infrastructure. In addition to its extensive sales and customer service and support infrastructure in the United States, since the beginning of 1996 the Company has established sales and customer service and support offices in Japan, South Korea, Singapore, Thailand and Taiwan. The Company believes that substantial growth opportunities exist for sales of its systems to domestic and foreign-based customers for use in their manufacturing facilities located in Southeast Asia. Therefore, the Company currently has 40 dedicated customer service and support engineers and technicians in Southeast Asia, which the Company believes is the largest foreign-based group of customer service and support personnel of any domestic supplier of process and production-test equipment to the data storage industry. Experienced Management Team With Significant Ownership. The Company's Chairman and Chief Executive Officer, John F. Schaefer, and its Vice President, Finance and Chief Financial Officer, R. Joseph Saunders, joined the Company in November 1994. Working with Arthur J. Cormier, the founder and previous President of the Company, the Company assembled a group of experienced officers, middle managers and senior technologists. Mr. Cormier is currently serving as a director of and consultant to the Company. This senior management team has grown the Company's sales, both internally and through acquisitions, from approximately $20.1 million in 1994 to approximately $184.7 million for 1997. The Company's directors and officers and their respective affiliates beneficially own approximately 86.6% of the Company's capital stock. Demonstrated Ability to Integrate Acquisitions. In order to expand its operations and capitalize on the growing demand for process and production-test equipment for the data storage industry, since November 1994, the Company's management team has acquired seven specialized suppliers of process and production-test systems or technologies. The Company believes that it has successfully integrated each of these acquisitions into its operations. 48 56 GROWTH STRATEGY The Company believes that it is well-positioned to grow future revenue and cash flow. The key elements of the Company's growth strategy are as follows: Maintain Leadership in Core Technologies. The Company intends to remain a technological leader in its markets by continuing to work with customers, academic institutions and independent third parties to identify emerging data storage technology trends early in the development process and contribute to the development of standards related to process and production-test for the data storage industry. Because the Company's systems are integral to its customers' manufacturing processes, the Company believes that it is well-positioned to utilize its research and development resources to partner with its customers in the development of next-generation products. Leverage Installed Base of Systems. The Company intends to leverage its installed base of systems by selling new systems to existing customers and by continuing to develop and aggressively market system upgrade solutions in response to rapidly changing industry requirements. In addition, because data storage manufacturers are required to focus increasingly on their own core competencies, the Company believes that there is a significant opportunity to increase its sales by supplying certain process and production-test equipment to data storage manufacturers that currently develop such systems internally. Leverage and Expand Global Infrastructure. Due to its extensive global service and support infrastructure, the Company believes it is well-positioned to increase productivity and profitability. In particular, the Company believes that it will be able to leverage the significant investment it has made in establishing a sales and customer service and support infrastructure in Southeast Asia to capitalize on the increasing activity in the data storage industry in that region. As data storage manufacturers require equipment suppliers to support their increasingly global operations, the Company intends to continue to expand its world-wide service and support network. Pursue Complementary Acquisitions. As with many other industries, data storage manufacturers are increasingly attempting to rationalize their vendor bases. As a result, there has been an increasing trend toward consolidation of data storage equipment suppliers. The Company intends to continue to capitalize on this trend by completing complementary acquisitions of additional product lines, technologies and related businesses. The Company believes that its market leadership position and demonstrated ability to successfully integrate strategic acquisitions will continue to attract additional strategic opportunities. PRODUCTS The Company's process and production-test products are an integral part of the process of manufacturing disk drives, disks and read/write heads. The Company's products address the increasingly complex disk drive and disk drive component production processes and the constant pressure to improve manufacturing yields. The Company's products combine substantial proprietary technology, including extensive software, custom electronic componentry, micro-positioning systems, high-performance air bearing spindles, optical detectors, and various other internally designed probes required for detection and measurement, together with commercially available components such as high performance lasers, DC motors and optical encoders. The proprietary software incorporated into each of the Company's products enable real-time process and production-test capabilities without off-line processing. The Company believes that its proprietary software offers a competitive advantage due to its powerful signal processing and analysis capabilities, flexible user-interface, and adaptability to specific customer applications. The Company's products are categorized into four principal areas: (i) disk (media) process and production-test equipment; (ii) read/write head production-test equipment; (iii) disk drive process and production-test equipment and (iv) production automation equipment. The Company's products are predominantly used in an in-line production mode by the Company's customers. As such, the customers integrate the Company's products into their processes, using multiple variations of test protocols available on the systems. The Company's software facilitates this adaptation process and, accordingly, substantially all of the Company's products are semi-customized to satisfy each customer's unique product specifications and test 49 57 requirements. The Company anticipates more extensive customization of its products in the future due to the increasing complexity of the technology and production processes for data storage devices. Therefore, the Company continually endeavors to enhance its products with new features and functionality. The Company has demonstrated the ability to provide required customizations and product upgrades in response to changes in data storage technology. With its substantial product development and research capability and commitment to maintaining close relationships with its customers, the Company believes it is well positioned to continue to provide cost-effective solutions to the rapidly changing data storage industry. The following tables include the Company's principal current products and products expected to be introduced during the first nine months of 1998. DISK (MEDIA) PROCESS AND PRODUCTION-TEST EQUIPMENT
- --------------------------------------------------------------------------------------------------------------- PRODUCT INTRODUCTION DATE APPLICATIONS ---------------------------- ---------------------- ------------------------------------------------- MEDIA CERTIFIERS - --------------------------------------------------------------------------------------------------------------- MG250 February 1995 Burnishing (removes bumps and particles from the MC950 June 1997 surface MG250APS January 1996 of a finished disk) MG250EPS January 1998 MC950EPS Second Quarter of 1998 Optical Scanning ("EPS" Option optically scans MSA950 Second Quarter of 1998 the surface of a finished disk for defects that could damage the glide head) Glide Certification (verifies that the surface of a finished disk does not have protrusions in excess of certain specified limits) Media Certification (verifies that data can be written and read from a finished disk within certain specifications) OPTICAL INSPECTION SYSTEMS - --------------------------------------------------------------------------------------------------------------- PS5000 September 1997 Optical Scanning (scans for defects on disk substrates and/or finished disks) LASER TEXTURIZER - --------------------------------------------------------------------------------------------------------------- LT1000 April 1997 Laser Texturizing (creates precise surface bumps on disks for head landing zones) MEDIA BALANCE TESTER - --------------------------------------------------------------------------------------------------------------- MB1000 November 1996 Media Balancing (verifies that disk substrates or finished disks are in balance within required specifications) - ---------------------------------------------------------------------------------------------------------------
50 58 HEAD PRODUCTION-TEST EQUIPMENT
- --------------------------------------------------------------------------------------------------------------- PRODUCT INTRODUCTION DATE APPLICATIONS ---------------------------- ---------------------- ------------------------------------------------- MR QUASI-STATIC HEAD TESTERS - --------------------------------------------------------------------------------------------------------------- MRH(HGA-level Tester) September 1995 MR Quasi-static Testing (conducts critical tests MRW(Wafer-level Tester) September 1996 at the wafer, bar, slider or HGA level of MR head MRS(Slider-level Tester) June 1997 production, including resistance, amplitude, MRB(Bar-level Tester) September 1997 asymmetry and stability tests) HGA RESONANCE TESTER - --------------------------------------------------------------------------------------------------------------- HRT June 1994 Mechanical Resonance Testing (tests HGA for mechanical resonance characteristics within required specifications) FLYING HEIGHT TESTERS - --------------------------------------------------------------------------------------------------------------- DFHT II September 1995 Flying Height Testing (measures head to disk DFHT III January 1998 spacing ("flying height") under various dynamic FH3000 June 1996 test conditions) FH4000 September 1996 SPINSTAND - --------------------------------------------------------------------------------------------------------------- Metric 133 May 1998 Mechanics platform for head and disk testing (used for multiple testing tasks, includes a precision air bearing spindle, X, Y, and Z stages and a micropositioner) - ---------------------------------------------------------------------------------------------------------------
DISK DRIVE PROCESS AND PRODUCTION-TEST EQUIPMENT
- --------------------------------------------------------------------------------------------------------------- PRODUCT INTRODUCTION DATE APPLICATIONS ---------------------------- ---------------------- ------------------------------------------------- SERVOWRITERS - --------------------------------------------------------------------------------------------------------------- HS5100 March 1997 Servowriting Drives (establishes reference tracks HS6100 September 1997 on hard disk drives to provide track/head HS7000 September 1997 position information essential to operation) Servowriting Media (establishes reference tracks on high capacity removable storage devices (cartridges), both floppy and hard disk, to provide track/head position information essential to operation) DISK DRIVE SIMULATOR - --------------------------------------------------------------------------------------------------------------- Proteus July 1991 Electronic Disk Drive Simulator (tests disk drive electronics) - ---------------------------------------------------------------------------------------------------------------
PRODUCTION AUTOMATION EQUIPMENT
- --------------------------------------------------------------------------------------------------------------- PRODUCT INTRODUCTION DATE APPLICATIONS ---------------------------- ---------------------- ------------------------------------------------- AUTOMATION - --------------------------------------------------------------------------------------------------------------- Media Certifier Workcell August 1995 Production Media Handling (provides automated Optical Inspection Workcell October 1997 handling of disks with certifiers, and sorts disks into grades according to test results) - ---------------------------------------------------------------------------------------------------------------
51 59 Disk (Media) Process and Production-Test Equipment The Company's disk-related test and certification products are used in-line to test, certify and sort disks. The Company believes that its disk-related products were used to test over half of the approximately 449 million disks produced worldwide in 1997. The Company's customers also use these products to provide quality control and to develop new products. The Company's two media certifier product series and its optical inspection product perform one or more of the following functions: (i) burnishing -- removing bumps and particles from the surface of a finished disk; (ii) optical scanning -- optically scanning the surface of a finished disk for defects that could damage the glide head; (iii) glide certification -- verifying that the surface of a finished disk does not have protrusions in excess of certain specified limits; and (iv) media certification -- verifying that data can be written and read from a finished disk within certain specifications. The Company's disk-related automation products provide automated handling of disks with certifiers, and sort disks into grades according to test results. The Company's laser texturizer creates precise surface bumps on disks for head landing zones, i.e., the area of the disk where the head rests when the disk drive is not in operation. This process reduces the potential for stiction (head sticking to the disk). The Company's media balance tester verifies that disk substrates or finished disks are in balance within required specifications. Designed to provide maximum throughput in high-volume, tightly controlled disk manufacturing environments, the Company's disk-related products are selected by Phase Metrics' customers to improve product yield, quality, and production throughput. Based in part on published industry data, the Company believes it has the largest installed base worldwide of disk production-test equipment with approximately 4,000 stations. MG250 and MG250EPS Media Certifiers. The MG250 product series certifies disks to ensure that their magnetic integrity and physical properties meet the stringent requirements of disk drive manufacturers. The single spindle, spiral-type MG250 certifier incorporates the following functions: burnishing, optical scanning (optional), glide testing, and certifying finished disks. The MG250 offers an innovative MR-capable spiral certification approach, which provides high process throughput. This MR-capable product is designed to perform over a wide range of disk test conditions while operating at test frequencies up to 50 MHz with low-glide technology to accommodate high areal density media. The MG250 features a user-friendly interface, a fully programmable analog channel, and automatic internal calibration algorithm. The MG250EPS incorporates pre-glide optical scanning of the disk, which reduces operating costs by increasing the useful life of the glide head used in the test process. MC950 and MC950EPS Media Certifiers. The recently introduced MC950 product series also certifies disks to ensure that their magnetic integrity and physical properties meet the stringent requirements of disk drive manufacturers. The MC950 incorporates two spindles and provides the functionality provided by the MG250. However, the MC950 uses the classic step-and-repeat technology for media certification favored by certain major customers, as opposed to the spiral certification approach employed by the MG250. The MC950EPS will incorporate pre-glide optical scanning of the disk, which will reduce operating costs by increasing the useful life of the glide head used in the test process. The "EPS" optical scanning option is expected to be available in the second quarter of 1998. PS5000 Disk Inspection System. The PS5000 is an optical scanning system that scans for defects on disk substrates and/or finished disks. The PS5000 stand-alone system is used by hard disk drive, substrate and media manufacturers for failure analysis in both engineering and production environments. An automated workcell configuration provides in-line inspection to allow substrate or finished disk manufacturers to control and improve key process steps producing up to 500 disks per hour and resulting in higher production yields, output and product quality. The PS5000 has industry leading submicron-level defect detection capability and features a spiral scanning technique for high throughput. LT1000 Laser Texturizer. The LT1000 is used to create precise surface bumps on disks for head landing zones. The LT1000 also provides texture verification to ensure that all disks are properly textured before moving to the next process step. 52 60 MB1000 Media Balance Tester. The MB1000 verifies that disk substrates or finished disks are in balance within required specifications. Increasing rotation speeds used in high-end disk drives combined with more disks per drive has tended to cause an increased sensitivity to media balance. The MB1000, which incorporates an advanced air bearing spindle and a design that facilitates fast disk loading and alignment, provides rapid pass/fail testing for adjustable balance criteria. Testing may be performed at both substrate as well as finished disk levels. Head Production-Test Equipment The Company's head testing products are used by leading disk drive head manufacturers in the development, design and testing of their products to improve manufacturing yields, product performance and reliability. Based on industry sources, approximately 870 million HGAs (head gimbal assemblies) will be shipped in 1997, all of which required multiple tests for critical performance characteristics. The majority of head tests are completed "in-line," or during the head manufacturing process, and are completed on 100% of the heads produced. The Company believes that it is well positioned to benefit from this high growth market by providing the following head production-test equipment: (i) flying height testers -- which measure head flying heights under various dynamic test conditions; (ii) MR quasi-static testers -- which conduct critical tests at the wafer, bar, slider or HGA level of MR head production, including resistance, amplitude, asymmetry and stability tests; (iii) spinstands for use with dynamic electrical head tester electronics -- which verify the actual working performance capabilities of HGAs while being tested on a real disk and (iv) HGA resonance testers -- which test HGAs for mechanical resonance characteristics within required specifications. The maximum possible hard disk drive storage capacity is a function of the signal to noise ratio provided by the read/write head and media combination. Since head output increases exponentially as a function of the spacing between the disk and head, head to disk spacing, i.e., flying height, is the most critical head/disk interface parameter related to higher drive capacity. Lower flying heads provide greater areal density by permitting higher tracks per inch (tpi) on the disk and greater bit per inch (bpi) on each track. In 1993, the Company established market leadership in measuring flying height by providing the first flying height tester to accurately measure below one microinch. The Company's flying height testers have maintained their market leadership position and become the industry standard by providing the best gauge repeatability and accuracy available. MR Quasi-static Head Testers. The Company's MR quasi-static head testers include MRW (wafer-level tester), MRB (bar-level tester), MRS (slider-level tester), and MRH (HGA-level tester). They are designed to provide fast, accurate and repeatable testing of MR heads at multiple locations in the manufacturing process from the wafer to HGA levels. With production yields often below 50% in the MR head manufacturing process, the ability to test MR elements early in the manufacturing process to identify nonconforming products can result in significant cost savings. In product development, MR quasi-static head testers also assist in the design improvement process. HRT Resonance Tester. The HRT is a tester used by read/write head and suspension manufacturers and disk drive manufacturers to check and analyze the mechanical resonance characteristics of HGAs within required specifications. The HRT is designed for testing resonant frequencies of the head suspension to facilitate improved access times, and is capable of measuring mechanical resonance in a wide range of suspension types and heads. The HRT's removable HGA mounting blocks simplify setup and facilitate high throughput operation. DFHT III and FH3000 Flying Height Testers. The DFHT III flying height tester is the recognized disk drive industry standard for flying height testing with what the Company believes is the largest installed base in the industry. Flying height requirements continue to be reduced which requires constant improvements in flying height measurement technology. Featuring the Company's patented dynamic interferometry technology, the DFHT III provides accurate, repeatable and correlatable flying height test measurements of both MR and inductive heads below one microinch in both engineering and production applications. The FH3000 Flying Height Tester utilizes the same detector technology, electronics and software as the DFHT III with a high speed loading capability, thus increasing throughput. The DFHT III product is used by read/write head 53 61 manufacturers in HGA production and product development; hard disk drive manufacturers for research, product development and incoming quality assurance; media manufacturers to check glide head performance and special head manufacturers for product development and in-line testing in manufacturing. FH4000 Flying Height Tester. The FH4000 flying height tester utilizes the same technology as the DFHT III with the addition of altitude chamber technology, which addresses the difficult task of measuring flying height at different atmospheric pressures to simulate altitude changes. Since altitude can have a significant effect on flying height, this critical product provides the Company's customers with a method of analyzing altitude effects on flying height. Metric 133 Spinstand. The Metric 133 Spinstand will offer the micropositioning control and mechanics required for advanced MR and GMR read/write head development and production testing. Micropositioning is required for critical off-track testing as TPI (tracks per inch) continues to increase in new disk drive designs. The Metric 133 will use an advanced micropositioner embedded into the linear-motor X-Y stages to accurately locate the head gap to the track position with a resolution of 0.04 microinches and a repeatability of better than one microinch. This product is expected to be available in May 1998. Disk Drive Process and Production-Test Equipment The Company's disk drive processing equipment consists of servowriters and an electronic disk drive simulator. All hard disk drives and high capacity removable cartridges require servowriting, a process whereby precision servowriting equipment establishes reference tracks on disk drives to provide track/head position information essential to operation. Until servo tracks are written, hard disks drives and high capacity removable cartridges are not functional. Therefore, the servowriter is a critical in-line process tool for completing drives and cartridges. Historically, larger disk drive manufacturers produced their own servowriters due to the critical nature of this equipment and the lack of adequate outside sources for servowriting systems. As disk drive capacities continue to increase, the track density on disk drives also continues to increase. The Company's research and development efforts are designed to keep pace with this trend. Since servowriters represent a sizable capital investment for disk drive manufacturers, there is significant value placed on flexibility (ability to support multiple drive programs), and upgradeability (ability to change the core positioning technology to keep pace with increasing TPI requirements). The Company's family of hard disk drive servowriters provide industry leading capabilities in both of these areas. Servowriting is also a critical function in the manufacture of high-capacity floppy disks and high-capacity removable storage cartridges. The Company is the leading supplier of servowriters to manufacturers in this rapidly growing segment of the data storage market. HS5100 Servowriter. The HS5100 servowriter is designed for conventional hard disk drives. The HS5100 incorporates optical encoder based positioning to 15,000 tracks per inch for higher accuracy and increased reliability. The HS5100 is fully compatible with MR technology, utilizes a small footprint, minimizing cleanroom capital costs, and has been designed for high throughput and yield. HS6100 Servowriter. The HS6100 servowriter is designed for high capacity, removable-disk storage devices and single disk servowriting. The HS6100 combines the features of the HS5100 with an advanced air bearing spindle with rotating speeds up to 13,000 r.p.m. for high precision spinning of the disk during the servowriting operation. The HS6100 also employs customized fixturing for cartridges and disks to accommodate the various emerging standards in this rapidly growing segment of the data storage market. HS7000 Servowriter. The HS7000 servowriter is designed for conventional hard disk drives and is suited for very high track density servowriting up to 20,000 tracks per inch and servo operating frequencies up to 100 MHz. The HS7000 utilizes advanced laser diode detection and positioning technology with optical encoders. Incorporating recently introduced, non-contact, dual servo positioning systems to eliminate contact with the drive arm, this product has been designed for high throughput and product yield and, with the March 1998 introduction of the HS7500, the option to utilize the system outside the cleanroom environment. The HS7000 and HS7500 are fully compatible with MR head technology. Proteus. The Proteus electronically simulates the mechanical head and disk assembly (HDA) drive and provides completely programmable simulation of head signals. This facilitates disk drive electronics testing 54 62 and development. This engineering development tool is used to test the servo electronics of a disk drive to facilitate rapid development of servo patterns thereby decreasing the time to market for new disk drive designs. Production Automation Equipment The Company's automation workcells are sold with the disk production-test equipment. Disk manufacturers demand automated handling of disks to meet requirements for throughput, quality control, cleanliness, and process feedback. The Company's workcells provide the disk manufacturers with the ability to automatically sort product (disks) by different performance criteria for their different customers. High throughput, flexibility, and statistical process control features combine to provide low overall costs and high quality control. Media Certifier Workcell. These automated disk handling systems offer seamless workcell integration of the Company's MG250 and MC950 disk test products. With advanced disk handling tools and process management and control software, the Company's media test workcells have the highest manufacturing throughput available. Although workcell output is a function of the product being tested and the test set-up file being used, typical MC950 and MG250 workcells can test and sort between 3,500 and 5,000 disks per day. Optical Inspection Workcell. The Optical Inspection Workcell incorporates most of the certifier workcell technology, but involves different mechanical interfaces (end effectors) and software to facilitate optical testing versus certification. Throughput levels of up to 500 disks per hour are achievable. CUSTOMERS, MARKETING AND SALES The Company sells its products to virtually every major disk drive, disk and read/write head manufacturer in the world. The following table sets forth certain of the Company's customers during the past two years:
DISK DRIVE SYSTEMS DISK SYSTEMS READ/WRITE HEAD SYSTEMS AUTOMATION - ---------------------- ---------------------- ----------------------- ---------------------- Avatar Systems HMT Technology Applied Magnetics HMT Technology Corporation Corporation Corporation Corporation Fuji Photo Film HOYA Corporation Fujitsu Limited HOYA Corporation Company, Ltd. Komag, Incorporated International Business Seagate Technology, Iomega Corporation MaxMedia Division, Machines Corporation Inc. JTS Corporation Hyundai Electronics Mitsumi Electric Co., StorMedia, Samsung Electronics America Ltd. Incorporated Company, Ltd. Seagate Technology, Quantum Corporation Trace Storage Inc. Read-Rite Corporation Technology StorMedia, SAE Magnetics (H.K.) Corporation Incorporated Ltd. Western Digital Trace Storage Corporation Technology Corporation Western Digital Corporation
There are a relatively small number of data storage manufacturers throughout the world and the Company derives a significant portion of its net sales from a relatively small number of customers. The Company expects that its dependence on relatively few key customers will continue in the future. Approximately 52.2%, 45.0% and 51.0% of the Company's net sales in 1995, 1996 and 1997, respectively, were derived from sales to the Company's three largest customers in each of those periods. Even though the Company's customer mix will likely change from period to period in the future, Seagate, Komag, HMT, Iomega and Trace have historically accounted for a significant portion of the Company's net sales. For 1995, 1996 and 1997, Seagate accounted for 25.0%, 19.0% and 18.0%, respectively, of net sales; Komag accounted for 10.7%, 14.5% and 15.9%, respectively, of net sales; HMT accounted for 4.4%, 5.2% and 17.1%, respectively, of net sales; Iomega accounted for 16.5%, 7.9% and 1.9%, respectively, of net sales and Trace accounted for 6.8%, 11.5% and 4.4%, respectively, of net sales during these periods. If net sales to these or any other significant customer of the Company were to decrease in any material amount in the future, the Company's business, results of operations and financial condition would be materially adversely effected. A substantial majority of the Company's sales are repeat sales to long-standing customers in the data storage industry. Usually, multiple units are purchased with automation as a customer either completes a 55 63 major fabrication facility or upgrades an existing installed base of the Company's products. In most instances, the decision to purchase the Company's products is based on the customers' comparisons of multiple performance measures, including specifications, throughput, product yield, compatibility to the existing installed base and overall cost of the Company's product in the process. The purchases often involve large purchase orders, against which the customers authorize shipment releases. The substantial majority of the Company's machines sell for between $100,000 and $200,000 per unit, with an average per unit price of approximately $130,000. Products are often purchased in multiple units with automation, known as work cells. The Company has no long-term contracts with its customers. The Company's customers often submit master purchase orders against which they "release" specific product orders from time to time, often with little lead time. Any cancellation, reduction, rescheduling or significant delay of orders from significant customers could have a material adverse effect on the Company's business, results of operations and financial condition. Each of the Company's customers has some unique product specification requirements which requires the Company to provide semi-customized products. As a result, per unit sales prices for the Company's products will generally vary by customer and sales order. If development or service costs with respect to the customization work are underestimated, there could be an adverse impact on the Company's gross profits. In addition, the Company's products often require post-installation, on-site customization and integration in order to tailor products to customer specifications. Revenue and corresponding expenses for such post-installation services is recognized in the period such services are provided. Inaccurate estimation of such on-site service costs could have a material adverse impact on the Company's business, results of operations and financial condition. The Company sells its products primarily through its direct sales force. The sales process for the Company's systems focuses on responding to each customer's specific needs. As a result, the selling process for the Company's products is often a multi-level, long-term process involving individuals from marketing, engineering, operations, customer service and senior management. The Company's other sales and marketing activities include participating in trade shows, publishing articles in trade journals, presenting at technical meetings and conferences, participating in industry trade groups and consortiums and distributing promotional literature. In 1995, 1996 and 1997, the Company's export sales to unaffiliated customers constituted approximately 23.0%, 57.0% and 49.0%, respectively, of net sales for such periods. The export sales were primarily to domestic data storage companies with major production facilities located in Singapore, Malaysia and other parts of Asia. Even though the Company exports a majority of its products, the purchasing decision for such sales is usually made by purchasing personnel located in the United States. The Company's direct sales staff focuses on these types of sales as well as all of the Company's sales in the United States. In Japan, the Company sells its products both through its wholly-owned subsidiary and Nissho Iwai, a leading distributor in Japan. In Southeast Asia and South Korea, the Company sells its products directly through its wholly-owned subsidiaries. The Company's own direct sales force and a third party distributer cover markets in Hong Kong and China. The Company expects that export sales will continue to represent a significant portion of its net sales in the foreseeable future. See "Risk Factors -- International Operations." CUSTOMER SERVICE AND SUPPORT As of February 28, 1998, the Company had a world-wide customer service and support staff of 99 persons, consisting of applications engineers, service engineers and technicians. The Company believes that providing highly responsive, uninterrupted, world-wide customer service and support is essential to providing value-added solutions for its customers. The Company's commitment to world-wide customer support and service is evidenced by its sales and customer support offices in South Korea, Japan, Singapore, Malaysia, Thailand and Taiwan. To supplement its direct service and support efforts, the Company's distributors and sales representatives in Hong Kong and Japan offer a range of other customer service and support using personnel trained by Phase Metrics. The Company has structured its direct service and support operations into distinct service units based on its product lines. Each of these units offers product installation, on-going process support, emergency system repair, internal training programs, external customer training, documentation and formation of customer user 56 64 groups. In general, the Company provides a 90-day to one-year warranty on all equipment it sells, depending on the sales contract and geographic location of the sale. BACKLOG The Company's sales have historically been made pursuant to purchase orders rather than long-term contracts. These purchase orders are generally subject to cancellation, modification, quantity reductions or rescheduling on short notice and with little or no penalty. Certain of the Company's customers have recently begun to submit master purchase orders to the Company against which they "release" specific product orders from time to time, often with little lead time between the order date and the expected shipment date. The Company's backlog of purchase orders requesting delivery in the following quarter was approximately $12.1 million as of December 31, 1997, compared to $19.0 million as of December 31, 1996. The Company does not believe its backlog as of any particular date is indicative of sales or operating results for any future period. COMPETITION The disk drive process and production-test equipment industry is highly competitive. The Company believes that the most important competitive factors in its industry are technological innovation; equipment reliability, throughput and uptime; customer service and support and cost of ownership. The Company believes it competes favorably with respect to each of these factors. In each of the Company's product lines, the Company faces substantial competition from established merchant suppliers of process and production-test equipment, some of which have greater financial, engineering, manufacturing, research and development and marketing resources than the Company. For example, the Company faces competition from General Disk for servowriters; Hitachi DECO and Sony Techtronics for disk certifiers; Swan Instruments for MR head testers; Zygo Corporation for flying height testers; Technastar for automation technology and Guzik Technical for spin-stands. Historically, there has also been competition from entrepreneurs with focused market knowledge and new technology. The Company also experiences competition world-wide from Hitachi DECO, a large, full-line manufacturer of process and production-test equipment. Hitachi DECO, a subsidiary of Hitachi, Limited, has substantially greater financial, technical, marketing, manufacturing, research and development and other resources than the Company. The Company also experiences competition from other full-line and partial-line manufacturers of process and production-test equipment. There can be no assurance that the Company's competitors will not develop enhancements to, or future generations of, competitive products that will offer price or performance features superior to the Company's products or that new competitors will not enter the Company's markets. Many of the Company's competitors are investing heavily in the development of new and enhanced products aimed at applications currently addressed by the Company's products. The Company expects its competitors to continue to improve the design and performance of their products and to introduce new products with competitive price/performance characteristics. Competitive pressures often necessitate price reductions which can adversely affect operating results. The Company will be required to make a continued high level of investment in product development and research, sales and marketing and ongoing customer service and support to remain competitive. There can be no assurance that the Company will have sufficient resources to continue to make such investments or that the Company will be able to achieve the technological advances necessary to maintain its competitive position. The Company believes that its future success will be dependent, in part, upon its ability to compete successfully in the Japanese, South Korean and Southeast Asian markets. The Company's largest competitor, Hitachi DECO, is headquartered in Japan which gives it a competitive advantage over the Company in that market to the extent buying decisions are influenced by its local presence. In addition, the Company's ability to compete in Japan, South Korea and Southeast Asia in the future is dependent upon continuing free trade between these countries and the United States, the continuing ability of the Company to develop in a timely manner products that meet the technical requirements of its foreign customers and the continuing ability of the Company to develop and maintain satisfactory relationships with leading companies in the data storage 57 65 industry in these areas. Moreover, the Company's sales in these areas will be affected by the overall economies of Japan, South Korea and Southeast Asia. In addition to the competition the Company faces from other merchant manufacturers of process and production-test equipment, most of the Company's customers develop at least a portion of their own process and production-test equipment needs internally, especially servowriters and read/write head test equipment. Accordingly, the Company must compete against the internal development efforts of this captive market. Manufacturers within this captive market are often reluctant to change their production lines to incorporate merchant supplied process and production-test technology. Moreover, it is possible that with the rapid changes in data storage technology, the development of new process and production-test equipment will be so closely linked to the Company's customers' product development cycles that certain customers and potential customers will find it more efficient to fulfill their own process and production-testing equipment needs internally, thereby placing the Company at a competitive disadvantage. RESEARCH AND DEVELOPMENT The market for process and production-test equipment is characterized by rapid technological changes and product innovation. The Company continually endeavors to understand how changing data storage technology will impact its customers' requirements for process and production-test equipment in the future. The Company encourages its customers to work closely with its product development and research personnel during the development cycle of new and enhanced data storage products. In 1996, the Company formed an advanced research department which is responsible for working with the Company's customers, academic institutions and independent third parties to (i) identify emerging data storage technology trends early in the development process, (ii) identify and develop new core technologies for the Company's systems and (iii) contribute to the development of process and production-test standards for the data storage industry. The Company believes that continued and timely development of new products and enhancements to its existing products are necessary to maintain its competitive position. As of February 28, 1998, the Company employed a total of approximately 200 degreed engineers focused on product development and research. Research and development expenses were approximately $11.4 million, $31.1 million and $43.6 million for 1995, 1996 and 1997, respectively. The Company anticipates that it will continue to devote a significant amount of financial resources to product development and research for the foreseeable future. MANUFACTURING The Company conducts its manufacturing activities at its facilities in San Diego, Fremont, Concord and Hayward, California. The Company's principal manufacturing activities consist of quality assurance and assembling of components designed and developed by the Company as well as other components and subassemblies which are acquired from third party suppliers and then integrated into the Company's finished products. Most of these components, including substantially all of the electronic circuit boards and optical componentry incorporated into the Company's systems, are made to the Company's exacting specifications. The Company's manufacturing strategy is to produce high precision, technologically advanced, reliable products and replacement parts. To achieve these goals, the Company must continually adjust to changes in technology. As a result, the Company focuses on the engineering/manufacturing interface in its product development efforts. The Company also continuously seeks to improve its materials procurement and control processes to increase throughput and reduce inventory levels. The Company enhanced its fully integrated computer system for all materials procurement and control functions. The Company also continues to consolidate its supplier base and increase its utilization of third-party outsourcing arrangements for certain subassembly and performance test functions. Such outsourcing arrangements provide for just-in-time delivery when possible. In order to meet customer delivery requirements, the Company is working to reduce the time required to manufacture its products. However, due to periodic increases in the Company's backlog, technological advances that must be incorporated into the Company's products, customization issues and other reasons, the average time between order and shipment of the Company's products may increase in the future. The 58 66 Company's ability to quickly increase its manufacturing capacity could be limited given (i) the complexity of the manufacturing process, especially if the Company is partially customizing its products to its customers' specifications; (ii) the lengthy lead times necessary to obtain critical components and (iii) the need for highly skilled personnel. In certain instances the Company relies on a single source or a limited group of suppliers for certain components and subassemblies used in its products. Although the Company seeks to reduce its dependence on sole and limited source suppliers, the partial or complete loss of these sources could have a material adverse effect on the Company's results of operations and damage customer relationships due to the complexity of the products they supply and the significant amount of time required to qualify new suppliers. In addition, long lead times are often required to obtain critical components and subassemblies used in certain of the Company's products from these and other suppliers which could impede the Company's ability to quickly respond to changes in demand and product specifications. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The Company believes that due to the rapid pace of innovation within the data storage industry in general, the Company's protection of patent and other intellectual property rights is less important than factors such as its technological expertise, product innovation, the Company's installed base, the marketing ability of its sales force and the ability to provide world-wide support and service to its customers. The Company does attempt, however, to protect its intellectual property rights through patents, copyrights, trade secrets and other measures. The Company currently holds 27 United States patents and has applied for 72 additional patents in the United States. The Company also holds a number of foreign patents and has filed a number of foreign patent applications. No assurance can be given that the claims allowed on any patents held by the Company will be sufficiently broad to protect the Company's technology. Moreover, there can be no assurance that any patent owned by the Company will not be invalidated, deemed unenforceable, circumvented or challenged, that the rights granted thereunder will provide competitive advantages to the Company or that any of the Company's pending or future patent applications will be issued with claims of the scope sought by the Company, if at all. Furthermore, there can be no assurance that others will not develop similar products, duplicate the Company's products or design around the patents owned by the Company. In addition, there can be no assurance that foreign intellectual property laws or the Company's agreements will protect the Company's intellectual property rights in any foreign country. Any failure to protect the Company's intellectual property rights could have a material adverse effect upon the Company's business, financial condition and results of operations. Although the Company does not believe any of its products or proprietary rights infringe the rights of third parties, there can be no assurance that infringement claims will not be asserted against the Company in the future. Any such claims, with or without merit, could divert the attention of management, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, or at all. If infringement were established, the Company could be required to pay damages or be enjoined from making, using or selling the infringing product. Likewise, there can be no assurance that a third party's product, if infringing on the Company's proprietary rights, may be prevented from doing so without litigation. Any of the foregoing could have a material adverse effect upon the Company's business, financial condition and results of operations. The Company requires each of its employees to enter into a proprietary rights and non-disclosure agreement in which the employee agrees to maintain the confidentiality of all proprietary information of the Company and, subject to certain exceptions, to assign to the Company all rights in any proprietary information or technology made or contributed by the employee during his or her employment. In addition, the Company regularly enters into non-disclosure agreements with third parties, such as consultants, potential joint venture partners and customers. In spite of these precautions, it may be possible for third parties to copy, develop or otherwise obtain and use the Company's proprietary technology without authorization or to develop similar technology independently. 59 67 EMPLOYEES As of February 28, 1998, the Company had 668 full-time employees, including 207 in product development and research, 236 in manufacturing, 37 in sales and marketing, 99 in service and support, and 89 in finance and administration activities. Many of the Company's employees have specialized skills of significant value to the Company, and the Company's future success will depend in large part upon its ability to attract and retain highly skilled technical, managerial, financial and marketing personnel, who are in great demand. The Company believes that attracting and motivating skilled technical personnel is vital to its success and there can be no assurance that the Company will be successful in retaining or recruiting these and other key personnel. No employee is represented by a union or covered by a collective bargaining agreement, and the Company has not had a work stoppage or strike. The Company considers its employee relations to be good. PROPERTIES The Company owns three buildings with a total of approximately 123,000 square feet on approximately nine acres of land in San Diego, California; leases three buildings with a total of 175,000 square feet under leases expiring in November and December 2000 and August 2003 in Fremont, California; leases two buildings with a total of 38,000 square feet under leases expiring in September 1998 and May 1999 in Concord, California; and leases a 12,000 square foot building under a month-to-month lease in Hayward, California. The Company conducts manufacturing and research and development at all of these sites and also has service and support capabilities at each of these locations, except Hayward. The Company's domestic sales and marketing functions are headquartered in its Fremont facility. For its Pacific Rim operations, the Company also leases 1,900 square feet in Tokyo, Japan; 2,700 square feet in AnSen City, South Korea; 3,300 square feet in Singapore; 800 square feet in Thailand and 1,000 square feet in Taiwan. These facilities are primarily used as technical, applications, and sales and service support centers for the Company's Pacific Rim customers. The Company believes that its facilities are adequate for its current level of business and does not anticipate any material difficulty in renewing any of its leases as they expire or securing replacement facilities, in each case on commercially reasonable terms. LEGAL PROCEEDINGS The Company is not currently involved in any material legal proceedings. 60 68 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES Set forth below is certain information regarding the directors and executive officers of the Company as of February 28, 1998.
NAME AGE POSITION John F. Schaefer........................... 55 Chairman of the Board, President and Chief Executive Officer David L. Bultman........................... 50 Vice President, Product Development, Disk Drive and Media Products Neil A. Brumberger......................... 50 Vice President and President, Phase Metrics Automation Wayne G. Erickson.......................... 40 Vice President, Sales and Marketing Dennis J. Geurts........................... 48 Vice President, Fremont Operations Dr. Michael R. Madden...................... 55 Vice President, San Diego Operations Ronald Y. Miyahara......................... 48 Vice President and General Manager, Japan and Korea Operations Michael G. Rogowski........................ 43 Vice President, Customer Engineering R. Joseph Saunders......................... 60 Vice President, Finance, Chief Financial Officer and Assistant Secretary Dr. Heiner Sussner......................... 49 Vice President, Research and Development and Chief Technical Officer Arthur J. Cormier(1)....................... 41 Director Thompson Dean(1)(2)........................ 39 Director Robert Finzi(1)(2)......................... 44 Director Dr. Gilbert F. Amelio(1)................... 54 Director William E. Terry(2)........................ 64 Director
- --------------- (1) Member of Audit Committee (2) Member of Compensation Committee John F. Schaefer has been Chairman of the Board and Chief Executive Officer since November 1994 and President since February 1997. From 1992 to 1994, Mr. Schaefer was President, Chief Operating Officer and Director of McGaw Incorporated, a provider of intravenous products and devices. From 1989 to 1991, Mr. Schaefer was President, Chief Executive Officer and Director of Levolor Corporation ("Levolor"), a manufacturer of window blinds and similar products. Prior to joining Levolor in 1989, Mr. Schaefer was employed by Baker Hughes, Inc., where he was President of the Process Equipment Group, Executive Vice President of the Corporation, and a Director. David L. Bultman has been Vice President, Product Development, Disk Drive and Media Products since July 1996. From December 1994 to July 1996, Mr. Bultman was employed by Storage Dimensions, Inc., serving as Senior Vice President, Engineering. From November 1993 to October 1994, Mr. Bultman was Vice President, Engineering at DKI. Prior to joining DKI, Mr. Bultman was Vice President, Engineering at Ministor Peripherals. Neil A. Brumberger has been a Vice President of the Company and President of the Company's Automation Division since the Company's acquisition of ART in July 1995. Mr. Brumberger founded ART, a manufacturer of integrated automation systems for process and production-test equipment, in 1984 and, prior to that time, he was a Project Manager and Director of Engineering for the Bay Area Rapid Transit District for nine years. Wayne G. Erickson has been Vice President Sales and Marketing since November 1992. From January 1985 to November 1992, Mr. Erickson was employed by Quantum/Plus Development Corporation 61 69 ("Quantum"), a leading supplier of read/write head systems, serving as OEM Marketing Manager, Product Line Manager and National Sales Manager, Retail Channels. Prior to joining Quantum, Mr. Erickson was Engineer and Program Manager at Shugart Corporation. Dennis J. Geurts has been Director of Fremont Operations since October 1995 and was promoted in March 1996 to Vice President of Fremont Operations. Prior to October 1995, Mr. Geurts held various senior management positions in the operations, manufacturing and materials divisions of Applied Materials Inc., an equipment supplier to the semiconductor industry, over a thirteen-year period. Before joining Applied Materials, Mr. Geurts was Senior Manager at General Electric -- Nuclear Division. Dr. Michael R. Madden has been Director of Operations, San Diego since February 1995 and was promoted to Vice President, Technology Transfer in June 1995. Prior to February 1995, Dr. Madden managed the High Reliability Products Division of UDT Sensors, Inc. He also served as Vice President, Research Development, for Advanced Photonix, Inc. From 1977 to 1987, Dr. Madden was the Chief Executive Officer of Centronics Electro-Optics, Inc. and Silicon Detector Corporation. Ronald Y. Miyahara has been Vice President, Japan and Korea Operations for the Company since November 1995, having previously served as Vice President, Operations from November 1994 through October 1995. Mr. Miyahara previously served as President of ProQuip, Inc., a supplier of advanced process and production-test equipment for disk manufacturers, which the Company acquired in November 1994. Prior to the acquisition, Mr. Miyahara served in various positions at ProQuip, Inc., including President and General Manager from 1991 to 1994, Vice President of Operations from 1989 to 1991, and Chief Financial Officer from 1984 to 1991. Michael G. Rogowski has been Director of Customer Engineering since November 1994 and was promoted in March 1996 to Vice President of Customer Engineering. Prior to joining the Company, Mr. Rogowski was Vice President of Manufacturing/Test Engineering for Cambrian Systems, Inc., a supplier of advanced process and production-test equipment for disk and read/write head manufacturers, which the Company acquired in November 1994. From 1992 to 1994, Mr. Rogowski was the Director of Test Engineering at Akashic Memories. Between 1979 and 1992, Mr. Rogowski held various positions in engineering and management in the Mechanical Integration, Test Equipment Development, and Manufacturing Test Engineering organizations within IBM Corporation. R. Joseph Saunders has been Vice President, Chief Financial Officer and Assistant Secretary of the Company since November 1994. Mr. Saunders joined the Company from Southwest Water Company, owner of two regulated public water suppliers, where he served as Vice President-Finance, Chief Financial Officer and Secretary between 1992 and November 1994. From 1975 to 1992, Mr. Saunders served in a series of senior financial management positions with Baker Hughes, Inc., including Group Vice President of Finance. Dr. Heiner Sussner has been Vice President, Research and Development and Chief Technical Officer since October 1996. From 1992 until October 1996, Dr. Sussner served IBM Corporation as an executive consultant for technology investments in Europe, as director of IBM's Almaden research facility for data storage technology and as a manager/senior research scientist. Prior to 1992, Dr. Sussner served in various capacities for IBM over a period of 16 years. Dr. Sussner was awarded the IEEE Medal for Engineering Excellence for Leadership in 1994. Arthur J. Cormier has been a consultant to the Company since February 1997. Mr. Cormier founded the Company and has served as a Director since the Company's inception in 1989. He has served as President and Chief Operating Officer of the Company since its inception until February 1997. He held the position of Chief Executive Officer until the Company's recapitalization in November 1994. From 1987 to 1989, Mr. Cormier was Applications Engineer for National Micronetics Incorporated. Prior to joining National Micronetics, Mr. Cormier was employed by Eastman Kodak Company from 1985 to 1987, where he was an Engineering Program Manager. Thompson Dean has been a Director of the Company since November 1994. Since January 1997, Mr. Dean has been Managing Partner of DLJ Merchant Banking, Inc., an affiliate of DLJ. Prior to that Mr. Dean had been a Managing Director of DLJ Merchant Banking, Inc. since May 1992. Prior to that time, 62 70 Mr. Dean served as a Managing Director of DLJ, and was employed by that firm in various capacities from September 1988 until September 1992. Robert Finzi has been a Director of the Company since November 1994. Since May 1991, Mr. Finzi has been a Vice President of Sprout Group, a division of DLJ Capital Corporation, which is the managing general partner of Sprout Growth II, L.P. and an affiliate of DLJ. Mr. Finzi is also a general partner of a series of investment funds managed by Sprout Group and a limited partner of the general partner of ML Ventures II, L.P. From 1984 to 1991, Mr. Finzi was a Vice President of Merrill Lynch Venture Capital. Mr. Finzi also serves on the Board of Directors of The Cerplex Group, Inc., Gentle Dental Services Co. and four privately-held companies. Dr. Gilbert F. Amelio has been a Director of the Company since June 1995. From 1994 until July 1997, Dr. Amelio served as a Director of Apple Computer, Inc. ("Apple") and from February 1996 until July 1997 he served as Chairman of the Board and Chief Executive Officer of Apple. Prior to joining Apple, Dr. Amelio was Chairman of the Board, President and Chief Executive Officer of National Semiconductor Corporation for five years. Dr. Amelio is an IEEE Fellow, holder of 16 patents and is the co-author of two books, "Profit from Experience: The National Semiconductor Story of Transformation Management" and "On the Firing Line: My 500 Days at Apple." Dr. Amelio is currently Partner and Director of The Parkside Group, LLC and serves on the Board of Directors of SBC Communications. William E. Terry has been a Director since August 1997. From 1986 until his retirement in November 1993, Mr. Terry served as Executive Vice President and a Director of Hewlett-Packard. Prior to that, Mr. Terry served in a number of other senior executive positions with Hewlett-Packard. Mr. Terry currently serves on the Board of Directors of Key Tronic Corporation and Altera Corporation. The Board of Directors has a Compensation Committee (the "Compensation Committee") which is responsible for making determinations regarding salaries, bonuses and other compensation matters for the Company's executive officers. The members of the Compensation Committee are Mr. Dean, Mr. Finzi and Mr. Terry. None of these individuals were at any time during 1996 an officer or employee of the Company. The Board of Directors also has an Audit Committee (the "Audit Committee") which supervises and makes recommendations and decisions with respect to the periodic audits of the Company's financial results. The members of the Audit Committee are Mr. Cormier, Mr. Dean, Mr. Finzi and Dr. Amelio. DIRECTOR COMPENSATION Except as described below, the directors do not receive cash compensation for services on the Board of Directors or any Committee thereof. Dr. Amelio and Mr. Terry are each paid a retainer by the Company of $1,000 per month for their services on the Board of Directors. Dr. Amelio and Mr. Terry also each receive $1,000 for each meeting of the Board of Directors or committee thereof that they attend. In addition, the Company granted Dr. Amelio an option to purchase 100,000 shares of Common Stock under the 1995 Option Plan at an exercise price of $1.00 per share when he joined the Board in June 1995 and Mr. Terry was granted an option to purchase 50,000 shares of Common Stock under the 1995 Option Plan at an exercise price of $8.75 per share when he joined the Board in August, 1997. These options are immediately exercisable for all the option shares, but any shares purchased under the option will be subject to repurchase by the Company at the option exercise price paid per share if Dr. Amelio or Mr. Terry cease serving on the Board prior to vesting in their respective shares. As of February 28, 1998, Dr. Amelio had vested in 53,333 option shares and Mr. Terry had vested in no option shares. Dr. Amelio will vest in his remaining option shares over his period of Board service in a series of successive equal monthly installments upon completion of each additional month of Board service. Mr. Terry will vest in 10,000 option shares in August 1998, and will vest in the remaining option shares over his period of Board service in a series of successive equal monthly installments upon completion of each additional month of Board service. All non-employee Board members are reimbursed for their out-of-pocket expenses in serving on the Board of Directors. 63 71 EXECUTIVE COMPENSATION The following table sets forth certain summary information concerning the compensation earned by the Company's Chief Executive Officer and its four other most highly compensated executive officers (the "Named Executive Officers") whose total salary and bonus for 1997 exceeded $100,000, for services rendered to the Company in all capacities during that year. No executive who would otherwise have been includable in such table on the basis of salary and bonus earned for 1997 has resigned or otherwise terminated employment during 1997.
LONG TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION SECURITIES NAME AND -------------------- UNDERLYING ALL OTHER PRINCIPAL POSITION(S) SALARY BONUS OPTIONS COMPENSATION(1) John F. Schaefer................................. $325,000 $105,000 -- $ 6,658 Chairman and Chief Executive Officer Dr. Heiner Sussner............................... 230,000 19,688 -- 6,019 Vice President, R&D and Chief Technical Officer David L. Bultman................................. 230,000 40,000 -- 155,825(2) Vice President, Product Development Disk Drive and Media Products Neil A. Brumberger............................... 200,000 75,000 -- 7,387 Vice President and President, Phase Metrics Automation R. Joseph Saunders............................... 200,000 21,558 -- 7,038 Vice President, Finance, Chief Financial Officer and Assistant Secretary
- --------------- (1) Includes the Company's matching contribution under its 401(k) Plan and the value of personal use of company automobiles. (2) Includes forgiven loans and signing bonuses totalling $150,000. STOCK OPTIONS AND STOCK APPRECIATE RIGHTS The following table contains information concerning the stock options granted to the Named Executive Officers during 1997. All the grants were made under the Company's 1995 Plan (as defined herein). No stock appreciation rights were granted to the Named Executive Officers during 1997.
INDIVIDUAL GRANTS(1) --------------------------------------------------------------------- MARKET POTENTIAL REALIZATION NUMBER PRICE OF VALUE AT ASSUMED OF PERCENT OF SECURITIES ANNUAL RATES OF STOCK SECURITIES TOTAL OPTIONS EXERCISE UNDERLYING PRICE APPRECIATION FOR UNDERLYING GRANTED TO PRICE OPTIONS OPTION TERM(2) OPTIONS EMPLOYEES IN PER ON DATE EXPIRATION ---------------------- NAME GRANTED 1997 SHARE OF GRANT DATE 5% 10% ---- ---------- --------------- -------- ---------- ---------- --------- --------- John F. Schaefer...... -- -- -- -- -- -- -- Dr. Heiner Sussner.... 60,000 5.5% $8.75 $8.75 8/01/07 $330,170 $836,715 David L. Bultman...... 25,000 2.3 8.75 8.75 8/01/07 137,571 348,631 Neil A. Brumberger.... -- -- -- -- -- -- -- R. Joseph Saunders.... -- -- -- -- -- -- --
- --------------- (1) Option grants are immediately exercisable for all the option shares, but any shares purchased under such option will be subject to repurchase by the Company at the option exercise price paid per share. (2) There can be no assurance provided to any executive officer or other holder of the Company's securities that the actual stock price appreciation over the ten-year option term will be at the assumed 5% and 10% 64 72 levels or at any other defined level. Unless the market price of the Common Stock appreciates over the option term, no value will be realized from those option grants which were made to the Named Executive Officers with an exercise price equal to the fair market value of the option shares on the grant date. AGGREGATE OPTION EXERCISES IN 1997 AND YEAR-END VALUES The following table provides information, with respect to each of the Named Executive Officers, concerning the exercise of options during 1997 and unexercised options held by them at the end of that fiscal year. None of the Named Executive Officers exercised any options during 1997.
VALUE OF UNEXERCISED IN-THE NUMBER OF UNEXERCISED OPTIONS MONEY OPTIONS AT AT DECEMBER 31, 1997(#) DECEMBER 31, 1997($)(1) ------------------------------- ------------------------------- NAME EXERCISABLE(2) UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE ---- -------------- ------------- -------------- ------------- John F. Schaefer...................... -- -- -- -- Dr. Heiner Sussner.................... 150,000(2) -- $112,500(2) -- David L. Bultman...................... 125,000(3) -- 125,000(3) -- Neil A. Brumberger.................... -- -- -- -- R. Joseph Saunders.................... -- -- -- --
- --------------- (1) Based upon the fair market value of $8.75 per share determined by the Board of Directors at December 31, 1997, less the option exercise price payable per share. (2) Although the options are fully exercisable, only 21,000 options had vested as of December 31, 1997. The option shares issuable upon exercise of such options are, prior to vesting, subject to a right of repurchase in favor of the Company. (3) Although the options are fully exercisable, only 28,333 options had vested as of December 31, 1997. The option shares issuable upon exercise of such options are, prior to vesting, subject to a right of repurchase in favor of the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity which has one or more executive officers serving as a member of the Company's Board of Directors or Compensation Committee. COMPENSATION PLANS AND ARRANGEMENTS Employment Contracts and Change in Control Arrangements In November 1994, the Company entered into an employment contract with Mr. Schaefer providing for his employment as Chief Executive Officer and Chairman of the Board of the Company. The employment contract is terminable at will by either Mr. Schaefer or the Company upon 30-days' notice. The employment contract provides for an annual minimum base salary of $325,000. In addition, beginning in 1996, Mr. Schaefer became eligible to receive a bonus under the Company's bonus plan for officers. If the employment contract is terminated by the Company other than for cause or by Mr. Schaefer due to breach of the agreement or certain other actions by the Company, the Company must pay Mr. Schaefer, in addition to all accrued and unpaid salary and benefits, his salary and certain benefits for a period of 12 months from the date of such termination. If the Company terminates Mr. Schaefer's employment upon his permanent disability, subject to reduction for any insurance benefits received, Mr. Schaefer is entitled to receive his salary and benefits for 12 months from the date of such termination. In July 1995, in connection with the acquisition of ART, the Company entered into an employment contract with Mr. Brumberger providing for his employment as Vice President of the Company and President, Phase Metrics Automation. The employment contract is for a minimum term of three years and is terminable at will by Mr. Brumberger upon 30-days notice. The employment contract provides for an annual base salary of $200,000 and a minimum annual bonus of $75,000. 65 73 In connection with any change of control of the Company, subject to certain limitations, outstanding options held by Dr. Sussner and Messrs. Bultman and Saunders (as well as certain other senior executive officers) will either immediately vest in full, or will subsequently vest in full upon the involuntary termination of the individual's employment within 12 months thereafter. Bonus Plan for Officers and Certain Key Employees The Company has an established bonus plan for officers and certain key employees, including the Named Executive Officers. Payment of bonuses under this plan is dependent on the Company achieving its financial goals established annually by the Compensation Committee, as well as the employee achieving certain priorities as established by Company management. Bonus targets range from a low of 10% of base salary for certain employees to a high of 50% of base salary for the Chief Executive Officer. Employees can earn up to 150% of their bonus targets, depending upon the performance of both the employee and the Company. 1995 Stock Incentive Plan The Company's 1995 Stock Option Plan (the "1995 Plan") became effective when adopted by the Board of Directors (the "Board") and approved by the Company's shareholders in April 1995. A total of 6,300,000 shares of Common Stock have been authorized for issuance over the term of the 1995 Plan, subject to adjustment in the event of any stock dividends, stock splits or other similar changes affecting the Company's outstanding Common Stock. Employees (including officers), non-employee Board members and consultants and other advisors in the service of the Company or any parent or subsidiary company may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock at an exercise price not less than 85% of the fair market value per share on the grant date. The 1995 Plan is currently administered by the Board. However, the Board may at any time delegate such administration to the Compensation Committee. The Plan Administrator (whether the Board or such committee) has complete discretion to determine which eligible persons are to receive option grants, the time or times when such grants are to be made, the number of shares subject to each such grant, the status of an option as either an incentive stock option or a non-statutory stock option under the federal tax laws, the vesting or exercise schedule in effect for the option and the maximum term for which any option will remain outstanding. No option granted under the 1995 Plan may have a term in excess of 10 years and will be subject to earlier termination following the optionee's cessation of service with the Company. Option grants under the 1995 Plan may either become exercisable for the option shares in a series of installments over the optionee's period of service with the Company or may be immediately exercisable for all the option shares, but any shares purchased under such an immediately exercisable option will be subject to repurchase by the Company, at the option exercise price paid per share, should the optionee leave the Company's service prior to vesting in those shares. The Company will also have a right of first refusal with respect to any proposed sales or transfers of the shares of Common Stock issued under the 1995 Plan. Accordingly, the Company will have the opportunity to match any third-party offer to acquire those shares. However, all first refusal rights under the 1995 Plan will terminate in the event the Company's Common Stock is publicly held. The option exercise price will normally be payable in cash at the time of exercise. However, the Plan Administrator may allow the optionee to deliver a promissory note in payment of the exercise price and any withholding taxes incurred in connection with the exercise. Any such note will bear interest at the minimum rate required under the federal tax laws and will be secured by the purchased shares. Following an initial public offering of the Common Stock, the exercise price may be paid in shares of Common Stock valued at fair market value or through a cashless exercise procedure pursuant to which the purchased option shares are sold immediately and a portion of the sale proceeds equal to the option exercise price for those shares are remitted to the Company. 66 74 Should the Company be acquired by merger or asset sale, all outstanding options will immediately vest in full, except to the extent those options are assumed by the successor entity. In the event the price payable per share of Common Stock in the acquisition (determined on a fully-diluted basis) is at least $7.00, the shares subject to the outstanding options under the 1995 Plan will, whether or not those options are to be assumed by the successor entity, vest for some option holders immediately upon such acquisition and will vest for the remaining option holders upon the subsequent termination of their service with the Company or the successor entity within 18 months following such acquisition. As of February 28, 1998, options for 2,150,134 shares of Common Stock were outstanding under the 1995 Plan, options for 1,453,480 shares had been exercised, and 2,696,386 shares of Common Stock were available for future option grant. To the extent any outstanding options terminate or expire unexercised, the shares of Common Stock subject to those options will be available for subsequent option grants. The Plan Administrator has the authority to effect the cancellation of outstanding options under the 1995 Plan in return for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of the Common Stock on the new grant date. The Board may amend or modify the 1995 Plan at any time. The 1995 Plan will terminate on April 1, 2005, unless sooner terminated by the Board. 67 75 CERTAIN TRANSACTIONS Since January 1, 1997, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which the Company was or is to be a party in which the amount involved exceeds $60,000 and in which any director, executive officer or holder of more than five percent of the outstanding capital stock of the Company had or will have a direct or indirect material interest other than compensation and other arrangements, which are described where required under "Management" and the transactions described below. RECAPITALIZATION In November 1994, the Company completed a recapitalization (the "Recapitalization") and in connection therewith entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") with DLJ Merchant Banking Partners, L.P., a Delaware limited partnership ("DLJMBP"), DLJ International Partners, C.V., a Netherlands Antilles limited partnership ("DLJIP"), DLJ Offshore Partners, C.V., a Netherlands Antilles limited partnership ("DLJOP"), DLJ Merchant Banking Funding, Inc., a Delaware corporation ("DLJMBF"), DLJ Capital Corporation, a Delaware corporation ("DLJCC"), Sprout Growth II, L.P., a Delaware limited partnership and venture capital affiliate of DLJ ("Sprout II") and Sprout Capital VI, L.P., a Delaware limited partnership and venture capital affiliate of DLJ ("Sprout VI") (collectively, "DLJ and the Sprout Entities"), Mr. Arthur J. Cormier and Mr. John T. Schaefer. In connection with the Recapitalization, the Company also (i) entered into a Securityholders Agreement with DLJ and the Sprout Entities, Mr. Cormier and Mr. Schaefer (the "Securityholders Agreement"), (ii) exchanged its existing capital stock for shares of its Series A and B Preferred Stock, (iii) issued and sold shares of its Common Stock and (iv) issued and sold $8.0 million aggregate principal amount of its Convertible Subordinated Notes. As part of the Recapitalization, Mr. Cormier sold his Series B Preferred Stock and certain shares of his Series A Preferred Stock to DLJ and the Sprout Entities and Mr. Schaefer. See "Description of Capital Stock." In 1995, DLJMBF transferred $671,975 in aggregate principal amount of its Convertible Subordinated Notes and 161,920 shares of its Series B Preferred Stock to DLJ First ESC, L.L.C., a Delaware limited liability corporation ("DLJ First"). As part of that transaction, DLJ First became a party to the Securities Purchase Agreement and the Securityholders Agreement and is one of the "DLJ and the Sprout Entities" as defined herein. The outstanding shares of Series A Preferred Stock and Series B Preferred Stock are convertible into an aggregate of 12,107,280 shares of Common Stock. The Convertible Subordinated Notes issued to DLJ and the Sprout Entities are convertible into an aggregate of 5,142,720 shares of Common Stock of the Company and are subordinated in right of payment and with respect to certain other rights to all senior debt of the Company, including indebtedness evidenced by the New Notes and outstanding indebtedness under the New Credit Facility. See "Description of Capital Stock." BRIDGE FINANCING In November 1994, the Company entered into a Bridge Securities Purchase Agreement (the "Bridge Financing Agreement") with PM Funding, Inc., a Delaware corporation ("PM Funding"), an affiliate of DLJ and the Sprout Entities. Under the Bridge Financing Agreement, the Company borrowed $20.0 million from PM Funding and issued warrants to PM Funding, DLJCC, Sprout II and Sprout VI, which are exercisable for an aggregate of 800,000 shares of Common Stock at an exercise price of $1.55 per share, subject to adjustment (the "Bridge Note Warrants"). The Bridge Note Warrants expire on November 23, 2004. The loan with PM Funding was repaid by the Company in March 1995. SECURITYHOLDERS AGREEMENT The Securityholders Agreement, as amended, provides that each of Messrs. Schaefer and Cormier, DLJMBP and Sprout II, shall be entitled to designate one director to the Company's Board, and Messrs. Schaefer and Cormier, with the consent of DLJ and the Sprout Entities, shall have the right to designate the fifth and sixth directors to the Company's Board. The Securityholders Agreement also contains 68 76 certain restrictions on the ability of the parties thereto to sell their shares of stock; registration rights; preemptive rights in connection with the issuance by the Company of additional equity securities other than upon certain defined events, including an initial public offering by the Company; certain rights of first refusal and other matters customary for such agreements. The rights of the parties to the Securityholders Agreement with respect to certain restrictions on transfer and the preemptive rights under such Agreement terminate in connection with certain public offerings of Common Stock by the Company. Under the Securityholders Agreement, the Company is obligated until November 23, 1998, to use DLJ as its exclusive financial advisor and investment banker. In consideration for DLJ's services, the Company has agreed to pay DLJ an annual retainer of $200,000. In each of 1996 and 1997, the Company paid DLJ $200,000 in fees for financial advisory and certain investment banking services provided to the Company. DLJ acted as the initial purchaser in the Note Offering and received an underwriting discount of $3.575 million in connection therewith. FORMER CREDIT FACILITY In connection with the refinancing of its then-outstanding indebtedness in January and December of 1996, the Company paid fees of $1.2 million for debt issuance costs to DLJ Capital Funding, Inc. ("DLJCF"), the syndicate agent. DLJCF is an affiliate of DLJ. 69 77 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Company's capital stock as of February 28, 1998, by (i) each person (or group of affiliated persons) known by the Company to beneficially own more than five percent of any class of its capital stock, (ii) each of the Company's directors, (iii) each of the Named Executive Officers and (iv) all directors and executive officers of the Company as a group. Unless otherwise indicated, the address for each stockholder is c/o Phase Metrics, Inc., 10260 Sorrento Valley Road, San Diego, California 92121.
SERIES A SERIES B COMMON STOCK(2) PREFERRED(3) PREFERRED(4) TOTAL(5) ------------------- ------------------- ------------------- -------------------- BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT DLJ and the Sprout Entities (6)............................ 5,942,720 51.5% 2,000,000 24.2% 3,857,280 100.0% 11,800,000 49.9% Arthur J. Cormier (7)............ -- -- 4,500,000 54.5 -- -- 4,500,000 25.4 John F. Schaefer (8)............. 2,750,000 49.0 1,750,000 21.2 -- -- 4,500,000 25.4 Neil A. Brumberger(9)............ 450,000 7.6 -- -- -- -- 450,000 2.5 Wayne G. Erickson (10)........... 300,000 5.3 -- -- -- -- 300,000 1.7 R. Joseph Saunders (11).......... 150,000 2.7 -- -- -- -- 150,000 * Dr. Heiner Sussner (12).......... 150,000 2.6 -- -- -- -- 150,000 * David L. Bultman (13)............ 125,000 2.2 -- -- -- -- 125,000 * Dr. Gilbert F. Amelio (14)....... 100,000 1.7 -- -- -- -- 100,000 * William E. Terry (15)............ 50,000 * -- -- -- -- 50,000 * Thompson Dean (6)................ -- -- -- -- -- -- -- -- Robert Finzi (6)................. -- -- -- -- -- -- -- -- All directors and executive officers as a group (15 persons) (16).................. 4,384,567 72.0 6,250,000 75.8 -- -- 10,634,567 58.4
- --------------- * Less than one percent. (1) Except as indicated by footnote, the Company understands that the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to community property laws where applicable. (2) Reflects the beneficial ownership of the Company's Common Stock, assuming the conversion of the Convertible Subordinated Notes and the Bridge Note Warrants. Shares of Common Stock subject to options, warrants or notes which are currently exercisable or exercisable within 60 days of February 28, 1998, are deemed outstanding for computing the percentages of the person holding such options, warrants or notes, but are not deemed outstanding for computing the percentages of any other person. Percentage ownership is based on 5,607,480 shares of Common Stock outstanding as of February 28, 1998. (3) The number of shares reflects the number of shares of Common Stock in the aggregate issuable upon the conversion of the Series A Preferred Stock held by each person. Each share of Series A Preferred Stock is convertible into 20 shares of Common Stock. See "Description of Capital Stock -- Series A Preferred Stock." (4) The number of shares reflects the number of shares of Common Stock in the aggregate issuable upon the conversion of the Series B Preferred Stock held by each person. Each share of Series B Preferred Stock is convertible into 20 shares of Common Stock. See "Description of Capital Stock -- Series B Preferred Stock." (5) Reflects the beneficial ownership of the Company's capital stock, assuming the conversion of the Series A Preferred Stock, Series B Preferred Stock, Convertible Subordinated Notes and the Bridge Note Warrants. Shares of Common Stock subject to options, warrants or notes which are currently exercisable or exercisable within 60 days of February 28, 1998, are deemed outstanding for computing the percentage of the person holding such options, warrants or notes, but are not deemed outstanding for computing the percentage of any other person. 70 78 (6) Consists of shares held directly by DLJMBP, DLJIP, DLJOP, DLJMBF, DLJCC, DLJ First, PM Funding, Sprout II and Sprout VI. See "Certain Transactions." The address of each of DLJMBP, DLJMBF, DLJCC, DLJ First and PM Funding is 277 Park Avenue, New York, New York 10172. The address of DLJIP and DLJOP is John B. Gorsiraweg 14, Willemstad, Curacao, Netherlands Antilles. The address of Sprout II and Sprout VI (the "Sprout Group") is 3000 Sand Hill Road, Building 3, Suite 170, Menlo Park, California 94025. Mr. Dean, as a Managing Director of DLJMBP, and Mr. Finzi, as a General Partner of the Sprout Group, may be deemed to share voting and investment power over such shares. Messrs. Dean and Finzi disclaim beneficial interest in such shares, except to the extent of their respective interests in DLJ and the Sprout Entities. Includes 800,000 shares of Common Stock issuable upon the exercise of the Bridge Note Warrants at an exercise price of $1.55 per share held by DLJCC and PM Funding. Includes an aggregate of 5,142,720 shares of Common Stock issuable upon the exercise of the Convertible Subordinated Notes. (7) Includes 130,000 shares held by Mr. Cormier's children and other relatives for which Mr. Cormier maintains voting control. (8) Includes 98,700 shares of Common Stock which are held by Mr. Schaefer's children and other relatives for which Mr. Schaefer maintains voting control and 657,500 shares held by Mr. Schaefer's wife as her separate property. (9) Includes 43,333 shares that are subject to a right of repurchase in favor of the Company that lapse in a series of monthly installments ending in July 2000. (10) Includes 8,000 shares held in trust for Mr. Erickson's children for which Mr. Erickson maintains voting control. Includes 95,000 shares that are subject to a right of repurchase in favor of the Company that lapse in a series of monthly installments ending in November 1999. (11) Includes 47,500 shares that are subject to a right of repurchase in favor of the Company that lapse in a series of monthly installments ending in November 1999. (12) Includes immediately exercisable options to purchase 150,000 shares. Because of limitations under the federal tax laws for Incentive Stock Options, only options to purchase 113,543 shares are currently exercisable or exercisable within 60 days of February 28, 1998. The option shares issuable upon exercise of such option are, prior to vesting, subject to a right of repurchase in favor of the Company that lapse in a series of monthly installments ending in October 2001. (13) Includes immediately exercisable options to purchase 125,000 shares. Because of limitations under the federal tax laws for Incentive Stock Options, only options to purchase 92,449 shares are currently exercisable or exercisable within 60 days of February 28, 1998. The option shares issuable upon exercise of such option are, prior to vesting, subject to a right of repurchase in favor of the Company that lapse in a series of monthly installments ending in July 2001. (14) Includes immediately exercisable options to purchase 100,000 shares. The option shares issuable upon exercise of such option are, prior to vesting, subject to a right of repurchase in favor of the Company that lapse in a series of monthly installments ending in June 2000. (15) Includes immediately exercisable options to purchase 50,000 shares. The option shares issuable upon exercise of such option are, prior to vesting, subject to a right of repurchase in favor of the Company that will lapse in a series of annual and monthly installments ending in August 2002. (16) See Notes 7, 8, 9, 10, 11, 12, 13, 14 and 15. Includes options exercisable for 485,559 shares of Common Stock under the 1995 Option Plan, and 730,000 shares of Common Stock of which 248,500 shares are subject to a right of repurchase in favor of the Company that lapses in a series of monthly installments ending in August 2002. Excludes shares held by DLJ and the Sprout Entities. See Note 6 above. 71 79 DESCRIPTION OF INDEBTEDNESS The following sets forth information concerning indebtedness of the Company. NEW CREDIT FACILITY In connection with the Refinancing, the Company entered into the New Credit Facility with the Lenders by amending and restating its Former Credit Facility. The following is a summary of the material terms and conditions of the New Credit Facility and is subject to the detailed provisions of the amended and restated credit agreement with the Lenders and the various documents related thereto. The New Credit Facility provides the Company with up to $25.0 million of revolving credit, subject to certain conditions, which limit could be increased to $40.0 million at the sole discretion of the Lenders. The New Credit Facility is secured by substantially all of the Company's current and future assets (other than the real estate owned by the Company in San Diego, California on which its headquarters is located) and guaranteed on a secured basis by the Subsidiary Guarantors. The guarantees of the Subsidiary Guarantors in favor of the Lenders are secured by substantially all of the existing and future assets of the Subsidiary Guarantors. The Company's obligations under the New Credit Facility are also secured by a pledge of all or a portion of the outstanding capital stock of the Company's direct and indirect material subsidiaries, subject to certain exceptions. With certain exceptions, the Company and the Subsidiary Guarantors are prohibited from pledging any of their assets other than under the New Credit Facility. Indebtedness under the New Credit Facility and the related guarantees of the Subsidiary Guarantors in favor of the Lenders, to the extent of the assets securing such obligations, effectively rank senior to indebtedness outstanding under the New Notes and the New Note Guarantees. Borrowings under the New Credit Facility are available for working capital and general corporate purposes, including the issuance of letters of credit, subject to a borrowing base test and the achievement of certain financial ratios and compliance with certain conditions and covenants. As of February 28, 1998, the Company had approximately $17.0 million of borrowing availability under the New Credit Facility. All indebtedness outstanding under the New Credit Facility will mature in January 2001. The initial interest rate for borrowings under the New Credit Facility will be, at the option of the Company, LIBOR plus 3.0% or the Base Rate plus 1.0%. The Company may elect interest periods of one, three or six months for LIBOR borrowings. Calculation of interest will be on the basis of actual days elapsed in a year of 360 days (or 365 or 366 days, as the case may be, in the case of Base Rate loans). The Company is obligated to pay a quarterly commitment fee on the aggregate unused amount of the New Credit Facility at an annual rate of 0.75% (which amount may be decreased to 0.50% beginning in 1999 under certain circumstances). The "Base Rate" is the higher of (i) the prime commercial lending rate of Fleet National Bank and (ii) the Federal Funds Effective Rate plus 0.5%. "LIBOR" is defined as the rate displayed for deposits in dollars for a period equal to the relevant interest period on page 3750 of the Telerate Screen (or such other page as may replace such page on such service for the purpose of displaying the London interbank offered rate of major Banks for deposits in dollars) two business days prior to the first day of the relevant interest period. LIBOR will at all times include statutory reserves to the extent actually incurred. Indebtedness under the New Credit Facility may be prepaid in whole or in part without premium or penalty (subject in some cases to interest rate breakage costs) and the Lenders' commitments relative thereto reduced or terminated upon such notice and in such amounts as may be agreed upon. The New Credit Facility contains customary and appropriate representations and warranties, including, without limitation, those relating to due organization and authorization, no conflicts with agreements, financial condition, no material adverse changes, litigation, compliance with laws and environmental liabilities. The New Credit Facility also contains, in addition to the borrowing base test, customary and appropriate conditions to all borrowings under the New Credit Facility including satisfaction of requirements relating to prior written notice of borrowing, the accuracy of representations and warranties and the absence of any default or event of default. 72 80 The New Credit Facility also contains customary affirmative and negative covenants, including, without limitation, limitations on other indebtedness, liens, investments and guarantees, restricted payments, mergers and acquisitions, sales of assets, capital expenditures, leases and affiliate transactions. The New Credit Facility also contains financial covenants relating to minimum interest coverage, minimum net worth, minimum cash flow and profitability and maximum leverage. Events of default under the New Credit Facility include those relating to non-payment of interest, principal or fees payable under the New Credit Facility; non-performance of certain covenants; cross default to other material debt of the Company and its subsidiaries (including indebtedness under the New Notes); bankruptcy or insolvency; judgments in excess of specified amounts; default under certain related loan documents; materially inaccurate or false representations or warranties and change of control. CONVERTIBLE SUBORDINATED NOTES In connection with the Recapitalization, the Company issued and sold $8.0 million principal amount of its Convertible Subordinated Notes (the "Convertible Subordinated Notes") to DLJ and the Sprout Entities, pursuant to the Securities Purchase Agreement. The Convertible Subordinated Notes mature in July 2005. Interest accrued at an annual rate of 25.0% for the three-year period between November 23, 1994 (the "Original Issue Date") and November 23, 1997, and thereafter accrues at an annual rate equal to the greater of 12.5% and the prime rate plus 2.0%. Interest is payable at maturity. In the event the Company enters into any transaction constituting a liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the Company is obligated to redeem the Convertible Subordinated Notes in cash at a price equal to the aggregate principal amount thereof plus accrued interest (the "Accreted Amount"). The Convertible Subordinated Notes (including all accrued interest thereon) are convertible into an aggregate of 5,142,720 shares of the Company's Common Stock at the option of the holders thereof, and, upon the Company's initial public offering, are automatically convertible into that number of shares of Common Stock. The Convertible Subordinated Notes also contain customary anti-dilution rights and protective voting provisions that, among other things and subject to certain qualifications, limit the Company's ability to (i) amend, alter or repeal its Certificate of Incorporation or the charter documents of its subsidiaries in any manner adverse to the preferences, privileges, voting rights and powers of the holders of the Convertible Subordinated Notes; (ii) voluntarily liquidate, dissolve or wind up the Company or any of its subsidiaries; (iii) voluntarily convey, exchange or transfer all or substantially all of the Company's assets; (iv) other than indebtedness outstanding under the New Notes and the New Credit Facility, incur, assume, refinance, renew, discharge, repay (other than pursuant to regularly scheduled payments thereof) or cancel any indebtedness of the Company or any of its subsidiaries, (v) pay dividends or make distributions on capital stock of the Company and its subsidiaries and (vi) except as required under the terms of the Indenture related to the New Notes, redeem or repurchase any shares of capital stock of the Company, without the written consent of the holders of at least 75% in aggregate Accreted Amount of the Convertible Subordinated Notes. Events of default under the Convertible Subordinated Notes include, among other things, (i) a default continuing in payment of all or any part of the principal or interest payable thereunder when due; (ii) a default under other Material Debt (as defined in the Convertible Subordinated Notes) of the Company or any of its subsidiaries or under any mortgage, indenture or other instrument under which there may be issued or by which there may be secured or evidenced any Material Debt of the Company or any of its subsidiaries which results in the acceleration of such indebtedness prior to its stated maturity and (iii) certain events of bankruptcy or insolvency with respect to the Company or any of its subsidiaries. Upon the occurrence of an event of default, the holders of a majority of the aggregate Accreted Amount of the Convertible Subordinated Notes may declare all outstanding amounts under the Convertible Subordinated Notes to be immediately due and payable. The Convertible Subordinated Notes are expressly subordinated to all senior debt of the Company, including the indebtedness outstanding under the New Notes, as well as any indebtedness outstanding under the New Credit Facility. The Convertible Subordinated Notes may be amended with the written consent of the holders of a majority in aggregate Accreted Amount of the Convertible Subordinated Notes then outstanding. 73 81 DESCRIPTION OF NEW NOTES GENERAL The Notes were, and the New Notes will be, issued pursuant to the Indenture dated as of January 30, 1998, among the Company, the direct or indirect domestic Restricted Subsidiaries of the Company (together, the "Subsidiary Guarantors") and State Street Bank and Trust Company of California, N.A., as trustee (the "Trustee"). The terms of the New Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The New Notes are subject to all such terms, and Holders of New Notes are referred to the Indenture and the Trust Indenture Act for a statement thereof. The terms of the New Notes are identical in all material respects to the Notes, except that the New Notes have been registered under the Securities Act and, therefore, will not bear restrictive legends with respect to such registration and will not contain certain provisions providing for an increase in the interest rate thereon under certain circumstances described in the Registration Rights Agreement, the provisions of which will terminate upon the consummation of the Exchange Offer. The following summary of the material provisions of the Indenture does not purport to be complete and is qualified in its entirety by reference to the Indenture, including the definitions therein of certain terms used below. Copies of the proposed form of Indenture are available as set forth below under "-- Additional Information." The definitions of certain terms used in the following summary are set forth below under "-- Certain Definitions." For purposes of this summary, the term "Company" refers only to Phase Metrics, Inc. and not to any of its Subsidiaries. The New Notes will be general unsecured obligations of the Company and will rank pari passu in right of payment with all current and future unsecured senior Indebtedness of the Company. The Company's obligations under the New Notes will be fully and unconditionally guaranteed on an unsecured senior basis by, and will be joint and several obligations of, the Subsidiary Guarantors. See "-- Note Guarantees." As of December 31, 1997, on an as adjusted basis giving effect to the Note Offering and the application of the net proceeds thereof, the New Notes and the New Note Guarantees would have been effectively subordinated to approximately $3.2 million of secured obligations of the Company and the Subsidiary Guarantors. The Indenture will permit the incurrence of additional secured Indebtedness in the future. A copy of the Indenture has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The operations of the Company are conducted in part through its Subsidiaries, and the Company may, therefore, be dependent upon the cash flow of its Subsidiaries to meet its debt obligations, including its obligations under the New Notes. All of the existing domestic Restricted Subsidiaries of the Company are, and all future domestic Restricted Subsidiaries are expected to be, Subsidiary Guarantors. As of the date of the Indenture, all of the Company's Subsidiaries will be Restricted Subsidiaries. However, under certain circumstances, the Company will be able to designate current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the restrictive covenants set forth in the Indenture. PRINCIPAL, MATURITY AND INTEREST The New Notes will be limited in aggregate principal amount to $110.0 million and will mature on February 1, 2005. Interest on the New Notes will accrue at the rate of 10 3/4% per annum and will be payable semiannually in arrears on February 1 and August 1 of each year, commencing on August 1, 1998, to Holders of record on the immediately preceding January 15 and July 15. Interest on the New Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Principal, premium and Liquidated Damages, if any, and interest on the New Notes will be payable at the office or agency of the Company maintained for such purpose within the City and State of New York or, at the option of the Company, payment of interest and Liquidated Damages, if any, may be made by check mailed to the Holders of the New Notes at their respective addresses set forth in the register of Holders of New Notes; provided that all payments of principal, premium and Liquidated Damages, if any, and interest with respect to New Notes the Holders of which have given wire transfer instructions to the Company will be required to be 74 82 made by wire transfer of immediately available funds to the accounts specified by the Holders thereof. Until otherwise designated by the Company, the Company's office or agency in New York will be the office of the Trustee maintained for such purpose. The New Notes will be issued in denominations of $1,000 and integral multiples thereof. NEW NOTE GUARANTEES The Company's payment obligations under the New Notes will be fully and unconditionally guaranteed by the Subsidiary Guarantors on a joint and several basis. The New Note Guarantees will be general unsecured obligations of the Subsidiary Guarantors, will rank senior in right of payment to all subordinated Indebtedness of the Subsidiary Guarantors and pari passu in right of payment to all existing and future senior Indebtedness of the Subsidiary Guarantors, if any. The obligations of any Subsidiary Guarantor under its New Note Guarantee will be limited so as not to constitute a fraudulent conveyance under applicable law. The Indenture will provide that no Subsidiary Guarantor may consolidate with or merge with or into (whether or not such Subsidiary Guarantor is the surviving Person), another corporation, Person or entity whether or not affiliated with such Subsidiary Guarantor unless, subject to the provisions of the following paragraph, (i) the Person formed by or surviving any such consolidation or merger (if other than such Subsidiary Guarantor) assumes all the obligations of such Subsidiary Guarantor pursuant to a supplemental indenture in form and substance reasonably satisfactory to the Trustee, under the New Notes and the Indenture; (ii) immediately after giving effect to such transaction, no Default or Event of Default exists; (iii) such Subsidiary Guarantor, or any Person formed by or surviving any such consolidation or merger, would have Consolidated Net Worth (immediately after giving effect to such transaction) equal to or greater than the Consolidated Net Worth of such Subsidiary Guarantor immediately preceding the transaction and (iv) the Company would be permitted by virtue of its pro forma Fixed Charge Coverage Ratio, immediately after giving effect to such transaction, to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the Fixed Charge Coverage Ratio test set forth in the covenant described below under the caption "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock." The requirements of clauses (i), (iii) and (iv) of this paragraph will not apply in the case of a consolidation with or merger with or into the Company or another Subsidiary Guarantor. The Indenture will provide that (i) in the event of a sale or other disposition of all of the assets of any Subsidiary Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the capital stock of any Subsidiary Guarantor, or (ii) in the event that the Company designates a Subsidiary Guarantor to be an Unrestricted Subsidiary, or such Subsidiary Guarantor ceases to be a Subsidiary of the Company, then such Subsidiary Guarantor (in the event of a sale or other disposition, by way of such a merger, consolidation or otherwise, of all of the capital stock of such Subsidiary Guarantor or any such designation) or the entity acquiring the property (in the event of a sale or other disposition of all of the assets of such Subsidiary Guarantor) will be released and relieved of any obligations under its New Note Guarantee; provided, that the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of the Indenture. See "--Repurchase at the Option of Holders." In the case of a sale, assignment, lease, transfer, conveyance or other disposition of all or substantially all of the assets of a Subsidiary Guarantor, upon the assumption provided for in clause (ii) of the covenant described under the caption "-- Certain Covenants -- Merger, Consolidation, or Sale of Assets," such Subsidiary Guarantor shall be discharged from all further liability and obligation under the Indenture. 75 83 OPTIONAL REDEMPTION The New Notes will not be redeemable at the Company's option prior to February 1, 2002. Thereafter, the New Notes will be subject to redemption at any time at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on February 1 of the years indicated below:
YEAR PERCENTAGE ---- ---------- 2002........................................................ 105.375% 2003........................................................ 102.688% 2004 and thereafter......................................... 100.000%
Notwithstanding the foregoing, at any time prior to February 1, 2001, the Company may redeem up to 33% of the original aggregate principal amount of New Notes at a redemption price of 110.75% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the redemption date, with the net cash proceeds of a Public Equity Offering; provided, that at least 67% of the original aggregate principal amount of New Notes remains outstanding immediately after the occurrence of such redemption; and provided, further, that such redemption shall occur within 90 days of the date of the closing of such Public Equity Offering. SELECTION AND NOTICE If less than all of the New Notes are to be redeemed at any time, selection of New Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the New Notes are listed, or, if the New Notes are not so listed, on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate; provided, that no New Notes of $1,000 or less shall be redeemed in part. Notices of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each Holder of New Notes to be redeemed at its registered address. Notices of redemption may not be conditional. If any New Note is to be redeemed in part only, the notice of redemption that relates to such New Note shall state the portion of the principal amount thereof to be redeemed. A new note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original New Note. New Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on New Notes or portions of them called for redemption. MANDATORY REDEMPTION Except as set forth below under "-- Repurchase at the Option of Holders," the Company is not required to make mandatory redemption or sinking fund payments with respect to the New Notes. REPURCHASE AT THE OPTION OF HOLDERS Change of Control Upon the occurrence of a Change of Control, each Holder of New Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's New Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase (the "Change of Control Payment"). Within 30 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase New Notes on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"), pursuant to the procedures required by the Indenture and described in such notice. The Company will comply with the requirements of Rule 14e-1 under the Exchange 76 84 \Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the New Notes as a result of a Change of Control. On the Change of Control Payment Date, the Company will, to the extent lawful, (1) accept for payment all New Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all New Notes or portions thereof so tendered and (3) deliver or cause to be delivered to the Trustee the New Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of New Notes or portions thereof being purchased by the Company. The Paying Agent will promptly mail to each Holder of New Notes so tendered the Change of Control Payment for such New Notes, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new note equal in principal amount to any unpurchased portion of the New Notes surrendered, if any; provided, that each such new note will be in a principal amount of $1,000 or an integral multiple thereof. The Change of Control provisions described above will be applicable whether or not any other provisions of the Indenture are applicable. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the Holders of the New Notes to require that the Company repurchase or redeem the New Notes in the event of a takeover, recapitalization or similar transaction. The Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by the Company and purchases all New Notes validly tendered and not withdrawn under such Change of Control Offer. The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of the Company and its Subsidiaries taken as a whole. Although there is a developing body of case law interpreting the phrase "substantially all," there is no precise established definition of that phrase under applicable law. Accordingly, the ability of a Holder of New Notes to require the Company to repurchase such Notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Company and its Subsidiaries taken as a whole to another Person or group may be uncertain. Asset Sales The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 75% of the consideration therefor received by the Company or such Restricted Subsidiary is in the form of (a) cash or Cash Equivalents or (b) property or assets that are used or useful in a Permitted Business, or Capital Stock of any Person primarily engaged in a Permitted Business if, as a result of the acquisition by the Company or any Restricted Subsidiary thereof, such Person becomes a Restricted Subsidiary; provided, that the amount of (x) any liabilities of the Company or any Restricted Subsidiary (other than contingent liabilities and liabilities of the Company that are by their terms subordinated to the New Notes or any guarantee thereof) that are assumed by the transferee of any such assets pursuant to the customary novation agreement that releases the Company or such Restricted Subsidiary from further liability and (y) any notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are converted by the Company or such Restricted Subsidiary into cash or Cash Equivalents (to the extent of the cash or Cash Equivalents received) within 180 days following the closing of such Asset Sale, will be deemed to be cash for purposes of this provision; provided, further, that the 75% limitation referred to above shall not apply to any sale, transfer or other disposition of assets in which the cash portion of the consideration received therefor, determined in accordance with the foregoing proviso, is equal to or greater than what the after-tax net proceeds would have been had such transaction complied with the aforementioned 75% limitation. 77 85 Within 270 days after the receipt of any Net Proceeds from an Asset Sale, the Company may apply such Net Proceeds, at its option, (a) to permanently repay Indebtedness outstanding under the New Credit Facility (and to correspondingly reduce commitments with respect to the revolving borrowings thereunder) or other Pari Passu Indebtedness; provided, that if the Company shall so repay other Pari Passu Indebtedness, it will equally and ratably reduce Indebtedness under the New Notes if the New Notes are then redeemable or, if the New Notes may not be then redeemed, the Company shall make an offer to all Holders to purchase at 100% of the principal amount thereof the amount of New Notes that would otherwise be redeemed or (b) to an investment in property, capital expenditures or assets that are used or useful in a Permitted Business, or Capital Stock of any Person primarily engaged in a Permitted Business if, as a result of the acquisition by the Company or any Restricted Subsidiary thereof, such Person becomes a Restricted Subsidiary. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the preceding sentence of this paragraph will be deemed to constitute "Excess Proceeds." Pending the final application of any such Net Proceeds, the Company may temporarily reduce the revolving Indebtedness under the New Credit Facility or otherwise invest such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $15.0 million, the Company will be required to make an offer to all Holders of New Notes (an "Asset Sale Offer") to purchase the maximum principal amount of New Notes that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any, thereon, to the date of purchase, in accordance with the procedures set forth in the Indenture. To the extent that the aggregate amount of New Notes tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of New Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the New Notes to be purchased on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. CERTAIN COVENANTS Restricted Payments The Indenture will provide that from and after the date of the Indenture the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of the Company's or any of its Restricted Subsidiaries' Equity Interests (including, without limitation, any payment in connection with any merger or consolidation involving the Company) or to the direct or indirect holders of the Company's or any of its Restricted Subsidiaries' Equity Interests in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company); (ii) purchase, redeem or otherwise acquire or retire for value (including without limitation, in connection with any merger or consolidation involving the Company) any Equity Interests of the Company or any direct or indirect parent of the Company; (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Pari Passu Indebtedness or any Indebtedness which is subordinated to the New Notes, except scheduled payments of interest or principal at Stated Maturity of such Indebtedness or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: (a) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; (b) the Company would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described below under caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"; and 78 86 (c) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Subsidiaries after the date of the Indenture (excluding Restricted Payments permitted by clause (ii) of the next succeeding paragraph), is less than the sum of (i) 50% of the Consolidated Net Income of the Company for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the date of the Indenture to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds received by the Company from the issue or sale since the date of the Indenture of Equity Interests of the Company (other than Disqualified Stock) or of Disqualified Stock or debt securities of the Company that have been converted into such Equity Interests (other than Equity Interests (or Disqualified Stock or convertible debt securities) sold to a Subsidiary of the Company and other than Disqualified Stock or convertible debt securities that have been converted into Disqualified Stock), plus (iii) to the extent that any Restricted Investment that was made after the date of the Indenture is sold for cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (B) the initial amount of such Restricted Investment, plus (iv) if any Unrestricted Subsidiary (A) the assets of which are used or useful in, or which is engaged in, one or more Permitted Businesses is redesignated as a Restricted Subsidiary, the fair market value of such redesignated Subsidiary (as determined in good faith by the Board of Directors) as of the date of its redesignation or (B) pays any cash dividends or cash distributions to the Company or any of its Restricted Subsidiaries, 50% of any such cash dividends or cash distributions made after the date of the Indenture. The provisions of the immediately preceding paragraph will not prohibit (i) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the Indenture; (ii) the redemption, repurchase, retirement, defeasance or other acquisition of any Indebtedness subordinated to the New Notes or Equity Interests of the Company in exchange for, or out of the net cash proceeds of the substantially concurrent sale or issuance (other than to a Restricted Subsidiary of the Company) of, other Equity Interests of the Company (other than any Disqualified Stock); (iii) the defeasance, redemption, repurchase or other acquisition of Pari Passu Indebtedness or Indebtedness subordinated to the New Notes with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any dividend by a Restricted Subsidiary of the Company to the holders of its Equity Interests on a pro rata basis; (v) optional and mandatory prepayments on any revolving credit Indebtedness incurred under the New Credit Facility or (vi) any other Restricted Payment which, together with all other Restricted Payments made pursuant to this clause (vi) after the date of the Indenture, does not exceed $5.0 million in the aggregate (in each case, after giving effect to all subsequent reductions in the amount of any Restricted Investment made pursuant to this clause (vi) either as a result of (A) the repayment of disposition thereof for cash or (B) the redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary (valued proportionate to the Company's equity interest in such Subsidiary at the time of such redesignation), but, in the case of clauses (A) and (B), not to exceed the amount of such Restricted Investment previously made pursuant to this clause (vi); provided that in the case of each of clauses (i) through (vi) no Default or Event of Default shall have occurred and be continuing after making such Restricted Payment. The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default or Event of Default; provided, that in no event shall the business currently operated by any Subsidiary Guarantor be transferred to or held by an Unrestricted Subsidiary. For purposes of making such determination, all outstanding Investments by the Company and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such outstanding Investments will be deemed to constitute Investments in an amount equal to the fair market value of such Investments at the time of such designation (as determined in good faith by the Board of Directors). Such designation will only be permitted if 79 87 such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or such Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any non-cash Restricted Payment shall be determined in good faith by the Board of Directors whose resolution with respect thereto shall be delivered to the Trustee; such determination will be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if such fair market value exceeds $1.0 million. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by the covenant "-- Restricted Payments" were computed, together with a copy of any fairness opinion or appraisal required by the Indenture. Incurrence of Indebtedness and Issuance of Preferred Stock The Indenture provides that the Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and that the Company will not issue any Disqualified Stock and will not permit any of its Subsidiaries to issue any shares of preferred stock; provided, however, that the Company may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio for the Company's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock is issued would have been at least 2.0 to 1 if the date on which the Indebtedness is incurred is prior to February 1, 2000, and at least 2.5 to 1 if the date on which the Indebtedness is incurred is on or after February 1, 2000, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock had been issued, as the case may be, at the beginning of such four-quarter period. The provisions of the first paragraph of this covenant will not apply to the incurrence of any of the following items of Indebtedness (collectively, "Permitted Debt"): (i)the incurrence by the Company and the Subsidiary Guarantors of Indebtedness pursuant to the New Credit Facility; provided, that the aggregate principal amount of all such Indebtedness (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of the Company thereunder) outstanding under the New Credit Facility after giving effect to such incurrence does not exceed the sum of $40.0 million; (ii) the incurrence by the Company and its Restricted Subsidiaries of the Existing Indebtedness; (iii) the incurrence by the Company and the Subsidiary Guarantors of Indebtedness represented by the New Notes and the New Note Guarantees, respectively; (iv) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case (other than in the case of a mortgage financing secured by the real estate (and personal property associated with such real estate) owned by the Company in San Diego, California on which the Company's headquarters is located on the date of the Indenture) incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of the Company or such Restricted Subsidiary (whether through the direct purchase of assets or the Capital Stock of any Person owning such Assets), in an aggregate principal amount not to exceed $10.0 million at any time outstanding; (v) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness in connection with the acquisition of assets or a new Restricted Subsidiary; provided, that such Indebtedness was incurred by the prior owner of such assets or such Restricted Subsidiary prior to such acquisition by 80 88 the Company or one of its Subsidiaries and was not incurred in connection with, or in contemplation of, such acquisition by the Company or one of its Subsidiaries; provided, further, that the principal amount (or accreted value, as applicable) of such Indebtedness, together with any other outstanding Indebtedness incurred pursuant to this clause (v), does not exceed $5.0 million; (vi) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness that was permitted by the Indenture to be incurred; (vii) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between the Company and any of its Wholly Owned Restricted Subsidiaries or between one Wholly Owned Restricted Subsidiary and another Wholly Owned Restricted Subsidiary; provided, however, that (a) if the Company is the obligor on such Indebtedness and the payee is not a Subsidiary Guarantor, such Indebtedness is expressly subordinated to the prior payment in full in cash of all Obligations with respect to the Notes; (b) if a Wholly Owned Restricted Subsidiary that is not a Subsidiary Guarantor is the obligor on such Indebtedness, such Indebtedness, to the extent owing to the Company or any Subsidiary Guarantor, does not exceed $5.0 million in aggregate principal amount at any time outstanding and (c) (x) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Company or a Wholly Owned Restricted Subsidiary and (y) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Wholly Owned Restricted Subsidiary shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be, that was not permitted by this clause (vii); (viii) the incurrence by the Company or any of its Restricted Subsidiaries of Hedging Obligations that are incurred for the purpose of fixing or hedging (a) currency risk or interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Indenture to be outstanding or (b) exchange rate risk with respect to agreements or Indebtedness of such Person payable denominated in a currency other than U.S. dollars; provided, that such agreements do not increase the Indebtedness of the obligor outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or interest rates or by reason of fees, indemnities and compensation payable thereunder; (ix) the Guarantee by the Company or any of its Restricted Subsidiaries of Indebtedness of the Company or a Restricted Subsidiary of the Company that was permitted to be incurred by another provision of this covenant; (x) the incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse Debt; provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of the Company; (xi) Indebtedness incurred by the Company or any of its Restricted Subsidiaries constituting reimbursement obligations with respect to letters of credit issued in the ordinary course of business, including without limitation to letters of credit in respect to workers' compensation claims or self-insurance, or other Indebtedness with respect to reimbursement type obligations regarding workers' compensation claims; provided, however, that upon the drawing of such letters of credit or the incurrence of such Indebtedness, such obligations are reimbursed within 30 days following such drawing or incurrence; (xii) Indebtedness arising from agreements of the Company or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, asset or Subsidiary, other than guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or Subsidiary for the purpose of financing such acquisition; provided, that (a) such Indebtedness is not reflected on the balance sheet of the Company or any Restricted Subsidiary (contingent obligations referred to in a footnote to financial statements and not otherwise reflected on the balance sheet will not be deemed to be 81 89 reflected on such balance sheet for purposes of this clause (a)) and (b) the maximum assumable liability in respect of all such Indebtedness shall at no time exceed the gross proceeds including non-cash proceeds (the fair market value of such non-cash proceeds being measured at the time received and without giving effect to any subsequent changes in value) actually received by the Company and its Restricted Subsidiaries in connection with such disposition; (xiii) Obligations in respect of performance and surety bonds and completion guarantees provided by the Company or any Restricted Subsidiary in the ordinary course of business; (xiv) the incurrence by Foreign Subsidiaries which are not Guarantors of Indebtedness in connection with the financing of accounts or notes receivable outside of the United States in an aggregate principal amount at any time outstanding, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any other Indebtedness incurred pursuant to this clause (xiv) not to exceed $10.0 million; provided, that neither the Company nor any Guarantor shall have guaranteed or provided credit support of any kind (including any undertaking, agreement or instrument which would constitute Indebtedness) with respect to such Indebtedness; and (xv) the incurrence by the Company or any of its Restricted Subsidiaries of additional Indebtedness, incurred after the date of the Indenture, in an aggregate principal amount (or accreted value, as applicable) at any time outstanding, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any other Indebtedness incurred pursuant to this clause (xv), not to exceed $15.0 million. For purposes of determining compliance with this covenant, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (i) through (xv) above or is entitled to be incurred pursuant to the first paragraph of this covenant, the Company shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this covenant and such item of Indebtedness will be treated as having been incurred pursuant to only one of such clauses or pursuant to the first paragraph hereof. Accrual of interest and the accretion of accreted value will not be deemed to be an incurrence of Indebtedness for purposes of this covenant. Liens The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, create, incur, assume or otherwise cause or suffer to exist or become effective any Lien (other than Permitted Liens) upon any of their property or assets, now owned or hereafter acquired. Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i) (a) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits, or (b) pay any indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or advances to the Company or any of its Restricted Subsidiaries or (iii) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (a) Existing Indebtedness as in effect on the date of the Indenture, (b) the New Credit Facility as in effect as of the date of the Indenture, and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof; provided, that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings are no more restrictive in the aggregate with respect to such dividend and other payment restrictions than those contained in the New Credit Facility as in effect on the date of the Indenture, (c) the Indenture and the Notes, (d) any applicable law, rule, regulation or order, (e) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in contemplation of such 82 90 acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired; provided, that, in the case of Indebtedness, such Indebtedness was permitted by the terms of the Indenture to be incurred, (f) customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices, (g) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (iii) above on the property so acquired, (h) Permitted Refinancing Indebtedness; provided, that the material restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive than those contained in the agreements governing the Indebtedness being refinanced, and (i) contracts for the sale of assets, including without limitation customary restrictions with respect to a Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Subsidiary. Merger, Consolidation, or Sale of Assets The Indenture provides that the Company may not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another Person unless (i) the Company is the surviving corporation or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the Person formed by or surviving any such consolidation or merger (if other than the Company) or the Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of the Company under the Notes and the Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii) immediately after such transaction no Default or Event of Default exists; (iv) except in the case of a merger of the Company with or into a Wholly Owned Restricted Subsidiary of the Company, the Company or the entity or Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made will, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described above under the caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock," and (v) each Subsidiary Guarantor, unless it is the other party to the transactions described above, shall have by supplemental indenture confirmed that its New Note Guarantee shall apply to such Person's obligations under the Indenture and the New Notes. Transactions with Affiliates The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction") unless (i) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $1.0 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $5.0 million, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing; provided, that the following shall not be deemed Affiliate Transactions: (1) any employ- 83 91 ment agreement entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (2) transactions between or among the Company and/or its Restricted Subsidiaries, (3) Permitted Investments and Restricted Payments that are permitted by the provisions of the Indenture described above under the caption "--Restricted Payments," (4) customary loans, advances, fees and compensation paid to, and indemnity provided on behalf of, officers, directors, employees or consultants of the Company or any of its Restricted Subsidiaries, (5) transactions in accordance with the Securityholders Agreement, as amended; provided, that no such amendment contains any provisions that are materially adverse to the Holders of the New Notes, and (6) transactions between the Company or its Restricted Subsidiaries on the one hand, and DLJ or its Affiliates, on the other hand, involving the provision of financial, advisory, placement or underwriting services by DLJ; provided, that fees payable to DLJ do not exceed the usual and customary fees of DLJ for similar services. Limitation on Issuances and Sales of Capital Stock of Wholly Owned Restricted Subsidiaries The Indenture provides that the Company (i) will not, and will not permit any Wholly Owned Restricted Subsidiary of the Company to, transfer, convey, sell, lease or otherwise dispose of any Capital Stock of any Wholly Owned Subsidiary of the Company to any Person (other than the Company or a Wholly Owned Restricted Subsidiary of the Company), unless (a) such transfer, conveyance, sale, lease or other disposition is of all the Capital Stock of such Wholly Owned Restricted Subsidiary and (b) the cash Net Proceeds from such transfer, conveyance, sale, lease or other disposition are applied in accordance with the covenant described above under the caption "--Asset Sales," and (ii) will not permit any Wholly Owned Restricted Subsidiary of the Company to issue any of its Equity Interests (other than, if necessary, shares of its Capital Stock constituting directors' qualifying shares) to any Person other than to the Company or a Wholly Owned Restricted Subsidiary of the Company. Limitations on Issuances of Guarantees of Indebtedness The Indenture provides that the Company will not permit any Restricted Subsidiary, directly or indirectly, to Guarantee or pledge any assets to secure the payment of any other Indebtedness of the Company unless either such Restricted Subsidiary (x) is a Subsidiary Guarantor or (y) simultaneously executes and delivers a supplemental indenture to the Indenture providing for the Guarantee of the payment of the New Notes by such Restricted Subsidiary, which Guarantee shall be senior to or pari passu with such Restricted Subsidiary's Guarantee of or pledge to secure such other Indebtedness. Notwithstanding the foregoing, any such Guarantee by a Restricted Subsidiary of the New Notes shall provide by its terms that it shall be automatically and unconditionally released and discharged upon any sale, exchange or transfer, to any Person not an Affiliate of the Company, of all of the Company's stock in, or all or substantially all the assets of, such Restricted Subsidiary, which sale, exchange or transfer is made in compliance with the applicable provisions of the Indenture. The form of such Guarantee is attached as an exhibit to the Indenture. Business Activities The Company will not, and will not permit any Restricted Subsidiary to, engage in any business other than a Permitted Business, except to such extent as would not be material to the Company and its Restricted Subsidiaries taken as a whole. Additional Note Guarantees The Indenture provides that (i) if the Company or any of its Restricted Subsidiaries shall, after the date of the Indenture, transfer or cause to be transferred, including by way of any Investment, in one or a series of transactions (whether or not related), any assets, businesses, divisions, real property or equipment having an aggregate fair market value (as determined in good faith by the Board of Directors) in excess of $1.0 million to any Restricted Subsidiary that is neither a Subsidiary Guarantor nor a Foreign Subsidiary, (ii) if the Company or any of its Restricted Subsidiaries shall acquire another Restricted Subsidiary other than a Foreign Subsidiary having total assets with a fair market value (as determined in good faith by the Board of 84 92 Directors) in excess of $1.0 million or (iii) if any Restricted Subsidiary other than a Foreign Subsidiary shall incur Acquired Debt in excess of $1.0 million, then the Company shall, at the time of such transfer, acquisition or incurrence, (i) cause such transferee, acquired Restricted Subsidiary or Restricted Subsidiary incurring Acquired Debt (if not then a Subsidiary Guarantor) to execute a New Note Guarantee of the Obligations of the Company under the New Notes in the form set forth in the Indenture and (ii) deliver to the Trustee an Opinion of Counsel, in form reasonably satisfactory to the Trustee, that such New Note Guarantee is a valid, binding and enforceable obligation of such transferee, acquired Restricted Subsidiary or Restricted Subsidiary incurring Acquired Debt, subject to customary exceptions for bankruptcy, fraudulent conveyance and equitable principles. Notwithstanding the foregoing, the Company or any of its Restricted Subsidiaries may make a Restricted Investment in any Wholly Owned Restricted Subsidiary of the Company without compliance with this covenant provided that such Restricted Investment is permitted by the covenant described under the caption, "-- Restricted Payments." Reports The Indenture provides that, whether or not required by the rules and regulations of the Commission, so long as any New Notes are outstanding, the Company will furnish to the Holders of New Notes (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's certified independent accountants and (ii) all current reports that would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports. In addition, whether or not required by the rules and regulations of the Commission, the Company will file a copy of all such information and reports with the Commission for public availability (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition, the Company has agreed that, for so long as any New Notes remain outstanding, it will furnish to the Holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. EVENTS OF DEFAULT AND REMEDIES The Indenture provides that each of the following constitutes an Event of Default: (i) default for 30 days in the payment when due of interest on, or Liquidated Damages, if any, with respect to, the New Notes; (ii) default in payment when due of the principal of or premium, if any, on the New Notes; (iii) failure by the Company to comply with the provisions described under the captions "-- Repurchase at the Option of Holders -- Change of Control," "-- Repurchase at the Option of Holders -- Asset Sales," or "-- Certain Covenants -- Merger, Consolidation, or Sale of Assets"; (iv) failure by the Company for 30 days after notice from the Trustee or at least 25% in principal amount of the New Notes then outstanding to comply with the provisions described under the captions "-- Restricted Payments" or "-- Incurrence of Indebtedness and Issuance of Preferred Stock"; (v) failure by the Company for 60 days after notice from the Trustee or at least 25% in principal amount of the New Notes then outstanding to comply with any of its other agreements in the Indenture or the New Notes; (vi) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created after the date of the Indenture, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $5.0 million or more; (vii) failure by the Company or any of its Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which judgments are not paid, discharged or stayed 85 93 for a period of 60 days and (viii) certain events of bankruptcy or insolvency with respect to the Company or any of its Subsidiaries. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding New Notes may declare all the New Notes to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Company or any of its Subsidiaries all outstanding New Notes will become due and payable without further action or notice. Holders of the New Notes may not enforce the Indenture or the New Notes except as provided in the Indenture. If any Event of Default occurs and is continuing, subject to certain limitations, Holders of a majority in principal amount of the then outstanding New Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the New Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. In the case of any Event of Default occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium that the Company would have had to pay if the Company then had elected to redeem the New Notes pursuant to the optional redemption provisions of the Indenture, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law upon the acceleration of the New Notes. If an Event of Default occurs prior to February 1, 2002 by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding the prohibition on redemption of the New Notes prior to February 1, 2002, then the premium specified in the Indenture shall also become immediately due and payable to the extent permitted by law upon the acceleration of the New Notes. The Holders of a majority in aggregate principal amount of the New Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the New Notes waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the New Notes. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No director, officer, employee, incorporator or stockholder of the Company or the Subsidiary Guarantors, as such, shall have any liability for any obligations of the Company or any Subsidiary Guarantor under the New Notes, the Indenture, the New Note Guarantees or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of New Notes, by accepting a New Note, waives and releases all such liability. The waiver and release are part of the consideration for issuance of the New Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Company may, at its option and at any time, elect to have all of its obligations discharged with respect to the outstanding New Notes and all obligations of the Subsidiary Guarantors under the New Note Guarantees ("Legal Defeasance") except for (i) the rights of Holders of outstanding New Notes to receive payments in respect of the principal of, premium and Liquidated Damages, if any, and interest on such New Notes when such payments are due from the trust referred to below, (ii) the Company's obligations with respect to the New Notes concerning issuing temporary New Notes, registration of New Notes, mutilated, destroyed, lost or stolen New Notes and the maintenance of an office or agency for payment and money for security payments held in trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee, and the Company's obligations in connection therewith and (iv) the Legal Defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, elect to have the obligations of the Company and 86 94 the Subsidiary Guarantors released with respect to certain covenants that are described in the Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the New Notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under "-- Events of Default" will no longer constitute an Event of Default with respect to the New Notes. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of the New Notes, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium and Liquidated Damages, if any, and interest on the outstanding New Notes on the stated maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the New Notes are being defeased to maturity or to a particular redemption date; (ii) in the case of Legal Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by the Internal Revenue Service a ruling or (B) since the date of the Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders of the outstanding New Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that the Holders of the outstanding New Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit) or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than the Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (vi) the Company must have delivered to the Trustee an opinion of counsel to the effect that after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (vii) the Company must deliver to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of New Notes over the other creditors of the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others and (viii) the Company must deliver to the Trustee an Officers' Certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. TRANSFER AND EXCHANGE A Holder may transfer or exchange New Notes in accordance with the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company is not required to transfer or exchange any New Note selected for redemption. Also, the Company is not required to transfer or exchange any New Note for a period of 15 days before a selection of New Notes to be redeemed. The registered Holder of a New Note will be treated as the owner of it for all purposes. 87 95 AMENDMENT, SUPPLEMENT AND WAIVER Except as provided in the next two succeeding paragraphs, the Indenture, the New Notes or the New Note Guarantees may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the New Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, New Notes), and any existing default or compliance with any provision of the Indenture, the New Notes or the New Note Guarantees may be waived with the consent of the Holders of a majority in principal amount of the then outstanding New Notes (including consents obtained in connection with a tender offer or exchange offer for New Notes). Without the consent of each Holder affected, an amendment or waiver may not (with respect to any New Notes held by a non-consenting Holder): (i) reduce the principal amount of New Notes whose Holders must consent to an amendment, supplement or waiver, (ii) reduce the principal of or change the fixed maturity of any New Note or alter the provisions with respect to the redemption of the New Notes (other than provisions relating to the covenants described above under the caption "-- Repurchase at the Option of Holders"); (iii) reduce the rate of or change the time for payment of interest on any New Note; (iv) waive a Default or Event of Default in the payment of principal of or premium or Liquidated Damages, if any, or interest on the New Notes (except a rescission of acceleration of the New Notes by the Holders of at least a majority in aggregate principal amount of the New Notes and a waiver of the payment default that resulted from such acceleration); (v) make any New Note payable in money other than that stated in the New Notes; (vi) make any change in the provisions of the Indenture relating to waivers of past Defaults or the rights of Holders of Notes to receive payments of principal of or premium, if any, or interest on the New Notes; (vii) waive a redemption payment with respect to any New Note (other than a payment required by one of the covenants described above under the caption "-- Repurchase at the Option of Holders") or (viii) make any change in the foregoing amendment and waiver provisions. Notwithstanding the foregoing, without the consent of any Holder of New Notes, the Company, the Subsidiary Guarantors and the Trustee may amend or supplement the Indenture, the New Notes or the New Note Guarantees to cure any ambiguity, defect or inconsistency, to provide for uncertificated New Notes in addition to or in place of certificated New Notes, to provide for the assumption of the Company's and the Subsidiary Guarantors' obligations to Holders of New Notes in the case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of New Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, to comply with requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act or to allow any Subsidiary to guarantee the New Notes. CONCERNING THE TRUSTEE The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; provided, that if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue or resign. The Holders of a majority in principal amount of the then outstanding New Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that in case an Event of Default shall occur (which shall not be cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Holder of New Notes, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. 88 96 ADDITIONAL INFORMATION Anyone who receives this Prospectus may obtain a copy of the Indenture and Registration Rights Agreement without charge by writing to Phase Metrics, Inc., 10260 Sorrento Valley Road, San Diego, California 92121; Attention: Chief Financial Officer. BOOK-ENTRY; DELIVERY; FORM AND TRANSFER The New Notes exchanged by QIBs initially will be in the form of one or more registered global notes without interest coupons (collectively, the "U.S. Global Notes"). Upon issuance, the U.S. Global Notes will be deposited with the Trustee, as custodian for The Depository Trust Company ("DTC"), in New York, New York, and registered in the name of DTC or its nominee, in each case for credit to the accounts of DTC's Direct and Indirect Participants (as defined below). The New Notes exchanged for Notes that were offered and sold in offshore transactions in reliance on Regulation S, if any, will be in the form of one or more permanent global notes (the "Regulation S Global Notes") and deposited with the Trustee, as custodian for DTC, in New York, New York, and registered in the name of a nominee of DTC (a "Nominee") for credit to the accounts of Indirect Participants at Euroclear and Cedel Bank. Beneficial interests in the Regulation S Permanent Global Notes may be transferred to a Person that takes delivery in the form of an interest in the U.S. Global Notes and beneficial interests in the U.S. Global Notes may be transferred to a Person that takes delivery in the form of an interest in the Regulation S Permanent Global Notes; provided, that in each case, that the certification requirements described below are complied with. See "Transfers of Interests in One Global Note for Interests in Another Global Note." All registered global notes are referred to herein collectively as "Global Notes." In addition, transfer of beneficial interests in any Global Notes will be subject to the applicable rules and procedures of DTC and its Direct or Indirect Participants (including, if applicable, those of Euroclear and Cedel Bank), which may change from time to time. The Global Notes may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee in certain limited circumstances. Beneficial interests in the Global Notes may be exchanged for New Notes in certificated form in certain limited circumstances. See "--Transfer of Interests in Global Notes for Certificated Notes." Initially, the Trustee will act as Paying Agent and Registrar. The New Notes may be presented for registration of transfer and exchange at the offices of the Registrar. Depository Procedures DTC has advised the Company that DTC is a limited-purpose trust company created to hold securities for its participating organizations (collectively, the "Direct Participants") and to facilitate the clearance and settlement of transactions in those securities between Direct Participants through electronic book-entry changes in accounts of Direct Participants. The Direct Participants include securities brokers and dealers (including DLJ), banks, trust companies, clearing corporations and certain other organizations, including Euroclear and Cedel Bank. Access to DTC's system is also available to other entities that clear through or maintain a direct or indirect custodial relationship with a Direct Participant (collectively, the "Indirect Participants"). DTC may hold securities beneficially owned by other Persons only through the Direct Participants or Indirect Participants and such other Persons' ownership interest and transfer of ownership interest will be recorded only on the records of the Direct Participant and/or Indirect Participant, and not on the records maintained by DTC. DTC has also advised the Company that, pursuant to DTC's procedures, DTC will maintain records of the ownership interests of each Direct Participants in the Global Notes and the transfer of ownership interests by and between Direct Participants. DTC will not maintain records of the ownership interests of, or the transfer of ownership interests by and between, Indirect Participants or other owners of beneficial interests in the Global Notes. Direct Participants and Indirect Participants must maintain their own records of the 89 97 ownership interests of, and the transfer of ownership interests by and between, Indirect Participants and other owners of beneficial interests in the Global Notes. Investors in the U.S. Global Notes may hold their interests therein directly through DTC if they are Direct Participants in DTC or indirectly through organizations that are Direct Participants in DTC. Investors in the Regulation S Global Notes may hold their interests therein directly through Euroclear or Cedel Bank or through organizations other than Euroclear and Cedel Bank that are Direct Participants in the DTC system. Morgan Guaranty Trust Company of New York, Brussels office is the operator and depository of Euroclear and Citibank, N.A. is the operator and depository of Cedel Bank (each a "Nominee" of Euroclear and Cedel Bank, respectively). Therefore, they will each be recorded on DTC's records as the holders of all ownership interests held by them on behalf of Euroclear and Cedel Bank, respectively. Euroclear and Cedel Bank will maintain on their records the ownership interests, and transfers of ownership interests by and between, their own customer's securities accounts. DTC will not maintain records of the ownership interests of, or the transfer of ownership interests by and between, customers of Euroclear or Cedel Bank. All ownership interests in any Global Notes, including those of customers' securities accounts held through Euroclear or Cedel Bank, may be subject to the procedures and requirements of DTC. The laws of some states require that certain Persons take physical delivery in definitive, certificated form, of securities that they own. This may limit or curtail the ability to transfer beneficial interests in a Global Note to such Persons. Because DTC can act only on behalf of Direct Participants, which in turn act on behalf of Indirect Participants and others, the ability of a Person having a beneficial interest in a Global Note to pledge such interest to Persons or entities that are not Direct Participants in DTC, or to otherwise take actions in respect of such interests, may be affected by the lack of physical certificates evidencing such interests. For certain other restrictions on the transferability of the Notes, See "-- Regulation S Permanent Global Notes" and "-- Transfers of Interests in Global Notes for Certificated Notes." EXCEPT AS DESCRIBED IN "--TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES", OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL NOT HAVE NEW NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF NEW NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE. Under the terms of the Indenture, the Company, the Subsidiary Guarantors and the Trustee will treat the Persons in whose names the New Notes are registered (including New Notes represented by Global Notes) as the owners thereof for the purpose of receiving payments and for any and all other purposes whatsoever. Payments in respect of the principal, premium, Liquidated Damages, if any, and interest on Global Notes registered in the name of DTC or its nominee will be payable by the Trustee to DTC or its nominee as the registered holder under the Indenture. Consequently, neither the Company, the Subsidiary Guarantors, the Trustee nor any agent of the Company, the Subsidiary Guarantors or the Trustee has or will have any responsibility or liability for (i) any aspect of DTC's records or any Direct Participant's or Indirect Participant's records relating to or payments made on account of beneficial ownership interests in the Global Notes or for maintaining, supervising or reviewing any of DTC's records or any Direct Participant's or Indirect Participant's records relating to the beneficial ownership interests in any Global Note or (ii) any other matter relating to the actions and practices of DTC or any of its Direct Participants or Indirect Participants. DTC has advised the Company that its current payment practice (for payments of principal, interest and the like) with respect to securities such as the New Notes is to credit the accounts of the relevant Direct Participants with such payment on the payment date in amounts proportionate to such Direct Participant's respective ownership interests in the Global Notes as shown on DTC's records. Payments by Direct Participants and Indirect Participants to the beneficial owners of the New Notes will be governed by standing instructions and customary practices between them and will not be the responsibility of DTC, the Trustee, the Company or the Subsidiary Guarantors. Neither the Company, the Subsidiary Guarantors nor the Trustee will be liable for any delay by DTC or its Direct Participants or Indirect Participants in identifying the beneficial owners of the New Notes, and the Company and the Trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee as the registered owner of the New Notes for all purposes. 90 98 The Global Notes will trade in DTC's Same-Day Funds Settlement System and, therefore, transfers between Direct Participants in DTC will be effected in accordance with DTC's procedures, and will be settled in immediately available funds. Transfers between Indirect Participants (other than Indirect Participants who hold an interest in the New Notes through Euroclear or Cedel Bank) who hold an interest through a Direct Participant will be effected in accordance with the procedures of such Direct Participant but generally will settle in immediately available funds. Transfers between and among Indirect Participants who hold interests in the New Notes through Euroclear and Cedel Bank will be effected in the ordinary way in accordance with their respective rules and operating procedures. Subject to compliance with the transfer restrictions applicable to the New Notes described herein, cross-market transfers between Direct Participants in DTC, on the one hand, and Indirect Participants who hold interests in the New Notes through Euroclear or Cedel Bank, on the other hand, will be effected by Euroclear or Cedel Bank's respective Nominee through DTC in accordance with DTC's rules on behalf of Euroclear or Cedel Bank; provided, that delivery of instructions relating to crossmarket transactions must be made directly to Euroclear or Cedel Bank, as the case may be, by the counterparty in accordance with the rules and procedures of Euroclear or Cedel Bank and within their established deadlines (Brussels time for Euroclear and UK time for Cedel Bank). Indirect Participants who hold interest in the New Notes through Euroclear and Cedel Bank may not deliver instructions directly to Euroclear's or Cedel Bank's Nominee. Euroclear or Cedel Bank will, if the transaction meets its settlement requirements, deliver instructions to its respective Nominee to deliver or receive interests on Euroclear's or Cedel Bank's behalf in the relevant Global Note in DTC, and make or receive payment in accordance with normal procedures for same-day fund settlement applicable to DTC. Because of time zone differences, the securities accounts of an Indirect Participant who holds an interest in the New Notes through Euroclear or Cedel Bank purchasing an interest in a Global Note from a Direct Participant in DTC will be credited, and any such crediting will be reported to Euroclear or Cedel Bank during the European business day immediately following the settlement date of DTC in New York. Although recorded in DTC's accounting records as of DTC's settlement date in New York, Euroclear and Cedel Bank customers will not have access to the cash amount credited to their accounts as a result of a sale of an interest in a Regulation S Global Note to a DTC Participant until the European business day for Euroclear or Cedel Bank immediately following DTC's settlement date. DTC has advised the Company that it will take any action permitted to be taken by a holder of New Notes only at the direction of one or more Direct Participants to whose account interests in the Global Notes are credited and only in respect of such portion of the aggregate principal amount of the New Notes as to which such Direct Participant or Direct Participants has or have given direction. However, if there is an Event of Default under the New Notes, DTC reserves the right to exchange Global Notes (without the direction of one or more of its Direct Participants) for New Notes in certificated form, and to distribute such certificated forms of New Notes to its Direct Participants. See "-- Transfers of Interests in Global Notes for Certificated Notes." Although DTC, Euroclear and Cedel Bank have agreed to the foregoing procedures to facilitate transfers of interests in the Regulation S Global Notes and in the U.S. Global Notes among Direct Participants, Euroclear and Cedel Bank, they are under no obligation to perform or to continue to perform such procedures, and such procedures may be discontinued at any time. None of the Company, the Subsidiary Guarantors, DLJ or the Trustee will have any responsibility for the performance by DTC, Euroclear or Cedel Bank or their respective Direct and Indirect Participants of their respective obligations under the rules and procedures governing any of their operations. The information in this section concerning DTC, Euroclear and Cedel Bank and their book-entry systems has been obtained from sources that the Company believes to be reliable, but the Company takes no responsibility for the accuracy thereof. "U.S. Person" means (i) any individual resident in the United States, (ii) any partnership or corporation organized or incorporated under the laws of the United States, (iii) any estate of which an executor or administrator is a U.S. Person (other than an estate governed by foreign law and of which at least one 91 99 executor or administrator is a non-U.S. Person who has sole or shared investment discretion with respect to its assets), (iv) any trust of which any trustee is a U.S. Person (other than a trust of which at least one trustee is a non-U.S. Person who has sole or shared investment discretion with respect to its assets and no beneficiary of the trust (and no settler, if the trust is revocable) is a U.S. Person), (v) any agency or branch of a foreign entity located in the United States, (vi) any non-discretionary or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. Person, (vii) any discretionary or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated or (if an individual) resident in the United States (other than such an account held for the benefit or account of a non-U.S. Person), (viii) any partnership or corporation organized or incorporated under the laws of a foreign jurisdiction and formed by a U.S. Person principally for the purpose of investing in securities not registered under the Securities Act (unless it is organized or incorporated and owned, by "accredited investors" within the meaning of Rule 501(a) under the Securities Act who are not natural persons, estates or trusts); provided, however that the term "U.S. Person" shall not include (A) a branch or agency of a U.S. Person that is located and operating outside the United States for valid business purposes as a locally regulated branch or agency engaged in the banking or insurance business, (B) any employee benefit plan established and administered in accordance with the law, customary practices and documentation of a foreign country and (C) the international organizations set forth in Section 902(o)(7) of Regulation S under the Securities Act and any other similar international organizations, and their agencies, affiliates and pension plans. Transfers of Interests in One Global Note for Interests in Another Global Note An Indirect Participant who holds an interest in Regulation S Global Notes will be permitted to transfer its interest to a U.S. Person who takes delivery in the form of an interest in U.S. Global Notes only upon receipt by the Trustee of any necessary written certification from the transferor. A Direct or Indirect Participant who holds an interest in U.S. Global Notes may transfer its interests to a Person who takes delivery in the form of an interest in Regulation S Global Notes only upon receipt by the Trustee of a written certification from the transferor to the effect that such transfer is being made in accordance with Rule 904 of Regulation S. Transfers involving an exchange of a beneficial interest in Regulation S Global Notes for a beneficial interest in U.S. Global Notes or vice versa will be effected by DTC by means of an instruction originated by the Trustee through DTC/Deposit Withdraw at Custodian (DWAC) system. Accordingly, in connection with such transfer, appropriate adjustments will be made to reflect a decrease in the principal amount of the one Global Note and a corresponding increase in the principal amount of the other Global Note, as applicable. Any beneficial interest in the one Global Note that is transferred to a Person who takes delivery in the form of the other Global Note will, upon transfer, cease to be an interest in such first Global Note and become an interest in such other Global Note and, accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to beneficial interests in such other Global Note for as long as it remains such an interest. Transfers of Interests in Global Notes for Certificated Notes An entire Global Note may be exchanged for definitive New Notes in registered, certificated form without interest coupons ("Certificated Notes") if (i) DTC (x) notifies the Company that it is unwilling or unable to continue as depositary for the Global Notes and the Company thereupon fails to appoint a successor depositary within 90 days or (y) has ceased to be a clearing agency registered under the Exchange Act, (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of Certificated Notes or (iii) there shall have occurred and be continuing a Default or an Event of Default with respect to the Notes. In any such case, the Company will notify the Trustee in writing that, upon surrender by the Direct and Indirect Participants of their interest in such Global Note, Certificated Notes will be issued to each Person that such Direct and Indirect Participants and the DTC identify as being the beneficial owner of the New Related Notes. 92 100 Beneficial interests in Global Notes held by any Direct or Indirect Participant may be exchanged for Certificated Notes upon request to DTC, by such Direct Participant (for itself or on behalf of an Indirect Participant), to the Trustee in accordance with customary DTC procedures. Certificated Notes delivered in exchange for any beneficial interest in any Global Note will be registered in the names, and issued in any approved denominations, requested by DTC on behalf of such Direct or Indirect Participants (in accordance with DTC's customary procedures). Neither the Company, the Subsidiary Guarantors nor the Trustee will be liable for any delay by the holder of the Global Notes or DTC in identifying the beneficial owners of New Notes, and the Company, the Subsidiary Guarantors and the Trustee may conclusively rely on, and will be protected in relying on, instructions from the holder of the Global Note or DTC for all purposes. Transfers of Certificated Notes Certificated Notes may only be transferred if the transferor first delivers to the Trustee a written certificate (and in certain circumstances, an opinion of counsel) confirming that, in connection with such transfer, it has complied with the restrictions on transfer described under "Notice to Investors." Same Day Settlement and Payment The Indenture will require that payments in respect of the New Notes represented by the Global Notes (including principal, premium, if any, interest and Liquidated Damages, if any) be made by wire transfer of immediately available same day funds to the accounts specified by the holder of interests in such Global Note. With respect to Certificated Notes, the Company will make all payments of principal, premium, if any, interest and Liquidated Damages, if any, by wire transfer of immediately available same day funds to the accounts specified by the holders thereof or, if no such account is specified, by mailing a check to each such holder's registered address. The Company expects that secondary trading in the Certificated Notes will also be settled in immediately available funds. REGISTRATION RIGHTS; LIQUIDATED DAMAGES The Company, the Subsidiary Guarantors and DLJ entered into the Registration Rights Agreement on the date of the Note Closing. In the Registration Rights Agreement, the Company and the Subsidiary Guarantors agreed to file an Exchange Offer Registration Statement with the Commission within 60 days of the date of the Note Closing, and use their respective best efforts to have it declared effective at the earliest possible time. The Company and the Subsidiary Guarantors also agreed to use their best efforts to cause the Exchange Offer Registration Statement to be effective continuously, to keep the Exchange Offer open for a period of not less than 20 business days and cause the Exchange Offer to be consummated no later than the 30th business day after it is declared effective by the Commission. Pursuant to the Exchange Offer, the Company is offering to the Holders of Transfer Restricted Securities who are able to make certain representations, the opportunity to exchange their Transfer Restricted Securities for New Notes. To participate in the Exchange Offer, each Holder must represent that it is not an affiliate of the Company, it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any Person to participate in, a distribution of the New Notes that are issued in the Exchange Offer and it is acquiring the New Notes in the Exchange Offer in its ordinary course of business. If (i) the Exchange Offer is not permitted by applicable law or Commission policy or (ii) any Holder of Notes which are Transfer Restricted Securities notifies the Company prior to the 20th business day following the consummation of the Exchange Offer that (a) it is prohibited by law or Commission policy from participating in the Exchange Offer, (b) it may not resell the New Notes acquired by it in the Exchange Offer to the public without delivering a prospectus, and the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by it or (c) it is a broker-dealer and holds New Notes acquired directly from the Company or any of the Company's affiliates, the Company and the Subsidiary Guarantors will file with the Commission a Shelf Registration Statement to register for public 93 101 resale the Transfer Restricted Securities held by any such Holder who provide the Company with certain information for inclusion in the Shelf Registration Statement. For the purposes of the Registration Rights Agreement, "Transfer Restricted Securities" means each Note until the earliest of the date of which (i) such Note is exchanged in the Exchange Offer and entitled to be resold to the public by the Holder thereof without complying with the prospectus delivery requirements of the Securities Act, (ii) such Note has been disposed of in accordance with the Shelf Registration Statement, (iii) such Note is disposed of by a Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the Exchange Offer Registration Statement (including delivery of the Prospectus contained therein) or (iv) such Note is distributed to the public pursuant to Rule 144 under the Securities Act. The Registration Rights Agreement provides that (i) if the Company or the Subsidiary Guarantors fail to file an Exchange Offer Registration Statement with the Commission on or prior to the 60th day after the date of the Note Closing, (ii) if the Exchange Offer Registration Statement is not declared effective by the Commission on or prior to the 120th day after the date of the Note Closing, (iii) the Exchange Offer is not consummated on or before the 30th business day after the Exchange Offer Registration Statement is declared effective (iv) if obligated to file the Shelf Registration Statement and the Company or the Subsidiary Guarantors fail to file the Shelf Registration Statement with the Commission on or prior to the 30th day after such filing obligation arises, (v) if obligated to file a Shelf Registration Statement and the Shelf Registration Statement is not declared effective on or prior to the 60th day after the obligation to file a Shelf Registration Statement arises or (vi) if the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, is declared effective but thereafter ceases to be effective or useable in connection with resales of the Transfer Restricted Securities, such time of non-effectiveness or non-usability (each, a "Registration Default"), the Company and the Subsidiary Guarantors agree to pay to each Holder of Transfer Restricted Securities affected thereby liquidated damages ("Liquidated Damages") in an amount equal to $0.05 per week per $1,000 in principal amount of Transfer Restricted Securities held by such Holder for each week or portion thereof that the Registration Default continues for the first 90 day period immediately following the occurrence of such Registration Default. The amount of the Liquidated Damages shall increase by an additional $0.05 per week per $1,000 in principal amount of Transfer Restricted Securities with respect to each subsequent 90 day period until all Registration Defaults have been cured, up to a maximum amount of Liquidated Damages of $0.25 per week per $1,000 in principal amount of Transfer Restricted Securities. The Company and the Subsidiary Guarantors shall not be required to pay liquidated damages for more than one Registration Default at any given time. Following the cure of all Registration Defaults, the accrual of Liquidated Damages will cease. All accrued Liquidated Damages shall be paid by the Company or the Subsidiary Guarantors to Holders entitled thereto by wire transfer to the accounts specified by them or by mailing checks to their registered address if no such accounts have been specified. CERTAIN DEFINITIONS Set forth below are certain defined terms used in the Indenture. Reference is made to the Indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "Acquired Debt" means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the 94 102 ownership of voting securities, by agreement or otherwise; provided, that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. "Asset Sale" means (i) the sale, lease, conveyance or other disposition of any assets or rights (including, without limitation, by way of a sale and leaseback) other than sales of inventory in the ordinary course of business consistent with past practices (provided, that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole will be governed by the provisions of the Indenture described above under the caption "-- Repurchase at Option of Holders -- Change of Control" and/or the provisions described above under the caption "-- Certain Covenants -- Merger, Consolidation or Sale of Assets" and not by the provisions of the Asset Sale covenant), and (ii) the issue or sale by the Company or any of its Restricted Subsidiaries of Equity Interests of any of the Company's Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $1.0 million or (b) for net proceeds in excess of $1.0 million. Notwithstanding the foregoing: (i) a transfer of assets by the Company to a Wholly Owned Restricted Subsidiary or by a Wholly Owned Restricted Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned Restricted Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary, (iii) a sale and leaseback of the real estate (and personal property associated with such real estate) owned by the Company in San Diego, California on which the Company's headquarters is located on the date of the Indenture and (iv) a Restricted Payment that is permitted by the covenant described above under the caption "-- Certain Covenants -- Restricted Payments" will not be deemed to be Asset Sales. "Attributable Debt" in respect of a sale and leaseback transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remaining term of the lease included in such sale and leaseback transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cash Equivalents" means (i) United States dollars, (ii) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of not more than one year from the date of acquisition, (iii) certificates of deposit and Eurodollar time deposits with maturities of one year or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any lender party to the New Credit Facility or with any domestic commercial bank having capital and surplus in excess of $500 million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (ii) and (iii) above entered into with any financial institution meeting the qualifications specified in clause (iii) above, and (v) commercial paper having the highest rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's Rating Services and in each case maturing within 270 days after the date of acquisition. "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act) other than the Principals or their Related Parties (as defined below), (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction (including, without limitation, any merger or consolida- 95 103 tion) the result of which is that any "person" (as defined above), other than the Principals and their Related Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition), directly or indirectly, of more than 50% of the Voting Stock of the Company (measured by voting power rather than number of shares), (iv) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors or (v) the Company consolidates with, or merges with or into, any Person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person consolidates with, or merges with or into, the Company, in any such event pursuant to a transaction in which any of the outstanding Voting Stock of the Company is converted into or exchanged for cash, securities or other property, other than any such transaction where the Voting Stock of the Company outstanding immediately prior to such transaction is converted into or exchanged for Voting Stock (other than Disqualified Stock) of the surviving or transferee Person constituting a majority of the outstanding shares of such Voting Stock of such surviving or transferee Person (immediately after giving effect to such issuance). "Consolidated Cash Flow" means, with respect to any Person for any period, the Consolidated Net Income of such Person and its Restricted Subsidiaries for such period, plus, to the extent deducted in computing Consolidated Net Income, (i) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period, (ii) Fixed Charges of such Person for such period, (iii) depreciation and amortization (including amortization of goodwill and other intangibles) and all other non-cash charges (excluding any such non-cash charge to the extent that it represents (A) an accrual of or reserve for cash charges in any future period, or (B) amortization of a prepaid cash expense that was paid in a prior period), (iv) any gain realized in connection with any Asset Sale and any extraordinary or non-recurring gain, in each case, on a consolidated basis determined in accordance with GAAP and (v) the amount of any non-cash compensation expense incurred in connection with issuances of securities under stock option, stock purchase and other equity-based incentive plans. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, the Fixed Charges of, and the depreciation and amortization and other non-cash charges of a Restricted Subsidiary of, a Person shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent (and in same proportion) that the Net Income of such Restricted Subsidiary was included in calculating the Consolidated Net Income of such Person. "Consolidated Interest Expense" means, with respect to any Person for any period, the sum of: (i) the interest expense of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP (including amortization of original issue discount, non-cash interest payments, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations; provided, that in no event shall any amortization of deferred financing costs be included in Consolidated Interest Expense) and (ii) consolidated interest expense of such Person and its Restricted Subsidiaries that was capitalized during such period, whether paid or accrued. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided, that (i) the Net Income (but not loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Wholly Owned Restricted Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iv) the cumulative effect of a change in 96 104 accounting principles shall be excluded and (v) the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not distributed to the Company or one of its Restricted Subsidiaries for purposes of the covenant described under the caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock" and shall be included for purposes of the covenant described under the caption "Restricted Payments" only to the extent of the amount of dividends or distributions paid in cash to the Company or one of its Restricted Subsidiaries. "Consolidated Net Worth" means, with respect to any Person as of any date, the sum of (i) the consolidated equity of the common stockholders of such Person and its consolidated Subsidiaries as of such date plus (ii) the respective amounts reported on such Person's balance sheet as of such date with respect to any series of preferred stock (other than Disqualified Stock) that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such preferred stock, less (x) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of tangible assets of a going concern business made within 12 months after the acquisition of such business) subsequent to the date of the Indenture in the book value of any asset owned by such Person or a consolidated Subsidiary of such Person, (y) all investments as of such date in unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except, in each case, Permitted Investments) and (z) all unamortized debt discount and expense and unamortized deferred charges as of such date, all of the foregoing determined in accordance with GAAP. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on the date of the Indenture or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the Holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the Notes mature; provided, that any Capital Stock that would not qualify as Disqualified Stock but for change of control provisions shall not constitute Disqualified Stock if the provisions are not more favorable to the holders of such Capital Stock than the provisions described under "-- Change of Control" applicable to the Holders of the Notes. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Existing Indebtedness" means Indebtedness of the Company and its Subsidiaries (other than Indebtedness under the New Credit Facility) in existence on the date of the Indenture, until such amounts are repaid. "Fixed Charges" means, with respect to any Person for any period, the sum, without duplication, of (i) the Consolidated Interest Expense of such Person for such period and (ii) any interest expense on Indebtedness of another Person that is guaranteed by the referent Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries (whether or not such guarantee or Lien is called upon) and (iii) the product of (A) all cash dividend payments of the Company and any Subsidiary Guarantor on any series of preferred stock of the Company or such Guarantor times (B) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. "Fixed Charge Coverage Ratio" means with respect to any Person for any period, the ratio of the Consolidated Cash Flow of such Person and its Restricted Subsidiaries for such period to the Fixed Charges of such Person and its Restricted Subsidiaries for such period. In the event that the Company or any of its 97 105 Restricted Subsidiaries incurs, assumes, guarantees, redeems or repays any Indebtedness (other than revolving credit borrowings) or issues or redeems preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but on or prior to the date on which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, guarantee, redemption or repayment of Indebtedness, or such issuance or redemption of preferred stock, as if the same had occurred at the beginning of the applicable four-quarter reference period. In addition, for purposes of making the computation referred to above, (i) acquisitions that have been made by the Company or any of its Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter period or subsequent to such reference period and on or prior to the Calculation Date shall be deemed to have occurred on the first day of the four-quarter reference period and Consolidated Cash Flow for such reference period shall be calculated without giving effect to clause (iii) of the proviso set forth in the definition of Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded and (iii) the Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, or operations or businesses disposed of prior to the Calculation Date, shall be excluded, but only to the extent that the obligations giving rise to such Fixed Charges will not be obligations of the referent Person or any of its Subsidiaries following the Calculation Date. "Foreign Subsidiary" means a Subsidiary that is formed under the laws of the United States of America or of a state or territory thereof, but shall exclude any Subsidiary which is treated as a partnership or branch for United States federal income tax purposes. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the date of the Indenture. "Global Notes" means the U.S. Global Note, the Regulation S Temporary Global Notes and the Regulation S Permanent Global Notes. "Government Securities" means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States is pledged. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency rates. "Indebtedness" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or bankers' acceptances or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person. The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof, in the case of any Indebtedness that does not require current 98 106 payments of interest, and (ii) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. "Insolvency or Liquidation Proceedings" means (i) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding, relative to the Company or to the creditors of the Company, as such, or to the assets of the Company, or (ii) any liquidation, dissolution, reorganization or winding up of the Company, whether voluntary or involuntary, and involving insolvency or bankruptcy or (iii) any assignment for the benefit of creditors or any other marshaling of assets and liabilities of the Company. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Restricted Subsidiary of the Company, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Restricted Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of the covenant described above under the caption "-- Restricted Payments." "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss). "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "New Credit Facility" means that certain Amended and Restated Credit Agreement, dated as of January 30, 1998, by and among the Company, certain financial institutions and Fleet National Bank, as agent, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and, in each case, as amended, modified, renewed, refunded, replaced or refinanced from time to time. "Non-Recourse Debt" means Indebtedness (i) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor or otherwise), or 99 107 (c) constitutes the lender, (ii) as to which no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness (other than the New Notes being offered hereby) of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (iii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Pari Passu Indebtedness" means Indebtedness of the Company that ranks pari passu in right of payment to the New Notes. "Permitted Business" means any of the businesses and any other businesses related to the businesses engaged in by the Company and its respective Restricted Subsidiaries on the date of the Indenture. "Permitted Investments" means (i) any Investment in the Company or in a Subsidiary Guarantor and Investments in Wholly-Owned Restricted Subsidiaries which are not Subsidiary Guarantors permitted under clauses (vii) or (ix) of the covenant described under the caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock", (ii) any Investment in Cash Equivalents, (iii) any Investment by the Company or any Restricted Subsidiary of the Company in a Person, if as a result of such Investment (a) such Person becomes a Guarantor or (b) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Guarantor, (iv) any Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with the covenant described above under the caption "-- Repurchase at the Option of Holders -- Asset Sales", (v) any acquisition of assets solely in exchange for the issuance of Equity Interests (other than Disqualified Stock) of the Company and (vi) other Investments made after the date of the Indenture in any Person having an aggregate fair market value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (vi) that are at the time outstanding, not in excess of $5.0 million. "Permitted Liens" means (i) Liens securing Indebtedness under the New Credit Facility that was permitted by the terms of the Indenture to be incurred or other Indebtedness allowed to be incurred under clause (i) of the covenant described above under the caption "Incurrence of Indebtedness and Issuance of Preferred Stock", (ii) Liens in favor of the Company, (iii) Liens on property of a Person existing at the time such Person is merged into or consolidated with the Company or any Restricted Subsidiary of the Company; provided, that such Liens were in existence prior to the contemplation of such merger or consolidation and do not extend to any assets other than those of the Person merged into or consolidated with the Company, (iv) Liens on property existing at the time of acquisition thereof by the Company or any Restricted Subsidiary of the Company; provided, that such Liens were in existence prior to the contemplation of such acquisition; (v) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business, (vi) Liens existing on the date of the Indenture, (vii) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded; provided, that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor, (viii) Liens incurred in the ordinary course of business of the Company or any Restricted Subsidiary of the Company with respect to obligations that do not exceed $5.0 million at any one time outstanding and that (a) are not incurred in connection with the borrowing of money or the obtaining of advances or credit (other than trade credit in the ordinary course of business) and (b) do not in the aggregate materially detract from the value of the property or materially impair the use thereof in the operation of business by the Company or such Restricted Subsidiary, (ix) Liens to secure Indebtedness (including Capital Lease Obligations) permitted by clause (iv) of the covenant described under the caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock" covering only the assets acquired with such Indebtedness, together with any additions and accessions thereto and replacements, substitutions and proceeds 100 108 (including insurance proceed(s) thereof), (x) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's, or other like Liens arising in the ordinary course of business in respect of obligations not overdue for a period in excess of 30 days or which are being contested in good faith by appropriate proceedings promptly instituted and diligently prosecuted; provided, that any reserve or other appropriate provisions as shall be required to conform with GAAP shall have been made therefor, (xi) easements, rights-of-way, zoning and similar restrictions and other similar encumbrances or title defects incurred, or leases or subleases granted to others, in the ordinary course of business, which do not in any case materially detract from the value of the property subject thereto or do not interfere with or adversely affect in any material respect the ordinary conduct of the business of the Company and its Restricted Subsidiaries taken as a whole, (xii) Liens (other than any Lien imposed by ERISA or any rule or regulation promulgated thereunder) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance, and other types of social security, (xiii) Liens in favor of a trustee under any indenture securing amounts due to the trustee in connection with its services under such indenture, (xiv) Liens under licensing agreements for use of intellectual property entered into in the ordinary course of business and (xv) Liens on inventory or cash to secure cash advances made by customers for the purchase price of inventory. "Permitted Refinancing Indebtedness" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries; provided that: (i) except for Indebtedness used to extend, refinance, renew, replace, defease or refund the New Credit Facility, the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount of (or accreted value, if applicable), plus accrued interest on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith and the amount of any market-based premium paid in connection therewith), (ii) such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded, (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the New Notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the New Notes on terms at least as favorable to the Holders of New Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded and (iv) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, limited liability company, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Principals" means DLJ Merchant Banking, Inc. and its Affiliates, the Sprout Group and its Affiliates, John F. Schaefer and Arthur J. Cormier. "Public Equity Offering" means a public offering of Equity Interests (other than Disqualified Stock) of the Company that results in the net proceeds to the Company of at least $25.0 million. "Regulation S" means Regulation S promulgated under the Securities Act. "Regulation S Global Notes" means the permanent global notes that are deposited with and registered in the name of the Depositary or its nominee, representing a series of Notes sold in reliance on Regulation S. "Related Party" with respect to any Principal means (i) any controlling stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family member (in the case of an individual) of such Principal or (ii) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of such Principal and/or such other Persons referred to in the immediately preceding clause (i). "Restricted Investment" means an Investment other than a Permitted Investment. 101 109 "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "Rule 144A" means Rule 144A promulgated under the Securities Act. "Securityholders Agreement" means the Securityholders Agreement, dated as of November 23, 1994, among the Company, John F. Schaefer, Arthur J. Cormier, and DLJ and the Sprout Entities. "Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "Subsidiary Guarantors" means each of (i) Helios Incorporated, Applied Robotic Technologies, Inc., Air Bearings Incorporated and Santa Barbara Metric, Inc. and (ii) any other Subsidiary that executes a New Note Guarantee in accordance with the provisions of the Indenture, and their respective successors and assigns. "Unrestricted Subsidiary" means (i) any Subsidiary that is designated by a resolution of the Board of Directors of the Company as an Unrestricted Subsidiary; but only to the extent that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (c) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries and (e) has at least one director on its board of directors that is not a director or executive officer of the Company or any of its Restricted Subsidiaries and has at least one executive officer that is not a director or executive officer of the Company or any of its Restricted Subsidiaries. Any such designation by the Board of Directors of the Company shall be evidenced to the Trustee by filing with the Trustee a certified copy of the resolutions of the Board of Directors giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted by the covenant described above under the caption "Certain Covenants -- Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under the caption "Incurrence of Indebtedness and Issuance of Preferred Stock," the Company shall be in default of such covenant). The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall be permitted only if (i) such Indebtedness is permitted under the covenant described under the caption "Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock," and (ii) no Default or Event of Default would be in existence following such designation. 102 110 "U.S. Global Note" means a permanent global note that is deposited with and registered in the name of the Depositary or its nominee, representing a series of New Notes sold in reliance on Rule 144A. "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "Wholly Owned Restricted Subsidiary" means a Subsidiary that is both a Wholly Owned Subsidiary and a Restricted Subsidiary. "Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person. 103 111 CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS The following is a general discussion of certain United States federal income and estate tax considerations relating to the acquisition, ownership and disposition of New Notes by the original holders of the New Notes. This discussion is based upon the Internal Revenue Code of 1986, as amended (the "Code"), and judicial decisions and administrative interpretations thereunder, as of the date hereof, and such authorities may be repealed, revoked, modified or otherwise interpreted or applied so as to result in federal income tax consequences different from those discussed below. There can be no assurance that the Internal Revenue Service (the "IRS") will not challenge one or more of the tax consequences described herein, and the Company has not obtained, nor does it intend to obtain, a ruling from the IRS or an opinion of counsel with respect to the U.S. federal tax consequences of acquiring or holding the Notes or the New Notes. This discussion does not purport to deal with all aspects of U.S. federal income taxation that may be relevant to a particular holder in light of the holder's circumstances (for example, persons subject to the alternative minimum tax provisions of the Code). Also, certain holders (including insurance companies, tax exempt organizations, financial institutions, subsequent purchasers of New Notes and broker-dealers) may be subject to special rules not discussed below. In addition, this discussion does not describe any tax consequences arising under the laws of any state, locality or taxing jurisdiction other than the United States federal government. In general, the discussion assumes that a holder acquired a Note at original issuance and holds such Note and the New Notes as a capital asset and not as part of a "hedge," "straddle," "conversion transaction," "synthetic security" or other integrated investment. Prospective investors are urged to consult their tax advisors regarding the United States federal tax consequences of acquiring, holding and disposing of New Notes, as well as any tax consequences that may arise under the laws of any foreign, state, local or other taxing jurisdiction. As used herein, the term "United States Holder" means a beneficial owner of a New Note that is, for United States federal income tax purposes, a citizen or resident (within the meaning of Section 7701(b) of the Code) of the United States, a corporation, partnership or other entity created or organized in the United States or under the laws of the United States or of any political subdivision thereof, an estate whose income is included in gross income for United States federal income tax purposes, regardless of its source or a trust, if a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust. UNITED STATES HOLDERS Exchange of Notes for New Notes The exchange of a Note, by a United States Holder, for a New Note should not constitute a taxable exchange of the Note. As a result, a United States Holder should not recognize taxable gain or loss upon receipt of a New Note. A United States Holder's holding period for a New Note should generally include the holding period for the Note so exchanged and such holder's adjusted tax basis in a New Note should generally be the same as such holder's adjusted tax basis in the Note so exchanged. Stated Interest. Stated interest on a New Note will be taxable to a United States Holder as ordinary interest income at the time that such interest accrues or is received, in accordance with the United States Holder's regular method of accounting for federal income tax purposes. The Company expects that the New Notes will not be considered to be issued with original issue discount for federal income tax purposes. Bond Premium on the New Notes. If a United States Holder of a New Note purchased a Note for an amount in excess of the amount payable at the maturity date (or a call date, if appropriate) of the Notes, the United States Holder may deduct such excess as amortizable bond premium over the aggregate terms of the Notes and the New Notes (taking into account earlier call dates, as appropriate), under a yield-to-maturity formula. The deduction is available only if an election is made by the United States Holder or is in effect. This election is revocable only with the consent of the IRS. The election applies to all obligations owned or subsequently acquired by the United States Holder. The United States Holder's adjusted tax basis in the Notes and the New Notes will be reduced to the extent of the deduction of amortizable bond premium. Except as may otherwise be provided in future regulations, under the Code the amortizable bond premium is treated as an offset to interest income on the Notes and the New Notes rather than as a separate deduction item. 104 112 Market Discount on the New Notes. The tax consequences of a disposition of the New Notes may be affected by the market discount provisions of the Code. These rules generally provide that if a United States Holder acquired the Notes (other than in an original issue) or the New Notes at a market discount which equals or exceeds 1/4 of 1% of the stated redemption price of the Notes at maturity multiplied by the number of remaining complete years to maturity and thereafter recognizes gain upon a disposition (or makes a gift) of the New Notes, the lesser of (i) such gain (or appreciation, in the case of a gift) or (ii) the portion of the market discount which accrued while the Notes or New Notes were held by such United States Holder will be treated as ordinary income at the time of the disposition (or gift). For these purposes, market discount means the excess (if any) of the stated redemption price at maturity over the basis of such Notes immediately after their acquisition by the United States Holder. A United States Holder of the New Notes may elect to include any market discount (whether accrued under the Notes or the New Notes) in income currently rather than upon disposition of the New Notes. This election once made applies to all market discount obligations acquired on or after the first taxable year to which the election applies, and may not be revoked without the consent of the IRS. A United States Holder of any New Note who acquired a Note or a New Note at a market discount generally will be required to defer the deduction of a portion of the interest on any indebtedness incurred or maintained to purchase or carry such Note or New Note until the market discount is recognized upon a subsequent disposition of the New Note. Such a deferral is not required, however, if the United States Holder elects to include accrued market discount in income currently. Sale, Exchange or Retirement of the New Notes. Upon the sale, exchange, redemption, retirement, maturity or other disposition of a New Note, a United States Holder will generally recognize taxable gain or loss equal to the difference between the sum of cash plus the fair market value of all other property received on such disposition (except to the extent such cash or property is attributable to accrued interest which will be taxable as ordinary income) and such holder's adjusted tax basis in the New Note. Gain or loss recognized on the disposition of a New Note generally will be capital gain or loss (except to the extent of any accrued market discount). Long-term capital gains tax rates will apply to dispositions by individuals of New Notes held for more than 18 months. The maximum long-term capital gains tax rate applicable to individuals is currently 20% (10% for individuals in the 15% tax bracket). Mid-term capital gains tax rates will apply to dispositions by individuals of New Notes held for more than one year but not more than 18 months. The maximum mid-term capital gains tax rate applicable to individuals is currently 28% (15% for individuals in the 15% tax bracket). Backup Withholding and Information Reporting. In general, a United States Holder of a New Note will be subject to backup withholding at the rate of 31% with respect to interest, principal and premium, if any, paid on a New Note, unless the holder (a) is an entity (including corporations, tax-exempt organizations and certain qualified nominees) that is exempt from withholding and, when required, demonstrates this fact, or (b) provides the Company with its Taxpayer Identification Number ("TIN") (which, for an individual, would be the holder's Social Security number), certifying that the TIN provided to the Company is correct and that the holder has not been notified by the IRS that it is subject to backup withholding due to underreporting of interest or dividends, and otherwise complies with applicable requirements of the backup withholding rules. In addition, such payments of interest, principal and premium to United States Holders that are not corporations, tax-exempt organizations or qualified nominees will generally be subject to information reporting requirements. The amount of any backup withholding from a payment to a United States Holder will be allowed as a credit against such holder's federal income tax liability and may entitle such holder to a refund, provided that the required information is furnished to the IRS. NON-UNITED STATES HOLDERS Stated Interest. Interest paid by the Company to any beneficial owner of a New Note that is not a United States Holder ("Non-United States Holder") will generally not be subject to United States federal 105 113 income or withholding tax if such interest is not effectively connected with the conduct of a trade or business within the United States by such Non-United States Holder and (a) such Non-United States Holder (i) does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Company; (ii) is not a controlled foreign corporation with respect to which the Company is a "related person" within the meaning of the Code and (iii) satisfies certain certification requirements or (b) such Non-United States Holder is entitled to the benefits of an income tax treaty under which the interest is exempt from United States withholding tax, and such Non-United States Holder provides a properly executed IRS Form 1001 claiming the exemption (or, after December 31, 1998, a properly executed IRS Form W-8, which may require obtaining a Taxpayer Identification Number and making certain certifications). Interest effectively connected with the conduct of a United States trade or business by a Non-United States Holder will be subject to the United States federal income tax on net income that applies to United States persons generally (and, with respect to corporate holders, under certain circumstances, may also be subject to the branch profits tax). Sale, Exchange or Retirement of the New Notes. A Non-United States Holder will generally not be subject to United States federal income tax on gain recognized on a sale, redemption, retirement at maturity or other disposition of a New Note unless (i) the gain is effectively connected with the conduct of a trade or business within the United States by the Non-United States Holder, (ii) in the case of a Non-United States Holder who is a nonresident alien individual and holds the Note as a capital asset, such holder is present in the United States for 183 or more days in the taxable year and certain other requirements are met or (iii) the Non-United States Holder is subject to tax pursuant to the provisions of U.S. tax law applicable to certain United States expatriates. Federal Estate Taxes. If interest on the New Notes is exempt from withholding of United States federal income tax under clause (a) of the rules described under "Stated Interest," the New Notes will not be included in the estate of a deceased Non-United States Holder for United States federal estate tax purposes. Backup Withholding and Information Reporting. The Company will, where required, report to the holders of New Notes and the IRS the amount of any interest paid on the New Notes in each calendar year and the amounts of tax withheld, if any, with respect to such payments. Copies of these information returns may also be made available under the provisions of a specific treaty or agreement to the tax authorities of the country in which the Non-United States Holder resides. Information reporting and backup withholding requirements will apply to the gross proceeds paid to a Non-United States Holder on the disposition of the New Notes by or through a United States office of a United States or foreign broker, unless certain certification requirements are met or the holder otherwise establishes an exemption. Information reporting requirements, but not backup withholding, will also apply to a payment of the proceeds of a disposition of the New Notes by or through a foreign office of a broker that is either a U.S. person or a U.S. related person, unless the holder is an exempt recipient (as demonstrated through appropriate certification) or such broker has documentary evidence in its file that the holder of the New Notes is not a United States person and has no actual knowledge to the contrary and certain other conditions are met. Neither information reporting nor backup withholding generally will apply to a payment of the proceeds of a disposition of the New Notes by or through a foreign office of a foreign broker that is not a United States related person. For purposes of this paragraph, a United States related person is (i) a "controlled foreign corporation" for United States federal income tax purposes, (ii) a foreign person 50% or more of whose gross income from all sources for the three-year period ending with the close of its taxable year preceding the payment (or for such part of the period that the broker has been in existence) is derived from activities that are effectively connected with the conduct of a United States trade or business, or (iii) with respect to payments made after December 31, 1998, a foreign partnership that, at any time during its taxable year is 50% or more (by income or capital interest) owned by United States persons or is engaged in the conduct of a United States trade or business. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or credited against the Non-United States Holder's United States federal income tax liability, provided that the required information is furnished to the IRS. Non-United States Holders are urged 106 114 to consult their tax advisors with respect to the application of the backup withholding rules, as revised under the recently adopted Treasury Regulations that will generally be effective with respect to payments made beginning January 1, 1999, to their particular situations. 107 115 NOTICE TO INVESTORS Unless and until a New Note is exchanged for a Note pursuant to the Exchange Offer, each Note will bear a legend to the following effect unless otherwise agreed by the Company and the holder thereof. "THIS NOTE (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE SECOND SENTENCE HEREOF. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) (A "QIB"), (B) IT IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT OR (C) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT (AN "IAI")); (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, (B) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (C) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR 904 OF THE SECURITIES ACT, (D) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (E) TO AN IAI THAT, PRIOR TO SUCH TRANSFER, FURNISHES THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE TRANSFER OF THIS NOTE (THE FORM OF WHICH CAN BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF NOTES LESS THAN $250,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (F) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY) OR (G) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION" AND "UNITED STATES" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING. 108 116 PLAN OF DISTRIBUTION Based on interpretations by the staff of the SEC enunciated in Exxon Capital Holdings Corporation (available May 13, 1988), Morgan Stanley & Co. Incorporated (available June 5, 1991), Shearman & Sterling (available July 2, 1993), K-III Communications Corporation (available May 14, 1993), and similar no-action or interpretive letters issued to third parties, the Company believes that the New Notes issued pursuant to the Exchange Offer in exchange for Notes may be offered for resale, resold and otherwise transferred by any Holder thereof (other than any such Holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act; provided, that such New Notes are acquired in the ordinary course of such Holder's business and such Holder is not participating, does not intend to participate and has no arrangement or understanding with any person to participate in a distribution of such New Notes. Accordingly, any Holder using the Exchange Offer or intending to participate in a distribution of the New Notes will not be able to rely on such no-action letters. Notwithstanding the foregoing, each Participating Broker-Dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with the initial sales of such New Notes to third parties. This Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with such sales of New Notes where such Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that it will under certain circumstances make this Prospectus, as amended or supplemented, available to any Participating Broker-Dealer for use in connection with any such resale and Participating Broker-Dealers shall be authorized to deliver this Prospectus for a period not exceeding one year after the Expiration Date. In addition, until 90 days after the date of this Prospectus, all dealers effecting transactions in the New Notes may be required to deliver a prospectus. The Company and the Subsidiary Guarantors will not receive any proceeds from any sales of the New Notes by Participating Broker-Dealers. New Notes received by Participating Broker-Dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such Participating Broker-Dealer that resells the New Notes that were received by it for its own account pursuant to the Exchange Offer or the purchasers of the New Notes. Any Participating Broker-Dealer that acquired Notes as a result of market making activities or other trading activities and who resells New Notes that were received by it pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of New Notes and any commission or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. By acceptance of the Exchange Offer, each broker-dealer that receives New Notes pursuant to the Exchange Offer hereby agrees to notify the Company prior to using this Prospectus in connection with the sale or transfer of New Notes and acknowledges and agrees that, upon receipt of notice from the Company of the happening of any event which makes any statement in this Prospectus untrue in any material respect or which requires the making of any changes in this Prospectus in order to make the statements herein not misleading (which notice the Company agrees to deliver promptly to such broker-dealer), such broker-dealer will suspend use of this Prospectus until the Company has amended or supplemented this Prospectus to correct such misstatement or omission and has furnished copies of the amended or supplemented prospectus to such broker-dealer. The Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any Participating Broker-Dealer that requests such documents in the Letter of Transmittal. See "The Exchange Offer." 109 117 There is no existing market for the New Notes and there can be no assurance as to the liquidity of any market that may develop for the New Notes, the ability of Holders of the New Notes to sell their New Notes or the price at which Holders would be able to sell their New Notes. Future trading prices of the New Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's operating results, the market for similar securities and general economic conditions. The Company has been advised by DLJ that it intends to make a market in the New Notes, subject to the limits imposed by the Securities Act and the Exchange Act and subject to any limits imposed during the pendency of any registration statement or shelf registration statement; however, DLJ is not obligated to do so, and may discontinue such market-making at any time without notice. The Company does not currently intend to list the New Notes on any securities exchange or the National Association of Securities Dealers Automated Quotation System. Therefore, no assurance can be given as to the liquidity of any trading market for the New Notes. In addition, such market-making activities may be limited during the Exchange Offer. See "Risk Factors -- Absence of Trading Market; Restrictions on Transfer." Entities affiliated with DLJ (i) hold 11,800,000 shares of Common Stock of the Company, including shares of the Company's Series A Preferred Stock and Series B Preferred Stock which are convertible into an aggregate of 2,000,000 shares and 3,857,280 shares of the Company's Common Stock, respectively, Convertible Subordinated Notes which are convertible into an aggregate of 5,142,720 shares of the Company's Common Stock, and Bridge Financing Warrants which are exercisable for an aggregate of 800,000 shares of the Company's Common Stock and (ii) pursuant to the Securityholders Agreement, are entitled to elect two member to the Company's Board of Directors. Under the Securityholders Agreement, the Company is obligated until November 23, 1998, to use DLJ as its exclusive financial advisor and investment banker. In consideration for DLJ's services, the Company has agreed to pay DLJ an annual retainer of $200,000. In each of 1996 and 1997, the Company paid DLJ $200,000 in fees for financial advisory and certain investment banking services provided to the Company. In connection with the refinancing of its then-outstanding indebtedness in January and December of 1996, the Company paid fees of $1.2 million in the aggregate for debt issuance costs to DLJCF. DLJCF is an affiliate of DLJ. 110 118 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 70,000,000 shares of Common Stock, $.0001 par value per share, of which 5,607,480 shares were outstanding as of February 28, 1998, and 605,364 shares of Preferred Stock, $.0001 par value per share, 412,500 of which have been designated Series A Preferred Stock and 192,864 of which have been designated Series B Preferred Stock, all of which shares of Series A and B Preferred Stock are outstanding. SERIES A PREFERRED STOCK Each share of Series A Preferred Stock is entitled to receive dividends to the same extent as the Common Stock. In the event of any liquidation, dissolution or winding up of the Company, the holders of Series A Preferred Stock are entitled to receive, subsequent to any distributions required to be made to the holders of the Series B Preferred Stock, but prior and in preference to any distribution of assets of the Company to the holders of Common Stock, the amount of $21.82 per share. Each share of Series A Preferred Stock is convertible at any time into Common Stock on a 20-for-one basis, subject to adjustment with respect to certain dilutive issuances by the Company. In addition, all of the shares of Series A Preferred Stock will be converted automatically into Common Stock upon the occurrence of (i) the initial public offering of the Company's Common Stock at a minimum price per share of $4.67 and net proceeds to the Company of at least $15.0 million or (ii) the conversion into Common Stock of the Convertible Subordinated Notes and/or shares of Series B Preferred Stock representing at least 30% of the aggregate number of shares of Common Stock into which all Convertible Subordinated Notes and shares of Series B Preferred Stock could be converted as of the closing of the transactions contemplated by the Securities Purchase Agreement. The holders of Series A Preferred Stock are entitled to vote with the holders of Common Stock on an as-converted basis on all matters presented for stockholder vote. In addition, the Series A Preferred Stock contains customary antidilution rights in the event of certain dilutive issuances by the Company of shares or rights to acquire shares of its capital stock and protective voting provisions that, among other things, limit the Company's ability to, without the affirmative vote of the holders of at least a majority of the outstanding shares of Series A Preferred Stock, (i) create, authorize or issue any senior class or series of stock other than the Series B Preferred Stock or any securities on parity with the Series A Preferred Stock, or increase the authorized number of shares of any such class or series of stock, or reclassify any authorized stock of the Company into any such class or series of stock, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such class or series of stock; (ii) issue additional shares of Series A Preferred Stock; (iii) amend, alter or repeal the Certificate of Incorporation of the Company or those of its subsidiaries in any manner adverse to the preferences, privileges, voting rights and powers of the holders of Series A Preferred Stock and (iv) voluntarily liquidate, dissolve or wind up the Company or any of its subsidiaries unless payments of liquidation preferences are paid in accordance with the Company's Certificate of Incorporation. SERIES B PREFERRED STOCK Each share of Series B Preferred Stock is entitled to receive cumulative dividends at (i) a rate of 25% of $31.11 per share per annum from the date of issuance of such shares until November 23, 1997 and (ii) the greater of (A) 12.5% of $31.11 per share per annum and (B) $31.11 multiplied by the prime rate plus 2%, thereafter. In the event of any liquidation, dissolution or winding up of the Company, the holders of Series B Preferred Stock shall be entitled to receive in preference to the holders of Series A Preferred Stock and Common Stock an amount equal to the greater of (A) $31.11 per share plus all accrued and unpaid dividends and (B) the amount that would have been received by a holder of one share of Series B Preferred Stock had such share been converted into Common Stock. As amended, the Company's Certificate of Incorporation requires the Company to redeem the Series B Preferred Stock on or after July 15, 2005, to the extent the Company has funds legally available for such payment, at a redemption price of $31.11 per share in cash, together with accrued and unpaid dividends. Each share of Series B Preferred Stock is convertible into Common Stock at any time on a 20-for-one basis, subject to adjustment with respect to certain dilutive issuances by the Company. In addition, all of the shares of Series B Preferred Stock shall be converted 111 119 automatically into Common Stock upon the occurrence of the initial public offering of the Company's Common Stock at a minimum price per share of $4.67 and net proceeds to the Company of at least $15.0 million. The holders of Series B Preferred Stock shall be entitled to vote with the holders of Common Stock on an as-converted basis on all matters presented for stockholder vote. In addition, the Series B Preferred Stock contains customary antidilution rights in the event of certain dilutive issuances by the Company of shares or rights to acquire shares of its capital stock and protective voting provisions that, among other things, limit the Company's ability to, without the affirmative vote of the holders of at least 66 2/3% of the outstanding shares of Series B Preferred Stock (so long as at least 25% of the aggregate number of shares of Common Stock issuable upon conversion of the Series B Preferred Stock and Convertible Subordinated Notes originally issued remain outstanding), (i) amend, alter or repeal the Certificate of Incorporation of the Company or its subsidiaries in any manner adverse to the preferences, privileges, voting rights and powers of the holders of the Series B Preferred Stock, (ii) voluntarily liquidate, dissolve or wind up the Company or any of its subsidiaries, (iii) voluntarily convey, exchange or transfer all or substantially all of the Company's assets, (iv) other than indebtedness under the New Notes and the New Credit Facility, incur, assume, refinance, renew, discharge, repay (other than pursuant to regularly scheduled payments thereof) or cancel any indebtedness of the Company or any of its subsidiaries,(v) pay dividends or distributions on capital stock of the Company and its subsidiaries and (vi) except as required under the terms of the Indenture related to the New Notes, redeem or repurchase any shares of capital stock of the Company. COMMON STOCK Each holder of Common Stock is entitled to one vote for each share held. Holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock would be entitled to share ratably in the Company's assets remaining after the payment of liabilities and the satisfaction of any liquidation preference granted to the holders of any outstanding shares of Preferred Stock, including the Series A and B Preferred Stock. Holders of Common Stock have no preemptive or other subscription rights. The shares of Common Stock are not convertible into any other security. REGISTRATION RIGHTS Pursuant to the Securityholders Agreement, holders (the "Registration Rights Holders") of approximately 16.3 million shares of Common Stock (including Common Stock issuable upon the conversion of the Series A and B Preferred Stock), 5.1 million shares of Common Stock issuable upon the conversion of the Convertible Subordinated Notes and 800,000 shares of Common Stock issuable upon the exercise of the Bridge Note Warrants are entitled to certain demand and piggy-back registration rights with respect to such shares. Pursuant to the Securityholders Agreement, certain of the Registration Rights Holders may currently and certain other Registration Rights Holders may, commencing six months after a public offering by the Company of its Common Stock, request that the Company file a registration statement under the Securities Act and, upon such request and subject to certain conditions and restrictions, the Company generally will be required to use its best efforts to effect each such registration up to a maximum of three such registrations (requests for registration on Form S-3 do not count towards the number of permitted requests for registration). In addition, if the Company proposes to register any of its Common Stock either for its own account or for the account of other stockholders, the Company is required, with certain exceptions, to notify the Registration Rights Holders and, subject to certain limitations, including in any underwritten registration the ability to limit the number of shares included in any such registration, to include in such registration all of the shares of Common Stock requested to be included by the Registration Rights Holders. The Company is generally obligated to bear the expenses, other than underwriting discounts and sales commissions, of these registrations. 112 120 WARRANTS The Company has Bridge Note Warrants outstanding exercisable for an aggregate of 800,000 shares of Common Stock at an exercise price of $1.55 per share. Such warrants expire on November 23, 2004. See "Certain Transactions -- Bridge Financing." TRANSFER AGENT The Company acts as the transfer agent and registrar for its Common and Preferred Stock. LEGAL MATTERS Certain legal matters with respect to the legality of the issuance of the New Notes offered hereby will be passed upon for the Company by Brobeck, Phleger & Harrison LLP, Newport Beach, California. Richard A. Fink, a member of Brobeck, Phleger & Harrison LLP, is Secretary of the Company and owns 40,000 shares of Common Stock. EXPERTS The consolidated financial statements of the Company and the financial statements of Air Bearings, Incorporated included in this Prospectus and the related financial statement schedule included elsewhere in the registration statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the registration statement, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. 113 121 GLOSSARY Access Speed: The time it takes to locate data on a disk, measured in milliseconds. Actuator Mechanics: The mechanism within the disk drive that controls movement of a head stack assembly. Areal Density: A measure of recording density calculated by multiplying bits per inch (bpi) by tracks per inch (tpi). Asperity: A bump or protrusion on the surface of a disk. Bit: The basic unit of storage of information in a computer system. Bits are represented by the presence or absence of changes in orientation of the magnetic domains along a track on the storage media. Bits Per Inch (BPI): A measure of how densely information is packed on a storage medium. Burnish: To remove asperities or particles from the surface of a disk. Byte: Eight bits. A megabyte (MB) equals one million bytes. A gigabyte (GB) equals one billion bytes. One byte is sufficient to define all the alphanumeric characters. Storage capacity of a disk drive is commonly measured in megabytes which is the total number of storable bits, divided by eight million. Disk: A magnetically coated disk substrate which spins inside a disk drive and is used as the storage medium for digital data. Disk Drive: The primary data storage device used by computers. Disk drives are used to record, store and retrieve digital information in a computer system. Flying Height: The distance between the read/write head and the disk surface, created by the cushion of air that results from the velocity of the disk rotation, which keeps the two objects from touching. Closer flying heights permit denser data storage but require more precise mechanical designs. Gigabyte: Equal to one billion bytes or one thousand megabytes. Glide Height: The minimum allowable distance between the read/write head and the surface of a disk. Glide height is measured in millionths of an inch (or microinches). Flying the read/write head closer to the surface of the spinning disk enhances performance in a disk drive. Head Disk Assembly (HDA): The combination of the HSA and disk(s) as part of the final assembly of a hard disk drive. Head Gimbal Assembly (HGA): A magnetic recording head attached to a flexure, or suspension arm, and a wire/tubing assembly. Head Stack Assembly (HSA): Multiple head gimbal assemblies (HGAs). Read/Write Head: A small magnetic transducer that flies above the surface of the disk and performs the functions of reading and writing data onto the disk. MR (magnetoresistive) Head: Recording head that uses an inductive thin-film element to write data onto the media and a separate MR element to read the data. The use of a separate but more sensitive read element permits data to be recorded and, subsequently, read at much higher track densities than inductive thin-film head technology. MR head technology is regarded by many in the industry as a means to significantly increase areal densities. Media Certification: The process of testing the magnetic qualities of a disk's surface. Megabyte: Equal to one million bytes. Microinch: One millionth of an inch. There are approximately 3000 microinches in a human hair and 200 microinches in a fingerprint. Quasi-Static Test: A static test (not involving a spinning disk) utilizing comparably low frequencies. A-1 122 Server: A computer generally configured for the support of concurrent multi-user applications. The server is generally a storage repository of software and data. Servowrite: To write magnetic servo tracks on a disk surface which provide track location and positioning information. Spindle: The drive's center shaft, on which the disks are mounted. A synchronized spindle is a shaft that allows two disks to spin simultaneously as a mirror image of each other, permitting redundant storage of data. Storage Capacity: The amount of information, expressed in bytes, that can be stored on a hard drive. Thin Films: For magnetic disks, films thickness measured in Angstroms (250 Angstroms = one microinch). Throughput: The number of units (disk drives, disks or read/write heads) processed through a given manufacturing step or on a given machine per unit. Track: One of the many concentric magnetic circle patterns written on a disk surface as a guide for storing and reading data. Tracks Per Inch (TPI): The number of tracks per inch of media. Transfer Rate: The rate at which the disk sends and receives data from the controller. Yield: A measure of manufacturing efficiency; the percent of acceptable product obtained from a specific manufacturing process(es). A-2 123 INDEX TO FINANCIAL STATEMENTS
PAGE PHASE METRICS, INC.: Independent Auditors' Report.............................. F-2 Consolidated Balance Sheets as of December 31, 1996 and 1997................................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997....................... F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1995, 1996 and 1997... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997............................................... F-6 Notes to Consolidated Financial Statements................ F-7 AIR BEARINGS, INCORPORATED: Independent Auditors' Report.............................. F-25 Consolidated Statement of Income and Retained Earnings for the year ended December 31, 1995....................... F-26 Consolidated Statement of Cash Flows for the year ended December 31, 1995...................................... F-27 Notes to Consolidated Financial Statements................ F-28
F-1 124 INDEPENDENT AUDITORS' REPORT Phase Metrics, Inc.: We have audited the accompanying consolidated balance sheets of Phase Metrics, Inc. and its subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing standards. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Phase Metrics, Inc. and its subsidiaries as of December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP San Jose, California January 30, 1998 F-2 125 PHASE METRICS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS:
DECEMBER 31, -------------------- 1996 1997 -------- -------- Current assets: Cash and cash equivalents................................. $ 2,737 $ 2,977 Accounts receivable -- net................................ 25,042 28,730 Inventories............................................... 51,795 55,585 Prepaid expenses and other................................ 5,734 1,975 Income taxes receivable................................... 5,000 5,156 Deferred tax assets....................................... 10,026 8,952 -------- -------- Total current assets................................... 100,334 103,375 Property, plant and equipment, net.......................... 28,078 38,023 Intangible assets, net...................................... 19,477 4,966 Deferred tax assets......................................... 2,842 5,269 Other....................................................... 3,282 3,097 -------- -------- Total assets................................................ $154,013 $154,730 ======== ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable.......................................... $ 18,188 $ 10,419 Accrued expenses and other liabilities.................... 21,117 16,058 Customer deposits......................................... 15,885 9,038 Current portion of debt................................... 2,463 1,785 -------- -------- Total current liabilities.............................. 57,653 37,300 Long-term liabilities: Long-term debt............................................ 85,557 111,272 Convertible subordinated notes............................ 8,000 8,000 Accrued expenses and interest............................. 5,520 6,794 Series B redeemable preferred stock, $.0001 par value, 192,864 shares authorized, issued and outstanding (liquidation preference of $10,578)....................... 6,314 9,237 Commitments (Notes 6 and 9) Stockholders' deficit: Series A preferred stock, $.0001 par value, 412,500 shares authorized, issued and outstanding (liquidation preference of $9,000).................................. 3 3 Common stock, $.0001 par value, 70,000,000 shares authorized; 5,632,500 and 5,627,431 shares issued and outstanding at December 31, 1996 and 1997, respectively........................................... 5,665 6,090 Retained deficit.......................................... (14,699) (23,166) Accumulated translation adjustments....................... -- (800) -------- -------- Total stockholders' deficit............................ (9,031) (17,873) -------- -------- Total liabilities, redeemable preferred stock and stockholders' deficit .................................... $154,013 $154,730 ======== ========
See notes to consolidated financial statements. F-3 126 PHASE METRICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------- 1995 1996 1997 -------- -------- -------- Net sales.................................................. $116,894 $190,773 $184,660 Cost of sales.............................................. 64,766 103,861 101,294 -------- -------- -------- Gross profit............................................. 52,128 86,912 83,366 Operating expenses: Research and development................................. 11,372 31,110 43,572 Selling, general and administrative...................... 15,695 24,631 22,968 Amortization and write-downs of intangibles.............. 13,094 28,656 14,591 Purchased in-process research and development............ -- 13,935 -- -------- -------- -------- Total operating expenses.............................. 40,161 98,332 81,131 -------- -------- -------- Income (loss) from operations.............................. 11,967 (11,420) 2,235 Interest expense........................................... 5,625 8,448 11,573 Other (income) expense -- net.............................. 149 (26) 474 -------- -------- -------- Income (loss) before income taxes and extraordinary items.................................................... 6,193 (19,842) (9,812) Income tax expense (benefit)............................... 1,524 (8,974) (4,268) -------- -------- -------- Income (loss) before extraordinary items................... 4,669 (10,868) (5,544) Extraordinary loss, net of income taxes.................... -- (1,122) -- -------- -------- -------- Net income (loss).......................................... 4,669 (11,990) (5,544) Accretion for redemption value and dividends on Series B redeemable preferred stock............................... (3,000) (3,000) (2,923) -------- -------- -------- Net income (loss) attributable to common stockholders...... $ 1,669 $(14,990) $ (8,467) ======== ======== ========
See notes to consolidated financial statements. F-4 127 PHASE METRICS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS)
SERIES A PREFERRED STOCK COMMON STOCK RETAINED ACCUMULATED ---------------- ------------------ EARNINGS TRANSLATION SHARES AMOUNT SHARES AMOUNT (DEFICIT) ADJUSTMENTS TOTAL ------- ------ --------- ------ --------- ----------- -------- Balance, January 1, 1995........ 412,500 $3 2,750,000 $1,065 $ (1,378) $ -- $ (310) Issuance of common stock to effect acquisitions........... -- -- 1,150,000 1,150 -- -- 1,150 Exercise of options............. -- -- 1,519,600 733 -- -- 733 Accrued dividends on Series B redeemable preferred stock.... -- -- -- -- (1,500) -- (1,500) Accretion for redemption value on Series B redeemable preferred stock............... -- -- -- -- (1,500) -- (1,500) Compensation expense on option grants........................ -- -- -- 350 -- -- 350 Net income...................... -- -- -- -- 4,669 -- 4,669 ------- -- --------- ------ -------- ----- -------- Balance, December 31, 1995...... 412,500 3 5,419,600 3,298 291 -- 3,592 Issuance of common stock to effect acquisitions........... -- -- 254,000 1,905 -- -- 1,905 Exercise of options, net of repurchases................... -- -- (41,100) 62 -- -- 62 Accrued dividends on Series B redeemable preferred stock.... -- -- -- -- (1,500) -- (1,500) Accretion for redemption value on Series B redeemable preferred stock............... -- -- -- -- (1,500) -- (1,500) Compensation expense on option grants........................ -- -- -- 400 -- -- 400 Net loss........................ -- -- -- -- (11,990) -- (11,990) ------- -- --------- ------ -------- ----- -------- Balance, December 31, 1996...... 412,500 3 5,632,500 5,665 (14,699) -- (9,031) Exercise of options, net of repurchases................... -- -- (5,069) 25 -- -- 25 Accrued dividends on Series B redeemable preferred stock.... -- -- -- -- (1,423) -- (1,423) Accretion for redemption value on Series B redeemable preferred stock............... -- -- -- -- (1,500) -- (1,500) Compensation expense on option grants........................ -- -- -- 400 -- -- 400 Net loss........................ -- -- -- -- (5,544) -- (5,544) Accumulated translation adjustments................... -- -- -- -- -- (800) (800) ------- -- --------- ------ -------- ----- -------- Balance, December 31, 1997...... 412,500 $3 5,627,431 $6,090 $(23,166) $(800) $(17,873) ======= == ========= ====== ======== ===== ========
See notes to consolidated financial statements. F-5 128 PHASE METRICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------- 1995 1996 1997 -------- -------- -------- Operating activities: Net income (loss)........................................ $ 4,669 $(11,990) $ (5,544) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation, amortization and write-downs of intangible assets................................... 15,897 32,953 21,872 Amortization of deferred financing costs.............. 1,395 644 540 Loss on disposal of property, plant and equipment..... -- -- 714 Compensation expense on option grants................. 350 400 400 Deferred income taxes................................. (10,196) (16,333) (1,353) Interest on convertible subordinated notes............ 2,000 2,000 1,894 Purchased in-process research and development......... -- 13,935 -- Extraordinary loss net of income taxes................ -- 1,122 -- Changes in assets and liabilities: Accounts receivable................................. (11,339) 2,442 (3,688) Inventories......................................... (20,107) (20,019) (4,508) Prepaid expenses and other assets................... (1,415) (5,796) 3,732 Income taxes receivable............................. -- (5,000) (156) Accounts payable.................................... 19,535 (5,189) (7,769) Customer deposits, accrued expenses and other liabilities...................................... 17,511 (10,571) (12,526) -------- -------- -------- Net cash provided by (used for) operating activities..................................... 18,300 (21,402) (6,392) -------- -------- -------- Investing activities: Acquisition of property, plant and equipment............. (9,135) (24,564) (17,091) Acquisitions, net of cash acquired of $6,755 and $1,595, respectively.......................................... (1,967) (20,752) -- Increase in patent costs................................. -- -- (78) -------- -------- -------- Net cash used for investing activities........... (11,102) (45,316) (17,169) -------- -------- -------- Financing activities: Proceeds from term notes................................. 18,000 145,000 -- Repayment of term and subordinated notes................. (4,850) (80,446) (1,800) Revolving loans -- net................................... 4,100 (300) 26,900 Repayment of bridge notes................................ (20,000) -- -- Payment of debt issuance costs........................... (765) (3,872) (330) Proceeds from sale/leaseback of equipment................ -- 4,431 -- Payments on capital lease obligations.................... (317) (436) (912) Proceeds from issuance of common stock, net of repurchases........................................... 733 62 25 -------- -------- -------- Net cash provided by (used for) financing activities..................................... (3,099) 64,439 23,883 -------- -------- -------- Effect of exchange rate changes on cash.................... -- -- (82) -------- -------- -------- Net increase (decrease) in cash and cash equivalents....... 4,099 (2,279) 240 Cash and cash equivalents, beginning of period............. 917 5,016 2,737 -------- -------- -------- Cash and cash equivalents, end of period................... $ 5,016 $ 2,737 $ 2,977 ======== ======== ======== Supplemental disclosure of cash flow information: Interest paid............................................ $ 2,789 $ 5,277 $ 9,393 ======== ======== ======== Income taxes paid, (net refunds)......................... $ 5,055 $ 21,857 $ (5,357) ======== ======== ========
See notes to consolidated financial statements. F-6 129 PHASE METRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations -- Phase Metrics, Inc. and its wholly-owned subsidiaries (the "Company") design, manufacture and sell process and production test equipment for the data storage industry. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates in the Preparation of the Consolidated Financial Statements -- The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. Assets, liabilities, revenues and expenses and disclosures of contingent assets and liabilities are affected by such estimates and assumptions. Actual results could differ from those estimates. Risks and Uncertainties -- The Company is subject to certain risks and uncertainties and believes that changes in any of the following areas could have a material effect on the Company's future financial position or results of operations: size and timing of orders from, and shipments to, major customers; the timing of introductions of new products and product enhancements by the Company or its competitors; the Company's ability to develop, introduce and market new, technologically advanced products; the cyclicality of the data storage industry; the rescheduling of capital expenditures by the Company's customers; variations in the Company's customer base and product mix; the availability and cost of key production materials and components; the Company's ability to effectively manage its inventory and to control costs; the financial stability of major customers; the Company's success in expanding its operations overseas; personnel changes; expenses associated with acquisitions; fluctuations in amortization and write-downs of intangible assets; foreign currency exchange rate fluctuations and general economic factors. Cash and Cash Equivalents -- The Company invests its excess cash in money market accounts and highly liquid government securities. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Inventories -- Inventories are stated at the lower of cost (first-in, first-out) or market. Property, Plant and Equipment -- Property, plant and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets. Buildings and improvements are depreciated over 39 years and equipment and furniture are generally depreciated over three to five years. Amortization of leasehold improvements is provided using the straight-line method over the lesser of the remaining lease term or the life of the assets. Depreciation and amortization expense related to property, plant and equipment totaled $2.8 million, $4.3 million, and $7.3 million for the years ended December 31, 1995, 1996 and 1997, respectively. Intangible Assets -- Intangible assets consist primarily of purchased technology, goodwill and covenants not to compete recorded in connection with the Company's acquisitions (see Note 3). Purchased technology and goodwill are amortized using the straight-line method over their expected useful lives, generally three years. Covenants not to compete are amortized using the straight-line method over the terms of the agreements of five to seven years. Impairment of Long-Lived Assets -- The recoverability of long-lived assets is evaluated by an analysis of operating results and consideration of other significant events or changes in the underlying assets and business environment. If the Company identifies events or circumstances which indicate that an impairment might exist, the Company determines whether the sum of the estimated undiscounted future cash flows attributable to the assets in question is less than their carrying amounts. If impairment exists, the Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their fair values determined by the estimated discounted future cash flows. In 1996, the Company recorded write-downs totaling $11.9 million related to impairment losses primarily for Cambrian Systems, Inc. ("Cambrian") and Applied Robotic F-7 130 PHASE METRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Technologies, Inc. ("ART") purchased technology. In 1997, the Company recorded a write-down of $2.0 million related to an impairment loss for Air Bearings, Inc. ("ABI") purchased technology (See Note 3). Stock-Based Compensation -- The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its stock-based awards to employees. Revenue Recognition -- Sales are generally recognized upon shipment. A provision for estimated warranty and installation costs is recorded upon product shipment. Research and Development -- Research and development costs are expensed as incurred. The Company's products include certain software applications that are integral to the operation of the product. The costs to develop such software have not been capitalized as the Company believes its current software development process is essentially completed concurrent with the establishment of technological feasibility of the software. Concentrations of Credit Risk -- Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash equivalents and accounts receivable. The Company invests its excess cash in money market accounts and highly liquid government securities. The Company sells its products without collateral primarily to companies located throughout the United States and Asia. Historically, a significant portion of the Company's sales in any particular period have been attributable to sales to a limited number of customers. Credit is extended based on an evaluation of the customer's financial condition. The Company estimates its potential losses on trade receivables on an ongoing basis and provides for anticipated losses in the period in which the sales are recognized. Sales to customers outside the United States (primarily Asia) totaled 23%, 57%, and 49% of net sales for the years ended December 31, 1995, 1996 and 1997, respectively. As of December 31, 1996 and 1997, balances due from foreign customers (primarily located in Asia) were $10.2 million and $12.0 million, respectively. The Company had sales to individual customers in excess of 10% of net sales, as follows:
DECEMBER 31, -------------------- 1995 1996 1997 ---- ---- ---- Customer: A................................................. 25% 19% 18% B................................................. -- -- 17% C................................................. 11% 15% 16% D................................................. -- 12% -- E................................................. 17% -- --
As of December 31, 1996 and 1997, accounts receivable from individual customers with balances due in excess of 10% of total accounts receivable totaled $16.9 million and $17.6 million, respectively. Reclassifications -- Certain prior year amounts have been reclassified to conform with the current year presentation. Fair Value of Financial Instruments -- As of December 31, 1996 and 1997, the carrying amounts of cash and cash equivalents and borrowings outstanding under the Company's credit agreements approximate their respective fair values. Estimation of the fair value of the convertible subordinated notes (see Note 4) is not deemed practicable due to the related party relationship. Foreign Currency Translation -- The financial statements of the Company's subsidiaries outside the United States are measured using the local currency as the functional currency. Assets and liabilities of these F-8 131 PHASE METRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) subsidiaries are translated at the rates of exchange at the balance sheet date. The resultant translation adjustments are presented as a separate component of stockholders' deficit. Recent Accounting Pronouncements -- In June 1997, SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," were issued. SFAS No. 130 requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from nonowner sources. SFAS No. 131 establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. Adoption of these statements will not impact the Company's consolidated financial position, results of operations or cash flows. Both statements are effective for fiscal years beginning after December 15, 1997, with earlier application permitted. 2. BALANCE SHEET DETAILS Accounts Receivable Accounts receivable consist of the following (in thousands):
DECEMBER 31, ------------------ 1996 1997 ------- ------- Trade receivables........................................ $25,788 $30,393 Allowance for doubtful accounts.......................... (746) (1,663) ------- ------- $25,042 $28,730 ======= =======
Inventories Inventories consist of the following (in thousands):
DECEMBER 31, ------------------ 1996 1997 ------- ------- Raw materials and components............................. $32,012 $30,915 Work-in-process.......................................... 11,466 9,796 Finished goods........................................... 8,317 14,874 ------- ------- $51,795 $55,585 ======= =======
Property, Plant and Equipment Property, plant and equipment consist of the following (in thousands):
DECEMBER 31, ------------------- 1996 1997 ------- -------- Land.................................................... $ 2,400 $ 2,400 Buildings and improvements.............................. 4,118 9,147 Equipment and furniture................................. 22,000 30,944 Leasehold improvements.................................. 3,900 5,514 Construction in progress................................ 661 1,098 ------- -------- 33,079 49,103 Accumulated depreciation and amortization............... (5,001) (11,080) ------- -------- $28,078 $ 38,023 ======= ========
F-9 132 PHASE METRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Intangible Assets Intangible assets consist of the following (in thousands):
DECEMBER 31, -------------------- 1996 1997 -------- -------- Purchased technology................................... $ 44,822 $ 17,598 Goodwill............................................... 4,410 -- Covenants not to compete............................... 2,175 2,175 Patents................................................ 53 131 -------- -------- 51,460 19,904 Accumulated amortization and write-downs............... (31,983) (14,938) -------- -------- $ 19,477 $ 4,966 ======== ========
Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consist of the following (in thousands):
DECEMBER 31, ------------------ 1996 1997 ------- ------- Accrued warranty......................................... $ 7,727 $ 5,461 Accrued compensation..................................... 6,992 6,271 Other.................................................... 6,398 4,326 ------- ------- $21,117 $16,058 ======= =======
Accrued Expenses and Interest Accrued expenses and interest consist of the following (in thousands):
DECEMBER 31, ---------------- 1996 1997 ------ ------ Accrued interest on convertible subordinated notes......... $4,208 $6,102 Other accrued expenses..................................... 1,312 692 ------ ------ $5,520 $6,794 ====== ======
3. ACQUISITIONS In November 1994, the Company acquired all of the outstanding common stock of ProQuip, Inc. ("ProQuip") and certain net assets of Cambrian. Concurrent with such acquisitions, the Company restructured its combined operations. In June 1995, the Company acquired all of the outstanding stock of Helios, Incorporated ("Helios") and in July 1995, the Company acquired all of the outstanding stock of ART and acquired certain net assets of Tahoe Instruments, Inc. ("Tahoe"). In January 1996, the Company acquired all of the outstanding stock of ABI and in December 1996, the Company acquired all of the outstanding stock of Santa Barbara Metric ("SBM") and a portion of the business of Kirell Development, Inc. ("KDI"). The acquired companies discussed above design, manufacture and sell process and production test equipment for the data storage industry. The acquisitions have been accounted for in accordance with the purchase method of accounting and the accompanying consolidated financial statements reflect the purchase F-10 133 PHASE METRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) price allocated to assets acquired and liabilities assumed based upon their fair values as of the acquisition date. The Company's results of operations include those of the acquired companies from their respective dates of acquisition. The fair value of significant assets acquired, liabilities assumed and purchased in-process research and development is summarized as follows (in millions):
1994 1995 1996 ------------------ --------------- -------------------- PROQUIP CAMBRIAN HELIOS ART ABI KDI & SBM ------- -------- ------ ----- ----- ----------- Current assets..................... $ 10.3 $ 3.5 $ 9.1 $ 5.6 $ 4.5 $ 0.5 Property and other assets.......... 1.2 0.5 -- 0.1 0.7 -- Covenant not to compete............ 1.5 0.2 -- -- -- 1.8 Purchased technology and goodwill......................... 10.8 14.7 11.6 7.5 4.9 -- Liabilities........................ (10.2) (7.7) (13.6) (7.8) (0.1) (1.4) Purchased in-process research and development...................... -- -- -- -- 11.0 2.4 ------ ----- ------ ----- ----- ----- Total purchase price............... $ 13.6 $11.2 $ 7.1 $ 5.4 $21.0 $ 3.3 ====== ===== ====== ===== ===== =====
In connection with the Company's acquisitions of ABI, SBM and a portion of the business of KDI in 1996, the Company acquired certain research and development projects that had not reached technological feasibility and had no alternative future uses. Accordingly, $13.4 million of purchased in-process research and development was expensed in 1996. The following summarizes the cash and noncash components of the Company's acquisitions (in millions):
1994 1995 1996 ----- ----- ----- Total purchase price........................................ $24.8 $13.0 $24.3 Common stock issued......................................... -- (1.1) (1.9) Notes payable issued........................................ -- (3.1) -- Cash acquired............................................... (2.8) (6.8) (1.6) ----- ----- ----- Cash used for acquisitions.................................. $22.0 $ 2.0 $20.8 ===== ===== =====
The following unaudited information presents the pro forma results of operations of the Company, after giving effect to certain adjustments including amortization of intangible assets acquired, as if each acquisition had taken place on January 1 of the year preceding its acquisition, with the exception of Tahoe, KDI and SBM for which the operations were deemed immaterial. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made on such date, nor are they necessarily indicative of future results to be expected (in thousands):
YEARS ENDED DECEMBER 31, -------------------- 1995 1996 -------- -------- Net sales................................................... $130,044 $190,773 ======== ======== Income (loss) before extraordinary item..................... $ (2,005) $ 1,320 ======== ======== Net income (loss)........................................... $ (2,005) $ 198 ======== ========
F-11 134 PHASE METRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. DEBT Debt Summary -- Debt is summarized as follows (in thousands):
DECEMBER 31, ------------------- 1996 1997 ------- -------- Credit agreements........................................... $83,800 $109,900 Convertible subordinated notes.............................. 8,000 8,000 Subordinated notes, interest at 6%, paid in 1997............ 1,000 -- Capital lease obligations with weighted average annual interest rates of 9%..................................................... 3,220 3,157 ------- -------- Total....................................................... 96,020 121,057 Less current portion........................................ (2,463) (1,785) ------- -------- Long-term debt.............................................. $93,557 $119,272 ======= ========
Credit Agreements -- At December 31, 1997, the Company had a $120.0 million credit agreement, amended in September of 1997, (the "Credit Agreement") with a group of financial institutions (the "Lenders") which provides for (i) five-year term loans (the "Term Loans") in the principal amount of $80.0 million, and (ii) a three-year revolving credit facility (the "Revolver") up to $40.0 million. The Credit Agreement was terminated and repaid in full subsequent to December 31, 1997 (See Note 11). The Term Loans bear interest at the Company's option of (i) prime plus 2% to 2.5% or (ii) LIBOR plus 3% to 3.5%. The Revolver bears interest at the Company's option of (i) prime plus 0.5% to 2%, or (ii) LIBOR plus 1.5% to 3%. The spreads depend on the Company's consolidated leverage ratio as defined in the Credit Agreement. As of December 31, 1997, the Term Loans bore interest at prime (8.5%) plus 2.5% and outstanding borrowings under the Revolver totaling $3.2 million. Substantially all assets of the Company are pledged as collateral for the Credit Agreement. The Company pays a commitment fee on the unused portion of its Revolver. The Credit Agreement contains certain affirmative and negative covenants customary for this type of agreement. The Credit Agreement is guaranteed by all of the Company's domestic subsidiaries and all such guarantees are collateralized by first priority pledges of all outstanding capital stock of each guarantor. In connection with the refinancing of certain credit agreements in January and December 1996, the related unamortized debt issuance costs were written off. These write-offs, net of related tax benefit of $.7 million, have been reported as extraordinary items in the accompanying consolidated statements of operations. In connection with the Credit Agreement, the Company paid fees of $1.2 million, for debt issuance costs to the syndication agent, a stockholder of the Company. Through a foreign subsidiary, the Company has entered into an accounts receivable based credit agreement. The agreement has no fixed expiration, does not contain any covenant compliance requirements, and the interest rate is negotiated on a customer by customer basis. The borrowings outstanding at December 31, 1996 totaled $0.2 million and bore interest at 1.2%. There were no borrowings outstanding as of December 31, 1997. Convertible Subordinated Notes -- In November 1994, the Company issued and sold $8.0 million principal amount of its convertible subordinated notes (the "Convertible Subordinated Notes") to certain stockholders. The Convertible Subordinated Notes currently will mature in December 2001. Interest accrued at an annual rate of 25.0% from the date of issuance through November 23, 1997, and thereafter accrues at an annual rate equal to the greater of 12.5% or prime (8.5% as of December 31, 1997) plus 2.0%. The Convertible Subordinated Notes bore interest at 12.5% as of December 31, 1997. Interest is payable at F-12 135 PHASE METRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) maturity. The Company and the holders of the Convertible Subordinated Notes agreed, effective upon the issuance of the Notes (See Note 11), to amend the Convertible Subordinated Notes to extend the maturity date to July 15, 2005 and to eliminate all rights of redemption formerly provided for. The convertible subordinated notes, including accrued interest: (i) are convertible into 5,142,720 shares of common stock at any time at the option of the holder, (ii) will automatically be converted into common stock upon effectiveness of a registration statement under the Securities Act of 1933 for the sale of common stock with a minimum per share price of $4.665 (as adjusted to take into account any subsequent subdivisions, combinations or reclassifications) and net proceeds to the Company of not less than $15.0 million, and (iii) are subject to certain anti-dilution provisions. Long-term debt repayments (excluding capital leases) as of December 31, 1997 are summarized as follows (in thousands):
YEAR ENDING DECEMBER 31, - -------------------------------------------------------- 1998.................................................. $ 800 1999.................................................. 55,767 2000.................................................. 26,667 2001.................................................. 34,666 2002.................................................. -- -------- Total......................................... $117,900 ========
5. INCOME TAXES The components of income tax expense (benefit) are summarized as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 -------- -------- ------- Current income taxes: Federal........................................... $ 9,513 $ 6,330 $(2,915) State............................................. 2,025 590 -- -------- -------- ------- Total..................................... 11,538 6,920 (2,915) Deferred income taxes: Federal........................................... (7,889) (13,610) 386 State............................................. (2,125) (3,211) (1,739) -------- -------- ------- Total..................................... (10,014) (16,821) (1,353) Income tax (benefit) expense before extraordinary items............................................. 1,524 (9,901) (4,268) Extraordinary items................................. -- 927 -- -------- -------- ------- Income tax expense (benefit)........................ $ 1,524 $ (8,974) $(4,268) ======== ======== =======
F-13 136 PHASE METRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The reconciliations between the statutory federal income tax rate and the effective income tax rate for the years ended December 31, 1995, 1996 and 1997 are as follows:
YEARS ENDED DECEMBER 31, ------------------------- 1995 1996 1997 ----- ------ ------ Statutory tax rate -- expense (benefit)..................... 35.0% (35.0)% (34.0)% Federal research and development credits.................... (4.9) (4.0) (8.2) State income taxes, net of federal benefit.................. (1.0) (6.6) (4.2) Foreign sales corporation, net of tax....................... (6.2) (2.4) -- Purchased in-process research and development............... -- 1.8 -- Compensation expense on option grants....................... -- 0.6 1.4 Other....................................................... 1.7 0.4 1.5 ---- ----- ----- Effective tax rate -- expense (benefit)..................... 24.6% (45.2)% (43.5)% ==== ===== =====
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting and the amounts used for income tax purposes. The items comprising the Company's deferred tax assets are as follows (in thousands):
DECEMBER 31, ------------------ 1996 1997 ------- ------- Reserves not currently deductible........................... $ 6,023 $ 5,492 Customer deposits........................................... 1,873 1,469 Uniform capitalization adjustment........................... 1,423 707 State taxes................................................. (919) (1,345) Purchased technology........................................ 4,972 6,540 Tax credit carryforwards (expiring through 2002)............ -- 803 Other....................................................... (504) 555 ------- ------- Total............................................. $12,868 $14,221 ======= =======
6. LEASES Capital Leases -- The Company incurred capital lease obligations of $1.9 million, $1.8 million, and $0.8 million in connection with lease agreements for equipment and furniture during the years ended December 31, 1995, 1996 and 1997, respectively. At December 31, 1996 and 1997, assets under capital leases included in property, plant and equipment totaled $3.8 million and $4.4 million with accumulated amortization of $0.6 million and $1.3 million, respectively. Operating Leases -- The Company leases certain of its facilities and certain equipment under operating leases that expire at various dates through 2003. Certain facility leases include provisions for inflation escalation adjustments, as well as one to five year renewal options. Rent expense under operating leases totaled $0.5 million, $3.4 million and $5.1 million for the years ended December 31, 1995, 1996 and 1997, respectively. In June 1996, the Company sold and leased back certain equipment under an operating lease for net proceeds of $4.4 million. No gain or loss was recognized in connection with this transaction. F-14 137 PHASE METRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Future minimum lease payments under capital and operating leases as of December 31, 1997 are summarized as follows (in thousands):
CAPITAL OPERATING YEAR ENDING DECEMBER 31: LEASES LEASES ------------------------ ------- --------- 1998................................................ $1,207 $ 4,804 1999................................................ 1,082 2,500 2000................................................ 985 2,196 2001................................................ 343 928 2002................................................ 73 847 Thereafter.......................................... -- 465 ------ ------- Total.......................................... 3,690 $11,740 ======= Amount representing interest............................. (533) ------ Present value of minimum lease payments.................. 3,157 Current portion.......................................... (985) ------ Long-term portion........................................ $2,172 ======
7. SERIES B REDEEMABLE PREFERRED STOCK Each share of Series B redeemable preferred stock ("Series B preferred stock"): (i) is voting, (ii) is convertible at the option of the holder into 20 shares of common stock, (iii) is entitled to preference in liquidation equal to $31.11 per share plus all cumulative and unpaid dividends, (iv) has antidilution rights, (v) has approval rights on new issuances of preferred stock, (vi) will automatically be converted into common stock upon the effectiveness of a registration statement under the Securities Act of 1933 for the sale of common stock with a minimum per share price of $4.665 (as adjusted to take into account any subsequent subdivisions, combinations or reclassifications) and net proceeds to the Company of not less than $15.0 million, (vii) is redeemable by the Company at $31.11 per share after the payment of cumulative and unpaid dividends, and (viii) is entitled to receive cumulative minimum dividends at the rate of 25% per year on the $6.0 million redemption value. This rate was reduced to the greater of 12.5% or prime (8.5% as of December 31, 1997) plus 2.0% after November 22, 1997. The dividends are cumulative at $1.5 million per year through November 1997 and thereafter at minimum rates of $0.8 million per year. At any time after November 23, 1998, a majority of the stockholders can request the Company to redeem all outstanding shares at the redemption price of $31.11 per share plus all unpaid dividends. On November 23, 2000 the Company must redeem all outstanding shares. All redemptions are subject to funds legally available. The $6.0 million redemption value is being accreted to retained earnings over the redemption period ending November 23, 1998. 8. STOCKHOLDERS' EQUITY (DEFICIT) Series A Preferred Stock -- The Series A preferred stock ranks junior to the Series B preferred stock with respect to dividend and liquidation rights, including liquidation rights in connection with any merger, dissolution or winding up of operations. Each share of Series A preferred stock: (i) is voting, (ii) is entitled to receive dividends at the same rate and time as common stockholders when declared by the board of directors, (iii) is convertible at the option of the holders into 20 shares of common stock, (iv) is entitled to receive $21.82 per share upon liquidation after payment in full to Series B preferred stockholders, (v) will automatically be converted into common stock upon the effectiveness of a registration statement under the Securities Act of 1933 for the sale of common stock with a minimum per share price of $4.665 (as adjusted to take into account any subsequent subdivisions, combinations or reclassifications) and net proceeds to the Company of not less than $15.0 million, and (vi) is subject to certain anti-dilution provisions. F-15 138 PHASE METRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Common Shares Reserved -- As of December 31, 1997, the Company has reserved the following number of shares of common stock for future issuance: Conversion of Series A and B preferred stock................ 12,107,280 Conversion of subordinated notes............................ 5,142,720 Exercise and issuance of stock options...................... 4,926,570 Exercise of warrants........................................ 800,000 ---------- Total............................................. 22,976,570 ==========
Registration Rights -- Series A and B preferred stockholders, convertible subordinated debtholders and the holders of the common stock warrants (collectively "securityholders") have been granted certain registration rights. Such rights may be invoked by request of the holders of at least 25% of such securities then outstanding or to be issued upon conversion of the Series A or Series B preferred stock. The securityholders have been granted a right of first refusal to purchase any outstanding capital stock offered for sale, as defined. Warrants -- In connection with the issuance and repayment of certain debt, the Company has outstanding warrants to acquire 800,000 shares of common stock at $1.55 per share, subject to adjustment. The warrants expire on November 23, 2004. Stock Option Plan -- Under the 1995 Stock Option Plan (the "Plan"), 6.3 million shares of common stock are reserved for issuance upon exercise of options granted by the Company. Under the Plan, incentive and non-qualified stock options may be granted to employees, officers, directors and consultants to purchase shares of the Company's common stock. The exercise price for an incentive stock option and a nonqualified stock option cannot be less than 100% and 85%, respectively, of the fair market value of the Company's common stock on the grant date as determined by the board of directors. Options vest at a rate of 20% on the first anniversary of the vesting commencement date determined by the Board of Directors and then ratably over the following 48 months. Options are immediately exercisable and underlying shares are subject to the Company's repurchase rights, which lapse over a five-year period. Options expire as determined by the Board of Directors, but not more than 10 years after the grant date. In addition, the Company has outstanding options to purchase an additional 100,000 shares of common stock granted outside of the Plan. At December 31, 1997, 2,638,386 shares were available for future option grants. The total number of shares authorized, as well as shares subject to outstanding options, will be appropriately adjusted in the event of certain changes to the Company's capital structure, such as stock dividends, stock splits or other recapitalizations. F-16 139 PHASE METRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A summary of stock option transactions is as follows:
WEIGHTED AVERAGE EXERCISE NUMBER OF PRICE PER SHARES SHARE ---------- ---------- Balance at January 1, 1995 Granted............................................. 2,400,000 $0.89 Exercised........................................... (1,519,600) $0.49 Canceled............................................ (56,400) $0.55 ---------- Balance at December 31, 1995.......................... 824,000 $1.66 Granted............................................. 1,108,000 $7.50 Exercised........................................... (35,216) $2.88 Canceled............................................ (179,983) $3.35 ---------- Balance at December 31, 1996.......................... 1,716,801 $5.22 Granted............................................. 1,093,500 $8.36 Exercised........................................... (52,498) $1.69 Canceled............................................ (469,619) $6.72 ---------- Balance at December 31, 1997.......................... 2,288,184 $6.49 ========== Vested at December 31, 1995........................... 21,108 $0.85 ========== Vested at December 31, 1996........................... 202,600 $1.58 ========== Vested at December 31, 1997........................... 495,833 $4.32 ========== Subject to repurchase at December 31, 1995............ 1,221,117 $0.50 ========== Subject to repurchase at December 31, 1996............ 817,679 $0.58 ========== Subject to repurchase at December 31, 1997............ 493,063 $0.55 ==========
The Company recognized compensation expense of $0.4 million during each of the years ended December 31, 1995, 1996 and 1997 for the amortization of the excess of the fair market value of the Company's common stock on the grant date over the exercise price of stock options granted in 1995. The remaining unamortized compensation expense related to such options is $1.1 million at December 31, 1997, which will be recognized ratably over the remaining vesting period. The pro forma information required by SFAS 123 and presented below has been determined as if the Company had accounted for its employee stock awards under the Plan using the fair value method of that statement. The fair value for these awards was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for December 31, 1995, 1996 and 1997, respectively: weighted average risk-free interest rates of 6.29%, 5.84% and 6.04%; no dividend yield or volatility factor; and a weighted average expected life of 3.3, 3.5 and 3.5 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The Company's employee stock awards have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate. In management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock awards. F-17 140 PHASE METRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For purposes of pro forma disclosures, the estimated fair value of the awards is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands):
YEARS ENDED DECEMBER 31, ----------------------------- 1995 1996 1997 ------ -------- ------- Pro forma net income (loss)........................... $4,383 $(12,487) $(5,976) ====== ======== =======
The following table summarizes information as of December 31, 1997 concerning options outstanding:
SHARES WEIGHTED AVERAGE SUBJECT EXERCISE OPTIONS REMAINING TO PRICES OUTSTANDING CONTRACTUAL LIFE VESTED REPURCHASE -------- ----------- ---------------- ------- ---------- (YEARS) $0.37 129,400 7.33 71,198 416,685 $1.00 293,367 7.58 142,595 70,111 $5.00 130,567 7.86 56,760 -- $7.50 1,055,700 8.72 224,630 5,917 $8.75 679,150 9.50 650 350 --------- ------- ------- 2,288,184 495,833 493,063 ========= ======= =======
The weighted average fair value of options granted during the years ended December 31, 1995, 1996 and 1997 was $1.01, $1.33 and $1.53, respectively. 9. COMMITMENTS Related Party Transaction -- In November 1994, the Company executed a consulting services agreement with certain of its stockholders which provides for the payment of $0.2 million in November of each year through 1998. As of December 31, 1997 the present value and accrued interest related to obligations under the agreement was $0.4 million. Acquisition-Related Agreements -- Concurrent with the Company's acquisitions of Helios, ART, ABI, SBM, Tahoe and KDI, the Company entered into, among other things, (i) employment or consulting agreements with the former principals of each respective entity for minimum terms of three years each, (ii) non-compete agreements for periods of five to seven years, and (iii) earn-out agreements based on units produced or sold with stated combined maximum earn-out payments for the material arrangements totaling $14.1 million, of which $3.3 million was considered certain and, accordingly, allocated to the original purchase price, and the remainder of which is being charged to compensation expense as incurred. During the years ended December 31, 1995, 1996 and 1997, $1.4 million, $3.8 million and $2.0 million, respectively, of earn-outs have been charged to compensation expense. 10. EMPLOYEE SAVINGS PLAN Under the Company's 401(k) plan (the "Plan"), eligible employees may defer up to 15% of their pre tax earnings, subject to the Internal Revenue Service annual contribution limit. Company matching contributions to the Plan totaled $0.4 million and $0.6 million for the years ended December 31, 1996 and 1997, respectively. 11. SUBSEQUENT EVENT On January 30, 1998, the Company sold $110.0 million of its 10.75% Senior Notes due 2005 (the "Notes"), in a private offering. The Notes bear interest at 10.75% per annum, payable semiannually in arrears on February 1 and August 1 of each year, commencing August 1, 1998. The Notes are senior unsecured F-18 141 PHASE METRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) obligations of the Company, and are redeemable at the option of the Company, in whole or in part, at any time on or after January 15, 2002, in cash at redemption prices as defined. In addition, at any time prior to January 15, 2001, the Company may redeem up to 40% of the Notes at a redemption price as defined, with the net proceeds of a public equity offering, as defined. The Company used the net proceeds of the Notes of $105.9 million, together with existing cash and an initial draw of $1.6 million under the New Credit Facility to repay in full its existing term loans and revolving credit facility and all accrued interest thereon, as well as to pay fees of $0.3 million for the New Credit Facility. Concurrently with closing the sale of the Notes, the Company entered into a $25 million revolving credit facility with a group of banks (the "New Credit Facility"). The New Credit Facility is secured by substantially all of the Company's assets. Borrowing availability under the New Credit Facility is subject to a borrowing base test and may be increased at any time at the sole discretion of the banks to up to $40 million. Borrowings under the New Credit Facility bear interest at the lead bank's prime rate plus 1%, or at LIBOR plus 3%, at the Company's election. The New Credit Facility provides for a commitment fee of three-fourths of one percent until March 31, 1999 and one-half of one percent thereafter on the unused portion of the commitment amount. The New Credit Facility will mature in January 2001. The Notes and the New Credit Facility contain customary affirmative and negative covenants, including limitations on other indebtedness, liens, investments and guarantees, restricted payments, mergers and acquisitions, sales of assets, capital expenditures, leases and affiliate transactions. The New Credit facility also contains financial covenants relating to minimum interest coverage, minimum net worth, minimum fixed charge coverage, minimum cash flow and maximum leverage. 12. FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES. The Company conducts substantially all of its business through the parent company and its domestic and foreign subsidiaries. In January 1998, the Company issued the Notes (see Note 11). The Notes are jointly and severally guaranteed by all of the Company's wholly-owned domestic subsidiaries (the "Guarantor Subsidiaries"). Presented below is condensed consolidating financial information for Phase Metrics, Inc. (the "Parent Company"), the Guarantor Subsidiaries and the wholly-owned foreign subsidiaries (the "Non-Guarantor Subsidiaries") for the years ended December 31, 1995 and 1996 and 1997. The condensed consolidating financial information has been presented to show the nature of assets held, results of operations and cash flows of the Parent Company, Guarantor Subsidiaries and Non-Guarantor Subsidiaries assuming the expected guarantee structure of the Senior Notes was in effect at the beginning of the periods presented. Separate financial statements for the Guarantor Subsidiaries are not presented based on management's determination that they would not provide additional information that is material to investors. The supplemental condensed consolidating financial information reflects the investments of the Parent Company in the Guarantor and Non-Guarantor Subsidiaries using the equity method of accounting. F-19 142 PHASE METRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1995
FOREIGN PARENT GUARANTOR NON-GUARANTOR ELIMINATING COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED -------- ------------ ------------- ----------- ------------ (IN THOUSANDS) Net sales.................................. $107,921 $8,973 $-- $ -- $116,894 Cost of sales.............................. 59,706 5,060 -- -- 64,766 -------- ------ --- ------- -------- Gross profit............................. 48,215 3,913 -- -- 52,128 Research and development expense........... 10,867 505 -- -- 11,372 Selling, general and administrative expense.................................. 13,935 1,760 -- -- 15,695 Amortization and write-downs of intangible assets................................... 13,094 -- -- -- 13,094 -------- ------ --- ------- -------- Income from operations................... 10,319 1,648 -- -- 11,967 Interest expense........................... 5,624 1 -- -- 5,625 Other (income) expense -- net.............. 175 (26) -- -- 149 -------- ------ --- ------- -------- Income before equity in subsidiaries and taxes................................. 4,520 1,673 -- -- 6,193 Equity in net income of subsidiaries....... 1,261 -- -- (1,261) -- Income tax expense......................... 1,112 412 -- -- 1,524 -------- ------ --- ------- -------- Net income................................. $ 4,669 $1,261 $-- $(1,261) $ 4,669 ======== ====== === ======= ========
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1995
FOREIGN PARENT GUARANTOR NON-GUARANTOR ELIMINATING COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED -------- ------------ ------------- ----------- ------------ (IN THOUSANDS) Net income................................. $ 4,669 $ 1,261 $ -- $(1,261) $ 4,669 Depreciation, amortization and write-downs of intangible assets...... 15,877 20 -- -- 15,897 Equity in net income of subsidiaries..... (1,261) -- -- 1,261 -- Other non-cash adjustments............... 3,745 -- -- -- 3,745 Changes in working capital............... (5,038) (973) -- -- (6,011) -------- ------- ------ ------- -------- Net cash provided by operating activities....................... 17,992 308 -- -- 18,300 -------- ------- ------ ------- -------- Investing activities: Acquisition of property, plant and equipment............................. (8,902) (233) -- -- (9,135) Acquisitions, net of cash acquired of $6,755................................ (1,967) -- -- -- (1,967) -------- ------- ------ ------- -------- Net cash used for investing activities....................... (10,869) (233) -- -- (11,102) -------- ------- ------ ------- -------- Financing activities: Revolving loans -- net................... 4,100 -- -- -- 4,100 Proceeds from term notes................. 18,000 -- -- -- 18,000 Repayment of debt........................ (4,850) -- -- -- (4,850) Repayment of bridge notes................ (20,000) -- -- -- (20,000) Intercompany balances and other.......... (274) (75) -- -- (349) -------- ------- ------ ------- -------- Net cash used for financing activities....................... (3,024) (75) -- -- (3,099) -------- ------- ------ ------- -------- Net increase in cash and cash equivalents.............................. 4,099 -- -- -- 4,099 Cash and cash equivalents, beginning of year..................................... 917 -- -- -- 917 -------- ------- ------ ------- -------- Cash and cash equivalents, end of year..... $ 5,016 $ -- $ -- $ -- $ 5,016 ======== ======= ====== ======= ========
F-20 143 PHASE METRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 1996 ASSETS
FOREIGN PARENT GUARANTOR NON-GUARANTOR ELIMINATING COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED -------- ------------ ------------- ----------- ------------ (IN THOUSANDS) Accounts receivable -- net................. $ 24,224 $ 629 $ 189 $ -- $ 25,042 Inventories................................ 48,946 2,150 1,768 (1,069) 51,795 Other current assets....................... 21,620 1,164 713 -- 23,497 Property, plant and equipment, net......... 26,532 1,223 323 -- 28,078 Intercompany balances...................... (4,455) 7,058 (2,603) -- -- Investment in subsidiaries................. 7,616 -- -- (7,616) -- Other...................................... 25,097 21 483 -- 25,601 -------- ------- ------- -------- -------- Total assets.......................... $149,580 $12,245 $ 873 $ (8,685) $154,013 ======== ======= ======= ======== ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Other current liabilities.................. $ 50,781 $ 3,873 $ 536 $ -- $ 55,190 Current portion of debt.................... 2,463 -- -- -- 2,463 Long-term debt............................. 93,557 -- -- -- 93,557 Other...................................... 5,496 -- 24 -- 5,520 Redeemable preferred stock................. 6,314 -- -- -- 6,314 Stockholders' equity (deficit)............. (9,031) 8,372 313 (8,685) (9,031) -------- ------- ------- -------- -------- Total liabilities, redeemable preferred stock and stockholders' deficit............................. $149,580 $12,245 $ 873 $ (8,685) $154,013 ======== ======= ======= ======== ========
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996
PARENT GUARANTOR NON-GUARANTOR ELIMINATING COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED -------- ------------ ------------- ----------- ------------ (IN THOUSANDS) Net sales.................................. $162,442 $37,654 $ 4,384 $(13,707) $190,773 Cost of sales.............................. 95,285 18,217 2,521 (12,162) 103,861 -------- ------- ------- -------- -------- Gross profit............................. 67,157 19,437 1,863 (1,545) 86,912 Research and development expense........... 29,397 1,539 174 -- 31,110 Selling, general and administrative expense.................................. 19,267 4,449 1,391 (476) 24,631 Amortization and write-downs of intangible assets................................... 28,656 -- -- -- 28,656 Purchased research and development expense.................................. 13,935 -- -- -- 13,935 -------- ------- ------- -------- -------- Income (loss) from operations............ (24,098) 13,449 298 (1,069) (11,420) Interest expense........................... 8,408 38 2 -- 8,448 Other (income) expense..................... (22) (5) 1 -- (26) -------- ------- ------- -------- -------- Income (loss) before equity in subsidiaries, taxes and extraordinary items................................. (32,484) 13,416 295 (1,069) (19,842) Equity in net income of subsidiaries....... 6,219 -- -- (6,219) -- Income tax expense (benefit)............... (15,397) 6,305 118 -- (8,974) -------- ------- ------- -------- -------- Net income (loss) before extraordinary items................................. (10,868) 7,111 177 (7,288) (10,868) Extraordinary items, net of income taxes... (1,122) -- -- -- (1,122) -------- ------- ------- -------- -------- Net income (loss).......................... $(11,990) $ 7,111 $ 177 $ (7,288) $(11,990) ======== ======= ======= ======== ========
F-21 144 PHASE METRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1996
FOREIGN PARENT GUARANTOR NON-GUARANTOR ELIMINATING COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED -------- ------------ ------------- ----------- ------------ (IN THOUSANDS) Net income (loss).......................... $(11,990) $ 7,111 $ 177 $(7,288) $(11,990) Depreciation, amortization and write-downs of intangible assets...... 32,511 347 95 -- 32,953 Equity in net income of subsidiaries..... (6,219) -- -- 6,219 -- Other non-cash adjustments............... 3,044 -- -- -- 3,044 Purchased research and development....... 13,935 -- -- -- 13,935 Extraordinary items...................... 1,122 -- -- -- 1,122 Changes in working capital............... (60,782) 1,521 (2,274) 1,069 (60,466) -------- ------- ------- ------- -------- Net cash provided by (used for) operating activities............. (28,379) 8,979 (2,002) -- (21,402) -------- ------- ------- ------- -------- Investing activities: Acquisition of property, plant and equipment............................. (23,519) (627) (418) -- (24,564) Acquisitions, net of cash acquired of $1,597................................ (20,752) -- -- -- (20,752) -------- ------- ------- ------- -------- Net cash used for investing activities....................... (44,271) (627) (418) -- (45,316) -------- ------- ------- ------- -------- Financing activities: Revolving loans -- net................... (300) (300) Proceeds from term notes................. 145,000 -- -- -- 145,000 Repayment of debt........................ (80,429) (17) -- -- (80,446) Intercompany balances and other.......... 4,478 (7,213) 2,920 -- 185 -------- ------- ------- ------- -------- Net cash provided by (used for) financing activities............. 68,749 (7,230) 2,920 -- 64,439 -------- ------- ------- ------- -------- Net increase (decrease) in cash and cash equivalents.............................. (3,901) 1,122 500 -- (2,279) Cash and cash equivalents, beginning of period................................... 5,016 -- -- -- 5,016 -------- ------- ------- ------- -------- Cash and cash equivalents, end of period... $ 1,115 $ 1,122 $ 500 $ -- $ 2,737 ======== ======= ======= ======= ========
F-22 145 PHASE METRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 1997 ASSETS
FOREIGN PARENT GUARANTOR NON-GUARANTOR ELIMINATING COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED -------- ------------ ------------- ----------- ------------ (IN THOUSANDS) Accounts receivable -- net................. $ 27,693 $ 470 $ 567 $ -- $ 28,730 Inventory.................................. 48,255 5,624 5,844 (4,138) 55,585 Other current assets....................... 17,672 786 602 -- 19,060 Property, plant and equipment, net......... 35,510 2,194 319 -- 38,023 Intercompany balances...................... (4,308) 11,589 (7,281) -- -- Investment in subsidiaries................. 13,247 -- -- (13,247) -- Other...................................... 12,800 48 484 -- 13,332 -------- ------- ------- -------- -------- Total assets..................... $150,869 $20,711 $ 535 $(17,385) $154,730 ======== ======= ======= ======== ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Other current liabilities.................. $ 32,241 $ 3,079 $ 195 $ -- $ 35,515 Current portion of debt.................... 1,785 -- -- -- 1,785 Long-term debt............................. 119,272 -- -- -- 119,272 Redeemable preferred stock................. 9,237 -- -- -- 9,237 Other...................................... 6,207 -- 587 -- 6,794 Stockholders' equity (deficit)............. (17,873) 17,632 (247) (17,385) (17,873) -------- ------- ------- -------- -------- Total liabilities, redeemable preferred stock and stockholders' deficit.......... $150,869 $20,711 $ 535 $(17,385) $154,730 ======== ======= ======= ======== ========
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997
FOREIGN PARENT GUARANTOR NON-GUARANTOR ELIMINATING COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED -------- ------------ ------------- ----------- ------------ (IN THOUSANDS) Net sales.................................. $165,724 $38,995 $12,631 $(32,690) $184,660 Cost of sales.............................. 102,461 16,098 11,069 (28,334) 101,294 -------- ------- ------- -------- -------- Gross profit............................... 63,263 22,897 1,562 (4,356) 83,366 Research and development expense........... 40,412 3,004 156 -- 43,572 Selling, general and administrative expense.................................. 18,559 3,556 2,140 (1,287) 22,968 Amortization and write-downs of intangible assets........................ 14,591 -- -- -- 14,591 -------- ------- ------- -------- -------- Income (loss) from operations.............. (10,299) 16,337 (734) (3,069) 2,235 Interest expense........................... 11,566 -- 7 -- 11,573 Other (income) expense -- net.............. 278 (53) 249 -- 474 -------- ------- ------- -------- -------- Income (loss) before equity in subsidiaries and taxes................................ (22,143) 16,390 (990) (3,069) (9,812) Equity in net income of subsidiaries....... 5,631 -- -- (5,631) -- Income tax expense (benefit)............... (10,968) 7,130 (430) -- (4,268) -------- ------- ------- -------- -------- Net income (loss).......................... $ (5,544) $ 9,260 $ (560) $ (8,700) $ (5,544) ======== ======= ======= ======== ========
F-23 146 PHASE METRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW YEAR ENDED DECEMBER 31, 1997
FOREIGN PARENT GUARANTOR NON-GUARANTOR ELIMINATING COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED -------- ------------ ------------- ----------- ------------ Net income (loss).......................... $(5,544) $ 9,321 $(1,181) $(8,700) $ (5,544) Depreciation, amortization and write-down of intangible assets.................. 21,119 487 266 -- 21,872 Equity in net income of subsidiaries..... (5,631) -- -- 5,631 -- Other non-cash adjustments............... 3,548 -- -- -- 3,548 Changes in working capital............... (21,090) (4,154) (4,093) 3,069 (26,268) -------- ------- ------- ------- -------- Net cash provided by (used for) operating activities............................... (7,598) 5,593 (4,387) -- (6,392) -------- ------- ------- ------- -------- Investing activities: Acquisition of property, plant and equipment............................. (15,442) (1,404) (245) -- (17,091) Increase in patent costs................. (78) (78) -------- ------- ------- ------- -------- Net cash used for investing activities..... (15,520) (1,404) (245) -- (17,169) -------- ------- ------- ------- -------- Financing activities: Proceeds from debt....................... 26,900 26,900 Repayment of debt........................ (1,776) -- (24) (1,800) Other.................................... (1,364) (4,531) 4,678 -- (1,217) -------- ------- ------- ------- -------- Net cash provided by (used for) financing activities............................... 23,760 (4,531) 4,654 -- 23,883 -------- ------- ------- ------- -------- Effect of exchange rate on cash............ -- -- (82) -- (82) Net increase (decrease) in cash and cash equivalents.............................. 642 (342) (60) -- 240 Cash and cash equivalents, beginning of year..................................... 1,115 1,122 500 2,737 -------- ------- ------- ------- -------- Cash and cash equivalents, end of year..... $ 1,757 $ 780 $ 440 $ -- $ 2,977 ======== ======= ======= ======= ========
F-24 147 INDEPENDENT AUDITORS' REPORT Air Bearings, Incorporated: We have audited the accompanying statements of income and retained earnings and of cash flows of Air Bearings, Incorporated for the year ended December 31, 1995. 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 generally accepted auditing standards. 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, such financial statements present fairly, in all material respects the results of operations and cash flows of Air Bearings, Incorporated for the year ended December 31, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP San Jose, California September 6, 1996 F-25 148 AIR BEARINGS, INCORPORATED STATEMENT OF INCOME AND RETAINED EARNINGS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995 ------------ Sales....................................................... $7,924 Cost of sales............................................... 1,621 ------ Gross profit.............................................. 6,303 ------ Operating expenses: Selling, general and administrative....................... 372 Research and development.................................. 92 ------ Total operating expenses.......................... 464 ------ Income from operations...................................... 5,839 Other income -- net......................................... (9) ------ Income before income taxes.................................. 5,848 Income tax expense.......................................... 88 ------ Net income.................................................. 5,760 Distributions to stockholders............................... (1,818) Retained earnings, beginning of year........................ 718 ------ Retained earnings, end of year.............................. $4,660 ======
See notes to financial statements. F-26 149 AIR BEARINGS, INCORPORATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995 ------------ Operating activities: Net income................................................ $5,760 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........................................... 72 Changes in assets and liabilities: Accounts receivable.................................. (1,743) Inventory............................................ (494) Prepaid expenses and other........................... (2) Accounts payable..................................... 35 Accrued expenses and other liabilities............... 129 ------ Net cash provided by operating activities......... 3,757 ------ Investing activities -- Acquisition of property............. (536) ------ Financing activities: Distributions to stockholders............................. (1,818) Repayments of notes payable............................... -- ------ Net cash used for financing activities............ (1,818) ------ Net increase in cash and cash equivalents................... 1,403 Cash and cash equivalents, beginning of year................ -- ------ Cash and cash equivalents, end of year...................... $1,403 ======
See notes to financial statements. F-27 150 AIR BEARINGS, INCORPORATED NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General -- The Company develops and manufactures air bearing spindles and other components used in production test equipment for the data storage industry. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. Assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities are affected by such estimates and assumptions. Actual results could differ from those estimates. Cash and Cash Equivalents -- Cash equivalents consist of money market accounts. The Company has not experienced any losses on its cash accounts. Inventory -- Inventory is stated at the lower of cost (first-in, first-out) or market. Property -- Property is stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the property (generally 5 years). Revenue -- Revenue from product sales is recognized upon shipment. Concentrations of Credit Risk -- The Company markets and sells its products domestically and internationally without collateral. Export sales, primarily to companies in Asia, accounted for 17% of 1995 sales. Three customers individually accounted for 43%, 22% and 17% of 1995 sales and the related accounts receivable from these customers aggregated approximately $1.5 million at December 31, 1995. 2. LEASE COMMITMENTS The Company has month-to-month operating leases for its facilities. Rental expense under these leases was $34,000 for the year ended December 31, 1995. 3. INCOME TAXES The Company is an S Corporation for federal tax and California franchise tax reporting purposes. S Corporation status requires the pass-through of income and losses to the shareholders of the Company. The tax payable and related provision by the Company consists of a 1 1/2% statutory California franchise tax. Distributions of earnings are made periodically during the year to the stockholders in an amount estimated to cover the tax on the earnings of the S Corporation. 4. EMPLOYEE BENEFIT PLAN The Company maintains a Simplified Employee Pension Plan ("SEP IRA Plan") for the benefit of all qualifying employees. The SEP IRA Plan provides for employer contributions up to 15% of each participant's compensation (as defined) with an individual yearly maximum employer contribution (as defined). Contributions of $66,000 were declared by the Company's Board of Directors in 1995. 5. SUBSEQUENT EVENT On January 18, 1996, all of the Company's outstanding stock was acquired by Phase Metrics, Inc. for total consideration of approximately $21 million. * * * * * * F-28 151 ====================================================== NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR DLJ. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE Available Information................. iv Summary............................... 1 Risk Factors.......................... 12 The Exchange Offer.................... 24 The Refinancing....................... 31 Use of Proceeds....................... 31 Capitalization........................ 32 Selected Consolidated Financial Data................................ 33 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 35 Business.............................. 44 Management............................ 61 Certain Transactions.................. 68 Principal Stockholders................ 70 Description of Indebtedness........... 72 Description of New Notes.............. 74 Certain United States Federal Tax Considerations...................... 104 Notice to Investors................... 108 Plan of Distribution.................. 109 Description of Capital Stock.......... 111 Legal Matters......................... 113 Experts............................... 113 Glossary.............................. A-1 Index to Financial Statements......... F-1
====================================================== ====================================================== $110,000,000 LOGO NEW 10 3/4% SENIOR NOTES DUE 2005 -------------------- PROSPECTUS -------------------- , 1998 ====================================================== 152 ALTERNATE PAGES TO BE USED IN MARKET-MAKING PROSPECTUS FOLLOW 153 PROSPECTUS [ALTERNATIVE COVER PAGE FOR MARKET-MAKING PROSPECTUS] NEW 10 3/4% SENIOR NOTES DUE 2005 ($110,000,000 PRINCIPAL AMOUNT) OF [PHASE METRICS LOGO] ------------------------ Phase Metrics, Inc., a Delaware corporation (the "Company"), exchanged (the "Exchange Offer"), upon the terms and subject to the conditions set forth in a prospectus related thereto, up to an aggregate principal amount of $110,000,000 of its new 10 3/4% Senior Notes due 2005 (the "New Notes") and the guarantees related thereto for an equal principal amount of its outstanding 10 3/4% Senior Notes due 2005 (the "Notes") and the guarantees related thereto. The New Notes are senior unsecured obligations of the Company and are substantially identical (including principal amount, interest rate, maturity and redemption rights) to the Notes for which they were exchanged pursuant to the Exchange Offer, except that (i) the offering and sale of the New Notes was registered under the Securities Act of 1933, as amended (the "Securities Act") and (ii) holders of New Notes are not entitled to certain rights under the Registration Rights Agreement of the Company and Applied Robotic Technologies, Inc., Helios, Incorporated, Air Bearings, Incorporated and Santa Barbara Metric, Inc., all of which are California corporations and wholly-owned subsidiaries of the Company (together with any future other subsidiary of the Company that executes a New Note Guarantee, the "Subsidiary Guarantors") dated as of January 30, 1998 (the "Registration Rights Agreement"). The New Notes are fully and unconditionally guaranteed on a senior unsecured basis (the "New Note Guarantees") by, and are joint and several obligations of the Subsidiary Guarantors. The New Notes are issued under an Indenture dated as of January 30, 1998 (the "Indenture"), among the Company, the Subsidiary Guarantors and State Street Bank and Trust Company, as trustee (the "Trustee"). See "Description of New Notes." The New Notes will bear interest from January 30, 1998, the date of issuance of the Notes, at a rate equal to 10 3/4% per annum. Interest on the New Notes will be payable semiannually on February 1 and August 1 of each year, commencing August 1, 1998. The New Notes are redeemable at the option of the Company, in whole or in part, at any time on or after February 1, 2002, at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages (as defined herein), if any, thereon to the date of redemption. Prior to February 1, 2001, up to 33% of the initially outstanding aggregate principal amount of New Notes (and any Notes which remain outstanding after the Exchange Offer) will be redeemable at the option of the Company from the net proceeds of a public sale of the Company's Common Stock ("Common Stock") at a price of 110.75% of the principal amount of the New Notes (and any Notes which remain outstanding after the Exchange Offer), together with accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption; provided, that at least 67% of the initially outstanding aggregate principal amount of New Notes (and any Notes which remain outstanding after the Exchange Offer) remains outstanding immediately after such redemption. Upon the occurrence of a Change of Control (as defined herein), each Holder (as defined herein) of New Notes may require the Company to repurchase all or a portion of such Holder's New Notes at 101% of the aggregate principal amount of the New Notes, together with accrued and unpaid interest and Liquidated Damages, if any, to the date of repurchase. There can be no assurance that sufficient funds will be available at the time of any Change of Control to make any required repurchase of New Notes. See "Risk Factors -- Payment Upon a Change of Control" and "Description of New Notes -- Repurchase at the Option of Holders -- Change of Control." ------------------------ SEE "RISK FACTORS" COMMENCING ON PAGE FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER NOTES IN THE EXCHANGE OFFER. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is , 1998. B-1 154 The New Notes are senior unsecured obligations of the Company and rank pari passu in right of payment to all existing and future senior indebtedness of the Company and senior in right of payment to all existing and future subordinated indebtedness of the Company. The New Notes are effectively subordinated, however, to all secured obligations of the Company, including any borrowings under the New Credit Facility (as defined herein) to the extent of the assets securing such obligations. The New Notes are fully and unconditionally guaranteed under the New Note Guarantees on a joint and several basis by the Subsidiary Guarantors. The New Note Guarantees are senior unsecured obligations of the Subsidiary Guarantors and rank pari passu in right of payment to all existing and future senior indebtedness of the Subsidiary Guarantors. The New Note Guarantees are effectively subordinated, however, to all secured obligations of the Subsidiary Guarantors, including the guarantees of the Subsidiary Guarantors in favor of the lenders under the New Credit Facility, to the extent of the assets securing such obligations. As of December 31, 1997, the New Notes and the New Note Guarantees would have been effectively subordinated to approximately $3.2 million of secured obligations of the Company and the Subsidiary Guarantors on an as adjusted basis giving effect to the Note Offering and the application of the net proceeds therefrom. This Prospectus is to be used by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") in connection with its offers and sales of the New Notes (and related guarantees) from time-to-time in market-making transactions at negotiated prices related to prevailing market prices at the time of sale. DLJ may act as principal or agent in such transactions. The Company does not intend to list the New Notes on any securities exchange or to seek admission thereof to trading in the National Association of Securities Dealers Automated Quotation System. DLJ has advised the Company that it intends to make a market in the New Notes; however, DLJ is not obligated to do so and any market-making may be discontinued at any time. The Company will receive no portion of the proceeds of the sale of any New Notes by DLJ and will bear expenses incident to the registration thereof. See "Plan of Distribution." The Notes were initially sold by the Company on January 30, 1998 (the "Note Closing") in transactions not registered under the Securities Act of 1933, as amended (the "Securities Act") in reliance upon the exemption provided in Section 4(2) thereof (the "Note Offering"). NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE NEW NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE NEW NOTES TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. [End of Alternative Cover] B-2 155 ABSENCE OF ACTIVE TRADING MARKET The New Notes constitute a new issue of securities with no established trading market. Although the New Notes will generally be permitted to be resold or otherwise transferred by holders who are not affiliates of the Company without compliance with the registration requirements under the Securities Act, the Company does not intend to list the New Notes on any securities exchange or to seek admission thereof to trading in the National Association of Securities Dealers Automated Quotation System. Although DLJ has advised the Company that it currently intends to make a market in the New Notes, DLJ is not obligated to do so and may discontinue such market making at any time without notice. In addition, such market making activity will be subject to the limits imposed by law. If a trading market does not develop or is not maintained, holders of the New Notes may experience difficulty in reselling the New Notes or may be unable to sell them at all. If a market for the New Notes develops, any such market may be discontinued at any time. Accordingly, there can be no assurance as to the development or liquidity of any market for the New Notes. DLJ may be deemed to be an "affiliate" of the Company and, as such, may be required to deliver a prospectus in connection with its market-making activities in the New Notes. B-3 156 USE OF PROCEEDS The net proceeds to the Company from the sale of the Notes were approximately $105.9 million (after deducting discounts and commissions and Note Offering expenses payable by the Company). The Company used all of such net proceeds, together with the Initial Draw of approximately $1.6 million under the New Credit Facility, to repay in full its then-existing term loan and revolving credit indebtedness under the Former Credit Facility, including all accrued interest thereunder to the date of repayment, and all expenses related to the Refinancing. This Prospectus is delivered in connection with the sale of the New Notes (and the related guarantees) by DLJ in market-making transactions. The Company will not receive any of the proceeds from such transactions. B-4 157 PLAN OF DISTRIBUTION This Prospectus has been prepared for use by DLJ in connection with offers and sales from time-to-time of the New Notes (and related guarantees) in market-making transactions at negotiated prices relating to prevailing market prices at the time of sale. DLJ may act as principal or agent in such transactions. DLJ has advised the Company that it currently intends to make a market in the New Notes, but it is not obligated to do so and may discontinue or suspend any such market-making activities at any time without notice. There is no existing market for the New Notes and there can be no assurance as to the liquidity of any market that may develop for the New Notes, the ability of Holders of the New Notes to sell their New Notes or the price at which Holders would be able to sell their New Notes. Future trading prices of the New Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's operating results, the market for similar securities and general economic conditions. The Company does not currently intend to list the New Notes on any securities exchange or the National Association of Securities Dealers Automated Quotation System. Therefore, no assurance can be given as to the liquidity of any trading market for the New Notes. See "Risk Factors -- Absence of Active Trading Market." DLJ served as the initial purchaser in the Note Offering and received total underwriting discounts and commissions of $3.575 million in connection therewith. DLJ and the Company entered into the Registration Rights Agreement with respect to the use by DLJ of this Prospectus. Pursuant to the Registration Rights Agreement, the Company agreed to bear all registration expenses incurred under such agreement, and the Company agreed to indemnify DLJ against certain liabilities, including liabilities under the Securities Act. Entities affiliated with DLJ (i) hold 11,800,000 shares of Common Stock of the Company, including shares of the Company's Series A Preferred Stock and Series B Preferred Stock which are convertible into an aggregate of 2,000,000 shares and 3,857,280 shares of the Company's Common Stock, respectively, Convertible Subordinated Notes which are convertible into an aggregate of 5,142,720 shares of the Company's Common Stock, and Bridge Financing Warrants which are exercisable for an aggregate of 800,000 shares of the Company's Common Stock and (ii) pursuant to the Securityholders Agreement, are entitled to elect two members to the Company's Board of Directors. Under the Securityholders Agreement, the Company is obligated until November 23, 1998, to use DLJ as its exclusive financial advisor and investment banker. In consideration for DLJ's services, the Company has agreed to pay DLJ an annual retainer of $200,000. In each of 1995, 1996 and 1997, the Company paid DLJ $200,000 in fees for financial advisory and certain investment banking services provided to the Company. In connection with the refinancing of its then-outstanding indebtedness in January and December of 1996, the Company paid fees of $1.2 million in the aggregate for debt issuance costs to DLJCF. DLJCF is an affiliate of DLJ. B-5 158 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Section 145 of the Delaware General Corporation Law the Company has broad powers to indemnify its directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). The Company's Bylaws (the "Bylaws") (Exhibit 3.2 hereto) provide that the Company shall indemnify its directors and officers to the fullest extent permitted by Delaware law. The Bylaws authorize the Company, to the fullest extent permitted by law, to advance litigation expenses to its directors and officers in defending any proceeding. In addition, the Company's Certificate of Incorporation (the "Certificate") (Exhibit 3.1 hereto) provides that, pursuant to Delaware law, its directors shall not be liable for monetary damages for breach of the directors' fiduciary duty of care to the Company and its stockholders. This provision in the Certificate does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Company, for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. The Certificate further provides that the Company shall indemnify (and advance expenses to) its directors and also is authorized to indemnify its officers (and any other person to which Delaware law permits) to the fullest extent permitted by law. The Company has entered into agreements to indemnify its directors and certain of its officers and employees in addition to the indemnification provided for in the Bylaws and under Delaware law. These agreements will, among other things, indemnify the Company's directors and certain of its officers and employees for certain expenses (including attorneys fees), judgments, fines and settlement amounts incurred by such person in any action or proceeding, including any action by or in the right of the Company, on account of services by that person as a director or officer of the Company or as a director or officer of any subsidiary of the Company, or as a director or officer of any other company or enterprise that the person provides services to at the request of the Company. The agreements also require the Company to advance all reasonable expenses incurred by or on behalf of the indemnified director or officer in connection with any proceeding by reason of the director or officer's corporate status subject to an undertaking by the indemnified director or officer to repay any expenses advanced that have been ultimately determined not to be indemnifiable. These indemnification agreements further provide that the conferred indemnification rights and remedies are to be nonexclusive of any other rights and remedies granted under law, the Certificate, any other agreement, or otherwise and that no change to these agreements shall limit or restrict any right under these agreements with respect to any action taken or omitted by such director or officer in his corporate status prior to such change and to the extent any such change in the law permits greater indemnification than would be currently provided under the Certificate and these agreements, the parties' intent is that these agreements provide the greater benefits so afforded by such change. The Company has also obtained directors' and officers' liability insurance. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS The following Exhibits are attached hereto and incorporated herein by reference. 3.1* Certificate of Incorporation of the Company, as amended. 3.2* Bylaws of the Company. 4.1 Purchase Agreement dated as of January 23, 1998 by and among the Company, Helios, Incorporated, Applied Robotic Technologies, Inc., Air Bearings, Incorporated, Santa Barbara Metric, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation.
II-1 159 4.2 Indenture dated as of January 30, 1998 by and among the Company, the Subsidiary Guarantors and State Street Bank and Trust Company of California, N.A. as Trustee. 4.3 Form of 10 3/4% Senior Notes Due 2005 dated as of January 30, 1998 (incorporated by reference to Exhibit 4.2). 4.4 Registration Rights Agreement dated as of January 30, 1998 by and among the Company, Helios, Incorporated, Applied Robotics Technologies, Inc., Air Bearings, Incorporated, Santa Barbara Metric, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation. 5.1* Opinion of Brobeck, Phleger & Harrison LLP. 10.1 Lease Agreement dated June 5, 1995 by and between the Company and Security Capital Industrial Trust. 10.2 Sublease Agreement dated April 1, 1997 by and between the Company and Hitachi America Ltd. 10.3 Master Security Agreement dated as of May 5, 1995 between the Company and Komag Incorporated, a Delaware corporation. 10.4 Employment Agreement dated November 23, 1994 by and between the Company and John F. Schaefer. 10.5 Komag Intercreditor Agreement dated May 5, 1995. 10.6 Form of Indemnification Agreement. 10.7 1995 Stock Option/Stock Issuance Plan. 10.8 Form of Notice of Grant of Stock Option with respect to holders of stock options granted under the 1995 Stock Option/Stock Issuance Plan. 10.9 Form of Stock Option Agreement and Addendum generally used in connection with the 1995 Stock Option/Stock Issuance Plan. 10.10 Form of Stock Purchase Agreement and Addendum generally used in connection with the 1995 Stock Option/ Stock Issuance Plan. 10.11 Securityholders Agreement dated November 23, 1994, as amended, between DLJ Merchant Banking Partners, L.P., DLJ International Partners, C.V., DLJ Offshore Partners, C.V., DLJ Merchant Banking Funding, Inc., DLJ Capital Corporation, Sprout Growth II, L.P., Sprout Capital VI, L.P., DLJ First ESC L.L.C., Arthur J. Cormier, John F. Schaefer and the Company. 10.12 Master Capital Lease Agreement dated as of January 13, 1996 by and between the Company and NTFC Capital Corporation. 10.13* Form of Convertible Subordinated Note Due 2005 dated as of November 23, 1994 including all amendments thereto. 10.14 Amended and Restated Credit Facility dated as of January 30, 1998 by and among the Company, as Borrower, Fleet National Bank, Imperial Bank and the other lenders named therein. 12.1 Statement Regarding Computation of Ratios. 21.1 List of Subsidiaries. 23.1 Independent Auditors Consent and Report on Schedule. 23.2* Consent of Brobeck, Phleger & Harrison LLP (contained in Exhibit 5.1). 24.1 Powers of Attorney (contained on signature page on page II-4, II-5, II-6, II-7 and II-8). 25.1 Form T-1 Statement of Eligibility and Qualification of State Street Bank and Trust Company of California, N.A. as Trustee. 27.1 Financial Data Schedule. 99.1 Form of Letter of Transmittal for the 10 3/4% Senior Notes due 2005.
II-2 160 99.2 Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. 99.3 Form of Notice of Guaranteed Delivery.
- --------------- * To be filed by amendment. (B) FINANCIAL STATEMENT SCHEDULES Schedule II -- Valuation and Qualifying Accounts -- Phase Metrics, Inc. Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 22. UNDERTAKINGS (a) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of the counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (b) The Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the Prospectus that is a part of this Registration Statement pursuant to Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of this Registration Statement through the date of responding to the request. II-3 161 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on the 26th day of March, 1998. PHASE METRICS, INC. By: /s/ JOHN F. SCHAEFER ------------------------------------ John F. Schaefer Chairman and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John F. Schaefer and R. Joseph Saunders and each of them his attorneys-in-fact, each with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto in all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that such attorneys-in-fact and agents or any of them, or his, her or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN F. SCHAEFER Chairman, Chief Executive March 26, 1998 - ----------------------------------------------------- Officer and President John F. Schaefer (Principal Executive Officer) /s/ R. JOSEPH SAUNDERS Vice President, Chief Financial March 26, 1998 - ----------------------------------------------------- Officer and Assistant Secretary R. Joseph Saunders (Principal Accounting and Financial Officer) /s/ ARTHUR J. CORMIER Director March 26, 1998 - ----------------------------------------------------- Arthur J. Cormier /s/ THOMPSON DEAN Director March 26, 1998 - ----------------------------------------------------- Thompson Dean /s/ ROBERT FINZI Director March 26, 1998 - ----------------------------------------------------- Robert Finzi /s/ DR. GILBERT F. AMELIO Director March 26, 1998 - ----------------------------------------------------- Dr. Gilbert F. Amelio /s/ WILLIAM E. TERRY Director March 26, 1998 - ----------------------------------------------------- William E. Terry
II-4 162 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on the 26th day of March, 1998. AIR BEARINGS, INCORPORATED By: /s/ JOHN F. SCHAEFER ------------------------------------ John F. Schaefer Chairman and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints R. Joseph Saunders his attorney-in-fact, with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto in all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that such attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN F. SCHAEFER Chairman and Chief Executive March 26, 1998 - ----------------------------------------------------- Officer (Principal Executive John F. Schaefer Officer) /s/ R. JOSEPH SAUNDERS Chief Financial Officer, March 26, 1998 - ----------------------------------------------------- Assistant Secretary and R. Joseph Saunders Director (Principal Accounting and Financial Officer)
II-5 163 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on the 26th day of March, 1998. APPLIED ROBOTIC TECHNOLOGIES, INC. By: /s/ JOHN F. SCHAEFER ------------------------------------ John F. Schaefer Chairman and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints R. Joseph Saunders his attorney-in-fact, with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto in all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that such attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN F. SCHAEFER Chairman and Chief Executive March 26, 1998 - ----------------------------------------------------- Officer (Principal Executive John F. Schaefer Officer) /s/ R. JOSEPH SAUNDERS Vice President, Assistant March 26, 1998 - ----------------------------------------------------- Secretary and Director R. Joseph Saunders (Principal Accounting and Financial Officer)
II-6 164 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on the 26th day of March, 1998. HELIOS, INCORPORATED By: /s/ JOHN F. SCHAEFER ------------------------------------ John F. Schaefer Chairman and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints R. Joseph Saunders his attorney-in-fact, with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto in all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that such attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN F. SCHAEFER Chairman and Chief Executive March 26, 1998 - ----------------------------------------------------- Officer (Principal Executive John F. Schaefer Officer) /s/ R. JOSEPH SAUNDERS Vice President and Assistant March 26, 1998 - ----------------------------------------------------- Secretary (Principal Accounting R. Joseph Saunders and Financial Officer)
II-7 165 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on the 26th day of March, 1998. SANTA BARBARA METRIC, INC. By: /s/ JOHN F. SCHAEFER ------------------------------------ John F. Schaefer Chairman and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints R. Joseph Saunders his attorney-in-fact, with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto in all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that such attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN F. SCHAEFER Chairman and Chief Executive March 26, 1998 - ----------------------------------------------------- Officer (Principal Executive John F. Schaefer Officer) /s/ R. JOSEPH SAUNDERS Chief Financial Officer, March 26, 1998 - ----------------------------------------------------- Assistant Secretary and R. Joseph Saunders Director (Principal Accounting and Financial Officer) /s/ W. DEWEY HOCKEMEYER Director March 26, 1998 - ----------------------------------------------------- W. Dewey Hockemeyer
II-8 166 SCHEDULE II PHASE METRICS, INC. CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS --------------------------- BALANCE AT CHARGES TO BALANCE AT BEGINNING COSTS AND CHARGES TO END OF DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD ----------- ---------- ---------- -------------- ---------- ---------- Year ended December 31, 1995 Allowance for doubtful accounts......... $154 $ 463 $-- $ 27 $ 590 Year ended December 31, 1996 Allowance for doubtful accounts......... 590 247 -- 91 746 Year ended December 31, 1997 Allowance for doubtful accounts......... 746 1,405 -- 488 1,663
167 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTIONS ------- ------------ 3.1* Certificate of Incorporation of the Company, as amended. 3.2* Bylaws of the Company. 4.1 Purchase Agreement dated as of January 23, 1998 by and among the Company, Helios, Incorporated, Applied Robotic Technologies, Inc., Air Bearings, Incorporated, Santa Barbara Metric, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation. 4.2 Indenture dated as of January 30, 1998 by and among the Company, the Subsidiary Guarantors and State Street Bank and Trust Company of California, N.A. as Trustee. 4.3 Form of 10 3/4% Senior Notes Due 2005 dated as of January 30, 1998 (incorporated by reference to Exhibit 4.2). 4.4 Registration Rights Agreement dated as of January 30, 1998 by and among the Company, Helios, Incorporated, Applied Robotics Technologies, Inc., Air Bearings, Incorporated, Santa Barbara Metric, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation. 5.1* Opinion of Brobeck, Phleger & Harrison LLP. 10.1 Lease Agreement dated June 5, 1995 by and between the Company and Security Capital Industrial Trust. 10.2 Sublease Agreement dated April 1, 1997 by and between the Company and Hitachi America Ltd. 10.3 Master Security Agreement dated as of May 5, 1995 between the Company and Komag Incorporated, a Delaware corporation. 10.4 Employment Agreement dated November 23, 1994 by and between the Company and John F. Schaefer. 10.5 Komag Intercreditor Agreement dated May 5, 1995. 10.6 Form of Indemnification Agreement. 10.7 1995 Stock Option/Stock Issuance Plan. 10.8 Form of Notice of Grant of Stock Option with respect to holders of stock options granted under the 1995 Stock Option/Stock Issuance Plan. 10.9 Form of Stock Option Agreement and Addendum generally used in connection with the 1995 Stock Option/Stock Issuance Plan. 10.10 Form of Stock Purchase Agreement and Addendum generally used in connection with the 1995 Stock Option/ Stock Issuance Plan. 10.11 Securityholders Agreement dated November 23, 1994, as amended, between DLJ Merchant Banking Partners, L.P., DLJ International Partners, C.V., DLJ Offshore Partners, C.V., DLJ Merchant Banking Funding, Inc., DLJ Capital Corporation, Sprout Growth II, L.P., Sprout Capital VI, L.P., DLJ First ESC L.L.C., Arthur J. Cormier, John F. Schaefer and the Company. 10.12 Master Capital Lease Agreement dated as of January 13, 1996 by and between the Company and NTFC Capital Corporation. 10.13* Form of Convertible Subordinated Note Due 2005 dated as of November 23, 1994 including all amendments thereto. 10.14 Amended and Restated Credit Facility dated as of January 30, 1998 by and among the Company, as Borrower, Fleet National Bank, Imperial Bank and the other lenders named therein. 12.1 Statement Regarding Computation of Ratios. 21.1 List of Subsidiaries.
168
EXHIBIT NUMBER DESCRIPTIONS ------- ------------ 23.1 Independent Auditors Consent and Report on Schedule. 23.2* Consent of Brobeck, Phleger & Harrison LLP (contained in Exhibit 5.1). 24.1 Powers of Attorney (contained on signature page on page II-4, II-5, II-6, II-7 and II-8). 25.1 Form T-1 Statement of Eligibility and Qualification of State Street Bank and Trust Company of California, N.A. as Trustee. 27.1 Financial Data Schedule. 99.1 Form of Letter of Transmittal for the 10 3/4% Senior Notes due 2005. 99.2 Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. 99.3 Form of Notice of Guaranteed Delivery.
- --------------- * To be filed by amendment. EX-4.1 2 PURCHASE AGREEMENT DATED AS OF 01/23/1998 1 EXHIBIT 4.1 PHASE METRICS, INC. HELIOS, INCORPORATED APPLIED ROBOTIC TECHNOLOGIES, INC. AIR BEARINGS, INCORPORATED SANTA BARBARA METRIC, INC. $110,000,000 10 3/4% SENIOR NOTES DUE 2005 PURCHASE AGREEMENT JANUARY 23, 1998 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION 2 $110,000,000 10 3/4% Senior Notes Due 2005 of Phase Metrics, Inc. PURCHASE AGREEMENT January 23, 1998 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION 277 Park Avenue New York, New York 10172 Dear Sirs: Phase Metrics, Inc., a Delaware corporation (the "COMPANY"), proposes to issue and sell to Donaldson, Lufkin & Jenrette Securities Corporation (the "INITIAL PURCHASER") an aggregate of $110,000,000 in principal amount of its 10 3/4% Senior Notes due 2005 (the "SENIOR NOTES"), subject to the terms and conditions set forth herein. The Senior Notes are to be issued pursuant to the provisions of an indenture (the "INDENTURE"), to be dated as of the Closing Date (as defined below), among the Company, the Guarantors (as defined below) and State Street Bank and Trust Company of California, N.A., as trustee (the "TRUSTEE"). The Senior Notes and the New Senior Notes (as defined below) issuable in exchange therefor are collectively referred to herein as the "NOTES." The Notes will be guaranteed (the "SUBSIDIARY GUARANTEES") by each of the entities listed on Schedule A, hereto (each, a "GUARANTOR" and collectively the "GUARANTORS"). Capitalized terms used but not defined herein shall have the meanings given to such terms in the Indenture. 1 OFFERING MEMORANDUM. The Senior Notes will be offered and sold to the Initial Purchaser pursuant to one or more exemptions from the registration requirements under the Securities Act of 1933, as amended (the "ACT"). The Company and the Guarantors have prepared a preliminary offering memorandum, dated December 31, 1997 (the "PRELIMINARY OFFERING MEMORANDUM") and a final offering memorandum, dated January 23, 1998 (the "OFFERING MEMORANDUM"), relating to the Senior Notes and the Subsidiary Guarantees. -1- 3 Upon original issuance thereof, and until such time as the same is no longer required pursuant to the Indenture, the Senior Notes (and all securities issued in exchange therefor, in substitution thereof or upon conversion thereof) shall bear the following legend: "THIS NOTE (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE SECOND SENTENCE HEREOF. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT)(A "QIB"), (B) IT IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT OR (C) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT (AN "IAI"), (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, (B) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (C) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR 904 OF THE SECURITIES ACT, (D) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (E) TO AN IAI THAT, PRIOR TO SUCH TRANSFER, FURNISHES THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE TRANSFER OF THIS NOTE (THE FORM OF WHICH CAN BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF NOTES LESS THAN $250,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (F) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY) OR (G) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION" AND "UNITED STATES" HAVE -2- 4 THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING." 2 AGREEMENTS TO SELL AND PURCHASE. On the basis of the representations, warranties and covenants contained in this Agreement, and subject to the terms and conditions contained herein, the Company agrees to issue and sell to the Initial Purchaser, and the Initial Purchaser agrees to purchase from the Company, an aggregate principal amount of $110,000,000 of Senior Notes at a purchase price equal to 96.75% of the principal amount thereof (the "PURCHASE PRICE"). 3 TERMS OF OFFERING. The Initial Purchaser has advised the Company that the Initial Purchaser will make offers (the "EXEMPT RESALES") of the Senior Notes purchased hereunder on the terms set forth in the Offering Memorandum, as amended or supplemented, solely to (i) persons whom the Initial Purchaser reasonably believe to be "qualified institutional buyers" as defined in Rule 144A under the Act ("QIBS"), and (ii) to persons permitted to purchase the Senior Notes in offshore transactions in reliance upon Regulation S under the Act (each, a "REGULATION S PURCHASER") (such persons specified in clauses (i) and (ii) being referred to herein as the "ELIGIBLE PURCHASERS"). The Initial Purchaser will offer the Senior Notes to Eligible Purchasers initially at a price equal to 100.0% of the principal amount thereof. Such price may be changed at any time without notice. Holders (including subsequent transferees) of the Senior Notes will have the registration rights set forth in the registration rights agreement (the "REGISTRATION RIGHTS AGREEMENT"), to be dated the Closing Date, in substantially the form of Exhibit A hereto, for so long as such Senior Notes constitute "TRANSFER RESTRICTED SECURITIES" (as defined in the Registration Rights Agreement). Pursuant to the Registration Rights Agreement, the Company and the Guarantors will agree to file with the Securities and Exchange Commission (the "COMMISSION") under the circumstances set forth therein, (i) a registration statement under the Act (the "EXCHANGE OFFER REGISTRATION STATEMENT") relating to the Company's registered 10 3/4% Senior Notes due 2005 (the "NEW SENIOR NOTES"), to be offered in exchange for the Senior Notes (such offer to exchange being referred to as the "EXCHANGE OFFER") and the Subsidiary Guarantees thereof and (ii) a shelf registration statement pursuant to Rule 415 under the Act (the "SHELF REGISTRATION STATEMENT" and, together with the Exchange Offer Registration Statement, the "REGISTRATION STATEMENTS") relating to the resale by certain holders of the Senior Notes and to use its best efforts to cause such Registration Statements to be declared and remain effective and usable for the periods specified in the Registration Rights Agreement and to consummate the Exchange Offer. This Agreement, the Indenture, the Notes, the Subsidiary Guarantees and the Registration Rights Agreement are hereinafter sometimes referred to collectively as the "OPERATIVE DOCUMENTS." 4 DELIVERY AND PAYMENT. -3- 5 (a) Delivery of, and payment of the Purchase Price for, the Senior Notes shall be made at the offices of Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California, or such other location as may be mutually acceptable. Such delivery and payment shall be made at 9:00 a.m. New York City time, on January 30, 1998 or at such other time as shall be agreed upon by the Initial Purchaser and the Company. The time and date of such delivery and the payment are herein called the "CLOSING DATE." (b) One or more of the Senior Notes in definitive global form, registered in the name of Cede & Co., as nominee of the Depository Trust Company ("DTC"), having an aggregate principal amount corresponding to the aggregate principal amount of the Senior Notes (collectively, the "GLOBAL NOTE"), shall be delivered by the Company to the Initial Purchaser (or as the Initial Purchaser directs) in each case with any transfer taxes thereon duly paid by the Company against payment by the Initial Purchaser of the Purchase Price thereof by wire transfer in same day funds to the order of the Company. The Global Note shall be made available to the Initial Purchaser for inspection not later than 9:30 a.m., New York City time, on the business day immediately preceding the Closing Date. 5 AGREEMENTS OF THE COMPANY AND THE GUARANTORS. Each of the Company and the Guarantors hereby agrees with the Initial Purchaser as follows: (a) To advise the Initial Purchaser promptly and, if requested by the Initial Purchaser, confirm such advice in writing, (i) of the issuance by any state securities commission of any stop order suspending the qualification or exemption from qualification of any Senior Notes for offering or sale in any jurisdiction designated by the Initial Purchaser pursuant to Section 5(e) hereof, or the initiation of any proceeding by any state securities commission or any other federal or state regulatory authority for such purpose and (ii) of the happening of any event during the period referred to in Section 5(c) below that makes any statement of a material fact made in the Preliminary Offering Memorandum or the Offering Memorandum untrue or that requires any additions to or changes in the Preliminary Offering Memorandum or the Offering Memorandum in order to make the statements therein not misleading. The Company shall use its best efforts to prevent the issuance of any stop order or order suspending the qualification or exemption of any Senior Notes under any state securities or Blue Sky laws and, if at any time any state securities commission or other federal or state regulatory authority shall issue an order suspending the qualification or exemption of any Senior Notes under any state securities or Blue Sky laws, the Company shall use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (b) To furnish the Initial Purchaser and those persons identified by the Initial Purchaser to the Company as many copies of the Preliminary Offering Memorandum and the Offering Memorandum, and any amendments or supplements thereto, as the Initial Purchaser may reasonably request for the time period specified in Section 5(c). Subject to the Initial Purchaser's compliance with its representations and warranties and agreements set forth in Section 7 hereof, the Company consents to the use of the Preliminary Offering Memorandum and the Offering -4- 6 Memorandum, and any amendments and supplements thereto required pursuant hereto, by the Initial Purchaser in connection with Exempt Resales. (c) During such period as in the opinion of counsel for the Initial Purchaser an Offering Memorandum is required by law to be delivered in connection with Exempt Resales by the Initial Purchaser and in connection with market-making activities of the Initial Purchaser for so long as any Senior Notes are outstanding, (i) not to make any amendment or supplement to the Offering Memorandum of which the Initial Purchaser shall not previously have been advised or to which the Initial Purchaser shall reasonably object after being so advised and (ii) to prepare promptly upon the Initial Purchaser's reasonable request, any amendment or supplement to the Offering Memorandum which may be necessary or advisable in connection with such Exempt Resales or such market-making activities. (d) If, during the period referred to in Section 5(c) above, any event shall occur or condition shall exist as a result of which, in the opinion of counsel to the Initial Purchaser, it becomes necessary to amend or supplement the Offering Memorandum in order to make the statements therein, in the light of the circumstances when such Offering Memorandum is delivered to an Eligible Purchaser, not misleading, or if, in the opinion of counsel to the Initial Purchaser, it is necessary to amend or supplement the Offering Memorandum to comply with any applicable law, forthwith to prepare an appropriate amendment or supplement to such Offering Memorandum so that the statements therein, as so amended or supplemented, will not, in the light of the circumstances when it is so delivered, be misleading, or so that such Offering Memorandum will comply with applicable law, and to furnish to the Initial Purchaser and such other persons as the Initial Purchaser may designate such number of copies thereof as the Initial Purchaser may reasonably request. (e) Prior to the sale of all Senior Notes pursuant to Exempt Resales as contemplated hereby, to cooperate with the Initial Purchaser and counsel to the Initial Purchaser in connection with the registration or qualification of the Senior Notes for offer and sale to the Initial Purchaser and pursuant to Exempt Resales under the securities or Blue Sky laws of such jurisdictions as the Initial Purchaser may reasonably request and to continue such registration or qualification in effect so long as required for Exempt Resales and to file such consents to service of process or other documents as may be necessary in order to effect such registration or qualification; provided, however, that neither the Company nor any Guarantor shall be required in connection therewith to qualify as a foreign corporation in any jurisdiction in which it is not now so qualified or to take any action that would subject it to general consent to service of process or taxation other than as to matters and transactions relating to the Preliminary Offering Memorandum, the Offering Memorandum or Exempt Resales, in any jurisdiction in which it is not now so subject. (f) So long as the Notes are outstanding, (i) to mail and make generally available as soon as practicable after the end of each fiscal year to the record holders of the Notes a financial report of the Company and its subsidiaries on a consolidated basis (and a similar financial report of all unconsolidated subsidiaries, if any), all such financial reports to include a consolidated balance sheet, a consolidated statement of operations, a consolidated statement of cash flows and a -5- 7 consolidated statement of stockholders' equity as of the end of and for such fiscal year, together with comparable information as of the end of and for the preceding year, certified by the Company's independent public accountants and (ii) to mail and make generally available as soon as practicable after the end of each quarterly period (except for the last quarterly period of each fiscal year) to such holders, a consolidated balance sheet, a consolidated statement of operations and a consolidated statement of cash flows (and similar financial reports of all unconsolidated subsidiaries, if any) as of the end of and for such period, and for the period from the beginning of such year to the close of such quarterly period, together with comparable information for the corresponding periods of the preceding year. (g) So long as the Notes are outstanding, to furnish to the Initial Purchaser as soon as available copies of all reports or other written communications furnished by the Company or any of the Guarantors to its security holders or furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company or any of the Guarantors is listed and such other publicly available information concerning the Company and/or its subsidiaries as the Initial Purchaser may reasonably request. (h) So long as any of the Senior Notes remain outstanding and during any period in which the Company and the Guarantors are not subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), to make available to any holder of Senior Notes in connection with any sale thereof and any prospective purchaser of such Senior Notes from such holder, the information ("RULE 144A INFORMATION") required by Rule 144A(d)(4) under the Act. (i) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses of the Company and the Guarantors incident to the performance of the respective obligations of the Company and the Guarantors under this Agreement, including: (i) the fees, disbursements and expenses of counsel to the Company and the Guarantors and accountants of the Company and the Guarantors in connection with the sale and delivery of the Senior Notes to the Initial Purchaser and pursuant to Exempt Resales, and all other fees and expenses of the Company and the Guarantors in connection with the preparation, printing, filing and distribution of the Preliminary Offering Memorandum, the Offering Memorandum and all amendments and supplements to any of the foregoing (including financial statements), including the mailing and delivering of copies thereof to the Initial Purchaser and persons designated by it in the quantities specified herein, (ii) all costs and expenses related to the transfer and delivery of the Senior Notes to the Initial Purchaser and pursuant to Exempt Resales, including any transfer or other taxes payable thereon, (iii) all costs of printing or producing this Agreement, the other Operative Documents and any other agreements or documents in connection with the offering, purchase, sale or delivery of the Senior Notes, (iv) all expenses in connection with the registration or qualification of the Senior Notes and the Subsidiary Guarantees for offer and sale under the securities or Blue Sky laws of the several states and all costs of printing or producing any preliminary and supplemental Blue Sky memoranda in connection therewith (including the filing fees and reasonable fees and disbursements of counsel for the Initial -6- 8 Purchaser in connection with such registration or qualification and memoranda relating thereto), (v) the cost of printing certificates representing the Senior Notes and the Subsidiary Guarantees, (vi) all expenses and listing fees in connection with the application for quotation of the Senior Notes in the National Association of Securities Dealers, Inc. ("NASD") Automated Quotation System - PORTAL ("PORTAL"), (vii) the fees and expenses of the Trustee and the Trustee's counsel in connection with the Indenture, the Notes and the Subsidiary Guarantees, (viii) the costs and charges of any transfer agent, registrar and/or depositary (including DTC), (ix) any fees charged by rating agencies for the rating of the Notes, (x) all costs and expenses of the Company and the Guarantors related to the Exchange Offer and any Registration Statement, as set forth in the Registration Rights Agreement, and (xi) and all other costs and expenses of the Company and the Guarantors incident to the performance of the obligations of the Company and the Guarantors hereunder for which provision is not otherwise made in this Section. (j) To use its best efforts to effect the inclusion of the Senior Notes in PORTAL and to maintain the listing of the Senior Notes on PORTAL for so long as the Senior Notes are outstanding. (k) To obtain the approval of DTC for "book-entry" transfer of the Notes, and to comply with all of its agreements set forth in the representation letters of the Company and the Guarantors to DTC relating to the approval of the Notes by DTC for "book-entry" transfer. (l) During the period beginning on the date hereof and continuing to and including the Closing Date, not to offer, sell, contract to sell or otherwise transfer or dispose of any debt securities of the Company or any Guarantor or any warrants, rights or options to purchase or otherwise acquire debt securities of the Company or any Guarantor substantially similar to the Notes and the Subsidiary Guarantees (other than (i) the Notes and the Subsidiary Guarantees, (ii) commercial paper issued in the ordinary course of business and (iii) the Initial Draw under the New Credit Facility (each as defined in the Offering Memorandum) as described in the Offering Memorandum), without the prior written consent of the Initial Purchaser. (m) Not to sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Act) that would be integrated with the sale of the Senior Notes to the Initial Purchaser or pursuant to Exempt Resales in a manner that would require the registration of any such sale of the Senior Notes under the Act. (n) Not to voluntarily claim, and to actively resist any attempts to claim, the benefit of any usury laws against the holders of any Notes. (o) To cause the Exchange Offer to be made in the appropriate form to permit New Senior Notes and guarantees thereof by the Guarantors registered pursuant to the Act to be offered in exchange for the Senior Notes and the Subsidiary Guarantees and to comply with all applicable federal and state securities laws in connection with the Exchange Offer. -7- 9 (p) To comply with all of its agreements set forth in the Registration Rights Agreement. (q) To use its best efforts to do and perform all things required or necessary to be done and performed under this Agreement by it prior to the Closing Date and to satisfy all conditions precedent to the delivery of the Senior Notes and the Subsidiary Guarantees. 6 REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY AND THE GUARANTORS. As of the date hereof, each of the Company and the Guarantors represents and warrants to, and agrees with, the Initial Purchaser that: (a) The Preliminary Offering Memorandum and the Offering Memorandum do not, and any supplement or amendment to them will not, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties contained in this paragraph (a) shall not apply to statements in or omissions from the Preliminary Offering Memorandum or the Offering Memorandum (or any supplement or amendment thereto) based upon information relating to the Initial Purchaser furnished to the Company in writing by the Initial Purchaser expressly for use therein. No stop order preventing the use of the Preliminary Offering Memorandum or the Offering Memorandum, or any amendment or supplement thereto, or any order asserting that any of the transactions contemplated by this Agreement are subject to the registration requirements of the Act, has been issued. (b) Each of the Company and its subsidiaries has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as described in the Preliminary Offering Memorandum and the Offering Memorandum and to own, lease and operate its properties, and each is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole (a "MATERIAL ADVERSE EFFECT"). (c) All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid, non-assessable, and, except as disclosed in the Offering Memorandum, are not subject to any preemptive or similar rights. (d) The entities listed on Schedule B hereto are the only subsidiaries, direct or indirect, of the Company. No subsidiary listed on Schedule B hereto, other than Helios, Incorporated, Applied Robotic Technologies, Inc., Air Bearings, Incorporated and Santa Barbara Metric, Inc., has (i) contributed in the last three fiscal years or in the nine months ended September 30, 1997 greater than 5% of the Company's revenues, EBITDA (as defined in the -8- 10 Offering Memorandum) or net income or (ii) at any of December 30, 1994, 1995 or 1996 or September 30, 1997 constituted greater than 5% of the total assets of the Company. All of the outstanding shares of capital stock of each of the Company's subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable, and are owned by the Company, directly or indirectly through one or more subsidiaries, and, except as disclosed in the Offering Memorandum, are free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature (each, a "LIEN"). (e) This Agreement has been duly authorized, executed and delivered by the Company and each of the Guarantors. (f) The Indenture has been duly authorized by the Company and each of the Guarantors and, on the Closing Date, will have been validly executed and delivered by the Company and each of the Guarantors. When the Indenture has been duly executed and delivered by the Company and each of the Guarantors, the Indenture will be a valid and binding agreement of the Company and each Guarantor, enforceable against the Company and each Guarantor in accordance with its terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. On the Closing Date, the Indenture will conform in all material respects to the requirements of the Trust Indenture Act of 1939, as amended (the "TIA" or"TRUST INDENTURE ACT"), and the rules and regulations of the Commission applicable to an indenture which is qualified thereunder. (g) The Senior Notes have been duly authorized and, on the Closing Date, will have been validly executed and delivered by the Company. When the Senior Notes have been issued, executed and authenticated in accordance with the provisions of the Indenture and delivered to and paid for by the Initial Purchaser in accordance with the terms of this Agreement, the Senior Notes will be entitled to the benefits of the Indenture and will be valid and binding obligations of the Company, enforceable in accordance with their terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. On the Closing Date, the Senior Notes will conform as to legal matters to the description thereof contained in the Offering Memorandum. (h) On the Closing Date, the New Senior Notes will have been duly authorized by the Company. When the New Senior Notes are issued, executed and authenticated in accordance with the terms of the Exchange Offer and the Indenture, the New Senior Notes will be entitled to the benefits of the Indenture and will be the valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. -9- 11 (i) The Subsidiary Guarantee to be endorsed on the Senior Notes by each Guarantor has been duly authorized by such Guarantor and, on the Closing Date, will have been duly executed and delivered by each such Guarantor. When the Senior Notes have been issued, executed and authenticated in accordance with the Indenture and delivered to and paid for by the Initial Purchaser in accordance with the terms of this Agreement, the Subsidiary Guarantee of each Guarantor endorsed thereon will be entitled to the benefits of the Indenture and will be the valid and binding obligation of such Guarantor, enforceable against such Guarantor in accordance with its terms, except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. On the Closing Date, the Subsidiary Guarantees to be endorsed on the Senior Notes will conform as to legal matters to the description thereof contained in the Offering Memorandum. (j) The Subsidiary Guarantee to be endorsed on the New Senior Notes by each Guarantor has been duly authorized by such Guarantor and, when issued, will have been duly executed and delivered by each such Guarantor. When the New Senior Notes have been issued, executed and authenticated in accordance with the terms of the Exchange Offer and the Indenture, the Subsidiary Guarantee of each Guarantor endorsed thereon will be entitled to the benefits of the Indenture and will be the valid and binding obligation of such Guarantor, enforceable against such Guarantor in accordance with its terms, except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. When the New Senior Notes are issued, authenticated and delivered, the Subsidiary Guarantees to be endorsed on the New Senior Notes will conform as to legal matters to the description thereof in the Offering Memorandum. (k) The Registration Rights Agreement has been duly authorized by the Company and each of the Guarantors and, on the Closing Date, will have been duly executed and delivered by the Company and each of the Guarantors. When the Registration Rights Agreement has been duly executed and delivered, the Registration Rights Agreement will be a valid and binding agreement of the Company and each of the Guarantors, enforceable against the Company and each Guarantor in accordance with its terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. On the Closing Date, the Registration Rights Agreement will conform as to legal matters to the description thereof in the Offering Memorandum. (l) Except for the potential default under the Company's current credit facility as disclosed in the Offering Memorandum, neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws or in default in the performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company and its subsidiaries, taken as a whole, -10- 12 to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound. (m) The execution, delivery and performance of this Agreement and the other Operative Documents by the Company and each of the Guarantors, compliance by the Company and each of the Guarantors with all provisions hereof and thereof and the consummation of the transactions contemplated hereby and thereby will not (i) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the securities or Blue Sky laws of the various states), (ii) conflict with or constitute a material breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any of its subsidiaries or any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound, (iii) to the Company's knowledge, violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over the Company, any of its subsidiaries or their respective property, (iv) result in the imposition or creation of (or the obligation to create or impose) a Lien under, any agreement or instrument which is material to Company or any of its subsidiaries or by which the Company or any of its subsidiaries or their respective property is bound, or (v) result in the termination, suspension or revocation of any Authorization (as defined below) of the Company or any of its subsidiaries or result in any other impairment of the rights of the holder of any such Authorization. (n) There are no legal or governmental proceedings pending or, to the Company's knowledge, threatened to which the Company or any of its subsidiaries is or, to the Company's knowledge, could be a party or to which any of their respective property is or, to the Company's knowledge, could be subject, which might result, singly or in the aggregate, in a Material Adverse Effect. (o) Neither the Company nor any of its subsidiaries has violated any foreign, federal, state or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS") or any provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the rules and regulations promulgated thereunder, except for such violations which, singly or in the aggregate, would not have a Material Adverse Effect. (p) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any Authorization, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a Material Adverse Effect. -11- 13 (q) Each of the Company and its subsidiaries has such permits, licenses, consents, exemptions, franchises, authorizations and other approvals (each, an "AUTHORIZATION") of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, including without limitation, under any applicable Environmental Laws, as are necessary to own, lease, license and operate its respective properties and to conduct its business, except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in the aggregate, have a Material Adverse Effect. Each such Authorization is valid and in full force and effect and each of the Company and its subsidiaries is in compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; and no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Authorization; and such Authorizations contain no restrictions that are burdensome to the Company or any of its subsidiaries; except where such failure to be valid and in full force and effect or to be in compliance, the occurrence of any such event or the presence of any such restriction would not, singly or in the aggregate, have a Material Adverse Effect. (r) The accountants, Deloitte & Touche LLP, that have certified the financial statements and supporting schedules included in the Preliminary Offering Memorandum and the Offering Memorandum are independent public accountants with respect to the Company and the Guarantors, as required by the Act and the Exchange Act. The historical consolidated financial statements, together with related schedules and notes, set forth in the Preliminary Offering Memorandum and the Offering Memorandum comply as to form in all material respects with the requirements applicable to registration statements on Form S-1 under the Act. (s) The historical financial statements, together with related schedules and notes forming part of the Offering Memorandum (and any amendment or supplement thereto), present fairly the consolidated financial position, results of operations and changes in financial position of the Company and its subsidiaries on the basis stated in the Offering Memorandum at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; and the other financial and statistical information and data regarding the Company set forth in the Offering Memorandum (and any amendment or supplement thereto) are, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. (t) The pro forma financial statements included in the Preliminary Offering Memorandum and the Offering Memorandum have been prepared on a basis consistent with the historical financial statements of the Company and its subsidiaries and give effect to assumptions used in the preparation thereof on a reasonable basis and in good faith and present fairly -12- 14 the historical and proposed transactions contemplated by the Preliminary Offering Memorandum and the Offering Memorandum. The other pro forma financial and statistical information and data included in the Offering Memorandum are, in all material respects, accurately presented and prepared on a basis consistent with the pro forma financial statements. (u) The Company is not and, after giving effect to the offering and sale of the Senior Notes and the application of the net proceeds thereof as described in the Offering Memorandum, will not be, an "investment company," as such term is defined in the Investment Company Act of 1940, as amended. (v) The Company and its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its subsidiaries, in each case free and clear of all Liens and defects, except such as are described in the Offering Memorandum or such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not materially interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries, in each case except as described in the Offering Memorandum. (w) The Company and its subsidiaries own or possess, or can acquire or license on reasonable terms, all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names ("INTELLECTUAL PROPERTY") currently employed by them in connection with the business now operated by them except where the failure to own, possess, license or otherwise be able to acquire such intellectual property would not, singly or in the aggregate, have a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice of infringement of or conflict with asserted rights of others with respect to any of such intellectual property which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect. (x) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; and neither the Company nor any of its subsidiaries (i) has received notice from any insurer or agent of such insurer that substantial capital improvements or other material expenditures will have to be made in order to continue such insurance or (ii) has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers at a cost that would not have a Material Adverse Effect. -13- 15 (y) Except as disclosed in the Offering Memorandum, no relationship, direct or indirect, exists between or among the Company or any of its subsidiaries on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company or any of its subsidiaries on the other hand, which would be required by the Act to be described in the Offering Memorandum if the Offering Memorandum were a prospectus included in a registration statement on Form S-1 filed with the Commission. (z) There is no (i) significant unfair labor practice complaint, grievance or arbitration proceeding pending or, to the Company's knowledge, threatened against the Company or any of its subsidiaries before the National Labor Relations Board or any state or local labor relations board, (ii) strike, labor dispute, slowdown or stoppage pending or threatened against the Company or any of its subsidiaries or (iii) union representation question existing with respect to the employees of the Company or any of its subsidiaries, except in the case of clauses (i), (ii) and (iii) for such actions which, singly or in the aggregate, would not have a Material Adverse Effect. To the Company's knowledge, no collective bargaining organizing activities are taking place with respect to the Company or any of its subsidiaries. (aa) The Company and each of its subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (bb) All material tax returns required to be filed by the Company and each of its subsidiaries in any jurisdiction where the Company or such subsidiary is required to file such returns have been filed, other than those filings being contested in good faith, and all material taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due pursuant to such returns or pursuant to any assessment received by the Company or any of its subsidiaries have been paid, other than those being contested in good faith and for which adequate reserves have been provided. (cc) All indebtedness of the Company and the Guarantors that will be repaid with the proceeds of the issuance and sale of the Senior Notes was incurred, and the indebtedness represented by the Senior Notes is being incurred, for proper purposes and in good faith and each of the Company and the Guarantors was, at the time of the incurrence of such indebtedness that will be repaid with the proceeds of the issuance and sale of the Senior Notes, and will be on the Closing Date (after giving effect to the application of the proceeds from the issuance of the Senior Notes) solvent, and had at the time of the incurrence of such indebtedness that will be repaid with the proceeds of the issuance and sale of the Senior Notes and will have on the Closing Date (after giving effect to the application of the proceeds from the issuance of the Senior Notes) sufficient -14- 16 capital for carrying on their respective business and were, at the time of the incurrence of such indebtedness that will be repaid with the proceeds of the issuance and sale of the Senior Notes, and will be on the Closing Date (after giving effect to the application of the proceeds from the issuance of the Senior Notes) able to pay their respective debts as they mature. (dd) No action has been taken and no law, statute, rule or regulation or order has been enacted, adopted or issued by any governmental agency or body which prevents the execution, delivery and performance of any of the Operative Documents, the issuance of the Senior Notes or the Subsidiary Guarantees, or suspends the sale of the Senior Notes or the Subsidiary Guarantees in any jurisdiction referred to in Section 5(e); and no injunction, restraining order or other order or relief of any nature by a federal or state court or other tribunal of competent jurisdiction has been issued with respect to the Company or any of its subsidiaries which would prevent or suspend the issuance or sale of the Senior Notes or the Subsidiary Guarantees in any jurisdiction referred to in Section 5(e). (ee) Except for the registration rights agreement described in the Offering Memorandum, there are no contracts, agreements or understandings between the Company or any Guarantor and any person granting such person the right to require the Company or such Guarantor to file a registration statement under the Act with respect to any securities of the Company or such Guarantor or to require the Company, or such Guarantor, to include such securities with the Notes and Subsidiary Guarantees registered pursuant to any Registration Statement. (ff) Neither the Company nor any of its subsidiaries nor any agent thereof acting on the behalf of them has taken, and none of them will take, any action that might cause this Agreement or the issuance or sale of the Senior Notes to violate Regulation G (12 C.F.R. Part 207), Regulation T (12 C.F.R. Part 220), Regulation U (12 C.F.R. Part 221) or Regulation X (12 C.F.R. Part 224) of the Board of Governors of the Federal Reserve System. (gg) No "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the Act (i) has imposed (or has informed the Company or any Guarantor that it is considering imposing) any condition (financial or otherwise) on the Company's or any Guarantor's retaining any rating assigned to the Company or any Guarantor, any securities of the Company or any Guarantor or (ii) has indicated to the Company or any Guarantor that it is considering (a) the downgrading, suspension, or withdrawal of, or any review for a possible change that does not indicate the direction of the possible change in, any rating so assigned or (b) any change in the outlook for any rating of the Company, any Guarantor or any securities of the Company or any Guarantor. (hh) Since the respective dates as of which information is given in the Offering Memorandum other than as set forth in the Offering Memorandum (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there has not occurred any material adverse change or any development involving a prospective material adverse change in the condition, financial or otherwise, or the earnings, business, management or operations -15- 17 of the Company and its subsidiaries, taken as a whole, (ii) there has not been any material adverse change or any development involving a prospective material adverse change in the capital stock or in the long-term debt of the Company or any of its subsidiaries and (iii) neither the Company nor any of its subsidiaries has incurred any material liability or obligation, direct or contingent. (ii) Each of the Preliminary Offering Memorandum and the Offering Memorandum, as of its date, contains all the information specified in, and meeting the requirements of, Rule 144A(d)(4) under the Act. (jj) When the Senior Notes and the Subsidiary Guarantees are issued and delivered pursuant to this Agreement, neither the Senior Notes nor the Subsidiary Guarantees will be of the same class (within the meaning of Rule 144A under the Act) as any security of the Company or the Guarantors that is listed on a national securities exchange registered under Section 6 of the Exchange Act or that is quoted in a United States automated inter-dealer quotation system. (kk) No form of general solicitation or general advertising (as defined in Regulation D under the Act) was used by the Company, the Guarantors or any of their respective representatives (other than the Initial Purchaser or any of its representatives, as to whom the Company and the Guarantors make no representation) in connection with the offer and sale of the Senior Notes contemplated hereby, including, but not limited to, articles, notices or other communications published in any newspaper, magazine, or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. No securities of the same class as the Senior Notes have been issued and sold by the Company within the six-month period immediately prior to the date hereof. (ll) Prior to the effectiveness of any Registration Statement, the Indenture is not required to be qualified under the TIA. (mm) None of the Company, the Guarantors nor any of their respective affiliates or any person acting on its or their behalf (other than the Initial Purchaser or any of its representatives, as to whom the Company and the Guarantors make no representation) has engaged or will engage in any directed selling efforts within the meaning of Regulation S under the Act ("REGULATION S") with respect to the Senior Notes or the Subsidiary Guarantees. (nn) The sale of the Senior Notes pursuant to Regulation S is not part of a plan or scheme on the part of the Company or the Guarantors to evade the registration provisions of the Act. (oo) The Company, the Guarantors and their respective affiliates and all persons acting on their behalf (other than the Initial Purchaser or any of its representatives, as to whom the Company and the Guarantors make no representation) have complied with and will comply with the offering restrictions requirements of Regulation S in connection with the offering of -16- 18 the Senior Notes outside the United States and, in connection therewith, the Offering Memorandum will contain the disclosure required by Rule 902(h). (pp) The Senior Notes sold in reliance on Regulation S will be represented upon issuance by a temporary global security that may not be exchanged for definitive securities until the expiration of the 40-day restricted period referred to in Rule 903(c)(3) of the Act and only upon certification of beneficial ownership of such Senior Notes by non-U.S. persons or U.S. persons who purchased such Senior Notes in transactions that were exempt from the registration requirements of the Act. (qq) No registration under the Act of the Senior Notes or the Subsidiary Guarantees is required for the sale of the Senior Notes and the Subsidiary Guarantees to the Initial Purchaser as contemplated hereby or for the Exempt Resales assuming the accuracy of the Initial Purchaser's representations and warranties and agreements set forth in Section 7 hereof. (rr Each certificate signed by any officer of the Company or any Guarantor and delivered to the Initial Purchaser or counsel for the Initial Purchaser shall be deemed to be a representation and warranty by the Company or such Guarantor to the Initial Purchaser as to the matters covered thereby. The Company acknowledges that the Initial Purchaser and, for purposes of the opinions to be delivered to the Initial Purchaser pursuant to Section 9 hereof, counsel to the Company and the Guarantors and counsel to the Initial Purchaser will rely upon the accuracy and truth of the foregoing representations and hereby consents to such reliance. 7. INITIAL PURCHASER'S REPRESENTATIONS AND WARRANTIES. The Initial Purchaser represents and warrants to, and agrees with, the Company and the Guarantors: (a) Such Initial Purchaser is either a QIB or an Accredited Institution, in either case, with such knowledge and experience in financial and business matters as is necessary in order to evaluate the merits and risks of an investment in the Senior Notes. (b) Such Initial Purchaser (A) is not acquiring the Senior Notes with a view to any distribution thereof or with any present intention of offering or selling any of the Senior Notes in a transaction that would violate the Act or the securities laws of any state of the United States or any other applicable jurisdiction and (B) will be reoffering and reselling the Senior Notes only to (x) QIBs in reliance on and in compliance with the exemption from the registration requirements of the Act provided by Rule 144A, and (y) in offshore transactions in reliance on and in compliance with Regulation S under the Act. (c) Such Initial Purchaser agrees that no form of general solicitation or general advertising (within the meaning of Regulation D under the Act) has been or will be used by such Initial Purchaser or any of its representatives in connection with the offer and sale of the Senior -17- 19 Notes pursuant hereto, including, but not limited to, articles, notices or other communications published in any newspaper, magazine or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. (d) Such Initial Purchaser agrees that, in connection with Exempt Resales, such Initial Purchaser will solicit offers to buy the Senior Notes only from, and will offer to sell the Senior Notes only to, Eligible Purchasers. Each Initial Purchaser further agrees that it will offer to sell the Senior Notes only to, and will solicit offers to buy the Senior Notes only from (A) Eligible Purchasers that the Initial Purchaser reasonably believes are QIBs, and (B) Regulation S Purchasers, in each case, that agree that (x) the Senior Notes purchased by them may be resold, pledged or otherwise transferred within the time period referred to under Rule 144(k) (taking into account the provisions of Rule 144(d) under the Act, if applicable) under the Act, as in effect on the date of the transfer of such Senior Notes, only (I) to the Company or any of its subsidiaries, (II) to a person whom the seller reasonably believes is a QIB purchasing for its own account or for the account of a QIB in a transaction meeting the requirements of Rule 144A under the Act, (III) in an offshore transaction (as defined in Rule 902 under the Act) meeting the requirements of Rule 904 of the Act, (IV) in a transaction meeting the requirements of Rule 144 under the Act, (V) to an Accredited Institution that, prior to such transfer, furnishes the Trustee a signed letter containing certain representations and agreements relating to the registration of transfer of such Senior Note (the form of which is substantially the same as Annex A to the Offering Memorandum) and, if such transfer is in respect of an aggregate principal amount of Senior Notes less than $250,000, an opinion of counsel acceptable to the Company that such transfer is in compliance with the Act, (VI) in accordance with another exemption from the registration requirements of the Act (and based upon an opinion of counsel acceptable to the Company) or (VII) pursuant to an effective registration statement and, in each case, in accordance with the applicable securities laws of any state of the United States or any other applicable jurisdiction and (y) they will deliver to each person to whom such Senior Notes or an interest therein is transferred a notice substantially to the effect of the foregoing. (e) None of such Initial Purchaser nor any of its affiliates or any person acting on its or their behalf has engaged or will engage in any directed selling efforts within the meaning of Regulation S with respect to the Senior Notes or the Subsidiary Guarantees. (f) The Senior Notes offered and sold by such Initial Purchaser pursuant hereto in reliance on Regulation S have been and will be offered and sold only in offshore transactions. (g) The sale of the Senior Notes offered and sold by such Initial Purchaser pursuant hereto in reliance on Regulation S is not part of a plan or scheme to evade the registration provisions of the Act. -18- 20 (h) Such Initial Purchaser agrees that it has not offered or sold and will not offer or sell the Senior Notes in the United States or to, or for the benefit or account of, a U.S. Person (other than a distributor), in each case, as defined in Rule 902 under the Act (i) as part of its distribution at any time and (ii) otherwise until 40 days after the later of the commencement of the offering of the Senior Notes pursuant hereto and the Closing Date, other than in accordance with Regulation S of the Act or another exemption from the registration requirements of the Act. Such Initial Purchaser agrees that, during such 40-day restricted period, it will not cause any advertisement with respect to the Senior Notes (including any "tombstone" advertisement) to be published in any newspaper or periodical or posted in any public place and will not issue any circular relating to the Senior Notes, except such advertisements as permitted by and include the statements required by Regulation S. (i) Such Initial Purchaser agrees that, at or prior to confirmation of a sale of Senior Notes by it to any distributor, dealer or person receiving a selling concession, fee or other remuneration during the 40-day restricted period referred to in Rule 903(c)(3) under the Act, it will send to such distributor, dealer or person receiving a selling concession, fee or other remuneration a confirmation or notice to substantially the following effect: "The Senior Notes covered hereby have not been registered under the U.S. Securities Act of 1933, as amended (the "SECURITIES ACT"), and may not be offered and sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of your distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the Offering and the Closing Date, except in either case in accordance with Regulation S under the Securities Act (or Rule 144A or to Accredited Institutions in transactions that are exempt from the registration requirements of the Securities Act), and in connection with any subsequent sale by you of the Senior Notes covered hereby in reliance on Regulation S during the period referred to above to any distributor, dealer or person receiving a selling concession, fee or other remuneration, you must deliver a notice to substantially the foregoing effect. Terms used above have the meanings assigned to them in Regulation S." (j) Such Initial Purchaser agrees that the Senior Notes offered and sold in reliance on Regulation S will be represented upon issuance by a global security that may not be exchanged for definitive securities until the expiration of the 40-day restricted period referred to in Rule 903(c)(3) of the Act and only upon certification of beneficial ownership of such Senior Notes by non-U.S. persons or U.S. persons who purchased such Senior Notes in transactions that were exempt from the registration requirements of the Act. The Initial Purchaser acknowledges that the Company and the Guarantors and, for purposes of the opinions to be delivered to each Initial Purchaser pursuant to Section 9 hereof, counsel to the Company and the Guarantors and counsel to the Initial Purchaser will rely upon the accuracy and truth of the foregoing representations and the Initial Purchaser hereby consents to such reliance. -19- 21 8. INDEMNIFICATION. (a) The Company and each Guarantor agree, jointly and severally, to indemnify and hold harmless the Initial Purchaser, its directors, its officers and each person, if any, who controls such Initial Purchaser within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, liabilities and judgments (including, without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action, that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in the Offering Memorandum (or any amendment or supplement thereto), the Preliminary Offering Memorandum or any Rule 144A Information provided by the Company or any Guarantor to any holder or prospective purchaser (who becomes a holder) of Senior Notes pursuant to Section 5(h) or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to the Initial Purchaser furnished in writing to the Company by such Initial Purchaser; provided, however, that the foregoing indemnity agreement with respect to any Preliminary Offering Memorandum shall not inure to the benefit of any Initial Purchaser who failed to deliver a Final Offering Memorandum (as then amended or supplemented, provided by the Company to the Initial Purchaser in the requisite quantity and on a timely basis to permit proper delivery on or prior to the Closing Date) to the person asserting any losses, claims, damages and liabilities and judgements caused by any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Offering Memorandum, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such material misstatement or omission or alleged material misstatement or omission was cured in the Final Offering Memorandum.. (b) The Initial Purchaser agrees to indemnify and hold harmless the Company and the Guarantors, and their respective directors and officers and each person, if any, who controls (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) the Company or the Guarantors, to the same extent as the foregoing indemnity from the Company and the Guarantors to the Initial Purchaser but only with reference to information relating to the Initial Purchaser furnished in writing to the Company by the Initial Purchaser expressly for use in the Preliminary Offering Memorandum or the Offering Memorandum. (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the "INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 8(a) -20- 22 and 8(b), the Initial Purchaser shall not be required to assume the defense of such action pursuant to this Section 8(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of the Initial Purchaser). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party, and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all indemnified parties and all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by Donaldson, Lufkin & Jenrette Securities Corporation, in the case of the parties indemnified pursuant to Section 8(a), and by the Company, in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with its written consent or (ii) effected without its written consent if the settlement is entered into more than twenty (20) business days after the indemnifying party shall have received a request from the indemnified party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the indemnifying party) and, prior to the date of such settlement, the indemnifying party shall have failed to comply with such reimbursement request. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. (d) To the extent the indemnification provided for in this Section 8 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Guarantors, on the one hand, and the Initial Purchaser on the other hand from the offering of the Senior Notes or (ii) if the -21- 23 allocation provided by clause 8(d)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 8(d)(i) above but also the relative fault of the Company and the Guarantors, on the one hand, and the Initial Purchaser, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Guarantors, on the one hand and the Initial Purchaser, on the other hand, shall be deemed to be in the same proportion as the total net proceeds from the offering of the Senior Notes (after underwriting discounts and commissions, but before deducting expenses) received by the Company, and the total discounts and commissions received by the Initial Purchaser bear to the total price to investors of the Senior Notes, in each case as set forth in the table on the cover page of the Offering Memorandum. The relative fault of the Company and the Guarantors, on the one hand, and the Initial Purchaser, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Guarantors, on the one hand, or the Initial Purchaser, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Guarantors, and the Initial Purchaser agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such indemnified party in connection with investigating or defending any matter, including any action, that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 8, the Initial Purchaser shall not be required to contribute any amount in excess of the amount by which the total discounts and commissions received by such Initial Purchaser exceeds the amount of any damages which the Initial Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) The remedies provided for in this Section 8 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. 9. CONDITIONS OF INITIAL PURCHASER'S OBLIGATIONS. The obligations of the Initial Purchaser to purchase the Senior Notes under this Agreement are subject to the satisfaction of each of the following conditions: -22- 24 (a) All the representations and warranties of the Company and the Guarantors contained in this Agreement shall be true and correct on the Closing Date with the same force and effect as if made on and as of the Closing Date. (b) On or after the date hereof, (i) there shall not have occurred any downgrading, suspension or withdrawal of, nor shall any notice have been given of any potential or intended downgrading, suspension or withdrawal of, or of any review (or of any potential or intended review) for a possible change that does not indicate the direction of the possible change in, any rating of the Company or any Guarantor or any securities of the Company or any Guarantor (including, without limitation, the placing of any of the foregoing ratings on credit watch with negative or developing implications or under review with an uncertain direction) by any "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the Act, (ii) there shall not have occurred any adverse change, nor shall any notice have been given of any potential or intended change, in the outlook for any rating of the Company or any Guarantor or any securities of the Company or any Guarantor by any such rating organization and (iii) no such rating organization shall have given notice that it has assigned (or is considering assigning) a lower rating to the Notes than that on which the Notes were marketed. (c) Since the respective dates as of which information is given in the Offering Memorandum other than as set forth in the Offering Memorandum (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there shall not have occurred any change or any development involving a prospective change in the condition, financial or otherwise, or the earnings, business, management or operations of the Company and its subsidiaries, taken as a whole, (ii) there shall not have been any change or any development involving a prospective change in the capital stock or in the long-term debt of the Company or any of its subsidiaries and (iii) neither the Company nor any of its subsidiaries shall have incurred any liability or obligation, direct or contingent, the effect of which, in any such case described in clause 9(c)(i), 9(c)(ii) or 9(c)(iii), in your judgment, is material and adverse and, in your judgment, makes it impracticable to market the Senior Notes on the terms and in the manner contemplated in the Offering Memorandum. (d) You shall have received on the Closing Date a certificate dated the Closing Date, signed by the President and the Chief Financial Officer of the Company and each of the Guarantors, confirming the matters set forth in Sections 6(y), 9(a) and 9(b) and stating that each of the Company and the Guarantors has complied with all the agreements and satisfied all of the conditions herein contained and required to be complied with or satisfied on or prior to the Closing Date. (e) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Initial Purchaser), dated the Closing Date, of Brobeck, Phleger & Harrison, LLP, counsel for the Company and the Guarantors, to the effect that: -23- 25 (i) each of the Company and its subsidiaries has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as described in the Offering Memorandum and to own, lease and operate its properties; (ii) each of the Company and its subsidiaries is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect; (iii) all the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid, non-assessable and, to such counsel's knowledge, were not issued in violation of any preemptive or similar rights; (iv) all of the outstanding shares of capital stock of each of the Company's subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable, and are owned of record by the Company; (v) the Senior Notes have been duly authorized and, when executed and authenticated in accordance with the provisions of the Indenture and delivered to and paid for by the Initial Purchaser in accordance with the terms of this Agreement, will be entitled to the benefits of the Indenture and will be valid and binding obligations of the Company, enforceable in accordance with their terms except as (x) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (y) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability; (vi) the Subsidiary Guarantees have been duly authorized and, when the Senior Notes are executed and authenticated in accordance with the provisions of the Indenture and delivered to and paid for by the Initial Purchaser in accordance with the terms of this Agreement, the Subsidiary Guarantees endorsed thereon will be entitled to the benefits of the Indenture and will be valid and binding obligations of the Guarantors, enforceable in accordance with their terms except as (x) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (y) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability; -24- 26 (vii) the Indenture has been duly authorized, executed and delivered by the Company and each Guarantor and is a valid and binding agreement of the Company and each Guarantor, enforceable against the Company and each Guarantor in accordance with its terms except as (x) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (y) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability; (viii) this Agreement has been duly authorized, executed and delivered by the Company and the Guarantors; (ix) The Registration Rights Agreement has been duly authorized, executed and delivered by the Company and the Guarantors and is a valid and binding agreement of the Company and each Guarantor, enforceable against the Company and each Guarantor in accordance with its terms, except as (x) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (y) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability; (x) the New Senior Notes have been duly authorized; (xi) the statements under the captions "Description of Indebtedness" and "Description of Notes" in the Offering Memorandum, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, fairly present in all material respects such legal matters, documents and proceedings; (xii) the statements under the caption "Certain United States Federal Income Tax Considerations" in the Offering Memorandum insofar as they purport to describe the provisions of the federal income tax laws referred to therein, fairly summarize such laws in all material respects. (xiii) the execution, delivery and performance of this Agreement and the other Operative Documents by the Company and each of the Guarantors, the compliance by the Company and each of the Guarantors with all provisions hereof and thereof and the consummation of the transactions contemplated hereby and thereby will not (i) require any consent, approval, authorization or other order of, or qualification with, any court or -25- 27 governmental body or agency (except such as may be required under the securities or Blue Sky laws of the various states), (ii) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any of its subsidiaries or any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company and its subsidiaries, taken as a whole (as identified by the Company to such counsel in a certificate to be attached to the opinion) to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound (collectively, the "Reviewed Agreements"), (iii) violate or conflict with any applicable law, rule or regulation, or, to our knowledge, any judgment, order or decree of any court or any governmental body or agency having jurisdiction over the Company, any of its subsidiaries or their respective property or (iv) result in the imposition or creation of (or the obligation to create or impose) a Lien under any Reviewed Agreement. (xiv) after due inquiry, such counsel does not know of any legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is or could be a party or to which any of their respective property is or could be subject, which could reasonably be expected to result, singly or in the aggregate, in a Material Adverse Effect on the ability of the Company and the Guarantors to perform their respective obligations hereunder and under the Senior Notes and the other documents executed in connection herewith and therewith or to consummate the transactions contemplated hereby or thereby. (xv) the Company is not and, after giving effect to the offering and sale of the Senior Notes and the application of the net proceeds thereof as described in the Offering Memorandum, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; (xvi) the Indenture complies as to form in all material respects with the requirements of the TIA, and the rules and regulations of the Commission applicable to an indenture which is qualified thereunder. It is not necessary in connection with the offer, sale and delivery of the Senior Notes to the Initial Purchaser in the manner contemplated by this Agreement or in connection with the Exempt Resales to qualify the Indenture under the TIA. (xvii) no registration under the Act of the Senior Notes is required for the sale of the Senior Notes to the Initial Purchaser as contemplated by this Agreement or for the Exempt Resales assuming that (i) each Initial Purchaser is a QIB or a Regulation S Purchaser, (ii) the accuracy of, and -26- 28 compliance with, the Initial Purchaser's representations and agreements contained in Section 7 of this Agreement and (iii) the accuracy of the representations of the Company and the Guarantors set forth in Section 5(h), Sections 6(dd), (ee) and (ff) and Sections 7(h), (i) and (j) of this Agreement. (xviii) such counsel has no reason to believe that, as of the date of the Offering Memorandum or as of the Closing Date, the Offering Memorandum, as amended or supplemented, if applicable (except for the financial statements and other financial data included therein, as to which such counsel need not express any belief) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The opinion of Brobeck, Phleger & Harrison, LLP described in Section 9(e) above shall be rendered to you at the request of the Company and the Guarantors and shall so state therein. In giving such opinion with respect to the matters covered by Section 9(e)(xvii), such counsel for the Company may state that their opinion and belief are based upon their participation in the preparation of the Offering Memorandum and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. (f) The Initial Purchaser shall have received on the Closing Date an opinion, dated the Closing Date, of Wilson Sonsini Goodrich & Rosati, P.C., counsel for the Initial Purchaser, in form and substance reasonably satisfactory to the Initial Purchaser. (g) The Initial Purchaser shall have received, at the time this Agreement is executed and at the Closing Date, letters dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Initial Purchaser from Deloitte & Touche, independent public accountants, containing the information and statements of the type ordinarily included in accountants' "comfort letters" to the Initial Purchaser with respect to the financial statements and certain financial information contained in the Offering Memorandum. (h) The Senior Notes shall have been approved by the NASD for trading and duly listed in PORTAL. (i) The Initial Purchaser shall have received a counterpart, conformed as executed, of the Indenture which shall have been entered into by the Company, the Guarantors and the Trustee. (j) The Company and the Guarantors shall have executed the Registration Rights Agreement and the Initial Purchaser shall have received an original copy thereof, duly executed by the Company and the Guarantors. -27- 29 (k) The Company and Fleet National Bank and Imperial Bank shall have executed and delivered the Amended and Restated Credit Agreement as described in the Offering Memorandum, such agreement shall be in full force and effect, and no event of default shall have occurred or be continuing thereunder. (l) Neither the Company nor the Guarantors shall have failed at or prior to the Closing Date to perform or comply with any of the agreements herein contained and required to be performed or complied with by the Company or the Guarantors, as the case may be, at or prior to the Closing Date. 10. EFFECTIVENESS OF AGREEMENT AND TERMINATION. This Agreement shall become effective upon the execution and delivery of this Agreement by the parties hereto. This Agreement may be terminated at any time on or prior to the Closing Date by the Initial Purchaser by written notice to the Company if any of the following has occurred: (i) any outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic conditions or in the financial markets of the United States or elsewhere that, in the Initial Purchaser's judgment, is material and adverse and, in the Initial Purchaser's judgment, makes it impracticable to market the Senior Notes on the terms and in the manner contemplated in the Offering Memorandum, (ii) the suspension or material limitation of trading in securities or other instruments on the New York Stock Exchange, the American Stock Exchange, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade or the Nasdaq National Market or limitation on prices for securities or other instruments on any such exchange or the Nasdaq National Market, (iii) the suspension of trading of any securities of the Company or any Guarantor on any exchange or in the over-the-counter market, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects, or will materially and adversely affect, the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your opinion has a material adverse effect on the financial markets in the United States. 11. MISCELLANEOUS. Notices given pursuant to any provision of this Agreement shall be addressed as follows: (i) if to the Company or any Guarantor, to Phase Metrics, Inc., 10260 Sorrento Valley Road, San Diego, California, telephone (619) 646-4800, and (ii) if to the Initial Purchaser, Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, or in any case to such other address as the person to be notified may have requested in writing. The respective indemnities, contribution agreements, representations, warranties and other statements of the Company, the Guarantors and the Initial Purchaser set forth in or made -28- 30 pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Senior Notes, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of the Initial Purchaser, the officers or directors of the Initial Purchaser, any person controlling the Initial Purchaser, the Company, any Guarantor, the officers or directors of the Company or any Guarantor, or any person controlling the Company or any Guarantor, (ii) acceptance of the Senior Notes and payment for them hereunder and (iii) termination of this Agreement. If for any reason the Senior Notes are not delivered by or on behalf of the Company as provided herein (other than as a result of any termination of this Agreement pursuant to Section 10), the Company and each Guarantor, jointly and severally, agree to reimburse the Initial Purchaser for all out-of-pocket expenses (including the reasonable fees and disbursements of counsel) incurred by them. Notwithstanding any termination of this Agreement, the Company shall be liable for all expenses which it has agreed to pay pursuant to Section 5(i) hereof. The Company and each Guarantor also agree, jointly and severally, to reimburse the Initial Purchaser and its officers, directors and each person, if any, who controls such Initial Purchaser within the meaning of Section 15 of the Act or Section 20 of the Exchange Act for any and all fees and expenses (including without limitation the reasonable fees and expenses of counsel) incurred by them in connection with enforcing their rights under this Agreement (including without limitation its rights under Section 8). The Initial Purchaser agrees to reimburse the Company and the Guarantors and their respective officers, directors and each person, if any, who controls the Company or the Guarantors within the meaning of Section 15 of the Act or Section 20 of the Exchange Act for any and all fees and expenses (including without limitation the reasonable fees and expenses of counsel) incurred by them in connection with enforcing their rights under this Agreement (including without limitation their respective rights under Section 8). Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Guarantors, the Initial Purchaser, the Initial Purchaser's directors and officers, any controlling persons referred to herein, the directors of the Company and the Guarantors and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Senior Notes from the Initial Purchaser merely because of such purchase. This Agreement shall be governed and construed in accordance with the laws of the State of New York. This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. -29- 31 Please confirm that the foregoing correctly sets forth the agreement among the Company, the Guarantors and the Initial Purchaser. Very truly yours, PHASE METRICS, INC. By: /s/ R. J. Saunders ---------------------------------------- Name: R. J. Saunders Title: Vice President HELIOS, INCORPORATED By: /s/ R. J. Saunders ---------------------------------------- Name: R. J. Saunders Title: Vice President APPLIED ROBOTIC TECHNOLOGIES, INC. By: /s/ R. J. Saunders ---------------------------------------- Name: R. J. Saunders Title: Vice President AIR BEARINGS, INCORPORATED By: /s/ R. J. Saunders ---------------------------------------- Name: R. J. Saunders Title: Vice President SANTA BARBARA METRIC, INC. By: /s/ R. J. Saunders ---------------------------------------- Name: R. J. Saunders Title: Vice President 32 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: /s/ Steven D. Smith --------------------------------- Name: Steven D. Smith Title: Senior Vice President 33 SCHEDULE A GUARANTORS HELIOS, INCORPORATED APPLIED ROBOTIC TECHNOLOGIES, INC. AIR BEARINGS, INCORPORATED SANTA BARBARA METRIC, INC. S-1 34 SCHEDULE B SUBSIDIARIES HELIOS, INCORPORATED APPLIED ROBOTIC TECHNOLOGIES, INC. AIR BEARINGS, INCORPORATED SANTA BARBARA METRIC, INC. PHASE METRICS PACIFIC PTE., LTD. PHASE METRICS JAPAN CO., LTD. PHASE METRICS KOREA CO., LTD. PHASE METRICS PACIFIC PTE., LTD. S-2 35 EXHIBIT A FORM OF REGISTRATION RIGHTS AGREEMENT EX-4.2 3 INDENTURE DATED AS OF 01/30/1998 1 EXHIBIT 4.2 EXECUTION COPY ================================================================================ PHASE METRICS, INC. HELIOS, INCORPORATED APPLIED ROBOTIC TECHNOLOGIES, INC. AIR BEARINGS, INCORPORATED SANTA BARBARA METRIC, INC. --------------------------------------------------------- $110,000,000 10-3/4% SENIOR NOTES DUE 2005 ---------------------------------------------------------- ------------------------ INDENTURE DATED AS OF JANUARY 30, 1998 ----------------------- STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A. Trustee ================================================================================ 2 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 - DEFINITIONS AND INCORPORATION BY REFERENCE...........................................1 SECTION 1.1 DEFINITIONS................................................................1 SECTION 1.2 OTHER DEFINITIONS.........................................................17 SECTION 1.3 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT........................................................17 SECTION 1.4 RULES OF CONSTRUCTION.....................................................18 ARTICLE 2 - THE NOTE............................................................................18 SECTION 2.1 FORM AND DATING...........................................................18 SECTION 2.2 EXECUTION AND AUTHENTICATION..............................................20 SECTION 2.3 REGISTRAR AND PAYING AGENT................................................21 SECTION 2.4 PAYING AGENT TO HOLD MONEY IN TRUST.......................................21 SECTION 2.5 HOLDER LISTS..............................................................21 SECTION 2.6 TRANSFER AND EXCHANGE.....................................................22 SECTION 2.7 REPLACEMENT NOTES.........................................................35 SECTION 2.8 OUTSTANDING NOTES.........................................................35 SECTION 2.9 TREASURY NOTES............................................................36 SECTION 2.10 TEMPORARY NOTES...........................................................36 SECTION 2.11 CANCELLATION..............................................................36 SECTION 2.12 DEFAULTED INTEREST........................................................37 SECTION 2.13 RECORD DATE...............................................................37 SECTION 2.14 COMPUTATION OF INTEREST...................................................37 SECTION 2.15 CUSIP NUMBER..............................................................37 ARTICLE 3 - REDEMPTION AND PREPAYMENT...........................................................37 SECTION 3.1 NOTICES TO TRUSTEE........................................................37 SECTION 3.2 SELECTION OF NOTES TO BE REDEEMED OR PURCHASED............................38 SECTION 3.3 NOTICE OF REDEMPTION......................................................38 SECTION 3.4 EFFECT OF NOTICE OF REDEMPTION............................................39 SECTION 3.5 DEPOSIT OF REDEMPTION OR PURCHASE PRICE...................................39 SECTION 3.6 NOTES REDEEMED IN PART....................................................40 SECTION 3.7 OPTIONAL REDEMPTION.......................................................40 SECTION 3.8 MANDATORY REDEMPTION......................................................41 SECTION 3.9 REPURCHASE OFFERS.........................................................41 ARTICLE 4 - COVENANTS...........................................................................43
-i- 3 SECTION 4.1 PAYMENT OF NOTES..........................................................43 SECTION 4.2 MAINTENANCE OF OFFICE OR AGENCY...........................................43 SECTION 4.3 COMMISSION REPORTS........................................................44 SECTION 4.4 COMPLIANCE CERTIFICATE....................................................44 SECTION 4.5 TAXES.....................................................................45 SECTION 4.6 STAY, EXTENSION AND USURY LAWS............................................45 SECTION 4.7 RESTRICTED PAYMENTS.......................................................46 SECTION 4.8 DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES....................................48 SECTION 4.9 INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK......................................................49 SECTION 4.10 ASSET SALES...............................................................52 SECTION 4.11 TRANSACTIONS WITH AFFILIATES..............................................53 SECTION 4.12 LIENS.....................................................................54 SECTION 4.13 OFFER TO PURCHASE UPON CHANGE OF CONTROL..................................54 SECTION 4.14 CORPORATE EXISTENCE.......................................................55 SECTION 4.15 LIMITATION ON ISSUANCES OF CAPITAL STOCK OF WHOLLY-OWNED RESTRICTED SUBSIDIARIES.................................55 SECTION 4.16 LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS.........................................................55 SECTION 4.17 BUSINESS ACTIVITIES.......................................................56 SECTION 4.18 ADDITIONAL GUARANTEES.....................................................56 SECTION 4.19 PAYMENT FOR CONSENTS......................................................56 ARTICLE 5 - SUCCESSORS..........................................................................57 SECTION 5.1 MERGER, CONSOLIDATION OF SALE OF ASSETS...................................57 SECTION 5.2 SUCCESSOR CORPORATION SUBSTITUTED.........................................57 ARTICLE 6 - DEFAULTS AND REMEDIES...............................................................58 SECTION 6.1 EVENTS OF DEFAULT.........................................................58 SECTION 6.2 ACCELERATION..............................................................59 SECTION 6.3 OTHER REMEDIES............................................................60 SECTION 6.4 WAIVER OF PAST DEFAULTS...................................................60 SECTION 6.5 CONTROL BY MAJORITY.......................................................61 SECTION 6.6 LIMITATION ON SUITS.......................................................61 SECTION 6.7 RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT.............................61 SECTION 6.8 COLLECTION SUIT BY TRUSTEE................................................62 SECTION 6.9 TRUSTEE MAY FILE PROOFS OF CLAIM..........................................62 SECTION 6.10 PRIORITIES................................................................63
-ii- 4 SECTION 6.11 UNDERTAKING FOR COSTS.....................................................63 ARTICLE 7 - TRUSTEE.............................................................................63 SECTION 7.1 DUTIES OF TRUSTEE.........................................................63 SECTION 7.2 RIGHTS OF TRUSTEE.........................................................64 SECTION 7.3 INDIVIDUAL RIGHTS OF TRUSTEE..............................................65 SECTION 7.4 TRUSTEE'S DISCLAIMER......................................................65 SECTION 7.5 NOTICE OF DEFAULTS........................................................66 SECTION 7.6 REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES................................66 SECTION 7.7 COMPENSATION AND INDEMNITY................................................66 SECTION 7.8 REPLACEMENT OF TRUSTEE....................................................67 SECTION 7.9 SUCCESSOR TRUSTEE BY MERGER, ETC..........................................68 SECTION 7.10 ELIGIBILITY; DISQUALIFICATION.............................................68 SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE COMPANY..........................................................69 ARTICLE 8 - LEGAL DEFEASANCE AND COVENANT DEFEASANCE............................................69 SECTION 8.1 OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE..................................................69 SECTION 8.2 LEGAL DEFEASANCE AND DISCHARGE............................................69 SECTION 8.3 COVENANT DEFEASANCE.......................................................70 SECTION 8.4 CONDITIONS TO LEGAL OR COVENANT DEFEASANCE................................70 SECTION 8.5 DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS.......................71 SECTION 8.6 REPAYMENT TO THE COMPANY..................................................72 SECTION 8.7 REINSTATEMENT.............................................................72 ARTICLE 9 - AMENDMENT, SUPPLEMENT AND WAIVER....................................................73 SECTION 9.1 WITHOUT CONSENT OF HOLDERS OF THE NOTES...................................73 SECTION 9.2 WITH CONSENT OF HOLDERS OF NOTES..........................................73 SECTION 9.3 COMPLIANCE WITH TRUST INDENTURE ACT.......................................75 SECTION 9.4 REVOCATION AND EFFECT OF CONSENTS.........................................75 SECTION 9.5 NOTATION ON OR EXCHANGE OF NOTES..........................................75 SECTION 9.6 TRUSTEE TO SIGN AMENDMENTS, ETC...........................................75 ARTICLE 10 - GUARANTEE OF NOTES.................................................................76 SECTION 10.1 NOTE GUARANTEE............................................................76 SECTION 10.2 EXECUTION AND DELIVERY OF NOTE GUARANTEE..................................77
-iii- 5 SECTION 10.3 SUBSIDIARY GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN TERMS.....................................................77 SECTION 10.4 RELEASES FOLLOWING SALE OF ASSETS, MERGER, SALE OF CAPITAL STOCK ETC.................................................78 SECTION 10.5 ADDITIONAL SUBSIDIARY GUARANTORS..........................................79 SECTION 10.6 LIMITATION ON SUBSIDIARY GUARANTOR LIABILITY..............................79 SECTION 10.7 "TRUSTEE" TO INCLUDE PAYING AGENT.........................................79 ARTICLE 11 - MISCELLANEOUS......................................................................80 SECTION 11.1 TRUST INDENTURE ACT CONTROLS..............................................80 SECTION 11.2 NOTICES...................................................................80 SECTION 11.3 COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OFNOTES................................................81 SECTION 11.4 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT............................................................81 SECTION 11.5 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.............................82 SECTION 11.6 RULES BY TRUSTEE AND AGENTS...............................................82 SECTION 11.7 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS...........................................82 SECTION 11.8 GOVERNING LAW.............................................................82 SECTION 11.9 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.............................83 SECTION 11.10 SUCCESSORS................................................................83 SECTION 11.11 SEVERABILITY..............................................................83 SECTION 11.12 COUNTERPART ORIGINALS.....................................................83 SECTION 11.13 TABLE OF CONTENTS, HEADINGS, ETC..........................................83
-iv- 6 TABLE OF CONTENTS (CONTINUED) PAGE ----
-v- 7 TABLE OF CONTENTS (CONTINUED) PAGE ---- EXHIBITS: Exhibit A FORMS OF NOTES Exhibit B FORM OF CERTIFICATE OF TRANSFEROR Exhibit C FORM OF CERTIFICATE OF EXCHANGE Exhibit D FORM OF CERTIFICATE FROM ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR Exhibit E FORM OF NOTE GUARANTEE Exhibit F FORM OF SUPPLEMENTAL INDENTURE
-vi- 8 Indenture, dated as of January 30, 1998, among PHASE METRICS, INC. (the "Company"), HELIOS, INCORPORATED, APPLIED ROBOTIC TECHNOLOGIES, INC., AIR BEARINGS, INCORPORATED and SANTA BARBARA METRIC, INC. (each, a "Subsidiary Guarantor" and together with any other Subsidiary of the Company that executes a Note Guarantee substantially in the form of EXHIBIT E attached hereto, the "Subsidiary Guarantors") and State Street Bank and Trust Company of California, N.A., as trustee (the "Trustee"). The Company, the Subsidiary Guarantors and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the holders of the Company's 10-3/4% Senior Notes due 2005 (the "Senior Notes") and the new 10 -3/4 % Senior Notes due 2005 (the "New Senior Notes") issuable upon the exchange of the Senior Notes: ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.1 DEFINITIONS. "Acquired Debt" means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. "Agent" means any Registrar, Paying Agent or co-registrar. "Applicable Procedures" means, with respect to any transfer or exchange of beneficial interests in a Global Note, the rules and procedures of the Depositary that apply to such transfer and exchange. "Asset Sale" means (i) the sale, lease, conveyance or other disposition of any assets or rights 9 (including, without limitation, by way of a sale and leaseback) other than sales of inventory in the ordinary course of business consistent with past practices (provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole will be governed by the provisions of the Section 4.14 and/or Article 5 and not by the provisions of Section 4.10), and (ii) the issue or sale by the Company or any of its Restricted Subsidiaries of Equity Interests of any of the Company's Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $1.0 million or (b) for net proceeds in excess of $1.0 million. Notwithstanding the foregoing: (i) a transfer of assets by the Company to a Wholly Owned Restricted Subsidiary or by a Wholly Owned Restricted Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned Restricted Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary, (iii) a sale and leaseback of the real estate (and personal property associated with such real estate) owned by the Company in San Diego, California on which the Company's headquarters is located on the date of the Indenture, and (iv) a Restricted Payment that is permitted by Section 4.7 will not be deemed to be Asset Sales. "Attributable Debt" in respect of a sale and leaseback transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remaining term of the lease included in such sale and leaseback transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "Bankruptcy Law" means Title 11, U.S. Code or any similar federal or state law for the relief of debtors. "Board of Directors" means the board of directors of the Company or any authorized committee of such board of directors. "Broker-Dealer" has the meaning set forth in the Registration Rights Agreement. "Business Day" means any day other than a Legal Holiday. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. -2- 10 "Cash Equivalents" means (i) United States dollars, (ii) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of not more than one year from the date of acquisition, (iii) certificates of deposit and eurodollar time deposits with maturities of one year or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any lender party to the New Credit Facility or with any domestic commercial bank having capital and surplus in excess of $500 million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (ii) and (iii) above entered into with any financial institution meeting the qualifications specified in clause (iii) above, and (v) commercial paper having the highest rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's Rating Services and in each case maturing within 270 days after the date of acquisition. "Cedel" means Cedel Bank, societe anonyme. "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act) other than the Principals or their Related Parties (as defined below), (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above), other than the Principals and their Related Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition), directly or indirectly, of more than 50% of the Voting Stock of the Company (measured by voting power rather than number of shares), (iv) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors or (v) the Company consolidates with, or merges with or into, any Person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person consolidates with, or merges with or into, the Company, in any such event pursuant to a transaction in which any of the outstanding Voting Stock of the Company is converted into or exchanged for cash, securities or other property, other than any such transaction where the Voting Stock of the Company outstanding immediately prior to such transaction is converted into or exchanged for Voting Stock (other than Disqualified Stock) of the surviving or transferee Person constituting a majority of the outstanding shares of such Voting Stock of such surviving or transferee Person (immediately after giving effect to such issuance). "Commission" means the Securities and Exchange Commission. "Company" means Phase Metrics, Inc., a Delaware corporation. -3- 11 "Consolidated Cash Flow" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period plus, to the extent deducted in computing Consolidated Net Income, (i) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period, (ii) Fixed Charges of such Person for such period, (iii) depreciation and amortization (including amortization of goodwill and other intangibles) and all other non-cash charges (excluding any such non-cash charge to the extent that it represents (A) an accrual of or reserve for cash charges in any future period, or (B) amortization of a prepaid cash expense that was paid in a prior period), (iv) any gain realized in connection with any Asset Sale and any extraordinary or non-recurring gain, in each case, on a consolidated basis determined in accordance with GAAP; and (v) the amount of any non-cash compensation expense incurred in connection with issuances of securities under stock option, stock purchase and other equity-based incentive plans. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, the Fixed Charges of, and the depreciation and amortization and other non-cash charges of a Restricted Subsidiary of, a Person shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent (and in same proportion) that the Net Income of such Restricted Subsidiary was included in calculating the Consolidated Net Income of such Person. "Consolidated Interest Expense" means, with respect to any Person for any period, the sum of: (i) the interest expense of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP (including amortization of original issue discount, non-cash interest payments, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations; provided, however, that in no event shall any amortization of deferred financing costs be included in Consolidated Interest Expense) and (ii) consolidated interest expense of such Person and its Restricted Subsidiaries that was capitalized during such period, whether paid or accrued. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (i) the Net Income (but not loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Wholly Owned Restricted Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iv) the cumulative effect of a change in accounting principles shall be excluded, and (v) the Net Income of any Unrestricted Subsidiary -4- 12 shall be excluded, whether or not distributed to the referent Person or one of its Restricted Subsidiaries for purposes of Section 4.9 hereof and shall be included for purposes of Section 4.7 hereof only to the extent of the amount of dividends or distributions paid in cash to the referent Person or one of its Restricted Subsidiaries. "Consolidated Net Worth" means, with respect to any Person as of any date, the sum of (i) the consolidated equity of the common stockholders of such Person and its consolidated Subsidiaries as of such date plus (ii) the respective amounts reported on such Person's balance sheet as of such date with respect to any series of preferred stock (other than Disqualified Stock) that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such preferred stock, less (x) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of tangible assets of a going concern business made within 12 months after the acquisition of such business) subsequent to the date hereof in the book value of any asset owned by such Person or a consolidated Subsidiary of such Person, (y) all investments as of such date in unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except, in each case, Permitted Investments), and (z) all unamortized debt discount and expense and unamortized deferred charges as of such date, all of the foregoing determined in accordance with GAAP. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on the date hereof, or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Corporate Trust Office of the Trustee" shall be at the address of the Trustee specified in Section 11.2 hereof or such other address as to which the Trustee may give notice to the Company. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Definitive Notes" means either the Restricted Definitive Notes or the Unrestricted Definitive Notes. "Depositary" means, with respect to the Notes issuable or issued in whole or in part in global form, the Person specified in Section 2.3 hereof as the Depositary with respect to the Notes, until a successor shall have been appointed and become such pursuant to Section 2.6 of this Indenture, and, thereafter, "Depositary" shall mean or include such successor. "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any -5- 13 event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the Holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the Notes mature; provided, however, that any Capital Stock that would not qualify as Disqualified Stock but for change of control provisions shall not constitute Disqualified Stock if the provisions are not more favorable to the holders of such Capital Stock than the provisions described under Section 4.13 hereof. "DLJ" means Donaldson, Lufkin & Jenrette Securities Corporation. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Euroclear" means Morgan Guaranty Trust Company of New York, the Brussels office, as operator of the Euroclear system. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Offer" means the offer by the Company to Holders to exchange Senior Notes for New Senior Notes. "Exchange Offer Registration Statement" has the meaning set forth in the Registration Rights Agreement. "Existing Indebtedness" means Indebtedness of the Company and its Subsidiaries (other than Indebtedness under the New Credit Facility) in existence on the date hereof, until such amounts are repaid. "Fixed Charges" means, with respect to any Person for any period, the sum, without duplication, of (i) the Consolidated Interest Expense of such Person for such period and (ii) any interest expense on Indebtedness of another Person that is guaranteed by the referent Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries (whether or not such guarantee or Lien is called upon) and (iii) the product of (A) all cash dividend payments of the Company and any Subsidiary Guarantor on any series of preferred stock of the Company or such Guarantor times (B) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. "Fixed Charge Coverage Ratio" means with respect to any Person for any period, the ratio of the Consolidated Cash Flow of such Person and its Restricted Subsidiaries for such period to the Fixed Charges of such Person and its Restricted Subsidiaries for such period. In the event that the Company or any of its Restricted Subsidiaries incurs, assumes, guarantees, redeems or repays any -6- 14 Indebtedness (other than revolving credit borrowings) or issues or redeems preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, guarantee, redemption or repayment of Indebtedness, or such issuance or redemption of preferred stock, as if the same had occurred at the beginning of the applicable four-quarter reference period. In addition, for purposes of making the computation referred to above, (i) acquisitions that have been made by the Company or any of its Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter period or subsequent to such reference period and on or prior to the Calculation Date shall be deemed to have occurred on the first day of the four-quarter reference period and Consolidated Cash Flow for such reference period shall be calculated without giving effect to clause (iii) of the proviso set forth in the definition of Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, or operations or businesses disposed of prior to the Calculation Date, shall be excluded, but only to the extent that the obligations giving rise to such Fixed Charges will not be obligations of the referent Person or any of its Subsidiaries following the Calculation Date. "Foreign Subsidiary" means a Subsidiary that is formed under the laws of the United States of America or of a state or territory thereof, but shall exclude any Subsidiary which is treated as a partnership or branch for United States federal income tax purposes. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the date hereof. "Global Notes" means the U.S. Global Notes, the Regulation S Temporary Global Notes, the Regulation S Permanent Global Notes and the Unrestricted Global Notes. "Government Securities" means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States is pledged. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. -7- 15 "Hedging Obligations" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency rates. "Holder" means a Person in whose name a Note is registered. "Indebtedness" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or banker's acceptances or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person. The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof, in the case of any Indebtedness that does not require current payments of interest, and (ii) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. "Indenture" means this Indenture, as amended or supplemented from time to time. "Indirect Participant" means a Person who holds an interest through a Participant. "Initial Purchaser" means Donaldson, Lufkin & Jenrette Securities Corporation. "Insolvency or Liquidation Proceedings" means (i) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding, relative to the Company or to the creditors of the Company, as such, or to the assets of the Company, or (ii) any liquidation, dissolution, reorganization or winding up of the Company, whether voluntary or involuntary and involving insolvency or bankruptcy, or (iii) any assignment for the benefit of creditors or any other marshaling of assets and liabilities of the Company. "Institutional Accredited Investor" means an institutional "accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together -8- 16 with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Restricted Subsidiary of the Company, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Restricted Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of the covenant described under Section 4.7 hereof. "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the City of New York, the city in which the Corporate Trust Office of the Trustee is located or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment shall be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Liquidated Damages" means all liquidated damages then owing pursuant to Section 5 of the Registration Rights Agreement. "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss). "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. -9- 17 "New Credit Facility" means that certain Credit Facility, dated as of January 30, 1998, by and among the Company, certain financial institutions and Fleet National Bank, as agent, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, modified, renewed, refunded, replaced or refinanced from time to time. "New Senior Notes" means the Company's 10 -3/4 % Senior Notes due 2005, which will be issued in exchange for the Company's Senior Notes. "Non-Recourse Debt" means Indebtedness (i) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor or otherwise), or (c) constitutes the lender; (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness (other than the Notes) of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (iii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries. "Note Custodian" means the Trustee, when serving as custodian for the Depositary with respect to the Notes in global form, or any successor entity thereto. "Notes" means the Senior Notes or the New Senior Notes, as applicable. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Offering" means the offer and sale of the Senior Notes as contemplated by the Offering Memorandum. "Offering Memorandum" means the Offering Memorandum, dated January 23, 1998, relating to the Company's offering and placement of the Senior Notes. "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Vice-President of such Person. "Officers' Certificate" means a certificate signed on behalf of the Company by two Officers of the Company, one of whom must be the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of the Company, that meets the requirements of Section 11.5 hereof. -10- 18 "Opinion of Counsel" means an opinion from legal counsel who is reasonably acceptable to the Trustee, that meets the requirements of Section 11.5 hereof. The counsel may be an employee of or counsel to the Company, any Subsidiary of the Company or the Trustee. "Pari Passu Indebtedness" means Indebtedness of the Company that ranks pari passu in right of payment to the Notes. "Participant" means, with respect to DTC, Euroclear or Cedel, a Person who has an account with DTC, Euroclear or Cedel, respectively (and, with respect to DTC, shall include Euroclear and Cedel). "Permitted Business" means any of the businesses and any other businesses related to the businesses engaged in by the Company and its respective Restricted Subsidiaries on the date hereof. "Permitted Investments" means (a) any Investment in the Company or in a Subsidiary Guarantor and Investments in Wholly-Owned Restricted Subsidiaries which are not Subsidiary Guarantors permitted under clauses (vii) or (ix) of Section 4.9; (ii) any Investment in Cash Equivalents; (iii) any Investment by the Company or any Restricted Subsidiary of the Company in a Person, if as a result of such Investment (a) such Person becomes a Guarantor or (b) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Guarantor; (iv) any Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with Section 4.10; (v) any acquisition of assets solely in exchange for the issuance of Equity Interests (other than Disqualified Stock) of the Company; and (vi) other Investments made after the date hereof in any Person having an aggregate fair market value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (vi) that are at the time outstanding, not in excess of $5.0 million. "Permitted Liens" means (i) Liens securing Indebtedness under the New Credit Facility that was permitted by the terms of this Indenture to be incurred or other Indebtedness allowed to be incurred under clause (i) of Section 4.9 hereof; (ii) Liens in favor of the Company; (iii) Liens on property of a Person existing at the time such Person is merged into or consolidated with the Company or any Restricted Subsidiary of the Company; provided that such Liens were in existence prior to the contemplation of such merger or consolidation and do not extend to any assets other than those of the Person merged into or consolidated with the Company; (iv) Liens on property existing at the time of acquisition thereof by the Company or any Restricted Subsidiary of the Company, provided that such Liens were in existence prior to the contemplation of such acquisition; (v) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (vi) Liens existing on the date hereof; (vii) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded, provided that any reserve or other appropriate provision as shall be -11- 19 required in conformity with GAAP shall have been made therefor; (viii) Liens incurred in the ordinary course of business of the Company or any Restricted Subsidiary of the Company with respect to obligations that do not exceed $5.0 million at any one time outstanding and that (a) are not incurred in connection with the borrowing of money or the obtaining of advances or credit (other than trade credit in the ordinary course of business) and (b) do not in the aggregate materially detract from the value of the property or materially impair the use thereof in the operation of business by the Company or such Restricted Subsidiary and (ix) Liens to secure Indebtedness (including Capital Lease Obligations) permitted by clause (iv) of Section 4.9 covering only the assets acquired with such Indebtedness, together with any additions and accessions thereto and replacements, substitutions and proceeds (including insurance proceed(s) thereof); (x) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's, or other like Liens arising in the ordinary course of business in respect of obligations not overdue for a period in excess of 30 days or which are being contested in good faith by appropriate proceedings promptly instituted and diligently prosecuted; provided, that any reserve or other appropriate provisions as shall be required to conform with GAAP shall have been made therefor; (xi) easements, rights-of-way, zoning and similar restrictions and other similar encumbrances or title defects incurred, or leases or subleases granted to others, in the ordinary course of business, which do not in any case materially detract from the value of the property subject thereto or do not interfere with or adversely affect in any material respect the ordinary conduct of the business of the Company and its Restricted Subsidiaries taken as a whole; (xii) Liens (other than any Lien imposed by ERISA or any rule or regulation promulgated thereunder) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance, and other types of social security; (xiii) Liens in favor of a trustee under any indenture securing amounts due to the trustee in connection with its services under such indenture; (xiv) Liens under licensing agreements for use of intellectual property entered into in the ordinary course of business; and (xv) Liens on inventory or cash to secure cash advances made by customers for the purchase price of inventory. "Permitted Refinancing Indebtedness" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries; provided that: (i) except for Indebtedness used to extend, refinance, renew, replace, defease or refund the New Credit Facility, the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount of (or accreted value, if applicable), plus accrued interest on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith and the amount of any market-based premium paid in connection herewith); (ii) such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Notes on terms at least as favorable to the Holders of Notes as those contained in the -12- 20 documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Principals" means DLJ Merchant Banking, Inc. and its Affiliates, the Sprout Group and its Affiliates, John F. Schaefer and Arthur J. Cormier. "Private Placement Legend" means the legend initially set forth on the Senior Notes in the form set forth in Section 2.6 (f) hereof. "Public Equity Offering" means a public offering of Equity Interests (other than Disqualified Stock) of the Company; that results in the net proceeds to the Company of at least $25.0 million. "QIB" means a "qualified institutional buyer" as defined in Rule 144A under the Securities Act. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of the date hereof, by and among the Company, the Subsidiary Guarantors and the Initial Purchaser. "Regulation S" means Regulation S promulgated under the Securities Act. "Regulation S Global Notes" means the Regulation S Temporary Global Notes or the Regulation S Permanent Global Notes, as applicable. "Regulation S Permanent Global Notes" means the permanent global notes that do not contain the paragraphs referred to in footnote 1 to the form of the Note attached hereto as EXHIBIT A-2, and that are deposited with and registered in the name of the Depositary or its nominee, representing a series of Notes sold in reliance on Regulation S. "Regulation S Temporary Global Notes" means the temporary global notes that contain the paragraphs referred to in footnote 1 to the form of the Note attached hereto as EXHIBIT A-2, and that are deposited with and registered in the name of the Depositary or its nominee, representing a series of Notes sold in reliance on Regulation S. "Related Party" with respect to any Principal means (i) any controlling stockholder or partner, 80% (or more) owned Subsidiary, or spouse or immediate family member (in the case of an individual) of such Principal or (ii) any trust, corporation, partnership, limited liability company or other entity, the beneficiaries, stockholders, partners, members, owners or Persons beneficially -13- 21 holding an 80% or more controlling interest of which consist of such Principal and/or such other Persons referred to in the immediately preceding clause (i). "Responsible Officer" when used with respect to the Trustee, means any officer in the Corporate Trust Office of the Trustee or any other officer of the Trustee to whom a particular corporate trust matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Definitive Note" means a Note in the form of the Note attached hereto as EXHIBIT A-1 that includes the information called for in footnote 2 thereof. "Restricted Global Notes" means the U.S. Global Notes and the Regulation S Global Notes, all of which shall bear the Private Placement Legend. "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "Rule 144A" means Rule 144A promulgated under the Securities Act. "Securities Act" means the Securities Act of 1933, as amended. "Securityholders Agreement" means the Securityholders Agreement, dated as of November 23, 1994, among the Company, John F. Schaefer, Arthur J. Cormier, DLJ Merchant Banking Partners, L.P., DLJ International Partners, C.V., DLJ Offshore Partners, C.V., DLJ Merchant Banking Funding, Inc., DLJ Capital Corporation, Sprout Growth II, L.P. and Sprout Capital VI, L.P. "Senior Notes" means the Company's 10 -3/4 % Senior Notes due 2005. "Shelf Registration Statement" means the Shelf Registration Statement as defined in the Registration Rights Agreement. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date hereof. "Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. -14- 22 "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "Subsidiary Guarantors" means each of (i) Helios, Incorporated, Applied Robotic Technologies, Inc., Air Bearings, Incorporated and Santa Barbara Metric, Inc. and (ii) any other Subsidiary that executes a Note Guarantee substantially in the form of EXHIBIT E attached hereto, and their respective successors and assigns. "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code Section 77aaa-77bbbb), as amended, as in effect on the date hereof. "Transfer Restricted Securities" means Senior Notes or beneficial interests therein that bear or are required to bear the Private Placement Legend. "Trustee" means State Street Bank and Trust Company of California, N.A. until a successor replaces it in accordance with the applicable provisions of this Indenture, and thereafter means the successor. "Unrestricted Global Notes" means one or more Global Notes that do not and are not required to bear the Private Placement Legend. "Unrestricted Definitive Note" means a Note in the form of the Note attached hereto as EXHIBIT A-1 that does not include the information called for in footnotes 1, 2 and 3 thereof. "Unrestricted Subsidiary" means (i) any Subsidiary that is designated by a resolution of the Board of Directors of the Company as an Unrestricted Subsidiary; but only to the extent that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (c) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) has at least one director on its board of directors that is not a director or executive officer of the Company or any of its Restricted Subsidiaries and has at least one -15- 23 executive officer that is not a director or executive officer of the Company or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted by Section 4.7 hereof. If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of this Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under Section 4.9 hereof, the Company shall be in default of such covenant). The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (i) such Indebtedness is permitted under Section 4.9 hereof, and (ii) no Default or Event of Default would be in existence following such designation. "U.S. Global Notes" means the permanent global notes that contain the paragraphs referred to in footnotes 1 and 2 and the additional schedule referred to in footnote 3 to the form of the Note attached hereto as EXHIBIT A-1, and that is deposited with and registered in the name of the Depositary or its nominee, representing a series of Notes sold in reliance on Rule 144A. "U.S. Person" means (i) any individual resident in the United States, (ii) any partnership or corporation organized or incorporated under the laws of the United States, (iii) any estate of which an executor or administrator is a U.S. Person (other than an estate governed by foreign law and of which at least one executor or administrator is a non-U.S. Person who has sole or shared investment discretion with respect to its assets), (iv) any trust of which any trustee is a U.S. Person (other than a trust of which at least one trustee is a non-U.S. Person who has sole or shared investment discretion with respect to its assets and no beneficiary of the trust (and no settler, if the trust is revocable) is a U.S. Person), (v) any agency or branch of a foreign entity located in the United States, (vi) any non-discretionary or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. Person, (vii) any discretionary or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated or (if an individual) resident in the United States (other than such an account held for the benefit or account of a non-U.S. Person), (viii) any partnership or corporation organized or incorporated under the laws of a foreign jurisdiction and formed by a U.S. person principally for the purpose of investing in securities not registered under the Securities Act (unless it is organized or incorporated and owned, by "accredited investors" within the meaning of Rule 501(a) under the Securities Act who are not natural persons, estates or trusts); provided, however that the term "U.S. Person" shall not include (A) a branch or agency of a U.S. Person that is located and operating outside the United States for valid business purposes as a locally regulated branch or agency engaged in the banking or insurance business, (B) any employee benefit plan established and administered in accordance with the law, customary practices and documentation of a foreign country and (C) the international organizations set forth in -16- 24 Section 902(o)(7) of Regulation S under the Securities Act and any other similar international organizations, and their agencies, affiliates and pension plans. "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "Wholly-Owned Restricted Subsidiary" means a Subsidiary that is both a Wholly-Owned Subsidiary and a Restricted Subsidiary. "Wholly-Owned Subsidiary" of any Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly-Owned Subsidiaries of such Person. SECTION 1.2 OTHER DEFINITIONS. Defined in Term Section "Affiliate Transaction"...............................................4.11 "Asset Sale Offer"....................................................4.10 "Change of Control Offer".............................................4.13 "Change of Control Payment"...........................................4.13 "Change of Control Payment Date"......................................4.13 "Covenant Defeasance".................................................8.03 "Custodian"...........................................................6.01 "DTC".................................................................2.03 "Event of Default"....................................................6.01 "Excess Proceeds".....................................................4.10 "Excess Proceeds Offer Triggering Event"..............................4.10 "incur"...............................................................4.09 "Legal Defeasance"....................................................8.02 "Offer Amount"........................................................3.09 "Offer Period"........................................................3.09 "Paying Agent"........................................................2.03 "Payment Default".....................................................6.01 "Permitted Debt"......................................................4.09 "Purchase Date".......................................................3.09
-17- 25 "Registrar"...........................................................2.03 "Repurchase Offer"....................................................3.09 "Restricted Payments".................................................4.07
SECTION 1.3 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in, and made a part of, this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Notes; "indenture security holder" means a Holder of a Note; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; "obligor" on the Notes means the Company, each Subsidiary Guarantor and any successor obligor upon the Notes. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by the Commission rule under the TIA have the meanings so assigned to them therein. SECTION 1.4 RULES OF CONSTRUCTION. Unless the context otherwise requires: (1) a term has the meaning assigned to it herein; (2) an accounting term not otherwise defined herein has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) references to sections of or rules under the Securities Act shall be deemed to include substitute, replacement or successor sections or rules adopted by the Commission from time to time. -18- 26 ARTICLE 2 THE NOTES SECTION 2.1 FORM AND DATING. The Notes and the Trustee's certificate of authentication shall be substantially in the form of EXHIBIT A-1 or EXHIBIT A-2 attached hereto. The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Note shall be dated the date of its authentication. The Notes initially shall be issued in denominations of $1,000 and integral multiples thereof. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Indenture and the Company, the Subsidiary Guarantors and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. (a) Global Notes. Notes offered and sold to QIBs in reliance on Rule 144A shall be issued initially in the form of U.S. Global Notes, which shall be deposited on behalf of the purchasers of the Notes represented thereby with the Trustee, as custodian of the Depositary, and registered in the name of the Depositary or a nominee of the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the U.S. Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee as hereinafter provided. Notes offered and sold in reliance on Regulation S shall be issued initially in the form of the Regulation S Temporary Global Note, which shall be deposited on behalf of the purchasers of the Notes represented thereby with the Trustee, as custodian for the Depositary, and registered in the name of the Depositary or the nominee of the Depositary for the accounts of designated agents holding on behalf of Euroclear or Cedel, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The "40-day restricted period" (as defined in Regulation S) shall be terminated upon the receipt by the Trustee of (i) a written certificate from the Depositary, together with copies of certificates from Euroclear and Cedel certifying that they have received certification of non-United States beneficial ownership of 100% of the aggregate principal amount of the Regulation S Temporary Global Notes (except to the extent of any beneficial owners thereof who acquired an interest therein pursuant to another exemption from registration under the Securities Act and who will take delivery of a beneficial ownership interest in a U.S. Global Note, all as contemplated by Section 2.6(a)(ii) hereof), and (ii) an Officers' Certificate from the Company certifying as to the same matters covered in clause (i) above. Following the termination of the 40-day restricted period, beneficial interests in the Regulation S Temporary Global Note shall be exchanged for beneficial interests in Regulation S Permanent Global Notes pursuant to the -19- 27 Applicable Procedures. Simultaneously with the authentication of Regulation S Permanent Global Notes, the Trustee shall cancel the Regulation S Temporary Global Note. The aggregate principal amount of the Regulation S Temporary Global Notes and the Regulation S Permanent Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee, as the case may be, in connection with transfers of interest as hereinafter provided. Each Global Note shall represent such of the outstanding Notes as shall be specified therein and each shall provide that it shall represent the aggregate amount of outstanding Notes from time to time endorsed thereon and that the aggregate amount of outstanding Notes represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges, redemptions and transfers of interests. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the amount of outstanding Notes represented thereby shall be made by the Trustee or the Note Custodian, at the direction of the Trustee, in accordance with instructions given by the Holder thereof as required by Section 2.6 hereof. The provisions of the "Operating Procedures of the Euroclear System" and "Terms and Conditions Governing Use of Euroclear" and the "General Terms and Conditions of Cedel" and "Customer Handbook" of Cedel shall be applicable to interests in the Regulation S Temporary Global Notes and the Regulation S Permanent Global Notes that are held by Participants through Euroclear or Cedel. The Trustee shall have no obligation to notify Holders of any such procedures or to monitor or enforce compliance with the same. Except as set forth in Section 2.6 hereof, the Global Notes may be transferred, in whole and not in part, only to another nominee of the Depositary or to a successor of the Depositary or its nominee. (b) Book-Entry Provisions. This Section 2.1(b) shall apply only to Global Notes deposited with or on behalf of the Depositary. The Company shall execute and the Trustee shall, in accordance with this Section 2.1(b), authenticate and deliver the Global Notes that (i) shall be registered in the name of the Depositary or the nominee of the Depositary and (ii) shall be delivered by the Trustee to the Depositary or pursuant to the Depositary's instructions or held by the Trustee as custodian for the Depositary. Participants shall have no rights either under this Indenture with respect to any Global Note held on their behalf by the Depositary or by the Note Custodian as custodian for the Depositary or under such Global Note, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its -20- 28 Participants, the operation of customary practices of such Depositary governing the exercise of the rights of an owner of a beneficial interest in any Global Note. SECTION 2.2 EXECUTION AND AUTHENTICATION. An Officer shall sign the Notes for the Company by manual or facsimile signature. If an Officer whose signature is on a Note no longer holds that office at the time a Note is authenticated, the Note shall nevertheless be valid. A Note shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Note has been authenticated under this Indenture. The form of Trustee's certificate of authentication to be borne by the Notes shall be substantially as set forth in EXHIBIT A-1 or EXHIBIT A-2 attached hereto. The Trustee shall, upon a written order of the Company signed by an Officer directing the Trustee to authenticate the Notes, authenticate Notes for original issue up to the aggregate principal amount stated in paragraph 4 of the Notes. The Trustee shall, upon written order of the Company signed by an Officer, authenticate New Senior Notes for original issuance in exchange for a like principal amount of Senior Notes exchanged in the Exchange Offer or otherwise exchanged for New Senior Notes pursuant to the terms of the Registration Rights Agreement. The aggregate principal amount of Notes outstanding at any time may not exceed such amount except as provided in Section 2.7 hereof. The Trustee may (at the Company's expense) appoint an authenticating agent acceptable to the Company to authenticate Notes. An authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate of the Company. SECTION 2.3 REGISTRAR AND PAYING AGENT. The Company shall maintain (i) an office or agency where Notes may be presented for registration of transfer or for exchange ("Registrar") and (ii) an office or agency where Notes may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Notes and of their transfer and exchange. The Company may appoint one or more additional paying agents. The term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company shall notify the Trustee in writing of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company or any of its Subsidiaries may act as Paying Agent or Registrar. -21- 29 The Company initially appoints The Depository Trust Company ("DTC") to act as Depositary with respect to the Global Notes. The Company initially appoints the Trustee to act as the Registrar and Paying Agent and to act as Note Custodian with respect to the Global Notes. The Company initially appoints the Trustee to act as the Registrar and Paying Agent with respect to the Definitive Notes. SECTION 2.4 PAYING AGENT TO HOLD MONEY IN TRUST. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent shall hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal, premium or Liquidated Damages, if any, or interest on the Notes, and shall notify the Trustee of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company or a Subsidiary) shall have no further liability for the money. If the Company or a Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. Upon the occurrence of events specified in Section 6.1(vii) through (ix) hereof, the Trustee shall serve as Paying Agent for the Notes. SECTION 2.5 HOLDER LISTS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders and shall otherwise comply with TIA Section 312(a). If the Trustee is not the Registrar, the Company and/or the Subsidiary Guarantors shall furnish to the Trustee at least seven (7) Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Holders of Notes and the Company and the Subsidiary Guarantors shall otherwise comply with TIA Section 312(a). SECTION 2.6 TRANSFER AND EXCHANGE. (a) Transfer and Exchange of Global Notes. A Global Note may not be transferred as a whole except by the Depositary to a nominee of the Depositary, by a nominee of the Depositary to the Depositary or to another nominee of the Depositary, or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. All Global Notes will be exchanged by the Company for Definitive Notes if (i) the Company delivers to the Trustee notice from the Depositary that it is unwilling or unable to continue to act as Depositary or that it is no longer a clearing agency registered under the Exchange Act and, in either case, a successor Depositary is not appointed by the Company within 120 days after the date of such notice from the Depositary, (ii) the Company in its sole discretion determines that the Global Notes (in whole but not in part) should be exchanged for Definitive Notes and delivers a -22- 30 written notice to such effect to the Trustee, or (iii) there shall have occurred and be continuing a Default or Event of Default with respect to the Notes; provided that in no event shall the Regulation S Temporary Global Note be exchanged by the Company for Definitive Notes prior to (x) the expiration of the 40-day restricted period and (y) the receipt by the Registrar of any certificates identified by the Company or its counsel to be required pursuant to Rule 903 under the Securities Act. Upon the occurrence of either of the preceding events in (i), (ii) or (iii) above, Definitive Notes shall be issued in such names as the Depositary shall instruct the Trustee. Global Notes also may be exchanged or replaced, in whole or in part, as provided in Sections 2.7 and 2.10 hereof. Every Note authenticated and delivered in exchange for, or in lieu of, a Global Note or any portion thereof, pursuant to Section 2.7 or 2.10 hereof, shall be authenticated and delivered in the form of, and shall be, a Global Note. A Global Note may not be exchanged for another Note other than as provided in this Section 2.6(a); however, beneficial interests in a Global Note may be transferred and exchanged as provided in Section 2.6(b), (c) or (f) hereof. (b) Transfer and Exchange of Beneficial Interests in Global Notes. The transfer and exchange of beneficial interests in the Global Notes shall be effected through the Depositary, in accordance with the provisions of this Indenture and the Applicable Procedures. Beneficial interests in the Restricted Global Notes shall be subject to restrictions on transfer described in the Private Placement Legend to the extent required by the Securities Act. Transfers of beneficial interests in the Global Notes also shall require compliance with either subparagraph (i) or (ii) below, as applicable, as well as one or more of the other following subparagraphs as applicable: (i) Transfer of Beneficial Interests in the Same Global Note. Beneficial interests in any Restricted Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in the same Restricted Global Note in accordance with the transfer restrictions set forth in the Private Placement Legend; provided, however, that prior to the expiration of the 40-day restricted period transfers of beneficial interests in the Temporary Regulation S Global Note may not be made to a U.S. Person or for the account or benefit of a U.S. Person (other than an Initial Purchaser). Beneficial interests in any Unrestricted Global Note may be transferred only to Persons who take delivery thereof in the form of a beneficial interest in an Unrestricted Global Note. No written orders or instructions shall be required to be delivered to the Registrar to effect the transfers described in this Section 2.6(b)(i). (ii) All Other Transfers and Exchanges of Beneficial Interests in Global Notes. In connection with all transfers and exchanges of beneficial interests (other than a transfer of a beneficial interest in a Global Note to a Person who takes delivery thereof in the form of a beneficial interest in the same Global Note), the transferor of such beneficial interest must deliver to the Registrar either (A) (1) a written order from a Participant to the Depositary in accordance with the Applicable Procedures directing the Depositary to credit or cause to be credited a beneficial interest in another Global Note in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given in accordance with the Applicable Procedures containing information regarding the Participant -23- 31 account to be credited with such increase or (B) (1) a written order from a Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to cause to be issued a Definitive Note in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given by the Depositary to the Registrar containing information regarding the Person in whose name such Definitive Note shall be registered to effect the transfer or exchange referred to in (1) above; provided that in no event shall Definitive Notes be issued upon the transfer or exchange of beneficial interests in the Regulation S Temporary Global Note prior to (x) the expiration of the 40-day restricted period and (y) the receipt by the Registrar of any certificates identified by the Company or its counsel to be required pursuant to Rule 903 under the Securities Act. Upon an Exchange Offer by the Company in accordance with Section 2.6(f) hereof, the requirements of this Section 2.6(b)(ii) shall be deemed to have been satisfied by compliance with the Applicable Procedures or upon receipt by the Registrar of the instructions contained in the Letter of Transmittal delivered by the Holder of such beneficial interests in the Restricted Global Notes. Upon satisfaction of all of the requirements for transfer or exchange of beneficial interests in Global Notes contained in this Indenture, the Notes and otherwise applicable under the Securities Act, the Trustee shall adjust the principal amount of the relevant Global Note(s) pursuant to Section 2.6(h) hereof. (iii) Transfer of Beneficial Interests to Another Restricted Global Note. A beneficial interest in any Restricted Global Note may be transferred to a Person who takes delivery thereof in the form of a beneficial interest in another Restricted Global Note if the transfer complies with the requirements of clause (ii) above and the Registrar receives the following: (A) if the transferee will take delivery in the form of a beneficial interest in the U.S. Global Note, then the transferor must deliver a certificate in the form of EXHIBIT B hereto, including the certifications in item (1) thereof; and (B) if the transferee will take delivery in the form of a beneficial interest in the Regulation S Temporary Global Note or the Regulation S Permanent Global Note, then the transferor must deliver a certificate in the form of EXHIBIT B hereto, including the certifications in item (2) thereof. (iv) Transfer and Exchange of Beneficial Interests in a Restricted Global Note for Beneficial Interests in an Unrestricted Global Note. A beneficial interest in any Restricted Global Note may be exchanged by any holder thereof for a beneficial interest in an Unrestricted Global Note or transferred to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note if the exchange or transfer complies with the requirements of clause (ii) above and: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the holder of the -24- 32 beneficial interest to be transferred, in the case of an exchange, or the transferee, in the case of a transfer, is not (1) a Broker-Dealer, (2) a Person participating in the distribution of the Notes issued in the Exchange Offer or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) any such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) any such transfer is effected by a Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a beneficial interest in an Unrestricted Global Note, a certificate from such holder in the form of EXHIBIT C hereto, including the certifications in item (1)(a) thereof; (2) if the holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a beneficial interest in an Unrestricted Global Note, a certificate from such holder in the form of EXHIBIT B hereto, including the certifications in item (4) thereof; and (3) in each such case set forth in this subparagraph (D), an Opinion of Counsel in form reasonably acceptable to the Company to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are not required in order to maintain compliance with the Securities Act. If any such transfer is effected pursuant to subparagraph (B) or (D) above at a time when an Unrestricted Global Note has not yet been issued, the Company shall issue and, upon receipt of an authentication order in accordance with Section 2.2 hereof, the Trustee shall authenticate one or more Unrestricted Global Notes in an aggregate principal amount equal to the principal amount of beneficial interests transferred pursuant to subparagraph (B) or (D) above. Beneficial interests in an Unrestricted Global Note cannot be exchanged for, or transferred to, Persons who take delivery thereof in the form of a beneficial interest in a Restricted Global Note. (c) Transfer or Exchange of Beneficial Interests in Global Notes for Definitive Notes. -25- 33 (i) If any holder of a beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Restricted Definitive Note, then, upon receipt by the Registrar of the following documentation: (A) if the holder of such beneficial interest proposes to exchange such beneficial interest for a Restricted Definitive Note, a certificate from such holder in the form of EXHIBIT C hereto, including the certifications in item (2)(a) thereof; (B) if such beneficial interest is being transferred to a QIB in accordance with Rule 144A under the Securities Act, a certificate to the effect set forth in EXHIBIT B hereto, including the certifications in item (1) thereof; (C) if such beneficial interest is being transferred to a non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904 under the Securities Act, a certificate to the effect set forth in EXHIBIT B hereto, including the certifications in item (2) thereof; (D) if such beneficial interest is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144 under the Securities Act, a certificate to the effect set forth in EXHIBIT B hereto, including the certifications in item (3)(a) thereof; (E) if such beneficial interest is being transferred to an Institutional Accredited Investor in reliance on an exemption from the registration requirements of the Securities Act other than those listed in subparagraphs (B) through (D) above, a certificate to the effect set forth in EXHIBIT B hereto, including the certifications, certificates and Opinion of Counsel required by item (3)(d) thereof, if applicable; (F) if such beneficial interest is being transferred to the Company or any of its Subsidiaries, a certificate to the effect set forth in EXHIBIT B hereto, including the certifications in item (3)(b) thereof; or (G) if such beneficial interest is being transferred pursuant to an effective registration statement under the Securities Act, a certificate to the effect set forth in EXHIBIT B hereto, including the certifications in item (3)(c) thereof, the Trustee shall cause the aggregate principal amount of the applicable Restricted Global Note to be reduced accordingly pursuant to Section 2.6(h) hereof, and the Company shall execute and the Trustee shall authenticate and deliver to the Person designated in the instructions a Restricted Definitive Note in the appropriate principal amount. Any Restricted Definitive Note issued in exchange for a beneficial interest in a Restricted Global -26- 34 Note pursuant to this Section 2.6(c) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant. The Trustee shall deliver such Restricted Definitive Notes to the Persons in whose names such Notes are so registered. Any Restricted Definitive Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.6(c)(i) shall bear the Private Placement Legend and shall be subject to all restrictions on transfer contained therein. (ii) Notwithstanding Sections 2.6(c)(i)(A) and (C) hereof, a beneficial interest in the Regulation S Temporary Global Note may not be (A) exchanged for a Definitive Note prior to (x) the expiration of the 40-day restricted period and (y) the receipt by the Registrar of any certificates required pursuant to Rule 903(c)(3)(B) under the Securities Act or (B) transferred to a Person who takes delivery thereof in the form of a Definitive Note prior to the conditions set forth in clause (A) above or unless the transfer is pursuant to an exemption from the registration requirements of the Securities Act other than Rule 903 or Rule 904. (iii) Notwithstanding 2.6(c)(i) hereof, a holder of a beneficial interest in a Restricted Global Note may exchange such beneficial interest for an Unrestricted Definitive Note or may transfer such beneficial interest to a Person who takes delivery thereof in the form of an Unrestricted Definitive Note if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the holder of such beneficial interest, in the case of an exchange, or the transferee, in the case of a transfer, is not (1) a Broker-Dealer, (2) a Person participating in the distribution of the Notes issued in the Exchange Offer or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) any such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) any such transfer is effected by a Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for an Unrestricted Definitive Note, a certificate from such holder in the form of EXHIBIT C hereto, including the certifications in item (1)(b) thereof; -27- 35 (2) if the holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of an Unrestricted Definitive Note, a certificate from such holder in the form of EXHIBIT B hereto, including the certifications in item (4) thereof; and (3) in each such case set forth in this subparagraph (D), an Opinion of Counsel in form reasonably acceptable to the Company, to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are not required in order to maintain compliance with the Securities Act. (iv) If any holder of a beneficial interest in an Unrestricted Global Note proposes to exchange such beneficial interest for an Unrestricted Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of an Unrestricted Definitive Note, then, upon satisfaction of the conditions set forth in Section 2.6(b)(ii) hereof, the Trustee shall cause the aggregate principal amount of the applicable Unrestricted Global Note to be reduced accordingly pursuant to Section 2.6(h) hereof, and the Company shall execute and the Trustee shall authenticate and deliver to the Person designated in the instructions an Unrestricted Definitive Note in the appropriate principal amount. Any Unrestricted Definitive Note issued in exchange for a beneficial interest pursuant to this Section 2.6(c)(iv) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant. The Trustee shall deliver such Unrestricted Definitive Notes to the Persons in whose names such Notes are so registered. Any Unrestricted Definitive Note issued in exchange for a beneficial interest pursuant to this section 2.6(c)(iv) shall not bear the Private Placement Legend. A beneficial interest in an Unrestricted Global Note cannot be exchanged for a Restricted Definitive Note or transferred to a Person who takes delivery thereof in the form of a Restricted Definitive Note. (d) Transfer and Exchange of Definitive Notes for Beneficial Interests in Global Note. (i) If any Holder of a Restricted Definitive Note proposes to exchange such Note for a beneficial interest in a Restricted Global Note or to transfer such Restricted Definitive Notes to a Person who takes delivery thereof in the form of a beneficial interest in a Restricted Global Note, then, upon receipt by the Registrar of the following documentation: (A) if the Holder of such Restricted Definitive Note proposes to exchange such Note for a beneficial interest in a Restricted Global Note, a certificate from such Holder in the form of EXHIBIT C hereto, including the certifications in item (2)(b) thereof; -28- 36 (B) if such Restricted Definitive Note is being transferred to a QIB in accordance with Rule 144A under the Securities Act, a certificate to the effect set forth in EXHIBIT B hereto, including the certifications in item (1) thereof; or (C) if such Restricted Definitive Note is being transferred to a non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904 under the Securities Act, a certificate to the effect set forth in EXHIBIT B hereto, including the certifications in item (2) thereof; the Trustee shall cancel the Restricted Definitive Note, increase or cause to be increased the aggregate principal amount of, in the case of clause (A) above, the appropriate Restricted Global Note, in the case of clause (B) above, the 144A Global Note, and in the case of clause (C) above, the Regulation S Global Note. (ii) A Holder of a Restricted Definitive Note may exchange such Note for a beneficial interest in an Unrestricted Global Note or transfer such Restricted Definitive Note to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, is not (1) a Broker-Dealer, (2) a Person participating in the distribution of the Notes issued in the Exchange Offer or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) any such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) any such transfer is effected by a Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the Holder of such Restricted Definitive Notes proposes to exchange such Notes for a beneficial interest in the Unrestricted Global Note, a certificate from such Holder in the form of EXHIBIT C hereto, including the certifications in item (1)(c) thereof; (2) if the Holder of such Restricted Definitive Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of a -29- 37 beneficial interest in the Unrestricted Global Note, a certificate from such Holder in the form of EXHIBIT B hereto, including the certifications in item (4) thereof; and (3) in each such case set forth in this subparagraph (D), an Opinion of Counsel in form reasonably acceptable to the Company to the effect that such exchange or transfer is in compliance with the Securities Act, that the restrictions on transfer contained herein and in the Private Placement Legend are not required in order to maintain compliance with the Securities Act, and such Restricted Definitive Notes are being exchanged or transferred in compliance with any applicable blue sky securities laws of any State of the United States. Upon satisfaction of the conditions of any of the subparagraphs in this Section 2.6(d)(ii), the Trustee shall cancel the Restricted Definitive Notes and increase or cause to be increased the aggregate principal amount of the Unrestricted Global Note. (iii) A Holder of an Unrestricted Definitive Note may exchange such Note for a beneficial interest in an Unrestricted Global Note or transfer such Unrestricted Definitive Notes to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note at any time. Upon receipt of a request for such an exchange or transfer, the Trustee shall cancel the applicable Unrestricted Definitive Note and increase or cause to be increased the aggregate principal amount of the Unrestricted Global Note. If any such exchange or transfer from a Definitive Note to a beneficial interest is effected pursuant to subparagraphs (ii)(B), (ii)(D) or (iii) above at a time when an Unrestricted Global Note has not yet been issued, the Company shall issue and, upon receipt of an authentication order in accordance with Section 2.2 hereof, the Trustee shall authenticate one or more Unrestricted Global Notes in an aggregate principal amount equal to the principal amount of beneficial interests transferred pursuant to subparagraphs (ii)(B), (ii)(D) or (iii) above. (e) Transfer and Exchange of Definitive Notes for Definitive Notes. Upon request by a Holder of Definitive Notes and such Holder's compliance with the provisions of this Section 2.6(e), the Registrar shall register the transfer or exchange of Definitive Notes. Prior to such registration of transfer or exchange, the requesting Holder shall present or surrender to the Registrar the Definitive Notes duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by his attorney, duly authorized in writing. In addition, the requesting Holder shall provide any additional certifications, documents and information, as applicable, pursuant to the provisions of this Section 2.6(e). (i) Restricted Definitive Notes may be transferred to and registered in the name of Persons who take delivery thereof if the Registrar receives the following: (A) if the transfer will be made pursuant to Rule 144A under the Securities Act, then the transferor must deliver a certificate in the form of EXHIBIT B hereto, including the certifications in item (1) thereof; -30- 38 (B) if the transfer will be made pursuant to Rule 903 or Rule 904, then the transferor must deliver a certificate in the form of EXHIBIT B hereto, including the certifications in item (2) thereof; and (C) if the transfer will be made pursuant to any other exemption from the registration requirements of the Securities Act, then the transferor must deliver a certificate in the form of EXHIBIT B hereto, including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable. (ii) Any Restricted Definitive Note may be exchanged by the Holder thereof for an Unrestricted Definitive Note or transferred to a Person or Persons who take delivery thereof in the form of an Unrestricted Definitive Note if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, is not (1) a Broker-Dealer, (2) a Person participating in the distribution of the Notes issued in the Exchange Offer or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) any such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) any such transfer is effected by a Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the Holder of such Restricted Definitive Notes proposes to exchange such Notes for an Unrestricted Definitive Note, a certificate from such Holder in the form of EXHIBIT C hereto, including the certifications in item (1)(d) thereof; (2) if the Holder of such Restricted Definitive Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of an Unrestricted Definitive Note, a certificate from such Holder in the form of EXHIBIT B hereto, including the certifications in item (4) thereof; and (3) in each such case set forth in this subparagraph (D), an Opinion of Counsel in form reasonably acceptable to the Company to the effect that such exchange or transfer is in compliance with the Securities Act, that the restrictions on transfer contained herein and in the Private Placement Legend are not required in order to maintain compliance with the Securities Act, and such -31- 39 Restricted Definitive Note is being exchanged or transferred in compliance with any applicable blue sky securities laws of any State of the United States. (iii) A Holder of Unrestricted Definitive Notes may transfer such Notes to a Person who takes delivery thereof in the form of an Unrestricted Definitive Note. Upon receipt of a request for such a transfer, the Registrar shall register the Unrestricted Definitive Notes pursuant to the instructions from the Holder thereof. Unrestricted Definitive Notes cannot be exchanged for or transferred to Persons who take delivery thereof in the form of a Restricted Definitive Note. (f) Exchange Offer. Upon the occurrence of the Exchange Offer in accordance with the Registration Rights Agreement, the Company shall issue and, upon receipt of an authentication order in accordance with Section 2.2, the Trustee shall authenticate (i) one or more Unrestricted Global Notes in an aggregate principal amount equal to the principal amount of the beneficial interests in the Restricted Global Notes tendered for acceptance by persons that are not (x) Broker-Dealers, (y) Persons participating in the distribution of the Notes issued in the Exchange Offer or (z) Persons who are Affiliates (as defined in Rule 144) of the Company and accepted for exchange in the Exchange Offer and (ii) Unrestricted Definitive Notes in an aggregate principal amount equal to the principal amount of the Restricted Definitive Notes accepted for exchange in the Exchange Offer. Concurrent with the issuance of such Notes, the Trustee shall cause the aggregate principal amount of the applicable Restricted Global Notes to be reduced accordingly, and the Company shall execute and the Trustee shall authenticate and deliver to the Persons designated by the Holders of Definitive Notes so accepted Unrestricted Definitive Notes in the appropriate principal amount. (g) Legends. The following legends shall appear on the face of all Global Notes and Definitive Notes issued under this Indenture unless specifically stated otherwise in the applicable provisions of this Indenture. (i) Private Placement Legend. (A) Except as permitted by subparagraph (B) below, each Global Note and each Definitive Note (and all Notes issued in exchange therefor or substitution thereof) shall bear the legend in substantially the following form: "THIS NOTE (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE SECOND SENTENCE HEREOF. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE -32- 40 144A UNDER THE SECURITIES ACT) (A "QIB"), (B) IT IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT OR (C) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A) (1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT (AN "IAI"), (2) AGREES THAT IT WILL NOT, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, (B) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (C) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR 904 OF THE SECURITIES ACT, (D) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (E) TO AN IAI THAT, PRIOR TO SUCH TRANSFER, FURNISHES THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE TRANSFER OF THIS NOTE (THE FORM OF WHICH CAN BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF NOTES LESS THAN $250,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (F) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY) OR (G) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION" AND "UNITED STATES" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING." (B) Notwithstanding the foregoing, any Unrestricted Global Note or Unrestricted Definitive Note issued pursuant to subparagraphs (b)(iv), (c)(iii), (c)(iv), (d)(ii), (d)(iii), (e)(ii), (e)(iii) or (f) to this Section 2.6 (and all Notes issued in exchange therefor or substitution thereof) shall not bear the Private Placement Legend. -33- 41 (ii) Global Note Legend. Each Global Note shall bear a legend in substantially the following form: "UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL IN AS MUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN." (iii) Regulation S Temporary Global Note Legend. The Regulation S Temporary Global Note shall bear a legend in substantially the following form: "THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE CASH PAYMENTS OF INTEREST DURING THE PERIOD WHICH SUCH HOLDER HOLDS THIS NOTE. NOTHING IN THIS LEGEND SHALL BE DEEMED TO PREVENT INTEREST FROM ACCRUING ON THIS NOTE." (h) Cancellation and/or Adjustment of Global Notes. At such time as all beneficial interests in a particular Global Note have been exchanged for Definitive Notes or a particular Global Note has been redeemed, repurchased or canceled in whole and not in part, each such Global Note shall be returned to or retained and canceled by the Trustee in accordance with -34- 42 Section 2.11 hereof. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note or for Definitive Notes, the principal amount of Notes represented by such Global Note shall be reduced accordingly and an endorsement shall be made on such Global Note, by the Trustee or by the Depositary at the direction of the Trustee, to reflect such reduction; and if the beneficial interest is being exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note, such other Global Note shall be increased accordingly and an endorsement shall be made on such Global Note, by the Trustee or by the Depositary at the direction of the Trustee, to reflect such increase. (i) General Provisions Relating to Transfers and Exchanges. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Global Notes and Definitive Notes upon receipt of a Company Order or at the Registrar's request. (ii) No service charge shall be made to a holder of a beneficial interest in a Global Note or to a Holder of a Definitive Note for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Sections 2.10, 3.9, 4.10, 4.13 and 9.5 hereof). (iii) The Registrar shall not be required to register the transfer of or exchange any Note selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. (iv) All Global Notes and Definitive Notes issued upon any registration of transfer or exchange of Global Notes or Definitive Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Global Notes or Definitive Notes surrendered upon such registration of transfer or exchange. (v) The Company shall not be required (A) to issue, to register the transfer of or to exchange Notes during a period beginning at the opening of business 15 days before the day of any selection of Notes for redemption under Section 3.02 hereof and ending at the close of business on the day of selection, (B) to register the transfer of or to exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part or (C) to register the transfer of or to exchange a Note between a record date and the next succeeding Interest Payment Date. (vi) Prior to due presentment for the registration of a transfer of any Note, the Trustee, any Agent and the Company may deem and treat the Person in whose name any -35- 43 Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of and interest on such Notes and for all other purposes, and none of the Trustee, any Agent or the Company shall be affected by notice to the contrary. (vii) The Trustee shall authenticate Global Notes and Definitive Notes in accordance with the provisions of Section 2.2 hereof. (viii) All certifications, certificates and Opinions of Counsel required to be submitted to the Registrar pursuant to this Section 2.6 to effect a transfer or exchange may be submitted by facsimile. SECTION 2.7 REPLACEMENT NOTES. If any mutilated Note is surrendered to the Trustee, or the Company and the Trustee receives evidence to their satisfaction of the destruction, loss or theft of any Note, the Company shall issue and the Trustee, upon the written order of the Company signed by an Officer of the Company, shall authenticate a replacement Note if the Trustee's requirements are met. If required by the Trustee or the Company, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent and any authenticating agent from any loss that any of them may suffer if a Note is replaced. The Company and the Trustee may charge for their expenses in replacing a Note. Every replacement Note is an additional obligation of the Company and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Notes duly issued hereunder. SECTION 2.8 OUTSTANDING NOTES. The Notes outstanding at any time are all the Notes authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation, those reductions in the interest in a Global Note effected by the Trustee in accordance with the provisions hereof, and those described in this Section 2.8 as not outstanding. Except as set forth in Section 2.9 hereof, a Note does not cease to be outstanding because the Company or any Subsidiary Guarantor or an Affiliate of the Company or any Subsidiary Guarantor holds the Note. If a Note is replaced pursuant to Section 2.7 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Note is held by a bona fide purchaser. If the principal amount of any Note is considered paid under Section 4.1 hereof, it ceases to be outstanding and interest on it ceases to accrue. If the Paying Agent (other than the Company, a Subsidiary or an Affiliate of any thereof) holds, on a redemption date or maturity date, money sufficient to pay Notes payable on that date, -36- 44 then on and after that date such Notes shall be deemed to be no longer outstanding and shall cease to accrue interest. SECTION 2.9 TREASURY NOTES. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Company or any Subsidiary Guarantor, or by any Affiliate of the Company or any Subsidiary Guarantor shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes shown on the Trustee's register as being so owned shall be so disregarded. Notwithstanding the foregoing, Notes that are to be acquired by the Company or any Subsidiary Guarantor or an Affiliate of the Company or any Subsidiary Guarantor pursuant to an exchange offer, tender offer or other agreement shall not be deemed to be owned by such entity until legal title to such Notes passes to such entity. SECTION 2.10 TEMPORARY NOTES. Until Definitive Notes are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Notes upon a written order of the Company signed by an Officer of the Company. Temporary Notes shall be substantially in the form of Definitive Notes but may have variations that the Company considers appropriate for temporary Notes. Without unreasonable delay, the Company shall prepare and the Trustee shall upon receipt of a written order of the Company signed by an Officer authenticate Definitive Notes in exchange for temporary Notes. Holders of temporary Notes shall be entitled to all of the benefits of this Indenture. SECTION 2.11 CANCELLATION. The Company at any time may deliver to the Trustee for cancellation any Notes previously authenticated and delivered hereunder or which the Company may have acquired in any manner whatsoever, and all Notes so delivered shall be promptly canceled by the Trustee. All Notes surrendered for registration of transfer, exchange or payment, if surrendered to any Person other than the Trustee, shall be delivered to the Trustee. The Trustee and no one else shall cancel all Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation. Subject to Section 2.7 hereof, the Company may not issue new Notes to replace Notes that it has redeemed or paid or that have been delivered to the Trustee for cancellation. All canceled Notes held by the Trustee shall be destroyed and certification of their destruction delivered to the Company, unless by a written order, signed by an Officer of the Company, the Company shall direct that canceled Notes be returned to it. -37- 45 SECTION 2.12 DEFAULTED INTEREST. If the Company or any Subsidiary Guarantor defaults in a payment of interest on the Notes, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date, which date shall be at the earliest practicable date but in all events at least five (5) Business Days prior to the payment date, in each case at the rate provided in the Notes and in Section 4.1 hereof. The Company shall fix or cause to be fixed each such special record date and payment date, and shall promptly thereafter, notify the Trustee of any such date. At least fifteen (15) days before the special record date, the Company (or the Trustee, in the name and at the expense of the Company) shall mail or cause to be mailed to Holders a notice that states the special record date, the related payment date and the amount of such interest to be paid. SECTION 2.13 RECORD DATE. The record date for purposes of determining the identity of Holders of the Notes entitled to vote or consent to any action by vote or consent authorized or permitted under this Indenture shall be determined as provided for in TIA Section 316 (c). SECTION 2.14 COMPUTATION OF INTEREST. Interest on the Notes shall be computed on the basis of a 360-day year comprised of twelve 30-day months. SECTION 2.15 CUSIP NUMBER. The Company in issuing the Notes may use a "CUSIP" number, and if it does so, the Trustee shall use the CUSIP number in notices of redemption or exchange as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Notes and that reliance may be placed only on the other identification numbers printed on the Notes. The Company shall promptly notify the Trustee of any change in the CUSIP number. ARTICLE 3 REDEMPTION AND PREPAYMENT SECTION 3.1 NOTICES TO TRUSTEE. If the Company elects to redeem Notes pursuant to the optional redemption provisions of Section 3.7 hereof, it shall furnish to the Trustee, at least 45 days but not more than 60 days before a redemption date (unless a shorter period is acceptable to the Trustee) an Officers' Certificate setting -38- 46 forth (i) the Section of this Indenture pursuant to which the redemption shall occur, (ii) the redemption date, (iii) the principal amount of Notes to be redeemed and (iv) the redemption price. If the Company is required to make an offer to purchase Notes pursuant to Section 4.10 or 4.13 hereof, it shall furnish to the Trustee, at least 45 days before the scheduled purchase date, an Officers' Certificate setting forth (i) the section of this Indenture pursuant to which the offer to purchase shall occur, (ii) the terms of the offer, (iii) the principal amount of Notes to be purchased, (iv) the purchase price, (v) the purchase date and (vi) and further setting forth a statement to the effect that (a) the Company or one of its Subsidiaries has affected an Asset Sale and there are Excess Proceeds aggregating more than $15.0 million or (b) a Change of Control has occurred, as applicable. SECTION 3.2 SELECTION OF NOTES TO BE REDEEMED OR PURCHASED. If less than all of the Notes are to be redeemed at any time, selection of Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate; provided that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at its registered address. Notices of redemption may not be conditional. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on Notes or portions of them called for redemption. SECTION 3.3 NOTICE OF REDEMPTION. At least 30 days but not more than 60 days before a redemption date, the Company shall mail or cause to be mailed by first class mail, a notice of redemption to each Holder whose Notes are to be redeemed. The notice shall identify the Notes to be redeemed and shall state: (1 the redemption date; (2 the redemption price for the Notes and accrued interest, and Liquidated Damages, if any; (3 if any Note is being redeemed in part, the portion of the principal amount of such Notes to be redeemed and that, after the redemption date, upon surrender of such Note, a new Note -39- 47 or Notes in principal amount equal to the unredeemed portion shall be issued upon surrender of the original Note; (4 the name and address of the Paying Agent; (5 that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price; (6 that, unless the Company defaults in making such redemption payment, interest and Liquidated Damages, if any, on Notes called for redemption ceases to accrue on and after the redemption date; (7 the paragraph of the Notes and/or Section of this Indenture pursuant to which the Notes called for redemption are being redeemed; and (8 that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Notes. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense; provided, however, that the Company shall have delivered to the Trustee, at least 45 days prior to the redemption date (or such shorter period as shall be acceptable to the Trustee), an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in the notice as provided in the preceding paragraph. The notice mailed in the manner herein provided shall be conclusively presumed to have been duly given whether or not the Holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the Holder of any Note shall not affect the validity of the proceeding for the redemption of any other Note. SECTION 3.4 EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed in accordance with Section 3.3 hereof, Notes called for redemption become irrevocably due and payable on the redemption date at the redemption price plus accrued and unpaid interest and Liquidated Damages, if any, to such date. A notice of redemption may not be conditional. SECTION 3.5 DEPOSIT OF REDEMPTION OR PURCHASE PRICE. On or before 10:00 a.m. (New York City time) on each redemption date or the date on which Notes must be accepted for purchase pursuant to Section 4.10 or 4.13, the Company shall deposit with the Trustee or with the Paying Agent money sufficient to pay the redemption price of and accrued and unpaid interest and Liquidated Damages, if any, on all Notes to be redeemed or purchased on that date. The Trustee or the Paying Agent shall promptly return to the Company upon its written request any money deposited with the Trustee or the Paying Agent by the Company in -40- 48 excess of the amounts necessary to pay the redemption price of (including any applicable premium), accrued interest and Liquidated Damages, if any, on all Notes to be redeemed or purchased. If Notes called for redemption or tendered in an Asset Sale Offer or Change of Control Offer are paid or if the Company has deposited with the Trustee or Paying Agent money sufficient to pay the redemption or purchase price of, unpaid and accrued interest and Liquidated Damages, if any, on all Notes to be redeemed or purchased, on and after the redemption or purchase date interest and Liquidated Damages, if any, shall cease to accrue on the Notes or the portions of Notes called for redemption or tendered and not withdrawn in an Asset Sale Offer or Change of Control Offer (regardless of whether certificates for such securities are actually surrendered). If a Note is redeemed or purchased on or after an interest record date but on or prior to the related interest payment date, then any accrued and unpaid interest and Liquidated Damages, if any, shall be paid to the Person in whose name such Note was registered at the close of business on such record date. If any Note called for redemption shall not be so paid upon surrender for redemption because of the failure of the Company to comply with the preceding paragraph, interest shall be paid on the unpaid principal and Liquidated Damages, if any, from the redemption or purchase date until such principal and Liquidated Dames, if any, is paid, and to the extent lawful on any interest not paid on such unpaid principal, in each case, at the rate provided in the Notes and in Section 4.1 hereof. SECTION 3.6 NOTES REDEEMED IN PART. Upon surrender of a Note that is redeemed in part, the Company shall issue and, upon the Company's written request, the Trustee shall authenticate for the Holder at the expense of the Company a new Note equal in principal amount to the unredeemed portion of the Note surrendered. SECTION 3.7 OPTIONAL REDEMPTION. (a Except as set forth in the next paragraph, the Notes will not be redeemable at the Company's option prior to February 1, 2002. Thereafter, the Notes will be subject to redemption at any time at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on February 1 of the years indicated below:
YEAR PERCENTAGE 2002 105.375% 2003 102.688% 2004 and thereafter 100.000%
(b Notwithstanding the foregoing, at any time prior to February 1, 2001, the Company may redeem up to 33% of the original aggregate principal amount of Notes at a redemption price of 110.75% of the principal amount thereof, plus accrued and unpaid interest and Liquidated -41- 49 Damages thereon, if any, to the redemption date, with the net cash proceeds of a Public Equity Offering; provided that at least 67% of the original aggregate principal amount of Notes remains outstanding immediately after the occurrence of such redemption; and provided, further, that such redemption shall occur within 90 days of the date of the closing of such Public Equity Offering. SECTION 3.8 MANDATORY REDEMPTION. Except as set forth under Sections 3.9, 4.10 and 4.13 hereof, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. SECTION 3.9 REPURCHASE OFFERS. In the event that the Company shall be required to commence an offer to all Holders to repurchase Notes (a "Repurchase Offer") pursuant to Section 4.10 hereof (an "Excess Proceeds Offer)" or pursuant to Section 4.13 hereof (a "Change of Control Offer"), the Company shall follow the procedures specified below. A Repurchase Offer shall commence no earlier than 30 days and no later than 60 days after a Change of Control (unless the Company is not required to make such offer pursuant to Section 4.13(c) hereof) or an Excess Proceeds Offer Triggering Event (as defined below), as the case may be, and remain open for a period of twenty (20) Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Offer Period"). No later than five (5) Business Days after the termination of the Offer Period (the "Purchase Date"), the Company shall purchase the principal amount of Notes required to be purchased pursuant to Section 4.10 hereof, in the case of an Excess Proceeds Offer, or 4.13 hereof, in the case of a Change of Control Offer (the "Offer Amount") or, if less than the Offer Amount has been tendered, all Notes tendered in response to the Repurchase Offer. Payment for any Notes so purchased shall be made in the same manner as interest payments are made. If the Purchase Date is on or after an interest record date and on or before the related interest payment date, any accrued and unpaid interest and Liquidated Damages, if any, shall be paid to the Person in whose name a Note is registered at the close of business on such record date, and no additional interest or Liquidated Damages, if any, shall be payable to Holders who tender Notes pursuant to the Repurchase Offer. Upon the commencement of a Repurchase Offer, the Company shall send, by first class mail, a notice to the Trustee and each of the Holders, with a copy to the Trustee. The notice shall contain all instructions and materials necessary to enable such Holders to tender Notes pursuant to such Repurchase Offer. The Repurchase Offer shall be made to all Holders. The notice, which shall govern the terms of the Repurchase Offer, shall describe the transaction or transactions that constitute the Change of Control or Excess Proceeds Offer Triggering Event, as the case may be and shall state: -42- 50 (a that the Repurchase Offer is being made pursuant to this Section 3.9 and Section 4.10 or 4.13 hereof, as the case may be, and the length of time the Repurchase Offer shall remain open; (b the Offer Amount, the purchase price and the Purchase Date; (c that any Note not tendered or accepted for payment shall continue to accrue interest; (d that, unless the Company defaults in making such payment, any Note accepted for payment pursuant to the Repurchase Offer shall cease to accrue interest and Liquidated Damages, if any, after the Purchase Date; (e that Holders electing to have a Note purchased pursuant to a Repurchase Offer shall be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note, duly completed, or transfer by book-entry transfer, to the Company, the Depositary, or the Paying Agent at the address specified in the notice not later than the close of business on the last day of the Offer Period; (f that Holders shall be entitled to withdraw their election if the Company, the Depositary or the Paying Agent, as the case may be, receives, not later than the expiration of the Offer Period, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Note the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Note purchased; (g that, if the aggregate principal amount of Notes surrendered by Holders exceeds the Offer Amount, the Company shall select the Notes to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Notes in denominations of $1,000, or integral multiples thereof, shall be purchased); and (h that Holders whose Notes were purchased only in part shall be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered (or transferred by book-entry transfer). On or before 10:00 a.m. (New York City time) on each Purchase Date, the Company shall irrevocably deposit with the Trustee or Paying Agent in immediately available funds the aggregate purchase price with respect to a principal amount of Notes equal to the Offer Amount, together with accrued and unpaid interest and Liquidated Damages, if any, thereon, to be held for payment in accordance with the terms of this Section 3.9. On the Purchase Date, the Company shall, to the extent lawful, (i) accept for payment, on a pro rata basis to the extent necessary, the Offer Amount of Notes or portions thereof tendered pursuant to the Repurchase Offer, or if less than the Offer Amount has been tendered, all Notes tendered, (ii) deliver or cause the Paying Agent or depository, as the case may be, to deliver to the Trustee Notes so accepted and (iii) deliver to the Trustee an Officers' Certificate stating that such Notes or portions thereof were accepted for payment by the Company in accordance with the terms of this Section 3.9. The Company, the Depositary or the Paying Agent, as the case may be, shall promptly (but in any case not later than three (3) Business Days after the -43- 51 Purchase Date) mail or deliver to each tendering Holder an amount equal to the purchase price of the Notes tendered by such Holder and accepted by the Company for purchase, plus any accrued and unpaid interest and Liquidated Damages, if any, thereon, and the Company shall promptly issue a new Note, and the Trustee, shall authenticate and mail or deliver such new Note, to such Holder, equal in principal amount to any unpurchased portion of such Holder's Notes surrendered. Any Note not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof. The Company shall publicly announce in a newspaper of general circulation or in a press release provided to a nationally recognized financial wire service the results of the Repurchase Offer on the Purchase Date. Other than as specifically provided in this Section 3.9, any purchase pursuant to this Section 3.9 shall be made pursuant to the provisions of Sections 3.1, 3.2, 3.5 and 3.6 hereof. ARTICLE 4 COVENANTS SECTION 4.1 PAYMENT OF NOTES. The Company shall pay or cause to be paid the principal of, premium, if any, and interest on the Notes on the dates and in the manner provided in the Notes. The Company shall pay all Liquidated Damages, if any, in the same manner on the dates and in the amounts set forth in the Registration Rights Agreement. Principal, premium and Liquidated Damages, if any, and interest, shall be considered paid for all purposes hereunder on the date the Paying Agent if other than the Company or a Subsidiary thereof holds, as of 10:00 a.m. (New York City time) money deposited by the Company in immediately available funds and designated for and sufficient to pay all such principal, premium and Liquidated Damages, if any, and interest, then due. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Notes to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace period) at the same rate to the extent lawful. SECTION 4.2 MAINTENANCE OF OFFICE OR AGENCY. The Company shall maintain within the City of New York an office or agency (which may be an office of the Trustee or an Affiliate of the Trustee or Registrar) where Notes may be surrendered for registration of transfer or for exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at -44- 52 any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency within the City and State of New York for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Office of the Trustee as one such office or agency of the Company in accordance with Section 2.3 hereof. SECTION 4.3 COMMISSION REPORTS. From and after the earlier of the effective date of the Exchange Offer Registration Statement or the effective date of the Shelf Registration Statement, whether or not required by the rules and regulations of the Commission, so long as any Notes are outstanding, the Company shall furnish to the Holders of Notes (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's certified independent accountants and (ii) all current reports that would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports. In addition, whether or not required by the rules and regulations of the Commission, the Company shall file a copy of all such information and reports with the Commission for public availability (unless the Commission will not accept such a filing) within the time periods that would have been applicable had the Company been subject to such rules and regulations and make such information available to securities analysts and prospective investors upon request. In addition, the Company has agreed that, for so long as any Notes remain outstanding, it shall furnish to the Holders, to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. The Company shall at all times comply with TIA Section 314(a). The financial information to be distributed to Holders of Notes shall be filed with the Trustee and mailed to the Holders at their addresses appearing in the register of Notes maintained by the Registrar, within 90 days after the end of the Company's fiscal years and within 45 days after the end of each of the first three quarters of each such fiscal year. -45- 53 The Company shall provide the Trustee with a sufficient number of copies of all reports and other documents and information and, if requested by the Company, the Trustee will deliver such reports to the Holders under this Section 4.3. SECTION 4.4 COMPLIANCE CERTIFICATE. The Company shall deliver to the Trustee, within 90 days after the end of each fiscal year, an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether each has kept, observed, performed and fulfilled its obligations under this Indenture (including, with respect to any Restricted Payments made during such year, the basis upon which the calculations required by Section 4.7 hereof were computed, which calculations may be based on the Company's latest available financial statements), and further stating, as to each such Officer signing such certificate, that, to the best of his or her knowledge, each entity has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action the Company is taking or proposes to take with respect thereto) and that, to the best of his or her knowledge, no event has occurred and remains in existence by reason of which payments on account of the principal of, premium or Liquidated Damages, if any, or interest on the Notes is prohibited or if such event has occurred, a description of the event and what action the Company is taking or proposes to take with respect thereto. So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, in connection with the year-end financial statements delivered pursuant to Section 4.3 hereof, the Company shall use its best efforts to deliver a written statement of the Company's independent public accountants (who shall be a firm of established national reputation) that in making the examination necessary for certification of such financial statements, nothing has come to their attention that would lead them to believe that the Company has violated any provisions of Article Four or Section 5.1 hereof or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. In the event that such written statement of the Company's independent public accountants cannot be obtained, the Company shall deliver an Officers' Certificate certifying that it has used its best efforts to obtain such statements and was unable to do so. The Company shall, so long as any of the Notes are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. SECTION 4.5 TAXES. -46- 54 The Company shall pay, and shall cause each of its Subsidiaries to pay, prior to delinquency all material taxes, assessments and governmental levies, except such as are contested in good faith and by appropriate proceedings and with respect to which appropriate reserves have been taken in accordance with GAAP. SECTION 4.6 STAY, EXTENSION AND USURY LAWS. The Company and each Subsidiary Guarantor covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and the Company and each Subsidiary Guarantor (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted. SECTION 4.7 RESTRICTED PAYMENTS. From and after the date hereof the Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of the Company's or any of its Restricted Subsidiaries' Equity Interests (including, without limitation, any payment in connection with any merger or consolidation involving the Company) or to the direct or indirect holders of the Company's or any of its Restricted Subsidiaries' Equity Interests in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company); (ii) purchase, redeem or otherwise acquire or retire for value (including without limitation, in connection with any merger or consolidation involving the Company) any Equity Interests of the Company or any direct or indirect parent of the Company; (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is Pari Passu Indebtedness or any Indebtedness which is subordinated to the Notes, except scheduled payments of interest or principal at Stated Maturity of such Indebtedness; or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: (a no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; (b the Company would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.9 hereof; and -47- 55 (c such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Subsidiaries after the date hereof (excluding Restricted Payments permitted by clause (ii) of the next succeeding paragraph), is less than the sum of (i) 50% of the Consolidated Net Income of the Company for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the date hereof to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds received by the Company from the issue or sale since the date hereof of Equity Interests of the Company (other than Disqualified Stock) or of Disqualified Stock or debt securities of the Company that have been converted into such Equity Interests (other than Equity Interests (or Disqualified Stock or convertible debt securities) sold to a Subsidiary of the Company and other than Disqualified Stock or convertible debt securities that have been converted into Disqualified Stock), plus (iii) to the extent that any Restricted Investment that was made after the date hereof is sold for cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (B) the initial amount of such Restricted Investment plus (iv) if any Unrestricted Subsidiary (A) the assets of which are used or useful in, or which is engaged in, one or more Permitted Businesses is redesignated as a Restricted Subsidiary, the fair market value of such redesignated Subsidiary (as determined in good faith by the Board of Directors) as of the date of its redesignation or (B) pays any cash dividends or cash distributions to the Company or any of its Restricted Subsidiaries, 50% of any such cash dividends or cash distributions made after the date hereof. The foregoing provisions shall not prohibit (i) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions hereof; (ii) the redemption, repurchase, retirement, defeasance or other acquisition of any Indebtedness subordinated to the Notes or Equity Interests of the Company in exchange for, or out of the net cash proceeds of the substantially concurrent sale or issuance (other than to a Restricted Subsidiary of the Company) of, other Equity Interests of the Company (other than any Disqualified Stock); (iii) the defeasance, redemption, repurchase or other acquisition of Pari Passu Indebtedness or Indebtedness subordinated to the Notes with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any dividend by a Restricted Subsidiary of the Company to the holders of its Equity Interests on a pro rata basis; (v) optional and mandatory prepayments on any revolving credit Indebtedness incurred under the New Credit Facility; or (vi) any other Restricted Payment which, together with all other Restricted Payments made pursuant to this clause (vi) after the date hereof, does not exceed $5.0 million in the aggregate (in each case, after giving effect to all subsequent reductions in the amount of any Restricted Investment made pursuant to this clause (vi) either as a result of (A) the repayment of disposition thereof for cash or (B) the redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary (valued proportionate to the Company's equity interest in such Subsidiary at the time of such redesignation), but, in the case of clauses (A) and (B), not to exceed the amount of such Restricted Investment previously made pursuant to this clause (vi); provided that in the case of each of clauses -48- 56 (i) through (vi) no Default or Event of Default shall have occurred and be continuing after making such Restricted Payment. The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default or Event of Default; provided that in no event shall the business currently operated by any Subsidiary Guarantor be transferred to or held by an Unrestricted Subsidiary. For purposes of making such determination, all outstanding Investments by the Company and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this Section 4.7. All such outstanding Investments will be deemed to constitute Investments in an amount equal to the fair market value of such Investments at the time of such designation (as determined in good faith by the Board of Directors). Such designation shall only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or such Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any non-cash Restricted Payment shall be determined in good faith by the Board of Directors whose resolution with respect thereto shall be delivered to the Trustee such determination to be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if such fair market value exceeds $1.0 million. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this Section 4.7 were computed, together with a copy of any fairness opinion or appraisal required herein. SECTION 4.8 DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits, or (b) pay any indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or advances to the Company or any of its Restricted Subsidiaries or (iii) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (a) Existing Indebtedness as in effect on the date hereof, (b) the New Credit Facility as in effect as of the date hereof, and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof, provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are no more restrictive in the aggregate with respect to such dividend -49- 57 and other payment restrictions than those contained in the New Credit Facility as in effect on the date hereof, (c) this Indenture and the Notes, (d) any applicable law, rule, regulation or order, (e) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms hereof to be incurred, (f) customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices, (g) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (iii) above on the property so acquired, (h) Permitted Refinancing Indebtedness, provided that the material restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive than those contained in the agreements governing the Indebtedness being refinanced, and (i) contracts for the sale of assets, including without limitation customary restrictions with respect to a Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Subsidiary. SECTION 4.9 INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and the Company shall not issue any Disqualified Stock and shall not permit any of its Subsidiaries to issue any shares of preferred stock; provided, however, that the Company may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio for the Company's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock is issued would have been at least 2.0 to 1 if the date on which the Indebtedness is incurred is prior to February 1, 2000, and at least 2.5 to 1 if the date on which the Indebtedness is incurred is on or after February 1, 2000, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock had been issued, as the case may be, at the beginning of such four-quarter period. The provisions of the first paragraph of this covenant will not apply to the incurrence of any of the following items of Indebtedness (collectively, "Permitted Debt"): (i the incurrence by the Company and the Subsidiary Guarantors of Indebtedness pursuant to the New Credit Facility; provided that the aggregate principal amount of all such Indebtedness (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of the Company thereunder) outstanding under the New Credit Facility after giving effect to such incurrence does not exceed the sum of $40.0 million. -50- 58 (ii the incurrence by the Company and its Restricted Subsidiaries of the Existing Indebtedness; (iii) the incurrence by the Company and the Subsidiary Guarantors of Indebtedness represented by the Notes and the Note Guarantees, respectively; (iv) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case (other than in the case of a mortgage financing secured by the real estate (and personal property associated with such real estate) owned by the Company in San Diego, California on which the Company's headquarters is located on the date of the Indenture) incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of the Company or such Restricted Subsidiary (whether through the direct purchase of assets or the Capital Stock of any Person owning such Assets), in an aggregate principal amount not to exceed $10.0 million at any time outstanding; (v) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness in connection with the acquisition of assets or a new Restricted Subsidiary; provided that such Indebtedness was incurred by the prior owner of such assets or such Restricted Subsidiary prior to such acquisition by the Company or one of its Subsidiaries and was not incurred in connection with, or in contemplation of, such acquisition by the Company or one of its Subsidiaries; provided further that the principal amount (or accreted value, as applicable) of such Indebtedness, together with any other outstanding Indebtedness incurred pursuant to this clause (v), does not exceed $5.0 million; (vi) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness that was permitted by this Indenture to be incurred; (vii) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between the Company and any of its Wholly-Owned Restricted Subsidiaries or between one Wholly-Owned Restricted Subsidiary and another Wholly-Owned Restricted Subsidiary; provided, however, that (a) if the Company is the obligor on such Indebtedness and the payee is not a Subsidiary Guarantor, such Indebtedness is expressly subordinated to the prior payment in full in cash of all Obligations with respect to the Notes; (b) if a Wholly-Owned Restricted Subsidiary that is not a Subsidiary Guarantor is the obligor on such Indebtedness, such Indebtedness, to the extent owing to the Company or any Subsidiary Guarantor, does not exceed $5.0 million in aggregate principal amount at any time outstanding; and (c) (x) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Company or a Wholly Owned Restricted Subsidiary and (y) any sale or other transfer of any such Indebtedness to a -51- 59 Person that is not either the Company or a Wholly Owned Restricted Subsidiary shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be, that was not permitted by this clause (vii); (viii) the incurrence by the Company or any of its Restricted Subsidiaries of Hedging Obligations that are incurred for the purpose of fixing or hedging (a) currency risk or interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Indenture to be outstanding or (b) exchange rate risk with respect to agreements or Indebtedness of such person payable denominated in a currency other than U.S. dollars; provided that such agreements do not increase the Indebtedness of the obligor outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or interest rates or by reason of fees, indemnities and compensation payable thereunder; (ix) the Guarantee by the Company or any of its Restricted Subsidiaries of Indebtedness of the Company or a Restricted Subsidiary of the Company that was permitted to be incurred by another provision of this covenant; (x) the incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse Debt, provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of the Company; (xi) Indebtedness incurred by the Company or any of its Restricted Subsidiaries constituting reimbursement obligations with respect to letters of credit issued in the ordinary course of business, including without limitation to letters of credit in respect to workers' compensation claims or self-insurance, or other Indebtedness with respect to reimbursement type obligations regarding workers' compensation claims; provided, however, that upon the drawing of such letters of credit or the incurrence of such Indebtedness, such obligations are reimbursed within 30 days following such drawing or incurrence; (xii) Indebtedness arising from agreements of the Company or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, asset or Subsidiary, other than guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or Subsidiary for the purpose of financing such acquisition; provided that (a) such Indebtedness is not reflected on the balance sheet of the Company or any Restricted Subsidiary (contingent obligations referred to in a footnote to financial statements and not otherwise reflected on the balance sheet will not be deemed to be reflected on such balance sheet for purposes of this clause (a) and (b) the maximum assumable liability in respect of all such Indebtedness shall at no time exceed the gross proceeds including non-cash proceeds (the fair market value of such non-cash proceeds being measured at the time received and without giving effect to any subsequent changes in value) actually received by the Company and its Restricted Subsidiaries in connection with such disposition; -52- 60 (xiii) Obligations in respect of performance and surety bonds and completion guarantees provided by the Company or any Restricted Subsidiary in the ordinary course of business; (xiv) the incurrence by Foreign Subsidiaries which are not a Guarantors of Indebtedness in connection with the financing of accounts or notes receivable outside of the United States in an aggregate principal amount at any time outstanding, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any other Indebtedness incurred pursuant to this clause (xiv) not to exceed $10.0 million; provided that neither the Company nor any Guarantor shall have guaranteed or provided credit support of any kind (including any undertaking, agreement or instrument which would constitute Indebtedness) with respect to such Indebtedness; and (xv) the incurrence by the Company or any of its Restricted Subsidiaries of additional Indebtedness, incurred after the date hereof, in an aggregate principal amount (or accreted value, as applicable) at any time outstanding, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any other Indebtedness incurred pursuant to this clause (xv), not to exceed $15.0 million. For purposes of determining compliance with this covenant, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (i) through (xv) above or is entitled to be incurred pursuant to the first paragraph of this Section 4.9, the Company shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this Section 4.9 and such item of Indebtedness will be treated as having been incurred pursuant to only one of such clauses or pursuant to the first paragraph hereof. Accrual of interest and the accretion of accreted value will not be deemed to be an incurrence of Indebtedness for purposes of this Section 4.9. SECTION 4.10 ASSET SALES. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 75% of the consideration therefor received by the Company or such Restricted Subsidiary is in the form of (a) cash or Cash Equivalents or (b) property or assets that are used or useful in a Permitted Business, or Capital Stock of any Person primarily engaged in a Permitted Business if, as a result of the acquisition by the Company or any Restricted Subsidiary thereof, such Person becomes a Restricted Subsidiary; provided that the amount of (x) any liabilities of the Company or any Restricted Subsidiary (other than contingent liabilities and liabilities of the Company that are by their terms subordinated to the Notes or any guarantee thereof) that are assumed by the transferee of any such assets pursuant to the customary novation agreement that releases the Company or such -53- 61 Restricted Subsidiary from further liability and (y) any notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are converted by the Company or such Restricted Subsidiary into cash or Cash Equivalents (to the extent of the cash or Cash Equivalents received) within 180 days following the closing of such Asset Sale, will be deemed to be cash for purposes of this provision; provided further that the 75% limitation referred to above shall not apply to any sale, transfer or other disposition of assets in which the cash portion of the consideration received therefor, determined in accordance with the foregoing proviso, is equal to or greater than what the after-tax net proceeds would have been had such transaction complied with the aforementioned 75% limitation. Within 270 days after the receipt of any Net Proceeds from an Asset Sale, the Company may apply such Net Proceeds, at its option, (a) to permanently repay Indebtedness outstanding under the New Credit Facility (and to correspondingly reduce commitments with respect to the revolving borrowings thereunder) or other Pari Passu Indebtedness, provided that if the Company shall so repay other Pari Passu Indebtedness, it will equally and ratably reduce Indebtedness under the Notes if the Notes are then redeemable or, if the Notes may not be then redeemed, the Company shall make an offer to all Holders to purchase at 100% of the principal amount thereof the amount of Notes that would otherwise be redeemed or (b) to an investment in property, capital expenditures or assets that are used or useful in a Permitted Business, or Capital Stock of any Person primarily engaged in a Permitted Business if, as a result of the acquisition by the Company or any Restricted Subsidiary thereof, such Person becomes a Restricted Subsidiary. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the preceding sentence of this paragraph will be deemed to constitute "Excess Proceeds." Pending the final application of any such Net Proceeds, the Company may temporarily reduce the revolving Indebtedness under the New Credit Facility or otherwise invest such Net Proceeds in any manner that is not prohibited by this Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $15.0 million, the Company will be required to make an offer to all Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal amount of Notes that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any, thereon, to the date of purchase, in accordance with the procedures set forth herein. To the extent that the aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. SECTION 4.11 TRANSACTIONS WITH AFFILIATES. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, -54- 62 agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction") unless (i) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $1.0 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $5.0 million, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing; provided that the following shall not be deemed Affiliate Transactions: (1) any employment agreement entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (2) transactions between or among the Company and/or its Restricted Subsidiaries, (3) Permitted Investments and Restricted Payments that are permitted by the provisions herein described above under Section 4.7, (4) customary loans, advances, fees and compensation paid to, and indemnity provided on behalf of, officers, directors, employees or consultants of the Company or any of its Restricted Subsidiaries, (5) transactions in accordance with the Securityholders Agreement, as amended; provided that no such amendment contains any provisions that are materially adverse to the Holders of the Notes, and (6) transactions between the Company or its Restricted Subsidiaries on the one hand, and DLJ or its Affiliates, on the other hand, involving the provision of financial, advisory, placement or underwriting services by DLJ; provided that fees payable to DLJ do not exceed the usual and customary fees of DLJ for similar services. SECTION 4.12 LIENS. The Company shall not and shall not permit any of its Restricted Subsidiaries to, create, incur, assume or otherwise cause or suffer to exist or become effective any Lien (other than Permitted Liens) upon any of their property or assets, now owned or hereafter acquired. SECTION 4.13 OFFER TO PURCHASE UPON CHANGE OF CONTROL. Upon the occurrence of a Change of Control, each Holder of Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase (the "Change of Control Payment"). Within 30 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Notes on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed (the "Change of Control -55- 63 Payment Date"), pursuant to the procedures required by Section 3.9 hereof and described in such notice. The Company shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Notes as a result of a Change of Control. On the Change of Control Payment Date, the Company shall, to the extent lawful, (1) accept for payment all Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Notes or portions thereof so tendered and (3) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Notes or portions thereof being purchased by the Company. The Paying Agent will promptly mail to each Holder of Notes so tendered the Change of Control Payment for such Notes, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any; provided that each such new Note will be in a principal amount of $1,000 or an integral multiple thereof. The Change of Control provisions described above will be applicable whether or not any other provisions of this Indenture are applicable. Except as described above with respect to a Change of Control, this Indenture does not contain provisions that permit the Holders of the Notes to require that the Company repurchase or redeem the Notes in the event of a takeover, recapitalization or similar transaction. The Company shall not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth herein applicable to a Change of Control Offer made by the Company and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. SECTION 4.14 CORPORATE EXISTENCE. Subject to Section 4.13 and Article 5 hereof, as the case may be, the Company and each Subsidiary Guarantor shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or other existence of each of its Subsidiaries in accordance with the respective organizational documents (as the same may be amended from time to time) of the Company or any such Subsidiary and the rights (charter and statutory), licenses and franchises of the Company and its Subsidiaries; provided that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any of its Subsidiaries, if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders of the Notes. -56- 64 SECTION 4.15 LIMITATION ON ISSUANCES OF CAPITAL STOCK OF WHOLLY-OWNED RESTRICTED SUBSIDIARIES. The Company (i) shall not, and shall not permit any Wholly-Owned Restricted Subsidiary of the Company to, transfer, convey, sell, lease or otherwise dispose of any Capital Stock of any Wholly-Owned Subsidiary of the Company to any Person (other than the Company or a Wholly-Owned Restricted Subsidiary of the Company), unless (a) such transfer, conveyance, sale, lease or other disposition is of all the Capital Stock of such Wholly-Owned Restricted Subsidiary and (b) the cash Net Proceeds from such transfer, conveyance, sale, lease or other disposition are applied in accordance with Section 4.10 hereof and (ii) will not permit any Wholly-Owned Restricted Subsidiary of the Company to issue any of its Equity Interests (other than, if necessary, shares of its Capital Stock constituting directors' qualifying shares) to any Person other than to the Company or a Wholly-Owned Restricted Subsidiary of the Company. SECTION 4.16 LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS. The Company shall not permit any Restricted Subsidiary, directly or indirectly, to Guarantee or pledge any assets to secure the payment of any other Indebtedness of the Company unless either such Restricted Subsidiary (x) is a Subsidiary Guarantor or (y) simultaneously executes and delivers a supplemental indenture to this Indenture providing for the Guarantee of the payment of the Notes by such Restricted Subsidiary, which Guarantee shall be senior to or pari passu with such Restricted Subsidiary's Guarantee of or pledge to secure such other Indebtedness. Notwithstanding the foregoing, any such Guarantee by a Restricted Subsidiary of the Notes shall provide by its terms that it shall be automatically and unconditionally released and discharged upon any sale, exchange or transfer, to any Person not an Affiliate of the Company, of all of the Company's stock in, or all or substantially all the assets of, such Restricted Subsidiary, which sale, exchange or transfer is made in compliance with the applicable provisions hereof. The form and substance of such Guarantee shall be substantially similar to EXHIBIT E hereto. SECTION 4.17 BUSINESS ACTIVITIES. The Company shall not, and shall not permit any Restricted Subsidiary to, engage in any business other than Permitted Businesses, except to such extent as would not be material to the Company and its Restricted Subsidiaries taken as a whole. SECTION 4.18 ADDITIONAL GUARANTEES. If (i) the Company or any of its Restricted Subsidiaries shall, after the date hereof, transfer or cause to be transferred, including by way of any Investment, in one or a series of transactions (whether or not related), any assets, businesses, divisions, real property or equipment having an aggregate fair market value (as determined in good faith by the Board of Directors) in excess of $1.0 million to any Restricted Subsidiary that is not a Subsidiary Guarantor or a Foreign Subsidiary, (ii) the Company or any of its Restricted Subsidiaries shall acquire another Restricted Subsidiary, -57- 65 other than a Foreign Subsidiary, having total assets with a fair market value (as determined in good faith by the Board of Directors) in excess of $1.0 million, or (iii) if any Restricted Subsidiary other than a Foreign Subsidiary shall incur Acquired Debt in excess of $1.0 million, then the Company shall, at the time of such transfer, acquisition or incurrence, (A) cause such transferee, acquired Restricted Subsidiary or Restricted Subsidiary incurring Acquired Debt (if not then a Subsidiary Guarantor) to execute a Note Guarantee of the Obligations of the Company under the Notes in the form and substance substantially similar to EXHIBIT E hereto and (B) deliver to the Trustee an Opinion of Counsel, in form reasonably satisfactory to the Trustee, that such Note Guarantee is a valid, binding and enforceable obligation of such transferee, acquired Restricted Subsidiary or Restricted Subsidiary incurring Acquired Debt, subject to customary exceptions for bankruptcy, fraudulent conveyance and equitable principles. Notwithstanding the foregoing, the Company or any of its Restricted Subsidiaries may make a Restricted Investment in any Wholly-Owned Restricted Subsidiary of the Company without compliance with this Section 4.18, provided that such Restricted Investment is permitted by Section 4.7 hereof. SECTION 4.19 PAYMENT FOR CONSENTS. Neither the Company nor any of its Subsidiaries shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder of any Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions hereof or the Notes unless such consideration is offered to be paid or is paid to all Holders of the Notes that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. ARTICLE 5 SUCCESSORS SECTION 5.1 MERGER, CONSOLIDATION OF SALE OF ASSETS. The Company shall not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another Person unless (i) the Company is the surviving corporation or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the Person formed by or surviving any such consolidation or merger (if other than the Company) or the Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of the Company under the Notes and this Indenture pursuant to a supplemental indenture in a form substantially similar to EXHIBIT E hereto; (iii) immediately after such transaction no Default or Event of Default exists; (iv) except in the case of a merger of the -58- 66 Company with or into a Wholly-Owned Restricted Subsidiary of the Company, the Company or the entity or Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made will, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the Section 4.9 hereof; and (v) each Subsidiary Guarantor, unless it is the other party to the transactions described above, shall have by supplemental indenture confirmed that its Note Guarantee shall apply to such Person's obligations hereunder and under the Notes. SECTION 5.2 SUCCESSOR CORPORATION SUBSTITUTED. Upon any consolidation or merger, or any sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the assets of the Company in accordance with Section 5.1 hereof, the successor corporation formed by such consolidation or into or with which the Company is merged or to which such sale, assignment, transfer, lease, conveyance or other disposition is made shall succeed to, and be substituted for (so that from and after the date of such consolidation, merger, sale, lease, conveyance or other disposition, the provisions of this Indenture referring to the "Company" shall refer instead to the successor corporation and not to the Company), and shall exercise every right and power of the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein; provided, that, (i) solely for the purposes of computing Consolidated Net Income for purposes of clause (b) of the first paragraph of Section 4.7 hereof, the Consolidated Net Income of any person other than the Company and its Subsidiaries shall be included only for periods subsequent to the effective time of such merger, consolidation, combination or transfer of assets; and (ii) in the case of any sale, assignment, transfer, lease, conveyance, or other disposition of less than all of the assets of the predecessor Company, the predecessor Company shall not be released or discharged from the obligation to pay the principal of or interest and Liquidated Damages, if any, on the Notes. ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.1 EVENTS OF DEFAULT. Each of the following constitutes an "Event of Default": (i) default for 30 days in the payment when due of interest on, or Liquidated Damages with respect to, the Notes; (ii) default in payment when due of principal of or premium, if any, on the Notes; -59- 67 (iii) failure by the Company to comply with the provisions described under Sections 4.10 or 4.13 or Article 5 hereof; (iv) failure by the Company for 30 days after notice from the Trustee or at least 25% in principal amount of the Notes then outstanding to comply with the provisions described under Sections 4.7 or 4.9 hereof; (v) failure by the Company for 60 days after notice from the Trustee or at least 25% in principal amount of the Notes then outstanding to comply with any of its other agreements in this Indenture or the Notes; (vi) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created after the date hereof, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $5.0 million or more; (vii) failure by the Company or any of its Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; (viii) the Company or any of its Subsidiaries, pursuant to or within the meaning of Bankruptcy Law: (a) commences a voluntary case, (b) consents to the entry of an order for relief against it in an involuntary case, (c) consents to the appointment of a Custodian of it or for all or substantially all of its property, (d) makes a general assignment for the benefit of its creditors, or (e) generally is not paying its debts as they become due; or -60- 68 (ix) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (a) is for relief against the Company or any of its Subsidiaries in an involuntary case; (b) appoints a Custodian of the Company or any of its Subsidiaries or for all or substantially all of the property of the Company or any of its Subsidiaries; or (c) orders the liquidation of the Company or any of its Subsidiaries; and the order or decree remains unstayed and in effect for 60 consecutive days. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. SECTION 6.2 ACCELERATION. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default as described in (viii) and (ix) of Section 6.1 hereof, all outstanding Notes will become due and payable without further action or notice. Holders of the Notes may not enforce this Indenture or the Notes except as provided in this Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. In the case of any Event of Default occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium that the Company would have had to pay if the Company then had elected to redeem the Notes pursuant to the optional redemption provisions of Section 3.7(a) hereof, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law upon the acceleration of the Notes. If an Event of Default occurs prior to February 1, 2002 by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding the prohibition on redemption of the Notes prior to February 1, 2002, then the amount payable in respect of such Notes for purposes of this paragraph for each of the twelve-month periods beginning on February 1 of the years indicated below shall be set forth below, expressed as percentages of the principal amount that would otherwise be due but for the provisions of this sentence, plus accrued and unpaid interest and Liquidated Damages, if any, to the date of payment: -61- 69 Year Percentage 1998........................................ 116.125% 1999........................................ 113.438% 2000........................................ 110.750% 2001........................................ 108.063%
SECTION 6.3 OTHER REMEDIES. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal, premium, if any, interest and Liquidated Damages, if any, on the Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder of a Note in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. The Company is required to deliver to the Trustee annually a statement regarding compliance with this Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. SECTION 6.4 WAIVER OF PAST DEFAULTS. The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Notes waive any existing Default or Event of Default and its consequences under this Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the Notes. SECTION 6.5 CONTROL BY MAJORITY. The Holders of a majority in principal amount of the then outstanding Notes may direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee or exercising any trust power conferred on it. However, (i) the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that the Trustee determines may be unduly prejudicial to the rights of other Holders of Notes or that may involve the Trustee in personal liability, and (ii) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. In case an Event of Default shall occur (which shall not be cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent person in the conduct of such person's own affairs. Notwithstanding any provision to the contrary in this Indenture, the Trustee is under no obligation to exercise any of its rights or powers under this -62- 70 Indenture at the request of any Holder of Notes, unless such Holder shall offer to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. SECTION 6.6 LIMITATION ON SUITS. A Holder of a Note may pursue a remedy with respect to this Indenture, the Note Guarantees or the Notes only if: (a) the Holder of a Note gives to the Trustee written notice of a continuing Event of Default or the Trustee receives such notice from the Company; (b) the Holders of at least 25% in principal amount of the then outstanding Notes make a written request to the Trustee to pursue the remedy; (c) such Holder of a Note or Holders of Notes offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (d) the Trustee does not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity; and (e) during such 60-day period the Holders of a majority in principal amount of the then outstanding Notes do not give the Trustee a direction inconsistent with the request. A Holder of a Note may not use this Indenture to prejudice the rights of another Holder of a Note or to obtain a preference or priority over another Holder of a Note. SECTION 6.7 RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of principal, premium, if any, interest, and Liquidated Damages, if any, on the Note, on or after the respective due dates expressed in the Note (including in connection with an offer to purchase), or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.8 COLLECTION SUIT BY TRUSTEE. If an Event of Default specified in Section 6.1(i) or (ii) hereof occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal of, premium and Liquidated Damages, if any, and interest remaining unpaid on the Notes and interest on overdue principal and, to the extent lawful, interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. -63- 71 SECTION 6.9 TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders of the Notes allowed in any judicial proceedings relative to the Company (or any other obligor upon the Notes), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other securities or property payable or deliverable upon the conversion or exchange of the Notes or on any such claims and any Custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.7 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.7 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties that the Holders may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10 PRIORITIES. If the Trustee collects any money pursuant to this Article 6, it shall pay out the money in the following order: First: to the Trustee, its agents and attorneys for amounts due under Section 7.7 hereof, including payment of all compensation, expense and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection; Second: to Holders of Notes for amounts due and unpaid on the Notes for principal, premium, if any, interest, and Liquidated Damages, if any, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal, premium, if any, interest, and Liquidated Damages, if any, respectively; Third: without duplication, to the Holders for any other Obligations owing to the Holders under this Indenture and the Notes; and Fourth: to the Company or to such party as a court of competent jurisdiction shall direct. -64- 72 The Trustee may fix a record date and payment date for any payment to Holders of Notes pursuant to this Section 6.10. SECTION 6.11 UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder of a Note pursuant to Section 6.7 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Notes. ARTICLE 7 TRUSTEE SECTION 7.1 DUTIES OF TRUSTEE. (a) If an Event of Default has occurred and is continuing of which a Responsible Officer of the Trustee has knowledge, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in its exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (i) the duties of the Trustee shall be determined solely by the express provisions of this Indenture or the TIA and the Trustee need perform only those duties that are specifically set forth in this Indenture or the TIA and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: -65- 73 (i) this paragraph does not limit the effect of paragraph (b) of this Section 7.1; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.5 hereof. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section 7.1. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee shall be under no obligation to exercise any of its rights and powers under this Indenture at the request of any Holders, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 7.2 RIGHTS OF TRUSTEE. (a) The Trustee may conclusively rely on the truth of the statements and correctness of the opinions contained in, and shall be protected from acting or refraining from acting upon, any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. Prior to taking, suffering or admitting any action, the Trustee may consult with counsel of the Trustee's own choosing and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within the rights or powers conferred upon it by this Indenture. -66- 74 (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company or any Subsidiary Guarantor shall be sufficient if signed by an Officer of the Company or Subsidiary Guarantor, as applicable. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders unless such Holders shall have offered to the Trustee reasonable security or indemnity satisfactory to the Trustee against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction. SECTION 7.3 INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual or any other capacity may become the owner of Notes and may otherwise deal with the Company, the Subsidiary Guarantors or any Affiliate of the Company or any Subsidiary Guarantor with the same rights it would have if it were not Trustee. However, in the event that the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue as Trustee or resign. Any Agent may do the same with like rights and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof. SECTION 7.4 TRUSTEE'S DISCLAIMER. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture, the Note Guarantees or the Notes, it shall not be accountable for the Company's use of the proceeds from the Notes or any money paid to the Company or upon the Company's direction under any provision of this Indenture, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee, and it shall not be responsible for any statement or recital herein or any statement in the Notes or any other document in connection with the sale of the Notes or pursuant to this Indenture other than its certificate of authentication. SECTION 7.5 NOTICE OF DEFAULTS. If a Default or Event of Default occurs and is continuing and if it is known to a Responsible Officer of the Trustee, the Trustee shall mail to Holders of Notes a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or Event of Default in payment on any Note pursuant to Section 6.1(i) or (ii) hereof, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of the Holders of the Notes. SECTION 7.6 REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES. -67- 75 Within 60 days after each May 15 beginning with the May 15 following the date of this Indenture, and for so long as Notes remain outstanding, the Trustee shall mail to the Holders of the Notes a brief report dated as of such reporting date that complies with TIA Section 313(a) (but if no event described in TIA Section 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA Section 313(b). The Trustee shall also transmit by mail all reports as required by TIA Section 313(c). A copy of each report at the time of its mailing to the Holders of Notes shall be mailed to the Company and filed with the Commission and each stock exchange on which the Company has informed the Trustee in writing the Notes are listed in accordance with TIA Section 313(d). The Company shall promptly notify the Trustee when the Notes are listed on any stock exchange and of any delisting thereof. SECTION 7.7 COMPENSATION AND INDEMNITY. The Company and the Subsidiary Guarantors shall pay to the Trustee from time to time reasonable compensation for its acceptance of this Indenture and services hereunder. To the extent permitted by law, the Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. The Company and the Subsidiary Guarantors shall indemnify the Trustee against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, including the costs and expenses of enforcing this Indenture against the Company and the Subsidiary Guarantors (including this Section 7.7) and defending itself against any claim (whether asserted by the Company, the Subsidiary Guarantors or any Holder or any other person) or liability in connection with the exercise or performance of any of its powers or duties hereunder except to the extent any such loss, liability or expense may be attributable to its negligence or bad faith. The Trustee shall notify the Company and the Subsidiary Guarantors promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company and the Subsidiary Guarantors shall not relieve the Company and the Subsidiary Guarantors of its obligations hereunder. The Company and the Subsidiary Guarantors shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company and the Subsidiary Guarantors shall pay the reasonable fees and expenses of such counsel. The Company and the Subsidiary Guarantors need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The obligations of the Company and the Subsidiary Guarantors under this Section 7.7 shall survive the satisfaction and discharge of this Indenture. -68- 76 To secure the Company's and the Subsidiary Guarantors' payment obligations in this Section 7.7, the Trustee shall have a Lien prior to the Notes on all money or property held or collected by the Trustee, except that held in trust to pay principal, interest and Liquidated Damages, if any, on particular Notes. Such Lien shall survive the satisfaction and discharge of this Indenture and the resignation or removal of the Trustee. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.1(viii) or (ix) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. The Trustee shall comply with the provisions of TIA Section 313(b)(2) to the extent applicable. SECTION 7.8 REPLACEMENT OF TRUSTEE. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.8. The Trustee may resign in writing at any time and be discharged from the trust hereby created by so notifying the Company. The Holders of a majority in principal amount of the then outstanding Notes may remove the Trustee by so notifying the Trustee and the Company in writing. The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 7.10 hereof; (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (c) a Custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company, or the Holders of at least 10% in principal amount of the then outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. -69- 77 If the Trustee, after written request by any Holder of a Note who has been a Holder of a Note for at least six months, fails to comply with Section 7.10 hereof, such Holder of a Note may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and the duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to the Holders of the Notes. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided that all sums owing to the Trustee hereunder have been paid and subject to the Lien provided for in Section 7.7 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 7.8, the Company's obligations under Section 7.7 hereof shall continue for the benefit of the retiring Trustee. SECTION 7.9 SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee or any Agent consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business (including the trust created by this Indenture) to, another corporation, the successor corporation without any further act shall be the successor Trustee or any Agent, as applicable. SECTION 7.10 ELIGIBILITY; DISQUALIFICATION. There shall at all times be a Trustee hereunder that is a corporation organized and doing business under the laws of the United States of America or of any state thereof that is authorized under such laws to exercise corporate trustee power, that is subject to supervision or examination by federal or state authorities. The Trustee (or, if the Trustee is a subsidiary of a bank holding company, its parent) shall at all times have a combined capital surplus of at least $50.0 million as set forth in its most recent annual report of condition. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1), (2) and (5). The Trustee is subject to TIA Section 310(b). SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE COMPANY. The Trustee is subject to TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. ARTICLE 8 -70- 78 LEGAL DEFEASANCE AND COVENANT DEFEASANCE SECTION 8.1 OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE. The Company and the Subsidiary Guarantors may, at the option of their respective Boards of Directors evidenced by a resolution set forth in an Officers' Certificate, at any time, elect to have either Section 8.2 or 8.3 hereof be applied to all outstanding Notes and Note Guarantees upon compliance with the conditions set forth below in this Article 8. SECTION 8.2 LEGAL DEFEASANCE AND DISCHARGE. Upon the Company's exercise under Section 8.1 hereof of the option applicable to this Section 8.2, the Company and each Subsidiary Guarantor shall, subject to the satisfaction of the conditions set forth in Section 8.4 hereof, be deemed to have been discharged from their respective obligations with respect to all outstanding Notes and Note Guarantees on the date the conditions set forth below are satisfied (hereinafter, "Legal Defeasance"). For this purpose, Legal Defeasance means that the Company and each Subsidiary Guarantor shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Notes and Note Guarantees, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.5 hereof and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all their respective other obligations under such Notes and Note Guarantees and this Indenture (and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following provisions which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of outstanding Notes to receive payments in respect of the principal of, premium, if any, and interest and Liquidated Damages, if any, on such Notes when such payments are due from the trust referred to in Section 8.4(a); (b) the Company's obligations with respect to such Notes under Sections 2.2, 2.3, 2.4, 2.5, 2.6, 2.7, 2.10 and 4.2 hereof; (c) the rights, powers, trusts, duties and immunities of the Trustee including without limitation thereunder Section 7.7, 8.5 and 8.7 hereof and the Company's obligations in connection therewith and (d) the provisions of this Article 8. Subject to compliance with this Article 8, the Company may exercise its option under this Section 8.2 notwithstanding the prior exercise of its option under Section 8.3 hereof. SECTION 8.3 COVENANT DEFEASANCE. Upon the Company's exercise under Section 8.1 hereof of the option applicable to this Section 8.3, the Company and each Subsidiary Guarantor shall, subject to the satisfaction of the conditions set forth in Section 8.4 hereof, be released from its obligations under the covenants contained in Sections 3.9, 4.5, 4.7, 4.8, 4.9, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17, 4.18, 5.1 and 10.1 hereof with respect to the outstanding Notes and Note Guarantees on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"), and the Notes and Note Guarantees shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection -71- 79 with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Notes and Note Guarantees shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to the outstanding Notes and Note Guarantees, the Company or any of its Subsidiaries may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.1 hereof, but, except as specified above, the remainder of this Indenture and such Notes and Note Guarantees shall be unaffected thereby. In addition, upon the Company's exercise under Section 8.1 hereof of the option applicable to this Section 8.3, subject to the satisfaction of the conditions set forth in Section 8.4 hereof, Sections 6.1(iii) through 6.1(v) hereof shall not constitute Events of Default. SECTION 8.4 CONDITIONS TO LEGAL OR COVENANT DEFEASANCE. The following shall be the conditions to the application of either Section 8.2 or 8.3 hereof to the outstanding Notes and Note Guarantees: In order to exercise either Legal Defeasance or Covenant Defeasance: (a) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of the Notes, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as shall be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium and Liquidated Damages, if any, and interest on the outstanding Notes on the stated maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the Notes are being defeased to maturity or to a particular redemption date; (b) in the case of an election under Section 8.2 hereof, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date hereof, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders of the outstanding Notes shall not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and shall be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (c) in the case of an election under Section 8.3 hereof, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that the Holders of the outstanding Notes shall not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and shall be subject to federal -72- 80 income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (d) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit) or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (e) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than this Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (f) the Company shall have delivered to the Trustee an opinion of counsel to the effect that after the 91st day following the deposit, the trust funds shall not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (g) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of Notes over the other creditors of the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (h) the Company shall have delivered to the Trustee an Officers' Certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. SECTION 8.5 DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. Subject to Section 8.6 hereof, all money and non-callable Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 8.5, the "Trustee") pursuant to Section 8.4 hereof in respect of the outstanding Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal, premium, if any, interest and Liquidated Damages, if any, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or non-callable Government Securities deposited pursuant to -73- 81 Section 8.4 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Notes. Anything in this Article 8 to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon the written request of the Company and be relieved of all liability with respect to any money or non-callable Government Securities held by it as provided in Section 8.4 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may be the opinion delivered under Section 8.4(a) hereof), are in excess of the amount thereof that would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance. SECTION 8.6 REPAYMENT TO THE COMPANY. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, interest or Liquidated Damages, if any, on any Note and remaining unclaimed for one year after such principal, and premium, if any, or interest or Liquidated Damages, if any, has become due and payable shall be paid to the Company on its written request or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining shall be repaid to the Company. SECTION 8.7 REINSTATEMENT. If the Trustee or Paying Agent is unable to apply any United States dollars or non-callable Government Securities in accordance with Section 8.2 or 8.3 hereof, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations of the Company and the Subsidiary Guarantors under this Indenture, the Notes and the Note Guarantees shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.2 or 8.3 hereof until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.2 or 8.3 hereof, as the case may be; provided, however, that, if the Company makes any payment of principal of, premium, if any, interest or Liquidated Damages, if any, on any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE 9 -74- 82 AMENDMENT, SUPPLEMENT AND WAIVER SECTION 9.1 WITHOUT CONSENT OF HOLDERS OF THE NOTES. Notwithstanding Section 9.2 of this Indenture, without the consent of any Holder of Notes the Company and the Trustee may amend or supplement this Indenture, the Notes or the Note Guarantees: (a) to cure any ambiguity, defect or inconsistency; (b) to provide for uncertificated Notes in addition to or in place of certificated Notes; (c) to provide for the assumption of the Company's or a Subsidiary Guarantor's obligations to the Holders of the Notes in the case of a merger, or consolidation pursuant to Article 5 or Article 10 hereof, as applicable; (d) to make any change that would provide any additional rights or benefits to the Holders of the Notes or that does not adversely affect the legal rights hereunder of any Holder of the Notes; (e) to comply with requirements of the Commission in order to effect or maintain the qualification of this Indenture under the TIA; or (f) to allow any Subsidiary to Guarantee the Notes. Upon the written request of the Company accompanied by a resolution of its Board of Directors of the Company authorizing the execution of any such amended or supplemental indenture, and upon receipt by the Trustee of the documents described in Section 9.6 hereof, the Trustee shall join with the Company and the Subsidiary Guarantors in the execution of any amended or supplemental indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into such amended or supplemental indenture that affects its own rights, duties or immunities under this Indenture or otherwise. SECTION 9.2 WITH CONSENT OF HOLDERS OF NOTES. Except as provided below in this Section 9.2, this Indenture, the Notes or the Note Guarantees may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer, for Notes), and, any existing default or compliance with any provision of this Indenture, the Notes or the Note Guarantees may be waived with the consent of the Holders of a majority in principal amount of the then outstanding -75- 83 Notes (including consents obtained in connection with or a tender offer or exchange offer for the Notes). Upon the request of the Company accompanied by a resolution of its Board of Directors authorizing the execution of any such amended or supplemental indenture, and upon the filing with the Trustee of evidence satisfactory to the Trustee of the consent of the Holders of Notes as aforesaid, and upon receipt by the Trustee of the documents described in Section 9.6 hereof, the Trustee shall join with the Company and the Subsidiary Guarantors in the execution of such amended or supplemental indenture unless such amended or supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may, but shall not be obligated to, enter into such amended or supplemental indenture. It shall not be necessary for the consent of the Holders of Notes under this Section 9.2 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 9.2 becomes effective, the Company shall mail to the Holders of each Note affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amended or supplemental indenture or waiver. Subject to Sections 6.2, 6.4 and 6.7, hereof, the Holders of a majority in aggregate principal amount of the Notes then outstanding may amend or waive compliance in a particular instance by the Company or the Subsidiary Guarantors with any provision of this Indenture, the Notes or the Note Guarantees. However, without the consent of each Holder affected, an amendment, or waiver may not (with respect to any Note held by a non-consenting Holder): (a) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; (b) reduce the principal of or change the fixed maturity of any Note or alter the provisions with respect to the redemption of the Notes (other than provisions relating to Sections 3.9, 4.10 and 4.13 hereof); (c) reduce the rate of or change the time for payment of interest on any Note; (d) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the Notes (except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the Notes and a waiver of the payment default that resulted from such acceleration); (e) make any Note payable in money other than that stated in the Notes; (f) make any change in Section 6.4 or 6.7 hereof; -76- 84 (g) waive a redemption or repurchase payment with respect to any Note (other than a payment required by Section 4.10 or 4.13 hereof); or (h) make any change in the amendment and waiver provisions of this Article 9. SECTION 9.3 COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment or supplement to this Indenture, the Note Guarantees or the Notes shall be set forth in an amended or supplemental indenture that complies with the TIA as then in effect. SECTION 9.4 REVOCATION AND EFFECT OF CONSENTS. Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Note is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder of a Note may revoke the consent as to its Note if the Trustee receives written notice of revocation before the date the waiver, supplement or amendment becomes effective. When an amendment, supplement or waiver becomes effective in accordance with its terms, it thereafter binds every Holder. The Company may, but shall not be obligated to, fix a record date for determining which Holders of the Notes must consent to such amendment, supplement or waiver. If the Company fixes a record date, the record date shall be fixed at (i) the later of 30 days prior to the first solicitation of such consent or the date of the most recent list of Holders of Notes furnished for the Trustee prior to such solicitation pursuant to Section 2.5 hereof or (ii) such other date as the Company shall designate. SECTION 9.5 NOTATION ON OR EXCHANGE OF NOTES. The Trustee may place an appropriate notation about an amendment, supplement or waiver on any Note thereafter authenticated. The Company in exchange for all Notes may issue and the Trustee shall authenticate new Notes that reflect the amendment, supplement or waiver. Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment, supplement or waiver. SECTION 9.6 TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall sign any amended or supplemental indenture authorized pursuant to this Article 9 if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. The Company and the Subsidiary Guarantors may not sign an amendment or supplemental indenture until their respective Boards of Directors approve it. In -77- 85 signing or refusing to sign any amended or supplemental indenture the Trustee shall be entitled to receive and (subject to Section 7.1 hereof) shall be fully protected in relying upon, in addition to the documents required by Section 10.4 hereof, an Officers' Certificate and an Opinion of Counsel stating that the execution of such amended or supplemental indenture is authorized or permitted by this Indenture, that it is not inconsistent herewith, and that it will be valid and binding upon the Company and the Subsidiary Guarantors in accordance with its terms. ARTICLE 10 GUARANTEE OF NOTES SECTION 10.1 NOTE GUARANTEE. Subject to Section 10.6 hereof, each of the Subsidiary Guarantors hereby, jointly and severally, unconditionally guarantees to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of this Indenture, the Notes and the Obligations of the Company hereunder and thereunder, that: (a) the principal of, premium, if any, interest and Liquidated Damages, if any, on the Notes will be promptly paid in full when due, subject to any applicable grace period, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal, premium, if any, (to the extent permitted by law) interest on any interest, if any, and Liquidated Damages, if any, on the Notes, and all other payment Obligations of the Company to the Holders or the Trustee hereunder or thereunder will be promptly paid in full and performed, all in accordance with the terms hereof and thereof; and (b) in case of any extension of time of payment or renewal of any Notes or any of such other Obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, subject to any applicable grace period, whether at stated maturity, by acceleration, redemption or otherwise. Failing payment when so due of any amount so guaranteed for whatever reason the Subsidiary Guarantors will be jointly and severally obligated to pay the same immediately. An Event of Default under this Indenture or the Notes shall constitute an event of default under the Note Guarantees, and shall entitle the Holders to accelerate the Obligations of the Subsidiary Guarantors hereunder in the same manner and to the same extent as the Obligations of the Company. The Subsidiary Guarantors hereby agree that their Obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a Subsidiary Guarantor. Each Subsidiary Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that this Note Guarantee will not be discharged except by complete performance of the Obligations contained in the Notes and this Indenture. If any Holder or the Trustee is required by any court or otherwise to return to the -78- 86 Company, the Subsidiary Guarantors, or any Note Custodian, Trustee, liquidator or other similar official acting in relation to either the Company or the Subsidiary Guarantors, any amount paid by either to the Trustee or such Holder, this Note Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. Each Subsidiary Guarantor agrees that it shall not be entitled to, and hereby waives, any right of subrogation in relation to the Holders in respect of any Obligations guaranteed hereby. Each Subsidiary Guarantor further agrees that, as between the Subsidiary Guarantors, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the Obligations guaranteed hereby may be accelerated as provided in Article 6 for the purposes of this Note Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby, and (y) in the event of any declaration of acceleration of such Obligations as provided in Article 6 hereof, such Obligations (whether or not due and payable) shall forthwith become due and payable by the Subsidiary Guarantors for the purpose of this Note Guarantee. The Subsidiary Guarantors shall have the right to seek contribution from any non-paying Subsidiary Guarantor so long as the exercise of such right does not impair the rights of the Holders under the Note Guarantees. SECTION 10.2 EXECUTION AND DELIVERY OF NOTE GUARANTEE. To evidence its Note Guarantee set forth in Section 10.1, each Subsidiary Guarantor hereby agrees that a notation of such Note Guarantee substantially in the form of EXHIBIT E shall be endorsed by an Officer of such Subsidiary Guarantor on each Note authenticated and delivered by the Trustee and that this Indenture shall be executed on behalf of such Subsidiary Guarantor, by manual or facsimile signature, by an Officer of such Subsidiary Guarantor. Each Subsidiary Guarantor hereby agrees that its Note Guarantee set forth in Section 10.1 shall remain in full force and effect notwithstanding any failure to endorse on each Note a notation of such Note Guarantee. If an Officer whose signature is on this Indenture or on the Note Guarantee no longer holds that office at the time the Trustee authenticates the Note on which a Note Guarantee is endorsed, the Note Guarantee shall be valid nevertheless. The delivery of any Note by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of the Note Guarantee set forth in this Indenture on behalf of the Subsidiary Guarantors. SECTION 10.3 SUBSIDIARY GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN TERMS (a) Except as set forth in Articles 4 and 5 hereof, nothing contained in this Indenture shall prohibit a merger between a Subsidiary Guarantor and another Subsidiary Guarantor or a merger between a Subsidiary Guarantor and the Company. -79- 87 (b) Subject to Section 10.4 hereof, no Subsidiary Guarantor may consolidate with or merge with or into (whether or not such Subsidiary Guarantor is the surviving Person), another corporation, Person or entity whether or not affiliated with such Subsidiary Guarantor unless, subject to the provisions of the following paragraph, (i) the Person formed by or surviving any such consolidation or merger (if other than such Subsidiary Guarantor) assumes all the obligations of such Subsidiary Guarantor pursuant to a supplemental indenture in form and substance reasonably satisfactory to the Trustee, under the Notes and this Indenture; (ii) immediately after giving effect to such transaction, no Default or Event of Default exists; (iii) such Subsidiary Guarantor, or any Person formed by or surviving any such consolidation or merger, would have Consolidated Net Worth (immediately after giving effect to such transaction), equal to or greater than the Consolidated Net Worth of such Subsidiary Guarantor immediately preceding the transaction; and (iv) the Company would be permitted by virtue of its pro forma Fixed Charge Coverage Ratio, immediately after giving effect to such transaction, to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.9. The requirements of clauses (i), (iii) and (iv) of this paragraph will not apply in the case of a consolidation with or merger with or into the Company or another Subsidiary Guarantor. (c) In the case of any such consolidation, merger, sale or conveyance and upon the assumption by the successor Person, by supplemental indenture, executed and delivered to the Trustee and substantially in the form of EXHIBIT E hereto, of the Note Guarantee endorsed upon the Notes and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Subsidiary Guarantor, such successor Person shall succeed to and be substituted for the Subsidiary Guarantor with the same effect as if it had been named herein as a Subsidiary Guarantor; provided that, solely for purposes of computing Consolidated Net Income for purposes of clause (b) of the first paragraph of Section 4.7 hereof, the Consolidated Net Income of any Person other than the Company and its Restricted Subsidiaries shall only be included for periods subsequent to the effective time of such merger, consolidation, combination or transfer of assets. Such successor Person thereupon may cause to be signed any or all of the Note Guarantees to be endorsed upon all of the Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee. All of the Note Guarantees so issued shall in all respects have the same legal rank and benefit under this Indenture as the Note Guarantees theretofore and thereafter issued in accordance with the terms of this Indenture as though all of such Note Guarantees had been issued at the date of the execution hereof. SECTION 10.4 RELEASES FOLLOWING SALE OF ASSETS, MERGER, SALE OF CAPITAL STOCK ETC. In the event (a) of a sale or other disposition of all of the assets of any Subsidiary Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the capital stock of any Subsidiary Guarantor, or (b) that the Company designates a Subsidiary Guarantor to be an Unrestricted Subsidiary, or such Subsidiary Guarantor ceases to be a Subsidiary of the Company, then such Subsidiary Guarantor (in the event of a sale or other disposition, by way of such a merger, consolidation or otherwise, of all of the capital stock of such Subsidiary Guarantor or any such -80- 88 designation) or the entity acquiring the property (in the event of a sale or other disposition of all of the assets of such Subsidiary Guarantor) shall be released and relieved of any obligations under its Note Guarantee; provided that the Net Proceeds of such sale or other disposition are applied in accordance with the provisions of Section 4.10 and, if applicable, Section 4.13 hereof. In the case of a sale, assignment, lease, transfer, conveyance or other disposition of all or substantially all of the assets of a Subsidiary Guarantor, upon the assumption provided for in clause (i) of the Section 10.3(b) hereof, such Subsidiary Guarantor shall be discharged from all further liability and obligation under this Indenture. Upon delivery by the Company to the Trustee of an Officers' Certificate to the effect of the foregoing, the Trustee shall execute any documents reasonably required in order to evidence the release of any Subsidiary Guarantor from its Obligation under its Note Guarantee. Any Subsidiary Guarantor not released from its Obligations under its Note Guarantee shall remain liable for the full amount of principal of, premium, if any, interest and Liquidated Damages, if any, on the Notes and for the other Obligations of such Subsidiary Guarantor under this Indenture as provided in this Article 10. SECTION 10.5 ADDITIONAL SUBSIDIARY GUARANTORS. Any Person that was not a Subsidiary Guarantor on the date of this Indenture may become a Subsidiary Guarantor by executing and delivering to the Trustee (a) a supplemental indenture in substantially the form of EXHIBIT E, and (b) an Opinion of Counsel to the effect that such supplemental indenture has been duly authorized and executed by such Person and constitutes the legal, valid, binding and enforceable obligation of such Person (subject to such customary exceptions concerning creditors rights', fraudulent transfers, public policy and equitable principles as may be acceptable to the Trustee in its discretion). SECTION 10.6 LIMITATION ON SUBSIDIARY GUARANTOR LIABILITY. For purposes hereof, each Subsidiary Guarantor's liability shall be limited to the lesser of (i) the aggregate amount of the Obligations of the Company under the Notes and this Indenture and (ii) the amount, if any, which would not have (A) rendered such Subsidiary Guarantor "insolvent" (as such term is defined in the United States Bankruptcy Code and in the Debtor and Creditor Law of the State of New York) or (B) left such Subsidiary Guarantor with unreasonably small capital at the time its Note Guarantee of the Notes was entered into; provided that, it will be a presumption in any lawsuit or other proceeding in which a Subsidiary Guarantor is a party that the amount guaranteed pursuant to the Note Guarantee is the amount set forth in clause (i) above unless any creditor, or representative of creditors of such Subsidiary Guarantor, or debtor in possession or trustee in bankruptcy of the Subsidiary Guarantor, otherwise proves in such a lawsuit that the aggregate liability of the Subsidiary Guarantor is the amount set forth in clause (ii) above. In making any determination as to solvency or sufficiency of capital of a Subsidiary Guarantor in accordance with the previous sentence, the right of such Subsidiary Guarantor to contribution from other Subsidiary Guarantors, and any other rights such Subsidiary Guarantor may have, contractual or otherwise, shall be taken into account. -81- 89 SECTION 10.7 "TRUSTEE" TO INCLUDE PAYING AGENT. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article 10 shall in each case (unless the context shall otherwise require) be construed as extending to and including such Paying Agent within its meaning as fully and for all intents and purposes as if such Paying Agent were named in this Article 10 in place of the Trustee. ARTICLE 11 MISCELLANEOUS SECTION 11.1 TRUST INDENTURE ACT CONTROLS. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA Section 318(c), the imposed duties shall control. SECTION 11.2 NOTICES. Any notice or communication by the Company, the Subsidiary Guarantors or the Trustee to the others is duly given if in writing and delivered in Person or mailed by first class mail (registered or certified, return receipt requested), telecopier or overnight air courier guaranteeing next day delivery, to the others' address: If to the Company or the Subsidiary Guarantors: Phase Metrics, Inc. 10260 Sorrento Valley Road San Diego, California 92121 Telecopier No.: (619) 646-4990 Attention: Chief Financial Officer With a copy to: Brobeck, Phleger & Harrison, LLP 4675 MacArthur Court, Suite 1000 Newport Beach, California 92660 Telecopier No.: (714) 752-7522 Attention: Greg T. Williams, Esq. If to the Trustee: -82- 90 State Street Bank and Trust Company of California, N.A. 725 South Figueroa Street, Suite 3100 Los Angeles, CA 90017 Telecopier No.: (213) 362-7357 Attention: Corporate Trust Department (Phase Metrics, Inc. 10-3/4% Senior Notes due 2005) The Company, the Subsidiary Guarantors or the Trustee, by notice to the others may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier promising next Business Day delivery. Any notice or communication to a Holder shall be mailed by first class mail or by overnight air courier promising next Business Day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in TIA Section 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. SECTION 11.3 COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES. Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION 11.4 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company or the Subsidiary Guarantors to the Trustee to take any action under this Indenture (other than the initial issuance of the Senior Notes), the Company or Subsidiary Guarantor shall furnish to the Trustee upon request: -83- 91 (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 11.5 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been satisfied; and (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 11.5 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied. SECTION 11.5 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA Section 314(a)(4)) shall comply with the provisions of TIA Section 314(e) and shall include: (a) a statement that the Person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been satisfied; and (d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been satisfied. SECTION 11.6 RULES BY TRUSTEE AND AGENTS. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. SECTION 11.7 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS. No director, officer, employee, incorporator or stockholder of the Company or the Subsidiary Guarantors, as such, shall have any liability for any obligations of the Company or any Subsidiary Guarantor under the Notes, this Indenture, the Note Guarantees or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. -84- 92 SECTION 11.8 GOVERNING LAW. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS INDENTURE, THE NOTES AND THE NOTE GUARANTEES. SECTION 11.9 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret any other indenture, loan or debt agreement of the Company or its Subsidiaries or of any other Person. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 11.10 SUCCESSORS. All agreements of the Company and the Subsidiary Guarantors in this Indenture, the Notes and the Note Guarantees shall bind their respective successors and assigns. All agreements of the Trustee in this Indenture shall bind its successors and assigns. SECTION 11.11 SEVERABILITY. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 11.12 COUNTERPART ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 11.13 TABLE OF CONTENTS, HEADINGS, ETC. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof. [Signatures on following page] -85- 93 SIGNATURES Dated as of January 30, 1998 PHASE METRICS, INC. By: /s/ R. Joseph Saunders -------------------------------------- Name: R. Joseph Saunders ------------------------------------ Title: Chief Financial Officer ----------------------------------- HELIOS, INCORPORATED By: /s/ R. Joseph Saunders ------------------------------------- Name: R. Joseph Saunders ----------------------------------- Title: Vice President ---------------------------------- APPLIED ROBOTIC TECHNOLOGIES, INC. By: /s/ R. Joseph Saunders ------------------------------------- Name: R. Joseph Saunders ----------------------------------- Title: Vice President ---------------------------------- AIR BEARINGS, INCORPORATED By: /s/ R. Joseph Saunders ------------------------------------- Name: R. Joseph Saunders ----------------------------------- Title: Vice President ---------------------------------- SANTA BARBARA METRIC, INC. By: /s/ R. Joseph Saunders ------------------------------------- Name: R. Joseph Saunders ----------------------------------- Title: Vice President ---------------------------------- 94 STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A., as Trustee By: /s/ Jeanne Mar ------------------------------------- Name: Jeanne Mar ----------------------------------- Title: Assistant Vice President ---------------------------------- 95 EXHIBIT A-1 (Face of Senior Note) 10-3/4% Senior Notes due 2005 No.___ $_______________ CUSIP NO. 717217 AA 1 Phase Metrics, Inc. promises to pay to _________________ or registered assigns, the principal sum of ___________ Dollars on February 1, 2005. Interest Payment Dates: February 1 and August 1 Record Dates: January 15 and July 15 PHASE METRICS, INC. By: ------------------------------------- Name: R. Joseph Saunders Title: Chief Financial Officer This is one of the Senior Notes referred to in the within-mentioned Indenture: Dated:___________, ____ STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A., as Trustee By: ------------------------------------- Authorized Signatory 96 (Back of Senior Note) 10-3/4% Senior Notes due 2005 [UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL IN AS MUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.](1) - --------------- (1) This paragraph should be included only if the Senior Note is issued in global form. A-1-2 97 [THIS NOTE (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE SECOND SENTENCE HEREOF. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) (A "QIB"), (B) IT IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT OR (C) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A) (1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT (AN "IAI"), (2) AGREES THAT IT WILL NOT, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, (B) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (C) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR 904 OF THE SECURITIES ACT, (D) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (E) TO AN IAI THAT, PRIOR TO SUCH TRANSFER, FURNISHES THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE TRANSFER OF THIS NOTE (THE FORM OF WHICH CAN BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF NOTES LESS THAN $250,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (F) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY) OR (G) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION" AND "UNITED STATES" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING.](2) Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. INTEREST. Phase Metrics, Inc., a Delaware corporation, or its successor (the "Company"), promises to pay interest on the principal amount of this Senior Note at the rate of - ---------------- (2) This paragraph should be removed upon the exchange of Senior Notes for New Senior Notes in the Exchange Offer or upon the registration of the Senior Notes pursuant to the terms of the Registration Rights Agreement. A-1-3 98 10-3/4% per annum and shall pay the Liquidated Damages, if any, payable pursuant to Section 5 of the Registration Rights Agreement referred to below. The Company will pay interest and Liquidated Damages, if any, in United States dollars (except as otherwise provided herein) semi-annually in arrears on February 1 and August 1, commencing on August 1, 1998, or if any such day is not a Business Day, on the next succeeding Business Day (each an "Interest Payment Date"). Interest on the Senior Notes shall accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of issuance; provided that if there is no existing Default or Event of Default in the payment of interest, and if this Senior Note is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date, except in the case of the original issuance of Senior Notes, in which case interest shall accrue from the date of authentication. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Senior Notes to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace period) at the same rate to the extent lawful. Interest shall be computed on the basis of a 360-day year comprised of twelve 30-day months. 2. METHOD OF PAYMENT. The Company will pay interest on the Senior Notes (except defaulted interest) and Liquidated Damages, if any, on the applicable Interest Payment Date to the Persons who are registered Holders of Senior Notes at the close of business on the January 15 or July 15 next preceding the Interest Payment Date, even if such Senior Notes are canceled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Senior Notes shall be payable as to principal, premium and Liquidated Damages, if any, and interest at the office or agency of the Company maintained for such purpose within or without the City and State of New York, or, at the option of the Company, payment of interest and Liquidated Damages, if any, may be made by check mailed to the Holders at their addresses set forth in the register of Holders; provided that payment by wire transfer of immediately available funds shall be required with respect to principal of, premium and Liquidated Damages, if any, and interest on, all Global Notes and all other Senior Notes the Holders of which shall have provided written wire transfer instructions to the Company and the Paying Agent. Such payment shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. 3. PAYING AGENT AND REGISTRAR. Initially, State Street Bank and Trust Company of California, N.A., the Trustee under the Indenture, shall act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity. 4. INDENTURE. The Company issued the Senior Notes under an Indenture dated as of January 30, 1998 ("Indenture") among the Company, the Subsidiary Guarantors and the Trustee. The terms of the Senior Notes include those stated in the Indenture and those made a part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code Sections A-1-4 99 77aaa-77bbbb) (the "TIA"). The Senior Notes are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. The Senior Notes are general unsecured Obligations of the Company limited to $110,000,000 in aggregate principal amount, plus amounts, if any, sufficient to pay premium or Liquidated Damages, if any, and interest on outstanding Senior Notes as set forth in Paragraph 2 hereof. 5. OPTIONAL REDEMPTION. Except as set forth in the next paragraph, the Senior Notes shall not be redeemable at the Company's option prior to February 1, 2002. Thereafter, the Senior Notes shall be subject to redemption at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below together with accrued and unpaid interest and any Liquidated Damages, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on February 1 of the years indicated below:
YEAR PERCENTAGE 2002...................................... 105.375 % 2003...................................... 102.688 % 2004 and thereafter....................... 100.000 %
Notwithstanding the foregoing, at any time prior to February 1, 2001, the Company may redeem up to 33% of the original aggregate principal amount of Notes at a redemption price of 110.75% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the redemption date, with the net cash proceeds of a Public Equity Offering; provided that at least 67% of the original aggregate principal amount of Notes remains outstanding immediately after the occurrence of such redemption; and provided, further, that such redemption shall occur within 90 days of the date of the closing of such Public Equity Offering. 6. MANDATORY REDEMPTION. Except as set forth in paragraph 7 below, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Senior Notes. 7. REPURCHASE AT OPTION OF HOLDER. (a) Upon the occurrence of a Change of Control, each Holder of Senior Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Senior Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any, thereon, to the date of purchase. Within 30 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control setting forth the procedures governing the Change of Control Offer required by the Indenture. A-1-5 100 (b) When the aggregate amount of Excess Proceeds exceeds $15.0 million, the Company shall offer to all Holders of Senior Notes (an "Asset Sale Offer") to purchase the maximum principal amount of Senior Notes that may be purchased out of the Excess Proceeds at an offer price in cash equal to 100% of principal amount thereof, plus accrued and unpaid interest, and Liquidated Damages thereon, if any, to the date of purchase in accordance with the procedures set forth in the Indenture. To the extent that the aggregate amount of Senior Notes tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for any general corporate purposes. If the aggregate principal amount of Senior Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Senior Notes to be purchased on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. (c) Holders of the Senior Notes that are the subject of an offer to purchase will receive a Change of Control Offer or Asset Sale Offer from the Company prior to any related purchase date and may elect to have such Senior Notes purchased by completing the form titled "Option of Holder to Elect Purchase" appearing below. 8. NOTICE OF REDEMPTION. Notice of redemption shall be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Senior Notes are to be redeemed at its registered address. Senior Notes in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Senior Notes held by a Holder are to be redeemed. On and after the redemption date, interest and Liquidated Damages, if any, ceases to accrue on the Senior Notes or portions thereof called for redemption. 9. DENOMINATIONS, TRANSFER, EXCHANGE. The Senior Notes are in registered form without coupons in initial denominations of $1,000 and integral multiples of $1,000. The transfer of the Senior Notes may be registered and the Senior Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company need not exchange or register the transfer of any Senior Note or portion of a Senior Note selected for redemption, except for the unredeemed portion of any Senior Note being redeemed in part. Also, it need not exchange or register the transfer of any Senior Notes for a period of 15 days before a selection of Senior Notes to be redeemed or during the period between a record date and the corresponding Interest Payment Date. 10. PERSONS DEEMED OWNERS. The registered Holder of a Senior Note may be treated as its owner for all purposes. 11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to the following paragraphs, the Indenture, the Senior Notes and the Note Guarantees may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Senior Notes then outstanding (including, without limitation, consents obtained in connection with a A-1-6 101 purchase of or, tender offer or exchange offer for Senior Notes), and any existing Default or Event of Default or compliance with any provision of the Indenture, the Senior Notes or the Note Guarantees may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Senior Notes (including consents obtained in connection with a tender offer or exchange offer for Senior Notes). Without the consent of any Holder of Senior Notes, the Company and the Trustee may amend or supplement the Indenture, the Note Guarantees or the Senior Notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated Senior Notes in addition to or in place of certificated Senior Notes, to provide for the assumption of the Company's or a Subsidiary Guarantor's obligations to Holders of Senior Notes in the case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of Senior Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, to comply with the requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act or to allow any Subsidiary to guarantee the Senior Notes. 12. DEFAULTS AND REMEDIES. Events of Default include: (i) default for 30 days in the payment when due of interest on or Liquidated Damages, if any, with respect to the Senior Notes; (ii) default in payment when due of the principal of or premium, if any, on the Senior Notes; (iii) failure by the Company or any Restricted Subsidiary to comply with the provisions described in Sections 4.10, 4.13 or 5.1 of the Indenture; (iv) failure by the Company or any Restricted Subsidiary for 30 days after notice from the Trustee or at least 25% in principal amount of the Senior Notes to comply with the provisions described in Sections 4.7 and 4.9, of the Indenture; (v) failure by the Company or any Subsidiary for 60 days after notice from the Trustee or the Holders of at least 25% in principal amount of the Senior Notes then outstanding to comply with its other agreements in the Indenture or the Senior Notes; (vi) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of their its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date hereof, which default (A) (i) is caused by a failure to pay when due at final stated maturity (giving effect to any grace period related thereto) any principal of or premium, if any, or interest on such Indebtedness (a "Payment Default") or (ii) results in the acceleration of such Indebtedness prior to its express maturity and (B) in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $5.0 million or more; (vii) failure by the Company or any of its Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which judgments are not paid, discharged or stayed within 60 days after their entry; and (viii) certain events of bankruptcy or insolvency with respect to the Company, any of its Significant Subsidiaries or any group of Subsidiaries that, taken together, would constitute a Significant Subsidiary. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Senior Notes may declare all the Senior Notes to be due A-1-7 102 and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Company or any of its Significant Subsidiaries all outstanding Senior Notes will become due and payable without further action or notice. Holders of the Senior Notes may not enforce the Indenture or the Senior Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Senior Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Senior Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. 13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company, the Subsidiary Guarantors or their respective Affiliates, and may otherwise deal with the Company, the Subsidiary Guarantors or their respective Affiliates, as if it were not the Trustee. 14. NO RECOURSE AGAINST OTHERS. No director, officer, employee, incorporator or stockholder, of the Company or any Subsidiary Guarantor, as such, shall have any liability for any obligations of the Company or any Subsidiary Guarantor under the Senior Notes, the Indenture or the Note Guarantees or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Senior Notes by accepting a Senior Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Senior Notes and any Note Guarantee. 15. AUTHENTICATION. This Senior Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 16. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 17. ADDITIONAL RIGHTS OF HOLDERS OF TRANSFER RESTRICTED SECURITIES. In addition to the rights provided to Holders of the Senior Notes under the Indenture, Holders of Transferred Restricted Securities (as defined in the Registration Rights Agreement) shall have all the rights set forth in the Registration Rights Agreement, dated as of the date hereof, among the Company, the Subsidiary Guarantors and the Initial Purchaser (the "Registration Rights Agreement"). 18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Senior Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to the Holders. No representation is made as to the accuracy of such numbers either as A-1-8 103 printed on the Senior Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company shall furnish to any Holder upon written request and without charge a copy of the Indenture and/or the Registration Rights Agreement. Requests may be made to: Phase Metrics, Inc. 10260 Sorrento Valley Road San Diego, California 92121 Telecopier No. (619) 646-4990 Chief Financial Officer A-1-9 104 ASSIGNMENT FORM To assign this Senior Note, fill in the form below: (I) or (we) assign and transfer this Senior Note to - -------------------------------------------------------------------------------- (Insert assignee's soc. sec. or tax I.D. no.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint_____________________________________________ to transfer this Senior Note on the books of the Company. The agent may substitute another to act for him. Date:_________________ Your Signature: -------------------------- (Sign exactly as your name appears on the face of this Senior Note) Signature Guarantee: [Signature must be guaranteed by an Eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15 if Senior Notes are to be delivered A-1-10 105 other than to and in the name of the registered holder.] A-1-11 106 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Senior Note purchased by the Company pursuant to Section 4.10 or 4.13 of the Indenture, check the box below: [ ] Section 4.10 [ ] Section 4.13 If you want to elect to have only part of the Senior Note purchased by the Company pursuant to Section 4.10 or Section 4.13 of the Indenture, state the principal amount you elect to have purchased: $ - ------------- Date: Your Signature: ----------------------- -------------------------- (Sign exactly as your name appears on the Senior Note) Tax Identification No.: ------------------------ Signature Guarantee. [Signature must be guaranteed by an Eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15.] A-1-12 107 SCHEDULE OF EXCHANGES OF SENIOR NOTES(3) THE FOLLOWING EXCHANGES OF A PART OF THIS GLOBAL NOTE FOR OTHER SENIOR NOTES HAVE BEEN MADE:
AMOUNT OF AMOUNT OF AMOUNT OF INCREASE IN DECREASE IN INCREASE IN THIS GLOBAL PRINCIPAL PRINCIPAL NOTE AMOUNT OF AMOUNT OF FOLLOWING DATE OF THIS GLOBAL THIS GLOBAL SUCH EXCHANGE NOTE NOTE DECREASE - ------------ ------------ ------------ ---------------
(3) This should be included only if the Senior Note is issued in global form. A-1-13 108 EXHIBIT A-2 (Face of Regulation S Temporary Global Note) 10-3/4% Senior Notes due 2005 No._____ $_______________ ISIN NO.: USU 7172EAA11 Phase Metrics, Inc. promises to pay to ________________ or registered assigns, the principal sum of ________ Dollars on February 1, 2005. Interest Payment Dates: February 1 and August 1 Record Dates: January 15 and July 15 PHASE METRICS, INC. By: ------------------------------------- Name: Title: This is one of the Senior Notes referred to in the within-mentioned Indenture: Dated: ----------------------------- STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A., as Trustee By: -------------------------------- Authorized Signatory 109 (Back of Regulation S Temporary Global Note) 10-3/4% Senior Notes due 2005 UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. [THIS NOTE (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE SECOND SENTENCE HEREOF. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) (A "QIB"), (B) IT IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT OR (C) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A) (1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT (AN "IAI"), (2) AGREES THAT IT WILL NOT, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, (B) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (C) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR 904 OF THE SECURITIES ACT, (D) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (E) TO AN IAI THAT, PRIOR TO SUCH TRANSFER, FURNISHES THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE TRANSFER OF THIS NOTE (THE FORM OF WHICH CAN BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF NOTES LESS THAN $250,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (F) IN ACCORDANCE WITH ANOTHER A-2-2 110 EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY) OR (G) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION" AND "UNITED STATES" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING. THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE CASH PAYMENTS OF INTEREST DURING THE PERIOD WHICH SUCH HOLDER HOLDS THIS NOTE. NOTHING IN THIS LEGEND SHALL BE DEEMED TO PREVENT INTEREST FROM ACCRUING ON THIS NOTE.](1) Until this Regulation S Temporary Global Note is exchanged for Regulation S Permanent Global Notes, the Holder hereof shall not be entitled to receive payments of interest or Liquidated Damages, if any, hereon although interest and Liquidated Damages, if any, will continue to accrue; until so exchanged in full, this Regulation S Temporary Global Note shall in all other respects be entitled to the same benefits as other Senior Notes under the Indenture. This Regulation S Temporary Global Note is exchangeable in whole or in part for one or more Regulation S Permanent Global Notes or U.S. Global Notes only (i) on or after the termination of the 40-day restricted period (as defined in Regulation S) and (ii) upon presentation of certificates (accompanied by an Opinion of Counsel, if applicable) required by Article 2 of the Indenture. Upon exchange of this Regulation S Temporary Global Note for one or more Regulation S Permanent Global Notes or U.S. Global Notes, the Trustee shall cancel this Regulation S Temporary Global Note. This Regulation S Temporary Global Note shall not become valid or obligatory until the certificate of authentication hereon shall have been duly manually signed by the Trustee in accordance with the Indenture. This Regulation S Temporary Global Note shall be governed by and construed in accordance with the laws of the State of the New York. All references to "$," "Dollars," "dollars" or "U.S. $" are to such coin or currency of the United States of America as at the time shall be legal tender for the payment of public and private debts therein. - -------------------- (1) These paragraphs should be removed upon the exchange of Regulation S Temporary Global Notes for Regulation S Permanent Global Notes pursuant to the Indenture. A-2-3 111 Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. INTEREST. Phase Metrics, Inc., a Delaware corporation, or its successor (the "Company"), promises to pay interest on the principal amount of this Senior Note at the rate of 10-3/4% per annum and shall pay the Liquidated Damages, if any, payable pursuant to Section 5 of the Registration Rights Agreement referred to below. The Company will pay interest and Liquidated Damages, if any, in United States dollars (except as otherwise provided herein) semi-annually in arrears on February 1 and August 1, commencing on August 1, 1998, or if any such day is not a Business Day, on the next succeeding Business Day (each an "Interest Payment Date"). Interest on the Senior Notes shall accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of issuance; provided that if there is no existing Default or Event of Default in the payment of interest, and if this Senior Note is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date, except in the case of the original issuance of Senior Notes, in which case interest shall accrue from the date of authentication. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Senior Notes to the extent lawful; it shall pay interest (including post- petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace period) at the same rate to the extent lawful. Interest shall be computed on the basis of a 360-day year comprised of twelve 30-day months. 2. METHOD OF PAYMENT. The Company will pay interest on the Senior Notes (except defaulted interest) and Liquidated Damages, if any, on the applicable Interest Payment Date to the Persons who are registered Holders of Senior Notes at the close of business on the January 15 or July l5 next preceding the Interest Payment Date, even if such Senior Notes are canceled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Senior Notes shall be payable as to principal, premium and Liquidated Damages, if any, and interest at the office or agency of the Company maintained for such purpose within or without the City and State of New York, or, at the option of the Company, payment of interest and Liquidated Damages, if any, may be made by check mailed to the Holders at their addresses set forth in the register of Holders; provided that payment by wire transfer of immediately available funds shall be required with respect to principal of, premium and Liquidated Damages, if any, and interest on, all Global Notes and all other Senior Notes the Holders of which shall have provided written wire transfer instructions to the Company and the Paying Agent. Such payment shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. 3. PAYING AGENT AND REGISTRAR. Initially, State Street Bank and Trust Company of California, N.A., the Trustee under the Indenture, shall act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity. A-2-4 112 4. INDENTURE. The Company issued the Senior Notes under an Indenture dated as of January 30, 1998 ("Indenture") among the Company, the Subsidiary Guarantors and the Trustee. The terms of the Senior Notes include those stated in the Indenture and those made a part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbbb) (the "TIA"). The Senior Notes are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. The Senior Notes are general unsecured Obligations of the Company limited to $110,000,000 in aggregate principal amount, plus amounts, if any, sufficient to pay premium or Liquidated Damages, if any, and interest on outstanding Senior Notes as set forth in Paragraph 2 hereof. 5. OPTIONAL REDEMPTION. Except as set forth in the next paragraph, the Senior Notes shall not be redeemable at the Company's option prior to February 1, 2002. Thereafter, the Senior Notes shall be subject to redemption at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below together with accrued and unpaid interest and any Liquidated Damages, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on February 1 of the years indicated below:
YEAR PERCENTAGE 2002...................................... 105.375 % 2003...................................... 102.688 % 2004 and thereafter....................... 100.000 %
Notwithstanding the foregoing, at any time prior to February 1, 2001, the Company may redeem up to 33% of the original aggregate principal amount of Senior Notes at a redemption price of 110.75% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the redemption date, with the net proceeds of a Public Equity Offering; provided that at least 67% of the original aggregate principal amount of Senior Notes remains outstanding immediately after the occurrence of such redemption; and provided, further, that such redemption shall occur within 90 days of the date of the closing of such Public Equity Offering. 6. MANDATORY REDEMPTION. Except as set forth in paragraph 7 below, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Senior Notes. 7. REPURCHASE AT OPTION OF HOLDER. (a) Upon the occurrence of a Change of Control, each Holder of Senior Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Senior Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any, thereon, to the date of purchase. Within 30 days following any Change of Control, the Company will mail a notice to each Holder A-2-5 113 describing the transaction or transactions that constitute the Change of Control setting forth the procedures governing the Change of Control Offer required by the Indenture. (b) When the aggregate amount of Excess Proceeds exceeds $15.0 million, the Company shall offer to all Holders of Senior Notes (an "Asset Sale Offer") to purchase the maximum principal amount of Senior Notes that may be purchased out of the Excess Proceeds at an offer price in cash equal to 100% of principal amount thereof, plus accrued and unpaid interest, and Liquidated Damages thereon, if any, to the date of purchase in accordance with the procedures set forth in the Indenture. To the extent that the aggregate amount of Senior Notes tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for any general corporate purposes. If the aggregate principal amount of Senior Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Senior Notes to be purchased on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. (c) Holders of the Senior Notes that are the subject of an offer to purchase will receive a Change of Control Offer or Asset Sale Offer from the Company prior to any related purchase date and may elect to have such Senior Notes purchased by completing the form titled "Option of Holder to Elect Purchase" appearing below. 8. NOTICE OF REDEMPTION. Notice of redemption shall be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Senior Notes are to be redeemed at its registered address. Senior Notes in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Senior Notes held by a Holder are to be redeemed. On and after the redemption date, interest and Liquidated Damages, if any, ceases to accrue on the Senior Notes or portions thereof called for redemption. 9. DENOMINATIONS, TRANSFER, EXCHANGE. The Senior Notes are in registered form without coupons in initial denominations of $1,000 and integral multiples of $1,000. The transfer of the Senior Notes may be registered and the Senior Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company need not exchange or register the transfer of any Senior Note or portion of a Senior Note selected for redemption, except for the unredeemed portion of any Senior Note being redeemed in part. Also, it need not exchange or register the transfer of any Senior Notes for a period of 15 days before a selection of Senior Notes to be redeemed or during the period between a record date and the corresponding Interest Payment Date. 10. PERSONS DEEMED OWNERS. The registered Holder of a Senior Note may be treated as its owner for all purposes. A-2-6 114 11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to the following paragraphs, the Indenture, the Senior Notes and the Note Guarantees may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Senior Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of or, tender offer or exchange offer for Senior Notes), and any existing Default or Event of Default or compliance with any provision of the Indenture, the Senior Notes or the Note Guarantees may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Senior Notes (including consents obtained in connection with a tender offer or exchange offer for Senior Notes). Without the consent of any Holder of Senior Notes, the Company and the Trustee may amend or supplement the Indenture, the Note Guarantees or the Senior Notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated Senior Notes in addition to or in place of certificated Senior Notes, to provide for the assumption of the Company's or a Subsidiary Guarantor's obligations to Holders of Senior Notes in the case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of Senior Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, to comply with the requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act or to allow any Subsidiary to guarantee the Senior Notes. 12. DEFAULTS AND REMEDIES. Events of Default include: (i) default for 30 days in the payment when due of interest on or Liquidated Damages, if any, with respect to the Senior Notes; (ii) default in payment when due of the principal of or premium, if any, on the Senior Notes; (iii) failure by the Company or any Restricted Subsidiary to comply with the provisions described in Sections 4.10, 4.13 or 5.1 of the Indenture; (iv) failure by the Company or any Restricted Subsidiary for 30 days after notice from the Trustee or at least 25% in principal amount of the Senior Notes to comply with the provisions described in Sections 4.7 and 4.9, of the Indenture; (v) failure by the Company or any Subsidiary for 60 days after notice from the Trustee or the Holders of at least 25% in principal amount of the Senior Notes then outstanding to comply with its other agreements in the Indenture or the Senior Notes; (vi) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of their its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date hereof, which default (A) (i) is caused by a failure to pay when due at final stated maturity (giving effect to any grace period related thereto) any principal of or premium, if any, or interest on such Indebtedness (a "Payment Default") or (ii) results in the acceleration of such Indebtedness prior to its express maturity and (B) in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $5.0 million or more; (vii) failure by the Company or any of its Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which judgments are not paid discharged or stayed within 60 days after their entry; and (viii) certain events of bankruptcy or insolvency with respect to the A-2-7 115 Company, any of its Significant Subsidiaries or any group of Subsidiaries that, taken together, would constitute a Significant Subsidiary. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Senior Notes may declare all the Senior Notes to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Company or any of its Significant Subsidiaries all outstanding Senior Notes will become due and payable without further action or notice. Holders of the Senior Notes may not enforce the Indenture or the Senior Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Senior Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Senior Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. 13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company, the Subsidiary Guarantors or their respective Affiliates, and may otherwise deal with the Company, the Subsidiary Guarantors or their respective Affiliates, as if it were not the Trustee. 14. NO RECOURSE AGAINST OTHERS. No director, officer, employee, incorporator or stockholder, of the Company or any Subsidiary Guarantor, as such, shall have any liability for any obligations of the Company or any Subsidiary Guarantor under the Senior Notes, the Indenture or the Note Guarantees or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Senior Notes by accepting a Senior Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Senior Notes and any Note Guarantee. 15. AUTHENTICATION. This Senior Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 16. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 17. ADDITIONAL RIGHTS OF HOLDERS OF TRANSFER RESTRICTED SECURITIES. In addition to the rights provided to Holders of the Senior Notes under the Indenture, Holders of Transferred Restricted Securities (as defined in the Registration Rights Agreement) shall have all the rights set forth in the Registration Rights Agreement, dated as of the date hereof, among the Company, the Subsidiary Guarantors and the Initial Purchaser (the "Registration Rights Agreement"). A-2-8 116 18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Senior Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to the Holders. No representation is made as to the accuracy of such numbers either as printed on the Senior Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company shall furnish to any Holder upon written request and without charge a copy of the Indenture and/or the Registration Rights Agreement. Requests may be made to: Phase Metrics, Inc. 10260 Sorrento Valley Road San Diego, California 92121 Telecopier No. (619) 646-4990 Chief Financial Officer A-2-9 117 SCHEDULE OF EXCHANGES FOR GLOBAL NOTES The following exchanges of a part of this Regulation S Temporary Global Note for other Global Notes have been made:
Amount of Amount of Principal Amount Signature of Decrease in Increase in of this Global authorized Principal Amount Principal Amount Note following officer of Date of of this Global of this Global such decrease Trustee or Senior Exchange Note Note (or increase) Note Custodian - --------------------- ------------------ ---------------- ----------------- -------------------
A-2-10 118 EXHIBIT B FORM OF CERTIFICATE OF TRANSFER State Street Bank and Trust Company of California, N.A. 725 South Figueroa Street, Suite 3100 Los Angeles, CA 90017 Re: 10-3/4% Senior Notes due 2005 Reference is hereby made to the Indenture, dated as of January 30, 1998 (the "Indenture"), among Phase Metrics, Inc., as issuer (the "Company"), certain of its subsidiaries, and State Street Bank and Trust Company of California, N.A., as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. ______________, (the "Transferor") owns and proposes to transfer the Notes] or interest in such Notes] specified in Annex A hereto, in the principal amount of $___________ in such Notes] or interests (the "Transfer"), to __________ (the "Transferee"), as further specified in Annex A hereto. In connection with the Transfer, the Transferor hereby certifies that: [CHECK ALL THAT APPLY] 1. [ ] CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE U.S. GLOBAL NOTE OR A RESTRICTED DEFINITIVE NOTE PURSUANT TO RULE 144A. The Transfer is being effected pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Transferor hereby further certifies that the beneficial interest or Restricted Definitive Note is being transferred to a Person that the Transferor reasonably believed and believes is purchasing the beneficial interest or Restricted Definitive Note for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A and such Transfer is in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Restricted Definitive Note will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the 144A Global Note and/or the Restricted Definitive Note and in the Indenture and the Securities Act. 2. [ ] CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE TEMPORARY REGULATION S GLOBAL NOTE, THE REGULATION S GLOBAL NOTE OR A RESTRICTED DEFINITIVE NOTE PURSUANT TO REGULATION S. The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and, accordingly, the Transferor hereby further certifies that (i) the Transfer is not being made to a person in the United States and (x) at the time the buy order was 119 originated, the Transferee was outside the United States or such Transferor and any Person acting on its behalf reasonably believed and believes that the Transferee was outside the United States or (y) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither such Transferor nor any Person acting on its behalf knows that the transaction was prearranged with a buyer in the United States, (ii) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S under the Securities Act, (iii) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act and (iv) if the proposed Transfer is being made prior to the expiration of the 40-day restricted period, the Transfer is not being made to a U.S. Person or for the account or benefit of a U.S. Person (other than an Initial Purchaser). Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Restricted Definitive Note will be subject to the restrictions on Transfer enumerated in the Private Placement Legend printed on the Regulation S Global Note, the Temporary Regulation S Global Note and/or the Definitive Note and in the Indenture and the Securities Act. 3. [ ] CHECK AND COMPLETE IF TRANSFEREE WILL TAKE DELIVERY OF A RESTRICTED DEFINITIVE NOTE PURSUANT TO ANY PROVISION OF THE SECURITIES ACT OTHER THAN RULE 144A OR REGULATION S. The Transfer is being effected in compliance with the transfer restrictions applicable to Restricted Definitive Notes and pursuant to and in accordance with the Securities Act and any applicable blue sky securities laws of any state of the United States, and accordingly the Transferor hereby further certifies that (check one): (a) [ ] such Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act; or (b) [ ] such Transfer is being effected to the Company or a Subsidiary thereof; or (c) [ ] such Transfer is being effected pursuant to an effective registration statemeNT under the Securities Act and in compliance with the prospectus delivery requirements of the Securities Act; or (d) [ ] such Transfer is being effected to an Institutional Accredited Investor and pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A, Rule 144 or Rule 904, and the Transferor hereby further certifies that the Transfer complies with the transfer restrictions applicable to Restricted Definitive Notes and the requirements of the exemption claimed, which certification is supported by (1) a certificate executed by the Transferee in the form of Exhibit D to the Indenture and (2) if such Transfer is in respect of a principal amount of Notes at the time of transfer of less than $250,000, an Opinion of Counsel provided by the Transferor or the B-3 120 Transferee (a copy of which the Transferor has attached to this certification), to the effect that such Transfer is in compliance with the Securities Act. Upon consummation of the proposed transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Restricted Definitive Note will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Definitive Notes and in the Indenture and the Securities Act. 4. [ ] CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE OR OF AN UNRESTRICTED DEFINITIVE NOTE. (a) [ ] CHECK IF TRANSFER IS PURSUANT TO RULE 144. (i) The Transfer is being effecteD pursuant to and in accordance with Rule 144 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Unrestricted Definitive Note will no longer be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes, on Restricted Definitive Notes and in the Indenture. (b) [ ] CHECK IF TRANSFER IS PURSUANT TO REGULATION S. (i) The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Unrestricted Definitive Note will no longer be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes, on Restricted Definitive Notes and in the Indenture. (c) [ ] CHECK IF TRANSFER IS PURSUANT TO OTHER EXEMPTION. (i) The Transfer is being effected pursuant to and in compliance with an exemption from the registration requirements of the Securities Act other than Rule 144, Rule 903 or Rule 904 and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any State of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Unrestricted Definitive Note will not be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes or Restricted Definitive Notes and in the Indenture. B-4 121 This certificate and the statements contained herein are made for your benefit and the benefit of the Company. [Insert Name of Transferor] By: --------------------------------------- Name: Title: Dated: , ------------------ -------- B-5 122 ANNEX A TO CERTIFICATE OF TRANSFER 1. The Transferor owns and proposes to transfer the following: [CHECK ONE OF (a) OR (b)] (a) [ ] a beneficial interest in the: (i) [ ] U.S. 144A Global Note (CUSIP: 717217AA1/ISIN: USU717217 AA14), or (ii) [ ] Regulation S Global Note (CUSIP: 717217AB9/ISIN: USU7172EAA11), or (b) [ ] a Restricted Definitive Note. 2. After the Transfer the Transferee will hold: [CHECK ONE] (a) [ ] a beneficial interest in the: (i) [ ] 144A Global Note (CUSIP 717217 AA1), or (ii) [ ] Regulation S Global Note (CUSIP/ISIN 717217 AB 9/ USU7172EAA11), or (iii) [ ] Unrestricted Global Note (CUSIP); or (b) [ ] a Restricted Definitive Note; or (c) [ ] an Unrestricted Definitive Note, in accordance with the terms of the Indenture. B-6 123 EXHIBIT C FORM OF CERTIFICATE OF EXCHANGE State Street Bank and Trust Company of California, N.A. 725 South Figueroa Street, Suite 3100 Los Angeles, CA 90017 Re: 10-3/4% Senior Notes due 2005 (CUSIP ) Reference is hereby made to the Indenture, dated as of January 30, 1998 (the "Indenture"), among Phase Metrics, Inc. as issuer (the "Company"), certain subsidiaries of the Company and State Street Bank and Trust Company of California, N.A., as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. ________________ , (the "Owner") owns and proposes to exchange the Notes] or interest in such Notes] specified herein, in the principal amount of $____________ in such Notes] or interests (the "Exchange"). In connection with the Exchange, the Owner hereby certifies that: 1. EXCHANGE OF RESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN A RESTRICTED GLOBAL NOTE FOR UNRESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN AN UNRESTRICTED GLOBAL NOTE (a) [ ] CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE TO BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for a beneficial interest in an Unrestricted Global Note in an equal principal amount, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Notes and pursuant to and in accordance with the United States Securities Act of 1933, as amended (the "Securities Act"), (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest in an Unrestricted Global Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (b) [ ] CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE TO UNRESTRICTED DEFINITIVE NOTE. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for an Unrestricted Definitive Note, the Owner hereby certifies (i) the Definitive Note is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance 124 with the Securities Act and (iv) the Unrestricted Definitive Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (c) [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE. In connection with the Owner's Exchange of a Restricted Definitive Note for a beneficial interest in an Unrestricted Global Note, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Definitive Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (d) [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO UNRESTRICTED DEFINITIVE NOTE. In connection with the Owner's Exchange of a Restricted Definitive Note for an Unrestricted Definitive Note, the Owner hereby certifies (i) the Unrestricted Definitive Note is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Definitive Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the Unrestricted Definitive Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. 2. EXCHANGE OF RESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN RESTRICTED GLOBAL NOTES FOR RESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN RESTRICTED GLOBAL NOTES (a) [ ] CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE TO RESTRICTED DEFINITIVE NOTE. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for a Restricted Definitive Note with an equal principal amount, the Owner hereby certifies that the Restricted Definitive Note is being acquired for the Owner's own account without transfer. Upon consummation of the proposed Exchange in accordance with the terms of the Indenture, the Restricted Definitive Note issued will continue to be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Definitive Note and in the Indenture and the Securities Act. (b) [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE. In connection with the Exchange of the Owner's Restricted Definitive Note for a beneficial interest in the [CHECK ONE] [ ] U.S. Global Note or [ ] Regulation S GLOBal Note, with an equal principal amount, the Owner hereby certifies (i) such Owner acquired such Restricted Definitive Note in a transaction pursuant to Rule 144A or Regulation S, (ii) the beneficial interest is being acquired for the Owner's own account without transfer and (iii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Notes and pursuant to and in accordance with the Securities Act, and in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Exchange in accordance 125 with the terms of the Indenture, the beneficial interest issued will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the relevant Restricted Global Note and in the Indenture and the Securities Act. This certificate and the statements contained herein are made for your benefit and the benefit of the Company. [Insert Name of Owner] By: ----------------------------------------- Name: Title: Dated: , ----------------- ------- C-3 126 EXHIBIT D FORM OF CERTIFICATE FROM ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR State Street Bank and Trust Company of California, N.A. 725 South Figueroa Street, Suite 3100 Los Angeles, CA 90017 Re: 10-3/4% Senior Notes due 2005 Reference is hereby made to the Indenture, dated as of January 30, 1998 (the "Indenture"), among Phase Metrics, Inc., as issuer (the "Company"), certain of the Company's subsidiaries and State Street Bank and Trust Company, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. In connection with our proposed purchase of $____________ aggregate principal amount of Restricted Definitive Notes we confirm that: 1. We understand that any subsequent transfer of the Notes or any interest therein is subject to certain restrictions and conditions set forth in the Indenture and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Notes or any interest therein except in compliance with, such restrictions and conditions and the United States Securities Act of 1933, as amended (the "Securities Act"). 2. We understand that the Notes have not been registered under the Securities Act, and that the Notes and any interest therein may not be offered or sold except as permitted in the following sentence. We agree, on our own behalf and on behalf of each account for which we acquire any Notes (for which are acting as hereinafter stated), that such Notes may be offered, resold, pledged or otherwise transferred only (i) to a person whom we reasonably believe to be a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in a transaction meeting the requirements of Rule 144A, in a transaction meeting the requirements of Rule 144 under the Securities Act, outside the United States in a transaction meeting the requirements of Rule 904 under the Securities Act, or in accordance with another exemption from the registration requirements of the Securities Act (and based upon an opinion of counsel if the Company so requests), (ii) to the Company or (iii) pursuant to an effective registration statement, and, in each case, in accordance with any applicable securities laws of any State of the United States or any other applicable jurisdiction. We further agreement to provide to any person purchasing the Definitive Note or a beneficial interest in a Global Note from us in a transaction meeting the requirements of (i) or (ii) of this paragraph a notice advising such purchaser that resales thereof are restricted as stated herein. 127 3. We understand that, on any proposed resale of the Notes or beneficial interest therein, we will be required to furnish to you and the Company such certifications, legal opinions and other information as you and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Notes purchased by us will bear a legend to the foregoing effect. 4. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Notes, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment. 5. We are acquiring the Notes without a view to distribution thereof in violation of the Securities Act for our own account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. ------------------------------------ [Insert Name of Accredited Investor] By: --------------------------------- Name: Title: Dated: , -------------- ------ 128 EXHIBIT E NOTE GUARANTEE Subject to Section 10.6 of the Indenture, each Subsidiary Guarantor hereby, jointly and severally, unconditionally guarantees to each Holder of a Senior Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of the Indenture, the Senior Notes and the Obligations of the Company under the Senior Notes or under the Indenture, that: (a) the principal of, premium, if any, interest and Liquidated Damages, if any, on the Senior Notes will be promptly paid in full when due, subject to any applicable grace period, whether at maturity, by acceleration, redemption or otherwise, and interest on overdue principal, premium, if any, (to the extent permitted by law) interest on any interest, if any, and Liquidated Damages, if any, on the Senior Notes and all other payment Obligations of the Company to the Holders or the Trustee under the Indenture or under the Senior Notes will be promptly paid in full and performed, all in accordance with the terms thereof; and (b) in case of any extension of time of payment or renewal of any Senior Notes or any of such other payment Obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, subject to any applicable grace period, whether at stated maturity, by acceleration, redemption or otherwise. Failing payment when so due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Subsidiary Guarantors will be jointly and severally obligated to pay the same immediately. The obligations of the Subsidiary Guarantor to the Holders and to the Trustee pursuant to this Note Guarantee and the Indenture are expressly set forth in Article 10 of the Indenture, and reference is hereby made to such Indenture for the precise terms of this Note Guarantee. The terms of Article 10 of the Indenture are incorporated herein by reference. This Note Guarantee is subject to release as and to the extent provided in Section 10.4 of the Indenture. This is a continuing Guarantee and shall remain in full force and effect and shall be binding upon each Subsidiary Guarantor and its respective successors and assigns to the extent set forth in the Indenture until full and final payment of all of the Company's Obligations under the Senior Notes and the Indenture and shall inure to the benefit of the successors and assigns of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee, the rights and privileges herein conferred upon that party shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. This is a Note Guarantee of payment and not a guarantee of collection. This Note Guarantee shall not be valid or obligatory for any purpose until the certificate of authentication on the Senior Note upon which this Note Guarantee is noted shall have been executed by the Trustee under the Indenture by the manual signature of one of its authorized officers. 129 For purposes hereof, each Subsidiary Guarantor's liability shall be limited to the lesser of (i) the aggregate amount of the Obligations of the Company under the Senior Notes and the Indenture and (ii) the amount, if any, which would not have (A) rendered such Subsidiary Guarantor "insolvent" (as such term is defined in the Bankruptcy Law and in the Debtor and Creditor Law of the State of New York) or (B) left such Subsidiary Guarantor with unreasonably small capital at the time its Note Guarantee of the Senior Notes was entered into; provided that, it will be a presumption in any lawsuit or other proceeding in which a Subsidiary Guarantor is a party that the amount guaranteed pursuant to the Note Guarantee is the amount set forth in clause (i) above unless any creditor, or representative of creditors of such Subsidiary Guarantor, or debtor in possession or trustee in bankruptcy of such Subsidiary Guarantor, otherwise proves in such a lawsuit that the aggregate liability of the Subsidiary Guarantor is limited to the amount set forth in clause (ii) above. The Indenture provides that, in making any determination as to the solvency or sufficiency of capital of a Subsidiary Guarantor in accordance with the previous sentence, the right of such Subsidiary Guarantors to contribution from other Subsidiary Guarantors and any other rights such Subsidiary Guarantors may have, contractual or otherwise, shall be taken into account. {remainder of page intentionally left blank} E-2 130 Capitalized terms used herein have the same meanings given in the Indenture unless otherwise indicated. Dated as of January 30, 1998 HELIOS, INCORPORATED By: -------------------------------------- Name: R. Joseph Saunders Title: Dated as of January 30, 1998 APPLIED ROBOTIC TECHNOLOGIES, INC. By: -------------------------------------- Name: R. Joseph Saunders Title: Dated as of January 30, 1998 AIR BEARINGS, INCORPORATED By: -------------------------------------- Name: R. Joseph Saunders Title: Dated as of January 30, 1998 SANTA BARBARA METRIC, INC. By: -------------------------------------- Name: R. Joseph Saunders Title: E-3 131 EXHIBIT F FORM OF SUPPLEMENTAL INDENTURE SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as of ___________, between Subsidiary Guarantor (the "New Subsidiary Guarantor"), a subsidiary of Phase Metrics, Inc., a Delaware corporation (the "Company"), and State Street Bank and Trust Company of California, N.A., as trustee under the indenture referred to below (the "Trustee"). Capitalized terms used herein and not defined herein shall have the meaning ascribed to them in the Indenture (as defined below). W I T N E S S E T H WHEREAS, the Company has heretofore executed and delivered to the Trustee an indenture (the "Indenture"), dated as of January 30, 1998, providing for the issuance of an aggregate principal amount of $110,000,000 of 10-3/4 % Senior Notes due 2005 (the "Senior Notes"); WHEREAS, Section 10.5 of the Indenture provides that under certain circumstances the Company may cause, and Section 10.3 of the Indenture provides that under certain circumstances the Company must cause, certain of its subsidiaries to execute and deliver to the Trustee a supplemental indenture pursuant to which such subsidiaries shall unconditionally guarantee all of the Company's Obligations under the Senior Notes pursuant to a Note Guarantee on the terms and conditions set forth herein; and WHEREAS, pursuant to Section 9.1 of the Indenture, the Trustee is authorized to execute and deliver this Supplemental Indenture. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the New Subsidiary Guarantor and the Trustee mutually covenant and agree for the equal and ratable benefit of the Holders of the Senior Notes as follows: 1. CAPITALIZED TERMS. Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture. 2. AGREEMENT TO NOTE GUARANTEE. The New Subsidiary Guarantor hereby agrees, jointly and severally with all other Subsidiary Guarantors, to guarantee the Company's Obligations under the Senior Notes and the Indenture on the terms and subject to the conditions set forth in Article 10 of the Indenture and to be bound by all other applicable provisions of the Indenture. 3. NO RECOURSE AGAINST OTHERS. No past, present or future director, officer, employee, incorporator, shareholder or agent of any Subsidiary Guarantor, as such, shall have any liability for any obligations of the Company or any Subsidiary Guarantor under the Senior Notes, any 132 Note Guarantees, the Indenture or this Supplemental Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Senior Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Senior Notes. 4. NEW YORK LAW TO GOVERN. The internal law of the State of New York shall govern and be used to construe this Supplemental Indenture. 5. COUNTERPARTS The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 6. EFFECT OF HEADINGS. The Section headings herein are for convenience only and shall not affect the construction hereof. 7. THE TRUSTEE. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or for or in respect of the correctness of the recitals of fact contained herein, all of which recitals are made solely by the New Subsidiary Guarantor. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed and attested, all as of the date first above written. Dated: ------------------ [NAME OF NEW SUBSIDIARY GUARANTOR] By: --------------------------------------- Name: Title: Dated: , as Trustee -------------------- ------------------------------------------ By: --------------------------------------- Name: Title: F-2 133 CROSS-REFERENCE TABLE* Trust Indenture
Act Section Indenture Section 310 (a)(1)................................ 7.10 (a)(2)................................ 7.10 (a)(3)................................ N.A. (a)(4)................................ N.A. (a)(5)................................ 7.10 (b)................................... 7.03; 7.10 (c)................................... N.A. 311 (a)................................... 7.11 (b)................................... 7.11 (c)................................... N.A. 312 (a)................................... 2.05 (b)................................... 11.03 (c)................................... 11.03 313 (a)................................... 7.06 (b)(1)................................ 7.06 (b)(2)................................ 7.06; 7.07 (c)................................... 7.06; 11.02 (d)................................... 7.06 314 (a)................................... 4.03; 11.05 (b)................................... N.A. (c)(1)................................ 11.04 (c)(2)................................ 11.04 (c)(3)................................ N.A. (d)................................... N.A. (e)................................... 11.05 (f)................................... N.A. 315 (a)................................... 7.01 (b)................................... 7.05, 11.02 (c)................................... 7.01 (d)................................... 7.01 (e)................................... 6.11 316 (a)(last sentence).................... 2.09 (a)(1)(A)............................. 6.05 (a)(1)(B)............................. 6.04
F-3 134
Act Section Indenture Section (a)(2)................................ N.A. (b)................................... 6.07 316 (c)................................... 2.13 317 (a)(1)................................ 6.08 (a)(2)................................ 6.09 (b)................................... 2.04 318 (a)................................... 11.01 (b)................................... N.A. (c)................................... 11.01
- ------------------- N.A. means not applicable *This Cross-Reference Table is not part of the Indenture. F-4 EX-4.4 4 REGISTRATION RIGHTS AGREEMENT DATED AS OF 01/30/98 1 EXHIBIT 4.4 ================================================================================ - -------------------------------------------------------------------------------- A/B EXCHANGE REGISTRATION RIGHTS AGREEMENT Dated as of January 30, 1998 by and among Phase Metrics, Inc. Helios, Incorporated Applied Robotic Technologies, Inc. Air Bearings, Incorporated Santa Barbara Metric, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation - -------------------------------------------------------------------------------- 2 This Registration Rights Agreement (this "AGREEMENT") is made and entered into as of January 30, 1998, by and among Phase Metrics, Inc., a Delaware corporation (the "COMPANY"), Helios, Incorporated, Applied Robotic Technologies, Inc., Air Bearings, Incorporated and Santa Barbara Metric, Inc. (the "GUARANTORS"), and Donaldson, Lufkin & Jenrette Securities Corporation (the "INITIAL PURCHASER"), each of whom has agreed to purchase the Company's 10 3/4% Senior Notes due 2005 (the "SENIOR NOTES") pursuant to the Purchase Agreement (as defined below). This Agreement is made pursuant to the Purchase Agreement, dated January 23, 1998 (the "PURCHASE AGREEMENT"), by and among the Company, the Guarantors and the Initial Purchaser. In order to induce the Initial Purchaser to purchase the Series A Notes, the Company has agreed to provide the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the obligations of the Initial Purchaser set forth in Section 9 of the Purchase Agreement. Capitalized terms used herein and not otherwise defined shall have the meaning assigned to them the Indenture, dated January 30, 1998, between the Company and State Street Bank and Trust Company of California, N.A., as Trustee, relating to the Senior Notes and the New Senior Notes (the "INDENTURE"). The parties hereby agree as follows: SECTION 1. DEFINITIONS As used in this Agreement, the following capitalized terms shall have the following meanings: ACT: The Securities Act of 1933, as amended. AFFILIATE: As defined in Rule 144 of the Act. BROKER-DEALER: Any broker or dealer registered under the Exchange Act. CERTIFICATED SECURITIES: Definitive Notes, as defined in the Indenture. CLOSING DATE: The date hereof. COMMISSION: The Securities and Exchange Commission. CONSUMMATE: An Exchange Offer shall be deemed "Consummated" for purposes of this Agreement upon the occurrence of (a) the filing and effectiveness under the Act of the Exchange Offer Registration Statement relating to the New Senior Notes to be issued in the Exchange Offer, (b) the maintenance of such Exchange Offer Registration Statement continuously effective and the keeping of the Exchange Offer open for a period not less than the period required pursuant to Section 3(b) hereof and (c) the delivery by the Company to the Registrar under the Indenture of New Senior Notes in the same aggregate principal amount as the aggregate principal amount of Senior Notes tendered by Holders thereof pursuant to the Exchange Offer. EFFECTIVENESS DEADLINE: As defined in Section 3(a) and 4(a) hereof. 3 EXCHANGE ACT: The Securities Exchange Act of 1934, as amended. EXCHANGE OFFER: The exchange and issuance by the Company of a principal amount of New Senior Notes (which shall be registered pursuant to the Exchange Offer Registration Statement) equal to the outstanding principal amount of Senior Notes that are tendered by such Holders in connection with such exchange and issuance. EXCHANGE OFFER REGISTRATION STATEMENT: The Registration Statement relating to the Exchange Offer, including the related Prospectus. EXEMPT RESALES: The transactions in which the Initial Purchaser proposes to sell the Senior Notes to certain "qualified institutional buyers," as such term is defined in Rule 144A under the Act and pursuant to Regulation S under the Act. FILING DEADLINE: As defined in Sections 3(a) and 4(a) hereof. HOLDERS: As defined in Section 2 hereof. NEW SENIOR NOTES: The Company's 10 3/4% Senior Notes due 2005 to be issued pursuant to the Indenture: (i) in the Exchange Offer or (ii) as contemplated by Section 4 hereof. PROSPECTUS: The prospectus included in a Registration Statement at the time such Registration Statement is declared effective, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus. RECOMMENCEMENT DATE: As defined in Section 6(d) hereof. REGISTRATION DEFAULT: As defined in Section 5 hereof. REGISTRATION STATEMENT: Any registration statement of the Company and the Guarantors relating to (a) an offering of New Senior Notes pursuant to an Exchange Offer or (b) the registration for resale of Transfer Restricted Securities pursuant to the Shelf Registration Statement, in each case, (i) that is filed pursuant to the provisions of this Agreement and (ii) including the Prospectus included therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and material incorporated by reference therein. REGULATION S: Regulation S promulgated under the Act. RULE 144: Rule 144 promulgated under the Act. SHELF REGISTRATION STATEMENT: As defined in Section 4 hereof. SUSPENSION NOTICE: As defined in Section 6(d) hereof. TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb) as in effect on the date of the Indenture. 4 TRANSFER RESTRICTED SECURITIES: Each Senior Note, until the earliest to occur of (a) the date on which such Senior Note is exchanged in the Exchange Offer for a New Senior Note which is entitled to be resold to the public by the Holder thereof without complying with the prospectus delivery requirements of the Act, (b) the date on which such Senior Note has been disposed of in accordance with a Shelf Registration Statement (and the purchases thereof have been issued New Senior Notes therefor), or (c) the date on which such Senior Note is distributed to the public pursuant to Rule 144 under the Act and (d) each New Senior Note until the date on which such New Senior Note is disposed of by a Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the Exchange Offer Registration Statement (including the delivery of the Prospectus contained therein). SECTION 2. HOLDERS A Person is deemed to be a holder of Transfer Restricted Securities (each, a "HOLDER") whenever such Person owns Transfer Restricted Securities. SECTION 3. REGISTERED EXCHANGE OFFER (a) Unless the Exchange Offer shall not be permitted by applicable federal law (after the procedures set forth in Section 6(a)(i) below have been complied with), the Company and the Guarantors shall (i) cause the Exchange Offer Registration Statement to be filed with the Commission as soon as practicable after the Closing Date, but in no event later than 60 days after the Closing Date (such 60th day being the "FILING DEADLINE"), (ii) use its best efforts to cause such Exchange Offer Registration Statement to become effective at the earliest possible time, but in no event later than 120 days after the Closing Date (such 120th day being the "EFFECTIVENESS DEADLINE"), (iii) in connection with the foregoing, (A) file all pre-effective amendments to such Exchange Offer Registration Statement as may be necessary in order to cause it to become effective, (B) file, if applicable, a post-effective amendment to such Exchange Offer Registration Statement pursuant to Rule 430A under the Act and (C) cause all necessary filings, if any, in connection with the registration and qualification of the New Senior Notes to be made under the Blue Sky laws of such jurisdictions as are reasonably necessary to permit Consummation of the Exchange Offer, and (iv) upon the effectiveness of such Exchange Offer Registration Statement, commence and Consummate the Exchange Offer. The Exchange Offer shall be on the appropriate form permitting (i) registration of the New Senior Notes to be offered in exchange for the Senior Notes that are Transfer Restricted Securities and (ii) resales of New Senior Notes by Broker-Dealers that tendered into the Exchange Offer Senior Notes that such Broker-Dealer acquired for its own account as a result of market making activities or other trading activities (other than Senior Notes acquired directly from the Company or any of its Affiliates) as contemplated by Section 3(c) below. (b) The Company and the Guarantors shall use their respective best efforts to cause the Exchange Offer Registration Statement to be effective continuously, and shall keep the Exchange Offer open for a period of not less than the minimum period required under applicable federal and state securities laws to Consummate the Exchange Offer; provided, however, that in no event shall such period be less than 20 Business Days. The Company and the Guarantors shall cause the Exchange Offer to comply with all applicable federal and state securities laws. No securities other than the New Senior Notes shall be included in the Exchange Offer Registration Statement. The Company and the Guarantors shall use their respective -3- 5 best efforts to cause the Exchange Offer to be Consummated on the earliest practicable date after the Exchange Offer Registration Statement has become effective, but in no event later than 30 Business Days thereafter (such 30th day being the "CONSUMMATION DEADLINE"). (c) The Company shall include a "Plan of Distribution" section in the Prospectus contained in the Exchange Offer Registration Statement and indicate therein that any Broker-Dealer who holds Transfer Restricted Securities that were acquired for the account of such Broker-Dealer as a result of market-making activities or other trading activities (other than Senior Notes acquired directly from the Company or any Affiliate of the Company), may exchange such Transfer Restricted Securities pursuant to the Exchange Offer. Such "Plan of Distribution" section shall also contain all other information with respect to such sales by such Broker-Dealers that the Commission may require in order to permit such sales pursuant thereto, but such "Plan of Distribution" shall not name any such Broker-Dealer or disclose the amount of Transfer Restricted Securities held by any such Broker-Dealer, except to the extent required by the Commission as a result of a change in policy, rules or regulations after the date of this Agreement. See the Shearman & Sterling no-action letter (available July 2, 1993). Because such Broker-Dealer may be deemed to be an "underwriter" within the meaning of the Act and must, therefore, deliver a prospectus meeting the requirements of the Act in connection with its initial sale of any New Senior Notes received by such Broker-Dealer in the Exchange Offer, the Company and Guarantors shall permit the use of the Prospectus contained in the Exchange Offer Registration Statement by such Broker-Dealer to satisfy such prospectus delivery requirement. To the extent necessary to ensure that the prospectus contained in the Exchange Offer Registration Statement is available for such sales of New Senior Notes by Broker-Dealers, the Company and the Guarantors agree to use their respective best efforts to keep the Exchange Offer Registration Statement continuously effective, supplemented, amended and current as required by and subject to the provisions of Sections 6(a) and (c) hereof and in conformity with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of one year from the Consummation Deadline or such shorter period as will terminate when all Transfer Restricted Securities covered by such Registration Statement have been sold pursuant thereto. The Company and the Guarantors shall provide sufficient copies of the latest version of such Prospectus to such Broker-Dealers, promptly upon request, and in no event later than one day after such request, at any time during such period. SECTION 4. SHELF REGISTRATION (a) Shelf Registration. If (i) the Exchange Offer is not permitted by applicable law (after the Company and the Guarantors have complied with the procedures set forth in Section 6(a)(i) below) or (ii) if any Holder of Transfer Restricted Securities shall notify the Company within 20 Business Days following the Consummation Deadline that (A) such Holder was prohibited by law or Commission policy from participating in the Exchange Offer or (B) such Holder may not resell the New Senior Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the Prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such Holder or (C) such Holder is a Broker-Dealer and holds Senior Notes acquired directly from the Company or any of its Affiliates, then the Company and the Guarantors shall: (x) cause to be filed, on or prior to 30 days after the earlier of (i) the date on which the Company determines that the Exchange Offer Registration Statement cannot be filed as a result of clause (a)(i) above -4- 6 and (ii) the date on which the Company receives the notice specified in clause (a)(ii) above, (such earlier date, the "FILING DEADLINE"), a shelf registration statement pursuant to Rule 415 under the Act (which may be an amendment to the Exchange Offer Registration Statement (the "SHELF REGISTRATION STATEMENT")), relating to all Transfer Restricted Securities, and (y) shall use their respective best efforts to cause such Shelf Registration Statement to become effective on or prior to 60 days after the Filing Deadline for the Shelf Registration Statement (such 60th day the "EFFECTIVENESS DEADLINE"). If, after the Company has filed an Exchange Offer Registration Statement that satisfies the requirements of Section 3(a) above, the Company is required to file and make effective a Shelf Registration Statement solely because the Exchange Offer is not permitted under applicable federal law (i.e., clause (a)(i) above), then the filing of the Exchange Offer Registration Statement shall be deemed to satisfy the requirements of clause (x) above; provided that, in such event, the Company shall remain obligated to meet the Effectiveness Deadline for the Shelf Registration Statement set forth in clause (y). To the extent necessary to ensure that the Shelf Registration Statement is available for sales of Transfer Restricted Securities by the Holders thereof entitled to the benefit of this Section 4(a), the Company and the Guarantors shall use their respective best efforts to keep any Shelf Registration Statement required by this Section 4(a) continuously effective, supplemented, amended and current as required by and subject to the provisions of Sections 6(b) and (c) hereof and in conformity with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for as long as the Initial Purchaser is deemed to be an affiliate of the Company but in no event less than the shorter of (i) two years (as extended pursuant to Section 6(c)(i)) following the Closing Date, or (ii) the date on which all Transfer Restricted Securities covered by such Shelf Registration Statement have been sold pursuant thereto. (b) Provision by Holders of Certain Information in Connection with the Shelf Registration Statement. No Holder of Transfer Restricted Securities may include any of its Transfer Restricted Securities in any Shelf Registration Statement pursuant to this Agreement unless and until such Holder furnishes to the Company in writing, within 20 days after receipt of a request therefor, the information specified in Item 507 or 508 of Regulation S-K, as applicable, of the Act for use in connection with any Shelf Registration Statement or Prospectus or preliminary Prospectus included therein. No Holder of Transfer Restricted Securities shall be entitled to liquidated damages pursuant to Section 5 hereof unless and until such Holder shall have provided all such information. Each selling Holder agrees to promptly furnish additional information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. SECTION 5. LIQUIDATED DAMAGES If (i) any Registration Statement required by this Agreement is not filed with the Commission on or prior to the applicable Filing Deadline, (ii) any such Registration Statement has not been declared effective by the Commission on or prior to the applicable Effectiveness Deadline, (iii) the Exchange Offer has not been Consummated on or prior to the Consummation Deadline or (iv) any Registration Statement required by this Agreement is filed and declared effective but shall thereafter cease to be effective or fail to be usable for its intended purpose without being succeeded immediately by a post-effective amendment to such -5- 7 Registration Statement that cures such failure and that is itself declared effective immediately (each such event referred to in clauses (i) through (iv), a "REGISTRATION DEFAULT"), then the Company and the Guarantors hereby jointly and severally agree to pay to each Holder of Transfer Restricted Securities affected thereby liquidated damages in an amount equal to $.05 per week per $1,000 in principal amount of Transfer Restricted Securities held by such Holder for each week or portion thereof that the Registration Default continues for the first 90-day period immediately following the occurrence of such Registration Default. The amount of the liquidated damages shall increase by an additional $.05 per week per $1,000 in principal amount of Transfer Restricted Securities with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of liquidated damages of $.25 per week per $1,000 in principal amount of Transfer Restricted Securities; provided that the Company and the Guarantors shall in no event be required to pay liquidated damages for more than one Registration Default at any given time. Notwithstanding anything to the contrary set forth herein, (1) upon filing of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of (i) above, (2) upon the effectiveness of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of (ii) above, (3) upon Consummation of the Exchange Offer, in the case of (iii) above, or (4) upon the filing of a post-effective amendment to the Registration Statement or an additional Registration Statement that causes the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement) to again be declared effective or made usable in the case of (iv) above, the accrual of liquidated damages payable with respect to the Transfer Restricted Securities as a result of such clause (i), (ii), (iii) or (iv), as applicable, shall cease. All accrued liquidated damages shall be paid to the Holders entitled thereto, in the manner provided for the payment of interest in the Indenture, on each Interest Payment Date, as more fully set forth in the Indenture and the Notes. Notwithstanding the fact that any securities for which liquidated damages are due cease to be Transfer Restricted Securities, all obligations of the Company and the Guarantors to pay liquidated damages with respect to securities shall survive until such time as such obligations with respect to such securities shall have been satisfied in full. SECTION 6. REGISTRATION PROCEDURES (a) Exchange Offer Registration Statement. In connection with the Exchange Offer, the Company and the Guarantors shall (x) comply with all applicable provisions of Section 6(c) below, (y) use their respective best efforts to effect such exchange and to permit the resale of New Senior Notes by Broker-Dealers that tendered in the Exchange Offer Senior Notes that such Broker-Dealer acquired for its own account as a result of its market making activities or other trading activities (other than Senior Notes acquired directly from the Company or any of its Affiliates) being sold in accordance with the intended method or methods of distribution thereof, and (z) comply with all of the following provisions: (i) If, following the date hereof there has been announced a change in Commission policy with respect to exchange offers such as the Exchange Offer, that in the reasonable opinion of counsel to the Company raises a substantial question as to whether the Exchange Offer is permitted by applicable federal law, the Company and the Guarantors hereby agree to seek a no-action letter or other favorable decision from the Commission allowing the Company and the Guarantors to Consummate an Exchange Offer for such Transfer Restricted Securities. The Company and the Guarantors hereby agree to pursue the issuance of such a decision to the Commission staff level. In connection with the foregoing, the Company and the Guarantors hereby agree to take all such other -6- 8 actions as may be requested by the Commission or otherwise required in connection with the issuance of such decision, including without limitation (A) participating in telephonic conferences with the Commission, (B) delivering to the Commission staff an analysis prepared by counsel to the Company setting forth the legal bases, if any, upon which such counsel has concluded that such an Exchange Offer should be permitted and (C) diligently pursuing a resolution (which need not be favorable) by the Commission staff. (ii) As a condition to its participation in the Exchange Offer, each Holder of Transfer Restricted Securities (including, without limitation, any Holder who is a Broker Dealer) shall furnish, upon the request of the Company, prior to the Consummation of the Exchange Offer, a written representation to the Company and the Guarantors (which may be contained in the letter of transmittal contemplated by the Exchange Offer Registration Statement) to the effect that (A) it is not an Affiliate of the Company, (B) it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the New Senior Notes to be issued in the Exchange Offer and (C) it is acquiring the New Senior Notes in its ordinary course of business. Each Holder using the Exchange Offer to participate in a distribution of the New Senior Notes hereby acknowledges and agrees that, if the resales are of New Senior Notes obtained by such Holder in exchange for Senior Notes acquired directly from the Company or an Affiliate thereof, it (1) could not, under Commission policy as in effect on the date of this Agreement, rely on the position of the Commission enunciated in Morgan Stanley and Co., Inc. (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), as interpreted in the Commission's letter to Shearman & Sterling dated July 2, 1993, and similar no-action letters (including, if applicable, any no-action letter obtained pursuant to clause (i) above), and (2) must comply with the registration and prospectus delivery requirements of the Act in connection with a secondary resale transaction and that such a secondary resale transaction must be covered by an effective registration statement containing the selling security holder information required by Item 507 or 508, as applicable, of Regulation S-K. (iii) Prior to effectiveness of the Exchange Offer Registration Statement, the Company and the Guarantors shall provide a supplemental letter to the Commission (A) stating that the Company and the Guarantors are registering the Exchange Offer in reliance on the position of the Commission enunciated in Exxon Capital Holdings Corporation (available May 13, 1988), Morgan Stanley and Co., Inc. (available June 5, 1991) as interpreted in the Commission's letter to Shearman & Sterling dated July 2, 1993, and, if applicable, any no-action letter obtained pursuant to clause (i) above, (B) including a representation that neither the Company nor any Guarantor has entered into any arrangement or understanding with any Person to distribute the New Senior Notes to be received in the Exchange Offer and that, to the best of the Company's and each Guarantor's information and belief, each Holder participating in the Exchange Offer is acquiring the New Senior Notes in its ordinary course of business and has no arrangement or understanding with any Person to participate in the distribution of the New Senior Notes received in the Exchange Offer and (C) any other undertaking or representation required by the Commission as set forth in any no-action letter obtained pursuant to clause (i) above, if applicable. (b) Shelf Registration Statement. (i) In connection with the Shelf Registration Statement, the Company and the Guarantors shall (x) comply with all the provisions of Section 6(c) below and (y) use their respective best efforts to effect such registration to permit the sale of the Transfer Restricted Securities being sold in accordance with the intended method or methods of distribution thereof (as indicated -7- 9 in the information furnished to the Company pursuant to Section 4(b) hereof), and pursuant thereto the Company and the Guarantors will prepare and file with the Commission a Registration Statement relating to the registration on any appropriate form under the Act, which form shall be available for the sale of the Transfer Restricted Securities in accordance with the intended method or methods of distribution thereof within the time periods and otherwise in accordance with the provisions hereof. (ii) The Company shall issue, upon the request of any Holder (after having sold the Senior Notes) or purchaser of Senior Notes (who can receive the New Senior Notes) covered by any Shelf Registration Statement contemplated by this Agreement, New Senior Notes having an aggregate principal amount equal to the aggregate principal amount of Senior Notes sold pursuant to the Shelf Registration Statement and surrendered to the Company for cancellation; the Company shall register the New Senior Notes in the name of the purchaser(s) who purchased securities subject to the Shelf Registration Statement. (c) General Provisions. In connection with any Registration Statement and any related Prospectus required by this Agreement, the Company and the Guarantors shall: (i) use their respective best efforts to keep such Registration Statement continuously effective and provide all requisite financial statements for the period specified in Section 3 or 4 of this Agreement, as applicable. Upon the occurrence of any event that would cause any such Registration Statement or the Prospectus contained therein (A) to contain a material misstatement or omission or (B) not to be effective and usable for resale of Transfer Restricted Securities during the period required by this Agreement, the Company and the Guarantors shall file promptly an appropriate amendment to such Registration Statement curing such defect, and, if Commission review is required, use their respective best efforts to cause such amendment to be declared effective as soon as practicable; (ii) prepare and file with the Commission such amendments and post-effective amendments to the applicable Registration Statement as may be necessary to keep such Registration Statement effective for the applicable period set forth in Section 3 or 4 hereof, as the case may be; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act, and to comply fully with Rules 424, 430A and 462, as applicable, under the Act in a timely manner; and comply with the provisions of the Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; (iii) advise each Holder and the Initial Purchaser promptly and, if requested by such Person, confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to any applicable Registration Statement or any post-effective amendment thereto, when the same has become effective, (B) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information relating thereto, (C) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement under the Act or of the suspension by any state securities commission of the qualification of the Transfer Restricted Securities for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes, (D) of the existence of any fact or the happening of any event that makes any statement of a material fact made in the Registration Statement, the Prospectus, any amendment or supplement thereto or any document incorporated by reference therein untrue, or that requires the making of any -8- 10 additions to or changes in the Registration Statement in order to make the statements therein not misleading, or that requires the making of any additions to or changes in the Prospectus in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Transfer Restricted Securities under state securities or Blue Sky laws, the Company and the Guarantors shall use their respective best efforts to obtain the withdrawal or lifting of such order at the earliest possible time; (iv) subject to Section 6(c)(i), if any fact or event contemplated by Section 6(c)(iii)(D) above shall exist or have occurred, prepare a supplement or post-effective amendment to the Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of Transfer Restricted Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (v) furnish to each Holder and the Initial Purchaser in connection with such exchange or sale, if any, before filing with the Commission, copies of any Registration Statement or any Prospectus included therein or any amendments or supplements to any such Registration Statement or Prospectus (including all documents incorporated by reference after the initial filing of such Registration Statement), which documents will be subject to the review and comment of such Persons in connection with such sale, if any, for a period of at least five Business Days, and the Company will not file any such Registration Statement or Prospectus or any amendment or supplement to any such Registration Statement or Prospectus (including all such documents incorporated by reference) to which such Persons shall reasonably object within five Business Days after the receipt thereof. Such Person shall be deemed to have reasonably objected to such filing if such Registration Statement, amendment, Prospectus or supplement, as applicable, as proposed to be filed, contains a material misstatement or omission or fails to comply with the applicable requirements of the Act; (vi) promptly prior to the filing of any document that is to be incorporated by reference into a Registration Statement or Prospectus, provide copies of such document to each Holder and the Initial Purchaser in connection with such exchange or sale, if any, make the Company's and the Guarantors' representatives available for discussion of such document and other customary due diligence matters, and include such information in such document prior to the filing thereof as such Persons may reasonably request; (vii) make available, at reasonable times, for inspection by each selling Holder and the Initial Purchaser and any attorney or accountant retained by such Persons, all financial and other records, pertinent corporate documents of the Company and the Guarantors and cause the Company's and the Guarantors' officers, directors and employees to supply all information reasonably requested by any such Persons, attorney or accountant in connection with such Registration Statement or any post-effective amendment thereto subsequent to the filing thereof and prior to its effectiveness; (viii) if requested by any Holders in connection with such exchange or sale or the Initial Purchaser, promptly include in any Registration Statement or Prospectus, pursuant to a -9- 11 supplement or post-effective amendment if necessary, such information as such selling Persons may reasonably request to have included therein, including, without limitation, information relating to the "Plan of Distribution" of the Transfer Restricted Securities and the use of the Registration Statement or Prospectus for market making activities; and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after the Company is notified of the matters to be included in such Prospectus supplement or post-effective amendment; (ix) furnish to each selling Holder in connection with such exchange or sale and the Initial Purchaser without charge, at least one copy of the Registration Statement, as first filed with the Commission, and of each amendment thereto, including all documents incorporated by reference therein and all exhibits (including exhibits incorporated therein by reference); (x) deliver to each selling Holder and the Initial Purchaser without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons reasonably may request; the Company and the Guarantors hereby consent to the use (in accordance with law) of the Prospectus and any amendment or supplement thereto by each selling Person in connection with the offering and the sale of the Transfer Restricted Securities covered by the Prospectus or any amendment or supplement thereto and all market making activities of the Initial Purchaser, as the case may be; (xi) upon the request of any Holder, enter into such customary agreements (including underwriting agreements) and make such reasonable representations and warranties and take all such other actions in connection therewith in order to expedite or facilitate the disposition of the Transfer Restricted Securities pursuant to any applicable Registration Statement contemplated by this Agreement as may be reasonably requested by any Holder in connection with any sale or resale pursuant to any applicable Registration Statement. In such connection , and also in connection with market making activities by the Initial Purchaser, the Company and the Guarantors shall: (A) upon request of such Person, furnish (or in the case of paragraphs (2) and (3), use its best efforts to cause to be furnished) to each such Person, upon Consummation of the Exchange Offer or upon the effectiveness of the Shelf Registration Statement, as the case may be: (1) a certificate, dated such date, signed on behalf of the Company and each Guarantor by (x) the President or any Vice President and (y) a principal financial or accounting officer of the Company and such Guarantor, confirming, as of the date thereof, the matters set forth in paragraphs (a) through (d) of Section 9 of the Purchase Agreement and such other similar matters as such Person may reasonably request; (2) an opinion, dated the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, of counsel for the Company and the Guarantors covering matters similar to those set forth in paragraph (c) of Section 9 of the Purchase Agreement and such other matter as such Person may reasonably request, and in any event including a statement to the effect that such counsel has participated in conferences with officers and other representatives of the Company and the Guarantors, representatives of the -10- 12 independent public accountants for the Company and the Guarantors and has considered the matters required to be stated therein and the statements contained therein, although such counsel has not independently verified the accuracy, completeness or fairness of such statements; and that such counsel advises that, on the basis of the foregoing, no facts came to such counsel's attention that caused such counsel to believe that the applicable Registration Statement, at the time such Registration Statement or any post-effective amendment thereto became effective and, in the case of the Exchange Offer Registration Statement, as of the date of Consummation of the Exchange Offer, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus contained in such Registration Statement as of its date and, in the case of the opinion dated the date of Consummation of the Exchange Offer, as of the date of Consummation, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Without limiting the foregoing, such counsel may state further that such counsel assumes no responsibility for, and has not independently verified, the accuracy, completeness or fairness of the financial statements, notes and schedules and other financial data included in any Registration Statement contemplated by this Agreement or the related Prospectus; and (3) a customary comfort letter, dated the date of Consummation of the Exchange Offer, or as of the date of effectiveness of the Shelf Registration Statement, as the case may be, from the Company's independent accountants, in the customary form and covering matters of the type customarily covered in comfort letters to underwriters in connection with underwritten offerings, and affirming the matters set forth in the comfort letters delivered pursuant to Section 9(g) of the Purchase Agreement; and (B) deliver such other documents and certificates as may be reasonably requested by such Persons to evidence compliance with clause (A) above and with any customary conditions contained in the any agreement entered into by the Company and the Guarantors pursuant to this clause (xi); (xii) prior to any public offering of Transfer Restricted Securities, cooperate with the selling Holders and their counsel in connection with the registration and qualification of the Transfer Restricted Securities under the securities or Blue Sky laws of such jurisdictions as the selling Holders may reasonably request and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Transfer Restricted Securities covered by the applicable Registration Statement; provided, however, that neither the Company nor any Guarantor shall be required to register or qualify as a foreign corporation where it is not now so qualified or to take any action that would subject it to the service of process in suits or to taxation, other than as to matters and transactions relating to the Registration Statement, in any jurisdiction where it is not now so subject; (xiii) in connection with any sale of Transfer Restricted Securities that will result in such securities no longer being Transfer Restricted Securities, cooperate with the Holders to -11- 13 facilitate the timely preparation and delivery of certificates representing Transfer Restricted Securities to be sold and not bearing any restrictive legends; and to register such Transfer Restricted Securities in such denominations and such names as the selling Holders may request at least two Business Days prior to such sale of Transfer Restricted Securities; (xiv) use their respective best efforts to cause the disposition of the Transfer Restricted Securities covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof to consummate the disposition of such Transfer Restricted Securities, subject to the proviso contained in clause (xii) above; (xv) provide a CUSIP number for all Transfer Restricted Securities not later than the effective date of a Registration Statement covering such Transfer Restricted Securities and provide the Trustee under the Indenture with printed certificates for the Transfer Restricted Securities which are in a form eligible for deposit with the Depository Trust Company; (xvi) otherwise use their respective best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders with regard to any applicable Registration Statement, as soon as practicable, a consolidated earnings statement meeting the requirements of Rule 158 (which need not be audited) covering a twelve-month period beginning after the effective date of the Registration Statement (as such term is defined in paragraph (c) of Rule 158 under the Act); (xvii) cause the Indenture to be qualified under the TIA not later than the effective date of the first Registration Statement required by this Agreement and, in connection therewith, cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for such Indenture to be so qualified in accordance with the terms of the TIA; and execute and use its best efforts to cause the Trustee to execute, all documents that may be required to effect such changes and all other forms and documents required to be filed with the Commission to enable such Indenture to be so qualified in a timely manner; and (xviii) provide promptly to each Holder and the Initial Purchaser, upon request, each document filed with the Commission pursuant to the requirements of Section 13 or Section 15(d) of the Exchange Act. (d) Restrictions on Holders. Each Holder agrees by acquisition of a Transfer Restricted Security and the Initial Purchaser agrees that, upon receipt of the notice referred to in Section 6(c)(iii)(C) or any notice from the Company of the existence of any fact of the kind described in Section 6(c)(iii)(D) hereof (in each case, a "SUSPENSION NOTICE"), such Person will forthwith discontinue disposition of Transfer Restricted Securities pursuant to the applicable Registration Statement until (i) such Person has received copies of the supplemented or amended Prospectus contemplated by Section 6(c)(iv) hereof, or (ii) such Person is advised in writing by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus (in each case, the "RECOMMENCEMENT DATE"). Each Person receiving a Suspension Notice hereby agrees that it will either (i) destroy any Prospectuses, other than permanent file copies, then in such Person's possession which have been replaced by the Company with more recently dated Prospectuses or (ii) deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such Person's possession of the Prospectus covering such Transfer Restricted Securities that was current at the time of receipt of the -12- 14 Suspension Notice. The time period regarding the effectiveness of such Registration Statement set forth in Section 3 or 4 hereof, as applicable, shall be extended by a number of days equal to the number of days in the period from and including the date of delivery of the Suspension Notice to the date of delivery of the Recommencement Date. SECTION 7. REGISTRATION EXPENSES (a) All expenses incident to the Company's and the Guarantors' performance of or compliance with this Agreement will be borne by the Company, regardless of whether a Registration Statement becomes effective, including without limitation: (i) all registration and filing fees and expenses; (ii) all fees and expenses of compliance with federal securities and state Blue Sky or securities laws; (iii) all expenses of printing (including printing certificates for the New Senior Notes to be issued in the Exchange Offer and printing of Prospectuses whether for exchanges, sales, market making or otherwise), messenger and delivery services and telephone; (iv) all fees and disbursements of counsel for the Company, and counsel for the Guarantors and the Holders of Transfer Restricted Securities in connection with any Shelf Registration Statement; (v) all application and filing fees in connection with listing the New Senior Notes on a national securities exchange or automated quotation system pursuant to the requirements hereof; and (vi) all fees and disbursements of independent certified public accountants of the Company and the Guarantors (including the expenses of any special audit and comfort letters required by or incident to such performance). The Company will, in any event, bear its and the Guarantors' internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any Person, including special experts, retained by the Company or the Guarantors. (b) In connection with any Shelf Registration Statement, the Company and the Guarantors will reimburse the Holders of Transfer Restricted Securities who are selling or reselling Senior Notes or New Senior Notes pursuant to the "Plan of Distribution" contained in the Shelf Registration Statement, as applicable, for the reasonable fees and disbursements of not more than one counsel, who shall be Wilson Sonsini Goodrich & Rosati, Professional Corporation, unless another firm shall be chosen by the Holders of a majority in principal amount of the Transfer Restricted Securities for whose benefit such Registration Statement is being prepared. SECTION 8. INDEMNIFICATION (a) The Company and the Guarantors agree, jointly and severally, to indemnify and hold harmless each Holder, the Initial Purchaser, their respective directors, officers and each Person, if any, who controls such Persons (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act), from and against any and all losses, claims, damages, liabilities, judgments, (including without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement, preliminary prospectus or Prospectus (or any amendment or supplement thereto) provided by the Company to any holder or any prospective purchaser (who becomes a holder) of New Senior Notes or registered Senior Notes, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to -13- 15 make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by an untrue statement or omission or alleged untrue statement or omission that is based upon information relating to any of the Holders furnished in writing to the Company by any of the Holders. (b) Each Holder of Transfer Restricted Securities and the Initial Purchaser agrees, severally and not jointly, to indemnify and hold harmless the Company and the Guarantors, and their respective directors and officers, and each person, if any, who controls (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) the Company, or the Guarantors to the same extent as the foregoing indemnity from the Company and the Guarantors set forth in Section 8(a) above, but only with reference to information relating to such Person furnished in writing to the Company by such Person expressly for use in any Registration Statement. In no event shall any Person be liable or responsible for any amount in excess of the amount by which the total amount received by such Person with respect to its sale of Transfer Restricted Securities pursuant to a Registration Statement exceeds (i) the amount paid by such Person for such Transfer Restricted Securities and (ii) the amount of any damages that such Person has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the "INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PERSON") in writing and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 8(a) and 8(b), a Holder shall not be required to assume the defense of such action pursuant to this Section 8(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of the Holder and/or the Initial Purchaser). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party, and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all indemnified parties and all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by a majority of the Holders and/or the Initial Purchaser, in the case of the parties indemnified pursuant to Section 8(a), and by the Company, in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with its written consent or (ii) effected without its written consent if the settlement is entered into more than twenty business days after the indemnifying party shall have received a request from the indemnified party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the indemnifying party) and, prior to the date of such -14- 16 settlement, the indemnifying party shall have failed to comply with such reimbursement request. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. (d) To the extent that the indemnification provided for in this Section 8 is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Guarantors, on the one hand, and the Holders and the Initial Purchaser, on the other hand, from their sale of Transfer Restricted Securities or (ii) if the allocation provided by clause 8(d)(i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 8(d)(i) above but also the relative fault of the Company and the Guarantors, on the one hand, and of the Holder and the Initial Purchaser, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative fault of the Company and the Guarantors, on the one hand, and of the Holder and the Initial Purchaser, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or such Guarantor, on the one hand, or by the Holder and the Initial Purchaser, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and judgments referred to above shall be deemed to include, subject to the limitations set forth in the second paragraph of Section 8(a), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The Company, the Guarantors and each Holder and the Initial Purchaser agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any matter, including any action that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 8, no Holder nor the Initial Purchaser, nor their respective directors, officers or any Person, if any, who controls such Person shall be required to contribute, in the aggregate, any amount in excess of the amount by which the total received by such Holder with respect to the sale of its Transfer Restricted Securities pursuant to a Registration Statement exceeds the sum of (A) the amount paid by such Holder and the Initial Purchaser for such Transfer Restricted Securities plus (B) the amount of any damages which such Holder and the Initial Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. -15- 17 The Holders' and the Initial Purchaser, obligations to contribute pursuant to this Section 8(c) are several in proportion to the respective principal amount of Transfer Restricted Securities held by each Holder or the Initial Purchaser, hereunder and not joint. SECTION 9. RULE 144A AND RULE 144 The Company and each Guarantor agrees with each Holder, for so long as any Transfer Restricted Securities remain outstanding and during any period in which the Company or such Guarantor (i) is not subject to Section 13 or 15(d) of the Exchange Act, to make available, upon request of any Holder of Transfer Restricted Securities, to any Holder or beneficial owner of Transfer Restricted Securities in connection with any sale thereof and any prospective purchaser of such Transfer Restricted Securities designated by such Holder or beneficial owner, the information required by Rule 144A(d)(4) under the Act in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144A, and (ii) is subject to Section 13 or 15 (d) of the Exchange Act, to make all filings required thereby in a timely manner in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144. SECTION 10. MISCELLANEOUS (a) No Inconsistent Agreements. Neither the Company nor any Guarantor will, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Neither the Company nor any Guarantor has previously entered into any agreement granting any registration rights with respect to its securities to any Person other than pursuant to that certain Securityholders Agreement dated November 23, 1994. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's and the Guarantors' securities under any agreement in effect on the date hereof. (b) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given unless (i) in the case of Section 5 hereof and this Section 10(b)(i), the Company has obtained the written consent of Holders of all outstanding Transfer Restricted Securities and (ii) in the case of all other provisions hereof, the Company has obtained the written consent of Holders of a majority of the outstanding principal amount of Transfer Restricted Securities (excluding Transfer Restricted Securities held by the Company or its Affiliates). Notwithstanding the foregoing, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of Holders whose securities are being tendered pursuant to the Exchange Offer and that does not affect directly or indirectly the rights of other Holders whose securities are not being tendered pursuant to such Exchange Offer may be given by the Holders of a majority of the outstanding principal amount of Transfer Restricted Securities subject to such Exchange Offer. (c) Third Party Beneficiary. The Holders shall be third party beneficiaries to the agreements made hereunder between the Company and the Guarantors, on the one hand, and the Initial Purchaser, on the other hand, and shall have the right to enforce such agreements directly to the extent they may deem such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder. -16- 18 (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail (registered or certified, return receipt requested), telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a Holder, at the address set forth on the records of the Registrar under the Indenture, with a copy to the Registrar under the Indenture; and (ii) if to the Company or the Guarantors: Phase Metrics, Inc. 10260 Sorrento Valley Road San Diego, CA 92121 Telecopier No.: (619) 646-4990 Attention: Chief Financial Officer With a copy to: Brobeck, Phleger & Harrison LLP 4675 MacArthur Court, #1000 Newport Beach, CA 92660-1846 Telecopier No.: (714) 752-7535 Attention: Greg T. Williams, Esq. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and on the next business day, if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands or other communications shall be concurrently delivered by the Person giving the same to the Trustee at the address specified in the Indenture. Upon the date of filing of the Exchange Offer or a Shelf Registration Statement, as the case may be, notice shall be delivered to Donaldson, Lufkin & Jenrette Securities Corporation, the Initial Purchaser (in the form attached hereto as Exhibit A) and shall be addressed to: Attention: Louise Guarneri (Compliance Department), 277 Park Avenue, New York, New York 10172. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent Holders of Transfer Restricted Securities; provided, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Transfer Restricted Securities in violation of the terms hereof or of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Transfer Restricted Securities in any manner, whether by operation of law or otherwise, such Transfer Restricted Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Transfer Restricted Securities such Person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement and, if applicable, the Purchase Agreement, and such Person shall be entitled to receive the benefits hereof. -17- 19 (f) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (g) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (h) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF. (i) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (j) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted with respect to the Transfer Restricted Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. [**remainder of page intentionally left blank**] -18- 20 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. PHASE METRICS, INC. By: /s/ R. J. Saunders ---------------------------------- Name: R. J. Saunders Title: Vice President HELIOS, INCORPORATED By: /s/ R. J. Saunders ---------------------------------- Name: R. J. Saunders Title: Vice President APPLIED ROBOTIC TECHNOLOGIES, INC. By: /s/ R. J. Saunders ---------------------------------- Name: R. J. Saunders Title: Vice President AIR BEARINGS, INCORPORATED By: /s/ R. J. Saunders ---------------------------------- Name: R. J. Saunders Title: Vice President SANTA BARBARA METRIC, INC. By: /s/ R. J. Saunders ---------------------------------- Name: R. J. Saunders Title: Vice President DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: /s/ Steven D. Smith --------------------------------- Name: Steven D. Smith Title: Senior Vice President 21 EXHIBIT A NOTICE OF FILING OF A/B EXCHANGE OFFER REGISTRATION STATEMENT To: Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Attention: Louise Guarneri (Compliance Department) Fax: (212) 892-7272 From: Phase Metrics, Inc. 10 3/4% Senior Notes due 2005 Date: ________________, 1998 For your information only (NO ACTION REQUIRED): Today, ______________, 1998, we filed [an A/B Exchange Registration Statement/a Shelf Registration Statement] with the Securities and Exchange Commission. We currently expect this registration statement to be declared effective within __ business days of the date hereof. -21- EX-10.1 5 LEASE AGREEMENT DATED 06/05/1995 1 EXHIBIT 10.1 [California Net Lease] LEASE AGREEMENT THIS LEASE AGREEMENT is made this 5th day of June, 1995, between Security Capital Industrial Trust ("Landlord"), and the Tenant named below. Tenant: Phase Metrics, Inc., a California corporation Tenant's representative, address, and phone no.: Ron Miyahara, 47600 Westinghouse Drive, Fremont, CA 94539, (510/226-4800) Premises: Approximately 72,080 square feet as shown on Exhibit A. Project: Bayside Corporate Center, Phase I (see Exhibit A) Building (if not the same as the Project): All of Building B commonly known as 47639 Fremont Boulevard and all of Building C commonly known as 47655 Fremont Boulevard Tenant's Proportionate Share of Project: 70.34% Tenant's Proportionate Share of Building B: 100% Tenant's Proportionate Share of Building C: 100% Lease Term: Beginning on the Commencement Date and ending on the last day of the 60th full calendar month thereafter. Commencement Date: October 9, 1995 Initial Monthly Base Rent: $51,537 Initial Estimated Monthly Operating Expense 1. Utilities: N/A Payments: (estimates only and subject to adjustment to actual costs and expenses according to the 2. Common Area Charges: $2,883 provisions of this Lease) 3. Taxes: $7,712 4. Insurance: $217 5. Others: N/A Initial Estimated Monthly $10,813 Operating Expense Payments: Initial Monthly Base Rent and $62,350 Operating Expense Payments: Security Deposit: $51,537 Broker: Chip Sutherland, CB Commercial Scott Newman, CB Commercial Addenda: Addendums 1, 2, 3, 5, 6, and 7, Exhibits A, B, C, D and E
2 1. GRANTING CLAUSE. In consideration of the obligation of Tenant to pay rent as herein provided and in consideration of the other terms, covenants, and conditions hereof, Landlord leases to Tenant, and Tenant takes from Landlord, the Premises, to have and to hold for the Lease Term, subject to the terms, covenants and conditions of this Lease. 2. ACCEPTANCE OF PREMISES. Landlord agrees to install the tenant improvements (the "Initial Tenant Improvements") described in the Construction Addendum attached hereto as Addendum 2 and Tenant shall accept the Premises in its condition as of the Commencement Date, subject to all applicable laws, ordinances and regulations. Tenant acknowledges that Landlord has made no representation or warranty as to the suitability of the Premises for the conduct of Tenant's business, and Tenant waives any implied warranty that the Premises are suitable for Tenant's intended purposes. The taking of possession of the Premises shall be conclusive evidence that Tenant accepts the Premises and that the Premises were in good condition at the time possession was taken except for any punchlist items agreed to in writing by Landlord and Tenant. In no event shall Landlord be liable for any defects in the Premises (except as set forth in this Paragraph 2 of the Lease) or for any limitation on its use (except as a direct result of construction defects). Landlord shall deliver the Premises to Tenant clean and free of debris on the Commencement Date and warrants to Tenant (which warranty shall survive for a period of one year following the Commencement Date) that the existing structural portions of the Premises including roof, roof membranes and surface, foundations, exterior walls, support beams, plumbing, fire sprinkler system, lighting, HVAC, window seals, electrical systems, and loading doors, if any, in the Premises shall be in good operating condition on the Commencement Date. If a non-compliance exists as of the Commencement Date, Landlord shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Tenant setting forth the nature and extent of such non-compliance, rectify same at Landlord's cost and expense. The Building and that portion of the Premises already constructed and to be constructed by Landlord or Landlord's contractor, have been or will be constructed in material compliance with all current governmental regulations, ordinances, and laws including zoning and building codes, regulations and ordinances and all applicable covenants and restrictions of record which are in effect on or prior to the completion of the buildout of the Tenant Improvements, including the provisions of Title III of the Americans with Disabilities Act as they may apply to the Building and that portion of the Premises already constructed. Landlord will be fully responsible for making all alterations and repairs to the Building and the Premises at its cost (which shall not be included as Operating Expenses), resulting from or necessitated by the failure by Landlord, Landlord's contractor, the Building or the Premises to comply with such governmental regulations, ordinances and laws, all as in effect as of the Commencement Date only, provided that such non-compliance is not the result of Tenant's use or occupancy of the Building or the Premises. 3. USE. The Premises shall be used only for the purpose of receiving, light manufacturing, storing, shipping and selling products, materials and merchandise made and/or distributed by Tenant and for such other lawful purposes as may be incidental thereto. Tenant shall not conduct or give notice of any auction, liquidation, or going out of business sale on the Premises. Tenant will use the Premises in a careful, safe and proper manner and will not commit waste thereon. Tenant, at its sole expense, shall comply with all laws (including, without limitation, Environmental Requirements, as defined herein, and laws regarding access for handicapped or disabled persons), ordinances and regulations, and all declarations, covenants, and restrictions, applicable to Tenant's use or occupation of the Premises, and with all governmental orders and directives of public officers which impose any duty or restriction with respect to the use or occupation of the Premises. Outside storage, including without limitation, storage of trucks and other vehicles, is prohibited without Landlord's prior written consent. No use shall be made of the Premises that would constitute the Project as a place of public accommodation under the Americans with 2 3 Disabilities Act or similar state statutes or local ordinances or any regulations promulgated thereunder, all as may be amended from time to time (the "ADA"); and Tenant shall cause the Premises (and, to the extent required by improvements to the Premises, the Project) to comply with the ADA. All improvements constructed pursuant to the Construction Addendum shall comply, as of the Commencement Date, with the ADA; provided, however that Landlord shall not be required to make any improvements which may be required if the Premises are to be used as a place of public accommodation. Tenant shall not permit any objectionable or unpleasant odors, smoke, dust, gas, noise, or vibrations, all as reasonably determined by Landlord, to emanate from the Premises, or take any other action that, in the reasonable opinion of Landlord, would constitute a nuisance or would disturb, unreasonably interfere with, or endanger Landlord or any other tenants of the Project. Landlord has inspected Tenant's warehouse space located at 47600 Westinghouse Drive, Fremont, California, and does not believe that the operations at such site would constitute a nuisance if such operations occurred in the Project. Tenant will not use or permit the Premises to be used for any purpose or in any manner that would void Tenant's or Landlord's insurance, increase the insurance risk, or cause the disallowance of any sprinkler credits. If any increase in the cost of any insurance on the Premises or the Project is caused by Tenant's use of the Premises, then Tenant shall pay the amount of such increase to Landlord. 4. BASE RENT. Tenant shall pay Base Rent in the amount set forth above. The first month's Base Rent, the Security Deposit, and the first monthly installment of estimated Operating Expenses (as hereafter defined) shall be due and payable on the date hereof, and Tenant promises to pay to Landlord in advance, without demand, deduction or set-off, monthly installments of Base Rent on or before the first day of each calendar month succeeding the Commencement Date. Payments of Base Rent for any fractional calendar month shall be prorated. All payments required to be made by Tenant to Landlord hereunder shall be payable at such address as Landlord may specify from time to time by written notice delivered in accordance herewith. The obligation of Tenant to pay Base Rent and other sums to Landlord and the obligations of Landlord under this Lease are independent obligations. Tenant shall have no right at any time to abate, reduce, or set-off any rent due hereunder except where expressly provided in this Lease. If Tenant is delinquent in any monthly installment of Base Rent or of estimated Operating Expenses for more than 5 days, Tenant shall pay to Landlord on demand a late charge equal to 3 percent of such delinquent sum. The provision for such late charge shall be in addition to all of Landlord's other rights and remedies hereunder or at law and shall not be construed as a penalty. Notwithstanding the above, Tenant shall not be obligated to pay the late charge until Landlord has given Tenant 5 days written notice of the delinquent payment (which may be give at any time during the delinquency); provided, however, that such notice shall not be required more than twice in any 12-month period or five times over the term of the Lease. 5. SECURITY DEPOSIT. Tenant shall deposit with Landlord on the date hereof the Security Deposit, which shall be held by Landlord as security for the performance of Tenant's obligations under this Lease. The Security Deposit is not an advance rental deposit or a measure of Landlord's damages in case of Tenant's default. Upon each occurrence of an Event of Default (hereinafter defined), Landlord may use all or part of the Security Deposit to pay delinquent payments due under this Lease, and the cost of any damage, injury, expense or liability caused by such Event of Default, without prejudice to any other remedy provided herein or provided by law. Tenant shall pay Landlord on demand the amount that will restore the Security Deposit to its original amount. Landlord's obligation respecting the Security Deposit is that of a debtor, not a trustee; no interest shall accrue thereon. The Security Deposit shall be the property of Landlord, but shall be paid to Tenant when Tenant's obligations under this Lease have been completely fulfilled. Landlord shall be released from any obligation with respect to the Security Deposit upon transfer of this Lease and the Premises to a person or entity assuming Landlord's obligations under this Paragraph 5. Tenant shall have no obligation or liability to any person or entity which assumes Landlord's interest in this Lease, the Premises or Project to pay any additional Security Deposit if Landlord falls to transfer such Security Deposit to such person or entity. 3 4 6. OPERATING EXPENSE PAYMENTS. During each month of the Lease Term, on the same date that Base Rent is due, Tenant shall pay Landlord an amount equal to 1/12 of the annual cost, as estimated by Landlord from time to time, of Tenant's Proportionate Share (hereinafter defined) of Operating Expenses for the Project. Payments thereof for any fractional calendar month shall be prorated. The term "Operating Expenses" means all costs and expenses incurred by Landlord with respect to the ownership, maintenance, and operation of the Project including, but not limited to costs of: Taxes (hereinafter defined) and reasonable fees payable to tax consultants and attorneys for consultation and contesting taxes; insurance; utilities; maintenance and repair of the roof of Building B or Building C; maintenance and repair of all common area portions of the Project, including without limitation, paving and parking areas, roads, alleys, and driveways, mowing, landscaping, exterior painting of the Premises, utility lines, mechanical systems serving the Premises or the common areas and other items described in Paragraph 11 below; amounts paid to contractors and subcontractors for work or services performed in connection with any of the foregoing; charges or assessments of any association to which the Project is subject; property management fees payable to a property manager in an amount not to exceed the "market rate" in Fremont, California, including any affiliate of Landlord, or if there is no property manager, an administration fee of 5 percent of Operating Expenses payable to Landlord; security services, if any; trash collection, sweeping and removal; and additions or alterations made by Landlord to the Project in order to comply with applicable laws or codes (not in effect as of the Commencement Date) as amended from time to time or that are appropriate to the continued operation of the Project as a bulk warehouse facility in the market area, provided that the cost of such additions or alterations that are required to be capitalized for federal income tax purposes shall be amortized on a straight line basis over a period equal to the lesser of the useful life thereof for federal income tax purposes or 10 years. Operating Expenses do not include the following matters: costs or expenses or depreciation or amortization for capital repairs and capital replacements required to be made by Landlord under Paragraph 10 of this Lease, debt service under mortgages or ground rent under ground leases, costs of restoration to the extent of net insurance proceeds received by Landlord with respect thereto, leasing commissions, the costs of renovating space for tenants expenses of initial development and construction, including, but not limited to, grading, paving, landscaping and decorating; expenses for which Landlord is reimbursed or indemnified (either by an insurer, condemnor, warrantor, or otherwise); losses which would have been insured losses if Landlord had carried the insurance required of Landlord under this Lease; legal expenses arising out of the initial construction of the Premises, or any tenant improvements or disputes with other tenants of the Project; the cost of any work or service performed for or facilities furnished to Tenant at Tenant expense; any cost or expense representing an amount paid to an entity affiliated in any way with Landlord which is in excess of the market rate for such work or service; any interest or penalties imposed upon Landlord by any taxing authority for late payment or otherwise; any costs related to the sale or financing of the Premises, or any part thereof; costs relating to the disposition of Hazardous Materials (but this exclusion shall not constitute a release by Landlord of Tenant for any such costs for which Tenant is liable pursuant to Paragraph 30 of this Lease); Landlord's advertising or promotional costs or charitable contributions; any costs or expenses incurred in connection with any voluntary/traffic mitigation actions; costs of maintenance, repair or replacements covered by warranty; costs of correcting latent or patent defects in the construction of the Building, the Premises or the Project, and any fines, penalties or interest charged against Landlord. Within a reasonable period after the conclusion of each calendar year (or more frequently, if desired by Landlord) Landlord shall furnish Tenant with a statement (the "Operating Expense Statement") showing in reasonable detail the Operating Expense for the appropriate period. If Tenant's total payments for any year are less than Tenant's Proportionate Share of actual Operating Expenses for such year, Tenant shall pay the difference to Landlord within 30 days after demand. If the total payments of Tenant for any year are more than Tenant's Proportionate Share of actual Operating Expenses for such year, Landlord shall retain such excess and credit it against Tenant's next payments. For purposes of calculating Tenant's Proportionate Share of Operating Expenses, a year shall mean a calendar year except the first year, which shall begin on the Commencement Date, and the last year, which shall end on the expiration of this Lease. With respect to Operating Expenses which Landlord allocates to the entire Project, Tenant's "Proportionate Share" shall be the percentage set forth on the first page of this Lease as Tenant's Proportionate Share of the Project as reasonably adjusted by Landlord in the future for changes in the physical size of the Premises or the Project; and, with respect to Operating Expenses which Landlord allocates only 4 5 to the Building, Tenant's "Proportionate Share" shall be the percentage set forth on the first page of this Lease as Tenant's Proportionate Share of the Building as reasonably adjusted by Landlord in the future for changes in the physical size of the Premises or the Building. Landlord may equitably increase Tenant's Proportionate Share for any item of expense or cost reimbursable by Tenant that relates to a repair, replacement, or service that benefits only the Premises or only a portion of the Project that includes the Premises or that vanes with the occupancy of the Project. The estimated Operating Expenses for the Premises set forth on the first page of this Lease are only estimates, and Landlord makes no guaranty or warranty that such estimates will be accurate. At any time within 3 months after Landlord has issued an Operating Statement, and after at least 2 days prior written notice to Landlord, Tenant will have the right, during normal business hours, to review and audit the books and records of Landlord (at the office of Landlord at which such books and records are routinely maintained) relating to such Operating Expense Statement only, in order to verify the sums paid by Tenant for Operating Expenses. 7. UTILITIES. Tenant shall pay for all water, gas, electricity, heat, light, power, telephone, sewer, sprinkler services, refuse and trash collection, and other utilities and services used on the Premises, all maintenance charges for utilities, and any storm sewer charges or other similar charges for utilities imposed by any governmental entity or utility provider, together with any taxes, penalties, surcharges or the like pertaining to Tenant's use of the Premises. Landlord shall have the right to cause at Tenant's expense any of said services to be separately metered or charged directly to Tenant by the provider. Tenant shall pay its share of all charges for jointly metered utilities based upon consumption, as reasonably determined by Landlord. Except as set forth below, Landlord shall not be liable for any interruption or failure of utilities or any other service to the Premises and no such interruption or failure shall result in the abatement of rent hereunder. If an interruption or cessation of utilities occurs and the Premises are not usable by Tenant for the conduct of Tenant's business as a result thereof, Base Rent and applicable Operating Expenses not actually incurred by Tenant shall be abated for the period which commences five (5) business days after the date Tenant gives Landlord notice of such interruption until such utilities are restored. Tenant agrees to limit use of water and sewer for normal restroom use and nothing herein contained shall impose upon Landlord any duty to provide sewer or water usage for other than normal restroom usage. 8. TAXES. Landlord agrees to pay all taxes, assessments and governmental charges of any kind and nature (collectively referred to as "Taxes") that accrue against the Project during the Lease Term, which shall be included as part of the Operating Expenses charged to Tenant hereunder, provided Landlord shall have the right to contest by appropriate legal proceedings the amount, validity, or application of any Taxes or liens thereof. All capital levies or other taxes assessed or imposed on Landlord upon the rents payable to Landlord under this Lease and any franchise tax, any excise, transaction, sales or privilege tax, assessment, levy or charge measured by or based, in whole or in part, upon such rents from the Premises and/or the Project or any portion thereof shall be paid by Tenant to Landlord monthly in estimated installments or, within 20 days after demand, at the option of Landlord, as additional rent; provided, however, in no event shall Tenant be liable for any net income taxes imposed on Landlord unless such net income taxes are in substitution for any Taxes payable hereunder. If any such tax or excise is levied or assessed directly against Tenant, then Tenant shall be responsible for and shall pay the same at such times and in such manner as the taxing authority shall require. Tenant shall be liable for all taxes levied or assessed against any personal properly or fixtures placed in the Premises, whether levied or assessed against Landlord or Tenant. 9. INSURANCE. Landlord shall maintain all risk property insurance covering the replacement cost of the Project, commercial liability insurance and rent loss insurance. Landlord may, but is not obligated to, maintain such other insurance and additional coverages as it may deem necessary. All such insurance shall be included as part of the Operating Expenses charged to Tenant hereunder. The Project may be included in a blanket policy (in which case the cost of such insurance allocable to the Project will be determined by Landlord based upon the insurer's cost calculations). Tenant, at its expense, shall maintain during the Lease Term a policy or policies of: all risk property insurance coveting the replacement cost of all property and improvements, installed or placed in the 5 6 Premises by Tenant at Tenant's expense; worker's compensation insurance with no less than the minimum limits required by law; employer's liability insurance with such limits as required by law; and commercial liability insurance, with a minimum limit of $1,000,000 per occurrence and a minimum umbrella limit of $1,000,000, for a total minimum combined general liability and umbrella limit of $2,000,000 (together with such additional umbrella coverage as Landlord may reasonably require) for properly damage, personal injuries, or deaths of persons occurring in or about the Premises. The commercial liability policies shall name Landlord as an additional insured, insure on an occurrence and not a claims-made basis, be issued by insurance companies which are reasonably acceptable to Landlord, not be cancelable unless 30 days prior written notice shall have been given to Landlord, contain a hostile fire endorsement and a contractual liability endorsement and provide primary coverage to Landlord (any policy issued to Landlord providing duplicate or similar coverage shall be deemed excess over Tenant's policies). Such policies or certificates thereof shall be delivered to Landlord by Tenant upon commencement of the Lease Term and upon each renewal of said insurance. The all risk property insurance obtained by Landlord and Tenant shall include a waiver of subrogation by the insurers and all rights based upon an assignment from its insured, against Landlord or Tenant, their officers, directors, employees, managers, agents, invitees and contractors, in connection with any loss or damage thereby insured against. Neither party nor its officers, directors, employees, managers, agents, invitees or contractors shall be liable to the other for loss or damage caused by any risk coverable by all risk property insurance, and each party waives any claims against the other party, and its officers, directors, employees, managers, agents, invitees and contractors for such loss or damage. The failure of a party to insure its property shall not void this waiver. 10. LANDLORD'S REPAIRS. Landlord shall maintain, at its expense, only the structural soundness of the roof, foundation, and exterior walls of the building of which the Premises are a part in good repair, reasonable wear and tear and casualty losses and damages caused by Tenant excluded. The term "walls" as used in this Paragraph 10 shall not include windows, glass or plate glass, doors or overhead doors, special store fronts, dock bumpers, dock plates or levelers, or office entries. Tenant shall immediately give Landlord written notice of any repair required by Landlord pursuant to this Paragraph 10, after which Landlord shall have a reasonable opportunity to repair. 11. TENANT'S REPAIRS. Landlord shall maintain in good repair and condition all parts of the Premises and the parking areas, driveways, alleys, spur tracks, and landscape and grounds surrounding the Premises. Such maintenance shall be at Tenant's cost and expense except as to those repairs for which Landlord is responsible under Paragraph 10. If Tenant leases less than the entire Project, Tenant shall only be responsible for its Proportionate Share of the costs of maintaining any items outside its Premises. Landlord shall at Tenant's expense maintain the heating and air conditioning and other mechanical systems and components of the Premises, including lighting, electrical systems, and plumbing lines and equipment. Tenant shall reimburse Landlord for all such costs and expenses in accordance with the provisions of Paragraph 6 above, except to the extent such repairs and replacements are covered by insurance on the Project under policies naming Landlord as the insured. Landlord may at any time upon Tenant's prior written consent which shall not be unreasonably withheld require Tenant to assume the maintenance and repair obligations set forth in this paragraph as they relate to the Premises. In such case, Tenant, at its own cost and expense, shall enter into and deliver to Landlord maintenance service contracts reasonably acceptable to Landlord with a contractor(s) approved by Landlord for hot water, heating and air conditioning, and other mechanical systems and equipment within or serving the Premises. The service and maintenance contract(s) must include all services required by Landlord and must become effective within 30 days after Landlord's request. In the event Tenant does not so deliver the service contract(s), Landlord shall have the right to contract for said service upon 48 hours prior written notice to Tenant, and Tenant shall upon demand reimburse Landlord for the full cost thereof. Subject to the provisions of Paragraphs 9 and 15, Tenant shall repair and pay for any damage to the Premises or the Project caused by Tenant or Tenant's employees, agents, or invitees, or caused by Tenant's default hereunder, reasonable wear and tear excepted. 6 7 12. TENANT IMPROVEMENTS AND TRADE FIXTURES. Any alterations, additions, or improvements made by or on behalf of Tenant to the Premises ("Tenant Improvements") of greater than $25,000 shall be subject to Landlord's prior written consent, which shall not be unreasonably withheld provided that the roof membrane and the structural components and mechanical systems of the Building are unaffected. No alterations, additions or improvements of less than $25,000 shall affect the roof membrane, structural components or mechanical systems of the Building. All Tenant Improvements shall comply with insurance requirements and with applicable laws, ordinances, and regulations, including, without limitation and to the extent applicable, laws and regulations regarding removal or alteration of structural or architectural barriers to handicapped or disabled persons (and Tenant shall construct at its expense any alteration required by such laws or regulations, as they may be amended). All Tenant Improvements shall be constructed in a good and workmanlike manner and only good grades of materials shall be used. All plans and specifications for any Tenant Improvements shall be submitted to Landlord for its approval, and Landlord may monitor construction of the Tenant Improvements; and Tenant shall reimburse Landlord for its actual, out-of-pocket reasonable costs in reviewing plans and documents and in monitoring construction. Landlord may post on and about the Premises notices and give notices that Landlord shall not be liable on account of any damage or claim in connection with such construction, and Tenant shall provide Landlord with the identities and mailing addresses of all persons performing work or supplying materials, prior to beginning such construction. Landlord's right to review plans and specifications and monitor construction shall be solely for its own benefit, and Landlord shall have no duty to see that such plans and specifications or construction comply with applicable laws, codes, rules, or regulations. At Landlord's request, Tenant shall obtain payment and performance bonds for any Tenant Improvements, the cost of which exceed $100,000 which bonds shall be delivered to Landlord prior to commencement of work on the Tenant Improvements and shall be in form and substance reasonably satisfactory to Landlord. Upon completion of any Tenant Improvements, Tenant shall deliver to Landlord sworn statements setting forth the names of all contractors and subcontractors who did work on the Tenant Improvements and final lien waivers from all such contractors and subcontractors. Tenant, at its own cost and expense, may erect such shelves, bins, machinery and trade fixtures (collectively "Trade Fixtures") as it desires provided that such items do not alter the basic character of the Premises or the Project, do not overload or damage the same, and may be removed without injury to the Premises, and provided that the construction, erection, and installation thereof complies with all applicable governmental laws, ordinances, regulations and with Landlord's requirements. Subject to Paragraph 21 below, upon the expiration of the Lease Term. Tenant shall remove its Trade Fixtures and shall repair any damage caused by such removal, by the last day of the Lease Term. 13. SIGNS. Tenant shall not make any changes to the exterior of the Premises, install any exterior lights, decorations, balloons, flags, pennants, banners, or painting, or erect or install any signs, windows or door lettering, placards, decorations, or advertising media of any type which can be viewed from the exterior of the Premises, without Landlord's prior written consent which shall not be unreasonably withheld or delayed provided that the Sign Criteria set forth on Exhibit D has been satisfied. Upon vacation of the Premises, Tenant shall remove all signs and repair, paint, and/or replace the building facia surface to which its signs are attached. Tenant shall obtain all applicable governmental permits and approvals for sign and exterior treatments. All signs, decorations, advertising media, blinds, draperies and other window treatment or bars or other security installations visible from outside the Premises shall be subject to Landlord's approval and conform in all respects to Landlord's requirements. 14. PARKING. Tenant shall be entitled to park in common with other tenants of the Project in those areas designated for nonreserved parking. In addition, Tenant shall be entitled to approximately 3.5 unmarked parking spaces per thousand square feet of Premises. Landlord may allocate parking spaces among Tenant and other tenants in the Project if Landlord determines that such parking facilities are becoming crowded. 15. FIRE AND CASUALTY DAMAGE. If at any time during the Lease Term, the Premises or the Project is damaged by fire or other casualty, Landlord shall notify Tenant, within 45 days after such damage, as to the amount of time Landlord reasonably estimates it will take to repair such damage. If the amount of such time 7 8 exceeds 6 months, either Landlord or Tenant may elect, upon notice to the other party delivered as soon as practicable but not later than 30 days after Landlord's notice, to terminate this Lease. If neither party elects to terminate this Lease or if Landlord estimates that the, damage will take 6 months or less to repair, Landlord shall promptly repair and reconstruct the improvements, subject to delays arising from the collection of insurance proceeds or from Force Majeure events, except that Landlord shall not be required to repair and reconstruct any fixtures, additions, or other improvements paid for by Tenant; and this Lease shall remain in full force and effect provided that the Lease Term will be extended for a time equal to the period beginning on the date the loss or damage was suffered until the repairs and replacement are completed. Tenant at Tenant's expense shall promptly perform, subject to delays arising from the collection of insurance proceeds, all repairs or restoration not required to be done by Landlord and shall promptly reenter the Premises and commence doing business in accordance with this Lease. Notwithstanding the foregoing, either party may terminate this Lease if the improvements are damaged during the last year of the Lease Term and Landlord reasonably estimates that it will take more than one month to repair such damage. If the Premises or a portion thereof is not usable as a result of damage by fire or other casualty to the Premises or building in which the Premises are located, and Landlord elects to repair and/or reconstruct the damaged improvements, Base Rent and Operating Expenses shall be abated for the period of repair and reconstruction in the proportion which the area of the Premises which is not usable by Tenant bears (as reasonably determined by Landlord and Tenant) to the total area of the Premises. Such abatement shall be the sole remedy of Tenant, and to the extent permitted by applicable law, and except as provided herein, Tenant waives any right to terminate the Lease by reason of damage or casualty loss. Notwithstanding anything in this Section 15 to the contrary, if Landlord fails to use all reasonable efforts to complete repair and restoration of damage to the Premises within six (6) months after determination of the estimated repair and restoration period Tenant may, at its option, terminate this Lease effective as of the date of damage upon written notice to Landlord given at any time within 10 days after the 180th day after the date of damage to the Premises. If, however, Landlord is unable to complete the repair or restoration to the Premises within 6 months after the use of all reasonable efforts to do so (and such failure is not the result of an event of Force Majeure), Tenant shall have no right to terminate the Lease unless Landlord fails to complete the repair or restoration within 270 days after the date damage occurs, in which event Tenant may terminate this Lease upon written notice to Landlord given at any time within 10 days thereafter. If as a result of an event of Force Majeure, Landlord is unable to complete the repair and restoration to the Premises within six months after determination of the estimated repair and restoration period, Landlord shall continue to use its best efforts to complete the work of repair and restoration and Tenant shall have no right to terminate this Lease unless Landlord fails to complete work of repair and restoration within 12 months after the determination of the estimated repair and restoration period. 16. CONDEMNATION. If any part of the Premises or the Project should be taken for any public or quasi-public use under governmental law, ordinance, or regulation, or by right of eminent domain, or by private purchase in lieu thereof (a "Taking" or "Taken"), and the Taking would prevent or materially interfere with use of the Premises as reasonably determined by Tenant or in Landlord's judgment would materially interfere with or impair its ownership or operation of the Project, then upon written notice by Landlord or Tenant, as the case may be this Lease shall terminate and Base Rent and Operating Expenses shall be apportioned as of said date. If part of the Premises shall be Taken, and this Lease is not terminated as provided above, the Base Rent and Operating Expenses payable hereunder during the unexpired Lease Term shall be reduced by the proportion that the square footage taken bears to the total square footage of the Premises. In the event of any such Taking, Landlord shall be entitled to receive the entire price or award from any such Taking without any payment to Tenant, and Tenant hereby assigns to Landlord Tenant's interest, if any, in such award. Tenant shall have the right, to the extent that same shall not diminish Landlord's award, to make a separate claim against the condemning authority (but not Landlord) for such compensation as may be separately awarded or recoverable by Tenant for moving expenses and damage to Tenant's Trade Fixtures, if a separate award for such items is made to Tenant. 8 9 17. ASSIGNMENT AND SUBLETTING. Without Landlord's prior written consent, which Landlord shall not unreasonably withhold, Tenant shall not assign this Lease or sublease the Premises or any part thereof or mortgage, pledge, or hypothecate its leasehold interest or grant any concession or license within the Premises and any attempt to do any of the foregoing shall be void and of no effect. For purposes of this paragraph, a transfer of the ownership interests controlling Tenant shall be deemed an assignment of this Lease unless Tenant's ownership interests are publicly traded. Notwithstanding the above, Tenant may assign or sublet the Premises, or any part thereof, to any entity controlling Tenant, controlled by Tenant or under common control with Tenant (a "Tenant Affiliate"), without the prior written consent of Landlord. Provided no default has occurred and is continuing under this Lease, upon 10 days prior written notice to Landlord, Tenant may, without Landlord's prior written consent, assign this Lease to an entity into which Tenant is merged or consolidated or to an entity to which substantially all of Tenant's assets are transferred, provided (x) such merger, consolidation, or transfer of assets is for a good business purpose and not principally for the purpose of transferring Tenant's leasehold estate, and (y) the assignee or successor entity has a net worth at least equal to the net worth of Tenant immediately prior to such merger, consolidation, or transfer. Tenant shall reimburse Landlord for all of Landlord's reasonable out-of-pocket expenses in connection with any assignment or sublease, not to exceed $1,000 in each case. Upon Landlord's receipt of Tenant's written notice of a desire to assign or sublet the Premises, or any part thereof (other than to a Tenant Affiliate), Landlord may, by giving written notice to Tenant within 10 days after receipt of Tenant's notice, terminate this Lease with respect to the space described in Tenant's notice, as of the date specified in Tenant's notice for the commencement of the proposed assignment or sublease. If Landlord so terminates the Lease, Landlord may enter into a lease directly with the proposed sublessee or assignee. Tenant may withdraw its notice to sublease or assign by notifying Landlord within 10 days after Landlord has given Tenant notice of such termination, in which case the Lease shall not terminate but shall continue. It shall be reasonable for the Landlord to withhold its consent to any assignment or sublease in any of the following instances: (i) an Event of Default has occurred and is continuing that would not be cured upon the proposed sublease or assignment; (ii) the assignee or sublessee does not have a reasonable net worth as determined by Landlord in its sole discretion; (iii) the intended use of the Premises by the assignee or sublessee is not reasonably satisfactory to Landlord; (iv) occupancy of the Premises by the assignee or sublessee would, in Landlord's opinion, violate an agreement binding upon Landlord or the Project with regard to the identity of tenants, usage in the Project, or similar matters; (v) the identity or business reputation of the assignee or sublessee will, in the good faith judgment of Landlord, tend to damage the goodwill or reputation of the Project; (vi) in the case of a sublease, the subtenant has not acknowledged that the Lease controls over any inconsistent provision in the sublease; or (vii) the proposed assignee or sublessee is a governmental agency. Tenant and Landlord acknowledge that each of the foregoing criterion are reasonable as of the date of execution of this Lease. The foregoing criteria shall not exclude any other reasonable basis for Landlord to refuse its consent to such assignment or sublease. Any approved assignment or sublease shall be expressly subject to the terms and conditions of this Lease. Tenant shall provide to Landlord all information concerning the assignee or sublessee as Landlord may request. Notwithstanding any assignment or subletting, Tenant shall at all times remain fully responsible and liable for the payment of the rent and for compliance with all of Tenant's other obligations under this Lease (regardless of whether Landlord's approval has been obtained for any such assignments or sublettings). In the event that the rent due and payable by a sublessee or assignee (or a combination of the rental payable under such sublease or assignment plus any bonus or other consideration therefor or incident thereto) exceeds the rental payable under this Lease, then Tenant shall be bound and obligated to pay Landlord as additional rent hereunder 50% of such excess rental and other excess consideration within 10 days following receipt thereof by Tenant. If this Lease be assigned or if the Premises be subleased (whether in whole or in part) or in the event of the mortgage, pledge, or hypothecation of Tenant's leasehold interest or grant of any concession or license within the Premises or if the Premises be occupied in whole or in part by anyone other than Tenant, then upon a default by Tenant hereunder Landlord may collect rent from the assignee, sublessee, mortgagee, pledgee, party to whom the leasehold interest was hypothecated, concessionee or licensee or other occupant and, except to the extent 9 10 set forth in the preceding paragraph, apply the amount collected to the next rent payable hereunder; and all such rentals collected by Tenant shall be held in trust for Landlord and immediately forwarded to Landlord. No such transaction or collection of rent or application thereof by Landlord, however, shall be deemed a waiver of these provisions or a release of Tenant from the further performance by Tenant of its covenants, duties, or obligations hereunder. 18. INDEMNIFICATION AND WAIVER. Except for the negligence or willful misconduct of Landlord, its agents, employees, or contractors and to the extent permitted by law, Tenant agrees to indemnify, defend and hold harmless Landlord, and Landlord's agents, employees and contractors, from and against any and all losses, liabilities, damages, costs and expenses (including attorneys' fees) resulting from claims by third parties for injuries to any person and damage to or theft or misappropriation or loss of property occurring in or about the Project and arising from the use and occupancy of the Premises or from any activity, work, or thing done, permitted or suffered by Tenant in or about the Premises or due to any other act or omission of Tenant, its subtenants, assignees, invitees, employees, contractors and agents. The furnishing of insurance required hereunder shall not be deemed to limit Tenant's obligations under the provisions of this Paragraph 18. 10 11 ADDENDUM 6 CAP ON OPERATING EXPENSES ATTACHED TO AND A PART OF THE LEASE AGREEMENT DATED JUNE 5, 1995, BETWEEN SECURITY CAPITAL INDUSTRIAL TRUST and PHASE METRICS, INC. Once the Base Year has been established, Tenant shall not be obligated to pay for increases in Operating expenses in any year to the extent they have increased by more than ten percent (10%) from the prior year. The base year as defined herein shall be the first full year of stabilized occupancy of the project and full assessment for real estate tax purposes. For purposes of this Addendum, Operating Expenses shall mean all operating expenses defined in Paragraphs 6, 7, and 8 of the Lease. In no event, however, shall expenses or utility costs which are separately metered be subject to a cap. Operating Expenses shall be determined on an aggregate basis and not on an individual basis, and the cap on Operating Expenses shall be determined on Operating Expenses as they have been adjusted for vacancy or usage pursuant to the terms of this Lease. Notwithstanding the above, after full assessment, Tenant shall not be obligated to pay for increases in real estate taxes of more than 2% per year. In the event of a sale of the Premises during the original Term of this Lease, the Tenant shall not be required to pay for increases in real estate taxes of more than 25% on a cumulative basis during the original Term of this Lease. 11 12 ADDENDUM 7 LANDLORD'S ENVIRONMENTAL DISCLOSURE ATTACHED TO AND A PART OF THE LEASE AGREEMENT DATED JUNE 5, 1995, BETWEEN SECURITY CAPITAL INDUSTRIAL TRUST and PHASE METRICS, INC. Landlord has delivered to Tenant the Environmental Reports described below. It is understood by Tenant, that Landlord has not made any independent investigations to confirm the accuracy or completeness of the Environmental Reports, and Landlord makes no representation or warranty as to the accuracy of such reports. Tenant agrees to keep the Environmental Reports confidential and not to disclose the contents thereof to any other party without the prior written consent of Landlord. ENVIRONMENTAL REPORTS: Phase I Environmental Site Assessment for the Bayside Business Park dated December 8, 1993 Project No. 5093-1106M prepared by SWL Environmental Services. 12 13 EXHIBIT A PLAN OF THE PREMISES ATTACHED 13 14 [diagram] 14 15 EXHIBIT B FLOOR PLAN ATTACHED TO AND A PART OF THE LEASE AGREEMENT DATED JUNE 5, 1995, BETWEEN SECURITY CAPITAL INDUSTRIAL TRUST and PHASE METRICS, INC. The premises shall be constructed generally in accordance with the preliminary floor plan (attached hereto) drawn by TSH Architects and dated March 8, 1995. Attached as Exhibit C is the Work Letter Agreement which defines the level of finishes Landlord is prepared to include with this tenant improvement. Landlord acknowledges that Tenant's architect, J. Wolcott, will be making certain modifications to the preliminary floor plan, and Landlord shall have the right to review and approve any and all such modifications, together with the final plans for all of Tenant's improvement work. Landlord shall not unreasonably withhold its consent to the modifications to the preliminary floor plan or the Final Plan. 15 16 [diagram] 16 17 EXHIBIT C WORK LETTER AGREEMENT ATTACHED TO AND A PART OF THE LEASE AGREEMENT DATED JUNE 5, 1995, BETWEEN SECURITY CAPITAL INDUSTRIAL TRUST and PHASE METRICS, INC. Landlord's required completion date for the final plans is June 30, 1995. Improvements shall be constructed in accordance with these plans and incorporate the tenant improvement standards as set forth below and the attached Bayside Corporate Center tenant finish standards. Tenant Improvement Standards. (a) Office Area 1. Carpet throughout the office area for ceramic tile in the restrooms and vinyl composition tile in the mail, computer, storage, connector link, lunch area and lab area. Carpet shall consist of 30 ounce direct glue down carpet by Design Weave, or comparable, without pad. Tenant shall have choice of colors for the various finishes. 2. Suspended acoustical ceiling consisting of 2' x 4' exposed grid at 10' in height. The office adjacent to the store fronts shall have ceilings at 12' in height. 3. Recessed fluorescent lighting fixtures, to code. 4. Heating, ventilating and air conditioning throughout. Provide exhaust fans at restrooms and lunchrooms. 5. Doors and partitions as shown with partitions to be textured finished drywall except for glass portions as shown. Doors are B-3 prefinished Birch, solid core with 20-minute label nine (9') feet high with 2' side lights. 6. Standard bathroom fixtures as shown. Toilet paper dispenser, paper towel/trash dispensers, toilet seat cover dispensers, sanitary napkin disposal. 7. Electrical service as shown with standard switching. Telephone outlets include pull wire, cable provided by others. 8. Blinds will be provided on all exterior windows. 9. Plastic laminate upper/lower cabinets in lunchroom. Landlord shall provide dishwasher at Tenant's expense. 17 18 (b) Assembly/Stores Area 1. Standard chain hung strip fluorescent lighting 10' off finish floor (no drop ceiling). 2. All walls to be firetaped and painted. 3. Electrical service as shown. 4. Dump HVAC throughout. 5. VCT floor covering. (c) Shipping/Receiving/Inspection/Machine Shop Areas 1. Standard chain hung strip fluorescent lighting 12' off finish floor (no drop ceiling). 2. All walls to be firetaped and painted. 3. Electrical service as shown. 4. Dump HVAC throughout. 5. Sealed concrete floor. 6. All walls to be firetaped and painted. (d) Buyoff Area 1. Suspended acoustical ceiling consisting of 2' x 4' exposed grid at 10' in height. 2. Recessed fluorescent lighting fixtures, to code. 3. Heating, ventilating and air conditioning throughout. 4. Vinyl composition floor covering throughout. 5. Electrical service as shown with standard switching. (e) Exclusions The tenant improvement standards do not include the following items: 1. Electrical data gathering lines or security equipment. 2. Telephonic or other communications equipment and cabling. 18 19 EXHIBIT D SIGN CRITERIA ATTACHED TO AND A PART OF THE LEASE AGREEMENT DATED JUNE 5, 1995, BETWEEN SECURITY CAPITAL INDUSTRIAL TRUST and PHASE METRICS, INC. WINDOW IDENTIFICATION SIGNS: Each Tenant will be allowed one window sign placed either to the left or the right of the entrance door, whichever provides the best visibility. Company names, logos or symbols will be allowed in this area-color and size to be determined by the Tenant. All other copy in this are except for logos or symbols will be mat white vinyl pressure sensitive letters. Copy must start at 5' from grade, working down to no more than 3 1/2' from grade. Sign layout including copy, sizes and color must be approved by the building management. Management reserves the right to deny any copy or color it considers unsuitable. One security decal only may be applied to the front door glass in the lower corner if the Tenant so desires. All exterior alarm bells are to be mounted to the rear of the building only. DIRECTORY SIGN IDENTIFICATION: A monument directory sign has been provided for each building. If only one Tenant occupies an entire building, that Tenant shall be allowed to utilize the entire directory sign area for their pressure sensitive, matte, Pearl Gray vinyl letters with a letter height suitable for the area allowed, and logo if so desired, also in Pearl Gray. If two or more Tenants occupy a building, signs shall be shared equally by the number of tenants within the building, utilizing pressure sensitive, matte, pearl Gray vinyl letters with a letter height suitable for the area allowed. A logo will be allowed if so desired, to the left of the company name also in Pearl Gray. A thin line will divide the areas between tenants. REAR LOADING SIGNS: Each Tenant will be allowed to identify its rear door for shipping and receiving purposes. The company name shall be placed on a 36" x 24" aluminum panel adjacent to the rear doors. The aluminum panel shall be painted gray to match the building. Copy shall consist of 3" white vinyl capital letters only in Futura Bold style. Company names and logos only are allowed. Management reserves the right to deny any copy it considers unsuitable. Layout is to be approved by building management. The cost of all lettering and logos will be the responsibility of the Tenant. No other signs are allowed in the windows or doors. 19 20 EXHIBIT E SCHEDULE The following schedule summarizes the required dates referenced in Addendum 2, Paragraph (d) as approved by JWA and Landlord: KEY DATES DELIVERIES June 9 Approved space study June 30 Complete construction documents (A&E): issue drawings for bid July 13 Review construction bids July 20 Award construction contract July 24 Receive permits. Begin constructions. October 9 Construction to be completed eleven (11) weeks from receipt of permit 20 EX-10.2 6 SUBLEASE AGREEMENT DATED 04/01/1997 1 EXHIBIT 10.2 SUBLEASE SUBLANDLORD: Hitachi America Ltd. SUBJECT PROPERTY: 47427 Fremont Boulevard, Fremont SUBTENANT: Phase Metrics, Inc., a California Corporation DATE: April 1, 1997 1. PARTIES: This Sublease is made and entered into as of April 1, 1997, by and between Hitachi America Ltd. ("Sublandlord"), and Phase Metrics, Inc. ("Subtenant"), under the Master Lease dated July 26, 1995, between Security Capital Industrial Trust, as "Lessor" and Sublandlord under this Sublease as "Lessee." A copy of the Master Lease is attached hereto as Attachment I and incorporated herein by this reference. 2. PROVISIONS CONSTITUTING SUBLEASE: 2.1 This Sublease is subject to all of the terms and conditions of the Master Lease. Subtenant hereby assumes and agrees to perform all of the obligations of "Lessee" under the Master Lease to the extent said obligations apply to the Subleased Premises and Subtenant's use of the Common Areas, except as specifically set forth herein. Sublandlord hereby agrees to cause Lessor under the Master Lease to perform all of the obligations of Lessor thereunder to the extent said obligations apply to the Subleased Premises and Subtenant's use of the Common Areas. Subtenant shall not commit or permit to be committed on the Subleased Premises or on any other portion of the Project any act or omission which violates any term or condition of the Master Lease. Except to the extent waived or consented to in writing by the other party or parties hereto who are affected thereby, neither of the parties hereto will, by renegotiation of the Master Lease, assignment, subletting, default or any other voluntary action, avoid or seek to avoid the observance or performance of the terms to be observed or performed hereunder by such party, but will at all times in good faith assist in carrying out all the terms of this Sublease and in taking all such action as may be necessary or appropriate to protect the rights of the other party or parties hereto who are affected thereby against impairment. If Sublandlord is given the right under the Master Lease to terminate the Master Lease (e.g., in case of destruction). Subtenant shall have the right, in its sole discretion, to determine whether it wishes to have the Master Lease terminated. If Subtenant elects to have the Master Lease terminated, Subtenant shall terminate this Sublease, and Sublandlord shall in turn terminate the Master Lease. As long as Subtenant is not in default of any provision of this Sublease, Sublandlord shall be obligated to perform all its obligations under the Master Lease, and Subtenant shall have quiet enjoyment of 1 2 the Premises during the term of this Sublease. 2.2 All of the terms and conditions contained in the Master Lease are incorporated herein, except as specifically provided below, and the terms and conditions specifically set forth in this Sublease, shall constitute the complete terms and conditions of this Sublease, except the following paragraphs of the Master Lease which shall solely be the obligation of Sublandlord: 1, 4 (first sentence only), 17, 37(c), Addendum #1,2, Exhibit "C". 2.3 This Sublease is subject and subordinate to the Master Lease. Except as specifically provided in this Sublease, all the terms, covenants and conditions contained in the Master Lease shall be applicable to this Sublease with the same force and effect as if Sublandlord were the Landlord and Subtenant were the Tenant under the Master Lease. In case of any breach by Subtenant, Sublandlord shall have al the rights against Subtenant as would be available to Landlord against Tenant if such breach were by Tenant under the Master Lease. 2.4 Notwithstanding anything contained in this Sublease to the contrary, the only services or rights to which Subtenant is entitled under this Sublease are those to which Sublandlord is entitled under the Master Lease and Subtenant will look to the Master Landlord under the Master Lease for all such services and rights. If the approval of Landlord is required under the Master Lease, then Subtenant shall obtain the approval of both Sublandlord and Master Landlord. 2.5 Subtenant shall neither do nor permit anything to be done which would cause the Master Lease to be terminated or forfeited by reason of any right of termination or forfeiture reserved or vested in the Master Landlord under the Master Lease, and Subtenant shall indemnify and defend Sublandlord from and against all claims of any kind whatsoever by reason of any breach or default of Subtenant which caused the Master Lease to be terminated or forfeited. 3. SUBLEASED PREMISES AND RENT: 3.1 Subleased Premises: Sublandlord leases to Subtenant and Subtenant leases from Sublandlord the Subleased Premises upon all of the terms, covenants and conditions contained in this Sublease. The Subleased Premises consist of approximately 30,400+ square feet located at 47427 Fremont Boulevard. 3.2 Rent: Subtenant shall pay to Sublandlord as Rent for the Subleased Premises the sum of Twenty-Seven Thousand Fifty-Six and 00/100 Dollars ($27,056.00) per month, without deductions, offset, prior notice or demand. Rent shall be payable by Subtenant to Sublandlord in consecutive monthly installments on or before the first day of each calendar month during the Sublease Term. If the Sublease commencement date or the termination date of the Sublease 2 3 occurs on a date other than the first day or the last day, respectively, of a calendar month, then the Rent for such partial month shall be prorated and the prorated Rent shall be payable on the Sublease commencement date or on the first day of the calendar month in which the Sublease termination date occurs, respectively. Notices for Rent payment: 47475 Fremont Boulevard, ATTN: Robert Renner, Fremont, CA 94538. 3.3 Security Deposit: In addition to the Rent specified above, Subtenant shall pay to Sublandlord an equivalent of one month's rent as a non-interest bearing Security Deposit. In the event Subtenant has performed all of the terms and conditions of this Sublease during the term hereof, Sublandlord shall return to Subtenant, within ten days after Subtenant has vacated the Subleased Premises, the Security Deposit less any sums due and owing to Sublandlord. In addition to Security Deposit, Sublessee, upon Sublease execution, shall prepay first and last months rent. Total prepaid rent plus deposit equals $81,168.00. 3.4 Subtenant shall pay rent provided under this Sublease and shall pay all additional rent provided in the Master Lease. Sublandlord shall be charged for additional rent or other sums pursuant to the provisions of the Master Lease, including without limitation Articles 6 (Operating Expense Payments) or 12 (Tenant-Made Alterations and Trade Fixtures), Subtenant shall be liable for 100% of such additional rent or sums. If Subtenant shall procure any additional services from the building, such as alterations or after-hour air conditioning, Subtenant shall pay for same at the rates charged by the Master Landlord and shall make such payment to Sublandlord or Master Landlord, as Sublandlord shall direct. Any rent or other sums payable by Subtenant under this Article shall be additional rent and collectable as such. 4. RIGHTS OF ACCESS AND USE: 4.1 Use: Subtenant shall use the Subleased Premises only for those purposes permitted in the Master Lease, unless Sublandlord and Master Landlord consent in writing to other uses prior to the commencement thereof. 5. SUBLEASE TERM: 5.1 Sublease Term: The Sublease Term shall be for the period commencing on April 1, 1997 or sooner if available, and continuing through October 31, 2000. In no event shall the Sublease Term extend beyond the Term of the Master Lease. 3 4 5.2 Inability to Deliver Possession: In the event Sublandlord is unable to deliver possession of the Subleased Premises at the commencement of the term, Sublandlord shall not be liable for any damage caused thereby, nor shall this Sublease be void or voidable but Subtenant shall not be liable for Rent until such time as Sublandlord offers to deliver possession of the Subleased Premises to Subtenant, but the term hereof shall not be extended by such delay. If Subtenant, with Sublandlord's consent, takes possession prior to commencement of the term, Subtenant shall do so subject to all the covenants and conditions hereof and shall pay Rent for the period ending with the commencement of the term at the same rental as that prescribed for the first month of the term prorated at the rate of 1/30th thereof per day. In the event Sublandlord has been unable to deliver possession of the Subleased Premises within 30 days from the commencement date, Subtenant, at Subtenant's option, may terminate this Sublease. 6. NOTICES: All notices, demands, consents and approvals which may or are required to be given by either party to the other hereunder shall be given in the manner provided in the Master Lease, at the addresses shown on the signature page hereof. Sublandlord shall notify Subtenant of any Event of Default under the Master Lease, or of any other event of which Sublandlord has actual knowledge which will impair Subtenant's ability to conduct its normal business at the Subleased Premises, as soon as reasonably practicable following Sublandlord's receipt of notice from the Landlord of an Event of Default or actual knowledge of Such impairment. If Sublandlord elects to terminate the Master Lease, Sublandlord shall so notify Subtenant by giving at least 30 days notice prior to the effective date of such termination. 7. COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT: Subtenant shall be responsible for the installation and cost of any and all improvements, alterations or other work required on or to the Subleased Premises or to any other portion of the property and/or building of which the Subleased Premises are a part, required or reasonably necessary because of: (1) Subtenant's use of the Subleased Premises or any portion thereof; (2) the use by a subtenant by reason of assignment or sublease; or (3) both, including any improvements, alterations or other work required under the Americans With Disabilities Act of 1990. Compliance with the provisions of this Section 8 shall be a condition of Sublandlord granting its consent to any assignment or Sublease of all or a portion of this Sublease and the Subleased Premises described in this Sublease. 8. COMPLIANCE WITH NONDISCRIMINATION REGULATIONS: It is understood that it is illegal for Sublandlord to refuse to display or sublease the Subleased Premises, or to assign, surrender or sell the Master Lease, to any person because of race, color, religion, national origin, sex, sexual orientation, marital status or disability. 4 5 9. TOXIC CONTAMINATION DISCLOSURE: Sublandlord and Subtenant each acknowledge that they have been advised that numerous federal, state, and/or local laws, ordinances and regulations ("Laws") affect the existence and removal, storage, disposal, leakage of and contamination by materials designated as hazardous or toxic ("Toxics"). Many materials, some utilized in everyday business activities and property maintenance, are designated as hazardous or toxic. Some of the Laws require that Toxics be removed or cleaned up by landowners, future landowners or former landowners without regard to whether the party required to pay for "clean up" caused the contamination, owned the property at the time the contamination occurred or even knew about the contamination. Some items, such as asbestos or PCBs, which were legal when installed, now are classified as Toxics, and are subject to removal requirements. Civil lawsuits for damages resulting from Toxics may be filed by third parties in certain circumstances. Sublandlord and Subtenant each acknowledge that Broker has no specific expertise with respect to environmental assessment or physical condition of the Subleased Premises, including, but not limited to, matters relating to: (i) problems which may be posed by the presence or disposal of hazardous or toxic substances on or from the Subleased Premises, (ii) problems which may be posed by the Subleased Premises being within the Special Studies Zone as designated under the Alquist-Priolo Special Studies Zone Act (Earthquake Zones), Section 2621-2630, inclusive of California Public Resources Code, and (iii) problems which may be posed by the Subleased Premises being within a HUD Flood Zone as set forth in the U.S. Department of Housing and Urban Development "Special Flood Zone Area Maps," as applicable. Sublandlord and Subtenant each acknowledge that Broker has not made an independent investigation or determination of the physical or environmental condition of the Subleased Premises, including, but not limited to, the existence or nonexistence of any underground tanks, sumps, piping, toxic or hazardous substances on the Subleased Premises. Subtenant agrees that it will rely solely upon its own investigation and/or the investigation of professionals retained by it or Sublandlord, and neither Sublandlord nor Subtenant shall rely upon Broker to determine the physical and environmental condition of the Subleased Premises or to determine whether, to what extent or in what manner, such condition must be disclosed to potential sublessees, assignees, purchasers or other interested parties. 10. RENT ABATEMENT AND DAMAGES TO PERSONAL PROPERTY: In the event Sublandlord, pursuant to the terms of the Master Lease, is entitled to and receives rent abatement, then to the extent such rent abatement affects the subleased premises, Subtenant shall be entitled to rent abatement in an amount that the net rentable area of the subleased premises bears to the total net rentable area of the Master Lease, and only to the extent any such abatement applies to the sublease term. In addition, any amounts paid or credited to Sublandlord under the terms of the Master Lease for damage to personal property shall be credited to Subtenant, subject to the same limitations set forth above. 5 6 11. HAZARDOUS, MATERIAL KNOWLEDGE: Sublandlord occupied the Premises as Tenant under the Master Lease from October 1, 1995 to the effective date of the Sublease. To the best of Sublandlord's knowledge, without making an independent inquiry or investigation: (1) Sublandlord has complied with the Environmental Requirements of Section 30 of the Master Lease during its occupancy and there are no Hazardous Materials located in the Premises and (ii) Sublandlord has received no written notice of any violation of such Environmental Requirements. As of the effective date of this Sublease, Subtenant shall be responsible for complying with the Environmental Requirements. Subtenant shall provide written notice to Sublandlord and Master Landlord and the owner of the property, within a reasonable time of its knowledge or reasonable belief, that a release of Hazardous Materials has occurred or will occur on the property or in the Premises. Subtenant shall not assign this lease nor sublet the subleased premises in whole or in part, and shall not permit Subtenant's interest in this Sublease to be vested in any third party by operation of law or otherwise. Tenant represents that it has read and is familiar with the terms of the Master Lease. All prior understandings and agreements between the parties are merged within this Sublease, which alone fully and completely sets forth the understanding of the parties; and this Sublease may not be changed or terminated orally or in any manner other than by an agreement in writing signed by both parties. The covenants and agreements contained in this Sublease shall benefit and bind Sublandlord and Subtenant and their respective executors, administrators, successors and assigns. SUBLANDLORD: HITACHI AMERICA LTD. By: /s/ HITACHI AMERICA LTD. ----------------------------------------- Date: 4/4/97 ----------------------------------------- SUBTENANT: PHASE METRICS, INC. By: /s/ R.J. SAUNDERS ---------------------------------------- R.J. Saunders, Chief Financial Officer Date: 4/2/97 ---------------------------------------- 6 7 NOTICES: 10260 Sorrento Valley Road San Diego, CA 92121 NOTICE TO SUBLANDLORD AND SUBTENANT: CORNISH & CAREY COMMERCIAL, IS NOT AUTHORIZED TO GIVE LEGAL OR TAX ADVICE; NOTHING CONTAINED IN THIS SUBLEASE OR ANY DISCUSSIONS BETWEEN CORNISH & CAREY AND SUBLANDLORD AND SUBTENANT SHALL BE DEEMED TO BE A REPRESENTATION OR RECOMMENDATION BY CORNISH & CAREY COMMERCIAL, OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL EFFECT OR TAX CONSEQUENCES OF THIS DOCUMENT OR ANY TRANSACTION RELATING THERETO. ALL PARTIES ARE ENCOURAGED TO CONSULT WITH THEIR INDEPENDENT FINANCIAL CONSULTANTS AND/OR ATTORNEYS REGARDING THE TRANSACTION CONTEMPLATED BY THIS PROPOSAL. 7 8 Attachment I Master Lease MASTER LANDLORD CONSENT The undersigned, Lessor under the Master Lease attached as Attachment I, hereby consents to the subletting of the Subleased Premises described herein on the terms and conditions contained in this Sublease. This Consent shall apply only to this Sublease and shall not be deemed to be a consent to any other Sublease. LANDLORD: By: ----------------------------------------- Date: --------------------------------------- 8 9 CONSENT BY LANDLORD TO SUBLEASE The undersigned, as Landlord under that certain Lease dated July 26, 1995 with Hitachi America Ltd., a New York Corporation ("Sublandlord") for certain premises at 47427 Fremont Boulevard, in Fremont CA (the "Prime Lease"), hereby consents to the entering into of the foregoing Sublease dated April 1, 1997 ("Sublease") between Sublandlord, as sublessor, and Phase Metrics, Inc., a California Corporation, as subtenant ("Subtenant"), upon the express understandings and conditions that: a. Landlord neither approves nor disapproves the terms, conditions and agreements contained in the Sublease (all of which shall be subordinate and subject at all times to the terms, covenants and conditions of the Prime Lease) and assumes no liability or obligation of any kind whatsoever on account of anything contained in the Sublease; b. By executing this consent, Landlord shall not be deemed to have waived any rights under the Prime Lease nor shall Landlord be deemed to have waived Sublandlord's obligations to obtain any required consents under the Prime Lease (other than consent to the Sublease itself); c. Notwithstanding anything in the Sublease to the contrary, Sublandlord shall be and continue to remain liable for the payment of rent and the full and prompt performance of all of the obligations of Tenant under and as set forth in the Prime Lease; d. Sublandlord shall pay Landlord 50 % of all excess monthly rent received per Sublease, with each payment of rent under the Prime Lease; e. Nothing contained in the Sublease shall be taken or construed to in any way modify, alter, waive or affect any of the terms, covenants or conditions contained in the Prime Lease, or be deemed to grant Subtenant any privity of contract with Landlord, or require Landlord to accept any payments from Subtenant on behalf of Sublandlord; f. The Sublease shall be deemed and agreed to be a sublease only and not an assignment and there shall be no further subletting or assignment of all or any portion of the premises demised under the Prime Lease (including the premises demised by the foregoing Sublease) except in accordance with the terms and conditions of the Prime Lease; and g. If Landlord terminates the Prime Lease as a result of a default by Sublandlord thereunder, the Sublease shall automatically terminate concurrently therewith 9 10 unless Landlord elects in writing to keep the Sublease in full force and effect in which case the Sublease shall become and be deemed to be a direct indenture of lease between Landlord and Subtenant. LANDLORD: Security Capital Industrial Trust, a Maryland Real Estate Investment Trust /s/ Ned Anderson -------------------------------------------- Ned K. Anderson Title: Senior Vice President Dated: 4/3/97 10 11 EXHIBIT A TO BE INSERTED 11 EX-10.3 7 MASTER SECURITY AGREEMENT DATED 05/05/1995 1 EXHIBIT 10.3 MASTER SECURITY AGREEMENT THIS MASTER SECURITY AGREEMENT (this "Agreement") is dated as of May 5, 1995 and entered into by and between Phase Metrics, Inc. ("Debtor"), and KOMAG, INCORPORATED, a Delaware corporation ("Komag"). WHEREAS, Debtor and Komag have entered into, and will enter into, from time to time, an agreement (each such agreement, a "Purchase Agreement" and, together with any other documents executed in connection therewith, referred to collectively as the "Purchase Documents"), pursuant to which Komag has agreed or will agree to provide Debtor with certain financing with respect to such Purchase Documents to enable Debtor to purchase raw materials and other goods for manufacture, fabrication and assembly to be sold to Komag under such Purchase Documents. WHEREAS, in order to induce Komag to enter into each of the Purchase Documents and to provide the Debtor with the benefits thereunder, Debtor has agreed to enter into this Agreement and to grant to Komag the security interest in the Applicable Collateral (described below) with respect to such Purchase Documents. NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: 1. Grant of Security. With respect to each of the Purchase Documents entered into by Komag and Debtor from time to time, as security for all of Debtor's obligations to Komag under this Agreement and each of such Purchase Documents, Debtor hereby transfers and grants to Komag a security interest (the "Applicable Security Interest") in all of the following property, wherever located, whether now owned or hereafter acquired or arising (the "Applicable Collateral"): (a) all inventory acquired, created, developed or assembled with funds advanced by Komag to Debtor pursuant to such Purchase Documents, including all such inventory held for sale or lease, all raw materials, work in process and finished goods and materials in each case relating to goods purchased by Komag under such Purchase Documents and all additions and accessions to any of the foregoing (collectively, the "Applicable Pledged Inventory"); (b) all documents of title, bills of lading, warehouse receipts and other documents in respect of the Applicable Pledged Inventory; (c) any and all funds received as advance deposits and any other funds received for a particular purchase order prior to the delivery of the purchased inventory covered in such purchase order from time to time by the Debtor from Komag pursuant to the terms of such Purchase Documents (the "Applicable Deposits") and the deposit account into which the Applicable Deposits are deposited ("Komag Deposit Account"); and (d) all proceeds of any of the Applicable Collateral. The Debtor shall release the Applicable Deposits from the Komag Deposit Account in a manner that complies with its Purchase Documents and the Debtor shall only deposit the Applicable Deposits and no other amounts into the Komag Deposit Account. 2 2. Representations and Warranties. Debtor represents and warrants that Debtor has the right to grant each Applicable Security Interest and, except as already obtained or given, no authorization from, consent of or notice to any other person or entity (including stockholders, partners or creditors), and no authorization, consent, approval or other action by or notice to or filing with any governmental authority, is required either for the grant of such Applicable Security Interest hereunder or the execution, delivery or performance of this Agreement by Debtor. 3. Covenants. Debtor agrees (a) to take all action and execute such documents and financing statements that may be necessary, or that Komag may reasonably request, in order to perfect and protect each Applicable Security Interest and its priority, and to enable Komag to exercise and enforce its rights and remedies hereunder, and not to bring or prosecute any infringement or other action that hinders or prevents such exercise and enforcement; (b) upon request, to confirm Debtor's compliance with the terms hereof; (c) other than to Komag, not to surrender or lose possession of any of the Applicable Collateral without prior written consent of Komag (except in connection with performing Debtor's obligations under the applicable Purchase Documents), or sell, rent or transfer (by operation of law or otherwise) any of the Applicable Collateral or any right or interest therein; (d) to give Komag prior written notice before removing any of the Applicable Collateral from the locations described below or changing its chief executive office outside of California or name (except in connection with performing Debtor's obligations under the applicable Purchase Documents); and (e) to note in Debtor's books and records the serial number of each chassis and, as appropriate, Komag's Applicable Security Interest therein. 4. Events of Default. Each of the following shall constitute an "Event of Default" hereunder: (a) any material breach or default by Debtor in the performance or observance of any provision of this Agreement, or any Purchase Documents not cured within 10 days after the occurrence of such breach or default; (b) the entry or filing of any judgment, writ, warrant of attachment, execution or similar process against any of the Applicable Collateral; or (c) Debtor shall commence a voluntary case or other proceeding (or an involuntary case or proceeding shall be commenced against Debtor (which involuntary case or proceeding shall remain undismissed and unstayed for a period of 60 days)) seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy or other similar law or seeking the appointment of a trustee, receiver, custodian or other similar official of it or any substantial part of its property, or Debtor shall make a general assignment for the benefit of creditors, or Debtor shall fail generally to pay its debts as they become due. 5. Remedies. If any Event of Default shall have occurred, all Applicable Deposits in the possession of Debtor shall be immediately returned to Komag, and Komag may exercise all the rights and remedies of a secured party under the California Uniform Commercial Code and all other available rights and remedies (all of which are cumulative). Debtor waives, to the fullest extent permitted by law, (a) any right of redemption with respect to the Applicable Collateral, whether before or after sale hereunder, and all rights, if any, of marshalling of the Applicable Collateral; (b) any right to require Komag (i) to 2 3 proceed against any person, (ii) to exhaust any other collateral or security, (iii) to pursue any remedy in Komag's power, or (iv) to make or give any presentments, demands for performance, notices of nonperformance, protests, notices of protests or notices of dishonor in connection with any of the Applicable Collateral; and (c) all claims, damages, and demands against Komag arising out of the repossession, retention, sale or application of the proceeds of any sale of the Applicable Collateral. 6. Costs and Expenses. Debtor agrees to pay or reimburse to Komag on demand all reasonable costs and expenses of Komag (including attorneys' fees) in connection with the enforcement of any Applicable Security Interest, the preservation, protection and realization upon any of the Applicable Collateral and any and all losses, costs and expenses sustained by Komag as a result of any failure by Debtor to perform and observe its obligations to Komag hereunder or under any Purchase Documents. Komag shall have no duty to exercise any of the rights, privileges or powers afforded to it. 7. Successors; Governing Law. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by Komag and Debtor and their respective successors, transferees and assigns and shall be governed by the laws of the State of California. 8. Amendments, Etc. This Agreement and each of the Purchase Documents contain the entire agreement of the parties with respect to the subject matter hereof and any amendment, waiver or consent hereof or thereof shall be in writing and signed by each of Komag and Debtor. No waiver or consent shall be effective except with respect to the specific instance and to the extent expressly provided. 9. Certain Waivers. Debtor waives any right to require Komag to proceed against any guarantor or any other person or entity, to exhaust any portion of any Applicable Collateral or any other security, to pursue any remedy in Komag's power or to make or give any presentments, protests, demands for performance or notices of nonperformance, protests or dishonor. 10. Notices. All notices and communications hereunder shall be in writing and shall be mailed or delivered to the respective addresses set forth below. All such notices and communications shall be effective upon the earlier date or receipt or 3 business days after deposit in the mail, first class, postage prepaid. 11. Severability. If any term or obligation hereunder shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining terms and obligations, or of such terms or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 12. Counterparts. This Agreement may be executed in one or more counterparts. 3 4 13. Power of Attorney. Upon the reasonable request of Komag, Debtor shall execute and cause to be filed any continuation statements or other financing statements necessary to continue the perfection and priority of the Applicable Security Interest in the Applicable Collateral. If Debtor fails to so execute and cause to be filed such financing statements, then to such extent Komag is hereby granted a power of attorney to execute and file such financing statements and continuation statements, which is coupled with an interest and irrevocable until such time as there are no obligations outstanding under this Agreement. 14. Negative Pledge. Debtor hereby agrees not to execute any security agreement or grant any lien or security interest after the date hereof in the Applicable Collateral during the term of this Agreement; provided, however, that the grant of a security interest or lien in favor of Canadian Imperial Bank of Commerce as agent (the "Agent") for the lenders under the Credit Agreement dated as of March 15, 1995, as amended or modified from time to time or any lenders refinancing such Credit Agreement, shall not be deemed to violate this negative covenant even if it takes a security interest in all or any portion of the Applicable Collateral so long as any refinancing lender executes an intercreditor agreement on substantially the terms as the intercreditor agreement executed by Canadian Imperial Bank of Commerce as agent for the lenders (the "Intercreditor Agreement"). 15. Termination. This Agreement shall create a continuing security interest that shall only terminate as to any Applicable Security Interest upon delivery of the purchased products as defined in the Purchase Documents to which such Applicable Security Interest relates and the payment of amounts owing by Debtor under Section 6 hereof and of the Intercreditor Agreement. Upon such termination, Komag will, at the expense of Debtor, execute and deliver to Debtor such documents as Debtor shall reasonably request to evidence the termination of this Agreement as to such Applicable Security Agreement and the termination and release of such Applicable Security Interest. DEBTOR WARRANTS THAT ITS CHIEF OFFICE IS LOCATED AT (AND NOTICES SHOULD BE DIRECTED TO) THE FOLLOWING ADDRESS: 3978 Sorrento Valley Blvd. San Diego, California 95121 DEBTOR: KOMAG: PHASE METRICS, INC. KOMAG, INCORPORATED By: /s/ R. J. SAUNDERS By: ---------------------------- ----------------------------------- Title: Vice President Title: ------------------------- ---------------------------------- Address for Notices: Address for Notices: 3978 Sorrento Valley Blvd. 275 South Hillview Drive San Diego, California 95121 Milpitas, CA 95035 Attn: Chief Financial Officer Attn: Chief Financial Officer 4 EX-10.4 8 EMPLOYMENT AGREEMENT DATED 11/23/1994 1 EXHIBIT 10.4 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of November __, 1994, by and between PHASE METRICS, INC., a California corporation (the "Company"), and John F. Schaefer ("Executive"). R E C I T A L S A. Concurrently herewith, the Company and Executive, among others, are entering into that certain Securities Purchase Agreement dated November __, 1994 (the "Purchase Agreement"). B. Contingent upon the closing of the transactions contemplated by the Purchase Agreement (the "Purchase Closing"), the Company and Executive desire to enter into this Agreement, which shall govern the terms and conditions of Company's employment of Executive. NOW, THEREFORE, in consideration of the mutual covenants and conditions hereinafter set forth, the parties hereto agree as follows: 1. Contingent Agreement. This Agreement shall be effective only upon the occurrence of the Purchase Closing. Nothing contained herein shall be construed to require, commit or otherwise obligate any of the parties hereto to enter into or consummate the transactions contemplated by the Purchase Agreement or the Purchase Closing. In the event the Purchase Closing shall not occur, this Agreement shall be of no force or effect, and neither party hereto shall have any liability or obligation hereunder or in any way relating hereto. 2. Employment. The Company hereby employs Executive and Executive hereby accepts employment with the Company. Subject to the provisions of Sections 7, 8 and 9 hereof, this Agreement shall be terminable at will by either party hereto upon 30-days written notice to the other party. The period from the date hereof until the date of such termination is sometimes referred to herein as the "Term." 3. Duties and Authority. (a) During the entire Term, Executive shall perform the duties and have the authority of Chief Executive Officer and Chairman of the Board of the Company. Subject to the direction of the Company's Board of Directors (the "Board"), Executive shall have, among other things (along with Arthur Cormier ("Cormier") with respect to significant matters), full authority over all departments, officers, employees and agents of the Company. Subject to the direction of the Board, in the performance of Executive's duties, Executive shall have (along with Cormier with respect to significant matters) full and complete authority and discretion (in the same manner as heretofore exercised by Executive) to take all 2 action Executive deems appropriate to operate, manage and develop the business of the Company. Subject to the terms of the Voting Agreement bearing even date herewith between Executive and Cormier, the Board shall resolve any disagreement between Executive and Cormier with respect to any of the foregoing business operations. (b) During the term of his employment hereunder, Executive will devote substantially all of his business time and best efforts to the performance of his duties hereunder and will not engage in any other business, profession or occupation for compensation or otherwise which would conflict with the rendition of such services either directly or indirectly, without the prior written consent of the Board. 4. Compensation. 4.1 Salary. For Executive's services rendered hereunder, the Company shall pay Executive an annual salary of Three Hundred Thousand Dollars ($300,000) ("Executive's Salary"). Executive's Salary shall be payable in equal installments in conformity with the Company's normal payroll period. Executive's Salary shall be reviewed by the Board from time to time at its discretion but not less often than annually, and Executive shall receive such salary increases (but not decreases) as the Board, in its sole discretion, shall determine, taking into consideration Executive's performance and the overall performance of the Company; provided, however, that until the occurrence of a public offering under the Securities Act of 1933, as amended, of any of the Company's capital stock (a "Company IPO"), Executive's Salary shall not be less than that of Cormier. Immediately after the execution of this Agreement, the Company shall pay to Executive in a lump sum salary from August 1, 1994 to the date hereof at the rate set forth in this Section 4.1. 4.2 Annual Bonus. With respect to the Company's 1994 and 1995 fiscal years, Executive shall not be entitled to any bonus. With respect to each fiscal year thereafter during the Term, in addition to Executive's Salary, Executive shall be eligible to receive an annual bonus from the Company in accordance with a bonus plan for the Company's officers which shall be implemented by the Company. Each such bonus, if any, shall be payable to Executive no later than 45 days after the end of the applicable fiscal year. Unless Executive is terminated for Cause (as defined herein) or Executive terminates his employment without Good Reason (as defined herein), in which case Executive shall not be eligible for any bonus in respect of the fiscal year of termination, for each fiscal year during which Executive is employed hereunder for fewer than twelve (12) months, Executive shall receive a pro rata portion of the annual bonus, if any, which he would otherwise have received for such full fiscal year. For the period of time during which both Executive and Cormier are employed by the Company, unless an IPO has occurred, all bonuses to Executive and Cormier shall be in equal amounts. 2 3 5. Executive Benefits. Executive shall be entitled to the following benefits, which benefits shall be, until the occurrence of a Company IPO, individually and in the aggregate, of no less value than the benefits provided to Cormier: 5.1 Vacation. Executive shall be entitled to four (4) weeks paid vacation during each year of the Term. Vacation which is not taken during any respective year shall be accrued and carried forward to the following year of the Term, provided, (a) in no event shall Executive be entitled to carry over more than eight (8) weeks vacation from one year to the next year and (b) Executive shall not be permitted to take more than three (3) consecutive weeks of vacation without the prior consent of the Board. 5.2 Automobile. During the Term, the Company shall provide Executive, for Executive's sole use, an automobile reasonably satisfactory to Executive and the Company or, in lieu thereof, an automobile allowance in accordance with Company policy. The Company shall pay all operating expenses of any nature whatsoever with regard to such automobile and shall procure and maintain in force insurance coverage on such automobile. 5.3 Group Benefits. Executive shall be entitled to participate in any group life, health, accident, disability or other insurance programs, deferred compensation, profit sharing and pension programs and any other fringe benefits as the Company may from time to time generally make available to executives of similar status. 5.4 Life Insurance. Subject to the approval of the Board, during the Term the Company shall pay up to $5,000 each year of the Term of premiums due annually on a policy of term life insurance on the life of Executive in the face amount of Two Million Dollars ($2,000,000) (the "Policy"), the proceeds of which will be payable to the beneficiary or beneficiaries designated by Executive. 6. Business Expenses and ReimburSement. Provided Executive provides proper documentation of such expenses, Executive shall be entitled to reimbursement by the Company for any and all ordinary and reasonable business expenses incurred by Executive in the performance of Executive's duties for and on behalf of the Company during the Term, including, but not limited to, the cost of entertainment, meals, travel expenses, conventions, meetings and seminars. Immediately after execution of this Agreement, the Company shall reimburse Executive an amount equal to $17,000, representing business expenses incurred by Executive for the benefit of the Company up to the date hereof. 7. Death or Disability of Executive. Executive's employment shall be terminated upon his death. In the event Executive's inability to perform his services hereunder by reason of Disability (as defined below) occurring during the Term, the Company may terminate Executive's employment. In the event of Executive's termination due to Disability, Executive shall nevertheless be entitled to receive Executive's Salary and benefits as provided for herein for a period of one year after the occurrence of such Disability; provided, 3 4 however, that if Executive has commenced receiving disability insurance benefits referenced in Section 5.3 hereof, the Company's obligation to pay Executive's Salary shall be reduced by the amount of the benefits received. "Disability" shall mean that Executive has been mentally or physically impaired in a manner rendering Executive unable to perform the duties of his usual employment for a period of six (6) consecutive months or for an aggregate of six (6) months in any eighteen (18) month period, all as attested to by a qualified medical doctor. 8. Termination for Cause; Termination for Good Reason. 8.1 Termination for Cause. Except as provided below, the Company shall have the right during the Term, at its election, to terminate Executive's employment upon written notice (which shall specify the grounds for such termination) for any of the following reasons, which shall constitute "Cause": (a) Executive's willful and continued failure substantially to perform Executive's services as provided herein (other than Executive's actual or anticipated failure to perform resulting from termination of this Agreement by Executive by reason of the Company's material breach of this Agreement); (b) Executive's commission of an act of fraud upon the Company; (c) Conviction of Executive of a felony; (d) Executive's willful dishonesty in the performance of his duties hereunder; (e) Any material breach by Executive of Section 10.1 hereof or any breach of Sections 10.2 or 10.3 hereof; or (f) Any other act or omission constituting material misconduct which is materially injurious to the financial condition or business reputation of the Company or any of its subsidiaries or affiliates; provided, however, that the Company shall not have the right to terminate Executive's employment under subsection (a) above until after (i) written notice by the Board to Executive identifying, with a reasonable degree of specificity, the basis for the Board's belief that Executive has willfully and continuously refused to perform his duties hereunder, and (ii) Executive has failed, within ten (10) days after such notice was received, to correct his performance provided that, in the event of such failure substantially to perform hereunder, there shall be no cure in the event of any subsequent willful and continued failure substantially to perform hereunder of a similar nature. 4 5 8.2 Payment Upon Termination For Cause. In the event of Executive's termination for Cause by the Company or termination by the Executive without Good Reason (as hereinafter defined), the Company shall only be obligated to pay Executive (i) any of Executive's Salary due and owing to Executive for the period through the effective date of such termination and (ii) benefits vested under any applicable pension or other employee benefit plans. 8.3 Termination for Good Reason. (a) Good Reason. Executive may unilaterally terminate his employment under this Agreement immediately upon "written notice to the Company and for ninety (90) days thereafter if (i) the Company fails to pay Executive any material amounts owed to Executive and such failure to pay continues for thirty (30) days following written notice from Executive to the Company of such failure to pay, or (ii) Executive is required to relocate his principal place of employment outside of a radius of fifty (50) miles from present place of employment, or (iii) without Executive's written consent, there is any material adverse change in Executive's duties, position, authority or responsibility under this Agreement, including without limitation the assignment of any duties which would constitute a material reduction in the importance of Executive's position. authority or responsibilities provided, however, that Executive shall not be able to terminate his employment under subsection (iii) above until after (i) written notice by Executive to the Company identifying, with a reasonable degree of specificity, the basis for Executive's belief that the Company has materially adversely changed Executive's duties, position, authority or responsibility under this Agreement, and (ii) the Company has failed, within ten (10) days after such notice was received, to correct the material adverse change; provided that, in the event of such material adverse change, there shall be no opportunity to cure in the event of any subsequent material adverse change hereunder of a similar nature. Any such termination by Executive shall be deemed a termination with "Good Reason." 9. Payment Upon Termination Other Than For Cause. In the event that this Agreement or Executive's employment under this Agreement is terminated for any reason other than for Cause, death or Disability (including without limitation, in the event Executive terminates this Agreement for Good Reason), the following shall apply: 9.1 Accrued Salary and Benefits. The Company shall pay Executive (a) the amounts payable under clauses (i) and (ii) of Section 8.2 hereof, and (b) all vested, accrued and unused vacation time existing as of the effective date of such termination as reflected in the Company's personnel records; provided such amount does not exceed an amount equal to (i) the amount of vacation remaining for such year and (ii) the maximum amount of vacation which may be carried forward under Section 5.1 of this Agreement. Payment for such vacation time shall be at a rate equal to Executive's Salary. 9.2 Severance. Subject to Executive's continued compliance with Article 10, the Company shall continue to pay Executive's Salary and provide the benefits set forth in Sections 5.2 and 5.3 of this Agreement, (i) if such termination occurs prior to the first 5 6 anniversary of the date hereof, for the period of time up to the second anniversary of the date hereof, or (ii) if such termination occurs after the first anniversary of the date hereof, for a period of one year after the effective date of such termination, all without any offset for any amounts or benefits received by Executive from any third parties, including without limitation, subsequent employers of Executive. 9.3 Board Position. To the extent provided in that certain Securityholders Agreement dated November 1994 by and among the Company, Executive and certain other parties (the "Securityholders Agreement"), Executive shall be entitled to retain his position as a member of the Board, provided that Executive shall not receive any compensation hereunder for so serving on the Board (but Executive shall be entitled to reimbursement for his reasonable expenses in attending Board Meetings). 10. Covenants. Executive acknowledges and recognizes the highly competitive nature of the businesses of the Company and accordingly agrees as follows: 10.1 Confidentiality. During the term of his employment and thereafter, Executive shall keep in confidence and shall not use for the benefit of any person or entity other than the Company, or divulge to others, any secret or confidential information, knowledge, data, ideas or plans of the Company gained in his capacity as an employee, officer or director of the Company, unless authorized by the Company in writing. 10.2 Covenant Not to Compete. During the Term, employee shall not compete, directly or indirectly, with the Company. In the event that (a) (i) Company terminates this Agreement for Cause, or (ii) Executive terminates this Agreement for any reason other than Good Reason, then Executive agrees that for a period of two (2) years following the date of any such termination, and (b) Executive's employment terminates for any other reason, then Executive agrees that for so long as he shall be receiving compensation pursuant to Section 9.2, Executive shall not (a) compete, directly or indirectly, with the business of the Company as conducted by it on the date of such competition in such county or counties within the United States where such business shall then be conducted or (b) in any line of business, market or geographic area in which the Company has plans to expand on the date of such termination. Ownership by Executive, as a passive investment, of less than five percent (5%) of the outstanding shares of capital stock of any corporation listed on a national securities exchange or publicly traded in the over-the-counter market shall not constitute a breach of this Section 10.2. 10.3 Covenant Not to Solicit Employees. Except with the prior consent of the Company, both during the term of his employment and for the period of two years thereafter, Executive will not directly or indirectly induce any employees of the Company or any of its affiliates to engage in any activity in which Executive is prohibited from engaging by Paragraphs 10.1 and 10.2 above or to terminate such employee's employment with the Company or any of affiliates, and will not directly or indirectly employ or offer employment 6 7 to any person who was employed by the Company or any of its affiliates unless such person shall have ceased to be employed by the Company or any of its affiliates for a period of at least 12 months. 10.4 Enforceability of Non-Compete. It is expressly understood and agreed that although Executive and the Company consider the restrictions contained in this Article 10 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against Executive, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of.the other restrictions contained herein. 11. Miscellaneous. 11.1 Notice. Any and all notices, designations, consents, offers, acceptances, or any other communication provided for herein shall be given in writing delivered personally, by overnight courier, by facsimile or registered or certified mail, addressed as follows: Company: Phase Metrics 3978 Sorrento Valley Boulevard San Diego, CA 92121 Facsimile: (619) 552-1132 Executive: John Schaefer 1509 Dolphin Terrace Corona Del Mar, CA 92625 Facsimile: (714) 760-1222 or to such other address as may be designated in writing or as otherwise provided in this Agreement. Each such notice shall be deemed given (i) if by hand, when personally delivered during normal working hours, (ii) if by overnight courier, on the next business day following deposit by the sender with such courier, (iii) if by telecopy, upon transmission during normal working hours and receipt by the sender of a transmission confirmation, and (iv) if by mail, on a date which is four (4) days after it is mailed in any post office or branch post office regularly maintained by the United States Postal Service (registered or certified, with postage prepaid and properly addressed). 11.2 Construction. This Agreement and the performance hereof shall be governed, interpreted, construed and regulated by the laws of the State of California without giving effect to the conflicts of law provisions thereof. 7 8 11.3 Waiver. The waiver by either party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of this Agreement. 11.4 Severability. If any term, covenant, condition or provision of this Agreement, or the application thereof to any person or circumstance, shall at any time or to any extent be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant, condition and provision of this Agreement shall be valid and enforced to the fullest extent permitted by law. 11.4 Entire Agreement. This Agreement, the Purchase Agreement and the Securityholders Agreement constitute the entire agreement and understanding of the parties with respect to the subject matter set forth herein, and supersede all prior agreements, arrangements and understandings related to such subject matter. This Agreement may not be amended except in a writing signed by both of the parties hereto. 11.5 Attorney's Fees. In the event of any proceeding between the parties hereto with respect to any dispute arising under this Agreement, the prevailing party shall, in addition to such other relief as may be awarded, be entitled to recover reasonable attorneys' fees and expenses. 11.7 Assignment; No Third Party Beneficiary. This Agreement shall be binding upon and inure to the benefit of the Company and the Executive and their respective executors, administrators, personal representatives, heirs, successors and permitted assigns. Except as provided in this Section, this Agreement shall not create, and shall not be construed as creating, any rights or benefits in favor of, or enforceable by, any person or entity other than the Company and the Executive. 8 9 [SCHAEFER EMPLOYMENT AGREEMENT] IN WITNESS WHEREOF, the Company and Executive have executed this Agreement as of the day and year first above written. "Company" Phase Metrics, a California corporation By: Title: "Executive" /s/ John F. Schaefer ----------------------------------------------- JOHN F. SCHAEFER 9 EX-10.5 9 KOMAG INTERCREDITOR AGREEMENT DATED 05/05/1995 1 EXHIBIT 10.5 (714) 955-8705 May 5, 1995 Mr. Ted Siegler Komag, Incorporated Director of Planning 275 S. Hillview Drive Milpitas, CA 95035 Re: Intercreditor Agreement regarding Phase Metrics, Inc. Dear Mr. Siegler: Phase Metrics, Inc. ( "Phase Metrics") and ProQuip, Inc. (collectively the "Borrowers") have entered into a Credit Agreement with Canadian Imperial Bank of Commerce as Agent for the Lenders listed in that certain Credit Agreement dated as of March 15, 1995 (the "Credit Agreement"). Pursuant to the Credit Agreement, Borrowers have executed a Security Agreement of even date (the "Security Agreement") which grants a blanket lien in all assets of the Borrowers, including inventory, work in process, and deposits (the "Agent's Collateral"). Komag has entered into a Master Security Agreement with Phase Metrics dated as of May __, 1995 (the "Master Security Agreement") pursuant to which Komag has taken a security interest in the Komag Deposit Account (the "Komag Deposit Account") and the Applicable Collateral (the "Applicable Collateral") each as defined in the Master Security Agreement. In order to clarify the respective rights of Komag and the Agent for itself and the benefit of the Lenders, the Agent for itself and on behalf of the Lenders and Komag hereby agree as follows: 2 Mr. Ted Siegler May 5, 1995 KOMAG, Inc. Page 2 1. The Agent for itself and on behalf of each of the Lenders hereby agrees that neither it nor the Lenders shall have any lien or claim to any amounts on deposit in the Komag Deposit Account. 2. The Agent for itself and on behalf of each of the Lenders hereby agrees (a) that neither it nor the Lenders shall have any lien or claim in any of the Applicable Collateral and (b) to the extent it is difficult or impractical to segregate the Agent's Collateral from any of the Applicable Collateral, to subordinate the priority of its and the Lenders' lien and security interest in any of such Agent's Collateral and the Applicable Collateral in favor of the lien and security interest, now or hereafter existing, of Komag, regardless of the time or order of attachment or perfection of any liens, the time or order of filing of financing statements, the acquisition of purchase money or other liens, or any other circumstances whatsoever. Until Phase Metrics has fully performed all of its obligations (the "Phase Metrics Purchase Obligations") in favor of Komag under the Purchase Agreements and the other documents entered into pursuant thereto (the "Purchase Documents") the Agent for itself and on behalf of the Lenders agrees that neither it nor the Lenders will enforce, or attempt to enforce, any rights or remedies under or with respect to any Applicable Collateral (and any Agent's Collateral that is impractical to segregate from the Applicable Collateral), including causing or compelling the pledge or delivery of any such collateral, any attachment of, levy upon, execution against, foreclosure upon or the taking of other action against or institution of other proceedings with respect to any such collateral, or asserting any claim or interest in any insurance with respect to any such collateral. The Agent further agrees to execute (or cause to be executed) any further documents or financing statements in order to evidence the subordination provided for herein. 3. The Agent for itself and on behalf of the Lenders further agrees that neither it nor the Lenders will interfere with or in any manner oppose a disposition of any Applicable Collateral by Komag in accordance with applicable law. 4. The Agent for itself and on behalf of the Lenders waives any and all notice from Komag of the incurrance of any Phase Metrics Purchase Obligations or any part thereof and any right to require Komag to marshall assets. 5. Until the payment and performance in full of all Phase Metrics Purchase Obligations, the Agent for itself and on behalf of the Lenders agrees that neither it nor the Lenders shall have, or shall directly or indirectly exercise, any rights that any such party may acquire by way of subrogation hereunder upon any payment or distribution to Komag hereunder or otherwise. 3 Mr. Ted Siegler May 5, 1995 KOMAG, Inc. Page 3 6. Phase Metrics agrees to pay to Komag on demand all reasonable costs and expenses of Komag, and the reasonable fees and disbursements of counsel, in connection with the enforcement of this letter agreement. 7. This letter agreement is a continuing agreement of subordination and shall continue in effect and be binding upon the Agent and the Lenders until payment and performance in full of the Phase Metrics Purchase Obligations and the termination of the Master Security Agreement. The subordinations, agreements and priorities set forth herein shall remain in full force and effect regardless of whether any party hereto in the future seeks to rescind, amend, terminate or reform, by litigation or otherwise, its respective agreements with Phase Metrics. This letter agreement shall continue to be effective or shall be reinstated, as the case may be, if, for any reason, any payment of the Phase Metrics Purchase Obligations by or on behalf of Phase Metrics shall be rescinded or must otherwise be restored by Komag, whether as a result of any bankruptcy or similar proceeding involving Phase Metrics or otherwise. 8. The Agent for itself and on behalf of the Lenders agrees that at any time and from time to time, without notice to or the consent of the Agent or the Lenders, without incurring responsibility to the Agent or the Lenders, and without impairing or releasing the subordination provided for herein or otherwise impairing the rights of Komag hereunder: (a) the time for Phase Metrics performance of or compliance with any of its agreements contained in the Purchase Documents may be extended or such performance or compliance may be waived by Komag; (b) the agreements of Phase Metrics with respect to the Purchase Documents may from time to time be modified by Phase Metrics and Komag for the purpose of adding any requirements thereto or changing in any manner the rights and obligations of Phase Metrics and Komag thereunder; provided, however, that the defined terms "Applicable Security Interest", "Applicable Collateral", "Applicable Pledged Inventory", "Applicable Deposits", "Komag Deposit Account" or "Purchase Documents" (each as defined in the Master Security Agreement) may not be amended nor may any amendment to the Master Security Agreement be made which would adversely affect the rights of the Agent or the Lenders without the prior written consent of the Agent, which will not be unreasonably withheld; (c) the manner, place or terms for payment of any Phase Metrics Purchase Obligations, or any portion thereof may be altered or the terms for payment extended, or the Phase Metrics Purchase Obligations, may be renewed in whole or in part; (d) the maturity of any Phase Metrics Purchase Obligations may be accelerated in accordance with the terms of any present or future agreement by either Phase Metrics and Komag; (e) any Applicable Collateral may be sold, exchanged, released or substituted and any lien in favor of Komag may be terminated, subordinated or fail to be perfected or become unperfected; (f)any person liable in any manner for any Phase Metrics Purchase Obligations, may be discharged, released or substituted; and (g)all other rights against Phase Metrics, any other 4 Mr. Ted Siegler May 5, 1995 KOMAG, Inc. Page 4 person or with respect to any Applicable Collateral may be exercised (or Komag may waive or refrain from exercising such rights). 9. Komag agrees that at any time and from time to time, without notice to or the consent of Komag, without incurring responsibility to Komag and without impairing the rights of the Agent or the Lenders hereunder: (a) the time for Phase Metrics performance of or compliance with any of its agreements contained in the Credit Agreement, the Security Agreement and any of the other "Loan Documents" (as defined in the Credit Agreement) may be extended or such performance or compliance may be waived by the Agent or the Lenders; (b) the Loan Documents may from time to time be modified by Phase Metrics and the Agent and the Lenders for any reason whatsoever; (c) the manner, place or terms for payment of any obligations or any portion thereof owing under the Loan Documents may be altered or the terms for payment extended, or Phase Metrics' obligations may be renewed in whole or in part; (d) the maturity of any obligations of Phase Metrics under the Loan Documents may be accelerated in accordance with the terms of any present or future agreement by either Phase Metrics or the Agent and the Lenders; (e) any of the Agent's Collateral may be sold, exchanged, released or substituted and any lien in favor of the Agent or the Lenders may be terminated, subordinated or failed to be perfected of become unperfected; (f) any person liable in any manner for any obligations of Phase Metrics under the Loan Documents, may be discharged, released or substituted; and (g) all other rights against Phase Metrics, any other person or with respect to any Agent's Collateral may be exercised or the Agent and the Lenders may waive or refrain from exercising such rights. Neither this Letter Agreement, the Security Agreement nor any Purchase Document shall be considered to be a Loan Document. 10. This Letter Agreement shall be binding on each of the parties hereto and any successors and assigns. This Letter Agreement shall be construed in accordance with California law and may not be amended or modified unless in a writing executed by both parties hereto. This Letter Agreement may be executed in one or more counterparts. 5 Mr. Ted Siegler May 5, 1995 KOMAG, Inc. Page 5 Please evidence your acceptance of the terms set forth in this Letter Agreement by countersigning below where indicated. Very truly yours, CANADIAN IMPERIAL BANK OF COMMERCE as Agent for the Lenders By:______________________________________ Its:_____________________________________ Agreed and accepted: Komag, Inc. By:_________________________________ Its:________________________________ Consented to: Phase Metrics, Inc. By: /s/ R. J. SAUNDERS --------------------------------- Its: Vice President -------------------------------- EX-10.6 10 FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.6 INDEMNIFICATION AGREEMENT THIS AGREEMENT (the "Agreement") is made and entered into this ____ day of _______________, 1997 between Phase Metrics, Inc., a Delaware corporation (the "Company") and ____________________ ("Indemnitee"). WITNESSETH THAT: WHEREAS, Indemnitee performs a valuable service for the Company; and WHEREAS, the Board of Directors of the Company have adopted a Certificate of Incorporation (the "Certificate") permitting the Board of Directors to indemnify certain officers and employees designated by the Board of Directors or Chief Executive Officer (the "Officers") and directors (the "Directors") of the Company; and WHEREAS, the Certificate and Section 145 of the Delaware General Corporation Law, as amended ("Law"), by their nonexclusive nature permit contracts between the Company and the Officers and Directors of the Company with respect to indemnification of such Officers and Directors; and WHEREAS, in accordance with the authorization as provided by the Law, the Company may purchase and maintain a policy or policies of Directors' and Officers' liability insurance ("D & O Insurance"), covering certain liabilities which may be incurred by its Officers and Directors in the performance of their obligations as Officers and Directors of the Company; and WHEREAS, as a result of recent developments affecting the terms, scope and availability of D & O Insurance there exists general uncertainty as to the extent of protection afforded the Company's Officers and Directors by such D & O Insurance and said uncertainty also exists under statutory and bylaw indemnification provisions; and WHEREAS, in recognition of past services and in order to induce Indemnitee to continue to serve as an officer and/or a director of the Company, the Company has determined and agreed to enter into this contract with Indemnitee; NOW, THEREFORE, in consideration of Indemnitee's continued service as an officer and/or a director after the date hereof, the parties hereto agree as follows: 1. INDEMNITY OF INDEMNITEE. The Company hereby agrees to hold harmless and indemnify Indemnitee to the full extent authorized or permitted by the provisions of the Law, as such may be amended from time to time, and Article ___ of the Certificate, as such may be amended. In furtherance of the foregoing indemnification, and without limiting the generality thereof: 2 (a) Proceedings Other Than Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(a) if, by reason of his Corporate Status (as hereinafter defined), he is, or is threatened to be made, a party to or participant in any Proceeding (as hereinafter defined) other than a Proceeding by or in the right of the Company. Pursuant to this Section 1(a), Indemnitee shall be indemnified against all Expenses (as hereinafter defined), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. (b) Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(b) if, by reason of his Corporate Status, he is, or is threatened to be made, a party to or participant in any Proceeding brought by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 1(b), Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company; provided, however, that, if applicable law so provides, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent that the Court of Chancery of the State of Delaware, or the court in which such Proceeding shall have been brought or is pending, shall determine that such indemnification may be made. (c) Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified to the maximum extent permitted by law against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. 2. 3 2. ADDITIONAL INDEMNITY. (a) Subject only to the exclusions set forth in Section 2(b) hereof, the Company hereby further agrees to hold harmless and indemnify Indemnitee against any and all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with any Proceeding (including an action by or on behalf of the Company) to which Indemnitee is, was or at any time becomes a party, or is threatened to be made a party, by reason of his Corporate Status; provided, however, that with respect to actions by or on behalf of the Company, indemnification of Indemnitee against any judgments shall be made by the Company only as authorized in the specific case upon a determination that Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company; and (b) No indemnity pursuant to this Section 2 shall be paid by the Company: (i) In respect to remuneration paid to Indemnitee if it shall be determined by a final judgment or other final adjudication that such remuneration was in violation of law; (ii) On account of any suit in which judgment is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; (iii) On account of Indemnitee's conduct which is finally adjudged to have been knowingly fraudulent or deliberately dishonest, or to constitute willful misconduct; or (iv) If a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful. 3. CONTRIBUTION. If the indemnification provided in Sections 1 and 2 is unavailable and may not be paid to Indemnitee for any reason other than those set forth in paragraphs (i), (ii) and (iii) of Section 2(b), then in respect to any Proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such Proceeding), the Company shall contribute to the amount of Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in such proportion as is appropriate to reflect (i) the relative benefits received by the Company on the one hand and by the Indemnitee on the other hand from the transaction from which such Proceeding arose, and (ii) the relative fault of the Company on the one hand and of the Indemnitee on the other hand in connection with the events which resulted in such Expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. 3. 4 The relative fault of the Company on the one hand and of the Indemnitee on the other hand shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such Expenses, judgments, fines or settlement amounts. The Company agrees that it would not be just and equitable if contribution pursuant to this Section 3 were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations. 4. INDEMNIFICATION FOR EXPENSES OF A WITNESS. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. 5. ADVANCEMENT OF EXPENSES. Notwithstanding any other provision of this Agreement, the Company shall advance all reasonable Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding by reason of Indemnitee's Corporate Status within ten days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 5 shall be unsecured and interest free. Notwithstanding the foregoing, the obligation of the Company to advance Expenses pursuant to this Section 5 shall be subject to the condition that, if, when and to the extent that the Company determines that Indemnitee would not be permitted to be indemnified under applicable law, the Company shall be entitled to be reimbursed, within thirty (30) days of such determination, by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Company that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any advance of Expenses until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). 4. 5 6. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. (a) To obtain indemnification (including, but not limited to, the advancement of Expenses and contribution by the Company) under this Agreement, Indemnitee shall submit to the Chief Executive Officer or Chief Financial Officer a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary or any Assistant Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification. (b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 6(a) hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case: (i) if a Change in Control (as hereinafter defined) shall have occurred, by Independent Counsel (as hereinafter defined) in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee (unless Indemnitee shall request that such determination be made by the Board of Directors or the stockholders, in which case the determination shall be made in the manner provided in Clause (ii) below), or (ii) if a Change in Control shall not have occurred, (A) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined), or (B) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, said Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee, or (C) if so directed by said Disinterested Directors, by the stockholders of the Company; and, if it is determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel, member of the Board of Directors, or stockholder of the Company shall act reasonably and in good faith in making a determination under the Agreement of the Indemnitee's entitlement to indemnification. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. (c) If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 6(b) hereof, the Independent Counsel shall be selected as provided in this Section 6(c). If a Change in Control shall not have occurred, the Independent Counsel shall be selected by the Board of Directors, and the Company shall give written notice to Indemnitee advising him of the identity of the Independent Counsel so 5. 6 selected. If a Change in Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board of Directors, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may, within 10 days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of "Independent Counsel" as defined in Section 14 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If a written objection is made and substantiated, the Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification pursuant to Section 6(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 6(b) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 6(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 6(c), regardless of the manner in which such Independent Counsel was selected or appointed. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 8(a)(iii) of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). (d) The Company shall not be required to obtain the consent of the Indemnitee to the settlement of any Proceeding which the Company has undertaken to defend if the Company assumes full and sole responsibility for such settlement and the settlement grants the Indemnitee a complete and unqualified release in respect of the potential liability. 7. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS. (a) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 6(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection 6. 7 with the making by any person, persons or entity of any determination contrary to that presumption. (b) If the person, persons or entity empowered or selected under Section 6 of this Agreement to determine whether Indemnitee is entitled to indemnification shall not have made a determination within thirty (30) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that such 30-day period may be extended for a reasonable time, not to exceed an additional fifteen (15) days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating documentation and/or information relating thereto; and provided, further, that the foregoing provisions of this Section 7(b) shall not apply (i) if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 6(b) of this Agreement and if (A) within fifteen (15) days after receipt by the Company of the request for such determination the Board of Directors or the Disinterested Directors, if appropriate, resolve to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy five (75) days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within fifteen (15) days after such receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat, or (ii) if the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 6(b) of this Agreement. (c) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement (with or without court approval), conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. (d) For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith if Indemnitee's action is based on the records or books of account of the Enterprise (as hereinafter defined), including financial statements, or on information supplied to Indemnitee by the Officers and Directors of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public account- 7. 8 ant or by an appraiser or other expert selected with reasonable care by the Enterprise. In addition, the knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement. The provisions of this Section 7(d) shall not be deemed to be exclusive or to limit in any way the other circumstances in which the Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement. 8. REMEDIES OF INDEMNITEE. (a) In the event that (i) a determination is made pursuant to Section 6 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 5 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 6(b) of this Agreement within 90 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 3 or 4 of this Agreement within ten (10) days after receipt by the Company of a written request therefor, or (v) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 6 or 7 of this Agreement, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of his entitlement to such indemnification. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 8(a). The Company shall not oppose Indemnitee's right to seek any such adjudication or award in arbitration. (b) In the event that a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 8 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. 8. 9 (c) If a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 8, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law. (d) In the event that Indemnitee, pursuant to this Section 8, seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all expenses (of the types described in the definition of Expenses in Section 16 of this Agreement) actually and reasonably incurred by him in such judicial adjudication or arbitration, but only if he prevails therein. If it shall be determined in said judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification sought, the expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated. The Company shall indemnify Indemnitee against any and all expenses and, if requested by Indemnitee, shall (within ten (10) days after receipt by the Company of a written request therefor) advance such expenses to Indemnitee, which are incurred by Indemnitee in connection with any action brought by Indemnitee to recover under any Directors' and Officers' liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of expenses or insurance recovery, as the case may be. (e) The Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 8 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement. 9. NONEXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE; SUBROGATION. (a) The rights of indemnification as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate, any agreement, a vote of stockholders or a resolution of Directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in the Law, whether by statute or judicial decision, permits greater indemnification than would be afforded currently under the Certificate and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every 9. 10 other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy. (b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for Directors, Officers, employees, or agents or fiduciaries of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. (c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. (d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. 10. EXCEPTION TO RIGHT OF INDEMNIFICATION. Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification under this Agreement with respect to any Proceeding brought by Indemnitee, or any claim therein, unless (a) the bringing of such Proceeding or making of such claim shall have been approved by the Board of Directors or (b) such Proceeding is being brought by the Indemnitee to assert his rights under this Agreement. 11. DURATION OF AGREEMENT. All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is an officer and/or a director of the Company (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any Proceeding (or any proceeding commenced under Section 8 hereof) by reason of his Corporate Status, whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives. This Agreement shall continue in effect regardless of whether 10. 11 Indemnitee continues to serve as an officer and/or a director of the Company or any other enterprise at the Company's request. 12. SECURITY. To the extent requested by the Indemnitee and approved by the Board of Directors, the Company may at any time and from time to time provide security to the Indemnitee for the Company's obligations hereunder through an irrevocable bank line of credit, funded trust or other collateral. Any such security, once provided to the Indemnitee, may not be revoked or released without the prior written consent of the Indemnitee. 13. ENFORCEMENT. (a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as an officer and/or a director of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as an officer and/or a director of the Company. (b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof. 14. DEFINITIONS. For purposes of this Agreement: (a) "Change in Control" means a change in control of the Company occurring after the date of this Agreement of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934 (the "Act"), whether or not the Company is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if after the date of this Agreement (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Act, as amended) other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 15% or more of the combined voting power of the Company's then outstanding securities (other than any such person or any affiliate thereof that is such a 15% beneficial owner as of the date hereof) without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person attaining such percentage interest; (ii) there occurs a proxy contest, or the Company is a party to a merger, consolidation, sale of assets, plan of liquidation or other reorganization, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a 11. 12 majority of the Board of Directors thereafter; or (iii) during any period of two consecutive years, other than as a result of an event described in clause (a)(ii) of this Section 16, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the Directors then still in office who were Directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors. A Change in Control shall not be deemed to have occurred under item (i) above if the "person" described under item (i) is entitled to report its ownership on Schedule 13G promulgated under the Act and such person is able to represent that it acquired such securities in the ordinary course of its business and not with the purpose nor with the effect of changing or influencing the control of the Company, nor in connection with or as a participant in any transaction having such purpose or effect. If the "person" referred to in the previous sentence would at any time not be entitled to continue to report such ownership on Schedule 13G pursuant to Rule 13d-1(b)(3)(i)(B) of the Act, then a Change in Control shall be deemed to have occurred at such time. (b) "Corporate Status" describes the status of a person who is or was a director, officer, employee or agent or fiduciary of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the express written request of the Company. (c) "Disinterested Director" means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee. (d) "Enterprise" shall mean the Company and any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is or was serving at the express written request of the Company as a director, officer, employee, agent or fiduciary. (e) "Expenses" shall include all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating, or being or preparing to be a witness in a Proceeding. 12. 13 (f) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. (g) "Proceeding" includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought by or in the right of the Company or otherwise and whether civil, criminal, administrative or investigative, in which Indemnitee was, is or will be involved as a party or otherwise, by reason of the fact that Indemnitee is or was an officer and/or a director of the Company, by reason of any action taken by him or of any inaction on his part while acting as an officer and/or a director of the Company, or by reason of the fact that he is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise; in each case whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement; including one pending on or before the date of this Agreement; and excluding one initiated by an Indemnitee pursuant to Section 8 of this Agreement to enforce his rights under this Agreement. 15. SEVERABILITY. If any provision or provisions of this Agreement shall be held by a court of competent jurisdiction to be invalid, void, illegal or otherwise unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby. 16. MODIFICATION AND WAIVER. No supplement, modification, termination or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall 13. 14 constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 17. NOTICE BY INDEMNITEE. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification covered hereunder. The failure to so notify the Company shall not relieve the Company of any obligation which it may have to the Indemnitee under this Agreement or otherwise. 18. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: (a) If to Indemnitee, to: __________________________________________ Phase Metrics, Inc. 10260 Sorrento Valley Road San Diego, California 92121-1605 (b) If to the Company, to: Phase Metrics, Inc. 10260 Sorrento Valley Road San Diego, California 92121-1605 Attention: Chief Executive Officer or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be. 19. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. 20. HEADINGS. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. 14. 15 21. GOVERNING LAW. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware without application of the conflict of laws principles thereof. 22. GENDER. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. PHASE METRICS, INC., a Delaware corporation By ______________________________________ John F. Schaefer Chief Executive Officer _________________________________________ _____________________________, Indemnitee 15. EX-10.7 11 1995 STOCK OPTION/STOCK ISSUANCE PLAN 1 EXHIBIT 10.7 PHASE METRICS, INC. 1995 STOCK OPTION PLAN (Amended through August 1, 1997) ARTICLE ONE GENERAL PROVISIONS I. PURPOSE OF THE PLAN This 1995 Stock Option Plan is intended to promote the interests of Phase Metrics, Inc., a California corporation, by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation. Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix. II. ADMINISTRATION OF THE PLAN A. The Plan shall be administered by the Board. However, any or all administrative functions otherwise exercisable by the Board may be delegated to the Committee. Members of the Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. The Board may also at any time terminate the functions of the Committee and reassume all powers and authority previously delegated to the Committee. B. The Plan Administrator shall have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Plan and to make such determinations under, and issue such interpretations of, the Plan and any outstanding options as it may deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have an interest in the Plan or any option or shares issued thereunder. III. ELIGIBILITY A. The persons eligible to receive option grants under the Plan are as follows: (i) Employees, 2 (ii) non-employee members of the Board or the non-employee members of the board of directors of any Parent or Subsidiary, and (iii) consultants who provide services to the Corporation (or any Parent or Subsidiary). B. The Plan Administrator shall have full authority to determine which eligible persons are to receive option grants under the Plan, the time or times when such option grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times at which each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding. IV. STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed 4,050,000(1)(2)(3)(4) shares. B. Shares of Common Stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent (i) the options expire or terminate for any reason prior to exercise in full or (ii) the options are cancelled in accordance with the cancellation-regrant provisions of Article Two. All shares issued under the Plan, whether or not those shares are subsequently repurchased by the Corporation pursuant to its repurchase rights under the Plan, shall reduce on a share-for-share basis the number of shares of Common Stock available for subsequent issuance under the Plan. C. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of - -------- (1) Includes the 250,000-share (pre-split) increase approved by the Board on August 8, 1995, and the 250,000-share (pre-split) increase approved by the Board on November 28, 1995. Also includes the 150,000-share (pre-split) increase approved by the Board on July 24, 1996. The additional 150,000-share (pre-split) contingent increase approved by the Board on July 24, 1996 is not included because those shares were issued outside of this Plan in a 25102(f) transaction. (2) Reflects 2-for-1 stock split effective September 27, 1996. (3) Includes the 500,000-share (post-split) increase approved by the Board on January 22, 1997, and approved by the Shareholders as of January 22, 1997. (4) Includes the 2,500,000-share (post-split) increase approved by the Board on August 1, 1997, and approved by the Shareholders as of August 1, 1997. 2. 3 consideration, appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan and (ii) the number and/or class of securities and the exercise price per share in effect under each outstanding option in order to prevent the dilution or enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. In no event shall any such adjustments be made in connection with the conversion of one or more outstanding shares of the Corporation's preferred stock into shares of Common Stock. ARTICLE TWO OPTION GRANT PROGRAM I. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options. A. EXERCISE PRICE. 1. The exercise price per share shall be fixed by the Plan Administrator in accordance with the following provisions: (i) The exercise price per share shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the option grant date. (ii) If the person to whom the option is granted is a 10% Shareholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Three and the documents evidencing the option, be payable in cash or check made payable to the Corporation. Should the Common Stock be registered under Section 12(g) of the 1934 Act at the time the option is exercised, then the exercise price may also be paid as follows: (i) in shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or 3. 4 (ii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable written instructions (a) to a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option grant. However, no option shall have a term in excess of ten (10) years measured from the option grant date. C. EFFECT OF TERMINATION OF SERVICE. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death: (i) Should the Optionee cease to remain in Service for any reason other than Disability or death, then the Optionee shall have a period of three (3) months following the date of such cessation of Service during which to exercise each outstanding option held by such Optionee. (ii) Should such Service terminate by reason of Disability, then the Optionee shall have a period of six (6) months following the date of such cessation of Service during which to exercise each outstanding option held by such Optionee. However, should such Disability be deemed to constitute Permanent Disability, then the period during which each outstanding option held by the Optionee is to remain exercisable shall be extended by an additional six (6) months so that the exercise period shall be the twelve (12)- month period following the date of the Optionee's cessation of Service by reason of such Permanent Disability. (iii) Should the Optionee die while holding one or more outstanding options, then the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution shall 4. 5 have a period of twelve (12) months following the date of the Optionee's death during which to exercise each such option. (iv) Under no circumstances, however, shall any such option be exercisable after the specified expiration of the option term. (v) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessation of Service. However, should the Optionee's Service terminate by reason of his or her death, then all of the shares subject to each outstanding option held by the Optionee at the time of death shall immediately vest, and each option may be exercised for any or all of those vested shares at any time during the applicable post-Service exercise period. (vi) Upon the expiration of the applicable post-Service exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding to the extent it is not exercisable for vested shares on the date of such cessation of Service. D. SHAREHOLDER RIGHTS. The holder of an option shall have no shareholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares. E. UNVESTED SHARES. The Plan Administrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock under the Plan. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, all or (at the discretion of the Corporation and with the consent of the Optionee) any of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. The Plan Administrator may not impose a vesting schedule upon any option grant or any shares of Common Stock subject to the option which is more restrictive than twenty percent (20%) per year vesting, beginning one (1) year after the option grant date. F. FIRST REFUSAL RIGHTS. Until such time as the Common Stock is first registered under Section 12(g) of the 1934 Act, the Corporation shall have the right of first refusal with respect to any proposed disposition by the Optionee (or any successor in interest) of any shares of Common Stock issued under the Plan. Such right of first refusal shall be 5. 6 exercisable in accordance with the terms established by the Plan Administrator and set forth in the document evidencing such right. G. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, the option shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or by the laws of descent and distribution following the Optionee's death. However, a Non-Statutory Option may be assigned in accordance with the terms of a Qualified Domestic Relations Order. The assigned option may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to such Qualified Domestic Relations Order. The terms applicable to the assigned option (or portion thereof) shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. H. WITHHOLDING. The Corporation's obligation to deliver shares of Common Stock upon the exercise of any options granted under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. II. INCENTIVE OPTIONS The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of the Plan shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options shall not be subject to the terms specified in this Section II. A. ELIGIBILITY. Incentive Options may only be granted to Employees. B. EXERCISE PRICE. The exercise price per share shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one (1) calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. D. 10% SHAREHOLDER. If any Employee to whom an Incentive Option is granted is a 10% Shareholder, then the option term shall not exceed five (5) years measured from the option grant date. 6. 7 III. CORPORATE TRANSACTION A. In the event of any Corporate Transaction, each outstanding option shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) in connection with such Corporate Transaction. In addition, all outstanding repurchase rights under the Plan shall terminate in the event of any Corporate Transaction, except to the extent the repurchase rights are assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction. B. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in the consummation of such Corporate Transaction, had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to (i) the number and class of securities available for issuance under the Plan following the consummation of such Corporate Transaction and (ii) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. C. The grant of options under the Plan shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. CANCELLATION AND REGRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Plan and to grant in substitution therefor new options covering the same or different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new option grant date. 7. 8 ARTICLE THREE MISCELLANEOUS I. FINANCING The Plan Administrator may permit any Optionee to pay the option exercise price by delivering a promissory note payable in one or more installments. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. Promissory notes may be authorized with or without security or collateral. However, any promissory notes delivered by a consultant must be secured by property other than the purchased shares of Common Stock. In all events, the maximum credit available to each Optionee may not exceed the sum of (i) the aggregate option exercise price payable for the purchased shares plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee in connection with the option exercise. II. ADDITIONAL AUTHORITY A. The Plan Administrator shall have the discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding: (i) to extend the period of time for which the option is to remain exercisable following the Optionee's cessation of Service or death from the limited period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate; provided, that in no event shall such option be exercisable after the specified expiration of the option term, and/or (ii) to permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee's cessation of Service or death but also with respect to one or more additional installments in which the Optionee would have vested under the option had the Optionee continued in Service. III. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan became effective when adopted by the Board in April 1995 and was approved by the Corporation's shareholders in April 1995. On August 8, 1995, the Board approved a 250,000-share increase in the number of shares authorized for issuance over the term of the Plan. The increase was approved by the Corporation's shareholders on November 28, 1995. On November 28, 1995, the Board approved a further 250,000-share increase in the 8. 9 number of shares authorized for issuance over the term of the Plan. However, no option granted in reliance upon such share increase may be exercised until the increase is approved by the Corporation's shareholders. If such shareholder approval is not obtained within twelve (12) months after the date of the Board's adoption of the Plan, then all options previously granted in reliance upon such increase shall terminate and cease to be outstanding, and no further options shall be granted. Subject to such limitation, the Plan Administrator may grant options under the Plan at any time after the effective date of the Plan and before the date fixed herein for termination of the Plan. B. The Plan shall terminate upon the earliest of (i) the expiration of the ten (10)-year period measured from the date the Plan is adopted by the Board, (ii) the date on which all shares available for issuance under the Plan shall have been issued or (iii) the termination of all outstanding options in connection with a Corporate Transaction. Upon such Plan termination, all options and unvested stock issuances outstanding under the Plan shall continue to have full force and effect in accordance with the provisions of the documents evidencing such options or issuances. IV. AMENDMENT OF THE PLAN A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall, without the consent of the Optionees, adversely affect their rights and obligations under their outstanding options. In addition, the Board shall not, without the approval of the Corporation's shareholders, (i) increase the maximum number of shares issuable under the Plan, except for permissible adjustments in the event of certain changes in the Corporation's capitalization, (ii) materially modify the eligibility requirements for Plan participation or (iii) materially increase the benefits accruing to Plan participants. B. Options may be granted under the Plan to purchase shares of Common Stock in excess of the number of shares then available for issuance under the Plan, provided any such options actually granted may not be exercised until there is obtained shareholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such shareholder approval is not obtained within twelve (12) months after the date the excess grants are first made, then any options granted on the basis of such excess shares shall terminate and cease to be outstanding. V. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes. 9. 10 VI. REGULATORY APPROVALS The implementation of the Plan, the granting of any option hereunder and the issuance of any shares of Common Stock upon the exercise of any option shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it and the shares of Common Stock issued pursuant to it. VII. NO EMPLOYMENT OR SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Optionee) or of the Optionee, which rights are hereby expressly reserved by each, to terminate the Optionee's Service at any time for any reason, with or without cause. VIII. FINANCIAL REPORTS The Corporation shall deliver a balance sheet and an income statement at least annually to each individual holding an outstanding option under the Plan, unless such individual is a key Employee whose duties in connection with the Corporation (or any Parent or Subsidiary) assure such individual access to equivalent information. 10. 11 APPENDIX The following definitions shall be in effect under the Plan: A. BOARD shall mean the Corporation's Board of Directors. B. CODE shall mean the Internal Revenue Code of 1986, as amended. C. COMMITTEE shall mean a committee of two (2) or more Board members appointed by the Board to exercise one or more administrative functions under the Plan. D. COMMON STOCK shall mean the Corporation's common stock. E. CORPORATE TRANSACTION shall mean either of the following shareholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which one hundred percent (100%) of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. F. CORPORATION shall mean Phase Metrics, Inc., a California corporation. G. DISABILITY shall mean the inability of an individual to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of such medical evidence as the Plan Administrator deems warranted under the circumstances. Disability shall be deemed to constitute PERMANENT DISABILITY in the event that such Disability is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more. H. DOMESTIC RELATIONS ORDER shall mean any judgment, decree or order (including approval of a property settlement agreement) which provides or otherwise conveys, pursuant to applicable State domestic relations laws (including community property laws), marital property rights to any spouse or former spouse of the Optionee. A-1. 12 I. EMPLOYEE shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. J. EXERCISE DATE shall mean the date on which the Corporation shall have received written notice of the option exercise. K. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) If the Common Stock is at the time neither listed on any Stock Exchange nor traded on the Nasdaq National Market, then the Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate, including the Corporation's earnings history, book value and prospects in the light of market conditions generally. L. INCENTIVE OPTION shall mean an option which satisfies the requirements of Code Section 422. M. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended. N. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422. O. OPTIONEE shall mean any person to whom an option is granted under the Plan. A-2. 13 P. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Q. PLAN shall mean the Corporation's 1995 Stock Option Plan, as set forth in this document. R. PLAN ADMINISTRATOR shall mean either the Board or the Committee, to the extent the Committee is at the time responsible for the administration of the Plan. S. QUALIFIED DOMESTIC RELATIONS ORDER shall mean a Domestic Relations Order which substantially complies with the requirements of Code Section 414(p). The Plan Administrator shall have the sole discretion to determine whether a Domestic Relations Order is a Qualified Domestic Relations Order. T. SERVICE shall mean the provision of services to the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant, unless otherwise specifically provided in the applicable stock option or stock purchase agreement evidencing the option grant or the purchase of shares thereunder. U. STOCK EXCHANGE shall mean either the American Stock Exchange or the New York Stock Exchange. V. SUBSIDIARY shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. W. 10% SHAREHOLDER shall mean the owner of stock (as determined under Code Section 424(d)) possessing ten percent (10%) or more of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary). A-3. EX-10.8 12 FORM OF NOTICE OF GRANT OF STOCK OPTION 1 EXHIBIT 10.8 Grant No._________________ PHASE METRICS, INC. NOTICE OF GRANT OF STOCK OPTION Notice is hereby given of the following option grant (the "Option") to purchase shares of the Common Stock of Phase Metrics, Inc. (the "Corporation"): Optionee: __________________________________________________________ Grant Date: ________________________________________________________ Vesting Commencement Date: _________________________________________ Exercise Price: $____ per share Number of Option Shares: ___________________ shares Expiration Date: ___________________________________________________ Type of Option: _____ Incentive Stock Option _____ Non-Statutory Stock Option Date Exercisable: Immediately Exercisable Vesting Schedule: The Option Shares shall be unvested and subject to repurchase by the Corporation at the Exercise Price paid per share. Optionee shall acquire a vested interest in, and the Corporation's repurchase right will accordingly lapse with respect to, (i) twenty percent (20%) of the Option Shares upon Optionee's completion of one (1) year of Service measured from the Vesting Commencement Date and (ii) the balance of the Option Shares in a series of forty-eight (48) equal successive monthly installments upon Optionee's completion of each additional month of Service over the forty-eight (48)-month period measured from the first anniversary of the Vesting Commencement Date. Should the Optionee die while in Employee status, then all the Option Shares shall immediately vest and shall no longer be subject to the Corporation's repurchase right. In no other event shall any additional Option Shares vest after Optionee's cessation of Service. The Option is granted subject to and in accordance with the terms of the Phase Metrics, Inc. 1995 Stock Option Plan (the "Plan"). Optionee shall be bound by the terms of the Plan and the terms of the Option as set forth in the Stock Option Agreement attached hereto as Exhibit A. Any Option Shares purchased under the Option will be subject to the provisions of the Stock Purchase Agreement attached hereto as Exhibit B. 2 Optionee hereby acknowledges receipt of a copy of the Plan in the form attached hereto as Exhibit C. REPURCHASE RIGHTS. OPTIONEE HEREBY AGREES THAT ALL OPTION SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO CERTAIN REPURCHASE RIGHTS AND RIGHTS OF FIRST REFUSAL EXERCISABLE BY THE CORPORATION AND ITS ASSIGNS UPON THE TERMS AND CONDITIONS SPECIFIED IN THE ATTACHED STOCK PURCHASE AGREEMENT. No Employment or Service Contract. Nothing in this Notice or in the Plan shall confer upon Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Optionee) or of Optionee, which rights are hereby expressly reserved by each, to terminate Optionee's Service at any time for any reason, with or without cause. Definitions. All capitalized terms in this Notice shall have the meaning assigned to them in this Notice or in the attached Stock Option Agreement. ____________________, 199__ Date PHASE METRICS, INC. By: _____________________________________ Title: __________________________________ _________________________________________ OPTIONEE Address: ________________________________ _________________________________________ ATTACHMENTS - ----------- EXHIBIT A - STOCK OPTION AGREEMENT EXHIBIT B - STOCK PURCHASE AGREEMENT EXHIBIT C - 1995 STOCK OPTION PLAN 2. 3 EXHIBIT A STOCK OPTION AGREEMENT 4 EXHIBIT B STOCK PURCHASE AGREEMENT 5 EXHIBIT C 1995 STOCK OPTION PLAN EX-10.9 13 FORM OF STOCK OPTION AGREEMENT AND ADDENDUM 1 EXHIBIT 10.9 PHASE METRICS, INC. STOCK OPTION AGREEMENT RECITALS A. Optionee is to render valuable services to the Corporation, and this Agreement is intended to document the stock option grant which the Corporation has this day made to Optionee as an incentive for him to continue in the Corporation's Service. B. All capitalized terms in this Agreement shall have the meaning assigned to them in the attached Appendix. NOW, THEREFORE, it is hereby agreed as follows: 1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as of the Grant Date, an option to purchase up to the number of Option Shares specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term specified in Paragraph 2 at the Exercise Price. 2. OPTION TERM. This option shall have a term of ten (10) years measured from the Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless sooner terminated in accordance with Paragraph 5 or 6. 3. LIMITED TRANSFERABILITY. This option shall be neither transferable nor assignable by Optionee other than by will or by the laws of descent and distribution following Optionee's death and may be exercised, during Optionee's lifetime, only by Optionee. 4. DATES OF EXERCISE. This option shall become exercisable for the Option Shares in one or more installments as specified in the Grant Notice. As the option becomes exercisable for such installments, those installments shall accumulate and the option shall remain exercisable for the accumulated installments until the Expiration Date or sooner termination of the option term under Paragraph 5 or 6. 5. CESSATION OF SERVICE. The option term specified in Paragraph 2 shall terminate (and this option shall cease to be outstanding) prior to the Expiration Date should any of the following provisions become applicable: a. Should Optionee cease to remain in Service for any reason (other than death or Disability) while this option is outstanding, then Optionee shall have a period of 2 three (3) months (commencing with the date of such cessation of Service) during which to exercise this option, but in no event shall this option be exercisable at any time after the Expiration Date. b. Should Optionee die while this option is outstanding, then the personal representative of Optionee's estate or the person or persons to whom the option is transferred pursuant to Optionee's will or in accordance with the laws of descent and distribution shall have the right to exercise this option. Such right shall lapse and this option shall cease to be outstanding upon the earlier of (i) the expiration of the twelve (12)- month period measured from the date of Optionee's death or (ii) the Expiration Date. c. Should Optionee cease Service by reason of Disability while this option is outstanding, then Optionee shall have a period of six (6) months (commencing with the date of such cessation of Service) during which to exercise this option. However, should such Disability be deemed to constitute Permanent Disability, then the period during which this option is to remain exercisable shall be extended by an additional six (6) months so that the exercise period shall be the twelve (12)-month period following the date of Optionee's cessation of Service by reason of such Permanent Disability. In no event shall this option be exercisable at any time after the Expiration Date. d. During the limited period of post-Service exercisability, this option may not be exercised in the aggregate for more than the number of Option Shares for which the option is exercisable at the time of Optionee's cessation of Service. e. Upon the expiration of the applicable post-Service exercise period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding for any otherwise exercisable Option Shares for which the option has not been exercised. However, this option shall immediately, upon Optionee's cessation of Service, terminate and cease to be outstanding with respect to any and all Option Shares for which this Option is not otherwise at that time exercisable. 6. SPECIAL TERMINATION OF OPTION. a. This option, to the extent outstanding at the time of a Corporate Transaction but not otherwise fully exercisable, shall automatically accelerate so that this option shall, immediately prior to the effective date of the Corporate Transaction, become exercisable for all of the Option Shares at the time subject to this option and may be exercised for any or all of those Option Shares as fully-vested shares of Common Stock. No such acceleration of this option, however, shall occur if and to the extent: (i) this option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation (or parent thereof) or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation (or parent thereof) or (ii) this option is to be replaced with a cash incentive program 2. 3 of the successor corporation which preserves the spread existing on the unvested Option Shares at the time of the Corporate Transaction (the excess of the Fair Market Value of those Option Shares over the aggregate Exercise Price payable for such shares) and provides for subsequent pay-out in accordance with the same option exercise/vesting schedule set forth in the Grant Notice. The determination of option comparability under clause (i) shall be made by the Plan Administrator, and such determination shall be final, binding and conclusive. b. If this option is assumed in connection with a Corporate Transaction, then this option shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction, and appropriate adjustments shall also be made to the Exercise Price, provided the aggregate Exercise Price shall remain the same. c. This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 7. ADJUSTMENT IN OPTION SHARES. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the total number and/or class of securities subject to this option and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder. 8. SHAREHOLDER RIGHTS. The holder of this option shall not have any shareholder rights with respect to the Option Shares until such person shall have exercised the option, paid the Exercise Price and become a holder of record of the purchased shares. 9. MANNER OF EXERCISING OPTION. a. In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, Optionee (or any other person or persons exercising the option) must take the following actions: (1) Execute and deliver to the Corporation a Purchase Agreement for the Option Shares for which the option is exercised. 3. 4 (2) Pay the aggregate Exercise Price for the purchased shares in cash or check made payable to the Corporation. Should the Common Stock be registered under Section 12(g) of the 1934 Act at the time the option is exercised, then the Exercise Price may also be paid as follows: (a) in shares of Common Stock held by Optionee (or any other person or persons exercising the option) for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date; or (b) through a special sale and remittance procedure pursuant to which Optionee (or any other person or persons exercising the option) shall concurrently provide irrevocable written instructions (a) to a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Exercise Price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Except to the extent the sale and remittance procedure is utilized in connection with the option exercise, payment of the Exercise Price must accompany the Purchase Agreement delivered to the Corporation in connection with the option exercise. (3) Furnish to the Corporation appropriate documentation that the person or persons exercising the option (if other than Optionee) have the right to exercise this option. (4) Execute and deliver to the Corporation such written representations as may be requested by the Corporation in order for it to comply with the applicable requirements of Federal and state securities laws. (5) Make appropriate arrangements with the Corporation (or Parent or Subsidiary employing or retaining Optionee) for the 4. 5 satisfaction of all Federal, state and local income and employment tax withholding requirements applicable to the option exercise. b. As soon as practical after the Exercise Date, the Corporation shall issue to or on behalf of Optionee (or any other person or persons exercising this option) a certificate for the purchased Option Shares, with the appropriate legends affixed thereto. c. In no event may this option be exercised for any fractional shares. 10. REPURCHASE RIGHTS. ALL OPTION SHARES ACQUIRED UPON THE EXERCISE OF THIS OPTION SHALL BE SUBJECT TO CERTAIN FIRST REFUSAL RIGHTS OF THE CORPORATION AND ITS ASSIGNS TO REPURCHASE THOSE SHARES IN ACCORDANCE WITH THE TERMS SPECIFIED IN THE PURCHASE AGREEMENT. 11. COMPLIANCE WITH LAWS AND REGULATIONS. a. The exercise of this option and the issuance of the Option Shares upon such exercise shall be subject to compliance by the Corporation and Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange (or the Nasdaq National Market if applicable) on which the Common Stock may be listed for trading at the time of such exercise and issuance. b. The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability with respect to the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. The Corporation, however, shall use its best efforts to obtain all such approvals. 5. 6 12. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and Optionee, Optionee's assigns and the legal representatives, heirs and legatees of Optionee's estate. 13. NOTICES. Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee's signature line on the Grant Notice. All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified. 14. GOVERNING LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California without resort to that State's conflict-of-laws rules. 6. 7 APPENDIX The following definitions shall be in effect under the Agreement: A. AGREEMENT shall mean this Stock Option Agreement. B. BOARD shall mean the Corporation's Board of Directors. C. COMMON STOCK shall mean the Corporation's common stock. D. CORPORATE TRANSACTION shall mean either of the following shareholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which one hundred percent (100%) of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. E. CORPORATION shall mean Phase Metrics, Inc., a California corporation. F. DISABILITY shall mean the inability of Optionee to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of such medical evidence as the Plan Administrator deems warranted under the circumstances. Disability shall be deemed to constitute PERMANENT DISABILITY in the event that such Disability is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more. G. EMPLOYEE shall mean an individual who is in the employ of the Corporation, subject to the Corporation's control and direction as to both the work to be performed and the manner and method of performance. H. EXERCISE DATE shall mean the date on which the option shall have been exercised in accordance with Paragraph 9 of the Agreement. I. EXERCISE PRICE shall mean the exercise price per share as specified in the Grant Notice. A-1. 8 J. EXPIRATION DATE shall mean the date on which the option expires as specified in the Grant Notice. K. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as the price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Board to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) If the Common Stock is at the time neither listed on any Stock Exchange nor traded on the Nasdaq National Market, then the Fair Market Value shall be determined by the Board after taking into account such factors as the Board shall deem appropriate, including the Corporation's earnings history, book value and prospects in the light of market conditions generally. L. GRANT DATE shall mean the date of grant of the option as specified in the Grant Notice. M. GRANT NOTICE shall mean the Notice of Grant of Stock Option accompanying the Agreement, pursuant to which Optionee has been informed of the basic terms of the option evidenced hereby. N. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended. O. OPTION SHARES shall mean the number of shares of Common Stock subject to the option. A-2. 9 P. OPTIONEE shall mean the person to whom the option is granted as specified in the Grant Notice. Q. PURCHASE AGREEMENT shall mean the stock purchase agreement in substantially the form of Exhibit B to the Grant Notice. R. SERVICE shall mean the Optionee's performance of services for the Corporation in the capacity of an Employee or non-employee Board member or as an independent consultant pursuant to the terms and conditions of the Consulting Services Agreement between the Optionee and the Corporation dated _____________. S. STOCK EXCHANGE shall mean the American Stock Exchange or the New York Stock Exchange. A-3. 10 ADDENDUM TO STOCK OPTION AGREEMENT The following provisions are hereby incorporated into, and are hereby made a part of, that certain Stock Option Agreement attached as Exhibit A to the Notice of Stock Option Grant evidencing the stock option (the "Option") which the Corporation granted to Optionee on _____________, 1996 to purchase ______________ shares of the Corporation's Common Stock under the Corporation's 1995 Stock Option Plan at an exercise price of $15.00 per share. All capitalized terms used in this Addendum, to the extent not otherwise specifically defined herein, shall have the meanings assigned to such terms in the Stock Option Agreement. INVOLUNTARY TERMINATION FOLLOWING CORPORATE TRANSACTION 1. To the extent the Option is, in connection with a Corporate Transaction, to be assumed or replaced with a comparable option in accordance with Paragraph 6 of the Option Agreement, the Option shall not accelerate upon the occurrence of that Corporate Transaction, and the Option shall accordingly continue, over Optionee's period of Service after the Corporate Transaction, to become exercisable for the Option Shares in one or more installments in accordance with the provisions of the Option Agreement. However, should Optionee cease Service by reason of an Involuntary Termination within twelve (12) months following a Corporate Transaction in which the acquisition price payable per share of Common Stock (determined on a fully-diluted basis as if all the Corporation's outstanding securities exercisable or convertible into Common Stock were in fact exercised or converted immediately prior to such Corporate Transaction) is an amount not less than the minimum price per share indicated in Paragraph 2 below for the fiscal year of the Corporation in which such Corporate Transaction occurs, then the Option, to the extent outstanding at the time but not otherwise fully exercisable, shall automatically accelerate so that the Option shall become immediately exercisable for all the Option Shares at the time subject to the Option and may be exercised for any or all of those Option Shares as fully vested shares. The Option shall remain so exercisable until the earlier of (i) the Expiration Date or (ii) the sooner termination of the Option in accordance with Paragraph 5 of the Stock Option Agreement. 2. The minimum acquisition price payable per share of Common Stock (determined on a fully-diluted basis in the manner indicated above) which will serve as a requisite condition to the acceleration of the Option under Paragraph 1 shall be determined in accordance with the table below on the basis of the fiscal year of the Corporation in which the Corporate Transaction is effected: Fiscal Year Minimum of Acquisition Price Acquisition Per Share 11 1996 $10.00 1997 or later $14.00 3. For purposes of this Addendum, Optionee will be deemed to cease Service by reason of an Involuntary Termination if such cessation of Service occurs: - involuntarily upon Optionee's dismissal or discharge by the Corporation for reasons other than fraud, any unauthorized use or disclosure of the Corporation's trade secrets and other proprietary information, or any other intentional misconduct adversely affecting the business or affairs of the Corporation in a material manner, or - voluntarily upon Optionee's resignation following (A) a change in Optionee's position with the Corporation which materially reduces Optionee's level of responsibility, (B) a reduction in Optionee's level of compensation (including base salary, fringe benefits and any non-discretionary and objective-standard incentive payment or bonus award) by more than fifteen percent (15%) or (C) a relocation of Optionee's principal place of employment by more than fifty (50) miles from Optionee's principal place of employment immediately prior to the Corporate Transaction, provided and only if such change, reduction or relocation is effected by the Corporation without Optionee's consent. IN WITNESS WHEREOF, Phase Metrics, Inc. has caused this Addendum to be executed by its duly-authorized officer, and Optionee has executed this Addendum, all as of the Effective Date specified below. PHASE METRICS, INC. By: _____________________________________ Title: __________________________________ _________________________________________ OPTIONEE EFFECTIVE DATE: _____________________, 1996 2. EX-10.10 14 FORM OF STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.10 PHASE METRICS, INC. STOCK PURCHASE AGREEMENT AGREEMENT made as of this_______ day of______ 19___ , by and among Phase Metrics, Inc., a California corporation, _________________________, Optionee under the Corporation's 1995 Stock Option Plan, and __________________, Optionee's spouse. All capitalized terms in this Agreement shall have the meaning assigned to them in this Agreement or in the attached Appendix. A. EXERCISE OF OPTION 1. EXERCISE. Optionee hereby purchases ________ shares of Common Stock (the "Purchased Shares") pursuant to that certain option (the "Option") granted Optionee on ____________________, 199__ (the "Grant Date") to purchase up to _______________ shares of Common Stock under the Plan at the exercise price of $______ per share (the "Exercise Price"). 2. PAYMENT. Concurrently with the delivery of this Agreement to the Corporation, Optionee shall pay the Exercise Price for the Purchased Shares in accordance with the provisions of the Option Agreement and shall deliver whatever additional documents may be required by the Option Agreement as a condition for exercise, together with a duly-executed blank Assignment Separate from Certificate (in the form attached hereto as Exhibit I) with respect to the Purchased Shares. 3. SHAREHOLDER RIGHTS. Until such time as the Corporation exercises the Repurchase Right, the First Refusal Right or the Special Purchase Right, Optionee (or any successor in interest) shall have all the rights of a shareholder (including voting, dividend and liquidation rights) with respect to the Purchased Shares, subject, however, to the transfer restrictions of Articles B and C. B. SECURITIES LAW COMPLIANCE 1. RESTRICTED SECURITIES. The Purchased Shares have not been registered under the 1933 Act and are being issued to Optionee in reliance upon the exemption from such registration provided by SEC Rule 701 for stock issuances under compensatory benefit plans such as the Plan. Optionee hereby confirms that Optionee has been informed that the Purchased Shares are restricted securities under the 1933 Act and may not be resold or transferred unless the Purchased Shares are first registered under the Federal securities laws or unless an exemption from such registration is available. Accordingly, Optionee hereby acknowledges that Optionee is prepared to hold the Purchased Shares for an indefinite period and that Optionee is aware that 2 SEC Rule 144 issued under the 1933 Act which exempts certain resales of unrestricted securities is not presently available to exempt the resale of the Purchased Shares from the registration requirements of the 1933 Act. 2. RESTRICTIONS ON DISPOSITION OF PURCHASED SHARES. Optionee shall make no disposition of the Purchased Shares (other than a Permitted Transfer) unless and until there is compliance with all of the following requirements: (i) Optionee shall have provided the Corporation with a written summary of the terms and conditions of the proposed disposition. (ii) Optionee shall have complied with all requirements of this Agreement applicable to the disposition of the Purchased Shares. (iii) Optionee shall have provided the Corporation with written assurances in the form attached as Exhibit II to this Agreement. (iv) Optionee shall have provided the Corporation with written assurances, in form and substance satisfactory to the Corporation, that the proposed disposition will not result in the contravention of any transfer restrictions applicable to the Purchased Shares pursuant to the provisions of the Rules of the California Corporations Commissioner identified in Paragraph B.4. The Corporation shall not be required (i) to transfer on its books any Purchased Shares which have been sold or transferred in violation of the provisions of this Agreement or (ii) to treat as the owner of the Purchased Shares, or otherwise to accord voting, dividend or liquidation rights to, any transferee to whom the Purchased Shares have been transferred in contravention of this Agreement. 3. RESTRICTIVE LEGENDS. The stock certificates for the Purchased Shares shall be endorsed with one or more of the following restrictive legends: (i) "The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares may not be sold or offered for sale in the absence of (a) an effective registration statement for the shares under such Act, (b) a `no action' letter of the Securities and Exchange Commission with respect to such sale or offer or (c) satisfactory assurances to the Corporation that registration under such Act is not required with respect to such sale or offer." (ii) "It is unlawful to consummate a sale or transfer of this security, or any interest therein, or to receive any consideration therefor, without the prior written consent of the Commissioner of Corporations of the State of California, except as permitted in the Commissioner's Rules." 2. 3 (iii) "The shares represented by this certificate are subject to certain repurchase rights and rights of first refusal granted to the Corporation and accordingly may not be sold, assigned, transferred, encumbered, or in any manner disposed of except in conformity with the terms of a written agreement dated _______, 199__ between the Corporation and the registered holder of the shares (or the predecessor in interest to the shares). A copy of such agreement is maintained at the Corporation's principal corporate offices." 4. RECEIPT OF COMMISSIONER RULES. Optionee hereby acknowledges receipt of a copy of Section 260.141.11 of the Rules of the California Corporations Commissioner, a copy of which is attached as Exhibit III to this Agreement. C. TRANSFER RESTRICTIONS 1. RESTRICTION ON TRANSFER. Except for any Permitted Transfer, Optionee shall not transfer, assign, encumber or otherwise dispose of any of the Purchased Shares which are subject to the Repurchase Right. In addition, Purchased Shares which are released from the Repurchase Right shall not be transferred, assigned, encumbered or otherwise disposed of in contravention of the First Refusal Right, the Market Stand-Off or the Special Purchase Right. 2. TRANSFEREE OBLIGATIONS. Each person (other than the Corporation) to whom the Purchased Shares are transferred by means of a Permitted Transfer must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Corporation that such person is bound by the provisions of this Agreement and that the transferred shares are subject to (i) the Repurchase Right, (ii) the First Refusal Right and (iii) the Market Stand-Off, to the same extent such shares would be so subject if retained by Optionee. 3. MARKET STAND-OFF. (a) In connection with any underwritten public offering by the Corporation of its equity securities pursuant to an effective registration statement filed under the 1933 Act, including the Corporation's initial public offering, Owner shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any Purchased Shares without the prior written consent of the Corporation or its underwriters. Such restriction (the "Market Stand-Off") shall be in effect for such period of time from and after the effective date of the final prospectus for the offering as may be requested by the Corporation or such underwriters. In no event, however, shall such period exceed one hundred eighty (180) days and the Market Stand-Off shall in all events terminate two (2) years after the effective date of the Corporation's initial public offering. (b) Owner shall be subject to the Market Stand-Off provided and only if the officers and directors of the Corporation are also subject to similar restrictions. 3. 4 (c) Any new, substituted or additional securities which are by reason of any Recapitalization or Reorganization distributed with respect to the Purchased Shares shall be immediately subject to the Market Stand-Off, to the same extent the Purchased Shares are at such time covered by such provisions. (d) In order to enforce the Market Stand-Off, the Corporation may impose stop-transfer instructions with respect to the Purchased Shares until the end of the applicable stand-off period. D. REPURCHASE RIGHT 1. GRANT. The Corporation is hereby granted the right (the "Repurchase Right"), exercisable at any time during the sixty (60)-day period following the date Optionee ceases for any reason other than death to remain in Service or (if later) during the sixty (60)-day period following the execution date of this Agreement, to repurchase at the Exercise Price all or, at the discretion of the Corporation and with the consent of Optionee, any portion of the Purchased Shares in which Optionee is not, at the time of his or her cessation of Service, vested in accordance with the Vesting Schedule (such shares to be hereinafter referred to as the "Unvested Shares"). 2. EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall be exercisable by written notice delivered to each Owner of the Unvested Shares prior to the expiration of the sixty (60)-day exercise period. The notice shall indicate the number of Unvested Shares to be repurchased and the date on which the repurchase is to be effected, such date to be not more than thirty (30) days after the date of such notice. The certificates representing the Unvested Shares to be repurchased shall be delivered to the Corporation prior to the close of business on the date specified for the repurchase. Concurrently with the receipt of such stock certificates, the Corporation shall pay to Owner, in cash or cash equivalents (including the cancellation of any purchase-money indebtedness), an amount equal to the Exercise Price previously paid for the Unvested Shares which are to be repurchased from Owner. 3. TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right shall terminate with respect to any Unvested Shares for which it is not timely exercised under Paragraph D.2. In addition, the Repurchase Right shall terminate and cease to be exercisable with respect to any and all Purchased Shares in which Optionee vests in accordance with the Vesting Schedule. All Purchased Shares as to which the Repurchase Right lapses shall, however, remain subject to (i) the First Refusal Right, (ii) the Market Stand-Off, and (iii) the Special Purchase Right. 4. AGGREGATE VESTING LIMITATION. If the Option is exercised in more than one increment so that Optionee is a party to one or more other Stock Purchase Agreements (the "Prior Purchase Agreements") which are executed prior to the date of this Agreement, then the total number of Purchased Shares as to which Optionee shall be deemed to have a fully-vested interest under this Agreement and all Prior Purchase Agreements shall not exceed in the aggregate 4. 5 the number of Purchased Shares in which Optionee would otherwise at the time be vested, in accordance with the Vesting Schedule, had all the Purchased Shares (including those acquired under the Prior Purchase Agreements) been acquired exclusively under this Agreement. 5. RECAPITALIZATION. Any new, substituted or additional securities or other property (including cash paid other than as a regular cash dividend) which is by reason of any Recapitalization distributed with respect to the Purchased Shares shall be immediately subject to the Repurchase Right, but only to the extent the Purchased Shares are at the time covered by such right. Appropriate adjustments to reflect such distribution shall be made to the number and/or class of Purchased Shares subject to this Agreement and to the price per share to be paid upon the exercise of the Repurchase Right in order to reflect the effect of any such Recapitalization upon the Corporation's capital structure; provided, however, that the aggregate purchase price shall remain the same. 6. CORPORATE TRANSACTION. (a) Immediately prior to the consummation of any Corporate Transaction, the Repurchase Right shall automatically lapse in its entirety, except to the extent the Repurchase Right is assigned to the successor corporation (or parent thereof) in connection with the Corporate Transaction. (b) To the extent the Repurchase Right remains in effect following a Corporate Transaction, such right shall apply to the new capital stock or other property (including any cash payment) received in exchange for the Purchased Shares in consummation of the Corporate Transaction, but only to the extent the Purchased Shares are at the time covered by such right. Appropriate adjustments shall be made to the price per share payable upon exercise of the Repurchase Right to reflect the effect of the Corporate Transaction upon the Corporation's capital structure; provided, however, that the aggregate purchase price shall remain the same. E. RIGHT OF FIRST REFUSAL 1. GRANT. The Corporation is hereby granted the right of first refusal (the "First Refusal Right"), exercisable in connection with any proposed transfer of the Purchased Shares in which Optionee has vested in accordance with the Vesting Schedule. For purposes of this Article E, the term "transfer" shall include any sale, assignment, pledge, encumbrance or other disposition of the Purchased Shares intended to be made by Owner, but shall not include any Permitted Transfer. 2. NOTICE OF INTENDED DISPOSITION. In the event any Owner of Purchased Shares in which Optionee has vested desires to accept a bona fide third-party offer for the transfer of any or, at the discretion of the Corporation and with the consent of Owner, all of such shares (the Purchased Shares subject to such offer to be hereinafter referred to as the "Target Shares"), Owner shall promptly (i) deliver to the Corporation written notice (the "Disposition Notice") of the terms of the offer, including the purchase price and the identity of the third-party offeror, and 5. 6 (ii) provide satisfactory proof that the disposition of the Target Shares to such third-party offeror would not be in contravention of the provisions set forth in Articles B and C. 3. EXERCISE OF THE FIRST REFUSAL RIGHT. The Corporation shall, for a period of twenty-five (25) days following receipt of the Disposition Notice, have the right to repurchase any or all of the Target Shares subject to the Disposition Notice upon the same terms as those specified therein or upon such other terms (not materially different from those specified in the Disposition Notice) to which Owner consents. Such right shall be exercisable by delivery of written notice (the "Exercise Notice") to Owner prior to the expiration of the twenty-five (25)-day exercise period. If such right is exercised with respect to all the Target Shares, then the Corporation shall effect the repurchase of such shares, including payment of the purchase price, not more than five (5) business days after delivery of the Exercise Notice; and at such time the certificates representing the Target Shares shall be delivered to the Corporation. Should the purchase price specified in the Disposition Notice be payable in property other than cash or evidences of indebtedness, the Corporation shall have the right to pay the purchase price in the form of cash equal in amount to the value of such property. If Owner and the Corporation cannot agree on such cash value within ten (10) days after the Corporation's receipt of the Disposition Notice, the valuation shall be made by an appraiser of recognized standing selected by Owner and the Corporation or, if they cannot agree on an appraiser within twenty (20) days after the Corporation's receipt of the Disposition Notice, each shall select an appraiser of recognized standing and the two (2) appraisers shall designate a third appraiser of recognized standing, whose appraisal shall be determinative of such value. The Corporation shall bear the cost of such appraisal. The closing shall then be held on the later of (i) the fifth (5th) business day following delivery of the Exercise Notice or (ii) the fifth (5th) business day after such valuation shall have been made. 4. NON-EXERCISE OF THE FIRST REFUSAL RIGHT. In the event the Exercise Notice is not given to Owner prior to the expiration of the twenty-five (25)-day exercise period, Owner shall have a period of thirty (30) days thereafter in which to sell or otherwise dispose of the Target Shares to the third-party offeror identified in the Disposition Notice upon terms (including the purchase price) no more favorable to such third-party offeror than those specified in the Disposition Notice; provided, however, that any such sale or disposition must not be effected in contravention of the provisions of Articles B and C. The third-party offeror shall acquire the Target Shares free and clear of the Repurchase Right and the First Refusal Right, but the acquired shares shall remain subject to the provisions of Article B and the Market Stand-Off. In the event Owner does not effect such sale or disposition of the Target Shares within the specified thirty (30)-day period, the First Refusal Right shall continue to be applicable to any subsequent disposition of the Target Shares by Owner until such right lapses. 5. PARTIAL EXERCISE OF THE FIRST REFUSAL RIGHT. In the event the Corporation makes a timely exercise of the First Refusal Right with respect to a portion, but not all, of the Target Shares specified in the Disposition Notice, Owner shall have the option, exercisable by written notice to the Corporation delivered within five (5) business days after Owner's receipt 6. 7 of the Exercise Notice, to effect the sale of the Target Shares pursuant to either of the following alternatives: (i) sale or other disposition of all the Target Shares to the third-party offeror identified in the Disposition Notice, but in full compliance with the requirements of Paragraph E.4, as if the Corporation did not exercise the First Refusal Right; or (ii) sale to the Corporation of the portion of the Target Shares which the Corporation has elected to purchase, such sale to be effected in substantial conformity with the provisions of Paragraph E.3. The First Refusal Right shall continue to be applicable to any subsequent disposition of the remaining Target Shares until such right lapses. Failure of Owner to deliver timely notification to the Corporation shall be deemed to be an election by Owner to sell the Target Shares pursuant to alternative (i) above. 6. RECAPITALIZATION/REORGANIZATION. (a) Any new, substituted or additional securities or other property which is by reason of any Recapitalization distributed with respect to the Purchased Shares shall be immediately subject to the First Refusal Right, but only to the extent the Purchased Shares are at the time covered by such right. (b) In the event of a Reorganization, the First Refusal Right shall remain in full force and effect and shall apply to the new capital stock or other property received in exchange for the Purchased Shares in consummation of the Reorganization, but only to the extent the Purchased Shares are at the time covered by such right. 7. LAPSE. The First Refusal Right shall lapse upon the earliest to occur of (i) the first date on which shares of the Common Stock are held of record by more than five hundred (500) persons, (ii) a determination is made by the Board that a public market exists for the outstanding shares of Common Stock or (iii) a firm commitment underwritten public offering, pursuant to an effective registration statement under the 1933 Act, covering the offer and sale of the Common Stock in the aggregate amount of at least ten million dollars ($10,000,000). However, the Market Stand-Off shall continue to remain in full force and effect following the lapse of the First Refusal Right. F. MARITAL DISSOLUTION OR LEGAL SEPARATION 1. GRANT. In connection with the dissolution of Optionee's marriage or the legal separation of Optionee and Optionee's spouse, the Corporation shall have the right (the "Special Purchase Right") to purchase from Optionee's spouse, in accordance with the provisions of Paragraph F.3, all or, at the discretion of the Corporation and with the consent of Optionee's 7. 8 spouse, any portion of the Purchased Shares which would otherwise be awarded to such spouse in settlement of any community property or other marital property rights such spouse may have in such shares. 2. NOTICE OF DECREE OR AGREEMENT. Optionee shall promptly provide the Corporation with written notice (the "Dissolution Notice") of (i) the entry of any judicial decree or order resolving the property rights of Optionee and Optionee's spouse in connection with their marital dissolution or legal separation or (ii) the execution of any contract or agreement relating to the distribution or division of such property rights. The Dissolution Notice shall be accompanied by a copy of the actual decree or order of dissolution or contract or agreement between Optionee and Optionee's spouse which provides for the award to the spouse of one or more Purchased Shares in settlement of any community property or other marital property rights such spouse may have in such shares. 3. EXERCISE OF THE SPECIAL PURCHASE RIGHT. The Special Purchase Right shall be exercisable by delivery of written notice (the "Purchase Notice") to Optionee and Optionee's spouse within thirty (30) days after the Corporation's receipt of the Dissolution Notice. The Purchase Notice shall indicate the number of shares to be purchased by the Corporation, the date such purchase is to be effected (such date to be not less than five (5) business days, nor more than ten (10) business days, after the date of the Purchase Notice) and the Fair Market Value to be paid for such Purchased Shares. Optionee (or Optionee's spouse, to the extent such spouse has physical possession of the Purchased Shares) shall, prior to the close of business on the date specified for the purchase, deliver to the Corporation the certificates representing the shares to be purchased. The Corporation shall, concurrently with the receipt of the stock certificates, pay to Optionee's spouse (in cash or cash equivalents) an amount equal to the higher of the Exercise Price or the Fair Market Value of the Purchased Shares on the date specified for the purchase, such Fair Market Value to be set forth in the Purchase Notice. If Optionee's spouse does not agree with the Fair Market Value specified for the shares in the Purchase Notice, then the spouse shall promptly notify the Corporation in writing of such disagreement and the fair market value of such shares shall thereupon be determined by an appraiser of recognized standing selected by the Corporation and the spouse. If they cannot agree on an appraiser within twenty (20) days after the date of the Purchase Notice, each shall select an appraiser of recognized standing, and the two (2) appraisers shall designate a third appraiser of recognized standing whose appraisal shall be determinative of such value. The Corporation shall bear the cost of the appraisal. The closing shall then be held on the fifth (5th) business day following the completion of such appraisal; provided, however, that if the appraised value is more than twenty-five percent (25%) greater than the Fair Market Value specified for the shares in the Purchase Notice, the Corporation shall have the right, exercisable prior to the expiration of such five (5) business-day period, to rescind the exercise of the Special Purchase Right and thereby revoke its election to purchase the shares awarded to the spouse. In the event the Corporation so revokes its election, the Corporation shall bear the entire cost of the appraisal. 8. 9 4. LAPSE. The Special Purchase Right shall lapse upon the earlier to occur of (i) the lapse of the First Refusal Right or (ii) the expiration of the exercise period specified in Paragraph F.3, to the extent the Special Purchase Right is not timely exercised in accordance with such paragraph. G. SPECIAL TAX ELECTION The acquisition of the Purchased Shares may result in adverse tax consequences which may be avoided by filing an election under Code Section 83(b). Such election must be filed within thirty (30) days after the date of this Agreement. A description of the tax consequences applicable to the acquisition of the Purchased Shares and the form for making the Code Section 83(b) election are set forth in Exhibit IV. OPTIONEE SHOULD CONSULT WITH HIS OR HER TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES OF ACQUIRING THE PURCHASED SHARES AND THE ADVANTAGES AND DISADVANTAGES OF FILING THE CODE SECTION 83(b) ELECTION. OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS OR HER BEHALF. H. GENERAL PROVISIONS 1. ASSIGNMENT. The Corporation may assign the Repurchase Right and/or the First Refusal Right to any person or entity selected by the Board, including (without limitation) one or more shareholders of the Corporation. The assignee of the Repurchase Right must make a cash payment to the Corporation in an amount equal to the excess (if any) of (i) the Fair Market Value of the Purchased Shares at the time subject to the assigned Repurchase Right over (ii) the aggregate repurchase price payable for the Purchased Shares. 2. NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement or in the Plan shall confer upon Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Optionee) or of Optionee, which rights are hereby expressly reserved by each, to terminate Optionee's Service at any time for any reason, with or without cause. 3. NOTICES. Any notice required to be given under this Agreement shall be in writing and shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, registered or certified, postage prepaid and properly addressed to the party entitled to such notice at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by ten (10) days advance written notice under this paragraph to all other parties to this Agreement. 9. 10 4. NO WAIVER. The failure of the Corporation in any instance to exercise the Repurchase Right, the First Refusal Right or the Special Purchase Right shall not constitute a waiver of any other repurchase rights and/or rights of first refusal that may subsequently arise under the provisions of this Agreement or any other agreement between the Corporation and Optionee or Optionee's spouse. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. 5. CANCELLATION OF SHARES. If the Corporation shall make available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Purchased Shares to be repurchased in accordance with the provisions of this Agreement, then from and after such time, the person from whom such shares are to be repurchased shall no longer have any rights as a holder of such shares (other than the right to receive payment of such consideration in accordance with this Agreement). Such shares shall be deemed purchased in accordance with the applicable provisions hereof, and the Corporation shall be deemed the owner and holder of such shares, whether or not the certificates therefor have been delivered as required by this Agreement. I. MISCELLANEOUS PROVISIONS 1. OPTIONEE UNDERTAKING. Optionee hereby agrees to take whatever additional action and execute whatever additional documents the Corporation may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either Optionee or the Purchased Shares pursuant to the provisions of this Agreement. 2. AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the entire contract between the parties hereto with regard to the subject matter hereof. This Agreement is made pursuant to the provisions of the Plan and shall in all respects be construed in conformity with the terms of the Plan. 3. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and upon Optionee, Optionee's assigns and the legal representatives, heirs and legatees of Optionee's estate, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms hereof. 4. POWER OF ATTORNEY. Optionee's spouse hereby appoints Optionee his or her true and lawful attorney in fact, for him or her and in his or her name, place and stead, and for his or her use and benefit, to agree to any amendment or modification of this Agreement and to execute such further instruments and take such further actions as may reasonably be necessary to carry out the intent of this Agreement. Optionee's spouse further gives and grants unto Optionee as his or her attorney in fact full power and authority to do and perform every act necessary and proper to be done in the exercise of any of the foregoing powers as fully as he or she might or could do if personally present, with full power of substitution and revocation, hereby 10. 11 ratifying and confirming all that Optionee shall lawfully do and cause to be done by virtue of this power of attorney. 5. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California without resort to that State's conflict-of-laws rules. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first indicated above. PHASE METRICS, INC. By: ---------------------------------------- Title: ------------------------------------- Address: ----------------------------------- ------------------------------------------- ------------------------------------------- OPTIONEE Address: ----------------------------------- ------------------------------------------- 11. 12 SPOUSAL ACKNOWLEDGMENT The undersigned spouse of Optionee has read and hereby approves the foregoing Stock Purchase Agreement. In consideration of the Corporation's granting Optionee the right to acquire the Purchased Shares in accordance with the terms of such Agreement, the undersigned hereby agrees to be irrevocably bound by all the terms of such Agreement, including (without limitation): (i) the right of the Corporation (or its assigns) to repurchase any Purchased Shares in which Optionee is not vested at the time of cessation of Service, and (ii) the right of the Corporation (or its assigns) to purchase any and all interest or right the undersigned may otherwise have in the Purchased Shares pursuant to community property laws or other marital property rights. ------------------------------------------- OPTIONEE'S SPOUSE Address: 12. 13 APPENDIX The following definitions shall be in effect under the Agreement: A. AGREEMENT shall mean this Stock Purchase Agreement. B. BOARD shall mean the Corporation's Board of Directors. C. CODE shall mean the Internal Revenue Code of 1986, as amended. D. COMMON STOCK shall mean the Corporation's common stock. E. CORPORATE TRANSACTION shall mean either of the following shareholder-approved transactions: (i) a merger or consolidation in which one hundred percent (100%) of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. F. CORPORATION shall mean Phase Metrics, Inc., a California corporation. G. DISPOSITION NOTICE shall have the meaning assigned to such term in Paragraph E.2. H. DISSOLUTION NOTICE shall have the meaning assigned to such term in Paragraph F.2. I. EXERCISE NOTICE shall have the meaning assigned to such term in Paragraph E.3. J. EXERCISE PRICE shall have the meaning assigned to such term in Paragraph A.1. K. FAIR MARKET VALUE of a share of Common Stock on any relevant date, prior to the initial public offering of the Common Stock, shall be determined by the Plan Administrator after taking into account such factors as it shall deem appropriate, including the Corporation's earnings history, book value and prospects in the light of market conditions generally. L. FIRST REFUSAL RIGHT shall mean the right granted to the Corporation in accordance with Article E. M. GRANT DATE shall have the meaning assigned to such term in Paragraph A.1. A-1. 14 N. GRANT NOTICE shall mean the Notice of Grant of Stock Option pursuant to which Optionee has been informed of the basic terms of the Option. O. INCENTIVE OPTION shall mean an option which satisfies the requirements of Code Section 422. P. MARKET STAND-OFF shall mean the market stand-off restriction specified in Paragraph C.3. Q. 1933 ACT shall mean the Securities Act of 1933, as amended. R. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended. S. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422. T. OPTION shall have the meaning assigned to such term in Paragraph A.1. U. OPTION AGREEMENT shall mean all agreements and other documents evidencing the Option. V. OPTIONEE shall mean the person to whom the Option is granted under the Plan. W. OWNER shall mean Optionee and all subsequent holders of the Purchased Shares who derive their chain of ownership through a Permitted Transfer from Optionee. X. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Y. PERMITTED TRANSFER shall mean (i) a gratuitous transfer of the Purchased Shares, provided and only if Optionee obtains the Corporation's prior written consent to such transfer, (ii) a transfer of title to the Purchased Shares effected pursuant to Optionee's will or the laws of intestate succession following Optionee's death or (iii) a transfer to the Corporation in pledge as security for any purchase-money indebtedness incurred by Optionee in connection with the acquisition of the Purchased Shares. Z. PLAN shall mean the Corporation's 1995 Stock Option Plan. AA. PLAN ADMINISTRATOR shall mean either the Board or a committee of Board members, to the extent the committee is at the time responsible for administration of the Plan. A-2. 15 AB. PRIOR PURCHASE AGREEMENT shall have the meaning assigned to such term in Paragraph D.4. AC. PURCHASE NOTICE shall have the meaning assigned to such term in Paragraph F.3. AD. PURCHASED SHARES shall have the meaning assigned to such term in Paragraph A.1. AE. RECAPITALIZATION shall mean any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the Corporation's outstanding Common Stock as a class without the Corporation's receipt of consideration. AF. REORGANIZATION shall mean any of the following transactions: (i) a merger or consolidation in which the Corporation is not the surviving entity, (ii) a sale, transfer or other disposition of all or substantially all of the Corporation's assets, (iii) a reverse merger in which the Corporation is the surviving entity but in which the Corporation's outstanding voting securities are transferred in whole or in part to a person or persons different from the persons holding those securities immediately prior to the merger, or (iv) any transaction effected primarily to change the state in which the Corporation is incorporated or to create a holding company structure. AG. REPURCHASE RIGHT shall mean the right granted to the Corporation in accordance with Article D. AH. SEC shall mean the Securities and Exchange Commission. AI. SERVICE shall mean the provision of services to the Corporation (or any Parent or Subsidiary) by an individual in the capacity of an employee, subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance, a non-employee member of the board of directors or a consultant. AJ. SPECIAL PURCHASE RIGHT shall mean the right granted to the Corporation in accordance with Article F. AK. SUBSIDIARY shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing A-3. 16 fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. AL. TARGET SHARES shall have the meaning assigned to such term in Paragraph E.2. AM. VESTING SCHEDULE shall mean the vesting schedule specified in the Grant Notice. AN. UNVESTED SHARES shall have the meaning assigned to such term in Paragraph D.1. A-4. 17 EXHIBIT I ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED ______________________ hereby sell(s), assign(s) and transfer(s) unto Phase Metrics, Inc. (the "Corporation"), ______________________ ( ______ ) shares of the Common Stock of the Corporation standing in his or her name on the books of the Corporation represented by Certificate No. _______________ herewith and do hereby irrevocably constitute and appoint ______________________ Attorney to transfer the said stock on the books of the Corporation with full power of substitution in the premises. Dated:_________ Signature ------------------------------- INSTRUCTION: Please do not fill in any blanks other than the signature line. Please sign exactly as you would like your name to appear on the issued stock certificate. The purpose of this assignment is to enable the Corporation to exercise the Repurchase Right without requiring additional signatures on the part of Optionee. 18 EXHIBIT II WRITTEN ASSURANCE IN CONNECTION WITH DISPOSITION OF PURCHASED SHARES I hereby notify you, Phase Metrics, Inc. (the "Company"), that I intend to sell _______ shares of the Company's Common Stock which I purchased upon exercise of an option granted to me under the Company's 1995 Stock Option Plan. I [am] [am not] an affiliate of the Company for the purposes of the Federal securities laws, and will accordingly effect the sale of the shares in accordance with the requirements of Rule 701 under the Securities Act of 1933, as amended. A-6. 19 EXHIBIT III SECTION 260.141.11 TITLE 10, CALIFORNIA ADMINISTRATIVE CODE 260.141.11 Restriction on Transfer. (a) The issuer of any security upon which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security at the time the certificate evidencing the security is delivered to the issuee or transferee. (b) It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except: (1) to the issuer; (2) pursuant to the order or process of any court; (3) to any person described in Subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules; (4) to the transferor's ancestors, descendants or spouse, or any custodian or trustee for the account of the transferor or the transferor's ancestors, descendants, or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferee's ancestors, descendants or spouse; (5) to holders of securities of the same class of the same issuer; (6) by way of gift or donation inter vivos or on death; (7) by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned; (8) to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or selling group; (9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner's written consent is obtained or under this rule not required; III-1. 20 (10) by way of a sale qualified under Sections 25111, 25112, 25113 or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification; (11) by a corporation to a wholly owned subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such corporation; (12) by way of an exchange qualified under Section 25111, 25112 or 25113 of the Code, provided that no order under Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification; (13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state; (14) to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state; or (15) by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed property law of another state if, in either such case, such person (i) discloses to potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser; (16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities; (17) by way of an offer and sale of outstanding securities in an issuer transaction that is subject to the qualification requirement of Section 25110 of the Code but exempt from that qualification requirement by subdivision (f) of Section 25102; provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section. (c) The certificates representing all such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows: "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." III-2. 21 EXHIBIT IV FEDERAL INCOME TAX CONSEQUENCES AND SECTION 83(B) TAX ELECTION I. FEDERAL INCOME TAX CONSEQUENCES AND SECTION 83(B) ELECTION FOR EXERCISE OF NON-STATUTORY OPTION. If the Purchased Shares are acquired pursuant to the exercise of a Non-Statutory Option, as specified in the Grant Notice, then under Code Section 83, the excess of the Fair Market Value of the Purchased Shares on the date any forfeiture restrictions applicable to such shares lapse over the Exercise Price paid for such shares will be reportable as ordinary income on the lapse date. For this purpose, the term "forfeiture restrictions" includes the right of the Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right. However, Optionee may elect under Code Section 83(b) to be taxed at the time the Purchased Shares are acquired, rather than when and as such Purchased Shares cease to be subject to such forfeiture restrictions. Such election must be filed with the Internal Revenue Service within thirty (30) days after the date of the Agreement. Even if the Fair Market Value of the Purchased Shares on the date of the Agreement equals the Exercise Price paid (and thus no tax is payable), the election must be made to avoid adverse tax consequences in the future. The form for making this election is attached as part of this exhibit. FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME BY OPTIONEE AS THE FORFEITURE RESTRICTIONS LAPSE. II. FEDERAL INCOME TAX CONSEQUENCES AND CONDITIONAL SECTION 83(B) ELECTION FOR EXERCISE OF INCENTIVE OPTION. If the Purchased Shares are acquired pursuant to the exercise of an Incentive Option, as specified in the Grant Notice, then the following tax principles shall be applicable to the Purchased Shares: (i) For regular tax purposes, no taxable income will be recognized at the time the Option is exercised. (ii) The excess of (a) the Fair Market Value of the Purchased Shares on the date the Option is exercised or (if later) on the date any forfeiture restrictions applicable to the Purchased Shares lapse over (b) the Exercise Price paid for the Purchased Shares will be includible in Optionee's taxable income for alternative minimum tax purposes. (iii) If Optionee makes a disqualifying disposition of the Purchased Shares, then Optionee will recognize ordinary income in the year of such disposition equal in amount to the excess of (a) the Fair Market Value of the Purchased Shares on the date the Option is exercised or (if later) on the date any forfeiture restrictions applicable to the Purchased Shares lapse over (b) the Exercise Price paid for the Purchased Shares. Any additional gain recognized upon the disqualifying disposition will be either short-term or long-term capital gain depending upon the period for which the Purchased Shares are held prior to the disposition. IV-1. 22 (iv) For purposes of the foregoing, the term "forfeiture restrictions" will include the right of the Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right. The term "disqualifying disposition" means any sale or other disposition 1 of the Purchased Shares within two (2) years after the Grant Date or within one (1) year after the exercise date of the Option. (v) In the absence of final Treasury Regulations relating to Incentive Options, it is not certain whether Optionee may, in connection with the exercise of the Option for any Purchased Shares at the time subject to forfeiture restrictions, file a protective election under Code Section 83(b) which would limit (a) Optionee's alternative minimum taxable income upon exercise and (b) Optionee's ordinary income upon a disqualifying disposition to the excess of the Fair Market Value of the Purchased Shares on the date the Option is exercised over the Exercise Price paid for the Purchased Shares. Accordingly, such election if properly filed will only be allowed to the extent the final Treasury Regulations permit such a protective election. Page 2 of the attached form for making the election should be filed with any election made in connection with the exercise of an Incentive Option. - -------- 1/ Generally, a disposition of shares purchased under an Incentive Option includes any transfer of legal title, including a transfer by sale, exchange or gift, but does not include a transfer to the Optionee's spouse, a transfer into joint ownership with right of survivorship if Optionee remains one of the joint owners, a pledge, a transfer by bequest or inheritance or certain tax free exchanges permitted under the Code. IV-2. 23 SECTION 83(B) ELECTION This statement is being made under Section 83(b) of the Internal Revenue Code, pursuant to Treas. Reg. Section 1.83-2. (1) The taxpayer who performed the services is: Name: Address: Taxpayer Ident. No.: (2) The property with respect to which the election is being made is ___________ shares of the common stock of Phase Metrics, Inc. (3) The property was issued on _____________, 199___. (4) The taxable year in which the election is being made is the calendar year 199____ . (5) The property is subject to a repurchase right pursuant to which the issuer has the right to acquire the property at the original purchase price if for any reason taxpayer's employment with the issuer is terminated. The issuer's repurchase right lapses in a series of annual and monthly installments over a five (5)-year period ending on . (6) The fair market value at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) is $ per share. (7) The amount paid for such property is $ _____________per share. (8) A copy of this statement was furnished to Phase Metrics, Inc. for whom taxpayer rendered the services underlying the transfer of property. (9) This statement is executed on _______________________, 199__. - ---------------------------------- ------------------------------------ Spouse (if any) Taxpayer This election must be filed with the Internal Revenue Service Center with which taxpayer files his or her Federal income tax returns and must be made within thirty (30) days after the execution date of the Stock Purchase Agreement. This filing should be made by registered or certified mail, return receipt requested. Optionee must retain two (2) copies of the completed form for filing with his or her Federal and state tax returns for the current tax year and an additional copy for his or her records. 24 The property described in the above Section 83(b) election is comprised of shares of common stock acquired pursuant to the exercise of an incentive stock option under Section 422 of the Internal Revenue Code (the "Code"). Accordingly, it is the intent of the Taxpayer to utilize this election to achieve the following tax results: 1. The purpose of this election is to have the alternative minimum taxable income attributable to the purchased shares measured by the amount by which the fair market value of such shares at the time of their transfer to the Taxpayer exceeds the purchase price paid for the shares. In the absence of this election, such alternative minimum taxable income would be measured by the spread between the fair market value of the purchased shares and the purchase price which exists on the various lapse dates in effect for the forfeiture restrictions applicable to such shares. The election is to be effective to the full extent permitted under the Code. 2. Section 421(a)(1) of the Code expressly excludes from income any excess of the fair market value of the purchased shares over the amount paid for such shares. Accordingly, this election is also intended to be effective in the event there is a "disqualifying disposition" of the shares, within the meaning of Section 421(b) of the Code, which would otherwise render the provisions of Section 83(a) of the Code applicable at that time. Consequently, the Taxpayer hereby elects to have the amount of disqualifying disposition income measured by the excess of the fair market value of the purchased shares on the date of transfer to the Taxpayer over the amount paid for such shares. Since Section 421(a) presently applies to the shares which are the subject of this Section 83(b) election, no taxable income is actually recognized for regular tax purposes at this time, and no income taxes are payable, by the Taxpayer as a result of this election. THIS PAGE 2 IS TO BE ATTACHED TO ANY SECTION 83(B) ELECTION FILED IN CONNECTION WITH THE EXERCISE OF AN INCENTIVE STOCK OPTION UNDER THE FEDERAL TAX LAWS. 2. 25 ADDENDUM TO STOCK PURCHASE AGREEMENT The following provisions are hereby incorporated into, and are hereby made a part of, that certain Stock Purchase Agreement attached as Exhibit B to the Notice of Stock Option Grant evidencing the stock option (the "Option") which the Corporation granted to Optionee on 11~ to purchase 15~ shares of the Corporation's Common Stock under the Corporation's 1995 Stock Option Plan at an exercise price of 14~ per share. All capitalized terms used in this Addendum, to the extent not otherwise specifically defined herein, shall have the meanings assigned to such terms in the Stock Purchase Agreement. INVOLUNTARY TERMINATION FOLLOWING CORPORATE TRANSACTION 1. Should Optionee cease Service by reason of an Involuntary Termination within twelve (12) months following a Corporate Transaction in which the acquisition price payable per share of Common Stock (determined on a fully-diluted basis as if all the Corporation's outstanding securities exercisable or convertible into Common Stock were in fact exercised or converted immediately prior to such Corporate Transaction) is an amount not less than the minimum price per share indicated in Paragraph 2 below for the fiscal year of the Corporation in which such Corporate Transaction occurs, then the Corporation's Repurchase Right shall, immediately upon such Involuntary Termination, lapse in its entirety and all the shares of Common Stock purchased or purchasable under the Option shall immediately vest. 2. The minimum acquisition price payable per share of Common Stock (determined on a fully-diluted basis in the manner indicated above) which will serve as a requisite condition under Paragraph 1 to the accelerated vesting of the shares of Common Stock purchased or purchasable under the Option shall be determined in accordance with the table below on the basis of the fiscal year of the Corporation in which the Corporate Transaction is effected:
Fiscal Year Minimum of Acquisition Price Acquisition Per Share ----------- --------- 1995 $7.00 1996 $10.00 1997 or later $14.00
3. For purposes of this Addendum, Optionee will be deemed to cease Service by reason of an Involuntary Termination if such cessation of Service occurs: 26 - involuntarily upon Optionee's dismissal or discharge by the Corporation for reasons other than fraud, any other intentional misconduct adversely affecting the business or affairs of the Corporation in a material manner or any other act of misconduct specified in Paragraph (5)(f) of the Option Agreement, or - voluntarily upon Optionee's resignation following (A) a change in Optionee's position with the Corporation which materially reduces Optionee's level of responsibility, (B) a reduction in Optionee's level of compensation (including base salary, fringe benefits and any non-discretionary and objective-standard incentive payment or bonus award) by more than twenty-five percent (25%) or (C) a relocation of Optionee's principal place of employment by more than fifty (50) miles from Optionee's principal place of employment immediately prior to the Corporate Transaction or Change in Control (as applicable), provided and only if such change, reduction or relocation is effected by the Corporation without Optionee's consent. IN WITNESS WHEREOF, Phase Metrics, Inc. has caused this Addendum to be executed by its duly-authorized officer, and Optionee has executed this Addendum, all as of the Effective Date specified below. PHASE METRICS, INC. By: ----------------------------------------- Title: -------------------------------------- -------------------------------------------- 2~ 1~, OPTIONEE EFFECTIVE DATE: --------------- 2. EX-10.11 15 SECURITYHOLDERS AGREEMENT DATED 11/23/1994 1 Exhibit 10.11 SECURITYHOLDERS AGREEMENT dated as of November 23, 1994 among DLJ MERCHANT BANKING PARTNERS, L.P., DLJ INTERNATIONAL PARTNERS, C.V., DLJ OFFSHORE PARTNERS, C.V., DLJ MERCHANT BANKING FUNDING, INC., DLJ CAPITAL CORPORATION, SPROUT GROWTH II, L.P., SPROUT CAPITAL VI, L.P., PM FUNDING, INC., ARTHUR J. CORMIER, JOHN F. SCHAEFER and PHASE METRICS, INC. 2 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 DEFINITIONS 1.1 Definitions.......................................................... 1 ARTICLE 2 CORPORATE GOVERNANCE 2.1 Composition of the Board............................................. 7 2.2 Removal.............................................................. 7 2.3 Vacancies............................................................ 7 2.4 Termination of Rights and Obligations................................ 8 2.5 Action by the Board.................................................. 8 2.6 Articles of Incorporation and Bylaws................................. 8 ARTICLE 3 RESTRICTIONS ON TRANSFER 3.1 General.............................................................. 8 3.2 Legend on Securities................................................ 10 3.3 Permitted Transferees................................................ 10 ARTICLE 4 RIGHTS OF FIRST REFUSAL; TAG ALONG RIGHTS; PREEMPTIVE RIGHTS; DRAG ALONG RIGHTS; TERMINATION AND INAPPLICABILITY OF PROVISIONS 4.1 Right of First Refusal; Tag along Rights............................. 10 4.2 Preemptive Rights.................................................... 14 4.3 Right to Compel Participation in Certain Transfers................... 15 4.4 Improper Transfer.................................................... 16 4.5 Termination of Agreement............................................. 16 4.6 Inapplicability of Transfer Restrictions and Corporate Governance Provisions to PM Funding, Inc........................................ 16
i 3 ARTICLE 5 REGISTRATION RIGHTS
PAGE ---- 5.1 Demand Registration.................................................. 16 5.2 Incidental Registration.............................................. 19 5.3 Holdback Agreements.................................................. 20 5.4 Registration Procedures.............................................. 20 5.5 Indemnification by the Issuer........................................ 23 5.6 Indemnification by Participating Securityholders..................... 23 5.7 Conduct of Indemnification Proceedings............................... 24 5.8 Contribution......................................................... 25 5.9 Participation in Public Offering..................................... 26 ARTICLE 6 CERTAIN COVENANTS AND AGREEMENTS 6.1 Confidentiality...................................................... 26 6.2 No Inconsistent Agreements........................................... 27 6.3 Agreement as Between PM Funding, Inc. and the Other DLJ Entities Regarding Conversion of the Notes.................................... 27 ARTICLE 7 MISCELLANEOUS 7.1 Entire Agreement..................................................... 27 7.2 Binding Effect; Benefit.............................................. 28 7.3 Assignability........................................................ 28 7.4 Amendment; Waiver; Termination....................................... 28 7.5 Exclusive Financial Advisor and Investment Banking Advisor........... 28 7.6 Certain Requirements In Connection with Conversion of Shares of Series B Preferred Stock............................................. 29 7.7 Notices.............................................................. 29 7.8 Headings............................................................. 31 7.9 Counterparts......................................................... 31 7.10 Applicable Law....................................................... 31 7.11 Specific Enforcement................................................. 31 7.12 Consent to Jurisdiction.............................................. 31
ii 4 SECURITYHOLDERS AGREEMENT AGREEMENT dated as of November 23, 1994 among DLJ Merchant Banking Partners, L.P., DLJ International Partners, C.V., DLJ Offshore Partners, C.V., DLJ Merchant Banking Funding, Inc., DLJ Capital Corporation, Sprout Growth II, L.P., Sprout Capital VI, L.P., PM Funding, Inc., a Delaware corporation (each of the foregoing, a "DLJ Entity", and collectively, the "DLJ Entities"), Arthur J. Cormier ("Cormier"), John F. Schaefer ("Schaefer") and Phase Metrics, Inc. (the "Issuer"). W I T N E S S E T H: WHEREAS, pursuant to the Securities Purchase Agreement dated as of November 23, 1994 (the "Securities Purchase Agreement") among the DLJ Entities (other than PM Funding, Inc.), Cormier, Schaefer and the Issuer, certain of the parties hereto, concurrently with the execution of this Agreement, are acquiring securities of the Issuer; and WHEREAS, the parties hereto desire to enter into this Agreement to govern certain of their rights, duties and obligations after consummation of the transactions contemplated by the Securities Purchase Agreement and the Bridge Securities Purchase Agreement; The parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1. Definitions. (a) The following terms, as used herein, have the following meanings: "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with such Person, provided that no securityholder of the Issuer shall be deemed an Affiliate of any other serurityholder solely by reason of any investment in the Issuer. For the purpose of this definition, the term "control" (including with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "Affiliated Employee Benefit Trust" means any trust that is a successor to the assets held by a trust established under an employee benefit plan subject to ERISA or any other trust established directly or indirectly under such plan or any other such plan having the same sponsor. 5 "Allowable Transfer Amount" shall mean, as to Schaefer or Cormier, as the case may be, at any time in any given calendar year, that number of shares of Common Stock that equals the excess, if any, of (i) 25% of the shares of Fully Diluted Common Stock owned by such individual on the date hereof over (ii) the aggregate number of shares of Fully Diluted Common Stock theretofore transferred (other than to permitted Transferees) by such individual up to such time in such calendar year, provided that the Allowable Transfer Amount of either such individual shall equal zero at such point as such individual shall have transferred in aggregate after the date hereof (other than to permitted Transferees) 50% of the shares of Fully Diluted Common Stock owned by him on the date hereof (it being understood that all such determinations shall be made taking into account any adjustments in accordance with the terms of the applicable securities). "Benchmark Shares" means shares of Common Stock sold or proposed to be sold by the DLJ Entities (other than to their permitted Transferees) subsequent to the Closing Date until the aggregate number of shares of Common Stock so sold or proposed to be sold by the DLJ Entities (other than as aforesaid) equals 225,000 (taking into account any stock dividend, stock split or reverse stock split subsequent to the Closing Date). "Board" means the board of directors of the Issuer. "Bridge Securities Purchase Agreement" means the Bridge Securities Purchase Agreement dated as of the date hereof between the Issuer and PM Funding, Inc. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "Common Stock" shall have the meaning set forth in the Securities Purchase Agreement. "Equity Securities" means Common Stock, securities convertible into or exchangeable for Common Stock and options, warrants or other rights to acquire Common Stock. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Exchange Act" means the Securities Exchange Act, as amended. "Fully Diluted" means, with respect to Common Stock and without duplication, all outstanding shares and all shares issuable in respect of securities convertible into or exchangeable for Common Stock, stock appreciation rights or options, warrants and other irrevocable rights to purchase or subscribe for Common Stock or securities convertible into or exchangeable for Common Stock and any Person shall be deemed to own such number of Fully Diluted shares of Common Stock as such Person has the right to acquire from any other Person (including the Issuer). 2 6 "Initial Public Offering" means the initial sale after the date hereof of Common Stock pursuant to an effective registration statement under the Securities Act (other than a registration statement on Form S-8 or any successor form). "Notes" shall have the meaning set forth in the Securities Purchase Agreement. "Other Securityholders" means all Securityholders other than any DLJ Entity, and their respective permitted Transferees. "Percentage Ownership" means, with respect to any Securityholder or any group of Securityholders at any time, (i) the number of shares of Fully Diluted Common Stock that such Securityholder or group of Securityholders owns at such time, divided by (ii) the total number of shares of Fully Diluted Common Stock at such time. "Permitted Transferee" means: (i) in the case of any DLJ Entity, (A) any other DLJ Entity, (B) any general or limited partner of any such entity (a "DLJ Partner"), and any corporation, partnership, Affiliated Employee Benefit Trust or other entity which is an Affiliate of any DLJ Partner (collectively, the "DLJ Affiliates"), (C) any managing director, general partner, director, limited partner, officer or employee of such DLJ Entity or a DLJ Affiliate, or the heirs, executors, administrators, testamentary trustees, legatees or beneficiaries of any of the foregoing Persons referred to in this clause (C) (collectively, "DLJ Associates"), (D) any trust, the beneficiaries of which, or any corporation, limited liability company or partnership, the stockholders, members or general or limited partners of which, include only such DLJ Entity, DLJ Affiliates, DLJ Associates, their spouses or their lineal descendants and (E) a voting trustee for one or more DLJ Entities, DLJ Affiliates or DLJ Associates under the terms of a voting trust desired to conform with the requirements of the Insurance Law of the State of New York; and (ii) in the case of any Other Securityholder, (A) the Issuer, (B) (x) such Securityholder's spouse or (y) such Securityholder's siblings or lineal descendants, so long as such Securityholder retains the right to vote such Securities, (C) a Person who acquires Securities from any such Securityholder pursuant to a will or the laws of descent and distribution, and (D) any trust the beneficiaries of which consist only of such Securityholders and/or such Securityholder's spouse, siblings and lineal descendants and (E) any Securityholder other than any DLJ Entity or its Permitted Transferees. "Person" means an individual, corporation, partnership, association, trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. 3 7 "Registrable Stock" means any shares of Common Stock until (i) a registration statement covering such shares of Common Stock has been declared effective by the SEC and such shares have been disposed of pursuant to such effective registration statement, (ii) such shares are sold under circumstances in which all of the applicable conditions of Rule 144 (or any similar provisions then in force) under the Securities Act are met or such shares may be sold pursuant to Rule 144(k) or (iii) such shares are otherwise transferred, the Issuer has delivered a new certificate or other evidence of ownership for such shares not bearing the legend required pursuant to this Agreement and such shares may be resold without subsequent registration under the Securities Act. "Registration Expenses" means (i) all registration and filing fees, (ii) fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Securities), (iii) printing expenses, (iv) internal expenses of the Issuer (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), (v) reasonable fees and disbursements of counsel for the Issuer and customary fees and expenses for independent certified public accountants retained by the Issuer (including expenses relating to any comfort letters or costs associated with the delivery by independent certified public accountants of a comfort letter or comfort letters requested pursuant to Section 5.4(h) hereof), (vi) the reasonable fees and expenses of any special experts retained by the Issuer in connection with such registration, (vii) reasonable fees and expenses of one counsel for the Securityholders participating in the offering, selected by the DLJ Entities, in the case of an offering in which any of the DLJ Entities participate, or selected by Cormier and Schaefer in any other case involving exercise of registration rights under Sections 5.1 or 5.2, (viii) fees and expenses in connection with any review of underwriting arrangements by the National Association of Securities Dealers, Inc. (the "NASD") including fees and expenses of any "qualified independent underwriter" and (ix) fees and disbursements of underwriters customarily paid by issuers or sellers of securities, but shall not include any underwriting fees, discounts or commissions attributable to the sale of Registrable Stock, or any out-of-pocket expenses (except as set forth in clause (vii) above) of the Securityholders or any fees and expenses of underwriter's counsel. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Securities" means Notes, shares of Common Stock, Series A Preferred Stock, Series B Preferred Stock, the Warrants, and other voting securities of the Issuer held by the Securityholders. "Securityholder" means each Person (other than the Issuer) who shall be a party to this Agreement, whether in connection with the execution and delivery hereof as of the date hereof, pursuant to Section 7.3 or otherwise, so long as such Person shall "beneficially own" (as such term is defined in Rule 13d-3 under the Exchange Act) any Securities. 4 8 "Series A Preferred Stock" shall have the meaning set forth in the Securities Purchase Agreement. "Series B Preferred Stock" shall have the meaning set forth in the Securities Purchase Agreement. "Sprout Entities" means DLJ Capital Corporation, Sprout Growth II, L.P. and Sprout Capital VI, L.P. "Subsidiary" means, with respect to any Person, any entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person. "Third Party" means a prospective purchaser of shares in an arm's-length transaction from a Securityholder where such purchaser is not a permitted Transferee of such Securityholder. "Underwritten Public Offering" means an underwritten public offering of Registrable Stock of the Issuer pursuant to an effective registration statement under the Securities Act. "Warrants" means the warrants exercisable to purchase Common Stock issued to PM Funding, Inc. pursuant to the Bridge Securities Purchase Agreement. (b) The term "DLJ Entities", to the extent such entities shall have transferred any of their Securities to "Permitted Transferees", shall mean the DLJ Entities and the Permitted Transferees of the DLJ Entities, taken together, and any right or action that may be taken at the election of the DLJ Entities may be taken at the election of the DLJ Entities, and such Permitted Transferees. (c) The term "other Securityholders", to the extent such shareholders shall have transferred any of their Securities to "Permitted Transferees", shall mean the other Securityholders and the Permitted Transferees of the other Securityholders, as the case may be, and any right or action that may be taken at the election of the other Securityholders may be taken at the election of the other Securityholders and the Permitted Transferees of the other Securityholders, as the case may be. (d) Each of the following terms is defined in the Section set forth opposite such term:
Term Section ---- ------- Aggregate Tag Amount 4.1(g)(i) Associate 2.1(a)
5 9
Term Section ---- ------- beneficially own 1.1(a) Cause 2.2 Confidential Information 6.1(b) control 1.1(a) Demand Registration 5.1(a) DLJ Affiliate 1.1(a) DLJ Associates 1.1(a) DLJ Entity 1.1(b) DLJ Non-Election 4.1(g)(v) DLJ Partner 1.1(a) DLJSC 7.5 Electing Individual 4.1(g)(v) Fifth Director 2.1 First Request Date 5.1(a) Holders 5.1(a)(ii) Incidental Registration 5.2(a) Indemnified Party 5.7 Indemnifying Party 5.7 Inspectors 5.4(g) Maximum Offering Size 5.1(d) NASD 1.1(a) Nominee 2.3(a) other Securityholder 1.1(c) Private Transaction 3.1(b) qualified independent underwriter 1.1(a) Records 5.4(g) Representatives 6.1(b) Restriction Termination Date 3.1(a) Section 3.1(c) Termination Date 3.1(c) Section 4.1 Offer 4.1(a) Section 4.1 Offer Notice 4.1(a) Section 4.1 Offer Price 4.1(a) Section 4.2 Notice 4.2 Section 4.3 Agreement 4.3(a) Section 4.3 Notice 4.3(a) Section 4.3 Notice Period 4.3(a) Section 4.3 Sale 4.3(a) Section 4.3 Sale Price 4.3(a) Selling Party 4.1(a) Selling Securityholder 5.1(a) Tag along Notice Period 4.1(g)(i) Tag along Right 4.1(g)(i) Tag along Sale 4.1(g)(i)
6 10
Term Section ---- ------- Tag along Seller 4.1(g)(i) Tagging Person 4.1(g)(i) transfer 3.1(a)
(e) Capitalized terms used herein and not otherwise defined herein shall have the meanings herein that are assigned to such terms in the Securities Purchase Agreement. ARTICLE 2 CORPORATE GOVERNANCE 2.1 Composition of the Board. The Board shall consist of five members, of whom one shall be designated by DLJ Merchant Banking Partners, L.P., one shall be designated by Sprout Growth II, L.P., one shall be designated by Schaefer, one shall be designated by Cormier, and one shall be an individual (the "Fifth Director") designated by Cormier and Schaefer and acceptable to the DLJ Entities, which individual is neither an "Affiliate" nor an "Associate" (as those terms are used within the meaning of Rule 12b-2 of the General Rules and Regulations under the Exchange Act) of the DLJ Entities, Schaefer or Cormier. Each Securityholder entitled to vote for the election of directors to the Board agrees that it will vote its Securities or execute consents, as the case may be, and take all other necessary action (including causing the Issuer to call a special meeting of shareholders) in order to ensure that the composition of the Board is as set forth in this Section 2.1. 2.2 Removal. Each Securityholder agrees that if, at any time, it is then entitled to vote for the removal of directors of the Issuer, it will not vote any of its Securities in favor of the removal of any director who shall have been designated or nominated pursuant to Section 2.1 unless such removal shall be for Cause or the person entitled to designate or nominate such director shall have consented to such removal in writing; that any of the DLJ Entities, Cormier or Schaefer may remove, or vote its Securities in favor of the removal of, the Fifth Director. Removal for "Cause" shall mean removal of a director because of such director's (a) willful and continued failure to substantially perform his duties with the Issuer in his established position, (b) willful conduct which is significantly injurious to the Issuer, monetarily or otherwise, or (c) conviction for, or guilty plea to, a felony. Subject to Section 2.3, nothing contained in this Section 2.2 shall affect the right of any Securityholder to designate members of the Board pursuant to Section 2.1. 2.3 Vacancies. If, as a result of death, disability, retirement, resignation, removal (with or without Cause) or otherwise, there shall exist or occur any vacancy on the Board: (a) the Person entitled under Section 2.1 to designate or nominate such director whose death, disability, retirement, resignation or removal resulted in such vacancy, or its Permitted Transferees, may, subject to the provisions of Sections 2.1 and 2.4, designate another individual (the "Nominee") to fill such capacity and serve as a director of the Issuer; and 7 11 (b) each Securityholder then entitled to vote for the election of the Nominee as a director of the Issuer agrees that it will vote its Securities, or execute a written consent, as the case may be, in order to ensure that the Nominee be elected to the Board. 2.4 Termination of Rights and Obligations. The right to designate one or more members of the Board pursuant to this Article 2 shall terminate (i) as to Cormier, at such time as Cormier and his Permitted Transferees in the aggregate own and have the right to acquire less than 5% of the Fully Diluted Common Stock then outstanding, (ii) as to Schaefer, at such time as Schaefer and his Permitted Transferees in the aggregate own and have the right to acquire less than 5% of the Fully Diluted Common Stock then outstanding, (iii) as to Sprout Growth II, L.P., at such time as the DLJ Entities in the aggregate own and have the right to acquire less than 5% of the Fully Diluted Common Stock then outstanding, and (iv) as to DLJ Merchant Banking Partners, L.P., at such time as the DLJ Entities (other than PM Funding, Inc.) in the aggregate own and have the right to acquire less than 5% of the Fully Diluted Common Stock then outstanding. The obligations imposed on Securityholders to give effect to the rights to designate directors set forth in Section 2.1 shall terminate as to any Person when such Person's right to designate a director is terminated. 2.5 Action by the Board. A quorum of the Board shall consist initially of four directors. All actions of the Board shall require the affirmative vote of at least a majority of the directors at a duly convened meeting of the Board at which a quorum is present or the unanimous written consent of the Board; provided that, in the event there is a vacancy on the Board and an individual has been nominated to fill such vacancy, the first order of business shall be to fill such vacancy. 2.6 Articles of Incorporation and Bylaws. (a) The Articles of Incorporation and Bylaws of the Issuer, as in effect on the date hereof, are attached as Exhibits B and A, respectively, to the Securities Purchase Agreement. (b) Each Securityholder shall vote its Securities, and shall take all other actions necessary, to ensure that the Issuer's Articles of Incorporation and Bylaws facilitate and do not at any time conflict with any provision of this Agreement. ARTICLE 3 RESTRICTIONS ON TRANSFER 3.1 General. (a) Until the earlier of (i) the third anniversary of the Closing Date and (ii) the consummation of an Initial Public Offering (the earlier of such dates, the "Restriction Termination Date"), no Securityholder may, directly or indirectly, sell, assign, transfer, grant a participation in, pledge or otherwise dispose of ("transfer") any Securities (or solicit any offers to buy or otherwise acquire, or to take a pledge of, any of its Securities) except transfers permitted by Section 3.3; provided that (x) Schaefer may pledge his Securities pursuant to the terms of the Cormier-Schaefer Agreement as in effect on the date hereof or as amended, supplemented or modified with the prior consent of the DLJ 8 12 Entities and (y) subject to Section 4.1, transfers shall be permitted to a Third Party in a Private Transaction (as defined below) as part of a foreclosure proceeding pursuant to the Cormier-Schaefer Agreements (but only to the extent that such transfer to a Third Party is required by California law or is effected in order to maintain a claim for deficiency). (b) From and after the Restriction Termination Date, no Securityholder may transfer any Securities (or solicit any offers to buy or otherwise acquire, or to take a pledge of, any Securities) except, subject to Section 3.1(c), (i) transfers permitted by Section 3.3, (ii) transfers in a bona fide Underwritten Public Offering upon exercise of registration rights pursuant to Article 5, (iii) transfers pursuant to Rule 144 (or any successor provisions under the Securities Act), (iv) pledges by Schaefer pursuant to the terms of the Cormier-Schaefer Agreement as in effect on the date hereof or as amended, supplemented or modified with the prior consent of the DLJ Entities, (v) in the case of any DLJ Entity and subject to Section 4.1, transfers to any other Person in any Private Transaction (as defined below); provided that no Securities may be transferred pursuant to clause (v) to any Person unless such Person shall have agreed in writing to be bound by the terms of this Agreement applicable to such Securityholder; and provided further that no DLJ Entity may transfer any of its Notes or shares of Series B Preferred Stock to a Person other than a Permitted Transferee without the consent of Cormier and Schaefer, (vi) in the case of Schaefer and Cormier, subject to Section 4.1, transfers of shares of Common Stock to any other Person in any Private Transaction (excluding any transaction covered by clause (iv) above), provided that no Securities may be transferred to any Person pursuant to this clause (vi) unless such Person shall have agreed in writing to be bound by the terms of this Agreement applicable to such Securityholder, and (vii) in the case of any Other Securityholder, transfers pursuant to Section 4.3 hereof. As used herein, "Private Transaction" means any transfer not covered by clause (i), (ii), (iii) or (vii) above. (c) Notwithstanding anything else contained herein, except pursuant to Section 3.1(x) or (y), 3.3 or 4.3, no transfer of any shares of Common Stock may be made by Cormier or Schaefer at any time to the extent that the number of shares then sought to be transferred by Cormier or Schaefer, as the case may be, would exceed the Allowable Transfer Amount applicable to such individual at such time. From and after the Section 3.1(c) Termination Date (as defined below), (x) the restriction contained in the preceding sentence shall terminate as to transfers pursuant to Section 3.1(b)(ii) and 3.1(b)(iii), and (y) transfers of shares of Common Stock may be made by Cormier or Schaefer pursuant to Section 3.1(b)(ii) or 3.1(b)(iii) without regard to the Allowable Transfer Amount but only to the extent such transfers are otherwise in accordance with the provisions of Articles 3 and 4. The earlier of (i) the sixth anniversary of the date hereof and (ii) such time as the aggregate number of shares of Fully Diluted Common Stock held by the DLJ Entities is less than 25% of the aggregate number of shares of Fully Diluted Common Stock held by the DLJ Entities on the date hereof (determined taking into account any adjustments in accordance with the terms of the applicable securities) is referred to as the "Section 3.1(c) Termination Date." 9 13 (d) No Securityholder may transfer any Securities at any time except in compliance with applicable federal or state securities laws. 3.2 Legend on Securities. (a) In addition to any other legend that may be required, each certificate for Securities that is issued to any Securityholder shall bear a legend in substantially the following form: "THE ISSUER OF THIS SECURITY IS A STATUTORY CLOSE CORPORATION AS DESCRIBED UNDER SECTION 158 CALIFORNIA CORPORATIONS CODE. THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD EXCEPT IN COMPLIANCE THEREWITH. THIS SECURITY IS ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AS SET FORTH IN THE SECURITYHOLDERS AGREEMENT DATED AS OF NOVEMBER 23, 1994, COPIES OF WHICH MAY BE OBTAINED UPON REQUEST FROM PHASE METRICS, INC. AND ANY SUCCESSOR THERETO." (b) If any shares of Common Stock shall cease to be Registrable Stock, the Issuer shall, upon the written request of the holder thereof, issue to such holder a new certificate evidencing such shares without the first sentence of the legend required by Section 3.2(a) endorsed thereon. If any Securities cease to be subject to any and all restrictions on transfer set forth in this Agreement, the Issuer shall, upon the written request of the holder thereof, issue to such holder a new certificate evidencing such Securities without the second sentence of the legend required by Section 3.2(a) endorsed thereon. 3.3 Permitted Transferees. Notwithstanding anything in this Agreement to the contrary, any Securityholder may at any time transfer any or all of its Securities to one or more of its Permitted Transferees without the consent of the Board or any other Securityholder or group of Securityholders and without compliance with Section 4.1 so long as (a) such Permitted Transferee shall have agreed in writing to be bound by the terms of this Agreement and (b) the transfer to such Permitted Transferee is not in violation of applicable federal or state securities laws. ARTICLE 4 RIGHTS OF FIRST REFUSAL; TAG ALONG RIGHTS; PREEMPTIVE RIGHTS; DRAG ALONG RIGHTS; TERMINATION AND INAPPLICABILITY OF PROVISIONS 4.1 Right of First Refusal; Tag along Rights. (a) Subject to the provisions of Section 4.1(g), if any Securityholder receives from or otherwise negotiates with a Third Party in a Private Transaction an offer to purchase for cash (or, subject to clause (f), non-cash consideration) any or all of the Securities owned or held by such Securityholder that 10 14 is otherwise permitted under this Agreement (including, without limitation, Section 3.1 hereof) (a "Section 4.1 Offer") and such Securityholder (a "Selling Party") intends to pursue such sale of such Securities to such Third Party in such Private Transaction, such Selling Party shall provide the Issuer and each other Securityholder written notice of such Section 4.1 Offer (a "Section 4.1 Offer Notice"). The Section 4.1 Offer Notice shall identify the number and type of Securities subject to the Section 4.1 Offer, the cash price at which a sale is proposed to be made (the "Section 4.1 Offer Price") and all other material terms and conditions of the Section 4.1 Offer. (b) Subject to the provisions of Section 4.1(g), the receipt of a Section 4.1 Offer Notice by the Issuer and each other Securityholder from any Selling Party shall constitute an offer by such Selling Party to sell, to the Issuer and each other Securityholder, for cash (or, subject to clause (f), non-cash consideration) in whole and not in part, with the Issuer having priority with respect to the acceptance of the Section 4.1 Offer. If the Issuer does not accept the offer, in whole and not in part, in accordance herewith, then such offer may be accepted, in whole and not in part, at the Section 4.1 Offer Price by the other Securityholders on a pro rata basis based on each other Securityholder's Percentage Ownership (unless the other Securityholders shall agree to another allocation resulting in acceptance of the Section 4.1 Offer with respect to all Securities subject to the Section 4.1 Offer); provided that in the event there is an undersubscription by the other Securityholders at the end of the 45-day period referred to below, the unsubscribed Securities shall be apportioned among those other Securityholders whose written notice of acceptance referred to below specified a number of additional shares such Securityholder would like to purchase pursuant to this Section 4.1, which apportionment shall be on a pro rata basis among such Securityholders in accordance with such other Securityholders' Percentage Ownership. Such offer shall be irrevocable for 45 days after receipt of such Section 4.1 Offer Notice by the Issuer and each other Securityholder. During such 45-day period, subject to the Issuer's priority right of exercise as set forth above, each other Securityholder shall have the right to accept such offer (as provided above) within such 45-day period. The Section 4.1 Offer may be accepted by giving a written irrevocable notice of acceptance to such Selling Party prior to the expiration of such 45-day period. (c) The Issuer or the Securityholders, as the case may be, shall purchase for cash (or, subject to clause (f), non-cash consideration) at the Section 4.1 Offer Price and pay for all Securities set forth in the Section 4.1 Offer Notice within a 20-day period following acceptance of the Section 4.1 Offer; provided that if the purchase and sale of such Securities is subject to expiration of any applicable statutory waiting period, the time period during which such purchase and sale may be consummated shall be extended until the expiration of five Business Days after such waiting period shall have expired; provided further that such time period shall not exceed 60 days without the written consent of the Selling Party. If such purchase and sale are not consummated by the Issuer and the Securityholders within such time period, such Section 4.1 Offer shall be deemed to be rejected. 11 15 (d) Upon the rejection or deemed rejection of the Section 4.1 Offer by the Issuer and the Securityholders or the failure to obtain any required consent for the purchase of the Securities subject thereto within 60 days, there shall commence a 90-day period during which the Selling Party shall have the right, subject to Section 4.1(g), to consummate the sale to the Third Party making the Section 4.1 Offer of all but not less than all of the Securities subject to the Section 4.1 Offer at a price not less than the Section 4.1 Offer Price; provided that (i) such Third Party shall have agreed in writing to be bound by the terms of this Agreement and (ii) the transfer to such Third Party is not in violation of applicable federal or state or foreign securities laws. Notwithstanding the foregoing, if the purchase and sale of such Securities is subject to any prior regulatory approval, the time period during which such purchase and sale may be consummated shall be extended until the expiration of five Business Days after all such approvals shall have been received but in no event shall such time period exceed 120 days without the consent of the Issuer. If such Selling Party does not consummate the sale of any Securities subject to the Section 4.1 Offer in accordance with the time limitations set forth above and in Section 4.1(g), such Selling Party may not sell any Securities without repeating the foregoing procedures. (e) Notwithstanding anything in this Agreement to the contrary, the provisions of this Section 4.1 will not be applicable to transfers made pursuant to and in compliance with Section 3.3, Section 4.3 or Article 5. (f) A Securityholder may transfer Securities in accordance with the foregoing provisions of this Section 4.1 for consideration other than cash only if such Securityholder has first obtained and delivered to each other Securityholder and the Issuer an opinion of an investment banking firm of national standing indicating that the fair market value of the non-cash consideration that such Securityholder proposes to accept as consideration for such Securities, together with any cash consideration, is at least equal to the Section 4.1 Sale Price. (g) (i) If any Section 4.1 Offer constitutes a proposed transfer by Cormier or Schaefer (each a "Tag along Seller") in a private Transaction permitted by Section 3.1(b)(vi) and 3.1(c) (a "Tag along Sale"), the DLJ Entities may, at their option, elect to exercise their rights under this Section 4.1(g) in lieu of their rights under Section 4.1(b) (or, in the event of a DLJ Non-Election (as defined below), the Electing Individual (as defined below) may elect to exercise his rights under this Section 4.1(g) in lieu of his rights under Section 4.1(b)). In the event that the DLJ Entities so elect to exercise their rights under this Section 4.1(g) in lieu of their rights under Section 4.1(b) (or, in the case of a DLJ Non-Election, the Electing Individual elects to exercise his rights under this Section 4.1(g) in lieu of his rights under Section 4.1(b)), the DLJ Entities and such of Cormier and Schaefer as is not a Tag along Seller in such Private Transaction (each of the DLJ Entities and such individual, a "Tagging Person") shall have the right (a "Tag along Right"), exercisable by written notice given to the Tag along Seller within 45 days after receipt of the Section 4.1 Offer Notice (the "Tag along Notice Period"), to request the Tag along Seller to include in the proposed transfer to the Third Party the number of shares of Common Stock or Securities convertible into shares of Common Stock held by such Tagging Person as is specified in such notice; provided that 12 16 (x) the Tag along Seller shall be required only to include in the proposed transfer a number (the "Aggregate Tag Amount") of shares of Common Stock or Securities that are convertible into Common Stock held by such Tagging Persons equal to not more than the number of shares of Common Stock proposed to be sold by the Tag along Seller to such Third Party in such transaction multiplied by a fraction, the numerator of which is the number of shares of Fully Diluted Common Stock owned by all such Tagging Persons immediately prior to the Tag along Sale, and the denominator of which is the total number of shares of Fully Diluted Common Stock immediately prior to the Tag along Sale and (y) if the aggregate number of shares of Common Stock proposed to be sold by all Tagging Persons in such transaction exceeds the Aggregate Tag Amount, the Aggregate Tag Amount of shares permitted to be sold shall be allocated among all Tagging Persons pro rata based on Percentage Ownership. If the DLJ Entities exercise their Tag along Right hereunder (or, in the case of a DLJ Non- Election, if the Electing Individual exercises his Tag along Right hereunder), each Tagging Person shall deliver to the Tag along Seller the certificate or certificates representing the Securities of such Tagging Person to be included in the transfer, together with a limited power-of-attorney authorizing the Tag along Seller to transfer such Securities on the terms set forth in the Section 4.1 Offer Notice. Delivery of such certificate or certificates representing the Securities to be transferred and the limited power-of-attorney authorizing the Tag along Seller to transfer such Securities shall constitute an irrevocable acceptance of the Tag along Sale by such Tagging Persons. If, at the end of a 120-day period after such delivery, the Tag along Seller has not completed the transfer of all such Securities, the Tag along Seller shall return to each Tagging Person the limited power-of-attorney (and all copies thereof) together with all certificates representing the Securities which such Tagging Person delivered for transfer pursuant to this Section 4.1(g), and Schaefer and Cormier may not effect another Tag along Sale without repeating the foregoing procedures. (ii) The per share consideration to be paid to the Tag along Seller and the Tagging Persons in any Tag along Sale shall be the Section 4.1 Offer Price in the case of sales of Common Stock and in the case of Securities convertible into Common Stock shall be the Section 4.1 Offer Price multiplied by the number of shares of Common Stock into which the Securities in question are convertible. (iii) Concurrently with the consummation of the Tag along Sale, the Tag along Seller shall notify the Tagging Persons thereof, shall remit to the Tagging Persons the total consideration for the Securities of the Tagging Persons transferred pursuant thereto (computed pursuant to Section 4.1(g)(ii)), and shall, promptly after the consummation of such Tag along Sale furnish such other evidence of the completion and time of completion of such transfer and the terms thereof as may be reasonably requested by the Tagging Persons. (iv) If at the termination of the Tag along Notice Period any Tagging Person shall not have elected to participate in the Tag along Sale, such Tagging Person will be deemed to have waived its rights under this Section 4.1(g) with respect to the transfer of its Securities pursuant to such Tag along Sale. 13 17 (v) In any Tag along Sale in which the DLJ Entities have exercised their Tag along Right, the right of any party pursuant to Section 4.1(b) to accept the offer referred to therein shall be deemed to have terminated. If the DLJ Entities elect not to exercise their Tag along Right in any Tag along Sale and elect to accept the offer referred to in Section 4.1(b), no other Person may exercise any Tag along Right under this Section 4.1(g). In the event that the DLJ Entities elect neither to exercise their Tag along Right in any Tag along Sale pursuant to Section 4.1(g) nor to accept the offer referred to in Section 4.1(b) (a "DLJ Non-Election"), such of Cormier or Schaefer as is not a Selling Party under Section 4.1(a) or a Tag along Seller under Section 4.1(g) (the "Electing Individual") may elect, subject to the provisions of this Section 4.1, either (i) to accept the offer referred to in Section 4.1(b) or (ii) to exercise his Tag along Right in any Tag along Sale pursuant to Section 4.1(g). 4.2 Preemptive Rights. For so long as any Notes or shares of Series B Preferred Stock remain outstanding, the Issuer shall provide each Securityholder with a written notice (a "Section 4.2 Notice") of any proposed issuance by the Issuer of Equity Securities at least 60 days prior to the proposed issuance date. Such notice shall specify the price at which the Equity Securities are to be issued and the other material terms of the issuance. Each Securityholder shall be entitled to purchase, at the price and on the terms specified in such Section 4.2 Notice, the Equity Securities proposed to be issued on a pro rata basis based upon such Securityholder's Percentage Ownership. A Securityholder may exercise its rights under this Section 4.2 by delivering written notice of its election to purchase Equity Securities to the Issuer within 30 days of receipt of the Section 4.2 Notice. Each Securityholder shall deliver a copy of any such written notice to the Issuer and each other Securityholder at least five Business Days prior to the expiration of such 30-day period. A delivery of such a written notice (which notice shall specify the number of shares (or amount) of Equity Securities to be purchased by the Securityholder submitting such notice) by a Securityholder shall constitute a binding agreement of such Securityholder to purchase, at the price and on the terms specified in the Section 4.2 Notice, the number of shares (or amount) of Equity Securities specified in such Securityholder's written notice. In the case of any issuance of Equity Securities, the Issuer shall have 90 days from the date of the Section 4.2 Notice to consummate the proposed issuance of any or all of such Equity Securities which the Securityholders have not elected to purchase at the price and upon terms that are not materially less favorable to the Issuer than those specified in the Section 4.2 Notice. At the consummation of such issuance, the Issuer shall issue certificates representing the Equity Securities to be purchased by each Securityholder exercising preemptive rights pursuant to this Section 4.2 registered in the name of such Securityholder, against payment by such Securityholder of the purchase price for such Equity Securities. If the Issuer proposes to issue Equity Securities after such 90-day period, it shall again comply with the procedures set forth in this Section. Notwithstanding the foregoing, no Securityholder shall be entitled to purchase Equity Securities as contemplated by this Section 4.2 in connection with issuances of Equity Securities (i) to employees of the Issuer or any Subsidiary of the Issuer pursuant to employee benefit plans or arrangements approved by the Board (including upon the exercise of employee stock options), (ii) in connection with an Initial Public Offering, (iii) in connection with any bona fide, arm's-length restructuring of outstanding 14 18 debt of the Issuer or any Subsidiary of the Issuer, (iv) in connection with any bona fide, arm's-length direct or indirect merger, acquisition or similar transaction, or (v) upon the conversion of any shares of Series A Preferred Stock or Series B Preferred Stock or Notes into Common Stock. The Issuer shall not be under any obligation to consummate any proposed issuance of Equity Securities, regardless of whether it shall have delivered a Section 4.2 Notice in respect of such proposed issuance. Unless earlier terminated pursuant to the terms of this Section 4.2, the provisions of this Section 4.2 shall terminate upon the consummation of an Initial Public Offering. 4.3 Right to Compel Participation in Certain Transfers. (a) If the DLJ Entities should, after November 23, 1998, propose to transfer for cash consideration of no less than $124.44 per share (as adjusted to take into account any subdivisions, combinations or reclassifications of the Common Stock after the date hereof) of Common Stock all shares of Common Stock that they own or have the right to acquire to any Third Party (a "Section 4.3 Sale"), the DLJ Entities may, at their option, require all but not less than all the Other Securityholders to participate in such transfer. The DLJ Entities shall provide written notice of such Section 4.3 Sale to the Other Securityholders (a "Section 4.3 Notice") and a copy of the agreement pursuant to which such shares are proposed to be transferred (the "Section 4.3 Agreement"). The Section 4.3 Notice shall identify the transferee, the number of shares of Common Stock subject to the Section 4.3 Sale, the consideration per share of Common Stock for which a transfer is proposed to be made (the "Section 4.3 Sale Price") and all other material terms and conditions of the Section 4.3 Sale. Each Other Securityholder shall be required to participate in the Section 4.3 Sale on the terms and conditions set forth in the Section 4.3 Notice and to tender all its shares of Common Stock, and Securities convertible into Common Stock as set forth below. The price of such transfer shall be the Section 4.3 Sale Price in the case of shares of Common Stock, and in the case of Securities convertible into Common Stock shall be the Section 4.3 Sale Price multiplied by the number of shares of Common Stock into which such Securities are convertible. Within ten Business Days following the date of the Section 4.3 Notice (the "Section 4.3 Notice Period"), each of the Other Securityholders shall deliver to a representative of the DLJ Entities designated in the Section 4.3 Notice certificates representing all shares of Common Stock held by such Other Securityholder and all Securities convertible into Common Stock held by such Other Shareholder, duly endorsed, together with all other documents required to be executed in connection with such Section 4.3 Sale or, if such delivery is not permitted by applicable law, an unconditional agreement to deliver such Securities pursuant to this Section 4.3(a) at the closing for such Section 4.3 Sale against delivery to such Other Securityholder of the consideration therefor. If an Other Securityholder should fail to deliver such certificates to the DLJ Entities, the Issuer shall cause the books and records of the Issuer to show that such Securities are bound by the provisions of this Section 4.3(a) and that such Securities shall be transferred to the Third Party immediately upon surrender for transfer by the Other Securityholder thereof. (b) If, within 120 days after the DLJ Entities give the Section 4.3 Notice, they have not completed the transfer of all the Securities subject to the Section 4.3 Sale, the DLJ Entities shall return to each of the Other Securityholders all certificates representing 15 19 Securities that such Other Securityholder delivered for transfer pursuant hereto, together with any documents in the possession of the DLJ Entities executed by the Other Securityholder in connection with such proposed transfer, and all the restrictions on transfer contained in this Agreement or otherwise applicable at such time with respect to Securities owned by the Other Securityholders shall again be in effect. (c) Promptly after the consummation of the transfer of Securities of the DLJ Entities and the Other Securityholders pursuant to this Section 4.3, the DLJ Entities shall give notice thereof to the Other Securityholders, shall remit to each of the Other Securityholders who have surrendered their certificates the total consideration for the shares of Common Stock and Securities convertible into Common Stock transferred pursuant hereto and shall furnish such other evidence of the completion and time of completion of such transfer and the terms thereof as may be reasonably requested by such Other Securityholders. 4.4 Improper Transfer. Any attempt to transfer any Securities not in compliance with this Agreement shall be null and void and neither the Issuer nor any transfer agent shall give any effect in the Issuer's records to such attempted transfer. 4.5 Termination of Agreement. This Agreement shall terminate upon the earliest of (i) the tenth anniversary of the date hereof; (ii) such time as at least 50% of the shares of Fully Diluted Common Stock are held by Persons (other than any Securityholder) who acquired their shares in a sale pursuant to (x) Rule 144 under the Securities Act or (y) a public offering registered under the Securities Act; and (iii) such time as the DLJ Entities own less than 5% of the aggregate number of shares of Fully Diluted Common Stock. 4.6 Inapplicability of Transfer Restrictions and Corporate Governance Provisions to PM Funding, Inc. Notwithstanding anything else contained herein, PM Funding, Inc. shall not be bound by or subject to any of (i) the restrictions on or obligations with respect to transfers of Securities set forth in Article 3 or in Section 4.1(a) through (f) or (ii) the corporate governance provisions set forth in Article 2. ARTICLE 5 REGISTRATION RIGHTS 5.1 Demand Registration. (a) Commencing on the date which is six months after the Initial Public Offering (the "First Request Date") Schaefer and Cormier may make a written request, and commencing on the date which is the earlier of (x) the First Request Date and (y) November 23, 1997, the DLJ Entities may make a written request (any 16 20 such requesting Person, a "Selling Securityholder") that the Issuer effect the registration under the Securities Act of all or a portion of such Selling Securityholder's Registrable Stock, and specifying the intended method of disposition thereof. The Issuer will promptly give written notice of such requested registration (a "Demand Registration") at least 30 days prior to the anticipated filing date of the registration statement relating to such Demand Registration to the other Securityholders and thereupon will use its best efforts to effect, as expeditiously as possible, the registration under the Securities Act of: (i) the Registrable Stock which the Issuer has been so requested to register by the Selling Securityholders, then held by the Selling Securityholders; and (ii) subject to Section 5.2, all other Registrable Stock which any other Securityholder entitled to request the Issuer to effect an Incidental Registration (as such term is defined in Section 5.2) pursuant to Section 5.2 (all such Securityholders, together with the Selling Securityholders, the "Holders") has requested the Issuer to register by written request received by the Issuer within 15 days after the receipt by such Holders of such written notice given by the Issuer, all to the extent necessary to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Stock so to be registered; provided that, subject to Section 5.1(c) hereof, the Issuer shall not be obligated to effect more than one Demand Registration for Schaefer and Cormier collectively, on the one hand, and two Demand Registrations for the DLJ Entities collectively, on the other hand, pursuant to this Section 5.1 other than any such Demand Registrations effected on Form S-3; and provided further that the Issuer shall not be obligated to effect a Demand Registration unless the Registrable Stock requested to be included in such Demand Registration constitutes at least 25% of the Common Stock then outstanding or to be issued upon conversion of the Notes and/or Series B Preferred Stock. In no event will the Issuer be required to effect more than two Demand Registrations on Form S-3 within any 12 month period. Promptly after the expiration of the 15-day period referred to in Section 5.1(a)(ii) hereof, the Issuer will notify all the Holders to be included in the Demand Registration of the other Holders and the number of shares of Registrable Stock requested to be included therein. The Selling Securityholders requesting a registration under this Section 5.1(a) may, at any time prior to the effective date of the registration statement relating to such registration, revoke such request, without liability to any of the other Holders, by providing a written notice to the Issuer revoking such request, in which case such request, so revoked, shall be considered a Demand Registration unless such revocation arose out of the fault of the Issuer, in which case such request shall not be considered a Demand Registration. Notwithstanding anything contained in this Agreement to the contrary, nothing herein shall be construed as requiring the Issuer to register any of its securities other than Common Stock. (b) The Issuer will pay all Registration Expenses in connection with any Demand Registration. 17 21 (c) A registration requested pursuant to this Section 5.1 shall not be deemed to have been effected unless the registration statement relating thereto (i) has become effective under the Securities Act and (ii) has remained effective for a period of at least 90 days (or such shorter period in which all Registrable Stock of the Holders included in such registration has actually been sold thereunder); provided that if after any registration statement requested pursuant to this Section 5.1 becomes effective (i) such registration statement is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court and (ii) less than 75% of the Registrable Stock included in such registration statement has been sold thereunder, such registration statement shall be at the sole expense of the Issuer and shall not be considered a Demand Registration, unless any such interference referred to in clause (i) of this proviso arose out of the fault of the Selling Securityholders, in which case such registration statement shall be considered a Demand Registration. (d) If a Demand Registration involves an Underwritten Public Offering and the managing underwriter shall advise the Issuer and the Selling Securityholders that, in its view, (i) the number of shares of Common Stock requested to be included in such registration (including Common Stock which the Issuer proposes to be included which is not Registrable Stock) or (ii) the inclusion of some or all of the Securities owned by the Holders, in either case, exceeds the largest number of Securities which can be sold without having an adverse effect on such offering, including the price at which such Securities can be sold (the "Maximum Offering Size"), the Issuer will include in such registration, in the priority listed below, up to the Maximum Offering Size: (A) first, all Benchmark Shares requested to be registered by the DLJ Entities (allocated, if necessary for the offering not to exceed the Maximum Offering Size, pro rata among the DLJ Entities on the basis of the relative number of shares of Registrable Stock requested to be included in such registration); (B) second, all Registrable Stock requested to be registered by any Selling Securityholders (allocated, if necessary for the offering not to exceed the Maximum Offering Size, pro rata among such Selling Securityholders on the basis of the relative number of shares of Registrable Stock (excluding any Benchmark Shares) so requested to be included in such registration); (C) third, all Registrable Stock requested to be included in such registration by any other Holder (allocated, if necessary for the offering not to exceed the Maximum Offering Size, pro rata among such other Holders on the basis of the relative number of shares of Registrable Stock (excluding any Benchmark Shares) so requested to be included in such registration); and (D) fourth, any Common Stock proposed to be registered by the issuer. 18 22 5.2 Incidental Registration. (a) If the Issuer proposes to register any of its Common Stock under the Securities Act (other than a registration (A) in connection with an Initial Public Offering, (B) on Form S-8 or S-4 or any successor or similar forms, (C) relating to Common Stock issuable upon exercise of employee stock options or in connection with any employee benefit or similar plan of the Issuer or (D) in connection with a direct or indirect merger, acquisition or other similar transaction) whether or not for sale for its own account, it will each such time, subject to the provisions of Section 5.2(b) hereof, give prompt written notice at least 30 days prior to the anticipated filing date of the registration statement relating to such registration to each Securityholder, which notice shall set forth such Securityholders' rights under this Section 5.2 and shall offer all Securityholders the opportunity to include in such registration statement such number of shares of Registrable Stock as each such Securityholder may request (an "Incidental Registration"). Upon the written request of any such Securityholder made within 15 days after the receipt of notice from the Issuer (which request shall specify the number of shares of Registrable Stock intended to be disposed of by such Securityholder), the Issuer will use its best efforts to effect the registration under the Securities Act of all Registrable Stock which the Issuer has been so requested to register by such Securityholders, to the extent requisite to permit the disposition of the Registrable Stock so to be registered; provided that (i) if such registration involves an Underwritten Public Offering, all such Securityholders requesting to be included in the Issuer's registration must sell their Registrable Stock to the underwriters selected as provided in Section 5.4(f) on the same terms and conditions as apply to the Issuer and the Selling Securityholders and (ii) if, at any time after giving written notice of its intention to register any stock pursuant to this Section 5.2(a) and prior to the effective date of the registration statement filed in connection with such registration, the Issuer shall determine for any reason not to register such stock, the Issuer shall give written notice to all such Securityholders and, thereupon, shall be relieved of its obligation to register any Registrable Stock in connection with such registration. No registration effected under this Section 5.2 shall relieve the Issuer of its obligations to effect a Demand Registration to the extent required by Section 5.1 hereof. The Issuer will pay all Registration Expenses in connection with each registration of Registrable Stock requested pursuant to this Section 5.2. (b) If a registration pursuant to this Section 5.2 involves an Underwritten Public Offering (other than in the case of an Underwritten Public Offering requested by any Securityholder in a Demand Registration, in which case the provisions with respect to priority of inclusion in such offering set forth in Section 5.1(d) shall apply) and the managing underwriter advises the Issuer that, in its view, the number of shares of Common Stock which the Issuer and the selling Securityholders intend to include in such registration exceeds the Maximum Offering Size, the Issuer will include in such registration, in the following priority, up to the Maximum Offering Size: (i) first, so much of the Common Stock proposed to be registered by the Issuer as would not cause the offering to exceed the Maximum Offering Size; (ii) second, all Benchmark Shares requested to be included in such registration statement by any DLJ Entity pursuant to this Section 5.2 (allocated, if 19 23 necessary for the offering not to exceed the Maximum Offering Size, pro rata among such DLJ Entities on the basis of the relative number of shares of Registrable Stock requested to be so included); and (iii) third, all Registrable Stock other than Benchmark Shares requested to be included in such registration by any Shareholder pursuant to Section 5.2 (allocated, if necessary for the offering not to exceed the Maximum Offering Size, pro rata among such Shareholders on the basis of the relative number of shares of Registrable Stock (excluding any Benchmark Shares) so requested to be included in such registration). 5.3 Holdback Agreements. If any registration of Registrable Stock shall be in connection with an Underwritten Public Offering, each Securityholder agrees not to effect any public sale or distribution, including any sale pursuant to Rule 144, or any successor provision, under the Securities Act, of any Registrable Stock, and not to effect any such public sale or distribution of any other Common Stock of the Issuer or of any stock convertible into or exchangeable or exercisable for any Common Stock of the Issuer (in each case, other than as part of such Underwritten Public Offering) during the 14 days prior to the effective date of such registration statement (except as part of such registration) or during the period after such effective date that such managing underwriter and the Issuer shall agree (but not to exceed 90 days). Any waiver of any restriction on sales or distributions referred to in this Section 5.3 shall be effective as to each of Cormier, Schaefer, and the DLJ Entities, regardless whether the waiver has in fact requested by, or granted only certain of such persons. 5.4 Registration Procedures. Whenever Securityholders request that any Registrable Stock be registered pursuant to Section 5.1 or 5.2 hereof, the Issuer will, subject to the provisions of such Sections, use its best efforts to effect the registration and the sale of such Registrable Stock in accordance with the intended method of disposition thereof as quickly as practicable, and in connection with any such request: (a) The Issuer will as expeditiously as possible prepare and file with the SEC a registration statement on any form for which the Issuer then qualifies or which counsel for the Issuer shall deem appropriate and which form shall be available for the sale of the Registrable Stock to be registered thereunder in accordance with the intended method of distribution thereof, and use its best efforts to cause such filed registration statement to become and remain effective for a period of not less than 90 days (or such shorter period in which all of the Registrable Stock of the Holders included in such registration statement shall have actually been sold thereunder). (b) The Issuer will, if requested, prior to filing a registration statement or prospectus or any amendment or supplement thereto, furnish to each Securityholder and each underwriter, if any, of the Registrable Stock covered by such registration statement copies of such registration statement as proposed to be filed, and thereafter the Issuer will furnish to such Securityholder and underwriter, if any, such number of copies of such registration statement, each amendment and supplement thereto (in each case including all exhibits 20 24 thereto and documents incorporated by reference therein), the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such Securityholder or underwriter may reasonably request in order to facilitate the disposition of the Registrable Stock owned by such Securityholder. (c) After the filing of the registration statement, the Issuer will promptly notify each Securityholder holding Registrable Stock covered. by such registration statement of any stop order issued or threatened by the SEC and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered. (d) The Issuer will use its best efforts to (i) register or qualify the Registrable Stock covered by such registration statement under such other securities or blue sky laws of such jurisdictions in the United States as any Securityholder holding such Registrable Stock reasonably (in light of such Securityholder's intended plan of distribution) requests and (ii) cause such Registrable Stock to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Issuer and do any and all other acts and things that may be reasonably necessary or advisable to enable such Securityholder to consummate the disposition of the Registrable Stock owned by such Securityholder; provided that the Issuer will not be required to (A) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (d), (B) subject itself to taxation in any such jurisdiction or (C) consent to general service of process in any such jurisdiction. (e) The Issuer will immediately notify each Securityholder holding such Registrable Stock covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the occurrence of an event requiring the preparation of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Stock, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and promptly prepare and make available to each such Securityholder and file with the SEC any such supplement or amendment. (f) Subject to Section 7.5, the Issuer may select, in its sole discretion, the underwriter or underwriters in connection with any Underwritten Public Offering as it may deem appropriate. Notwithstanding the foregoing, (i) the DLJ Entities will have the right, in their sole discretion, to select the underwriter or underwriters in connection with any underwritten Demand Registration initiated by any of the DLJ Entities pursuant to Section 5.1, and (ii) Cormier and Schaefer will have the right, in their sole discretion, to select the underwriter or underwriters in connection with any underwritten Demand Registration initiated by them only (and not also by any DLJ Entity) pursuant to Section 5.1. Any Affiliate of any of the DLJ Entities may be selected as underwriter for an Underwritten Public Offering. The Issuer will enter into customary agreements (including an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of such Registrable Stock, including the engagement 21 25 of a "qualified independent underwriter" in connection with the qualification of the underwriting arrangements with the NASD. (g) The Issuer will make available for inspection by any Securityholder and any underwriter participating in any disposition pursuant to a registration statement being filed by the Issuer pursuant to this Section 5.4 and any attorney, accountant or other professional retained by any such Securityholder or underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Issuer (collectively, the "Records") as shall be reasonably requested by any such Person, and cause the Issuer's officers, directors and employees to supply all information reasonably requested by any Inspectors in connection with such registration statement. (h) The Issuer will furnish to each such Securityholder and to each such underwriter, if any, a signed counterpart, addressed to such underwriter, of (i) an opinion or opinions of counsel to the Issuer and (ii) a comfort letter or comfort letters from the Issuer's independent public accountants, each in customary form and covering opinions majority therefor such matters of the type customarily covered by or comfort letters, as the case may be, as a majority of such Securityholders or the managing underwriter reasonably requests. (i) The Issuer will otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its securityholders, as soon as reasonably practicable, an earnings statement covering a period of 12 months, beginning within three months after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act. The Issuer may require each such Securityholder to promptly furnish in writing to the Issuer such information regarding the distribution of the Registrable Stock as the Issuer may from time to time reasonably request and such other information as may be legally required in connection with such registration. Each such Securityholder agrees that, upon receipt of any notice from the Issuer of the happening of any event of the kind described in Section 5.4(e) hereof, such Securityholder will forthwith discontinue disposition of Registrable Stock pursuant to the registration statement covering such Registrable Stock until such Securityholder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 5.4(e) hereof, and, if so directed by the Issuer, such Securityholder will deliver to the Issuer all copies, other than any permanent file copies then in such Securityholder's possession, of the most recent prospectus covering such Registrable Stock at the time of receipt of such notice. In the event that the Issuer shall give such notice, the Issuer shall extend the period during which such registration statement shall be maintained effective (including the period referred to in Section 5.4(a) hereof) by the number of days during the period from and including the date of the giving of notice pursuant to Section 5.4(e) hereof to the date when the Issuer shall make available to such Securityholder a prospectus supplemented or amended to conform with the requirements of Section 5.4(e) hereof. 22 26 5.5 Indemnification by the Issuer. The Issuer agrees to indemnify and hold harmless each Securityholder holding Registrable Stock covered by a registration statement, its officers, directors and agents, and each Person, if any, who controls such Securityholder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus relating to the Registrable Stock (as amended or supplemented if the Issuer shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission so made in strict conformity with information furnished in writing to the Issuer by such Securityholder or on such Securityholder's behalf expressly for use therein; provided that with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus, or in any prospectus, as the case may be, the indemnity agreement contained in this paragraph shall not apply to the extent that any such loss, claim, damage, liability or expense results from the fact that a current copy of the prospectus (or, in the case of a prospectus, the prospectus as amended or supplemented) was not sent or given to the Person asserting any such loss, claim, damage, liability or expense at or prior to the written confirmation of the sale of the Registrable Stock concerned to such Person if it is determined that the Issuer has provided such prospectus and it was the responsibility of such Securityholder to provide such Person with a current copy of the prospectus (or such amended or supplemented prospectus, as the case may be) and such current copy of the prospectus (or such amended or supplemented prospectus, as the case may be) would have cured the defect giving rise to such loss, claim, damage, liability or expense. The Issuer also agrees to indemnify any underwriters of the Registrable Stock, their officers and directors and each person who controls such underwriters on substantially the same basis as that of the indemnification of the Securityholders provided in this Section 5.5. 5.6 Indemnification by Participating Securityholders. (a) Subject to Section 5.6(b), each Securityholder holding Registrable Stock included in any registration statement agrees, severally but not jointly, to indemnify and hold harmless the Issuer, its officers, directors and agents and each Person, if any, who controls the Issuer within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Issuer to such Securityholder, but only (i) with respect to information furnished In writing by such Securityholder or on such Securityholder's behalf expressly for use in any registration statement or prospectus relating to the Registrable Stock, or any amendment or supplement thereto, or any preliminary prospectus or (ii) to the extent that any loss, claim, damage, liability or expense described in Section 5.5 results from the fact that a current copy of the prospectus (or, in the case of a prospectus, the prospectus as amended or supplemented) was not sent or given to the Person asserting any such loss, claim, damage, liability or expense at or prior to the written confirmation of the sale of the Registrable Stock concerned to such Person if it is determined that it was the responsibility of such Securityholder to provide such Person with a current 23 27 copy of the prospectus (or such amended or supplemented prospectus, as the case may be) and such current copy of the prospectus (or such amended or supplemented prospectus, as the case may be) would have cured the defect giving rise to such loss, claim, damage, liability or expense. Subject to Section 5.6(b), each such Securityholder also agrees to indemnify and hold harmless underwriters of the Registrable Stock, their officers and directors and each person who controls such underwriters on substantially the same basis as that of the indemnification of the Issuer provided in this Section 5.6. As a condition to including Registrable Stock in any registration statement filed in accordance with Article 5 hereof, the Issuer may require that it shall have received an undertaking reasonably satisfactory to it from any underwriter to indemnify and hold it harmless to the extent customarily provided by underwriters with respect to similar securities. (b) No Securityholder shall be liable under Section 5.6(a) for any damage thereunder in excess of the net proceeds realized by such Securityholder in the sale of the Registrable Stock of such Securityholder. 5.7 Conduct of Indemnification Proceedings. In case any proceeding (including any governmental investigation) shall be instituted involving any Person-in respect of which indemnity may be sought pursuant to this Article 5, such Person (an "Indemnified Party") shall promptly notify the Person against whom such indemnity may be sought (the "Indemnifying Party") in writing and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party, and shall assume the payment of all fees and expenses; provided that the failure of any Indemnified Party so to notify the Indemnifying Party shall not relieve the Indemnifying Party of its obligations hereunder except to the extent that the Indemnifying Party is materially prejudiced by such failure to notify. In any such proceeding, any Indemnified Party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel or (ii) in the reasonable judgment of such Indemnified Party representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the Indemnifying Party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) at any time for all such Indemnified Parties, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Indemnified Parties, such firm shall be designated in writing by the Indemnified Parties. The Indemnifying Party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent, or if there be a final judgment for the plaintiff, the Indemnifying Party shall indemnify and hold harmless such Indemnified Parties from and against any and all losses, claims, damages, liabilities and expenses or liability (to the extent stated above) by reason of such settlement or judgment. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party, unless such 24 28 settlement includes an unconditional release of such Indemnified Party from all liability arising out of such proceeding. 5.8 Contribution. If the indemnification provided for in this Article 5 is held by a court of competent jurisdiction to be unavailable to the Indemnified Parties in respect of any losses, claims, damages or liabilities referred to herein, then each such Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities (i) as between the Issuer and the Securityholders holding Registrable Stock covered by a registration statement on the one hand and the underwriters on the other, in such proportion as is appropriate to reflect the relative benefits received by the Issuer and such Securityholders on the one hand and the underwriters on the other, from the offering of the Registrable Stock, or if such allocation is not permitted by applicable law, in such proportion as s appropriate to reflect not only the relative benefits but also the relative fault of the Issuer and such Securityholders on the one hand and of such underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations and (ii) as between the Issuer on the one hand and each such Securityholder on the other, in such proportion as is appropriate to reflect the relative fault of the Issuer and of each such Securityholder in connection with such statements or omissions, as well as any other relevant equitable considerations. The relative benefits received by the Issuer and such Securityholders on the one hand and such underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Issuer and such Securityholders bear to the total underwriting discounts and commissions received by such underwriters, in each case as set forth in the table on the cover page of the prospectus. The relative fault of the Issuer and such Securityholders on the one hand and of such underwriters on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Issuer and such Securityholders or by such underwriters. The relative fault of the Issuer on the one hand and of each such Securityholder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Issuer and the Securityholders agree that it would not be just and equitable if contribution pursuant to this Section 5.8 were determined by pro rata allocation (even if the underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with 25 29 investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5.8, no underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Stock underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and no Securityholder shall be required to contribute any amount in excess of the amount by which the net proceeds realized on the sale of the Registrable Stock of such Securityholder exceeds the amount of any damages which such Securityholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Each Securityholder's obligation to contribute pursuant to this Section 5.8 is several in the proportion that the proceeds of the offering received by such Securityholder bears to the total proceeds of the offering received by all such Securityholders and not joint. 5.9 Participation in Public Offering. No Person may participate in any Underwritten Public Offering hereunder unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and the provisions of this Agreement in respect of registration rights. ARTICLE 6 CERTAIN COVENANTS AND AGREEMENTS 6.1 Confidentiality. (a) Each Securityholder hereby agrees that Confidential Information (as defined below) furnished and to be furnished to it was and will be made available in connection with such Securityholder's investment in the Issuer. Each Securityholder agrees that it will not use the Confidential Information in any way to the competitive disadvantage of the Issuer. Each Securityholder further acknowledges and agrees that it will not disclose any Confidential Information to any Person; provided that Confidential Information may be disclosed (i) to such Securityholder's Representatives (as defined below) in the normal course of the performance of their duties, (ii) to the extent required by applicable law, rule or regulation (including complying with any oral or written questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process to which a Securityholder is subject), (iii) to any Person to whom such Securityholder is contemplating a transfer of its Securities (provided that such transfer would not be in violation of the provisions of this Agreement and as long as such potential transferee is advised of the confidential nature of such information and agrees to be bound by a confidentiality agreement in form and substance satisfactory to the Issuer and consistent with the provisions hereof) or (iv) if the prior written consent of the Board shall have been obtained. Nothing contained herein shall prevent the use of 26 30 Confidential Information in connection with the assertion or defense of any claim by or against the Issuer or any Securityholder. (b) "Confidential Information" means any information concerning the Issuer, its financial condition, business, operations or prospects in the possession of or to be furnished to any Securityholder in its capacity as a shareholder of the Issuer or by virtue of its present or former right to designate a director of the Issuer; provided that the term "Confidential Information" does not include information which (i) becomes generally available to the public other than as a result of a disclosure by a Securityholder or its partners, directors, officers, employees, agents, counsel, investment advisers or representatives (all such persons being collectively referred to as "Representatives") in violation of any of the Transaction Documents (as such term is defined in the Securities Purchase Agreement), (ii) is or was available to such Securityholder on a nonconfidential basis prior to its disclosure to such Securityholder or its Representatives by the Issuer or (iii) was or becomes available to such Securityholder on a non-confidential basis from a source other than the Issuer, provided that such source is or was (at the time of receipt of the relevant information) not, to the best of such Securityholder's knowledge, bound by a confidentiality agreement with (or other confidentiality obligation to) the Issuer or another Person. 6.2 No Inconsistent Agreements. Neither the Issuer nor any Securityholder is presently a party to or will hereafter enter into any agreement with respect to any Securities which is inconsistent with the rights granted to any Securityholder by this Agreement or any other agreements relating to the Securities to which the Securityholders are parties or which otherwise conflicts with the provisions hereof or thereof, or will in the future grant or cause to be granted to any holder or prospective holder of any Securities, any rights relating thereto, including, for example, registration rights, which are, in the aggregate, made available on more favorable terms (including, without limitation, terms which are more favorable than those set forth in Article 5) to such holder than those granted to the Securityholders hereunder and thereunder, unless the Securityholders are given all of the benefits of such favorable terms and consent thereto. 6.3 Agreement as Between PM Funding, Inc. and the Other DLJ Entities Regarding Conversion of the Notes. Each DLJ Entity (other than PM Funding, Inc.) agrees that, immediately upon the request of PM Funding, Inc. delivered by notice to such DLJ Entity, such DLJ Entity shall exercise its right to convert (in whole and not in part) the Note (or Notes) held by such DLJ Entity into Common Stock in accordance with the provisions of Sections 5.1 and 5.2 of the Note. ARTICLE 7 MISCELLANEOUS 7.1 Entire Agreement. The Transaction Documents constitute the entire agreement between the parties with respect to the subject matter of the Transaction 27 31 Documents and supersede all prior agreements and understandings, both oral and written, between the parties with respect to the subject matter of this Agreement and the other Transaction Documents. 7.2 Binding Effect; Benefit. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, legal representatives and permitted assigns. Nothing in this Agreement, expressed or implied, is intended to confer on any Person other than the parties hereto, and their respective heirs, successors, legal representatives and permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. 7.3 Assignability. Neither this Agreement nor any right, remedy, obligation or liability arising hereunder or by reason hereof shall be assignable by the Issuer or any Securityholder, except in connection with a transfer of securities of the Issuer pursuant to the terms hereof; provided that any Person acquiring Securities who is required by the terms of this Agreement to become a party hereto shall execute and deliver to the Issuer an agreement to be bound by this Agreement and shall thenceforth be a "Securityholder". Any Securityholder who ceases to beneficially own any Securities shall cease to be bound by the terms hereof (other than Sections 5.6, 5.7, 5.8 and 6.1). 7.4 Amendment; Waiver; Termination. (a) No provision of this Agreement may be waived except by an instrument in writing executed by the party against whom the waiver is to be effective. No provision of this Agreement may be amended or otherwise modified except by an instrument in writing executed by the Issuer with the approval of the Board and Securityholders holding or having the right to acquire at least 85% of the Fully Diluted Common Stock held by parties to this Agreement. (b) In addition, any amendment, modification or termination of any provision of this Agreement that would adversely affect a DLJ Entity may be effected only with the consent of such DLJ Entity. (c) In addition, any amendment, modification or termination of any provision of this Agreement that would adversely affect Cormier or Schaefer may be effected only with the consent of Cormier or Schaefer, respectively. 7.5 Exclusive Financial Advisor and Investment Banking Advisor. During the period from and including the date hereof through and including the fourth anniversary hereof, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC"), or any Affiliate of DLJSC that the DLJ Entities may choose in their sole discretion, shall be engaged as the exclusive financial advisor and investment banker for the Issuer for an annual retainer fee (i) which shall be $200,000 effective for each of the first four one-year periods ending on an anniversary of the date hereof and (ii) which thereafter shall be on commercially reasonable terms to be agreed between the Issuer and DLJSC. 28 32 7.6 Certain Requirements In Connection with Conversion of Shares of Series B Preferred Stock. Notwithstanding anything herein to the contrary, no shares of Common Stock shall be issued upon conversion of any shares of Series B Preferred Stock to (i) DLJ Merchant Banking Funding, Inc. or (ii) any other affiliate of Donaldson, Lufkin & Jenrette, Inc. ("DLJ") designated in writing to the Issuer from time to time by DLJ Merchant Banking Funding, Inc., unless in connection with such conversion the Issuer shall have received a certificate from DLJ Merchant Banking Funding, Inc. to the effect that (A) immediately upon such conversion, DLJ will not directly or indirectly own, control or hold 5% or more of the voting securities of the Issuer, within the meaning of the New York insurance law or (B) it and The Equitable Life Assurance Society of the United States ("The Equitable") have been advised by counsel satisfactory to The Equitable that immediately upon such conversion DLJ will not be in control of the Issuer, within the meaning of the New York insurance law. The Issuer and the holders of shares of Series B Preferred Stock will use reasonable efforts to enter into mutually agreed upon arrangements to facilitate conversion of the shares of Series B Preferred Stock into Common Stock in accordance with the provisions of the first sentence of this Section 7.6. 7.7 Notices. All notices and other communications given or made pursuant hereto or pursuant to any other agreement among the parties, unless otherwise specified, shall be in writing and shall be deemed to have been duly given or made if sent by fax (with confirmation in writing), delivered personally or sent by registered or certified mail (postage prepaid, return receipt requested) to the parties at the fax number or address set forth below or at such other addresses as shall be furnished by the parties by like notice, and such notice or communication shall be deemed to have been given or made upon receipt: if to the DLJ Entities, to: DLJ Merchant Banking Funding, Inc. DLJ Merchant Banking partners, L.P. 140 Broadway New York, New York 10005-1285 Attention: Thompson Dean Fax: (212) 504-4991 and to: DLJ International Partners, C.V. DLJ Offshore Partners, C.V. c/o DLJ Offshore Management N.V. John B. Gorsiraweg 6 Willemstad, Curacao Netherlands Antilles Attention: Germaine Sprock MeesPierson Trust (Curacao) N.V. 29 33 DLJ Capital Corporation Sprout Growth II, L.P. Sprout Capital VI, L.P. 3000 Sand Hill Road Suite 270 Menlo Park, California 94025 Attention: Paul Bartlett Fax: (415) 854-8779 DLJ Bridge Finance, Inc. 140 Broadway New York, NY Attention: Robert Grien Fax: (212) 504-4991 with a copy to: Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 Attention: George R. Bason, Jr. Fax: (212) 450-4800 if to Cormier or the Issuer, to: Phase Metrics, Inc. 3978 Sorrento Valley Blvd. San Diego, CA 92121 Attention: Arthur J. Cormier Fax: (619) 552-1132 with a copy to: Paul, Hastings, Janofsky & Walker 695 Town Center Drive, 17th Floor Costa Mesa, CA 92626 Attention: Robert R. Burge Fax: (714) 979-1921 30 34 if to Schaefer, to: Phase Metrics, Inc. 3978 Sorrento Valley Blvd. San Diego, CA 92121 Attention: John F. Schaefer Fax: (619) 552-1132 with a copy to: Brobeck, Phleger & Harrison 4675 MacArthur Court, Suite 1000 Newport Beach, CA 92660 Attention: Richard A. Fink Fax: (714) 752-7522 Any Person who becomes a Securityholder shall provide its address and fax number to the Issuer, which shall promptly provide such information to each other Securityholder. 7.8 Headings. The headings contained in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. 7.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. 7.10 Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, without regard to the conflicts of law rules of such state. 7.11 Specific Enforcement. Each party hereto acknowledges that the remedies at law of the other parties for a breach or threatened breach of this Agreement would be inadequate and, in recognition of this fact, any party to this Agreement, without posting any bond, and in addition to all other remedies which may be available, shall be entitled to obtain equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy which may then be available. 7.12 Consent to Jurisdiction. Any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby be brought in the United States District Court for the Southern District of New York or any other New York State court sitting in New York City, and each of the parties hereby consents to the non-exclusive jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection 31 35 which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient form. Process in any such suit, action or proceeding may be served any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each party agrees that service of process on such party as provided in Section 7.6 shall be deemed effective service of process on such party. [Remainder of this page intentionally left blank.] 32 36 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. DLJ MERCHANT BANKING PARTNERS, L.P. BY DLJ MERCHANT BANKING, INC. Managing General Partner By: /s/ DLJ MERCHANT BANKING PARTNERS, L.P. ------------------------------------------------- Title: Managing Director DLJ INTERNATIONAL PARTNERS, C.V. BY DLJ MERCHANT BANKING, INC. Advisory General Partner By: /s/ DLJ INTERNATIONAL PARTNERS, C.V. ------------------------------------------------- Title: Managing Director DLJ OFFSHORE PARTNERS, C.V. BY DLJ MERCHANT BANKING, INC. Advisory General Partner By: /s/ DLJ OFFSHORE PARTNERS, C.V. ------------------------------------------------- Title: Managing Director DLJ MERCHANT BANKING FUNDING, INC. By: /s/ DLJ MERCHANT BANKING FUNDING, INC. ------------------------------------------------- Title: 33 37 DLJ CAPITAL CORPORATION By: /s/ Robert Finzi ------------------------------------------------- Robert Finzi Attorney-In-Fact SPROUT GROWTH II, L.P. By: DLJ Capital Corporation Managing General Partner By: /s/ Robert Finzi ------------------------------------------------- Robert Finzi Attorney-In-Fact SPROUT CAPITAL VI, L.P. By: DLJ Capital Corporation Managing General Partner By: /s/ Robert Finzi ------------------------------------------------- Robert Finzi Attorney-In-Fact PM FUNDING, INC. By: /s/ ------------------------------------------------- Name: Title: Vice President /s/ Arthur Cormier ------------------------------------------------- Arthur J. Cormier /s/ John Schaefer ------------------------------------------------- John F. Schaefer 34 38 PHASE METRICS, INC. By: /s/ Arthur Cormier ------------------------------------------------- Name: Arthur J. Cormier Title: President 35 39 FIRST AMENDMENT TO SECURITYHOLDERS AGREEMENT THIS FIRST AMENDMENT TO SECURITYHOLDERS AGREEMENT dated as of June 30, 1995 (the "Amendment") amends that certain Securityholders' Agreement (as hereinafter defined) and is made among DLJ Merchant Banking Partners, L.P., a Delaware limited partnership, DLJ International Partners, C.V., a Netherlands Antilles limited partnership, DLJ Offshore Partners, C.V., a Netherlands Antilles limited partnership, DLJ Merchant Banking Funding, Inc., a Delaware corporation, DLJ Capital Corporation, a Delaware corporation, Sprout Growth II, L.P., a Delaware limited partnership, Sprout Capital VI, L.P., a Delaware limited partnership, DLJ First ESC L.L.C., a Delaware limited liability company, PM Funding, Inc., a Delaware corporation (each of the foregoing, a "DLJ Entity", and collectively, the "DLJ Entities"), Phase Metrics, Inc., a California corporation (the "Issuer"), Arthur J. Cormier, an individual ("Cormier"), John F. Schaefer, an individual ("Schaefer"), Richard J. Freedland and Nanette A. Freedland as Trustees of the Freedland 1994 Unitrust, Alex Moraru and Liliana Moraru as Trustees of the Moraru 1994 Unitrust, Hung Ba Le and Anh Le as Trustees of the Le 1994 Unitrust, and Loai Najjar and Mickie Najjar as Trustees of the Najjar 1994 Unitrust (the "Shareholder Trusts"). WHEREAS, the Issuer desires to enter into that certain Stock Purchase and Exchange Agreement dated as of June 30, 1995 among the Issuer, Helios Incorporated ("Helios"), the Shareholder Trusts and each of the other parties thereto, pursuant to which the Issuer will acquire all of the issued and outstanding capital stock of Helios (the "Stock Purchase Agreement"); WHEREAS, in connection with the Stock Purchase Agreement, the Issuer will issue shares of its Common Stock (the "PM Shares") to the current shareholders of Helios (each a "Helios Shareholder" and, collectively, the "Helios Shareholders"); WHEREAS, in connection with the issuance of the PM Shares, each Helios Shareholder will become a party to the Securityholders Agreement dated as of November 23, 1994 (the "Securityholders Agreement") among the DLJ Entities, the Issuer, Schaefer and Cormier; WHEREAS, in order for the Helios Shareholders to become parties to the Security- holders Agreement, certain terms of the Securityholders Agreement must be amended. NOW, THEREFORE, for good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows: 1. Defined Terms. Capitalized terms not otherwise defined herein have the respective meanings assigned to them in the Securityholders Agreement. 1 40 2. References to the Securityholders Agreement. All references in the Securityholders Agreement to "this Agreement", and to all other words referring to the Securityholders Agreement (such as "herein", "hereto", "herewith" and "hereunder"), shall be deemed to mean and refer to the Securityholders Agreement, as amended by this Amendment (the "Securityholders Agreement"). All references in the Securityholders Agreement to "Securityholder" shall be deemed to include the Helios Shareholders. 3. Addition of Helios Shareholders to Securityholders Agreement. The parties hereto acknowledge and agree that each Helios Shareholder shall be deemed a "Securityholder" under the Securityholders Agreement and the PM Shares held by each Helios Shareholder shall be treated as "Securities" and "Common Stock" under the Securityholders Agreement. 4. Amendments to Securityholders Agreement. a. In Section 1.1 of the Securityholders Agreement, the following definition is hereby added: "`Helios Shareholders' means each Person who received shares of Common Stock of the Issuer pursuant to that certain Stock Purchase and Exchange Agreement dated as of June 30, 1995, among the Issuer, Helios Incorporated and each of the other parties signatory thereto." b. In Section 1.1 of the Securityholders Agreement, the following clause is hereby added to the definition of "Permitted Transferee": (iii) in the case of the Helios Shareholders, in addition to the Permitted Transferees enumerated in paragraph (ii) above, any beneficiary and/or trustee of any Helios Shareholder that is a trust; provided, that such transferee shall have agreed in writing to be bound by the terms of this Agreement; c. Section 3.1(b) of the Securityholders Agreement is hereby amended by inserting the words "the Helios Shareholders," before the word "Schaefer" in clause (vi). d. Section 4.1(g) is hereby amended as follows: (1) In the first sentence of clause (i), the word "or" between the words "Cormier" and "Schaefer" is deleted and replaced with a comma, and the words "or the Helios Shareholders" are inserted after the word "Schaefer"; (2) In the second sentence of clause (i), the word "and" between the words "Cormier" and "Schaefer" is deleted and replaced with a comma, and the words "and the Helios Shareholders" are inserted after the word "Schaefer"; 2 41 (3) In the last sentence of clause (i), the words "and Schaefer and Cormier may not effect another Tag along Sale without repeating the foregoing procedures" are deleted and replaced by "then Schaefer, Cormier and the Helios Shareholders may not effect another Tag along Sale without repeating the foregoing procedures"; and (4) In the third sentence of clause (v), the word "or" between the words "Cormier" and "Schaefer" is deleted and replaced with a comma, and the words "or the Helios Shareholders" are inserted after the word "Schaefer". e. Section 4.3(a) is hereby amended by deleting the words "Other Shareholder" in the sixth sentence and replacing them with the words "Other Securityholder". f. Section 5.2(b)(iii) of the Securityholders Agreement is hereby amended and restated in its entirety as follows: "(iii) third, all Registrable Stock other than Benchmark Shares requested to be included in such registration by any Securityholder pursuant to this Section 5.2 (allocated, if necessary for the offering not to exceed the Maximum Offering Size, pro rata among such Securityholders on the basis of the relative number of shares of Registrable Stock (excluding any Benchmark Shares) so requested to be included in such registration)." g. Section 5.3 of the Securityholders Agreement is hereby amended by inserting the words "the Helios Shareholders," after the word "Schaefer," in the last sentence. h. Section 7.7 of the Securityholders Agreement is hereby amended by inserting the following new paragraph immediately prior to the last sentence of Sec- tion 7.7: "if to the Helios Shareholders to: Richard J. Freedland and Nanette A. Freedland as Trustees of the Freedland 1994 Unitrust 1010 Madison Drive Mountain View, CA 94040 Hung Ba Le and Anh Le as Trustees of the Le 1994 Unitrust 2051 Edgegate San Jose, CA 95122 3 42 Alex Moraru and Liliana Moraru as Trustees of the Moraru 1994 Unitrust 4349 Nicolet Fremont, CA 94536 Loai Najjar and Mickie Najjar as Trustees of the Najjar 1994 Unitrust P.O. Box 3307 Santa Clara, CA 94087 with a copy to: Fenwick & West Two Palo Alto Square, Suite 800 Palo Alto, CA 94306 Attention: Dennis Debroeck Fax: (415) 857-0361" 5. Effect of Amendment. The Securityholders Agreement, as amended hereby, shall remain in full force and effect. 6. Effectiveness. This Amendment shall be effective only upon the Closing of the Stock Purchase Agreement. 7. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of California without regard to the conflicts of law provisions thereof. [Signature Pages to Follow] 4 43 COUNTERPART SIGNATURE PAGE TO FIRST AMENDMENT TO SECURITYHOLDERS AGREEMENT IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Securityholders Agreement to be duly executed by their respective authorized officers as of the day and year first above written. DLJ MERCHANT BANKING PARTNERS, L.P. By DLJ MERCHANT BANKING, INC. Managing General Partner By: /s/DLJ Merchant Banking, Inc. ------------------------------- Name: Title: DLJ INTERNATIONAL PARTNERS, C.V. By DLJ MERCHANT BANKING, INC. Advisory General Partner By: /s/DLJ Merchant Banking, Inc. ------------------------------- Name: Title: DLJ OFFSHORE PARTNERS, C.V. By DLJ MERCHANT BANKING, INC. Advisory General Partner By: /s/DLJ Merchant Banking, Inc. ------------------------------- Name: Title: 5 44 DLJ MERCHANT BANKING FUNDING, INC. By: /s/DLJ Merchant Banking Funding, Inc. ------------------------------- Name: Title: DLJ CAPITAL CORPORATION By: /s/DLJ Capital Corporation ------------------------------- Name: Title: DLJ FIRST ESC L.L.C. By: /s/DLJ First ESC L.L.C. ------------------------------- Name: Title: SPROUT GROWTH II, L.P. By DLJ Capital Corporation Managing General Partner By: /s/Robert Finzi ------------------------------- Robert Finzi Attorney-In-Fact SPROUT CAPITAL VI, L.P. By DLJ Capital Corporation Managing General Partner By: /s/Robert Finzi ------------------------------- Robert Finzi Attorney-In-Fact 6 45 /s/Arthur J. Cormier ------------------------------- Arthur J. Cormier /s/John F. Schaefer ------------------------------- John F. Schaefer [Signatures Continued on Next Page] 7 46 COUNTERPART SIGNATURE PAGE TO FIRST AMENDMENT TO SECURITYHOLDERS AGREEMENT PHASE METRICS, INC. By: /s/John F. Schaefer ------------------------------- Name: John F. Schaefer Title: Chief Executive Officer ACKNOWLEDGED AND AGREED TO: The undersigned parties hereby agree to be bound by the terms and conditions of this Amendment and the Securityholders Agreement dated as of November 23, 1994 among the DLJ Merchant Banking Partners, L.P., DLJ International Partners, C.V., DLJ Offshore Partners, C.V., DLJ Merchant Banking Funding, Inc., DLJ Capital Corporation, Sprout Growth II, L.P., Sprout Capital VI, L.P., DLJ First ESC L.L.C., PM Funding, Inc., Arthur J. Cormier, John F. Schaefer and Phase Metrics, Inc., as amended hereby. /s/Richard J. Freedland - ------------------------------------------------ Richard J. Freedland as Trustee of the Freedland 1994 Unitrust /s/Nanette A. Freedland - ------------------------------------------------ Nanette A. Freedland as Trustee of the Freedland 1994 Unitrust /s/Alex Moraru - ------------------------------------------------ Alex Moraru as Trustee of the Moraru 1994 Unitrust /s/Liliana Moraru - ------------------------------------------------ Liliana Moraru as Trustee of the Moraru 1994 Unitrust /s/Hung Ba Le - ------------------------------------------------ Hung Ba Le as Trustee of the Le 1994 Unitrust 8 47 /s/Anh Le - ------------------------------------------------ Anh Le as Trustee of the Le 1994 Unitrust /s/Loai Najjar - ------------------------------------------------ Loai Najjar as Trustee of the Najjar 1994 Unitrust /s/Mickie Najjar - ------------------------------------------------ Mickie Najjar as Trustee of the Najjar 1994 Unitrust 9 48 SECOND AMENDMENT TO SECURITYHOLDERS AGREEMENT THIS SECOND AMENDMENT TO SECURITYHOLDERS AGREEMENT dated as of July 18, 1995 (the "Amendment") amends that certain Securityholders' Agreement (as hereinafter defined) and is made among DLJ Merchant Banking Partners, L.P., a Delaware limited partnership, DLJ International Partners, C.V., a Netherlands Antilles limited partnership, DLJ Offshore Partners, C.V., a Netherlands Antilles limited partnership, DLJ Merchant Banking Funding, Inc., a Delaware corporation, DLJ Capital Corporation, a Delaware corporation, Sprout Growth II, L.P., a Delaware limited partnership, Sprout Capital VI, L.P., a Delaware limited partnership, DLJ First ESC L.L.C., a Delaware limited liability company, PM Funding, Inc., a Delaware corporation (each of the foregoing, a "DLJ Entity", and collectively, the "DLJ Entities"), Phase Metrics, Inc., a California corporation (the "Issuer"), Arthur J. Cormier, an individual ("Cormier"), John F. Schaefer, an individual ("Schaefer"), Richard J. Freedland and Nanette A. Freedland as Trustees of the Freedland 1994 Unitrust, Alex Moraru and Liliana Moraru as Trustees of the Moraru 1994 Unitrust, Hung Ba Le and Anh Le as Trustees of the Le 1994 Unitrust, and Loai Najjar and Mickie Najjar as Trustees of the Najjar 1994 Unitrust (the "Shareholder Trusts"). WHEREAS, the Issuer desires to enter into that certain Stock Purchase and Exchange Agreement dated as of July 18, 1995 among the Issuer, Applied Robotic Technologies, Inc. ("ART"), Neil A. Brumberger and Hart H. Brumberger (collectively, "Brumberger") , pursuant to which the Issuer will acquire all of the issued and outstanding capital stock of ART (the "Stock Purchase Agreement"); WHEREAS, in connection with the Stock Purchase Agreement, the Issuer will issue shares of its Common Stock (the "PM Shares") to Brumberger; WHEREAS, in connection with the issuance of the PM Shares, Brumberger will become a party to the Securityholders Agreement dated as of November 23, 1994, as amended by the First Amendment to Securityholders Agreement dated June 30, 1995 (the "Securityholders Agreement") among the DLJ Entities, the Issuer, Schaefer and Cormier; WHEREAS, in order for Brumberger to become parties to the Securityholders Agreement, certain terms of the Securityholders Agreement must be amended. NOW, THEREFORE, for good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows: 1. Defined Terms. Capitalized terms not otherwise defined herein have the respective meanings assigned to them in the Securityholders Agreement. 1 49 2. References to the Securityholders Agreement. All references in the Securityholders Agreement to "this Agreement", and to all other words referring to the Securityholders Agreement (such as "herein", "hereto", "herewith" and "hereunder"), shall be deemed to mean and refer to the Securityholders Agreement, as amended by this Amendment. All references in the Securityholders Agreement to "Securityholder" shall be deemed to include Brumberger. 3. Addition of Brumberger to Securityholders Agreement. The parties hereto acknowledge and agree that Brumberger shall be deemed a "Securityholder" under the Securityholders Agreement and the PM Shares held by Brumberger shall be treated as "Securities" and "Common Stock" under the Securityholders Agreement. 4. Amendments to Securityholders Agreement. (a) In Section 1.1 of the Securityholders Agreement, the following definition is hereby added: "`Brumberger' shall mean Neil A. Brumberger and Hart H. Brumberger." (b) Section 3.1(b) of the Securityholders Agreement is hereby amended by inserting the words ", Brumberger" after the word "Schaefer" in clause (vi). (c) Section 4.1(g) is hereby amended as follows: (i) In the first sentence of clause (i), the word "Brumberger," is inserted before the word "Cormier"; (ii) In the second sentence of clause (i), the word "Brumberger," is inserted before the word "Cormier"; (iii) In the last sentence of clause (i), the word "Brumberger," is inserted before the word "Schaefer"; and (iv) In the third sentence of clause (v), the word "Brumberger," is inserted before the word "Cormier." (d) Section 5.3 of the Securityholders Agreement is hereby amended by inserting the word "Brumberger," before the word "Cormier" in the last sentence. (e) Section 7.7 of the Securityholders Agreement is hereby amended by inserting the following new paragraph immediately prior to the last sentence of Section 7.7: 2 50 "if to Brumberger to: Neil A. Brumberger 121 Fiesta Circle Orinda, CA 94563 Fax: (510) 376-4609 with a copy to: Latham & Watkins 505 Montgomery Street Suite 1900 San Francisco, CA 94111 Attn: Christopher L. Kaufman, Esq. Fax: (415) 395-8095" 5. Effect of Amendment. The Securityholders Agreement, as amended hereby, shall remain in full force and effect. 6. Effectiveness. This Amendment shall be effective only upon the Closing of the Stock Purchase Agreement. 7. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of California without regard to the conflicts of law provisions thereof. [Signature Page to Follow] 3 51 COUNTERPART SIGNATURE PAGE TO AMENDMENT TO SECURITYHOLDERS AGREEMENT IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to Securityholders Agreement to be duly executed by their respective authorized officers as of the day and year first above written. DLJ MERCHANT BANKING PARTNERS, L.P. By DLJ MERCHANT BANKING, INC. Managing General Partner By: /s/DLJ Merchant Banking, Inc. ------------------------------------------- Name: Title: DLJ INTERNATIONAL PARTNERS, C.V. By DLJ MERCHANT BANKING, INC. Advisory General Partner By: /s/DLJ Merchant Banking, Inc. ------------------------------------------- Name: Title: DLJ OFFSHORE PARTNERS, C.V. By DLJ MERCHANT BANKING, INC. Advisory General Partner By: /s/DLJ Merchant Banking, Inc. ------------------------------------------- Name: Title: 4 52 DLJ MERCHANT BANKING FUNDING, INC. By: /s/DLJ Merchant Banking Funding, Inc. ------------------------------------------- Name: Title: DLJ CAPITAL CORPORATION By: /s/DLJ Capital Corporation ------------------------------------------- Name: Title: DLJ FIRST ESC L.L.C. By: /s/DLJ First ESC L.L.C. ------------------------------------------- Name: Title: SPROUT GROWTH II, L.P. By DLJ Capital Corporation Managing General Partner By: /s/Robert Finzi ------------------------------------------- Robert Finzi Attorney-In-Fact SPROUT CAPITAL VI, L.P. By DLJ Capital Corporation Managing General Partner By: /s/Robert Finzi ------------------------------------------- Robert Finzi Attorney-In-Fact 5 53 /s/Arthur J. Cormier ------------------------------------------- Arthur J. Cormier /s/John F. Schaefer ------------------------------------------- John F. Schaefer [Signatures Continued on Next Page] 6 54 COUNTERPART SIGNATURE PAGE TO AMENDMENT TO SECURITYHOLDERS AGREEMENT PHASE METRICS, INC. By: /s/John F. Schaefer ------------------------------------------- Name: John F. Schaefer Title: Chief Executive Officer ACKNOWLEDGED AND AGREED TO: The undersigned party hereby agrees to be bound by the terms and conditions of this Amendment and the Securityholders Agreement. /s/Neil A. Brumberger ------------------------------------------- Neil A. Brumberger /s/Hart H. Brumberger ------------------------------------------- Hart H. Brumberger 7 55 THIRD AMENDMENT TO SECURITYHOLDERS AGREEMENT THIS THIRD AMENDMENT TO SECURITYHOLDERS AGREEMENT dated as of January 18, 1996 (the "Amendment") amends that certain Securityholders' Agreement (as hereinafter defined) and is made among DLJ Merchant Banking Partners, L.P., a Delaware limited partnership; DLJ International Partners, C.V., a Netherlands Antilles limited partnership; DLJ Offshore Partners, C.V., a Netherlands Antilles limited partnership; DLJ Merchant Banking Funding, Inc., a Delaware corporation; DLJ Capital Corporation, a Delaware corporation; Sprout Growth II, L.P., a Delaware limited partnership; Sprout Capital VI, L.P., a Delaware limited partnership; DLJ First ESC L.L.C., a Delaware limited liability company; PM Funding, Inc., a Delaware corporation (each of the foregoing, a "DLJ Entity", and collectively, the "DLJ Entities"); Phase Metrics, Inc., a California corporation (the "Issuer"); Arthur J. Cormier, an individual ("Cormier"); John F. Schaefer, an individual ("Schaefer"); Richard J. Freedland and Nanette A. Freedland as Trustees of the Freedland 1994 Unitrust, Alex Moraru and Liliana Moraru as Trustees of the Moraru 1994 Unitrust, Hung Ba Le and Anh Le as Trustees of the Le 1994 Unitrust, and Loai Najjar and Mickie Najjar as Trustees of the Najjar 1994 Unitrust (collectively, the "Shareholder Trusts"); and Neil A. Brumberger and Hart H. Brumberger (collectively, "Brumberger") WHEREAS, the Issuer desires to enter into that certain Stock Purchase and Exchange Agreement dated as of even date herewith by and among the Issuer, Air Bearings, Incorporated ("ABI"), Roger D. and Mary Anne Christine Peters and Roger D. Peters and Mary Anne Christine Peters, as trustees for the Roger D. Peters and Mary Anne Christine Peters Living Trust (collectively, "Peters"); and Jeffrey K. and Yvonne H. Rhoton and Jeffrey K. Rhoton and Yvonne H. Rhoton, as trustees for the Jeffrey K. Rhoton and Yvonne H. Rhoton Living Trust (collectively, "Rhotons"), pursuant to which the Issuer will acquire all of the issued and outstanding capital stock of ABI (the "Stock Purchase Agreement"); WHEREAS, in connection with the Stock Purchase Agreement, the Issuer will issue shares of its Common Stock (the "PM Shares") to Peters and to Rhotons. WHEREAS, in connection with the issuance of the PM Shares, each of the Peters and each of the Rhotons will become a party to the Securityholders Agreement dated as of November 23, 1994, as amended by the First Amendment to Securityholders Agreement dated as of June 30, 1995 and the Second Amendment to the Securityholders Agreement dated as of July 18, 1995 (the "Securityholders Agreement"), by and among the DLJ Entities, Issuer, Schaefer, Cormier, the Shareholder Trusts, and Brumberger; WHEREAS, in order for the Peters and the Rhotons to each become a party to the Securityholders Agreement, certain terms of the Securityholders Agreement must be amended. 1 56 NOW, THEREFORE, for good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows: 1. Defined Terms. Capitalized terms not otherwise defined herein shall have the respective meanings assigned to them in the Securityholders Agreement. 2. References to the Securityholders Agreement. All references in the Securityholders Agreement to "this Agreement", and to all other words referring to the Securityholders Agreement (such as "herein", "hereto", "herewith" and "hereunder"), shall be deemed to mean and refer to the Securityholders Agreement, as amended by this Amendment. All references in the Securityholders Agreement to "Securityholder" shall be deemed to include each of Peters and Rhotons. 3. Addition of Peters and Rhotons to Securityholders Agreement. The parties hereto acknowledge and agree that each of the Peters and each of the Rhotons shall each be deemed a "Securityholder" under the Securityholders Agreement and the PM Shares held by Peters and Rhotons shall be treated as "Securities" and "Common Stock" under the Securityholders Agreement. 4. Amendments to Securityholders Agreement. (a) In Section 1.1 of the Securityholders Agreement, the following definitions are hereby added: "`Peters' shall mean Roger D. Peters and Mary Anne Christine Peters, as trustees for the Roger D. Peters and Mary Anne Christine Peters Living Trust." "`Rhotons' shall mean Jeffrey K. Rhoton and Yvonne H. Rhoton, as trustees for the Jeffrey K. Rhoton and Yvonne H. Rhoton Living Trust." (b) Section 3.1(b) of the Securityholders Agreement is hereby amended by inserting the words ", Peters, Rhotons" before the word "Schaefer" in clause (vi). (c) Section 4.1(g) is hereby amended as follows: (i) In the first sentence of clause (i), the words ", Peters, Rhotons" are inserted after the word "Schaefer"; (ii) In the second sentence of clause (i), the words ", Peters, Rhotons" are inserted after the word "Schaefer"; 2 57 (iii) In the last sentence of clause (i), the words ". Peters, Rhotons" are inserted after the word "Schaefer"; and (iv) In the third sentence of clause (v), the words ", Peters, Rhotons" are inserted after the word "Schaefer." (d) Section 5.3 of the Securityholders Agreement is hereby amended by inserting the words ", Peters, Rhotons" after the word "Schaefer" in the last sentence. (e) Section 7.7 of the Securityholders Agreement is hereby amended by inserting the following new paragraph immediately prior to the last sentence of Sec- tion 7.7: "if to Peters to: Roger D. Peters Mary Anne Christine Peters 152 Chicago Way San Francisco, CA 94112 with a copy to: Bronson, Bronson & McKinnon 505 Montgomery Street San Francisco, California 94111-2514 Attn: William T. Manierre, Esq. Fax: (415) 982-1394 if to Rhotons to: Jeffrey K. Rhoton Yvonne H. Rhoton 30 Woodland Court San Ramon, CA 94583 with a copy to: Bronson, Bronson & McKinnon 505 Montgomery Street San Francisco, California 94111-2514 Attn: William T. Manierre, Esq. Fax: (415) 982-1394" 3 58 5. Effect of Amendment. The Securityholders Agreement, as amended hereby, shall remain in full force and effect. 6. Effectiveness. This Amendment shall be effective only upon the Closing of the Stock Purchase Agreement. 7. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of California without regard to the conflicts of law provisions thereof. [Signature Page to Follow] 4 59 COUNTERPART SIGNATURE PAGE TO AMENDMENT TO SECURITYHOLDERS AGREEMENT IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to Securityholders Agreement to be duly executed by their respective authorized officers as of the day and year first above written. DLJ MERCHANT BANKING PARTNERS, L.P. By DLJ MERCHANT BANKING, INC. Managing General Partner By: /s/DLJ Merchant Banking, Inc. ------------------------------------------- Name: Title: DLJ INTERNATIONAL PARTNERS, C.V. By DLJ MERCHANT BANKING, INC. Advisory General Partner By: /s/DLJ Merchant Banking, Inc. ------------------------------------------- Name: Title: DLJ OFFSHORE PARTNERS, C.V. By DLJ MERCHANT BANKING, INC. Advisory General Partner By: /s/DLJ Merchant Banking, Inc. ------------------------------------------- Name: Title: DLJ MERCHANT BANKING FUNDING, INC. By: /s/DLJ Merchant Banking Funding, Inc. ------------------------------------------- Name: 5 60 Title: DLJ CAPITAL CORPORATION By: /s/DLJ Capital Corporation ------------------------------------------- Name: Title: DLJ FIRST ESC L.L.C. By: /s/DLJ First ESC L.L.C. ------------------------------------------- Name: Title: SPROUT GROWTH II, L.P. By DLJ Capital Corporation Managing General Partner By: /s/Robert Finzi ------------------------------------------- Robert Finzi Attorney-In-Fact SPROUT CAPITAL VI, L.P. By DLJ Capital Corporation Managing General Partner By: /s/Robert Finzi ------------------------------------------- Robert Finzi Attorney-In-Fact THE FREEDLAND 1994 UNITRUST By: /s/Richard J. Freedland ------------------------------------------- Richard J. Freedland, Trustee 6 61 By: /s/Nanette A. Freedland ----------------------------------------- Nanette A. Freedland, Trustee THE MORARU 1994 UNITRUST By: /s/Alex Moraru ----------------------------------------- Alex Moraru, Trustee By: /s/Liliana Moraru ----------------------------------------- Liliana Moraru, Trustee THE LE 1994 UNITRUST By: /s/Hung Ba Le ----------------------------------------- Hung Ba Le, Trustee By: /s/Anh Le ----------------------------------------- Anh Le, Trustee THE NAJJAR 1994 UNITRUST By: /s/Loai Najjar ----------------------------------------- Loai Najjar, Trustee By: /s/Mickie Najjar ----------------------------------------- Mickie Najjar, Trustee /s/Arthur J. Cormier ----------------------------------------- Arthur J. Cormier /s/John F. Schaefer ----------------------------------------- John F. Schaefer [Signatures Continued on Next Page] 7 62 COUNTERPART SIGNATURE PAGE TO AMENDMENT TO SECURITYHOLDERS AGREEMENT PHASE METRICS, INC. By: /s/John F. Schaefer --------------------------------------- Name: John F. Schaefer Title: Chief Executive Officer /s/Neil A. Brumberger --------------------------------------- Neil A. Brumberger /s/Hart H. Brumberger --------------------------------------- Hart H. Brumberger 8 63 ACKNOWLEDGED AND AGREED TO: The undersigned parties hereby agree to be bound by the terms and conditions of this Amendment and the Securityholders Agreement. /s/Roger D. Peters --------------------------------------------- Roger D. Peters, individually and as Co- Trustee with Mary Anne Christine Peters for the Roger D. Peters and Mary Anne Christine Peters Living Trust /s/Mary Anne Christine Peters --------------------------------------------- Mary Anne Christine Peters, individually and as Co-Trustee with Roger D. Peters for the Roger D. Peters and Mary Anne Christine Peters Living Trust /s/Jeffrey K. Rhoton --------------------------------------------- Jeffrey K. Rhoton, individually and as Co- Trustee with Yvonne H. Rhoton for the Jeffrey K. Rhoton and Yvonne H. Rhoton Living Trust /s/Yvonne H. Rhoton --------------------------------------------- Yvonne H. Rhoton, individually and as Co- Trustee with Jeffrey K. Rhoton as Co- Trustee for the Jeffrey K. Rhoton and Yvonne H. Rhoton Living Trust 9 64 FOURTH AMENDMENT TO SECURITYHOLDERS AGREEMENT THIS FOURTH AMENDMENT TO SECURITYHOLDERS AGREEMENT dated as of August 23, 1996 (the "Amendment") amends that certain Securityholders' Agreement (as hereinafter defined) and is made among DLJ Merchant Banking Partners, L.P., a Delaware limited partnership; DLJ International Partners, C.V., a Netherlands Antilles limited partnership; DLJ Offshore Partners, C.V., a Netherlands Antilles limited partnership; DLJ Merchant Banking Funding, Inc., a Delaware corporation; DLJ Capital Corporation, a Delaware corporation; Sprout Growth II, L.P., a Delaware limited partnership; Sprout Capital VI, L.P., a Delaware limited partnership; DLJ First ESC L.L.C., a Delaware limited liability company; PM Funding, Inc., a Delaware corporation (collectively, the "DLJ Entities"); Phase Metrics, Inc., a California corporation (the "Issuer"); Arthur J. Cormier, an individual ("Cormier"); John F. Schaefer, an individual ("Schaefer"); Richard J. Freedland and Nanette A. Freedland as Trustees of the Freedland 1994 Unitrust, Alex Moraru and Liliana Moraru as Trustees of the Moraru 1994 Unitrust, Hung Ba Le and Anh Le as Trustees of the Le 1994 Unitrust, and Loai Najjar and Mickie Najjar as Trustees of the Najjar 1994 Unitrust; Neil A. Brumberger and Hart H. Brumberger; Roger D. and Mary Anne Christine Peters and Roger D. Peters and Mary Anne Christine Peters, as trustees for the Roger D. Peters and Mary Anne Christine Peters Living Trust; and Jeffrey K. and Yvonne H. Rhoton and Jeffrey K. Rhoton and Yvonne H. Rhoton, as trustees for the Jeffrey K. Rhoton and Yvonne H. Rhoton Living Trust. WHEREAS, on the date hereof, the DLJ Entities, Schaefer and Cormier are entering into a Securities Purchase Agreement and in connection with the purchase of certain Securities of Schaefer and Cormier thereunder by the DLJ Entities to be effected on the date hereof, the parties agree to amend the Securityholders Agreement as set forth herein. NOW, THEREFORE, for good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows: 1. Defined Terms. Capitalized terms not otherwise defined in this Amendment shall have the respective meanings assigned to them in the Securityholders Agreement. 2. References to the Securityholders Agreement. All references in the Securityholders Agreement to "this Agreement", and to all other words referring to the Securityholders Agreement (such as "herein", "hereto", "herewith" and "hereunder"), shall be deemed to mean and refer to the Securityholders Agreement, as amended by this Amendment. 65 3. Amendments to Securityholders Agreement. (a) The definition of "Permitted Transferee" set forth in Section 1.1 shall be amended as follows: A new subsection (iii) shall be added to the definition of Permitted Transferee following subsection (ii) thereof and shall read in full as follows: "(iv) in the case of Schaefer and Cormier, not withstanding clause (E) of subsection (ii) above, the DLJ Entities; provided that in no event shall Schaefer or Cormier transfer to the DLJ Entities in excess of 50,000 shares each of the Series A Preferred Stock in reliance on this subsection (iv)." (b) The word "and" shall be deleted from the end of subsection (i) the period at the end of subsection (ii) shall be deleted and replaced with ";", and "; and" shall be inserted at the end of subsection (iii) in place of the period. 4. Effect of Amendment. The Securityholders Agreement, as amended hereby, shall remain in full force and effect. 5. Effectiveness. This Amendment shall be effective only upon the Closing of the Stock Purchase Agreement. 6. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of California without regard to the conflicts of law provisions thereof. [Signature Page to Follow] 2 66 COUNTERPART SIGNATURE PAGE TO AMENDMENT TO SECURITYHOLDERS AGREEMENT IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to Securityholders Agreement to be duly executed by their respective authorized officers as of the day and year first above written. DLJ MERCHANT BANKING PARTNERS, L.P. By DLJ MERCHANT BANKING, INC. Managing General Partner By: /s/DLJ Merchant Banking, Inc. ----------------------------------------------- Name: Title: DLJ INTERNATIONAL PARTNERS, C.V. By DLJ MERCHANT BANKING, INC. Advisory General Partner By: /s/DLJ Merchant Banking, Inc. ----------------------------------------------- Name: Title: DLJ OFFSHORE PARTNERS, C.V. By DLJ MERCHANT BANKING, INC. Advisory General Partner By: /s/DLJ Merchant Banking, Inc. ----------------------------------------------- Name: Title: DLJ MERCHANT BANKING FUNDING, INC. By: /s/DLJ Merchant Banking Funding, Inc. ----------------------------------------------- Name: 3 67 Title: COUNTERPART SIGNATURE PAGE TO AMENDMENT TO SECURITYHOLDERS AGREEMENT DLJ CAPITAL CORPORATION By: /s/DLJ Capital Corporation ----------------------------------------------- Name: Title: DLJ FIRST ESC L.L.C. By: /s/DLJ First ESC L.L.C. ----------------------------------------------- Name: Title: SPROUT GROWTH II, L.P. By DLJ Capital Corporation Managing General Partner By: /s/Robert Finzi ----------------------------------------------- Robert Finzi Attorney-In-Fact SPROUT CAPITAL VI, L.P. By DLJ Capital Corporation Managing General Partner By: /s/Robert Finzi ----------------------------------------------- Robert Finzi Attorney-In-Fact /s/Arthur J. Cormier ----------------------------------------------- Arthur J. Cormier 4 68 /s/John F. Schaefer ----------------------------------------------- John F. Schaefer 5 69 COUNTERPART SIGNATURE PAGE TO AMENDMENT TO SECURITYHOLDERS AGREEMENT PHASE METRICS, INC. By: /s/John F. Schaefer -------------------------------------------- Name: John F. Schaefer Title: Chief Executive Officer 6 70 FIFTH AMENDMENT TO SECURITYHOLDERS AGREEMENT THIS FIFTH AMENDMENT TO SECURITYHOLDERS AGREEMENT dated as of December 31, 1996 (the "Amendment") amends that certain Securityholders' Agreement (as hereinafter defined) and is made among DLJ Merchant Banking Partners, L.P., a Delaware limited partnership; DLJ International Partners, C.V., a Netherlands Antilles limited partnership; DLJ Offshore Partners, C.V., a Netherlands Antilles limited partnership; DLJ Merchant Banking Funding, Inc., a Delaware corporation; DLJ Capital Corporation, a Delaware corporation; Sprout Growth II, L.P., a Delaware limited partnership; Sprout Capital VI, L.P., a Delaware limited partnership; DLJ First ESC L.L.C., a Delaware limited liability company; (collectively, the "DLJ Entities"); Phase Metrics, Inc., a California corporation (the "Issuer"); Arthur J. Cormier, an individual ("Cormier"); John F. Schaefer, an individual ("Schaefer"); Richard J. Freedland and Nanette A. Freedland as Trustees of the Freedland 1994 Unitrust, Alex Moraru and Liliana Moraru as Trustees of the Moraru 1994 Unitrust, Hung Ba Le and Anh Le as Trustees of the Le 1994 Unitrust, and Loai Najjar and Mickie Najjar as Trustees of the Najjar 1994 Unitrust (collectively, the "Shareholder Trusts"); Neil A. Brumberger and Hart H. Brumberger (collectively "Brumberger"); Roger D. and Mary Anne Christine Peters and Roger D. Peters and Mary Anne Christine Peters, as trustees for the Roger D. Peters and Mary Anne Christine Peters Living Trust (collectively, "Peters"); and Jeffrey K. and Yvonne H. Rhoton and Jeffrey K. Rhoton and Yvonne H. Rhoton, as trustees for the Jeffrey K. Rhoton and Yvonne H. Rhoton Living Trust (collectively, "Rhotons"). WHEREAS, the Issuer has entered into that certain Agreement and Plan of Reorganization Agreement dated as of December 6, 1996, by and among the Issuer, PM Acquisition Corporation, a California corporation and wholly-owned subsidiary of Issuer ("Merger Sub"), Santa Barbara Metric, Inc., a California corporation ("SBM"), Raymond M. Karam ("Karam"), Randall E. Bye ("Bye") and Pedro A. Aylwin ("Aylwin"), pursuant to which Merger Sub will be combined with and into SBM, the surviving corporation in the merger (the "Reorganization Agreement"). WHEREAS, in connection with the Reorganization Agreement, the Issuer will issue shares of its Common Stock (the "PM Shares") to Karam, Bye and Aylwin. WHEREAS, in connection with the issuance of the PM Shares, each of Karam, Bye and Aylwin have agreed to become parties to the Securityholders Agreement dated as of November 23, 1994, as amended by the First Amendment to Securityholders Agreement dated as of June 30, 1995, the Second Amendment to the Securityholders Agreement dated as of July 18, 1995, the Third Amendment to Securityholders Agreement dated as of January 18, 1996 and the Fourth Amendment to Securityholders Agreement dated as of August 23, 1996 (the "Securityholders Agreement"), by and among the DLJ Entities, Issuer, Schaefer, Cormier, the Shareholder Trusts, Brumberger, Peters and Rhotons. 71 WHEREAS, in order for Karam, Bye and Aylwin to each become a party to the Securityholders Agreement, certain terms of the Securityholders Agreement must be amended. NOW, THEREFORE, for good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows: 1. Defined Terms. Capitalized terms not otherwise defined herein shall have the respective meanings assigned to them in the Securityholders Agreement. 2. References to the Securityholders Agreement. All references in the Securityholders Agreement to "this Agreement", and to all other words referring to the Securityholders Agreement (such as "herein", "hereto", "herewith" and "hereunder"), shall be deemed to mean and refer to the Securityholders Agreement, as amended by this Amendment. All references in the Securityholders Agreement to "Securityholder" shall be deemed to include each of Karam, Bye and Aylwin. 3. Addition of Karam, Bye and Aylwin to Securityholders Agreement. The parties hereto acknowledge and agree that each of Karam, Bye and Aylwin shall each be deemed a "Securityholder" under the Securityholders Agreement and the PM Shares held by Karam, Bye and Aylwin shall be treated as "Securities" and "Common Stock" under the Securityholders Agreement. 4. Amendments to Securityholders Agreement. a. In Section 1.1 of the Securityholders Agreement, the following definitions are hereby added: "`Aylwin' shall mean Pedro A. Aylwin." "`Bye' shall mean Randall E. Bye." "`Karam' shall mean Raymond M. Karam." b. Section 3.1(b) of the Securityholders Agreement is hereby amended by inserting the words "Karam, Bye, Aylwin" before the words "Peters, Rhotons" in clause (vi). c. Section 4.1(g) is hereby amended as follows: (1) In the first sentence of clause (i), the words, ", Karam, Bye and Aylwin" are inserted after the words "Peters, Rhotons"; 2 72 (2) In the second sentence of clause (i), the words, ", Karam, Bye and Aylwin" are inserted after the words "Peters, Rhotons"; (3) In the last sentence of clause (i), the words, ", Karam, Bye and Aylwin" are inserted after the words "Peters, Rhotons"; and (4) In the third sentence of clause (v), the words, ", Karam, Bye and Aylwin," are inserted after the words "Peters, Rhotons." d. Section 5.3 of the Securityholders Agreement is hereby amended by inserting the words, ", Karam, Bye and Aylwin," after the words "Peters, Rhotons" in the last sentence. e. Section 7.7 of the Securityholders Agreement is hereby amended by inserting the following new paragraph immediately prior to the last sentence of Sec- tion 7.7: "if to Karam to: Raymond M. Karam 226 East Junipero Santa Barbara, CA 93105 with a copy to: Price, Postel & Parma LLP 200 East Carrillo Street Suite 400 Santa Barbara, CA 93101 Attn: Raymond P. Le Blanc Fax: (805) 965-3978 if to Bye to: Randall E. Bye 535 Chalkhill Road Solvang, CA 93463 with a copy to: Price, Postel & Parma LLP 200 East Carrillo Street Suite 400 Santa Barbara, CA 93101 Attn: Raymond P. Le Blanc 3 73 Fax: (805) 965-3978 if to Aylwin to: Pedro A. Aylwin 1054 Miramonte Drive, #3 Santa Barbara, CA 93107 with a copy to: Price, Postel & Parma LLP 200 East Carrillo Street Suite 400 Santa Barbara, CA 93101 Attn: Raymond P. Le Blanc Fax: (805) 965-3978" 5. Effect of Amendment. The Securityholders Agreement, as amended hereby, shall remain in full force and effect. 6. Effectiveness. This Amendment shall be effective only at the Effective Time (as defined in the Reorganization Agreement). 7. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of California without regard to the conflicts of law provisions thereof. [Signature Page to Follow] 4 74 COUNTERPART SIGNATURE PAGE TO AMENDMENT TO SECURITYHOLDERS AGREEMENT IN WITNESS WHEREOF, the parties hereto have caused this Fifth Amendment to Securityholders Agreement to be duly executed by their respective authorized officers as of the day and year first above written. DLJ MERCHANT BANKING PARTNERS, L.P. By DLJ MERCHANT BANKING, INC. Managing General Partner By: /s/DLJ Merchant Banking, Inc. -------------------------------------------- Name: Title: DLJ INTERNATIONAL PARTNERS, C.V. By DLJ MERCHANT BANKING, INC. Advisory General Partner By: /s/DLJ Merchant Banking, Inc. -------------------------------------------- Name: Title: DLJ OFFSHORE PARTNERS, C.V. By DLJ MERCHANT BANKING, INC. Advisory General Partner By: /s/DLJ Merchant Banking, Inc. -------------------------------------------- Name: Title: DLJ MERCHANT BANKING FUNDING, INC. By: /s/DLJ Merchant Banking Funding, Inc. -------------------------------------------- Name: 5 75 Title: DLJ CAPITAL CORPORATION By: /s/DLJ Capital Corporation -------------------------------------------- Name: Title: DLJ FIRST ESC L.L.C. By: /s/DLJ First ESC L.L.C. -------------------------------------------- Name: Title: SPROUT GROWTH II, L.P. By DLJ Capital Corporation Managing General Partner By: /s/Robert Finzi -------------------------------------------- Robert Finzi Attorney-In-Fact SPROUT CAPITAL VI, L.P. By DLJ Capital Corporation Managing General Partner By: /s/Robert Finzi -------------------------------------------- Robert Finzi Attorney-In-Fact /s/Arthur J. Cormier -------------------------------------------- Arthur J. Cormier /s/John F. Schaefer -------------------------------------------- John F. Schaefer 6 76 [Signatures Continued on Next Page] 7 77 COUNTERPART SIGNATURE PAGE TO AMENDMENT TO SECURITYHOLDERS AGREEMENT PHASE METRICS, INC. By: /s/John F. Schaefer ----------------------------------------- Name: John F. Schaefer Title: Chief Executive Officer ACKNOWLEDGED AND AGREED TO: The undersigned parties hereby agree to be bound by the terms and conditions of this Amendment and the Securityholders Agreement. /s/Raymond M. Karam ----------------------------------------- Raymond M. Karam /s/Randall E. Bye ----------------------------------------- Randall E. Bye /s/Pedro A. Aylwin ----------------------------------------- Pedro A. Aylwin ACKNOWLEDGEMENT OF SPOUSES: The undersigned spouses of the foregoing partner acknowledge and agree to be bound by the terms and conditions of this Amendment and the Securityholders Agreement. ________________________________________ ________________________________________ ________________________________________ 8 78 SIXTH AMENDMENT TO SECURITYHOLDERS AGREEMENT THIS SIXTH AMENDMENT TO SECURITYHOLDERS AGREEMENT dated as of August 1, 1997 (the "Amendment") amends that certain Securityholders' Agreement (as hereinafter defined) and is made among DLJ Merchant Banking Partners, L.P., a Delaware limited partnership; DLJ International Partners, C.V., a Netherlands Antilles limited partnership; DLJ Offshore Partners, C.V., a Netherlands Antilles limited partnership; DLJ Merchant Banking Funding, Inc., a Delaware corporation; DLJ Capital Corporation, a Delaware corporation; Sprout Growth II, L.P., a Delaware limited partnership; Sprout Capital VI, L.P., a Delaware limited partnership; DLJ First ESC L.L.C., a Delaware limited liability company; (collectively, the "DLJ Entities"); Phase Metrics, Inc., a California corporation (the "Issuer"); Arthur J. Cormier, an individual ("Cormier"); John F. Schaefer, an individual ("Schaefer"); Richard J. Freedland and Nanette A. Freedland as Trustees of the Freedland 1994 Unitrust, Alex Moraru and Liliana Moraru as Trustees of the Moraru 1994 Unitrust, Hung Ba Le and Anh Le as Trustees of the Le 1994 Unitrust, and Loai Najjar and Mickie Najjar as Trustees of the Najjar 1994 Unitrust (collectively, the "Shareholder Trusts"); Neil A. Brumberger and Hart H. Brumberger (collectively "Brumberger"); Roger D. and Mary Anne Christine Peters and Roger D. Peters and Mary Anne Christine Peters, as trustees for the Roger D. Peters and Mary Anne Christine Peters Living Trust (collectively, "Peters"); Jeffrey K. and Yvonne H. Rhoton and Jeffrey K. Rhoton and Yvonne H. Rhoton, as trustees for the Jeffrey K. Rhoton and Yvonne H. Rhoton Living Trust (collectively, "Rhotons"); Pedro A. Aylwin, an individual ("Aylwin"); Randall E. Bye, an individual ("Bye"); and Raymond M. Karam, an individual ("Karam"). WHEREAS,the Issuer desires to increase the number of members of its Board of Directors from five (5) to six (6); NOW, THEREFORE, for good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows: 1. Defined Terms. Capitalized terms not otherwise defined herein shall have the respective meanings assigned to them in the Securityholders Agreement. 2. References to the Securityholders Agreement. All references in the Securityholders Agreement to "this Agreement," and to all other words referring to the Securityholders Agreement (such as "herein," "hereto," "herewith" and "hereunder"), shall be deemed to mean and refer to the Securityholders Agreement, as amended by this Amendment. 79 3. Amendments to Securityholders Agreement. Article 2, Section 2.1 shall be amended as follows: 2.1 Composition of the Board. The Board shall consist of six members, of whom one shall be designated by DLJ Merchant Banking Partners, L.P., one shall be designated by Sprout Growth II, L.P., one shall be designated by Schaefer, one shall be designated by Cormier, one shall be an individual (the "Fifth Director") designated by Cormier and Schaefer and acceptable to the DLJ Entities, which individual is neither an "Affiliate" nor an "Associate" (as those terms are used within the meaning of Rule 12b-2 of the General Rules and Regulations under the Exchange Act) of the DLJ Entities, Schaefer or Cormier, and one shall be an individual (the "Sixth Director") designated by a majority of the other five directors, which individual is neither an "Affiliate" nor an "Associate" (as those terms are used within the meaning of Rule 12b-2 of the General Rules and Regulations under the Exchange Act) of the DLJ Entities, Schaefer or Cormier. Each Securityholder entitled to vote for the election of directors to the Board agrees that it will vote its Securities or execute consents, as the case may be, and take all other necessary action (including causing the Issuer to call a special meeting of shareholders) in order to ensure that the composition of the Board is as set forth in this Section 2.1. 4. Effect of Amendment. The Securityholders Agreement, as amended hereby, shall remain in full force and effect. 5. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of California without regard to the conflicts of law provisions thereof. [Signature Page to Follow] 2 80 COUNTERPART SIGNATURE PAGE TO AMENDMENT TO SECURITYHOLDERS AGREEMENT IN WITNESS WHEREOF, the parties hereto have caused this Sixth Amendment to Securityholders Agreement to be duly executed by their respective authorized officers as of the day and year first above written. DLJ MERCHANT BANKING PARTNERS, L.P. By DLJ MERCHANT BANKING, INC. Managing General Partner By: /s/DLJ Merchant Banking, Inc. ------------------------------------------- Name: Title: DLJ INTERNATIONAL PARTNERS, C.V. By DLJ MERCHANT BANKING, INC. Advisory General Partner By: /s/DLJ International Partners, C.V. ------------------------------------------- Name: Title: DLJ OFFSHORE PARTNERS, C.V. By DLJ MERCHANT BANKING, INC. Advisory General Partner By: /s/DLJ Offshore Partners, C.V. ------------------------------------------- Name: Title: DLJ MERCHANT BANKING FUNDING, INC. By: /s/DLJ Merchant Banking Funding, Inc. ------------------------------------------- Name: Title: 3 81 DLJ CAPITAL CORPORATION By: /s/DLJ Capital Corporation ------------------------------------------- Name: Title: DLJ FIRST ESC L.L.C. By: /s/DLJ First ESC L.L.C. ------------------------------------------- Name: Title: SPROUT GROWTH II, L.P. By DLJ Capital Corporation Managing General Partner By: /s/Robert Finzi ------------------------------------------- Robert Finzi Attorney-In-Fact SPROUT CAPITAL VI, L.P. By DLJ Capital Corporation Managing General Partner By: /s/Robert Finzi ------------------------------------------- Robert Finzi Attorney-In-Fact /s/Arthur J. Cormier ------------------------------------------- Arthur J. Cormier /s/John F. Schaefer ------------------------------------------- John F. Schaefer [Signatures Continued on Next Page] 4 82 COUNTERPART SIGNATURE PAGE TO AMENDMENT TO SECURITYHOLDERS AGREEMENT PHASE METRICS, INC. By: /s/John F. Schaefer ------------------------------------------- Name: John F. Schaefer Title: Chief Executive Officer 5 EX-10.12 16 MASTER CAPITAL LEASE AGREEMENT DATED 01/13/1996 1 Exhibit 10.12 - ------------------------------------------------------------------------------- Lessor NTFC CAPITAL CORPORATION MASTER CAPITAL LEASE AGREEMENT - ------------------------------------------------------------------------------- LESSEE INFORMATION - ------------------------------------------------------------------------------- Lessee Person to Contact/Title PHASE METRICS, INC. R. Joseph Saunders - -------------------------------------------------------------------------------- Address Master Capital Lease Agreement No. [X]Corporation [ ]Proprietorship [ ]Partnership 10260 Sorrento Valley Road 53440 - -------------------------------------------------------------------------------- City County State Zip Code Telephone Number San Diego San Diego CA 92121 (619)597-7978 - -------------------------------------------------------------------------------- TERMS AND CONDITIONS (Reverse side contains Terms and Conditions which are also a part of this Agreement) 1. LEASE: Subject to Lessee's compliance with its obligations herein, Lessor shall purchase and lease to Lessee, and Lessee shall lease from Lessor, the equipment and associated items ("Equipment") that shall be described on or referred to in any Equipment Schedule ("Schedule") to this Master Capital Lease Agreement ("Agreement") which is executed from time to time by Lessor and Lessee and which makes reference to this Agreement. Each Schedule shall be subject to the terms and conditions set forth in this Agreement. To the extent certain computer programs and documentation used to describe, maintain and use the programs ("Software") are furnished with the Equipment, and a non-exclusive license and/or sublicense is granted in Lessee's agreement with a supplier ("Supplier") to purchase the Equipment ("Supplier Agreement"), Lessor grants to Lessee a similar non-exclusive sublicense to use the Software only in conjunction with the Equipment for so long as the Equipment is leased hereunder. The Equipment and Software (collectively, the "System") include all parts, repairs, additions, accessories, attachments and a substitutions thereto. Any reference to "Lease" shall mean with respect to each System described in any particular Schedule, this Agreement, the Schedule, the Consent of Supplier, the Delivery and Acceptance Certificate, any riders, amendments and addenda thereto, and other documents as may from time to time be made a part hereof. As conditions precedent to Lessor's obligation to purchase and lease any Equipment and sublicense the Software to Lessee, not later than the Scheduled Commencement Date as set forth on the applicable Schedule, (a) Lessee and Lessor shall have both executed this Agreement, a Schedule and other documentation as contemplated herein in Lessor's form thereof, and (b) Lessor, in its reasonable opinion, shall not determine that there has been a material adverse change in Lessee's condition. Upon Lessor's execution and acceptance of the Schedule, Lessee hereby assigns to Lessor its rights to receive title to the Equipment and any non-exclusive sublicense to use the Software as of the date the System is delivered to the location shown on the applicable Schedule ("Installation Site") and delegates to Lessor its duty to pay to the Supplier the Price (as defined in Section 5 below) for the System under the Supplier Agreement, but no other right, interest or obligation thereunder. Effective upon the termination of the Term (as defined below and as shown in the applicable Schedule), for any reason after the commencement of the Lease, other than Lessee's election to purchase the Equipment, Lessee hereby assigns to Lessor and Lessor hereby accepts from Lessee, all of Lessee's then remaining rights pursuant to the applicable Supplier Agreement. 2. TERM; RENEWAL AND EXTENSIONS: This Agreement will become effective upon execution by both Lessee and Lessor and shall continue in effect thereafter so long as any Lease remains in effect and may be terminated thereafter upon the mutual agreement of the parties. Provided all other conditions precedent to a Lease have been met, the lease term for the System described on each Schedule shall commence on the earlier of the date of execution by the Lessee of Lessor's form of Delivery and Acceptance Certificate or the date Lessor deems the System accepted pursuant to Section 6 herein ("Commencement Date"), and continue and be non-cancellable for the full number of months or other periods as set forth in such Schedule ("Initial Term"), plus any mutually agreed extension thereto, if any, (collectively, the "Term"), the first such full month commencing on the first day of the month following the Commencement Date (or commencing on the Commencement Date if such date is the first day of the month). 3. RENT AND PAYMENT: Lessee shall pay to Lessor all the rental payments as shown in the applicable Schedule ("Rent") during the entire Term of the Lease, except as such Rent may be adjusted pursuant to this Section, plus such additional amounts as are due Lessor under the Lease. Rent shall be paid monthly (or other Payment Frequency designated in the applicable Schedule) in advance on the first day of each calendar month (or other such Payment Frequency period) (each such date being hereinafter called a "Rent Payment Date"). If the Commencement Date for a Lease is other than the first day of a calendar month (or other payment period), Lessee shall pay to Lessor on the Commencement Date an amount equal to the Rent set forth in the Schedule prorated daily based on a 360-day year for each day from and including the Commencement Date to and including the last day of such month or other payment period. The Rent is based upon the Supplier's estimated total price of the System and the acceptance of the System by Lessee on or before the Scheduled Commencement Date (as set forth in the Schedule). If the Price (as defined below and as set forth in the Schedule) of the installed System exceeds or is less than the estimate as a result of a job change order ("JCO"), the Lessee authorizes Lessor to adjust the Rent accordingly. If the Commencement Date occurs after the Scheduled Commencement Date and Lessor waives the condition precedent that the Commencement Date occur on or before the Scheduled Commencement Date, Lessor's then current Lease Rate Factor for similar transactions shall apply and the Lessee authorizes Lessor to adjust the Rent, if required. Rent may also be adjusted as a result of any Modifications or Additions (as defined in Section 1 of the Schedule) made pursuant to Section 2 of the Schedule. Lessor shall inform Lessee in writing of any such adjustment. Whenever any payment of Rent or otherwise is not made within ten days of when due, to the extent permitted by applicable law, Lessee agrees to pay on demand (as a fee to offset Lessor's collection and administrative expenses), the greater of twenty-five dollars per month or one and one-half percent per month of all overdue amounts but not exceeding the lawful maximum, if any. All payments provided for herein shall be payable to Lessor in U.S. dollars at Lessor's address set forth in Section 22 hereof or such other place as Lessor directs, in writing. 4. ADVANCE PAYMENT: Lessee shall pay to Lessor, upon the execution and delivery of a Schedule, the advance payment set forth in that Schedule ("Advance Payment") in consideration for the Lessor's holding funds available to purchase the Equipment and sublicense the Software and as compensation for Lessor's review of Lessee's credit. Upon Lessor's acceptance of the Lease, the Advance Payment shall be applied to the payment(s) of Rent as set forth in the Schedule. Any Advance Payment shall be non-refundable if Lessee fails to timely provide all documentation and satisfy all conditions required by the Lease. 5. INTERIM FUNDING: Lessee hereby elects interim funding ("Interim Funding") and Lessee delegates and Lessor hereby assumes, subject to this Section, the obligation to pay the Price to Supplier pursuant to the applicable Supplier Agreement, notwithstanding the fact that such payments may be due prior to the Commencement Date ("Interim Funding Advances"). The term "Price" shall mean an amount equal to the actual purchase price of the System as set forth in the Supplier Agreement, and shall exclude all other costs, fees, damages, charges or sales or other taxes, whether imposed by Supplier or any other party and whether included in the Supplier Agreement as part of the purchase price of the System. All Interim Funding Advances shall bear interest (calculated daily based upon a 360-day year) at an annual rate equal to the "Base Lending Rate" designated by Citibank N.A., New York, New York adjusted as of the effective date of any change in such designation, plus two and one-half percent, or such lesser rate as shall be the maximum rate permitted by applicable law ("Interim Rate"). The periodic Rent shall be increased as a result of adding to the Price of the System an amount equal to the interest accrued on all Interim Funding Advances from the date of each advance until the Commencement Date. 6. DELIVERY AND ACCEPTANCE: All transportation, delivery and installation arrangements and costs (except to the extent any such costs are included in the Price of the System upon which the Rent is computed) are the sole responsibility of Lessee. Lessee assumes all risk of loss and the risk of any damages if the Supplier fails to deliver or delays in the delivery of any System, or if any System is unsatisfactory for any reason. Lessee agrees to accept the System, for purposes of any Lease, by signing the Delivery and Acceptance Certificate within thirty days after the date such System is connected to a public telephone network in a manner permitting calls to be made through such System to or from the Installation Site ("Cut-Over Date"). If Lessee fails or refuses to sign the Delivery and Acceptance Certificate within thirty days after the Cut-Over Date, (a) Lessor may declare Lessee's assignments and the delegation set forth in Section 1 hereof to be null and void ab initio and thereupon the Lease shall terminate; Lessor shall have no obligations under the Lease; and Lessee shall, on demand, immediately pay to Lessor all amounts previously paid by Lessor to Supplier, as Interim Funding Advances, plus Lessor's out-of-pocket expenses and all accrued interest on such Interim Funding Advances at the Interim Rate from the date of Lessor's payment to the Supplier to the date all sums due from Lessee to Lessor under the Lease are paid in full; or (b) unless Lessee gives Lessor written notice to the contrary within thirty days after the Cut-Over Date, Lessor may conclusively assume that the System is in good operation order and accepted by Lessee and Lessor may purchase the Equipment and obtain a sublicense to use the Software, with the Initial Term to commence as of the thirtieth day after the Cut-Over Date, as determined by the Supplier. 7. NET LEASE: THIS LEASE IS A NET LEASE AND LESSOR SHALL NOT BE RESPONSIBLE FOR THE DELIVERY, INSTALLATION, MAINTENANCE, USE, OPERATION, PERFORMANCE, SERVICE OR CONDITION OF ANY SYSTEM OR ANY DELAY IN, OR INADEQUACY OF, ANY OR ALL OF THE FOREGOING: Lessee agrees that all of Lessee's obligations under the Lease, specifically including its non-cancellable obligation to pay all Rent and other amounts due, are and shall be absolute and unconditional, and shall not be subject to any delay, reduction, setoff, defense, counterclaim or recoupment for any reason whatsoever including any failure of the System, or any part thereof, or any misrepresentations of any supplier, manufacturer, installer, vendor or distributor. Lessor and Lessee acknowledge that any manufacturer's warranties inure to the benefit of Lessee, to the extent such warranties are given, for so long as the System is leased, and Lessee agrees to pursue any claim it has directly against any supplier, manufacturer, installer, vendor or distributor and agrees that it shall not pursue any such claim against Lessor. Lessee shall continue to pay Lessor all amounts payable under the Lease under any and all circumstances. Except as specifically set forth in the Lease, nothing contained herein, in any Schedule, or elsewhere shall be deemed to modify, limit or expand the rights, warranties, remedies, liabilities contained in the Supplier Agreement, and neither Lessee nor Lessor shall have any greater rights, warranties, or remedies than are provided to Lessee pursuant to the Supplier Agreement. 8. QUIET ENJOYMENT: Lessor warrants that neither Lessor, nor any assignee or anyone acting or claiming through Lessor will interfere with Lessee's quiet enjoyment and use of the System so long as no Event of Default shall have occurred under the Lease and be continuing. 9. TAXES AND FEES: Lessee shall promptly reimburse Lessor, upon demand, as additional Rent(s), or shall pay directly, if so requested by Lessor, all license and registration fees, sales, use, personal property taxes and all other taxes and charges imposed by any federal, state, or local governmental or taxing authority, relating to the purchase, ownership, leasing, subleasing, possession, use, operation, or relocation of the System or upon the Rent or receipts with respect to the Lease, excluding, however, all taxes computed upon the net income of Lessor. 10. DISCLAIMER OF WARRANTIES AND DAMAGES: LESSEE ACKNOWLEDGES THAT (I) THE SIZE, DESIGN, CAPACITY OF THE SYSTEM AND THE MANUFACTURER AND SUPPLIER HAVE BEEN SELECTED BY LESSEE; (II) LESSOR IS NOT A MANUFACTURER, SUPPLIER, DEALER DISTRIBUTOR OR INSTALLER OF PROPERTY OF SUCH KIND; (III) NO MANUFACTURER OR EXCEPT AS OTHERWISE PROVIDED IN SECTIONS 3, 5 AND 6 OF THIS AGREEMENT OR SECTION 2 OF A SCHEDULE, ANY MODIFICATIONS, AMENDMENTS OR WAIVERS TO THE LEASE SHALL BE EFFECTIVE ONLY IF MUTUALLY AGREED UPON IN A WRITING, DULY EXECUTED BY AUTHORIZED REPRESENTATIVES OF THE PARTIES. NTFC CAPITAL CORPORATION PHASE METRICS, INC. BY /s/ MARY M. JONES BY /s/ R. J. SAUNDERS ------------------------------------- ------------------------------------- Authorized Representative Authorized Representative PRINT NAME MARY M. JONES PRINT NAME R. J. SAUNDERS ----------------------------- ----------------------------- TITLE MGR., CONTRACT ADM. DATE 1/13/96 --------------------- -------- TITLE V.P. DATE 1/1/96 --------------------- --------
2 MASTER CAPITAL LEASE AGREEMENT TERMS AND CONDITIONS (CONTINUED) SUPPLIER OR ANY OF THEIR REPRESENTATIVES IS AN AGENT OF LESSOR OR AUTHORIZED TO WAIVE OR ALTER ANY TERM OR CONDITION OF THE LEASE; AND (IV) EXCEPT FOR LESSOR'S WARRANTY OF QUIET ENJOYMENT, LESSOR HAS NOT MADE AND DOES NOT HEREBY MAKE ANY REPRESENTATION, WARRANTY OR COVENANT, WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED AS TO ANY MATTER WHATSOEVER INCLUDING, WITHOUT LIMITATION, THE DESIGN, QUALITY, CAPACITY, MATERIAL, WORKMANSHIP, OPERATION, CONDITION, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR HIDDEN OR LATENT DEFECT OF THE SYSTEM OR ANY PORTION THEREOF, OR AS TO ANY PATENT, COPYRIGHT OR TRADEMARK INFRINGEMENT. LESSEE LEASES THE SYSTEM "AS IS", "WHERE IS." IN NO EVENT SHALL LESSOR BE LIABLE TO LESSEE OR ANY OTHER PERSON OR ENTITY FOR SPECIAL, DIRECT, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES INCLUDING, WITHOUT LIMITATION, ANY PERSONAL INJURY DAMAGES, LOSS OF PROFITS OR SAVINGS, OR LOSS OF USE, OR FOR ANY DAMAGES BASED ON STRICT OR ABSOLUTE TORT LIABILITY OR LESSOR'S NEGLIGENCE (OTHER THAN PERSONAL INJURY OR PROPERTY DAMAGE CAUSED BY LESSOR'S SOLE ACTIVE NEGLIGENCE), OR CONSEQUENTIAL DAMAGES OF ANY NATURE WHATSOEVER RESULTING FROM ANY BREACH OF THE LEASE, USE OF THE SYSTEM OR OTHERWISE. 11. MAINTENANCE, USE, AND OPERATION: At all times during the Term, Lessee, at its sole cost and expense, shall maintain the System in good repair, condition and working order, ordinary wear and tear excepted; shall use the System and all parts thereof for its designated purpose and in compliance with all applicable laws; and shall at all times keep the System in its possession and control and not permit such System to be moved from the Installation Site without Lessor's prior written consent. 12. TITLE; SECURITY INTEREST; PERSONAL PROPERTY: Title to the Equipment is vested in Lessor subject to Lessee's rights under the Lease. In order to secure all of its obligations hereunder, Lessee hereby (i) grants to Lessor a first and prior security interest in any and all right, title and interest of Lessee in the Equipment Software and in all additions, attachments, accessions, replacements and leased Modifications and Additions (as defined in Section 1 of the Schedule) thereto and substitutions therefor, and proceeds thereof and (ii) agrees that the Lease may be filed as a financing statement evidencing such security interest. The System is, and shall at all times remain, the personal property of Lessor even if the Equipment is affixed or attached to real property or any improvements thereon. At Lessor's request, Lessee shall at no charge promptly affix to the System any tags, decals, or plates furnished by Lessor indicating Lessor's ownership of the Equipment and Lessee shall not permit their removal or concealment. Lessee shall at all times keep the System free and clear of all liens, and encumbrances, except those arising through the actions of Lessor. Lessee, at its expense, shall otherwise cooperate to defend the title of Lessor and to maintain the status of the System and all parts thereof as personal property. If requested by Lessor, Lessee will, at Lessee's expense, furnish a waiver of any interest in the Equipment from any party having an interest in any such real estate or building in which the System, or any part thereof, is located. Lessor may inspect the System at anytime during normal business hours of Lessee. 13. RETURN OF SYSTEM: Unless the Lessee has exercised its option to purchase as set forth in Section 3 of the Schedule at the end of the Initial Term, or any extension thereof, or upon any prior termination of a Lease pursuant to the terms of that Lease, Lessee shall, at its own risk and sole expense, immediately return the System to Lessor, by properly removing, disassembling and packing it for shipment, loading it on board a carrier acceptable to Lessor, and shipping the same to a destination specified by Lessor, freight and insurance prepaid, in the same condition and operating order as existed when received, ordinary wear and tear excepted. Lessee shall pay to Lessor any amount necessary to place the System in good repair condition and working order, ordinary wear and tear excepted. 14. INSURANCE: Lessee shall, at its expense, upon delivery of each System to its Installation Site and at all times thereafter, keep the System insured against all risks of loss or damage for an amount equal to the installed replacement cost for such System. Lessee shall also, at its expense, provide and maintain comprehensive general liability insurance. All insurance policies shall name Lessor as an additional insured and loss payee, as applicable, and shall be with an insurer, having a "Best Policy Holders" rating of "A" or better, and in such form, amount and deductibles as are satisfactory to Lessor. Each such policy must state by endorsement that the insurer shall give Lessor not less than thirty days prior written notice of any amendment, renewal or cancellation. Lessee shall, upon request, furnish to Lessor satisfactory evidence that such insurance coverage is in effect. Lessee may self insure with respect to the above coverages, with Lessor's prior written consent. 15. CASUALTY: If any System, in whole or in part, shall be lost or stolen or destroyed, or damaged from any cause whatsoever, or is taken in any condemnation or similar proceeding by a governmental authority (any such event is hereafter called an "Event of Loss"), Lessee shall promptly and fully notify Lessor thereof. Lessee shall, at its option (i) immediately place the affected Equipment and Software in good condition and working order, or (ii) replace the affected item with like equipment or software in good repair, condition and working order and transfer clear title or the sublicense thereto to Lessor, or (iii) pay to Lessor, within ten days of the Event of Loss, an amount equal to the Stipulated Loss Value ("SLV") (as hereinafter defined) for such affected Equipment or Software plus any other amounts then due and unpaid with respect to such Equipment and Software. If an Event of Loss occurs as to part of a System for which the SLV is paid, such event shall be treated as applicable only to the affected Equipment or Software, whereupon the Lease with respect thereto shall terminate and a prorata amount of all future rentals therefor shall abate from the date the SLV payment is actually received by Lessor. Upon the making of all required payments by Lessee pursuant to (iii) above, title to the applicable Equipment or the sublicense to the applicable Software shall pass to Lessee, (with no warranties) subject to the rights, if any, of the insurer. The SLV shall be an amount calculated by Lessor which is the present value at the higher of six percent (6%) simple interest rate or the lowest rate allowed by law of all Rent and other amounts payable by Lessee with respect to a System, or affected part thereof, from the date of the Event of Loss to the expiration date of the applicable Term. If Lessor shall receive any insurance proceeds or net awards, Lessor may, at its option, apply all or any part of such proceeds and awards to any obligations of Lessee to Lessor. 16. DEFAULT: Lessee shall be in default under the Lease upon the occurrence of any of the following events ("Event of Default" or "default"): (a) failure by Lessee to pay any installment of Rent or other amounts payable under the Lease for a period of ten days or more after receipt by Lessee of written notice thereof from Lessor of such default; or (b) failure by Lessee to perform any other material term, covenant or condition contained in any Lease or any other agreement of Lessee given in connection with the Lease, and such failure or breach shall continue uncured for twenty days after receipt by Lessee of written notice thereof; (c) the inaccuracy of any material representation or warranty made by the Lessee in connection with any Lease which failure or inaccuracy shall continue for a period of thirty (30) days or more; or (d) Lessee's ceasing to do business as a going concern or making a bulk sale; (e) except to the extent prohibited by applicable law, the Lessee becoming insolvent, making an assignment for the benefit of creditors, filling a voluntary petition or having an involuntary petition filed or action commenced against it under the United States Bankruptcy Code or any similar federal or state law; or (f) failure by Lessee to perform any of its obligations under any other agreement or lease with Lessor. 17. REMEDIES: If an Event of Default has occurred, Lessor shall have the right, in its sole discretion, to exercise any one or more of the following remedies: (a) declare any Lease entered into pursuant to this Agreement and/or any other lease between Lessor and Lessee to be in default; (b) terminate any Lease; (c) recover from Lessee all Rent and any and all amounts then due and unpaid; and (d) recover from Lessee all Rent and other amounts to become due, by acceleration or otherwise, on or before the expiration date of the applicable Term (plus the estimated fair market value of the System at the end of the applicable Term, if the System is not returned in accordance with Section 13 hereof), such amounts described insubsection (d) being discounted to the present value at the higher of six percent (6%) simple interest rate or the lowest rate allowed by law; such amounts described in (c) and (d) being the agreed upon damages ("Liquidated Damages"); (e) charge Lessee interest on all the Liquidated Damages due Lessor at the rate of one and one-half percent per month from the date of default until paid, but in no event more than the maximum rate permitted by law; (f) demand the Lessee return any System to Lessor in accordance with Section 13; and (g) take possession of any System wherever located, with or without demand or notice, or any court order or any process by law. Upon repossession or return of a System, Lessor may at its sole option, sell, lease or otherwise dispose of the System in a commercially reasonable manner, with or without notice and on public or private bid, and apply the net proceeds thereof, if any, toward the Liquidated Damages but only after deducting all expenses including, without limitation, reasonable attorneys' fees incurred in enforcement of any remedy of Lessor. Lessee shall be liable for any deficiency if the net proceeds available after the permitted deductions are less than Liquidated Damages. No right or remedy is exclusive of any other provided herein or permitted by law or equity. All rights and remedies shall be cumulative and may be enforced concurrently or individually from time to time. 18. INDEMNITY: Each Lease is a net lease. Therefore, Lessee shall indemnify Lessor against, and hold Lessor harmless from, and covenants to defend Lessor against, any and all losses, claims, liens, encumbrances, actions, suits, damages, obligations, liabilities and liens (and all costs and expenses, including, without limitation, reasonable attorneys' fees, incurred by Lessor in connection therewith) arising out of or in any way related to the Lease including, without limitation, the selection, purchase, delivery, ownership, lease, licensing, possession, maintenance, condition, use, operation, rejection or return of the System, the recovery of claims under insurance policies thereon, from Lessee's failure to commence the Lease of a System, or from any misuse, breach or violation of the Software sublicense, including, without limitation, unauthorized duplication of or modification to the Software, or arising by operation of law, excluding, however, any of the foregoing which result from the sole negligence or willful misconduct of Lessor. Lessee agrees that upon written notice by Lessor of the assertion of any claims, liens, encumbrances, actions, damages, obligations or liabilities, Lessee shall assume full responsibility for, or at Lessor's sole option, reimburse Lessor for, the defense thereof. The provisions of this Section shall continue in full force and effect notwithstanding full payment of the obligations under the Lease and survive the termination of the Lease for any reason, provided, however, the provisions hereof shall not survive longer than the applicable statute of limitations. 19. ASSIGNMENT: Lessor may, in whole or in part, without notice to or the consent of Lessee, sell, assign, grant a security interest in, or pledge its interest in the System and/or the Lease and any amounts due or to become due hereunder to any third party ("Assignee"). Upon receiving written notice from Lessor, Lessee shall, if so directed, pay all Rent and other amounts due directly to Assignee without abatement, deduction or setoff and free from any deduction for any claim or counterclaim, defense or other right which Lessee may have against Lessor or any other person or entity. Any Assignee shall be entitled to rely on Lessee's agreements as stated in the Lease, as applicable, and shall be considered a third-party beneficiary thereof. Lessee shall also execute and deliver to Lessor or any Assignee any additional documentation as Lessor or Assignee may reasonably request. Lessor shall be relieved of its future obligations under the Lease as a result of such assignment if Lessor assigns to Assignee ownership of the Equipment and Assignee assumes Lessor's future obligations. WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, LESSEE SHALL NOT ASSIGN, SUBLEASE, TRANSFER, PLEDGE, MORTGAGE OR OTHERWISE ENCUMBER (COLLECTIVELY, A "TRANSFER") THE SYSTEM OR THE LEASE OR ANY OF ITS RIGHTS THEREIN OR PERMIT ANY LEVY, LIEN OR ENCUMBRANCE THEREON. Any attempted nonconsensual Transfer by Lessee shall be void ab initio. No Transfer shall relieve Lessee of any of its obligations under the Lease. 20. MISCELLANEOUS: (a) Any failure of Lessor to require strict performance by Lessee or any waiver by Lessor of any provision of the Lease shall not be construed as a consent to or waiver of any other breach of the same or of any other provision. (b) No obligation of the Lessor hereunder shall survive the expiration or other termination of the Lease. (c) All of the Lessee's indemnities, waivers, assumptions of liability and duties contained in the Lease and all Lessor's disclaimers shall continue in full force and effect and survive the expiration or other termination of the Lease. (d) If there is more than one Lessee, the obligations of each Lessee are joint and several. (e) The Lessee agrees to execute and deliver to Lessor, upon demand, in a form satisfactory to Lessor, any and all other documents and assurances reasonably requested from time to time by Lessor, to evidence the intent of the Lease, or to protect Lessor's interest in a System, including any UCC financing statements or any waivers of interest or liens. To this end, Lessee appoints Lessor as its attorney-in-fact to execute, deliver and file or record such financing statements. Lessee agrees to pay the costs of filing or recording such documentation. (f) Lessee shall deliver to Lessor such additional financial information as Lessor may reasonably request. (g) THE LEASE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TENNESSEE and the Lessee consents and agrees that personal jurisdiction and subject matter jurisdiction shall be with the courts of the State of Tennessee, or the Federal District Court for the Middle District of Tennessee, solely at Lessor's option, with respect to any provision of the Lease. (h) If any provision shall be held to be invalid or unenforceable, the validity and enforceability of the remaining provisions shall not in any way be affected or impaired. (i) In the event Lessee fails to pay or perform any obligations under the Lease, Lessor may, at its option, pay or perform said obligation, and any payment made or expense incurred by Lessor in connection therewith shall be due and payable by Lessee upon demand by Lessor with interest thereon accruing at the maximum rate permitted by law until paid. (j) No lease charge, late charge, fee or interest, if applicable, is intended to exceed the maximum amount permitted to be charged or collected by applicable law. If one or more of such charges exceed such maximum, then such charges will be reduced to the legally permitted maximum charge and any excess charge will be used to reduce the Price of the System or refunded. (k) Time is of the essence in the Lease and in each of the Lease provisions. (l) Lessee shall pay Lessor on demand all costs and expenses, including reasonable attorneys' and collection fees incurred by Lessor in enforcing the terms and conditions of the Lease or in protecting Lessor's rights and interests in the Lease or the System. 21. TAX MATTERS: As between Lessor and Lessee, the Lease of any System hereunder shall be a financing transaction and Lessee shall be entitled to claim any available cost recovery deductions with respect to the Equipment. 22. NOTICES: Notices, demands and other communications to be effective shall be transmitted in writing by telex, telecopy, or facsimile transmission and confirmed by a similar mailed writing, by hand delivery, by first class, Registered or Certified Mail, return receipt requested, or an overnight courier service, addressed to Lessor at 220 Athens Way, Nashville, Tennessee 37228-1314 (Attention: Treasurer) or to Lessee as the case may be, at the billing address set forth on the applicable Schedule or at such other address as the parties may hereinafter substitute by written notice. Notice shall be effective four (4) days after the date it was mailed or upon receipt, whichever is earlier. 23. ORGANIZATION; AUTHORITY: The Lessee is duly organized and validly existing and in good standing under the laws of its State of formation and has the power and authority to execute and deliver this Agreement and any Schedules and riders thereto. The person executing this Agreement and any Schedules has been given authority to bind the Lessee and the Lease constitutes a legally binding and enforceable obligation of the Lessee. 24. COUNTERPARTS: The Lease, including the Delivery and Acceptance Certificate and any Schedules and riders thereto, may be executed by one or more of the parties on any number of separate counterparts (which may be originals or copies sent by facsimile transmission) each of which counterparts shall be an original, but all of which taken together shall be deemed to constitute one and the same instrument. 25. ENTIRE AGREEMENT: The Lease constitutes the entire agreement between Lessor and Lessee with respect to the subject matter hereof and supersede all previous negotiations, proposals, commitments, writings, and understandings of any nature whatsoever. No agent, employee, or representative of Lessor has any authority to bind Lessor to any representation or warranty concerning the System and, unless such representation or warranty is specifically included in the Lease, it shall not be enforceable by Lessee against Lessor. 26. BINDING NATURE: This Agreement and each Lease shall be binding upon and inure to the benefit of Lessor and Lessee and their respective successors and permitted assigns. 3 - -------------------------------------------------------------------------------- Lessor NTFC CAPITAL CORPORATION AGREEMENT ADDENDUM - -------------------------------------------------------------------------------- Lessee Agreement No. PHASE METRICS, INC. 53440 - -------------------------------------------------------------------------------- Contemporaneously with entering into the Agreement referenced above, Lessee and Lessor agree to the following amendments to the Agreement: 27. SECTION 16. DEFAULT. The following words are added after subsection (d) of Section 16 prior to the semicolon: ; provided however, Lessees' entering into a merger transaction that is accounted for as a pooling of interests as permitted pursuant to Section 19 shall not be considered an Event of Default. 28. SECTION 18. INDEMNITY. The words "which result from the sole" are deleted from the tenth line of Section 18 and the words "to the extent they result from the " substituted in lieu thereof. 29. SECTION 19. ASSIGNMENT. The following is added as the sixth and seventh sentences of Section 19: Notwithstanding the foregoing, Lessee is not required to obtain Lessor's written consent prior to entering into a merger transaction that is accounted for as a pooling of interests. However, Lessee shall provide Lessor within 10 days after the consummation of such a transaction all relevant information concerning the transaction as well as execute and deliver to Lessor such documents as Lessor may reasonably request including, without limitation, an assignment and appropriate financing statements. NTFC CAPITAL CORPORATION PHASE METRICS, INC. BY /s/ MARY M. JONES BY /s/ R. J. SAUNDERS ------------------------------------------ ------------------------------------------ Authorized Representative Authorized Representative PRINT NAME MARY M. JONES PRINT NAME R. J. SAUNDERS --------------------------------- --------------------------------- TITLE MGR. CONTRACT ADM. DATE 1/13/96 -------------------- ------------- TITLE V.P. DATE 1/1/96 -------------------- -------------
4 - -------------------------------------------------------------------------------- Lessor NTFC CAPITAL CORPORATION CERTIFICATE OF SECRETARY - -------------------------------------------------------------------------------- Lessee Agreement No. PHASE METRICS, INC. 53440 - -------------------------------------------------------------------------------- I, Richard A. Fink , the secretary of Phase Metrics, Inc. , a California corporation (hereinafter "Corporation"), hereby certify as follows: 1. I am the duly elected, qualified and acting ____________________ Secretary of the Corporation, and I am charged with maintaining the records, minutes, and seal of the Corporation. 2. The leasing of telecommunications equipment and the sublicensing of associated software by the Corporation from Lessor, the execution and delivery of a Master Capital Lease Agreement and Equipment Schedules thereto, whether executed now or in the future, together with all related instruments and documents (collectively "Leases") have been duly authorized by appropriate corporate action. 3. Pursuant to the Corporation's By-laws, Certificate of Incorporation, and any other appropriate documents of the Corporation as may be applicable, the following named person has been properly designated and appointed to the office indicated below, and that person continues to hold the office at this time. NAME OF OFFICER TITLE SIGNATURE OF OFFICER R. J. Saunders Vice President /s/ R. J. SAUNDERS - ------------------ ----------------- -------------------------- 4. Pursuant to the Corporation's By-laws, Certificate of Incorporation, and any other appropriate documents of the Corporation as may be applicable, the person designated to serve in the above-entitled capacity has been given sufficient authority to act on behalf of, and to bind the Corporation with respect to the execution and delivery of the Leases. 5. The Leases will constitute valid, legal, binding and enforceable obligations of the Corporation upon execution by the person whose name is set forth above and by an authorized representative of NTFC Capital Corporation. 6. Pursuant to the Corporation's By-laws, Certificate of Incorporation, and any other appropriate documents of the Corporation as may be applicable, I have the power and authority to execute this Certificate on behalf of the Corporation, and I have so executed this Certificate and set the seal of the Corporation on the 1st day of January, 1996. (SEAL) By: /s/ RICHARD A. FINK ------------------------------------ Secretary Note: The officer designated in paragraph 3 above must be other than the Secretary or Assistant Secretary executing this Certificate. EX-10.14 17 AMENDED AND RESTATED CREDIT FACILITY, 01/30/1998 1 EXHIBIT 10.14 AMENDED AND RESTATED CREDIT AGREEMENT dated as of January 30, 1998 Among PHASE METRICS, INC., as Borrower FLEET NATIONAL BANK, as Agent for the Lenders, and the Lenders now or hereafter party hereto 2 TABLE OF CONTENTS
Page RECITALS.....................................................................1 ARTICLE I DEFINITIONS.......................................................2 Section 1.1 Defined Terms.................................................2 Section 1.2 Other Definitional Provisions................................17 ARTICLE II THE LOANS.......................................................17 Section 2.1 The Revolving Loans..........................................17 Section 2.2 [Intentionally Deleted]......................................20 Section 2.3 Fees.........................................................20 Section 2.4 Repayment....................................................20 Section 2.5 Interest Rate and Payment Dates..............................21 Section 2.6 Continuation and Conversion Options..........................22 ARTICLE III GENERAL PROVISIONS CONCERNING THE LOANS........................22 Section 3.1 Use of Proceeds..............................................22 Section 3.2 Post Default Interest........................................23 Section 3.3 Computation of Interest and Fees.............................23 Section 3.4 Payments.....................................................23 Section 3.5 Payment on Non-Business Days.................................23 Section 3.6 Reduced Return...............................................24 Section 3.7 Indemnities..................................................24 Section 3.8 Funding Sources..............................................25 Section 3.9 Sharing of Payments, Etc.....................................25 Section 3.10 Inability to Determine Interest Rate........................26 Section 3.11 Requirements of Law.........................................26 Section 3.12 Illegality..................................................27 Section 3.13 Obligation to Mitigate......................................27 Section 3.14 Taxes.......................................................28 ARTICLE IV CONDITIONS OF EFFECTIVENESS AND LENDING.........................30 Section 4.1 Conditions Precedent to Effectiveness........................30 Section 4.2 Conditions Precedent to Each Borrowing.......................31 ARTICLE V REPRESENTATIONS AND WARRANTIES...................................32 Section 5.1 Representations and Warranties...............................32 ARTICLE VI COVENANTS.......................................................35 Section 6.1 Affirmative Covenants........................................35 Section 6.2 Negative Covenants...........................................38 ARTICLE VII EVENTS OF DEFAULT..............................................46 Section 7.1 Events of Default............................................46 ARTICLE VIII THE AGENT.....................................................49 Section 8.1 Authorization and Action.....................................49 Section 8.2 Agent's Reliance, etc........................................49 Section 8.3 The Agent and Affiliates.....................................50 Section 8.4 Lender Credit Decision.......................................50 Section 8.5 Indemnification..............................................50 Section 8.6 Successor Agent..............................................50 ARTICLE IX MISCELLANEOUS...................................................51 Section 9.1 Amendments, etc..............................................51 Section 9.2 Notices, etc.................................................51 Section 9.3 Right of Setoff; Deposit Accounts............................52 Section 9.4 No Waiver; Remedies..........................................52 Section 9.5 Costs and Expenses...........................................52
i 3
Section 9.6 Additional Lenders; Assignments; Participations..............52 Section 9.7 Effectiveness; Binding Effect; Governing Law.................55 Section 9.8 Forum Selection and Consent to Jurisdiction..................55 Section 9.9 Waiver of Jury Trial.........................................56 Section 9.10 Entire Agreement............................................56 Section 9.11 Separability of Provisions..................................56 Section 9.12 Obligations Several.........................................56 Section 9.13 Survival of Certain Agreements..............................56 Section 9.14 Execution in Counterparts...................................57 Section 9.15 Intercreditor Agreements with Customers.....................57
ANNEX I Revolving Commitments ii 4 SCHEDULES 5.1(f) Litigation 5.1(j) Environmental Matters 6.2(f) Permitted Liens 6.2(g) Existing Debt 6.2(k) Existing Investments 6.2(l) Existing Contingent Obligations iii 5 EXHIBITS Exhibit A Form of Revolving Promissory Note Exhibit B [Intentionally Omitted] Exhibit C Form of Notice of Borrowing Exhibit D Form of Notice of Conversion/Continuation Exhibit E Form of Borrower's Opinion Exhibit F Form of Compliance Certificate Exhibit G Form of Guaranty Exhibit H Form of Security Agreement Exhibit I Form of Assignment Agreement Exhibit J Form of Borrowing Base Certificate iv 6 AMENDED AND RESTATED CREDIT AGREEMENT This Amended and Restated Credit Agreement dated as of January 30, 1998 is entered into among PHASE METRICS, INC., as the borrower (the "Borrower"), the financial institutions named on the signature pages hereof and each other Person that becomes a Lender hereunder as described in Section 9.6 hereof (each a "Lender" and collectively the "Lenders"), and FLEET NATIONAL BANK, as agent (the " Agent") for the Lenders. The parties hereto agree as follows: RECITALS WHEREAS, on or about December 4, 1996 the Borrower obtained from Lenders and certain other financial institutions a term commitment of up to $80,000,000 and a revolving loan commitment of up to $40,000,000 all on the terms and conditions contained in that certain Credit Agreement by and between the parties hereto, certain other financial institutions and DLJ Capital Funding, Inc., as syndication agent (the "Existing Credit Agreement"); and WHEREAS, the Borrower has requested the Agent and the Lenders amend and restate said credit facility by replacing same with the Revolving Commitment in a maximum principal amount not to exceed $25,000,000 (which, subject to the complete discretion of the Lenders may be increased to up to $40,000,000 in the future) to repay certain outstanding indebtedness under the Existing Credit Agreement and to permit the Borrower to issue up to $110,000,000 of senior unsecured notes due 2005 and the Agent and the Lenders are willing to amend and restate the Existing Credit Agreement to permit certain indebtedness outstanding thereunder to remain outstanding on the terms and conditions set forth in this Amended and Restated Credit Agreement and to provide for the Revolving Commitment. NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the Borrower, the Lenders and the Agent agree that the Existing Credit Agreement is hereby amended and restated and shall remain in effect as amended and restated hereby on the terms and conditions contained herein, each of which are agreed to by the Borrower, the Lenders and the Agent as follows: WHEREAS, the Lenders are willing, on the terms and subject to the conditions hereinafter set forth (including Article IV), to extend the Commitment and make the Revolving Loans to the Borrower; NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the Borrower, the Lenders and the Agents agree as follows: 7 ARTICLE I DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms have the following meanings: "Accounts": All rights of a Person to payment for goods sold or leased or for services rendered, no matter how evidenced, including accounts receivable, contract rights, notes, drafts, chattel paper, acceptances and other forms of obligations and receivables so long as the right to such payment has been earned (entitlement to recognize revenue under GAAP) but regardless of whether an invoice for such amount has been rendered so long as the failure to render such invoice is in accordance with the payment schedule set forth in the underlying contract. "Account Debtor": The party who is obligated on or under an Account. "Acquisition": As defined in Section 6.2(j). "Affiliate": As applied to any Person, any Person directly or indirectly controlling, controlled by or under common control with, that Person. For the purposes of this definition, "control" (including with the correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities or by contract or otherwise. "Agent": As defined in the introductory paragraph of this Agreement and sometimes referred to as the Administrative Agent in certain of the Loan Documents. "Agreement": This Amended and Restated Credit Agreement, as amended, supplemented, restated or modified from time to time. "Applicable Margin": Initially, with respect to the unpaid principal amount of each Revolving Loan maintained as a (i) Prime Rate Loan, 1.00% per annum; and (ii) LIBO Rate Loan, 3.00% per annum; "Assignment Agreement": An Assignment Agreement in substantially the form of Exhibit I attached hereto. 2 8 "Borrower": Phase Metrics, Inc., a Delaware corporation and the successor by merger to Phase Metrics, Inc., a California corporation. "Borrower's Account": That certain deposit account established and maintained by the Borrower at the Domestic Lending Office of the Agent pursuant to Section 6.1(h). "Borrowing": As defined in Section 2.1. "Borrowing Base": An amount equal to seventy-five percent (75%) of Eligible Accounts; provided that if and so long as Borrower maintains a ratio of Consolidated Total Debt to EBITDA of less than 3.5:1.0 as of Fiscal Quarter endings of the Borrower, in each case determined on the basis of the Consolidated Total Debt and EBITDA for the Fiscal Quarter of the Borrower in question and for the immediately preceding three consecutive Fiscal Quarters of the Borrower, an amount equal to the sum of eighty percent (80%) of Eligible Accounts and the lesser of (i) twenty-five percent (25%) of Eligible Inventory and (ii) $10,000,000. "Borrowing Base Certificate": A certificate of the Borrower in substantially the form of Exhibit J attached hereto, delivered pursuant to Section 6.1(a)(vi). "Breakage Costs": All costs and losses which a Lender may incur as a result of any repayment of principal on LIBO Rate Loans borrowed hereunder on a date other than a scheduled maturity date for the applicable Borrowing and all costs and losses which a Lender may incur as a result of any failure of the Borrower to borrow hereunder after giving written Notice of Borrowing hereunder to the Agent pursuant to Section 2.1(b) or 2.2(b), such Lender's good faith computation of such costs and losses to be in reasonable detail setting forth the basis of the calculation thereof and to be conclusive and binding in the absence of manifest error, and the amount thereof to be paid in same day funds upon demand by such Lender or the Agent. "Business Day": A day other than a Saturday, Sunday or day on which commercial banks in California, Massachusetts or New York are authorized or required by law to close. "Capital Lease": As applied to any Person, any lease of any property (whether real, personal or mixed) by that Person as lessee which would, in accordance with GAAP, be required to be accounted for as a capital lease on the balance sheet of that Person. "Change in Control" means (a) the failure of the Borrower at any time to own, directly or indirectly, free and clear of all Liens and encumbrances, all right, title and interest in 100% of the shares of capital stock of each Guarantor having ordinary voting power; or (b) the failure of the Borrower at any time to have the right to elect a majority of the Board of Directors of each Guarantor; or 3 9 (c) 30% or more of the shares of capital stock of the Borrower having ordinary voting power on a fully diluted basis shall cease to be owned by the holders of such shares on the date of this Agreement; or (d) a "Change of Control" as defined in the Indenture shall occur. "Collateral": As defined in Section 1 of the Security Agreement, in Section 1 of each Subsidiary Security Agreement in the Pledge Agreement and in the Collateral Agreement. "Collateral Assignment": The Collateral Assignment, Patent Mortgage and Security Agreement dated as of December 4, 1996 between the Borrower and the Agent and the Affirmation and Amendment of Collateral Assignment, Patent Mortgage and Security Agreement between the Borrower and the Agent of even date herewith. "Commitment": The obligation of each Lender to make Loans to the Borrower pursuant to Article II in the amount or amounts referred to therein. The term "Commitments" means all such obligations of the Lenders. "Compliance Certificate": A certificate of the Borrower in substantially the form of Exhibit F attached hereto, delivered pursuant to Section 6.1(a)(iv)(B). "Consolidated Capital Expenditures": For any period, the Dollar amount of gross expenditures incurred by the Borrower and its consolidated Subsidiaries during such period for fixed assets, real property, plant and equipment, and renewals, improvements and replacements thereto required to be included in 'capital expenditures', 'additions to property, plant or equipment' or comparable items in the consolidated statement of changes in financial position of the Borrower and its consolidated Subsidiaries in conformity with GAAP, including insurance proceeds received as the result of damage or destruction of the property being replaced. "Consolidated Current Assets": At any date of determination, all amounts that should, in accordance with GAAP, be included as current assets on the consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at such date. "Consolidated Current Liabilities": At any date of determination, all amounts that should, in accordance with GAAP, be included as current liabilities on the consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at such date. "Consolidated Net Income": For any period, the net income (or loss) after income taxes plus to the extent deducted in determining net income (or loss) purchased in-process research and development costs net of tax benefits, all for such period of the Borrower and its Subsidiaries on a consolidated basis determined in accordance with GAAP. "Consolidated Net Worth": At any date of determination, the sum of the capital stock and additional paid-in capital plus retained earnings (or minus accumulated deficit) plus 4 10 purchased in-process research and development costs (net of tax benefits) of the Borrower and its consolidated Subsidiaries on a consolidated basis determined in accordance with GAAP. Consolidated Net Worth shall be calculated without giving effect to any foreign currency translation adjustments. "Consolidated Total Debt": At any date of determination, any Debt of the Borrower and its consolidated Subsidiaries; provided however, that, notwithstanding the foregoing, Consolidated Total Debt includes all Debt (w) under the Senior Unsecured Notes, (x) under Capital Leases, (y) under this Agreement and (z) that is scheduled to be amortized during the term of this Agreement, but excludes, for purposes of Section 6.2 Subordinated Debt. "Contingent Obligation": As applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person (i) with respect to any Debt, lease, dividend or other obligation of another if the primary purpose or intent thereof by the Person incurring the Contingent Obligation is to provide assurance that such obligation of another will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected (in whole or in part) against loss in respect thereof, (ii) with respect to any letter of credit issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings, or (iii) with respect to any Interest Rate Agreement or Currency Agreement. Contingent Obligations shall include (a) the direct or indirect guaranty, endorsement (otherwise than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of another, (b) the obligation to make take-or-pay or similar payment if required regardless of non-performance by any other party or parties to an agreement, and (c) any liability of that Person for the obligation of another through any agreement (contingent or otherwise) (x) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise) or (y) to maintain the solvency or any balance sheet item, level of income or financial condition of another if, in the case of any agreement described under subclauses (x) or (y) of this sentence, the primary purpose or intent thereof is as described in the preceding sentence. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported or, if less, the amount to which such Contingent Obligation is specifically limited. "Currency Agreement": As applied to any Person, any foreign exchange contract, currency swap agreement, futures contract, option contract, synthetic cap or other similar agreement or arrangement designed to protect that Person against fluctuations in currency values. "Debt": As applied to any Person, (i) all indebtedness for borrowed money, (ii) all Capital Leases whether or not properly classified as a liability on a balance sheet in accordance with GAAP, (iii) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money, (iv) any obligation owed for all or any part of the deferred purchase price of property or services, (v) all indebtedness secured by any Lien on any property or asset owned or held or to be purchased by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is 5 11 nonrecourse to the credit of that person (excluding customer deposits held by the Borrower), and (vi) any Contingent Obligation (excluding obligations under Interest Rate Agreements and Currency Agreements). "Dollars and $": Dollars in lawful currency of the United States of America. "EBITDA": For any applicable period, the sum (without duplication) for the Borrower and its Subsidiaries on a consolidated basis of (i) Consolidated Net Income, plus (ii) the amount deducted, in determining Consolidated Net Income, representing depreciation and amortization, plus (iii) the amount deducted, in determining Consolidated Net Income, representing income taxes (whether paid or deferred), plus (iv) the amount deducted, in determining Consolidated Net Income, representing Interest Expense, plus (v) the amount deducted, in determining Consolidated Net Income, representing charges from acquisitions which are allocated to in process research and development, plus (vi) the amount deducted in determining Consolidated Net Income, representing write-off of deferred initial public offering fees of approximately $400,000 for the Fiscal Year of the Borrower ending December 31, 1997, plus (vii) the non-cash compensation expensed by the Borrower of approximately $400,000 annually or $100,000 quarterly in connection with the issuance of securities under stock option, stock purchase and other equity based incentive plans. 6 12 "Eligible Accounts": Accounts that arise in the ordinary course of business of the Borrower that comply with the representations and warranties contained in the Security Agreement, excluding Accounts as to which any of the following apply: (i) Accounts with respect to which more than ninety (90) days have elapsed since the original invoice or payment schedule due date; (ii) Accounts with respect to which the Account Debtor is a director, officer, shareholder, employee, Subsidiary or Affiliate of the payee of the obligation; (iii) Accounts with respect to which the Account Debtor is the subject of bankruptcy, receivership or a similar insolvency proceeding, or has made an assignment for the benefit of creditors, or has failed or suspended or gone out of business; (iv) Accounts with respect to which the Account Debtor's obligation to pay the Account is conditional upon the Account Debtor's approval, or otherwise subject to return rights (without the consent of the account holder), with respect to the goods purchased giving rise to any such Account, but only to the extent of the portion thereof subject to approval or return; (v) any Account not payable in Dollars; (vi) Accounts against which the Account Debtor or any Person obligated to make payment thereon asserts in writing any defense, offset, counterclaim or other right to avoid or reduce the liability represented by such Accounts, but only to the extent of the disputed portion thereof; (vii) Accounts that are an obligation of any Person whose billing address is located outside of the United States of America or Canada, other than Accounts supported by one or more letters of credit in an amount, and of a tenor, and used by a financial institution reasonably acceptable to the Agent and other than Accounts of a subsidiary of a United States parent company approved in advance by the Agent; (viii) Accounts with respect to which the Account Debtor is the United States of America or any department, agency or instrumentality thereof, except for those Accounts as to which the payee has assigned its rights of payment thereof to the Agent for the benefit of the Agent and the Lenders, and the assignment has been acknowledged pursuant to the Assignment of Claims Act of 1940, as amended (31 U.S.C. 3727); (ix) Accounts owed by an Account Debtor where more than fifty percent (50%) of the aggregate Accounts owed to the Borrower by such Account Debtor do not constitute Eligible Accounts by reason of clause (i) above; or (x) Accounts the collection of which the Agent has, after consultation with a responsible officer of the Borrower, determined in the exercise of its reasonable judgment 7 13 and consistent with banking industry practices reasonably applied that (A) the creditworthiness or financial condition of the Account Debtor is unsatisfactory or (B) payment by the Account Debtor is impaired or doubtful. Any Account which is at any time an Eligible Account, but which subsequently meets any of the foregoing requirements, shall forthwith cease to be an Eligible Account until such time as such Account shall meet all the foregoing requirements. "Eligible Inventory": Any inventory of the Borrower located in the United States and as to which each of the following requirements has been fulfilled to the reasonable satisfaction of the Agent: (i) the Borrower has full and unqualified right to assign and grant, and has assigned and granted, a perfected Lien in such inventory to the Agent, for its benefit and that of the Lenders, as security for the Obligations; (ii) the Borrower owns such inventory free and clear of all Liens in favor of any Person other than the Lien in favor of the Agent and the Lenders granted pursuant to this Agreement or another Loan Document; (iii) none of such inventory is obsolete, unsalable, damaged or otherwise unfit for sale or consumption or further processing; and (iv) none of such inventory is stored by a warehouseman which has issued a negotiable warehouse receipt that is not held by the Agent. "Employee Benefit Plan": Any Pension Plan, any employee welfare benefit plan, or any other employee benefit plan which is described in Section 3(3) of ERISA and which is maintained for employees of the Borrower or any ERISA Affiliate of the Borrower. "Equity Issuance": As applied to any Person, the sale or issuance by such Person of (i) any capital stock of such Person, (ii) any options, warrants or other similar rights exercisable in respect of such capital stock, or (iii) any other security or instrument representing an equity interest (or the right to obtain an equity interest) in such Person. "ERISA": The Employee Retirement Income Security Act of 1974, as amended from time to time and any successor statute. "ERISA Affiliate": As applied to any Person, any trade or business (whether or not incorporated) which is a member of a group of which that Person is a member and which is under common control within the meaning of Section 414(b) and (c) of the Internal Revenue Code. "Eurocurrency Liabilities": Has the meaning specified in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. 8 14 "Existing Credit Agreement": As defined in the first WHEREAS clause of the Recitals of this Agreement. "Federal Funds Rate": On any day, a fluctuating interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "Fiscal Quarter": Any calendar quarter. "Fiscal Year": Any calendar year. "Foreign Subsidiaries": Any direct or indirect Subsidiary of the Borrower organized outside of the United States. "GAAP": Generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession. "Guarantors": Any direct or indirect Subsidiaries of the Borrower which are organized in the United States and which have become Guarantors in accordance with Section 6.2(v). "Indenture": That certain indenture dated on or about the date of this Agreement by and between the Borrower, each Guarantor under a Subsidiary Guaranty and State Street Bank and Trust Company of California, N.A. pursuant to which the Senior Unsecured Notes were issued and are outstanding as same may be amended, restated or modified in compliance with this Agreement. "Interest Coverage Ratio": At the end of any applicable period, the ratio of (a) EBITDA for the period of four consecutive Fiscal Quarters then ended, to (b) Interest Expense for the period then ended. "Interest Expense": For any applicable period, the aggregate consolidated interest expense of the Borrower and its Subsidiaries for such applicable period, as determined in 9 15 accordance with GAAP, including the portion of any payments made in respect of Capital Leases allocable to interest expense, but excluding for purposes of Section 6.2 interest expense on the Subordinated Debt. "Interest Payment Date": As to any Prime Rate Loan, until payment in full, (i) the last Business Day of each month commencing on the first of such days to occur after such Prime Rate Loan is made and, (ii) the Revolving Maturity Date. As to any LIBO Rate Loan, until payment in full, (x) the last day of the Interest Period relating to such LIBO Rate Loan (or, if earlier, the third month following the commencement of such Interest Period) and (y) the Revolving Maturity Date. "Interest Period": With respect to any LIBO Rate Loan: (i) initially, the period commencing on, as the case may be, the Borrowing or conversion date with respect to such LIBO Rate Loan and ending one, three or six months thereafter as selected by the Borrower in its Notice of Borrowing as provided in Section 2.1(b) or Section 2.2(b) or its notice of conversion as provided in Section 2.6; and (ii) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such LIBO Rate Loan and ending one, three or six months thereafter as selected by the Borrower in its notice of continuation as provided in Section 2.6; provided, that all of the foregoing provisions relating to Interest Periods are subject to the following: (a) if any Interest Period for a LIBO Rate Loan would otherwise end on a day which is not a LIBO Business Day, that Interest Period shall be extended to the next succeeding LIBO Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding LIBO Business Day; (b) the Borrower may not select an Interest Period with respect to any portion of principal of a LIBO Rate Loan which extends beyond a date on which the Borrower is required to make a payment of that portion of principal; and (c) there shall be no more than three Interest Periods outstanding at any time with respect to LIBO Rate Loans that constitute part of the Revolving Loans. "Interest Rate Agreement": As applied to any Person, an interest rate swap, cap or collar agreement or similar arrangement designed to protect that Person against fluctuations in interest rates. "Internal Revenue Code": The Internal Revenue Code of 1986, as amended to the date hereof and from time to time hereafter. 10 16 "Investment": As applied to any Person, (i) any direct or indirect purchase or other acquisition of, or of a beneficial interest in, capital stock, bonds, notes, debentures, partnership or other ownership interests or other securities of, another Person, or (ii) any direct or indirect loan, extension of credit, advance (other than advances to employees for moving, entertainment and travel expenses, drawing accounts and similar expenditures in the ordinary course of business) or capital contribution to any other Person, including all indebtedness and accounts receivable from the other Person that are not current assets or did not arise from sales to that other Person in the ordinary course of business. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustment for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment. "Lender": As defined in the introductory paragraph of this Agreement. "Lending Office": As to any Lender, the office or offices of such Lender specified as its "Lending Office" or "Domestic Lending Office" or "Offshore Lending Office," as the case may be, on Annex II or in the applicable Assignment Agreement, or such other office or offices as such Lender may from time to time notify the Borrower and the Agent. "Leverage Ratio": At the end of any applicable period, the ratio of (a) Consolidated Total Debt outstanding at the end of such period, to (b) EBITDA for the period of four consecutive Fiscal Quarters then ended. "LIBO Business Day": A day which is a Business Day and a day on which dealings in Dollar deposits may be carried out in the London interbank market. "LIBO Rate": For any Interest Period for all LIBO Rate Loans comprising part of the same Borrowing, an interest rate per annum equal to the rate per annum obtained by dividing (a) the interest rate per annum for deposits in Dollars for a period equal to the relevant Interest Period which appears on Telerate Page 3750 at or about 11:00 a.m. (London time) on the second Business Day before and for value on the first day of the relevant Interest Period or such other page as may replace such page on such service for the purpose of displaying the London interbank offered rate of major banks for deposits in Dollars at or about 11:00 a.m. (London time) on the second Business Day before and for value on the first day of the relevant Interest Period for deposits in amounts and durations comparable to such Borrowing and such Interest Period (and rounded upward to the next whole multiple of 1/16 of 1%) by (b) a percentage equal to 100% minus the LIBO Rate Reserve Percentage for such Interest Period. "LIBO Rate Loans": Loans hereunder at such time as they accrue interest at a rate based upon the LIBO Rate. 11 17 "LIBO Rate Reserve Percentage": For any Interest Period for all LIBO Rate Loans comprising part of the same Borrowing, the reserve percentage applicable two Business Days before the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities that includes deposits by reference to which the interest rate on LIBO Rate Loans is determined) having a term equal to such Interest Period. "Lien": Any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest). "Loans": The Revolving Loans made to the Borrower pursuant to Section 2.1. "Loan Documents": This Agreement, the Notes, the Security Agreement, the Subsidiary Guarantees, the Subsidiary Security Agreements, the Pledge Agreement, the Collateral Assignment and each other document required by the Agent or any Lender in connection with this Agreement and/or the credit extended hereunder. "Multiemployer Plan": A "multiemployer plan" as defined in Section 4001(a) (3) of ERISA which is maintained for employees of the Borrower or any ERISA Affiliate of the Borrower. "Net Proceeds": With respect to any insurance settlement, Equity Issuance or the sale of any assets (to the extent permitted by this Agreement) or subordinated Debt instruments, the gross cash proceeds received by the issuer or seller from such settlement, issuance or sale (including any cash payments subsequently received in respect of promissory notes or other non-cash consideration delivered to the seller), less the sum of (i) all reasonable and customary legal and accounting expenses, commissions and other fees and expenses incurred or to be incurred, and all federal, state, local and foreign taxes actually paid or estimated by the Borrower (in good faith) to be payable, in connection therewith and (ii) all payments made by the seller to retire Debt where such payments are required in connection with such sale; provided, however, that each of the following shall be excluded in determining the amount of Net Proceeds hereunder: (A) in the case of any Equity Issuance, the cash proceeds from (1) any issuance or sale by any Subsidiary to the Borrower or any Subsidiary, and (2) any issuance or sale to any officer, director, employee or consultant pursuant to any stock option or other employee benefit plan or other employee benefit plan or compensation plan in an aggregate amount up to $3,000,000; (B) in the case of any sale of assets, (1) sales of readily marketable investment securities investments in which are permitted under Section 6.2(k), (2) leases and subleases (including any sale/lease backs and synthetic lease transactions) permitted under Section 6.2(h), (3) sales and other transfers between or among the Borrower and its Subsidiaries permitted under Section 6.2(s), (4) cash payments required to be made in respect of any accrued employee benefits in connection with any asset sale, (5) the amount of any reasonable reserve established in accordance with 12 18 GAAP against any liabilities associated with assets sold (provided that the amount of any subsequent reduction of such reserve, other than in connection with a payment in respect of such liability, shall be deemed to be Net Proceeds received as of the date of such reduction), and (6) the amount of any such cash proceeds that the Borrower or any Subsidiary has used (or intends to use within 6 months of the date of receipt of such cash proceeds) to pay the purchase price in connection with any acquisition permitted hereunder; (C) in the case of any Debt issuance, any Debt secured by Liens permitted under Section 6.2(f), any Debt described in Section 6.2(g)(iv) or any Debt permitted under Section 6.2(g)(vi); and (D) in the case of any insurance settlement, the amount of any reasonable reserve established in accordance with GAAP against any liabilities associated with the receipt of such insurance settlement (provided the amount of any subsequent reduction of such reserve, other than in connection with a payment with respect to any such liability, shall be deemed to be Net Proceeds received as of the date of such reduction). "NonCash Working Capital": At any time of determination, the excess of Consolidated Current Assets (other than cash) over Consolidated Current Liabilities. "Note" and "Notes": The Revolving Notes as such Notes may be amended, endorsed or otherwise modified from time to time, including all Notes issued from time to time in substitution therefor. "Notice of Borrowing": The Notice of Borrowing required under Section 2.1(b) and Section 2.2(b) in substantially the form of Exhibit C annexed hereto. "Obligations": All amounts owing by the Borrower and each Subsidiary under this Agreement, the Notes or any other Loan Document. "Other Taxes": Any present or future stamp, court or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, this Agreement or any other Loan Document. "Pension Plan": Any employee plan which is subject to Section 412 of the Internal Revenue Code and which is maintained for employees of the Borrower or any ERISA Affiliate of the Borrower, other than a Multiemployer Plan. "Permitted Liens": The following types of Liens (other than any such Lien imposed pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or by ERISA): (i) Liens existing on the date hereof and listed on Schedule 6.2(f); (ii) Liens for taxes, assessments or governmental charges or claims to the extent not yet delinquent or being contested in good faith and for which appropriate reserves have been made in accordance with GAAP; 13 19 (iii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics and materialmen and other Liens imposed by law incurred in the ordinary course of business securing obligations that are not yet delinquent or are being contested in good faith and for which appropriate reserves have been made in accordance with GAAP; (iv) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (v) easements, reservations, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances affecting real property not interfering in any material respect with the use or value of such property; (vi) any attachment or judgment Lien not constituting an Event of Default under Section 7.1(h); (vii) Liens which constitute rights of set-off of a customary nature or bankers' Lien with respect to amounts on deposit, arising by operation of law; and (viii) Liens on inventory or cash to secure cash advances made by customers for the purchase price of inventory. "Person": An individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "Pledge Agreement": The Pledge Agreement dated as of December 4, 1996 between the Borrower and the Agent and the affirmation and amendment of pledge agreement between the Borrower and the Agent of even date herewith. "Potential Event of Default": Either (i) a condition or event which, after notice or lapse of time or both, would constitute an Event of Default if that condition or event were not cured or removed within any applicable grace or cure period, or (ii) a condition or event which would constitute an Event of Default on a future date if such condition or event is based on the Borrower's own estimate of its financial performance for a fiscal period ending on a future date. "Prime Rate": The higher of (i) the rate of interest announced from time to time by the Agent in Boston, Massachusetts as its Prime Commercial Lending Rate and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate on the day prior to the date on which the Prime Rate is to be determined. The Prime Commercial Lending Rate is a reference rate; the Agent may make loans at, above or below the Prime Commercial Lending Rate. 14 20 "Prime Rate Loans": Loans hereunder at such time as they accrue interest at a rate based upon the Prime Rate. "Regulations G, T, U and X": Regulations G, T, U and X, respectively, promulgated by the Board of Governors of the Federal Reserve System, as amended from time to time, and any successors thereto. "Related Transactions": Issuance by the Borrower of the Senior Unsecured Notes, execution and delivery of the Indenture, Borrower's receipt of the Net Proceeds thereof and repayment by the Borrower of fees and costs of such issuance and of outstanding Debt of the Borrower under the Existing Credit Agreement. "Requisite Lenders": As of any date of determination, Lenders owed at least 51% of the then aggregate unpaid principal amount of the Notes, or, if no principal amount of the Notes is outstanding, then Lenders having at least 51% of the Commitments. "Revolving Commitment": The amount of $25,000,000 as such amount may be reduced pursuant to Section 2.1(c) or may be increased up to $40,000,000 in the complete discretion of the Lenders pursuant to Section 2.1(e). "Revolving Loans": As defined in Section 2.1(a). "Revolving Maturity Date": January __, 2001. "Revolving Note": As defined in Section 2.1(d). "S.E.C.": The United States Securities and Exchange Commission and any successor institution or body which performs the functions or substantially all of the functions thereof. "Security Agreement": The Security Agreement dated as of December 4, 1996 between the Borrower and the Agent in substantially the form of Exhibit H attached hereto and the affirmation and amendment of security agreement by the Borrower and the Agent dated on or about the date hereof. "Senior Unsecured Notes": Those certain 10.75% senior unsecured notes due February 1, 2005, issued by the Borrower on or about the date hereof and outstanding pursuant to the Indenture as same may be amended, restated or modified in compliance with this Agreement and senior unsecured notes having the same substantive terms and conditions which may be exchanged therefor pursuant to the contemplated exchange offer for the notes issued on or about the date hereof. "Subordinated Debt": (i) that certain subordinated indebtedness issued by the Borrower pursuant to a Securities Purchase Agreement dated as of November 23, 1994, as amended prior to the date hereof (and as it may be subsequently amended with the consent of the 15 21 Requisite Lenders as provided herein), among the Borrower and the investors named therein and (ii) any other indebtedness of the Borrower or its Subsidiaries that is subordinated to the Obligations on terms acceptable to the Requisite Lenders. "Subsidiary": A corporation, partnership, association, joint venture or other business entity of which more than 50% of the total voting power of shares of stock or other ownership interests entitled (without regard to the occurrence of any contingency) to vote in the election of Person or Persons (whether directors, managers, trustees or other Persons performing similar functions) having the power to direct or cause the direction of the management and policies thereof are at the time owned, directly, or indirectly through one or more intermediaries, or both, by the Borrower. "Subsidiary Guaranty": Each guaranty dated as of December 4, 1996 by a Guarantor in favor of the Agent, and each consent, amendment and ratification of guaranty executed and delivered by each Guarantor on or about the date hereof and any Subsidiary Guaranty entered into by a Guarantor in favor of the Agent subsequent to the date hereof in substantially the form of Exhibit G annexed hereto. "Subsidiary Security Agreement": Each Security Agreement dated as of December 4, 1996 between a Guarantor and the Agent and each affirmation and amendment of security agreement between each Guarantor and the Agent dated on or about the date hereof, and any Subsidiary Security Agreement entered into between a Guarantor and the Agent subsequent to the date hereof in substantially the form of Exhibit H annexed hereto. "Taxes": Any and all present or future taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or similar charges, and all liabilities with respect thereto, excluding, in the case of each Lender and the Agent, respectively, taxes imposed on any Lender or the Agent as a result of a present or former connection between such Lender or the Agent and the jurisdiction of the governmental authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from such Lender or the Agent having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement). "Termination Event": (i) a "Reportable Event" described in Section 4043 of ERISA and the regulations issued thereunder (other than a "Reportable Event" not subject to the provision for 30 day notice to the Pension Benefit Guaranty Corporation under such regulations), or (ii) the withdrawal of the Borrower or any of its ERISA Affiliates from a Pension Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(l) (2) or 4068(f) of ERISA, or (iii) the filing of a notice of intent to terminate a Pension Plan or the treatment of a Pension Plan amendment as a termination under Section 4041 of ERISA, or (iv) the institution of proceedings to terminate a Pension Plan by the Pension Benefit Guaranty Corporation, (v) any other event or condition which might constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan, or (vi) the imposition of a lien pursuant to Section 412(n) of the Internal Revenue Code. 16 22 1.2 Other Definitional Provisions. (a) All terms defined in this Agreement shall have the defined meanings when used in the Notes or any certificate or other document made or delivered pursuant hereto. (b) As used herein and in the Notes, and any certificate or other document made or delivered pursuant hereto, accounting terms not defined in Section 1.1, and accounting terms partly defined in Section 1.1 to the extent not defined, shall have the respective meanings given to them under GAAP. In the event that GAAP changes during the term of this Agreement such that the financial covenants contained in Sections 6.2(a) through (d) would then be calculated in a different manner or with different components, (i) the Borrower, the Agent and the Lenders agree to negotiate to amend this Agreement in such respects as are necessary to conform those covenants as criteria for evaluating the Borrower's financial condition to substantially the same criteria as were effective prior to such change in GAAP and (ii) the Borrower shall be deemed to be in compliance with the financial covenants contained in such Sections, pending reaching agreement on such amendment, following any such change in GAAP if and to the extent that the Borrower would have been in compliance therewith under GAAP as in effect immediately prior to such change. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section, subsection, schedule and exhibit references are to this Agreement unless otherwise specified. (d) The terms defined in Section 1.1 include the plural as well as the singular. Pronouns of either gender or neuter shall include, as appropriate, the other pronoun forms. The terms "includes" and "including" shall not be construed to imply any limitation. (e) Each reference in the Loan Documents to the last day of a Fiscal Quarter of the Borrower, or to the last Business Day of a Fiscal Quarter of the Borrower, or to a Fiscal Quarter of the Borrower ending on a specified date, shall be deemed to refer to the last day of the Fiscal Quarter of the Borrower ending on or about such date. ARTICLE II THE LOANS 2.1 The Revolving Loans. (a) The Revolving Commitment. Each Lender agrees, severally and not jointly, on the terms and conditions hereinafter set forth, to make loans ("Revolving Loans") to the Borrower from time to time during the period from the date hereof to but excluding the 17 23 Revolving Maturity Date in an aggregate amount not to exceed the lesser of (x) the amount set forth opposite such Lender's name on Annex I hereto, as such amount may be reduced pursuant to Section 2.1(c) or (y) such Lender's pro rata share of the Borrowing Base. Each borrowing under this Section (a "Borrowing") shall be in a minimum amount of $300,000 and in an integral multiple of $100,000 in excess thereof; provided that a Revolving Loan consisting of a LIBO Rate Loan shall be in a minimum amount of $1,000,000 or an integral multiple of $250,000 in excess thereof. Each Borrowing shall be made on the same day by the Lenders ratably according to their respective Commitments. Within the limits of the Revolving Commitment and prior to the Revolving Maturity Date, the Borrower may borrow, repay pursuant to Section 2.4(b) and reborrow under this Section; provided that at no time shall the aggregate principal amount of outstanding Revolving Loans exceed the least of (x) the Revolving Commitment then in effect or (y) the Borrowing Base. (b) Making the Revolving Loans. (i) The Borrower may borrow under the Revolving Commitment on any Business Day if the Borrowing is to consist of a Prime Rate Loan and on any LIBO Business Day if the Borrowing is to consist of a LIBO Rate Loan, provided that the Borrower shall give the Agent irrevocable notice (which notice must be received by the Agent prior to 9:00 A.M., San Francisco time) in the form of Exhibit C (i) three (3) LIBO Business Days prior to the requested Borrowing date in the case of a LIBO Rate Loan, and (ii) on or before the requested Borrowing date in the case of a Prime Rate Loan, specifying (A) the amount of the proposed Borrowing, (B) the requested date of the Borrowing, (C) whether the Borrowing is to consist of a LIBO Rate Loan or a Prime Rate Loan, and (D) if the Loan is to be a LIBO Rate Loan, the length of the Interest Period therefor. Promptly following receipt of such notice, the Agent shall notify each Lender of the date of the Loan, whether the Loan will be a Prime Rate Loan or a LIBO Rate Loan, the amount of that Lender's pro rata share of the Loan and, if the Loan is a LIBO Rate Loan, of the applicable Interest Period. Not later than 11:00 a.m., San Francisco time, on the date specified for any Loan, each Lender shall deposit immediately available funds in the amount of its pro rata share of the Loan to the account of the Agent set forth on the signature pages hereof. Upon satisfaction of the applicable conditions set forth in Article IV, the Agent will make available the proceeds of all such Loans to the Borrower by depositing the amount of such Loans in the Borrower's Account. (ii) The notice of Borrowing may be given orally (including telephonically), and shall be promptly confirmed by a notice of Borrowing in writing, or in writing (including telex or facsimile transmission), and any conflict regarding a notice or between an oral notice and a written notice applicable to the same Borrowing shall be conclusively determined in the absence of manifest error by the Agent's books and records. The Agent's failure to receive any written notice of a particular Borrowing shall not relieve the Borrower of its obligations to repay the Borrowing made and to pay interest thereon. The Agent shall not incur any liability to the Borrower in acting upon any notice of Borrowing which the Agent believes in good faith to have been given by a Person duly authorized to borrow on behalf of the Borrower. 18 24 (iii) Unless the Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Agent such Lender's ratable portion of such Borrowing, the Agent may assume that such Lender has made such portion available to the Agent on the date of such Borrowing in accordance with subsection (i) of this Section 2.1(b) and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such ratable portion available to the Agent, such Lender and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, the interest rate applicable at the time to such Borrowing and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Lender's pro rata share of such Borrowing for purposes of this Agreement. The failure of any Lender to make available its pro rata share of any Borrowing shall not relieve any other Lender of its obligation, if any, hereunder, to make available its pro rata share of such Borrowing on the date of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make available its pro rata share of any Borrowing on the date of any Borrowing. The Borrower reserves all of its rights against any defaulting Lender. (c) Reduction of the Revolving Commitment. The Borrower shall have the right, upon at least two (2) Business Days' notice to the Agent, to terminate in whole or reduce in part the unused portion of the Revolving Commitment, without premium or penalty, provided that each partial reduction shall be in the aggregate amount of $1,000,000 or an integral multiple of $100,000 in excess thereof and that such reduction shall not reduce the Revolving Commitment to an amount less than the amount of Revolving Loans outstanding hereunder on the effective date of the reduction. (d) Revolving Notes. The Revolving Loans made by the Lenders pursuant hereto shall be evidenced by promissory notes of the Borrower, substantially in the form of Exhibit A, with any appropriate insertions (the "Revolving Notes"), payable to the order of each Lender and representing the obligation of the Borrower to pay the aggregate unpaid principal amount of all Revolving Loans made by that Lender, with interest thereon as prescribed in Section 2.5. Each Lender is hereby authorized to record in its books and records and on any schedule annexed to its Revolving Note, the date and amount of each Revolving Loan made by that Lender, and the date and amount of each payment of principal thereof, and in the case of LIBO Rate Loans, the Interest Period and interest rate with respect thereto and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded; provided that failure by any Lender to effect such recordation shall not affect the Borrower's obligations hereunder. Prior to the transfer of a Revolving Note, the transferring Lender shall record such information on any schedule annexed to and forming a part of such Revolving Note. (e) Increase of the Revolving Commitment. From time to time upon written request from the Borrower delivered to the Agent, the Lenders will consider an increase in the Revolving Commitment up to a maximum Revolving Commitment of $40,000,000; provided, however, that granting of any such increase shall require the unanimous written consent of the 19 25 Lenders, shall be granted only in the complete discretion of the Lenders, has not in any way been committed to the Borrower and shall be additionally subject to amendments to this Agreement, the Notes and such other documents, instruments and agreements as the Lenders may in their complete discretion select, all of which shall be in form and substance satisfactory to the Lenders in their complete discretion. The Borrower acknowledges that neither the Agent nor any of the Lenders has made any representation or warranty, either expressly or by or implication that any such increase in the Revolving Commitment would be granted at any time and the Borrower acknowledges and agrees that no Lender nor the Agent has any obligations of any kind with respect to, and the Borrower has no right to, the grant of any such increase in the Revolving Commitment. 2.2 [Intentionally omitted]. 2.3 Fees. (a) Commitment Fee. The Borrower agrees to pay to the Agent for the ratable benefit of the Lenders providing the Revolving Commitment a commitment fee on the average daily unused portion of the Revolving Commitment from the date hereof until the Revolving Maturity Date at the rate of (i) three-quarters of one percent (3/4 of 1%) per annum, payable on the last Business Day of each Fiscal Quarter of the Borrower commencing on the first such date occurring after the date of this Agreement through the date on which the Agent receives Borrower's financial statements for a Fiscal Quarter of the Borrower pursuant to Section 6.1(a)(ii) commencing with the March 31, 1999 Fiscal Quarter of the Borrower establishing that Borrower is in compliance with Section 6.2 and thereafter for any Fiscal Quarter of the Borrower for which Borrower is not in compliance with Section 6.2 and (ii) commencing with the Fiscal Quarter of the Borrower ending March 31, 1999, so long as Borrower is in compliance with Section 6.2, one-half of one percent (1/2 of 1%) per annum, payable on the last Business Day of each such Fiscal Quarter of the Borrower, and in all the foregoing cases payable on the Revolving Maturity Date. (b) Agency and Facility Fees. Upon execution of this Agreement and thereafter, the Borrower shall pay to the Agent non-refundable fees in the amounts agreed to separately by the Borrower. In addition, upon execution of this Agreement the Borrower shall pay to the Agent a facility fee in the amount agreed to separately by the Borrower and which shall be allocated to the Lender by the Agent in its discretion. 2.4 Repayment. (a) Mandatory Repayments. The aggregate principal amount of the Revolving Loans outstanding on the Revolving Maturity Date, together with accrued interest thereon, shall be due and payable in full on the Revolving Maturity Date. If at any time the outstanding Borrowings under Section 2.1 exceed the least of (x) the Revolving Commitment then in effect or (y) the Borrowing Base, then the Borrower shall immediately repay the excess to the Agent for the ratable accounts of the Lenders providing the Revolving Commitment. 20 26 (b) Optional Prepayment. The Borrower may at its option prepay the Loans, in whole or in part, at any time and from time to time, provided that the Agent shall have received from the Borrower notice of any such prepayment at least one (1) Business Day prior to the date of the proposed prepayment if such date is not the last day of the then current Interest Period for each Loan being prepaid, in each case specifying the date and the amount of prepayment, and provided further, that the Borrower shall be liable for and shall promptly pay to the Agent for the ratable benefit of the Lenders any Breakage Costs in respect of LIBO Rate Loans. Partial prepayments hereunder shall be in an aggregate principal amount of the lesser of (a) $200,000 or any whole multiple of $100,000 in excess thereof in the case of Prime Rate Loans and $1,000,000 or any whole multiple of $250,000 in excess thereof in the case of LIBO Rate Loans and (b) the outstanding balance of the Loan being prepaid. (c) Mandatory Prepayment. The Borrower shall immediately upon receipt deliver to the Agent for the benefit of the Lenders (as their interests may appear) the proceeds of the following as a mandatory prepayment and permanent reduction of the Revolving Commitment: (i) one hundred percent (100%) of the Net Proceeds received from the issuance of Debt or from the sale or other disposition of any assets of the Borrower or any Guarantor outside the ordinary course of business (in excess of amounts permitted under this Agreement); (ii) fifty percent (50%) of the Net Proceeds of an Equity Issuance (other than that described in clause (ii) of the definition of Equity Issuance); and (iii) one hundred percent (100%) of the Net Proceeds of any insurance payments received in respect of lost or damaged property that are not promptly applied to the repair, rebuilding or replacement of such property; provided, however, that any such mandatory prepayment may be waived, in whole or in part, by any Lender solely as to such Lender. (d) Excess Cash Flow Repayment. [Intentionally Omitted] (e) Optional Escrow. Notwithstanding the foregoing provisions of this Section 2.4, if the amount of Prime Rate Loans then outstanding is not sufficient to satisfy the entire mandatory prepayment requirement hereunder, the Borrower may, at its option, in order to avoid the payment of Breakage Costs, place any amounts which it would otherwise be required to use to prepay LIBO Rate Loans on a day other than the last day of the Interest Period therefor in an interest-bearing escrow account with the Agent until the end of such Interest Period at which time such escrowed amounts shall be applied to prepay such LIBO Rate Loans. 2.5 Interest Rate and Payment Dates. (a) Payment of Interest. Interest with respect to each Loan shall be payable in arrears on each Interest Payment Date for such Loan and on the date of any prepayment. (b) Prime Rate Loans. Revolving Loans which are Prime Rate Loans shall bear interest on the unpaid principal amount thereof at a rate per annum equal to the Prime Rate plus the Applicable Margin. 21 27 (c) LIBO Rate Loans. Revolving Loans which are LIBO Rate Loans shall bear interest for each Interest Period with respect thereto on the unpaid principal amount thereof at a rate per annum equal to the LIBO Rate determined for such Interest Period in accordance with the terms hereof plus the Applicable Margin. 2.6 Continuation and Conversion Options. The Borrower may elect from time to time to convert any outstanding Loans from Loans bearing interest at a rate determined by reference to one basis to Loans bearing interest at a rate determined by reference to an alternative basis by giving the Agent (i) irrevocable notice in the form of Exhibit D of an election to convert Loans to Prime Rate Loans and (ii) at least three (3) LIBO Business Days' prior irrevocable notice of an election to convert Loans to LIBO Rate Loans, provided that any conversion of Loans other than Prime Rate Loans shall only be made on the last day of an Interest Period with respect thereto, provided, further that no Loan may be converted to a Loan other than a Prime Rate Loan so long as an Event of Default or Potential Event of Default has occurred and is continuing. The Borrower may elect from time to time to continue any outstanding Loans other than Prime Rate Loans upon the expiration of the Interest Period(s) applicable thereto by giving to the Agent at least three (3) LIBO Business Days' prior irrevocable notice in the form of Exhibit D of continuation of a LIBO Rate Loan and the succeeding Interest Period(s) of such continued Loan or Loans will commence on the last day of the Interest Period of the Loan to be continued, provided that no Loan may be continued as a Loan other than a Prime Rate Loan so long as an Event of Default or Potential Event of Default has occurred and is continuing. Each notice electing to convert or continue a Loan shall be in the form of Exhibit D and shall specify: (i) the proposed conversion/continuation date; (ii) the amount of the Loan to be converted/continued; (iii) the nature of the proposed continuation/conversion; and (iv) in the case of a conversion to, or continuation of, a Loan other than a Prime Rate Loan, the requested Interest Period, and shall certify that no Event of Default or Potential Event of Default has occurred and is continuing. On the date on which such conversion or continuation is being made each Lender shall take such action as is necessary to effect such conversion or continuation. In the event that no Notice of Continuation or Conversion is received by the Agent with respect to outstanding Loans other than Prime Rate Loans, upon expiration of the Interest Period(s) applicable thereto, such Loans shall convert to Prime Rate Loans. Subject to the limitations set forth in this Section and in the definition of Interest Period, all or any part of outstanding Loans may be converted or continued as provided herein, provided that partial conversions or continuations with respect to Loans other than Prime Rate Loans shall be in an aggregate minimum amount of $1,000,000 and in an integral multiple of $250,000 in excess thereof. 22 28 ARTICLE III GENERAL PROVISIONS CONCERNING THE LOANS 3.1 Use of Proceeds. The proceeds of the Loans hereunder shall be used by the Borrower for general corporate purposes, including working capital needs, payment of the costs and fees incurred in connection with obtaining the Revolving Commitment and closing the Loans, capital expenditures, financing for acquisitions and refinancing of existing indebtedness. 3.2 Post Default Interest. Notwithstanding anything to the contrary contained in Section 2.5, after the occurrence of an Event of Default and following notice to the Borrower, all Obligations shall bear interest at a rate per annum which is equal to two percent (2%) above the highest rate which would otherwise be applicable pursuant to Section 2.5, from the date of such Event of Default. In addition, any Loan that is a Loan other than a Prime Rate Loan, shall be converted to a Prime Rate Loan at the end of the then current Interest Period thereafter. 3.3 Computation of Interest and Fees. (a) Calculations. Interest in respect of the Prime Rate Loans and fees shall be calculated on the basis of a 365/366 day year for the actual days elapsed. Any change in the interest rate on a Prime Rate Loan resulting from a change in the Prime Rate shall become effective as of the opening of business on the day on which such change in the Prime Rate shall become effective. In computing interest on any Loan, the date of the making of the Loan shall be included and the date of payment shall be excluded; provided that if a Loan is repaid on the same day on which it is made, one day's interest shall be paid on that Loan. Interest in respect of the LIBO Rate Loans shall be calculated on the basis of a 360 day year for the actual days elapsed. (b) Determination by Agent. Each determination of an interest rate or fee by the Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower in the absence of manifest error. 3.4 Payments. The Borrower shall make each payment of principal, interest and fees hereunder and under the Notes, without setoff or counterclaim, not later than 10:00 A.M., San Francisco time, on the day when due in lawful money of the United States of America to the Agent at the office of the Agent designated from time to time in immediately available funds. The Borrower hereby authorizes the Agent to charge its accounts with the Agent in order to cause timely payment to be made to the Agent of all principal, interest, fees and expenses due hereunder (subject to sufficient funds being available in its accounts for that purpose). The Agent shall promptly pay to each Lender its pro rata share of each payment received by the Agent as their interests may appear. 3.5 Payment on Non-Business Days. Whenever any payment to be made hereunder or under the Notes shall be stated to be due on a day which is not a Business Day, such payment 23 29 may be made on the next succeeding Business Day, and with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. 3.6 Reduced Return. If any Lender shall have determined that any applicable law, regulation, rule or regulatory requirement promulgated after the date hereof ("Requirement") regarding capital adequacy, or any change therein occurring after the date hereof, or any change occurring after the date hereof in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's capital as a consequence of its Commitment and obligations hereunder to a level below that which would have been achieved but for such Requirement, change or compliance (taking into consideration that Lender's policies with respect to capital adequacy) by an amount deemed by that Lender to be material (which amount shall be determined by that Lender's reasonable allocation of the aggregate of such reductions resulting from such events), then from time to time, within thirty (30) days after such Lender delivers to the Borrower a statement in reasonable detail setting forth the basis and calculation for allocating any additional amounts, the Borrower shall pay to that Lender such additional amount or amounts as will compensate that Lender for such reduction. 3.7 Indemnities. (a) Subject to the provisions of Section 9.5, whether or not the transactions contemplated hereby shall be consummated, the Borrower agrees to indemnify, pay and hold the Agent and each Lender, the shareholders, officers, directors, employees and agents of the Agent and each Lender, and each other Person controlling any of the foregoing within the meaning of either Section 15 of the Securities Act of 1933, as amended, or Section 20 of the Securities Exchange Act of 1934, as amended (each, an "Indemnified Person"), harmless from and against any and all claims, liabilities, losses, damages, costs and expenses, including reasonable attorneys' fees and costs (including the reasonable fees and out-of-pocket expenses of counsel) and including costs of investigation, document production, attendance at a deposition or other discovery, related to or in connection with the transactions contemplated by this Agreement, any of the Related Transactions or any contemplated use of the proceeds of the Loans, whether or not any Indemnified Person is a party thereto (collectively, the "Indemnified Liabilities"), except to the extent that such Indemnified Liabilities result from the gross negligence or willful misconduct of the Agent, or any Lender or any other Indemnified Person. If any claim is made, or any action, suit or proceeding is brought, against any Indemnified Person pursuant to this Section, the Indemnified Person shall notify the Borrower of such claim or of the commencement of such action, suit or proceeding, and the Borrower shall have the option to, and at the request of the Indemnified Person shall, direct and control the defense of such action, suit or proceeding, employing counsel selected by the Borrower and reasonably satisfactory to the Indemnified Person, and pay the fees and expenses of such counsel; provided, however, that any Indemnified Person may at its own expense retain separate counsel to participate in such defense. Notwithstanding the foregoing, such Indemnified Person shall have the right to employ separate 24 30 counsel at the Borrower's expense and to control and direct its own defense of such action, suit or proceeding if, in the reasonable opinion of counsel to such Indemnified Person, (i) there are or may be legal defenses available to such Indemnified Person or to other Indemnified Persons that are different from or additional to those available to the Borrower that the Borrower cannot assert, or (ii) a conflict or potential conflict exists between the Borrower and such Indemnified Person that would make such separate representation advisable. The Borrower agrees that it will not, without the prior written consent of the Agent, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding with respect to which the indemnification provided for in this Section is available (whether or not any Indemnified Person is a party thereto) unless such settlement, compromise or consent includes an unconditional release of the Agent and each other Indemnified Person from all liability arising or that may arise out of such claim, action, suit or proceeding. To the extent that the undertaking to indemnify, pay and hold harmless set forth in this Section 3.7 may be unenforceable because it is violative of any law or public policy, the Borrower shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law, to the payment and satisfaction of all Indemnified Liabilities incurred by any Indemnified Person. This covenant shall survive termination of this Agreement and payment of the outstanding Notes. (b) Funding Losses. The Borrower agrees to indemnify each Lender and to hold each Lender harmless from any loss or expense including, but not limited to, any such loss or expense arising from interest or fees payable by such Lender to lenders of funds obtained by it in order to maintain its LIBO Rate Loans hereunder, which such Lender may sustain or incur as a consequence of (i) default by the Borrower in payment of the principal amount of or interest on the LIBO Rate Loans of that Lender, (ii) default by the Borrower in making a conversion or continuation after the Borrower has given a notice thereof, (iii) default by the Borrower in making any payment after the Borrower has given a notice of payment or (iv) the Borrower making any payment of a LIBO Rate Loan on a day other than the last day of the Interest Period for such Loan. For purposes of this Section and Section 3.10, it shall be assumed that the affected Lender had funded or would have funded 100%, as the case may be, of a LIBO Rate Loan in the London interbank market for an amount and term. The determination of such amount by such Lender shall be presumed correct in the absence of manifest error. This covenant shall survive termination of this Agreement and payment of the outstanding Notes. 3.8 Funding Sources. Nothing in this Agreement shall be deemed to obligate any Lender to obtain the funds for any Loan in any particular place or manner or to constitute a representation by any Lender that it has obtained or will obtain the funds for any Loan in any particular place or manner. 3.9 Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Loans owing to it in excess of its ratable share of payments on account of the Loans obtained by all the Lenders, then such Lender shall forthwith purchase from the other Lenders such participations in the Loans owing to them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such 25 31 purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 3.9 or any other provision of this Agreement may, to the fullest extent permitted by law, exercise all of its rights of payment (including the right to set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. 3.10 Inability to Determine Interest Rate. In the event that the Agent or any Lender shall have determined (which determination shall be conclusive and binding upon the Borrower in the absence of manifest error) that by reason of circumstances affecting the London interbank market generally, adequate and reasonable means do not exist for ascertaining the LIBO Rate applicable pursuant to Section 2.5 for any Interest Period with respect to a LIBO Rate Loan that will result from a requested LIBO Rate Loan or that such rate of interest does not adequately cover the cost of funding such Loan, the Agent or such Lender shall forthwith give notice of such determination to the Borrower not later than 1:00 P.M., San Francisco time, on the requested Borrowing date, the requested conversion date or the last day of an Interest Period of a Loan which was to have been continued as a LIBO Rate Loan. If such notice is given and has not been withdrawn (i) any requested LIBO Rate Loan shall be made as a Prime Rate Loan, or, at the Borrower's option, such Loan shall not be made, (ii) any Loan that was to have been converted to a LIBO Rate Loan shall be continued as, or converted into, a Prime Rate Loan and (iii) any outstanding LIBO Rate Loan shall be converted, on the last day of the then current Interest Period with respect thereto, to a Prime Rate Loan. Until such notice has been withdrawn by the Agent, no further LIBO Rate Loans shall be made and the Borrower shall not have the right to convert a Loan to a LIBO Rate Loan. The Agent will review the circumstances affecting the London interbank market from time to time and the Agent will withdraw such notice at such time as it shall determine in the exercise of its reasonable judgment that the circumstances giving rise to said notice no longer exist. 3.11 Requirements of Law. In the event that any law, regulation or directive or any change therein or in the interpretation or application thereof or compliance by the Agent or any Lender with any request or directive (whether or not having the force of law) from any central bank or other governmental authority, agency or instrumentality: (a) does or shall subject the Agent or any Lender to any tax of any kind whatsoever with respect to this Agreement, any Note or any Loan made hereunder, or change the basis of taxation of payments to the Agent or any Lender of principal, commitment fee, interest or any other amount payable hereunder (except for income taxes or changes in the rate of tax on the overall net income of the Agent or such Lender); (b) does or shall impose, modify or hold applicable any reserve, assessment rate, special deposit, compulsory loan or other requirement against assets held by, or deposits or other 26 32 liabilities in or for the account of, advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of the Agent or any Lender which are not otherwise included in the determination of any LIBO Rate at the last Borrowing, conversion or continuation date of a Loan; (c) does or shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or other requirement against Commitments to extend credit; (d) does or shall impose on the Agent or any Lender any other condition; and the result of any of the foregoing is to increase the cost to the Agent or any Lender of making, renewing or maintaining its Revolving Commitment or the LIBO Rate Loans or to reduce any amount receivable thereunder (which increase or reduction shall be determined by the Agent's or such Lender's reasonable allocation of the aggregate of such cost increases or reduced amounts receivable resulting from such events), then, in any such case, the Borrower shall pay to the Agent or such Lender within thirty (30) Business Days of its statement described below, any additional amounts necessary to compensate the Agent or such Lender for such additional cost or reduced amount receivable as determined by the Agent or such Lender with respect to this Agreement. If the Agent or Lender becomes entitled to claim any additional amounts pursuant to this Section 3.11, it shall notify the Borrower of the event by reason of which it has become so entitled. A statement setting forth in reasonable detail the calculation as to any additional amounts payable pursuant to the foregoing sentence, and setting forth the basis and calculation for allocating such additional amounts among the other borrowers of the affected Agent or Lender, submitted by the affected Agent or Lender to the Borrower shall be conclusive in the absence of manifest error. 3.12 Illegality. Notwithstanding any other provisions herein, if any law, regulation, treaty or directive or any change therein or in the interpretation or application thereof by an entity with jurisdiction over the Agent or any Lender, shall make it unlawful, impossible, or impracticable for such Agent or any Lender to make or maintain LIBO Rate Loans as contemplated by this Agreement, (a) the commitment of the Agent or any Lender hereunder to make LIBO Rate Loans or convert Prime Rate Loans to LIBO Rate Loans shall forthwith be suspended until such event is resolved and (b) the Agent's or such Lender's Loans then outstanding as LIBO Rate Loans, if any, shall be converted automatically to Prime Rate Loans on the next succeeding Interest Payment Date or within such earlier period as allowed by law. The Borrower hereby agrees to pay the Agent or any such Lender, within thirty (30) days of its demand, any additional amounts necessary to compensate the Agent or any such Lender for any costs incurred by the Agent or any such Lender in making any conversion in accordance with this Section, including, but not limited to, any interest or fees payable by the Agent or any such Lender to lenders of funds obtained by it in order to make or maintain its LIBO Rate Loans hereunder (the Agent's or any such Lender's notice of such costs, in reasonable detail as certified to the Borrower and the Agent to be conclusive absent manifest error). 3.13 Obligation to Mitigate. The Agent and each Lender agrees that as promptly as practicable after it becomes aware of the occurrence of an event that would entitle it to give 27 33 notice pursuant to Section 3.6, 3.11 or 3.12, it will use reasonable efforts to make, fund or maintain its affected LIBO Rate Loans through another Lending Office of the Agent or such Lender if, as a result thereof, the increased cost would be avoided or materially reduced or the illegality would thereby cease to exist and if, in the reasonable opinion of the Agent or such Lender, the making, funding or maintaining of such LIBO Rate Loans through such other Lending Office would not in any material respect be disadvantageous to the Agent or such Lender or contrary to the Agent's or such Lender's internal policies or normal banking practices or any applicable legal or regulatory restrictions, provided that the Borrower shall pay all incremental expenses incurred by the Agent or any such Lender as a result of utilizing such other Lending Office. 3.14 Taxes. (a) Any and all payments by the Borrower to each Lender or the Agent under this Agreement and any other Loan Document shall be made free and clear of, and without deduction or withholding for, any Taxes. In addition, the Borrower shall pay all Other Taxes to the relevant taxing authority or other authority in accordance with applicable law. (b) If the Borrower shall be required by law to deduct or withhold any Taxes or Other Taxes from or in respect of any sum payable hereunder to any Lender or the Agent, then: (i) the sum payable shall be increased as necessary so that, after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section), such Lender or the Agent, as the case may be, receives an amount equal to the sum it would have received had no such deductions or withholdings been made; (ii) the Borrower shall make such deductions and withholdings; and (iii) the Borrower shall pay the full amount deducted or withheld to the relevant taxing authority or other authority in accordance with applicable law. (c) The Borrower agrees to indemnify and hold harmless each Lender and the Agent for the full amount of (i) Taxes and (ii) Other Taxes that are payable by such Lender or the Agent and any penalties, interest, additions to tax, expenses or other similar liabilities arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Payment under this indemnification shall be made within 45 days after the date the Lender or the Agent makes written demand therefor. (d) Each Lender that is not incorporated or organized in or under the laws of the United States of America or a state thereof (a "Non-U.S. Lender") shall: (i) deliver to the Borrower and the Agent, prior to the first day on which the Borrower is required to make any payments hereunder to such Lender, two copies of either United States Internal Revenue Service Form 1001 or Form 4224 or, in the case of a Non-U.S. Lender claiming exemption from U.S. Federal withholding tax under Section 871(h) or 881(c) of the Internal Revenue Code with respect to payments of "portfolio interest", a Form W-8, or any 28 34 subsequent versions thereof or successors thereto (and, if such Non-U.S. Lender delivers a Form W-8, a certificate representing that such Non-U.S. Lender is not a bank for purposes of Section 881(c) of the Internal Revenue Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Internal Revenue Code) of the Borrower and is not a controlled foreign corporation related to the Borrower (within the meaning of Section 864(d)(4) of the Internal Revenue Code)), properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or a reduced rate of, U.S. Federal withholding tax on payments by the Borrower under this Agreement; (ii) deliver to the Borrower and the Agent two further copies of any such form of certification on or before the date that any such form or certification expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower; and (iii) obtain such extensions of time for filing and complete such forms or certifications as may reasonably be requested by the Borrower or the Agent; unless in any such case any change in treaty, law or regulation has occurred prior to the date on which any such delivery would otherwise be required that renders any such form inapplicable or would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender so advises the Borrower and the Agent. Each Non-U.S. Lender that shall become a participant pursuant to Section 9.6 or a Lender pursuant to Section 9.6 shall, upon the effectiveness of the related transfer, be required to provide all the forms and statements required pursuant to this Section 3.14(d), provided that in the case of a participant such participant shall furnish all such required forms and statements to the Lender from which the related participation shall have been purchased. (e) The Borrower shall not be required to indemnify any Non-U.S. Lender or the Agent, or to pay any additional amounts to any Non-U.S. Lender or the Agent, in respect of U.S. Federal withholding tax pursuant to paragraph (a) above to the extent that (i) the obligation to withhold amounts with respect to U.S. Federal withholding tax existed on the date such Non-U.S. Lender became a party to this Agreement (or, in the case of a Non-U.S. participant, on the date such participant became a participant hereunder) or as of the date such Non-U.S. Lender changes its applicable Lending Office; provided, however, that this clause (i) shall not apply to the extent that (x) the indemnity payments or additional amounts any Lender (or participant) would be entitled to receive (without regard to this clause (i)) do not exceed the indemnity payment or additional amounts that the Person making the assignment, participation, transfer or change in Lending Office would have been entitled to receive in the absence of such assignment, participation, transfer or change in Lending Office, or (y) such assignment, participation, transfer or change in Lending Office had been requested by the Borrower, (ii) the obligation to pay such additional amounts would not have arisen but for a failure by such Non-U.S. Lender or Non-U.S. participant to comply with the provisions of paragraph (d) above or (iii) any of the representations or certifications made by a Non-U.S. Lender or Non-U.S. participant pursuant to paragraph (d) above are incorrect at the time a payment hereunder is made, other than by reason 29 35 of any change in treaty, law or regulation having effect after the date such representations or certifications were made. (f) If the Borrower determines in good faith that a reasonable basis exists for contesting any Taxes for which indemnification has been demanded hereunder, the relevant Lender or the Agent, as applicable, shall cooperate with the Borrower in challenging such Taxes at the Borrower's expense if so requested by the Borrower in writing. If any Lender or the Agent, as applicable, receives a refund of a Tax for which a payment has been made by the Borrower pursuant to this Agreement, which refund in the good faith judgment of such Lender or Agent, as the case may be, is attributable to such payment made by the Borrower, then the Lender or the Agent, as the case may be, shall reimburse the Borrower for such amount as the Lender or Agent, as the case may be, determines to be the proportion of the refund as will leave it, after such reimbursement, in no better or worse position than it would have been in if the payment had not been required. Neither the Lenders nor the Agent shall be obliged to disclose information regarding its tax affairs or computations to the Borrower in connection with this paragraph (f) or any other provision of this Section 3.14. (g) Promptly after the date of any payment by the Borrower of Taxes or Other Taxes, the Borrower shall furnish to each Lender or the Agent the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to such Lender or the Agent. ARTICLE IV CONDITIONS OF EFFECTIVENESS AND LENDING 4.1 Conditions Precedent to Effectiveness. The effectiveness of this Agreement is subject to the conditions precedent that: (a) The Agent shall have received the following, each dated as of the date hereof (except for the documents referred to in clause (ii)), in form and substance satisfactory to the Agent and (except for the Notes) in sufficient copies for each Lender: (i) The Notes issued by the Borrower to the order of each Lender; (ii) Copies of the Articles of Incorporation of the Borrower and each Guarantor, certified as of a recent date by the Secretary of State of California; (iii) Copies of the Bylaws of the Borrower and each Guarantor, certified by the Secretary or an Assistant Secretary of such Person; (iv) Copies of resolutions of the Board of Directors or other authorizing documents of the Borrower and each Guarantor, approving the Loan Documents to which such Person is a party and the transactions contemplated thereunder; 30 36 (v) An incumbency certificate executed by the Secretary or an Assistant Secretary of the Borrower and each Guarantor or equivalent document, certifying the names and signatures of the officers of the Borrower and each Guarantor or other Persons authorized to sign the Loan Documents to which such Person is a party and the other documents to be delivered hereunder; (vi) An executed and completed Notice of Borrowing regarding any Revolving Loans to be made or maintained on the date hereof; (vii) An executed and completed Borrowing Base Certificate; (viii) Executed copies of all Loan Documents; and (ix) A favorable opinion of counsel to the Borrower and each Guarantor, in the form of Exhibit E, and as to such other matters as any Lender may reasonably request. (x) Borrower's projections of its future performance. (b) The Borrower shall have paid to the Agent, for distribution (as appropriate) to the Agent and the Lenders, the fees, costs and expenses payable as required in Section 2.3 and Section 9.5, which amounts the Borrower may fund with a Borrowing. (c) All corporate and legal proceedings and all instruments and documents in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory in content, form and substance to the Agent and its counsel, and each Lender, the Agent and the Agent's counsel shall have received any and all further information and documents which the Agent or such counsel may reasonably have requested in connection therewith, such documents where appropriate to be certified by proper corporate or governmental authorities. (d) The Related Transactions shall have closed in a manner and pursuant to documentation in all respects satisfactory to the Agent. 4.2 Conditions Precedent to Each Borrowing. The obligation of each Lender to make a Loan on the occasion of each Borrowing (including the initial Borrowing) shall be subject to the further conditions precedent that on the date of such Borrowing: (a) the following statements shall be true and the Agent shall have received the Notice of Borrowing required by Section 2.1(b) and Section 2.2(b), which notice shall be deemed to be a certification by the Borrower that: (i) the representations and warranties contained in Section 5.1 are correct on and as of the date of such Borrowing as though made on and as of such date, except to the extent that such representations and warranties specifically relate only to an earlier date, in which 31 37 case such representations and warranties shall have been true and correct on and as of such earlier date, (ii) no event has occurred and is continuing, or would result from such Borrowing, which constitutes an Event of Default or Potential Event of Default, (iii) all Loan Documents are in full force and effect, and (iv) based on information available to the Borrower as of the date of such requested Borrowing, the Borrower represents and warrants that (x) the amount of such Borrowing, when added to all Revolving Loans then outstanding, will not exceed the Borrowing Base and (y) the Borrower is, as of the date of such Borrowing, and is projected to be, as of the last day of the next ending Fiscal Quarter, in minimum compliance with each of the covenants set forth in Section 6.2. (b) no injunction or other restraining order shall have been issued and no hearing to cause an injunction or other restraining order to be issued shall be pending or noticed with respect to any action, suit or proceeding seeking to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions contemplated by this Agreement or the making of the Loans hereunder. (c) As to Borrowings subsequent to the 90th day after the date hereof the Agent's inspection of the Borrower's accounts receivable records at the Borrower's premises shall have been completed and shall have been in all respects satisfactory in form and substance to the Agent. ARTICLE V REPRESENTATIONS AND WARRANTIES 5.1 Representations and Warranties. The Borrower represents and warrants as follows: (a) Organization. The Borrower and each of its Subsidiaries is duly organized, validly existing and in good standing under the laws of the state of its formation. The Borrower and each of its Subsidiaries is also duly authorized, qualified and licensed in all applicable jurisdictions, and under all applicable laws, regulations, ordinances or orders of public authorities, to carry on its business in the locations and in the manner presently conducted. (b) Authorization. The execution, delivery and performance by the Borrower or other executing Person of the Loan Documents, and the making of Borrowings hereunder, are within the Borrower's or such other Person's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) the Borrower's or such other Person's charter, by-laws or other organizational document or (ii) any law or regulation (including 32 38 Regulations G, T, U and X) or any contractual restriction binding on or affecting the Borrower or such other Person, and will not result in the creation of a Lien on any of its properties (other than under a Loan Document). (c) Governmental Consents; Regulation. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body (except (i) the filing of any necessary financing statements to perfect the Liens granted under the Security Agreement and (ii) routine reports required pursuant to the Securities Exchange Act of 1934, as amended, which reports will be made in the ordinary course of business) is required for the due execution, delivery and performance by the Borrower or other executing Person of the Loan Documents. Neither the Borrower nor any of its Subsidiaries is an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. (d) Validity. The Loan Documents are the binding obligations of the Borrower or other executing Person, enforceable in accordance with their respective terms; except in each case as such enforceability may be limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar laws of general application and equitable principles relating to or affecting creditors' rights. (e) Financial Condition. The balance sheet of the Borrower and its consolidated Subsidiaries as at December 31, 1996 and September 30, 1997 and the related statements of income and retained earnings of the Borrower and its consolidated Subsidiaries for the Fiscal Year or Fiscal Quarter (as the case may be) then ended, copies of which have been furnished to each Lender, fairly present the financial condition of the Borrower and its consolidated Subsidiaries as at such dates and the results of the operations of the Borrower and its consolidated Subsidiaries for the respective periods ended on such dates, all in accordance with GAAP, consistently applied, and since September 30, 1997 (subject, in the case of the September 30,1997 financial statements, to year-end audit adjustments and the absence of footnotes) there has been no material adverse change in the business, operations, properties, assets, prospects or condition (financial or otherwise) of the Borrower and its Subsidiaries, taken as a whole. (f) Litigation. Except as set forth on Schedule 5.1(f), there is no pending or threatened action or proceeding affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator, which may materially adversely affect the consolidated financial condition or operations of the Borrower and its Subsidiaries or which may have a material adverse effect on the Borrower's or another executing Person's ability to perform their respective obligations under the Loan Documents, having regard for their other financial obligations. (g) Employee Benefit Plans. The Borrower and each of its ERISA Affiliates is in compliance in all material respects with any applicable provisions of ERISA and the 33 39 regulations and published interpretations thereunder with respect to all Employee Benefit Plans. No Termination Event has occurred or is reasonably expected to occur with respect to any Pension Plan. (h) Disclosure. No representation or warranty of the Borrower contained in this Agreement or any other document, certificate or written statement furnished to the Agent or any Lender by or on behalf of the Borrower or any Subsidiary for use in connection with the transactions contemplated by this Agreement contains any untrue statement of a material fact or omits to state a material fact (known to the Borrower in the case of any document not furnished by it) necessary in order to make the statements contained herein or therein not misleading. There is no fact known to the Borrower (other than matters of a general economic nature) which materially adversely affects the business, operations, properties, assets, prospects or condition (financial or otherwise) of the Borrower or its Subsidiaries, taken as a whole, which has not been disclosed herein or in such other documents, certificates and statements furnished to the Agent or any Lender for use in connection with the transactions contemplated hereby. (i) Margin Stock. No proceeds of any Loan will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. (j) Environmental Matters. Except as set forth in Schedule 5.1(j), neither the Borrower nor any Subsidiary, nor any of their respective officers, employees, representatives or agents, nor, to the best of their knowledge, any other Person, has treated, stored, processed, discharged, spilled, or otherwise disposed of any substance defined as hazardous or toxic by any applicable federal, state or local law, rule, regulation, order or directive, or any waste or by-product thereof, at any real property or any other facility owned, leased or used by the Borrower or any Subsidiary, in violation of any applicable statutes, regulations, ordinances or directives of any governmental authority or court, which violations may result in liability to the Borrower or any Subsidiary or any of their respective officers, employees, representatives, agents or shareholders in an amount exceeding $250,000 for all such violations; and the unresolved violations set forth in said Schedule will not result in liability to the Borrower or any Subsidiary or any of their respective officers, employees, representatives, agents or shareholders in an amount exceeding $250,000 for all such unresolved violations. Except as set forth in said Schedule, no employee or other Person has ever made a claim or demand against the Borrower or any Subsidiary based on alleged damage to health caused by any such hazardous or toxic substance or by any waste or by-product thereof; and the unsatisfied claims or demands against the Borrower or any Subsidiary set forth in said Schedule will not result in uninsured liability to the Borrower or any Subsidiary or any of their respective officers, employees, representatives, agents or shareholders in an amount exceeding $250,000 for all such unsatisfied claims or demands. Except as set forth in said Schedule, neither the Borrower nor any Subsidiary has been charged by any governmental authority with improperly using, handling, storing, discharging or disposing of any such hazardous or toxic substance or waste or by-product thereof or with causing or permitting any pollution of any body of water; and the outstanding charges set forth in said Schedule will not result in liability to the Borrower or any Subsidiary or any of their 34 40 respective officers, employees, representatives, agents or shareholders in an amount exceeding $250,000 for all such outstanding charges. (k) Employee Matters. There is no strike or work stoppage in existence or threatened involving the Borrower or its Subsidiaries that may materially adversely affect the consolidated financial condition or operations of the Borrower and its Subsidiaries or that may have a material adverse effect on the Borrower's ability to perform its obligations under the Loan Documents, having regard for its other financial obligations. ARTICLE VI COVENANTS 6.1 Affirmative Covenants. So long as any Note shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower will, and will cause its Subsidiaries to (unless the Lenders shall otherwise consent in writing as provided in Section 9.1): (a) Financial Information. Furnish to each Lender and the Agent: (i) as soon as available, but in any event within ninety (90) days after the end of each Fiscal Year of the Borrower, a copy of the consolidated and consolidating balance sheet of the Borrower and its consolidated Subsidiaries as at the end of each Fiscal Year and the related consolidated and consolidating statements of income (or comparable statement) and changes in cash flow for such year, setting forth in each case in comparative form the figures as at the end of the previous year as to the balance sheet and the figures for the previous corresponding period as to the other statements, accompanied, with respect to such consolidated statements, by an unqualified report and opinion thereon of independent certified public accountants reasonably acceptable to the Agent; all such financial statements to be complete and correct in all material respects and in accordance with GAAP applied consistently throughout the Fiscal Year (except as approved by such accountants and disclosed therein); (ii) as soon as available, but in any event within forty-five (45) days after the end of each of the first three Fiscal Quarters of the Borrower, a copy of the unaudited consolidated and consolidating balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such period and the related unaudited consolidated and consolidating statements of income (or comparable statement) and changes in cash flow for such period and year to date, setting forth in each case in comparative form the figures as at the end of the previous Fiscal Year as to the balance sheet and the figures for the previous corresponding period as to the other statements, certified by a duly authorized officer of the Borrower as being fairly stated in all material respects subject to year end and audit adjustments, all such financial statements to be complete and correct in all material respects and in accordance with GAAP subject to normal year end and audit adjustments and the absence of footnotes, applied consistently throughout the period reflected therein (except as approved by such accountants and disclosed therein); 35 41 (iii) as soon as available, but in any event within thirty (30) days after the end of each calendar month, a copy of the unaudited consolidated and consolidating balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such period and the related unaudited consolidated and consolidating statements of income (or comparable statement) for such month certified by a duly authorized officer of the Borrower as being fairly stated in all material respects subject to normal quarterly, year end and audit adjustments and the absence of footnotes; (iv) together with each delivery of financial statements of the Borrower and its Subsidiaries pursuant to subdivisions (i) and (ii) above, (A) an officer's certificate stating that the signer has reviewed the terms of the Loan Documents and has made, or caused to be made under his/her supervision, a review in reasonable detail of the transactions and condition of the Borrower and its Subsidiaries during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signer does not have knowledge of the existence as at the date of the officer's certificate, of any condition or event which constitutes an Event of Default or Potential Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Borrower has taken, is taking and proposes to take with respect thereto; and (B) a Compliance Certificate in the form of Exhibit F demonstrating in reasonable detail compliance during and at the end of such accounting periods with the each of the covenants and restrictions contained in Section 6.2 as of the end of the fiscal period covered thereby; (v) substantially concurrent with the sending or filing thereof, copies of all reports which the Borrower sends to a majority of its security holders, and copies of all reports and registration statements which the Borrower or any of its Subsidiaries files with the S.E.C. or any national securities exchange; and (vi) as soon as available, but in any event within thirty (30) days after the end of each calendar month through March 31, 1999 and thereafter within 30 days after the end of each Fiscal Quarter of the Borrower, a Borrowing Base Certificate in substantially the form of Exhibit J setting forth the calculation of the Borrowing Base, certified by the chief financial officer, corporate controller or treasurer of the Borrower, and an aging of the Borrower's accounts receivable and accounts payable in form and detail acceptable to the Agent. (b) Notices and Information. Deliver to the Agent and each Lender: (i) promptly upon any officer of the Borrower obtaining knowledge (A) of any condition or event which constitutes an Event of Default or Potential Event of Default, (B) that any Person has given any notice to the Borrower or any of its Subsidiaries or taken any other action with respect to a claimed default or event or condition of the type referred to in Section 7.1(f), (C) of the institution of any litigation involving an alleged liability (including possible forfeiture of property) of the Borrower or any of its Subsidiaries equal to or greater than $100,000 or any adverse determination in any litigation involving a potential liability of the Borrower or any of its Subsidiaries equal to or greater than $100,000, or (D) of a material 36 42 adverse change in the business, operations, properties, assets or condition (financial or otherwise) of the Borrower and its Subsidiaries, taken as a whole, an officers' certificate specifying the nature and period of existence of any such condition or event, or specifying the notice given or action taken by such holder or Person and the nature of such claimed default, Event of Default, Potential Event of Default, event or condition, and what action the Borrower has taken, is taking and proposes to take with respect thereto; (ii) promptly upon becoming aware of the occurrence of or forthcoming occurrence of any (A) Termination Event, or (B) "prohibited transaction," as such term is defined in Section 4975 of the Internal Revenue Code or Section 406 of ERISA, in connection with any Employee Benefit Plan or any trust created thereunder, a written notice specifying the nature thereof, what action the Borrower has taken, is taking or proposes to take with respect thereto, and, when known, any action taken or threatened by the Internal Revenue Service, the Department of Labor, or the Pension Benefit Guaranty Corporation with respect thereto; (iii) with reasonable promptness copies of (A) all notices received by the Borrower or any of its ERISA Affiliates of the Pension Benefit Guaranty Corporation's intent to terminate any Pension Plan or to have a trustee appointed to administer any Pension Plan, (B) each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) filed by the Borrower or any of its ERISA Affiliates with the Internal Revenue Service with respect to each Pension Plan, and (C) all notices received by the Borrower or any of its ERISA Affiliates from a Multiemployer Plan sponsor concerning the imposition or amount of withdrawal liability pursuant to Section 4202 of ERISA; (iv) promptly, but in any event within thirty (30) days after receipt thereof, a copy of any notice, summons, citation, directive, letter or other form of communication from any governmental authority or court in any way concerning any action or omission on the part of the Borrower or any of its Subsidiaries in connection with any substance defined as toxic or hazardous by any applicable federal, state or local law, rule, regulation, order or directive or any waste or by-product thereof, or concerning the filing of a Lien upon, against or in connection with the Borrower, its Subsidiaries, or any of their leased or owned real or personal property, in connection with a Hazardous Substance Superfund or a Post-Closure Liability Fund as maintained pursuant to Section 9507 of the Internal Revenue Code if such act or omission may result in liability in an amount exceeding $100,000 for all such acts or omissions or if any such Lien, together with all other such Liens, is filed upon or against property the fair market value of which exceeds $100,000 in the aggregate; and (v) promptly, but in any event within ten (10) days after request, such other information and data with respect to the Borrower or any of its Subsidiaries as from time to time may be reasonably requested by the Agent or any Lender. (c) Corporate Existence, Etc. At all times preserve and keep in full force and effect its and its Subsidiaries' corporate existence and rights and franchises material to its business and those of each of its Subsidiaries; provided, however, that the corporate existence of 37 43 any such Subsidiary may be terminated if such termination is accomplished in accordance with Section 6.2(j)(i). (d) Payment of Taxes and Claims. Pay, and cause each of its Subsidiaries to pay, all taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its franchises, business, income or property before any penalty or interest accrues thereon, and all claims (including claims for labor, services, materials and supplies) for sums which have become due and payable and which by law have or may become a Lien upon any of its properties or assets, prior to the time when any penalty or fine shall be incurred with respect thereto; provided that no such charge or claim need be paid if being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if such reserve or other appropriate provision, if any, as shall be required in accordance with GAAP shall have been made therefor. (e) Maintenance of Properties; Insurance. Maintain or cause to be maintained in good repair, working order and condition all material properties used or useful in the business of the Borrower and its Subsidiaries and from time to time make or cause to be made all appropriate repairs, renewals and replacements thereof. The Borrower will maintain or cause to be maintained, with financially sound and reputable insurers, insurance with respect to its properties and business and the properties and business of its Subsidiaries against loss or damage of the kinds customarily insured against by corporations of established reputation engaged in the same or similar businesses and similarly situated, of such types and in such amounts as are customarily carried under similar circumstances by such other corporations. The Borrower will comply with any other insurance requirement set forth in any other Loan Document. (f) Inspection. Permit any authorized representatives designated by the Agent or any Lender to visit and inspect any of the properties of the Borrower or any of its Subsidiaries, including its and their financial and accounting records, and to make copies and take extracts therefrom, and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants, all upon reasonable advance notice and at such reasonable times during normal business hours and as often as may be reasonably requested. (g) Compliance with Laws, Etc. Exercise, and cause each of its Subsidiaries to exercise, all due diligence in order to comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, including all environmental laws, rules, regulations and orders, noncompliance with which would materially adversely affect the business, properties, assets, operations, prospects or condition (financial or otherwise) of the Borrower and its Subsidiaries, taken as a whole. (h) Borrower's Account. Maintain the Borrower's Account at all times with the Agent. 6.2 Negative Covenants. So long as any Note shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower will not, and will not permit any Subsidiaries to, without the written consent of the Lenders as provided in Section 9.1: 38 44 (a) Consolidated Net Worth. Permit Consolidated Net Worth at any time commencing on March 31, 1999 to be less than an amount equal to 120% of Borrower's Consolidated Net Worth at December 31, 1998 plus (i) 75% of cumulative Consolidated Net Income (but not loss) for each Fiscal Quarter of the Borrower commencing with the Fiscal Quarter ending March 31, 1999, plus (ii) 100% of the Net Proceeds of any Equity Issuance by the Borrower after the date hereof, plus (iii) increases in stockholders' equity upon any conversion of any Subordinated Debt or preferred stock to common stock by any Person after the date hereof. (b) [Intentionally omitted] (c) Leverage Ratio. As at the end of any Fiscal Quarter of the Borrower commencing with the Fiscal Quarter of the Borrower ending March 31, 1999, permit the ratio of Consolidated Total Debt as of the Fiscal Quarter of the Borrower then ending to EBITDA as of the Fiscal Quarter of the Borrower then ending to be more than the correlative amount indicated below:
Fiscal Quarter of the Borrower Ending Ratio --------------- ----- March 31, 1999 5.00:1.00 June 30, 1999 4.75:1.00 September 30, 1999 4.50:1.00 December 31, 1999 4.25:1.00 March 31, 2000 4.00:1.00 June 30, 2000 3.75:1.00 Each Fiscal Quarter Ending 3.50:1.00 of the Borrower thereafter
(d) Interest Coverage Ratio. As at the end of any Fiscal Quarter of the Borrower commencing with the Fiscal Quarter of the Borrower ending March 31, 1999, permit the ratio of EBITDA as of the Fiscal Quarter of the Borrower then ending to Interest Expense as of the Fiscal Quarter of the Borrower then ending to be less than the ratio set forth below opposite the Fiscal Quarter of the Borrower in question set forth below (in each case determined based upon the EBITDA and Interest Expense for the Fiscal Quarter of the Borrower in question and the immediately preceding three consecutive Fiscal Quarters of the Borrower): Fiscal Quarter of the 39 45
Borrower Ending Ratio --------------- ----- March 31, 1999 1.50:1.00 June 30, 1999 1.75:1.00 September 30, 1999 2.00:1.00 December 31, 1999 2.25:1.00 Each Fiscal Quarter Ending of the Borrower thereafter 2.50:1.00
(e) Minimum EBITDA. Permit EBITDA for any Fiscal Quarter of the Borrower commencing with the Fiscal Quarter of the Borrower ending March 31, 1998 to be less than the amount set forth below under the column headed "Minimum Quarterly EBITDA" immediately opposite the Fiscal Quarter of the Borrower in question or permit EBITDA for any such Fiscal Quarter of the Borrower and the immediately preceding three Fiscal Quarters of the Borrower to be less than the amount set forth below under the column headed "Minimum Rolling Four Quarter EBITDA" opposite the Fiscal Quarter of the Borrower in question:
Minimum Minimum Rolling Fiscal Quarter of the Quarterly Four Quarter Borrower Ending EBITDA EBITDA --------------- ------ ------ March 31, 1998 $1,000,000 $10,000,000 June 30, 1998 $3,500,000 $10,000,000 September 30, 1998 $3,500,000 $14,000,000 December 31, 1998 $5,000,000 $20,000,000 March 31, 1999 $5,000,000 $22,500,000 June 30, 1999 $5,000,000 $25,000,000 September 30, 1999 $5,000,000 $27,500,000 Each Fiscal Quarter Ending of the Borrower thereafter $5,000,000 $30,000,000
40 46 (e)(e) Profitability. Shall not have Consolidated Net Income of less than $1.00 for (a) two or more Fiscal Quarters of the Borrower (i) in the 1999 Fiscal Year of the Borrower or (ii) in any four consecutive Fiscal Quarters of the Borrower commencing with the Fiscal Quarter of the Borrower ending March 31, 2000 or (b) any four consecutive Fiscal Quarters of the Borrower commencing with the Fiscal Quarter of the Borrower ending December 31, 1999. (f) Liens Etc. Create or suffer to exist, or permit any of its Subsidiaries to create or suffer to exist, any Lien upon or with respect to any of its properties, whether now owned or hereafter acquired, other than: (i) Permitted Liens; (ii) purchase money Liens upon or in any property acquired, leased or held by the Borrower or any Subsidiary in the ordinary course of business to secure the purchase price of such property or to secure indebtedness incurred solely for the purpose of financing the acquisition or lease of such property, including Capital Leases; (iii) Liens securing Subordinated Debt on the date of this Agreement, subject to the subordination provisions of such Subordinated Debt; (iv) all renewals, refundings, refinancings and extensions of any such Liens described in clauses (i), (ii) and (iii) above; provided that the principal amount secured is not increased and that such Lien is not extended to other property (other than after acquired property of the same type which is already collateral). (g) Debt. Create or suffer to exist, or permit any of its Subsidiaries to create or suffer to exist, any Debt, other than: (i) Debt existing on the date hereof and set forth on Schedule 6.2(g); (ii) Debt owed to the Lenders hereunder; (iii) Debt secured by Liens permitted under Section 6.2(f); (iv) Debt of a wholly-owned Subsidiary of the Borrower to another wholly-owned Subsidiary of the Borrower and Debt of the Borrower to a wholly-owned Subsidiary of the Borrower; provided, however, that the maximum amount of Debt owing by Foreign Subsidiaries to the Borrower or any Guarantor shall not exceed $10,000,000 in the aggregate at any time outstanding; (v) Contingent Obligations permitted under Section 6.2(l); (vi) Debt not otherwise permitted by clauses (i) through (v) above, not in excess of $1,000,000 in the aggregate at any one time outstanding; and 41 47 (vii) all renewals, refundings, refinancings or extensions of any such Debt described in clauses (i) and (iii) above, provided that the terms thereof are not materially more burdensome to the Borrower than those set forth in the documents evidencing such Debt as in effect on the date hereof in the case of Debt described in clause (i), and provided, further, that no additional assets (other than after acquired property of the same type which is already collateral) are pledged to secure any renewals, refundings, refinancings or extensions of Debt described in clause (iii); and (viii) Debt under the Senior Unsecured Notes. (h) Lease Obligations. Create or suffer to exist, or permit any of its Subsidiaries to create or suffer to exist, any obligations for the payment of rental for any property under leases or agreements to lease (other than Capital Leases) which would cause the direct or contingent liabilities of the Borrower and its Subsidiaries, on a consolidated basis, in respect of all such obligations to exceed $7,000,000 payable in any Fiscal Year of the Borrower; provided, however, that such amount shall be increased by an amount equal to the periodic increases in rent payable by any of the Borrower or its Subsidiaries under any such leases, which periodic increases shall not exceed more than 5% of the prior rent amount in any Fiscal Year. (i) Dividends, etc. Declare or pay any dividends, purchase or otherwise acquire for value any of its capital stock now or hereafter outstanding, or make any distribution of assets to its stockholders as such, or permit any of its Subsidiaries to purchase or otherwise acquire for value any stock of the Borrower, except that the Borrower may (i) declare and deliver dividends and distributions payable in capital stock of the Borrower, and (ii) repurchase its capital stock in connection with any agreement between the Borrower or its Subsidiaries and any officer, director, employee or consultant of the Borrower or its Subsidiaries (other than those with Arthur J. Cormier and John F. Schaefer) entered into in the ordinary course of business wherein the Borrower or its Subsidiary is obligated or entitled to repurchase from such officer, director, employee or consultant such capital stock upon such Person's termination of employment or services with the Borrower; provided that the aggregate repurchases under this clause (ii) shall not exceed $2,000,000 in the aggregate during the term of this Agreement, and except that any wholly-owned Subsidiary of the Borrower may declare and pay cash dividends to the Borrower. (j) Consolidation, Merger. Consolidate or merge with any other Person, liquidate, wind-up or dissolve itself or acquire by purchase or otherwise all or substantially all of the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any Person (each, an "Acquisition"), or permit any of its Subsidiaries to do any of the foregoing, except that: (i) any Subsidiary of the Borrower may be merged or consolidated with or into the Borrower or any wholly-owned Subsidiary of the Borrower or be liquidated, wound up or dissolved, or all or any substantial part of its business, property or assets may be conveyed, sold, leased, transferred or otherwise disposed of, in one transaction or a series of transactions, to the Borrower or any wholly-owned Subsidiary of the Borrower; provided that, in the case of such 42 48 a merger or consolidation, the Borrower or such wholly-owned Subsidiary shall be the continuing or surviving corporation in all such cases before and after giving effect to such transaction there exists no Event of Default or Potential Event of Default; (ii) the Borrower may make Consolidated Capital Expenditures permitted under Section 6.2(n); (iii) the Borrower may make Acquisitions not otherwise contemplated by this Section 6.2(j), where the sum of (x) the cash consideration plus (y), the excess, if any, of the book value of the liabilities of the Person being acquired over the book value of the assets of the Person being acquired (each at the time immediately prior to the Acquisition) does not exceed an aggregate amount over the period commencing on the date of this Agreement and ending on the Revolving Maturity Date of $10,000,000; provided that any such Acquisition may only be made if in all cases before and after giving effect to any such Acquisition, (a) there exists no Event of Default or Potential Event of Default and (b) the ratio of Consolidated Total Debt as at the end of the Fiscal Quarter of the Borrower immediately preceding any such Acquisition to EBITDA as at the end of such Fiscal Quarter of the Borrower is less than 3.50:1.00 and such ratio remains less than 3.50:1.00 immediately after any such Acquisition; and (iv) the Borrower may make Investments permitted under Section 6.2(k). (k) Investments. Make or permit to remain outstanding, or permit any Subsidiary to make or permit to remain outstanding, any Investment, except that: (i) the Borrower and its Subsidiaries may continue to own Investments existing on the date hereof and set forth on Schedule 6.2(k); (ii) the Borrower and its Subsidiaries may own, purchase or acquire certificates of deposit issued by any Lender, commercial paper rated Moody's P-I, municipal bonds rated Moody's AA or better, direct obligations of the United States of America or its agencies, and obligations guaranteed by the United States of America; (iii) the Borrower may acquire nominal amounts of stock of public corporations, which acquisitions shall not exceed $500,000 in the aggregate during the term of this Agreement; (iv) the Borrower may acquire and own stock, obligations or securities received from customers in connection with debts created in the ordinary course of business owing to the Borrower or a Subsidiary; (v) the Borrower may continue to own the existing capital stock of its Subsidiaries; 43 49 (vi) the Borrower and its Subsidiaries may make or permit to remain outstanding Investments (whether in the form of loans or capital contributions) within the limits permitted under Section 6.2(g)(iv); and (vii) the Borrower may make any Acquisition permitted by Section 6.2(j). (l) Contingent Obligations. Create or become or remain liable, or permit any of its Subsidiaries to create or become or remain liable, with respect to any Contingent Obligation, except that: (i) the Borrower or its Subsidiaries may remain liable with respect to Contingent Obligations existing on the date hereof and set forth on Schedule 6.2(l); (ii) the Borrower may enter into Interest Rate Agreements and Currency Agreements that are not speculative in nature; and (iii) the Borrower or its Subsidiaries may endorse negotiable instruments for deposit or collection or similar transactions in the ordinary course of business. (m) Asset Sales. Convey, sell, lease, transfer or otherwise dispose of, or permit any Subsidiary to convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, (i) all or any part of its or its Subsidiary's business, property or fixed assets outside of the ordinary course of business, whether now owned or hereafter acquired, or (ii) any capital stock or debt of any of its Subsidiaries, except: (i) the Borrower may convey, sell, lease, transfer or otherwise dispose of business, property or fixed assets the fair market value of which does not exceed $250,000 in the aggregate in any Fiscal Year; and (ii) the Borrower or its Subsidiaries may convey, sell, lease, transfer of otherwise dispose of obsolete or worn out assets. (n) Consolidated Capital Expenditures. Commencing 1998 make, or permit any Subsidiary to make, Consolidated Capital Expenditures in excess of (a) if and so long as Borrower maintains a ratio of Consolidated Total Debt to EBITDA of less than 3.5:1.0 as of the endings of Fiscal Quarters of the Borrower, in each case determined on the basis of the Consolidated Total Debt and EBITDA for the Fiscal Quarter of the Borrower in question and for the immediately preceding three consecutive Fiscal Quarters of the Borrower, $10,000,000 in any Fiscal Year of the Borrower and (b) so long as such ratio is 3.5:1.0 or greater, $2,000,000 in each Fiscal Quarter of the Borrower; provided that the Borrower may carry over up to 50% of the Consolidated Capital Expenditures permitted hereunder but not made in any Fiscal Year to the next succeeding Fiscal Year so long as the Borrower is and, as a result of making such additional Consolidated Capital Expenditures in such succeeding Fiscal Year would remain, in compliance with each of the other financial covenants set forth in Section 6.2. 44 50 (o) Transactions with Shareholders and Affiliates. Enter into, or permit any of its Subsidiaries to enter into, any transaction (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any holder of 5% or more of any class of equity securities of the Borrower, or with any Affiliate of the Borrower or any such holder, on terms that (when taken in the light of any related or series of transactions of which such transaction is a part (if any)) are less favorable to the Borrower or any such Subsidiary than those which might be obtained at the time from Persons who are not such a holder or Affiliate. (p) Agreements Restricting Payment of Dividends. Permit any of its Subsidiaries to enter into any agreement restricting the ability of such Subsidiary to declare, order, pay or make or set apart any sum for any dividends or other distributions or repayment of intercompany Debt on account of any shares of any class of its stock. (q) Restrictive Agreements. Agree with any Person, or permit any of its Subsidiaries to agree with any Person, that the Borrower or such Subsidiary will not create, incur or suffer to exist any Liens on its properties. (r) Payments on Debt under the Senior Unsecured Notes and Subordinated Debt. (i) Declare, order or pay, or permit any of its Subsidiaries to declare, order or pay, any amount of principal of, premium, if any, liquidated damages or interest on, or redeem, purchase or retire or make any sinking fund or similar payment, or permit any of its Subsidiaries to do any of the foregoing, with respect to any Subordinated Debt (including any Subordinated Debt listed in Schedule 6.2(g)) or the Senior Unsecured Notes, except that the Borrower may make scheduled payments of interest on the Senior Unsecured Notes, provided, that no Event of Default or Potential Event of Default has occurred and is continuing, or would result from such payment; or (ii) amend the terms of any agreement relating to Subordinated Debt or the Senior Unsecured Notes, including without limitation the Indenture, except that the Borrower and any of its Subsidiaries may amend the terms of any Subordinated Debt so long as such amendment does not impose any additional obligations or liabilities on the Borrower or any of its Subsidiaries or impair the rights or benefits of the Agent or the Lenders contained therein or amend any of the subordination provisions thereof or (iii) except as prohibited hereby fail to comply with the terms and conditions of or governing (x) the Subordinated Debt or (y) the Senior Unsecured Notes, including without limitation the Indenture. (s) Sales and Lease-Backs. Become or remain liable, or permit any of its Subsidiaries to become or remain liable, directly or indirectly, with respect to any lease, whether an operating lease or a Capital Lease, of any property (whether real, personal or mixed), whether now owned or hereafter acquired, (i) which the Borrower or any of its Subsidiaries has sold or transferred or is to sell or transfer to any other Person or (ii) which the Borrower or any of its Subsidiaries intends to use for substantially the same purpose as any other property which has been or is to be sold or transferred by the Borrower or any of its Subsidiaries to any Person in connection with such lease; provided that the Borrower and its Subsidiaries may become and remain liable as lessee, guarantor or other surety with respect to any such lease if and to the extent that the Borrower or any of its Subsidiaries would be permitted to enter into, and remain liable under, such lease under Section 6.2(h). 45 51 (t) Conduct of Business. Engage, or permit any of its Subsidiaries to engage, in any business other than (i) the business engaged in by the Borrower and its Subsidiaries on the date of this Agreement and similar or related businesses, and (ii) such other lines of business as may be consented to by the Lenders as provided in Section 9.1. (u) Fiscal Year. Change its fiscal year-end from December 31. (v) New Subsidiaries. Create any new Subsidiaries (including any new Subsidiaries created in connection with an Acquisition permitted pursuant to Section 6.2(j)) unless, in the case of any Subsidiary that is not a Foreign Subsidiary, such Subsidiary executes and delivers to the Agent, for the benefit of the Lenders, a Subsidiary Guaranty of the Obligations in substantially the form of Exhibit G attached hereto, and a Subsidiary Security Agreement in substantially the form of Exhibit H attached hereto, with respect to all of its assets, and the parent of such Subsidiary grants to the Agent for the benefit of the Lenders a first priority, perfected pledge of all of the capital stock of such Subsidiary (but limited to 65% of Foreign Subsidiaries if the Agent receives evidence satisfactory to it that a pledge of greater than 65% would have material adverse tax consequences). (w) Investments in Foreign Subsidiaries. Make, or permit any Subsidiary to make, any Investment in any Foreign Subsidiary if, after giving effect to such Investment, the Borrower's aggregate Investment in all Foreign Subsidiaries would be in excess of 20% of the Borrower's consolidated total assets (determined in accordance with GAAP). ARTICLE VII EVENTS OF DEFAULT 7.1 Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) The Borrower shall fail to pay (i) any installment of principal when due hereunder, (ii) any installment of interest when due hereunder or (iii) any other amount payable hereunder on the date when due and (in the case of this clause (a)(iii)) such failure shall continue for three Business Days; or (b) Any representation or warranty made by the Borrower herein or by the Borrower or any Guarantor (or any of their respective officers) in connection with this Agreement or the other Loan Documents to which such person is a party shall prove to have been incorrect in any material respect when made; or (c) The Borrower shall fail to perform or observe any term, covenant or agreement contained in Sections 3.1, 6.1(b)(i)(A), (b)(i)(B), (c), (f) or 6.2 on its part to be performed or observed; or 46 52 (d) The Borrower or any Guarantor shall fail to perform or observe any term, covenant or agreement contained in this Agreement or any other Loan Document to which such Person is a party other than those referred to in Sections 7.1(a), (b), and (c) above on its part to be performed or observed and any such failure shall remain unremedied or uncured for thirty (30) days after the Borrower or such Guarantor (as the case may be) knows of such failure; or (e) The Borrower or any of its Subsidiaries shall default in the performance of or compliance with any term contained in any Loan Document other than this Agreement and such default shall not have been remedied or waived within any applicable grace period; or (f) The Borrower or any of its Subsidiaries shall (A) fail to pay any principal of, or premium or interest on, any Debt, the aggregate outstanding principal amount of which is at least $250,000 (excluding Debt evidenced by the Notes), when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt, or (B) fail to perform or observe any term, covenant or condition on its part to be performed or observed under any agreement or instrument relating to any such Debt, when required to be performed or observed, such failure shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such failure to perform or observe is to accelerate, or to permit the acceleration of, the maturity of such Debt; or (g) (i) The Borrower or any of its Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Borrower or any of its Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of sixty (60) days; or (iii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from the entry thereof; or (iv) the Borrower or any of its Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii) and (iii) above; or (v) the Borrower or any of its Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or 47 53 (h) One or more judgments or decrees shall be entered against the Borrower or any of its Subsidiaries involving in the aggregate a liability (not paid or fully covered by insurance) equal to or greater than $500,000 and all such judgments or decrees shall not have been vacated, discharged, or stayed or bonded pending appeal within thirty (30) days from the entry thereof; or (i) (i) The Borrower or any of its ERISA Affiliates shall fail to make full payment when due of all amounts which, under the provisions of any Pension Plan or Section 412 of the Internal Revenue Code, the Borrower or any of its ERISA Affiliates is required to pay as contributions thereto; (ii) any accumulated funding deficiency shall occur or exist, whether or not waived, with respect to any Pension Plan; (iii) the Borrower or any of its ERISA Affiliates shall enter into any transaction which has as its principal purpose the evasion of liability under Subtitle D of Title IV of ERISA; (iv) (A) Any Pension Plan maintained by the Borrower or any of its ERISA Affiliates shall be terminated within the meaning of Title IV of ERISA, or (B) a trustee shall be appointed by an appropriate United States district court to administer any Pension Plan, or (C) the Pension Benefit Guaranty Corporation (or any successor thereto) shall institute proceedings to terminate any Pension Plan or to appoint a trustee to administer any Pension Plan, or (D) the Borrower or any of its ERISA Affiliates shall withdraw (under Section 4063 of ERISA) from a Pension Plan, if as of the date of the event listed in subclauses (A)-(D) above or any subsequent date, the Borrower or its ERISA Affiliates has any liability (such liability to include any liability to the Pension Benefit Guaranty Corporation, or any successor thereto, or to any other party under Sections 4062, 4063 or 4064 of ERISA or any other provision of law) resulting from or otherwise associated with the events listed in subclauses (A)-(D) above; or (v) As used in this Section 7.1(i) the term "accumulated funding deficiency" has the meaning specified in Section 412 of the Internal Revenue Code, and the terms "actuarial present value" and "benefit liabilities' have the meanings specified in Section 4001 of ERISA; or (j) Any Change in Control shall occur; THEN, (i) upon the occurrence of any Event of Default described in clause (g) above, the Commitments shall immediately terminate and all Loans hereunder with accrued interest thereon, and all other amounts owing under this Agreement, the Notes and the other Loan Documents shall automatically become due and payable; and (ii) upon the occurrence of any other Event of Default, the Agent shall at the request, or may with the consent, of the Requisite Lenders, by notice to the Borrower, declare the Commitments to be terminated forthwith, whereupon the Commitments shall immediately terminate, and/or, by notice to the Borrower, declare the Loans hereunder, with accrued interest thereon, and all other amounts owing under this Agreement, the 48 54 Notes and the other Loan Documents to be due and payable forthwith, whereupon the same shall immediately become due and payable and the Agent may exercise any and all rights and remedies available at law or in equity and/or under any of the Loan Documents. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. ARTICLE VIII THE AGENT 8.1 Authorization and Action. Each Lender hereby appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement (including enforcement or collection of the Notes), the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Requisite Lenders, and such instructions shall be binding upon all Lenders and all holders of Notes; provided, however, that Agent shall not be required to take any action which is contrary to this Agreement or any other Loan Document or applicable law; provided, further, that the Agent shall be fully justified in refusing to take or to continue to take any action hereunder unless it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by the Agent by reason of taking or continuing to take any such action. The Agent shall promptly furnish to each Lender copies of all material documents, reports, certificates, financial statements and notices furnished to the Agent by the Borrower; provided, however, that the Agent shall not be liable to any Lender for its failure to provide copies of such material documents, reports, certificates, financial statements and notices unless such failure constitutes gross negligence or willful misconduct by the Agent. 8.2 Agent's Reliance, etc. Neither the Agent nor any of its respective directors, officers, agents or employees shall be liable for any action taken or omitted to be taken under or in connection with this Agreement, except for its own gross negligence or willful misconduct. The Agent may employ agents and attorneys-in-fact and shall not be responsible to any Lender for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Without limitation of the generality of the foregoing, the Agent: (i) may treat the payee of any Note as the holder thereof until the Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Agent; (ii) may consult with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations made by the Borrower in or in connection with this Agreement; (iv) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the 49 55 part of the Borrower or to inspect the property (including the books and records) of the Borrower; (v) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; and (vi) shall incur no liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram, cable or telex) believed by it in good faith to be genuine and signed or sent by the proper party or parties. 8.3 The Agent and Affiliates. With respect to its Commitment, the Loans made by it and the Note issued to it, the Agent shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though the Agent were not the Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include the Agent in its individual capacity. The Agent and its affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower, any of its subsidiaries and any Person who may do business with or own securities of the Borrower or any such subsidiary, all as if it were not the Agent and without any duty to account therefor to the Lenders. 8.4 Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender and based on the financial statements referred to in Section 5.1(e) and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agent, except as to the delivery of documents required to be delivered to each Lender pursuant to the terms hereof, or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. 8.5 Indemnification. Without limiting the obligations of the Borrower hereunder, the Lenders agree to indemnify the Agent (to the extent not reimbursed by the Borrower or any Guarantor), ratably according to the respective principal amounts outstanding under the Notes then held by each of them (or if no Notes are at the time outstanding or if any Notes are held by Persons which are not Lenders, ratably according to the respective amounts of their Commitments), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement or any action taken or omitted by the Agent under this Agreement, provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. Without limitation of the foregoing, but subject to the proviso to the preceding sentence each Lender agrees to reimburse the Agent promptly upon demand for its ratable share of any reasonable out-of-pocket expenses (including counsel fees and out-of-pocket expenses) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or 50 56 responsibilities under, this Agreement, to the extent that the Agent is not reimbursed for such expenses by the Borrower or any Guarantor. 8.6 Successor Agent. The Agent may resign at any time by giving written notice thereof to the Borrower and the Lenders and may be removed at any time with or without cause by the Requisite Lenders. Upon any such resignation or removal, the Requisite Lenders shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Requisite Lenders, and shall have accepted such appointment, within thirty (30) days after the retiring Agent's giving of notice of resignation or the Requisite Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. ARTICLE IX MISCELLANEOUS 9.1 Amendments, etc. No amendment or waiver of any provision of the Loan Documents nor consent to any departure by the Borrower or any Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Borrower and the Lenders having at least 51% of the sum of (x) the aggregate principal amount of Loans outstanding and (y) the aggregate principal amount of the unused portion of the Revolving Commitment; and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all the Lenders, do any of the following: (a) waive any of the conditions specified in Sections 4.1 and 4.2 or modify Section 9.7, (b) increase the Commitments of the Lenders, (c) reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder, (d) postpone any date fixed for any payment (including any mandatory prepayment pursuant to Section 2.4) of principal of, or interest on, the Notes or any fees or other amounts payable hereunder, (e) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Lenders, which shall be required for the Lenders or any of them to take any action hereunder (f) release any Guarantor or release any material portion of the Collateral, or (g) amend this Section 9.1; and provided, further, that no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Lenders required above to take such action, affect the rights or duties of the Agent under this Agreement or any other Loan Document. 9.2 Notices, etc. Except as otherwise set forth in this Agreement, all notices and other communications provided for hereunder shall be in writing (including telegraphic, telex or 51 57 facsimile communication) and mailed or telegraphed or telexed or sent by facsimile or delivered, if to the Borrower, at its address set forth on the signature page hereof; and if to any Lender or the Agent, at its address set forth on the signature page hereof; or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall be effective three (3) Business Days after deposit in the U.S mail, postage prepaid, when sent by telex or sent by facsimile, or when delivered, respectively, except that notices and communications to the Agent pursuant to Article II or VII shall not be effective until received by the Agent. 9.3 Right of Setoff; Deposit Accounts. Upon and after the occurrence of any Event of Default, each Lender is hereby authorized by the Borrower, at any time and from time to time, without notice, (a) to set off against, and to appropriate and apply to the payment of, the obligations and liabilities of the Borrower under the Loan Documents (whether matured or unmatured, fixed or contingent or liquidated or unliquidated) any and all amounts owing by such Lender to the Borrower (whether payable in Dollars or any other currency, whether matured or unmatured, and, in the case of deposits, whether general or special, time or demand and however evidenced) and (b) pending any such action, to the extent necessary, to hold such amounts as collateral to secure such obligations and liabilities and to return as unpaid for insufficient funds any and all checks and other items drawn against any deposits so held as such Lender in its sole discretion may elect. The Borrower hereby grants to each Lender a security interest in all deposits and accounts maintained with that Lender. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of set-off) which such Lender may have. 9.4 No Waiver; Remedies. No failure on the part of the Agent or any Lender to exercise, and no delay in exercising, any right under any of the Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right under any of the Loan Documents preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 9.5 Costs and Expenses. The Borrower agrees to pay on demand all reasonable fees and out-of-pocket costs and expenses of the Agent (including the fees and out-of-pocket expenses of local or foreign counsel) in connection with the preparation, amendment, or modification of the Loan Documents. The Borrower agrees to pay on demand all fees and out-of-pocket costs and expenses of the Agent and each Lender (including the fees and out-of-pocket expenses of local or foreign counsel) in connection with the enforcement (including in appellate, bankruptcy, insolvency, liquidation, reorganization, moratorium or other similar proceedings) or restructuring of the Loan Documents or "work-out" of the Obligations whether or not such work-out or restructuring is consummated. 9.6 Additional Lenders; Assignments; Participations. (a) Any Lender may assign, from time to time, all or any portion of its Commitments or its Loans and its Notes to an Affiliate of that Lender or to a Federal Reserve Bank or, subject to the prior written approval of the Borrower (which approval will not be 52 58 unreasonably withheld or delayed and may be evidenced by the Borrower's execution of an Assignment Agreement), to any other financial institution or any fund that is regularly engaged in making, purchasing or investing in loans reasonably acceptable to the Agent, by executing and delivering an Assignment Agreement in substantially the form of Exhibit I annexed hereto, provided the assigning Lender or the assignee has paid to the Agent a registration and processing fee in the amount of $2,500. From and after the effective date of such assignment (i) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it, have the rights and obligations of a Lender hereunder and (ii) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it (other than to an Affiliate or to a Federal Reserve Bank), relinquish its rights and be released from its obligations under this Agreement (other than pursuant to Section 9.6(e)), and, in the case of an assignment covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto, subject to its continuing obligations under Section 9.6(e) (other than to an Affiliate or to a Federal Reserve Bank). The Commitments hereunder and Annex I hereto shall be modified to reflect the Commitment of such assignee as provided in Section 9.6(f) and (g), and, if any such assignment occurs while any Notes are outstanding, new Notes shall, upon the surrender of the assigning Lender's Notes, be issued to such assignee and to the assigning Lender as necessary to reflect the new Commitments of the assigning Lender and of its assignee. (b) Each Lender may sell, negotiate or grant participations to other financial institutions in all or part of the obligations of the Borrower outstanding under the Loan Documents, without notice to or the approval of the Agent or the Borrower; provided that any such sale, negotiation or participation shall be in compliance with the applicable federal and state securities laws and the other requirements of this Section 9.6. No participant shall constitute a "Lender" under any Loan Document, and the Borrower shall continue to deal solely and directly with the Agent and the Lenders. (c) Each Lender may disclose to any proposed assignee or participant any information relating to the Borrower or any of its Subsidiaries; provided, that prior to such disclosure such proposed assignee or participant shall have agreed in writing to keep any such information confidential substantially on the terms of Section 9.6(e). (d) The grant of a participation interest shall be on such terms as the granting Lender determines are appropriate, provided only that (i) the holder of such a participation interest shall not have any of the rights of a Lender under this Agreement except, if the participation agreement so provides, rights to demand the payment of costs of the type described in Article III, to the extent that the grantor of the participation would otherwise be entitled to demand such payments, and rights to receive information provided by the Borrower from time to time pursuant to Sections 6.1 (a) and (b) hereof, (ii) the consent of the holder of such a participation interest shall not be required for amendments or waivers of provisions of the Loan Documents other than those that (A) increase the amount of the Commitments, (B) extend the term of the Commitments in which such participant participates, (C) decrease the rate of interest or the amount of any fee or any other amount payable to the Lenders under the Loan Documents in which such participant participates, (D) reduce the principal amount payable under the Loan 53 59 Documents in which such participant participates, or (E) extend the date fixed for the payment of principal or interest or any other amount payable under the Loan Documents in which such participant participates, and (iii) no Lender shall grant participation interests to more than 2 additional financial institutions. (e) Each Lender understands that some of the information and documents furnished to it pursuant to this Agreement may be confidential and each Lender agrees that it will keep all non-public information, documents and agreements so furnished to it (and identified as confidential) confidential in accordance with its customary procedures and will make no disclosure to other Persons of such information or agreements until it shall have become public, except (i) to the extent required in connection with matters involving operations under or enforcement or amendment of the Loan Documents; (ii) to such Lender's examiners and auditors or in accordance with such Lender's obligations under law or regulations or pursuant to subpoenas or other process to make information available to governmental agencies and examiners or to others; (iii) to any corporate parent of any Lender so long as such parent agrees to accept such information or agreement subject to the restrictions provided in this Section 9.6(e); (iv) to any participant bank or trust company of any Lender so long as such participant shares the corporate parent with such Lender and agrees to keep such information, documents or agreement confidential in accordance with the restrictions provided in this Section 9.6(e); (v) to the Agent or to any other Lender and their respective counsel and other professional advisors and to its own counsel and professional advisors so long as such Persons are instructed to keep such information confidential in accordance with the provisions of this Section 9.6(e); (vi) to proposed assignees and participants in accordance with Section 9.6(c); and (vii) with the prior written consent of the Borrower. (f) The Agent, on behalf of the Borrower, shall maintain at the address of the Agent specified herein (or at such other address as may be designated by the Agent from time to time in accordance with Section 9.2) a copy of each Assignment Agreement delivered to it and a register (the "Register") for the recordation of the names and addresses of the Lenders and the Commitment of and principal amount of the Loans owing to each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Agent and the Lenders shall treat each Person whose name is recorded in the Register as the owner of a Loan or other obligation hereunder as the owner thereof for all purposes of this Agreement and the other Loan Documents, notwithstanding any notice to the contrary. Any assignment of any Loan or other obligation hereunder shall be effective only upon appropriate entries with respect thereto being made in the Register. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (g) Upon its receipt of an Assignment Agreement executed by an assigning Lender and its assignee (and consented to by the Borrower (such consent not to be unreasonably withheld)) together with payment to the Agent of the registration and processing fee described in Section 9.6(a), the Agent shall record the information contained therein in the Register and give notice of such acceptance and recordation to the Lenders and the Borrower. Immediately upon the recordation of such information in the Register, this Agreement shall be deemed to be 54 60 amended to the extent, but only to the extent, necessary to reflect the addition of the assignee and the resulting adjustment of the Commitments arising therefrom, and (i) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment Agreement, shall have the rights of a Lender under the Loan Documents and (ii) the assigning Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment Agreement, relinquish its rights and be released from its obligations under the Loan Documents. The Commitment allocated to each assignee shall reduce such Commitments of the assigning Lender pro tanto. 9.7 Effectiveness; Binding Effect; Governing Law. This Agreement shall become effective when it shall have been executed by the Borrower, the Agent and each Lender and thereafter shall be binding upon and inure to the benefit of the Borrower, the Agent, each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of any Agent and all of the Lenders. THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ITS CHOICE OF LAW DOCTRINE. 9.8 Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS OR THE BORROWER SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY (TO THE EXTENT PERMITTED UNDER APPLICABLE LAW) IN THE COURTS OF THE STATE OF NEW YORK, NEW YORK COUNTY OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. THE BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS 55 61 BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OF FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER HEREBY IRREVOCABLY WAIVES (TO THE EXTENT PERMITTED UNDER APPLICABLE LAW) SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 9.9 Waiver of Jury Trial. THE AGENT AND THE LENDERS AND THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS OR THE BORROWER. THE BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENT AND THE LENDERS ENTERING INTO THIS AGREEMENT AND EACH SUCH OTHER LOAN DOCUMENT. 9.10 Entire Agreement. This Agreement with Exhibits and Schedules and the other Loan Documents embody the entire agreement and understanding between the parties hereto and supersedes all prior agreements and understandings relating to the subject matter hereof. 9.11 Separability of Provisions. In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 9.12 Obligations Several. The obligation of each Lender hereunder is several, and no Lender shall be responsible for the obligation or commitment of any other Lender hereunder. Nothing contained in this Agreement and no action taken by the Lenders pursuant hereto shall be deemed to constitute the Lenders to be a partnership, an association, a joint venture or any other kind of entity. 9.13 Survival of Certain Agreements. Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of the Borrower set forth in Sections 3.6, 3.7, 3.11, 3.14 and 9.5 and the agreements of the Lenders set forth in Sections 3.9, 3.10, 8.2, 8.5 and 9.3 shall survive the payment of the Loans and the Notes and the termination of this Agreement. 56 62 9.14 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement; signature pages may be detached from counterpart documents and reassembled to form duplicate executed originals. 9.15 Intercreditor Agreements with Customers. The Agent shall on behalf of the Lenders at the request of the Borrower from time to time enter into intercreditor agreements with the customers of the Borrower who have made advance deposits for the purchase of inventory. Such agreements shall: (i) be in a form acceptable to the Agent in the exercise of its reasonable commercial judgment; (ii) permit the Borrower to deposit the customer's advance into a separate deposit account which will be subject to a security interest solely in favor of such customer; (iii) permit such customer to have a first priority perfected security interest in the inventory purchased with such customer's deposit; and (iv) include such other terms as are mutually agreeable. 57 63 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. PHASE METRICS, INC. By: /s/ R. J. Saunders ---------------------------------------- Title: Vice President - Finance Address: 10260 Sorrento Valley Road San Diego, California 92121 Telephone: (619) 646-4850 Telecopier: (619) 646-4990 Attention: R. Joseph Saunders THE AGENT: FLEET NATIONAL BANK By: /s/ Fleet National Bank ----------------------------------------- Title: Vice President Address: One Federal Street Boston, Massachusetts 02110 Mail Stop: MA OF DO7A Telephone: (617) 346-0029 Telecopier: (617) 346-1633 Attention: Mathew Glauninger (credit matters) Attention: Kathy Connell (operations matters) 58 64 THE LENDERS: FLEET NATIONAL BANK By: /s/ Fleet National Bank ----------------------------------------- Title: Vice President Address: One Federal Street Boston, Massachusetts 02110 Mail Stop: MA OF DO7A Telephone: (617) 346-0029 Telecopier: (617) 346-1633 Attention: Mathew Glauninger (credit matters) Attention: Kathy Connell (operations matters) IMPERIAL BANK By: /s/ Imperial Bank ----------------------------------------- Title: Address: 701 B Street, 6th Fl. San Diego, California 92101 Telephone: (619) 338-1501 Telecopier: (619) 234-2234 Attention: Steven Cusato 59 65 ANNEX I
Lender Revolving Commitment - ------ -------------------- Fleet National Bank $12,500,000 Imperial Bank $12,500,000 Total $25,000,000 - ----- -----------
A-1 66 EXHIBIT A PHASE METRICS, INC. REVOLVING PROMISSORY NOTE San Diego, California $______________________ ________________,____ FOR VALUE RECEIVED, PHASE METRICS, INC., a Delaware corporation (the "Borrower"), promises to pay to the order of ________________________ (the "Lender") the principal amount of _______________($____________) or, if less, the aggregate amount of Revolving Loans (as defined in the Credit Agreement referred to below) made by the Lender to the Borrower pursuant to the Credit Agreement referred to below and outstanding on the Revolving Maturity Date (as defined in the Credit Agreement referred to below) which shall be paid on the Revolving Maturity Date. This Note amends and restates that certain revolving promissory note of the Borrower payable to the order of the Lender dated December 4, 1996. The Borrower also promises to pay interest on the unpaid principal amount hereof from the date hereof until paid at the rates and at the times which shall be determined in accordance with the provisions of the Credit Agreement. All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the office of the Agent described in the Credit Agreement. Until notified of the transfer of this Note, the Borrower shall be entitled to deem the Lender or such person who has been so identified by the transferor in writing to the Borrower as the holder of this Note, as the owner and holder of this Note. Each of the Lender and any subsequent holder of this Note agrees that before disposing of this Note or any part hereof it will make a notation hereon of all principal payments previously made hereunder and of the date to which interest hereon has been paid on the schedule attached hereto, if any; provided, however, that the failure to make notation of any payment made on this Note shall not limit or otherwise affect the obligation of the Borrower hereunder with respect to payments of principal or interest on this Note. This Note is referred to in, and is entitled to the benefits of, the Amended and Restated Credit Agreement dated as of January 30, 1998, as same may hereafter be amended, restated or modified (the "Credit Agreement") among the Borrower, the financial institutions named therein and Fleet National Bank, as Agent. The Credit Agreement, among other things, (i) provides for the making of advances (the "Loans") by the Lender to the Borrower from time to time in an aggregate amount not to exceed at any time outstanding the U.S. dollar amount first above mentioned, the indebtedness of the Borrower resulting from each such Loan being evidenced by this Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. -A-2- 67 The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligation of the Borrower, which is absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. The Borrower promises to pay all costs and expenses, including reasonable attorneys' fees and the out-of-pocket expenses of counsel, incurred in the collection and enforcement of this Note. The Borrower hereby consents to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waives diligence, presentment, protest, demand and notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder. This Note shall be governed by, and construed in accordance with, the laws of the state of New York without giving effect to its choice of law doctrine. IN WITNESS WHEREOF, the Borrower has caused this Note to be executed and delivered by its duly authorized officer, as of the date and the place first above written. Phase Metrics, Inc. By ------------------------------------ Title --------------------------------- -A-3- 68 TRANSACTIONS ON NOTE Date Amount Amount Principal Interest Interest Notation of Loan of Balance Paid Paid Made by Made Principal Through Paid 69 EXHIBIT B [INTENTIONALLY OMITTED] 70 EXHIBIT C [FORM OF NOTICE OF BORROWING] NOTICE OF BORROWING Pursuant to that certain Amended and Restated Credit Agreement dated as of January 30, 1998, as amended, restated or otherwise modified to the date hereof (said Amended and Restated Credit Agreement, as so amended, restated or otherwise modified, being the "Credit Agreement," the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among Phase Metrics, Inc., a Delaware corporation, (the "Borrower"), the financial institutions listed therein as Lenders ("Lenders") and Fleet National Bank, as Agent ("Agent"), this represents Borrower's request to borrow on _________________, 199_ from Lenders, in accordance with their respective commitment, $___________________ in Revolving Loans as [Prime/LIBO] Rate Loans. [The initial Interest Period for such Loans is requested to be a _______________ month period.] The proceeds of such Loans are to be deposited in the Borrower's Account. The undersigned officer, to the best of his knowledge, on behalf of the Borrower, certifies that: (i) The representations and warranties contained in the Credit Agreement and the other Loan Documents are true and correct in all material respects on and as of the date hereof to the same extent as though made on and as of the date hereof, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties were true and correct in all material respects on and as of such earlier date; (ii) No event has occurred and is continuing or would result from the consummation of the borrowing contemplated hereby that would constitute an Event of Default or a Potential Event of Default; (iii) All Loan Documents are in full force and effect; and (iv) Based on information available to the Borrower as of the date of such requested Borrowing, the Borrower represents and warrants that (x) the amount of such Borrowing, when added to all Revolving Loans then outstanding, will not exceed the Borrowing Base and (y) the Borrower is, as of the date of the Borrowing, and is projected to be, as of the last day of the next ending Fiscal Quarter, in minimum compliance with the financial covenants and other restrictions as set forth in Section 6.2. -C-1- 71 DATED: -------------------------- PHASE METRICS, INC. By ----------------------------------------- Title --------------------------------------- -C-2- 72 EXHIBIT D [FORM OF NOTICE OF CONVERSION/CONTINUATION] NOTICE OF CONVERSION/CONTINUATION Pursuant to that certain Amended and Restated Credit Agreement dated as of January 30, 1998, as amended, restated or otherwise modified to the date hereof (said Amended and Restated Credit Agreement, as so amended, restated or otherwise modified, being the "Credit Agreement," the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among Phase Metrics, Inc., a Delaware corporation (the "Borrower"), the financial institutions listed therein as Lenders and Fleet National Bank, as Agent, this represents the Borrower's request to [Select A or B with appropriate insertions and deletions: [A: convert $_________ principal amount of presently outstanding Revolving Loans that are [Prime/LIBO] Rate Loans [having an Interest Period that expires on ___________________ 199_] to [Prime/LIBO] Rate Loans on ___________________ 199_. [The initial Interest Period for such [LIBO] Rate Loans is requested to be a ________________ month period.] [B: continue as [LIBO] Rate Loans $_______________ in principal amount of presently outstanding Revolving Loans having an Interest Period that expires on ____________ 199_. The Interest Period for such [LIBO] Rate Loans commencing on ____________ 199_ is requested to be a ____________ month period.] [For Conversions to or Continuations of LIBO Rate Loans Only: The undersigned officer, to the best of his/her knowledge, on behalf of the Borrower, certifies that no Event of Default or Potential Event of Default has occurred and is continuing under the Credit Agreement.] DATED: -------------------------- PHASE METRICS, INC. By ----------------------------------------- Title --------------------------------------- -D-1- 73 EXHIBIT E [Letterhead of Brobeck Phleger & Harrison LLP] [TO BE PROVIDED] -E-1- 74 EXHIBIT F [FORM OF COMPLIANCE CERTIFICATE] COMPLIANCE CERTIFICATE I. This Compliance Certificate ("Compliance Certificate") is executed and delivered by Phase Metrics, Inc., a Delaware corporation (the "Borrower") to Fleet National Bank (the "Agent") pursuant to Section 6.1(a)(iv)(B) of the Amended and Restated Credit Agreement dated as of January 30, 1998 among the Borrower, the financial institutions named therein, and the Agent (the "Credit Agreement"). Any terms used herein and not defined herein shall have the meanings defined in the Credit Agreement. This Compliance Certificate covers the Borrower's: Fiscal Quarter ended ______________, 19__ Fiscal Year ended ______________, 19__ The following paragraphs set forth calculations in compliance with obligations pursuant to Section 6.2(a), (c), (d), (e), (e)(e), (g), (h), (j), (m) and (n) of the Credit Agreement, as of the end of the appropriate fiscal period set forth in paragraph 1 hereof. A. Consolidated Net Worth (Sec. 6.2(a)) - March 31, 1999 and thereafter: 1. Consolidated Net Worth $ ___________ 2. (a) Consolidated Net Worth at 12/31/98 x 120% = $ ___________ (b) 75% of cumulative Consolidated Net Income for each Fiscal Quarter of the Borrower commencing with the Fiscal $ ___________ Quarter ending March 31, 1999 (c) 100% of the Net Proceeds of any Equity Issuance by the Borrower $ ___________ after the date of the Credit Agreement (d) 100% of the increase in shareholders' equity as a result of any conversion of Subordinated $_____________ Debt to capital stock 3. (a)+(b)+(c)+(d) $_____________ Required: 1 > 3 $_____________ -F-1- 75 B. [Intentionally Omitted] C. Leverage Ratio (Sec. 6.2(c)) - March 31, 1999 and thereafter: (a) Consolidated Total Debt $_____________ (b) EBITDA $_____________ Ratio (a) to (b) ______________ Maximum Permitted Ratio ______________ D. Interest Coverage Ratio (Sec. 6.2(d)) - March 31, 1999 and thereafter: (a) EBITDA $_____________ (b) Interest Expense $_____________ Ratio (a) to (b) ______________ Minimum Permitted Ratio ______________ E. Minimum EBITDA (Sec. 6.2(e)) - March 31, 1998 and thereafter: Required > $__________ for Fiscal Quarter in question; and > $__________ $_____________ for Fiscal Quarter in question and 3 Fiscal Quarter preceding Fiscal Quarters $_____________ 4 Fiscal Quarters E.E. Minimum Profitability (Sec. 6.2 (e)(e)) - 1999 and thereafter Fiscal Quarters only: Consolidated Net Income (a) for most recent Fiscal Quarter $_____________ (b) immediately preceding Fiscal $_____________ Quarter (c) 2nd preceding Fiscal Quarter $_____________ (d) third preceding Fiscal Quarter $_____________ F. Debt (Sec. 6.2(g): -F-2- 76 Debt from Foreign Subsidiaries Permitted: < $10,000,000 $_____________ G. Lease Obligations (Sec. 6.2(h)): Operating Lease Obligations of the Borrower and subsidiaries in the current Fiscal Year $_____________ Required: < $7,000,000 indexed 77 I. Asset Sales (Sec. 6.2(m)): Fair market value of assets sold in current Fiscal Year $_____________ Permitted: < $250,000 J. Consolidated Capital Expenditures (Sec. 6.2(n)): (a) So long as rolling 4-Fiscal Quarter Ratio of Consolidated Total Debt to EBITDA is < 3.5:1.0: Consolidated Capital Expenditures of the Borrower and its Subsidiaries for the current Fiscal Year $_____________ Permitted: $10,000,000 in each Fiscal Year plus unused permitted carryover from previous Fiscal Year ($_____) (b) If said ratio is 3.5:1.0 or greater: Consolidated Capital Expenditures of the Borrower for the current Fiscal Quarter $_____________ Permitted: $2,000,000 plus unused permitted carryover from previous Fiscal Year ($____) 3. The undersigned agrees to furnish to the Administrative Agent, promptly upon the request of any Lender, any additional information regarding the calculations set forth in this Compliance Certificate. 4. The undersigned has reviewed the terms of the Credit Agreement and has made, or caused to be made under his/her supervision, a review in reasonable detail of the transactions and condition of the Borrower and its Subsidiaries during the fiscal period covered by this Compliance Certificate. The undersigned does not (either as a result of such review or otherwise) have any knowledge of the existence as of the date of this Compliance Certificate of -F-4- 78 any condition or event that constitutes an Event of Default or a Potential Event of Default, with the exception set forth below in response to which the Borrower is taking or proposes to take the following actions (if none, so state): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 5. This Compliance Certificate is executed on ______________________ by the Chief Executive Officer, Chief Financial Officer, Treasurer or Controller of the Borrower. The undersigned hereby certifies on behalf of the Borrower that each and every matter contained herein is derived from the Borrower's books and records and is, to the best knowledge of the undersigned, true and correct. PHASE METRICS, INC. a Delaware corporation By: --------------------------------------- Title: --------------------------------------- -F-5- 79 EXHIBIT G FORM OF GUARANTY This GUARANTY is entered into as of ___________, ____ by ________________ ("Guarantor"), in favor of and for the benefit of Fleet National Bank, as administrative agent for the Lenders (as hereinafter defined) ("Administrative Agent") party to the Credit Agreement (as hereinafter defined). RECITALS A. Phase Metrics, Inc., a [California corporation] [a Delaware corporation and the successor by merger to Phase Metrics, Inc., a California corporation] (the "Borrower"), certain financial institutions (each, a "Lender" and collectively, the "Lenders"), [DLJ Capital Funding, Inc., as Syndication Agent] and Fleet National Bank, as Administrative Agent for the Lenders, have entered into a Credit Agreement dated as of [December 4, 1996] (said Credit Agreement, as it may hereafter be amended from time to time, being the "Credit Agreement," the terms defined therein and not otherwise defined herein being used herein as therein defined), pursuant to which the Administrative Agent and the Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to the Borrower. B. Guarantor is a wholly-owned subsidiary of the Borrower. It is a condition of the Credit Agreement that the Borrower will cause Guarantor to enter into a Guaranty guaranteeing the obligations of the Borrower under the Credit Agreement, and a Security Agreement granting to the Administrative Agent a security interest in all of Guarantor's assets. C. It is in Guarantor's best interest that the Lenders agree to continue to extend credit to the Borrower, in order that the Borrower can advance funds to Guarantor, and in order that the Borrower remains a viable corporation which has the financial ability to provide operational and other support to Guarantor. Accordingly, Guarantor desires to guaranty all of the obligations of the Borrower under the Credit Agreement and to undertake the obligations contemplated by this Agreement. NOW, THEREFORE, based upon the foregoing and in order to induce Lenders and Administrative Agent to continue to make credit available to the Borrower, Guarantor hereby agrees as follows: SECTION 1. DEFINITIONS 1.1. Certain Defined Terms. As used in this Guaranty, the following terms shall have the following meanings unless the context otherwise requires: -G-1- 80 "Guarantied Obligations" has the meaning assigned to that term in subsection 2.1. "Guaranty" means this Guaranty dated as of December 1996 as it may be amended, supplemented or otherwise modified from time to time. "Payment in full", "paid in full" or any similar term means payment in full in cash of the Guarantied Obligations including, without limitation, all principal, interest, costs, fees and expenses (including, without limitation, legal fees and expenses) of Lenders and Administrative Agent as required under the Loan Documents. 1.2. Interpretation. (a) References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Guaranty unless otherwise specifically provided. (b) In the event of any conflict or inconsistency between the terms, conditions and provisions of this Guaranty and the terms, conditions and provisions of the Credit Agreement, the terms, conditions and provisions of this Guaranty shall prevail. SECTION 2. THE GUARANTY 2.1. Guaranty of the Guarantied Obligations. Subject to the provisions of subsection 2.2(a), Guarantor hereby irrevocably and unconditionally guaranties, as primary obligor and not merely as surety, the due and punctual payment in full of all Guarantied Obligations when the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. Section 362(a)). The term "Guarantied Obligations" is used herein in its most comprehensive sense and includes: (a) any and all Obligations of the Borrower and each other Obligor in respect of notes, advances, borrowings, loans, debts, interest, fees, costs, expenses (including, without limitation, legal fees and expenses of counsel and allocated costs of internal counsel), indemnities and liabilities of whatsoever nature now or hereafter made, incurred or created, whether absolute or contingent, liquidated or unliquidated, whether due or not due, and however arising under or in connection with the Credit Agreement and the other Loan Documents, including those arising under successive borrowing transactions under the Credit Agreement which shall either continue the Obligations of the Borrower or an Obligor or from time to time renew them after they have been satisfied; and (b) those expenses set forth in subsection 2.8 hereof. 2.2. Limitation on Amount Guarantied; Contribution by Guarantor. (a) Anything contained in this Guaranty to the contrary notwithstanding, the obligations of Guarantor -G-2- 81 hereunder shall be limited to a maximum aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any applicable provisions of comparable state law (collectively, the "Fraudulent Transfer Laws"), in each case after giving effect to all other liabilities of Guarantor, contingent or otherwise, that are relevant under the Fraudulent Transfer Laws (specifically excluding, however, any liabilities of Guarantor (x) in respect of intercompany indebtedness to the Borrower or other affiliates of the Borrower to the extent that such indebtedness would be discharged in an amount equal to the amount paid by Guarantor hereunder and (y) under any guaranty of Subordinated Debt which guaranty contains a limitation as to maximum amount similar to that set forth in this subsection 2.2(a), pursuant to which the liability of Guarantor hereunder is included in the liabilities taken into account in determining such maximum amount) and after giving effect as assets to the value (as determined under the applicable provisions of the Fraudulent Transfer Laws) of any rights to subrogation or contribution of Guarantor pursuant to (i) applicable law or (ii) any agreement providing for an equitable allocation among Guarantor and other affiliates of the Borrower of obligations arising under guaranties by such parties. (b) Guarantor under this Guaranty, and each guarantor under other guaranties relating to the Credit Agreement (the "Related Guaranties") which contain a contribution provision similar to that set forth in this subsection 2.2(b), together desire to allocate among themselves (collectively, the "Contributing Guarantors"), in a fair and equitable manner, their obligations arising under this Guaranty and the Related Guaranties. Accordingly, in the event any payment or distribution is made by Guarantor under this Guaranty or a guarantor under a Related Guaranty (a "Funding Guarantor") that exceeds its Fair Share (as defined below), that Funding Guarantor shall be entitled to a contribution from each of the other Contributing Guarantors in the amount of such other Contributing Guarantor's Fair Share Shortfall (as defined below), with the result that all such contributions will cause each Contributing Guarantor's Aggregate Payments (as defined below) to equal its Fair Share. "Fair Share" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (i) the ratio of (x) the Adjusted Maximum Amount (as defined below) with respect to such Contributing Guarantor to (y) the aggregate of the Adjusted Maximum Amounts with respect to all Contributing Guarantors, multiplied by (ii) the aggregate amount paid or distributed on or before such date by all Funding Guarantors under this Guaranty and the Related Guaranties in respect of the obligations guarantied. "Fair Share Shortfall" means, with respect to a Contributing Guarantor as of any date of determination, the excess, if any, of the Fair Share of such Contributing Guarantor over the Aggregate Payments of such Contributing Guarantor. "Adjusted Maximum Amount" means, with respect to a Contributing Guarantor as of any date of determination, the maximum aggregate amount of the obligations of such Contributing Guarantor under this Guaranty and the Related Guaranties, determined in accordance with subsection 2.2(a) or, if applicable, a similar provision contained in a Related Guaranty; provided that, solely for purposes of calculating the "Adjusted Maximum Amount" with respect to any Contributing Guarantor for purposes of this subsection 2.2(b), the assets or liabilities arising by virtue of any rights to or obligations of contribution hereunder or under any similar provision contained in a Related Guaranty shall not be considered as assets or liabilities of such Contributing Guarantor. "Aggregate Payments" means, with respect to a Contributing Guarantor -G-3- 82 as of any date of determination, the aggregate amount of all payments and distributions made on or before such date by such Contributing Guarantor in respect of this Guaranty and the Related Guaranties (including, without limitation, in respect of this subsection 2.2(b) or any similar provision contained in a Related Guaranty). The amounts payable as contributions hereunder and under similar provisions in the Related Guaranties shall be determined as of the date on which the related payment or distribution is made by the applicable Funding Guarantor. The allocation among Contributing Guarantors of their obligations as set forth in this subsection 2.2(b) or any similar provision contained in a Related Guaranty shall not be construed in any way to limit the liability of any Contributing Guarantor hereunder or under a Related Guaranty. Each Contributing Guarantor under a Related Guaranty is a third party beneficiary to the contribution agreement set forth in this subsection 2.2(b). 2.3. Liability of Guarantor Absolute. Guarantor agrees that its obligations hereunder are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance which constitutes a legal or equitable discharge of a guarantor or surety other than indefeasible payment in full of the Guarantied Obligations. In furtherance of the foregoing and without limiting the generality thereof, Guarantor agrees as follows: (a) This Guaranty is a guaranty of payment when due and not of collectibility. (b) The Administrative Agent may enforce this Guaranty upon the occurrence of an Event of Default under the Credit Agreement notwithstanding the existence of any dispute between Lenders and the Borrower with respect to the existence of such Event of Default. (c) The obligations of Guarantor hereunder are independent of the obligations of the Borrower under the Loan Documents and the obligations of any other guarantor of the obligations of the Borrower under the Loan Documents, and a separate action or actions may be brought and prosecuted against Guarantor whether or not any action is brought against the Borrower or any of such other guarantors and whether or not the Borrower is joined in any such action or actions. (d) Guarantor's payment of a portion, but not all, of the Guarantied Obligations shall in no way limit, affect, modify or abridge Guarantor's liability for any portion of the Guarantied Obligations which has not been paid. Without limiting the generality of the foregoing, if the Administrative Agent is awarded a judgment in any suit brought to enforce Guarantor's covenant to pay a portion of the Guarantied Obligations, such judgment shall not be deemed to release Guarantor from its covenant to pay the portion of the Guarantied Obligations that is not the subject of such suit. (e) The Administrative Agent or any Lender, upon such terms as it deems appropriate, without notice or demand and without affecting the validity or enforceability of this Guaranty or giving rise to any reduction, limitation, impairment, discharge or termination of Guarantor's liability hereunder, from time to time may (i) renew, extend, accelerate, increase the rate of interest on, or otherwise change the time, place, manner or terms of payment of the Guarantied Obligations, (ii) settle, compromise, release or discharge, or accept or refuse any -G-4- 83 offer of performance with respect to, or substitutions for, the Guarantied Obligations or any agreement relating thereto and/or subordinate the payment of the same to the payment of any other obligations; (iii) request and accept other guaranties of the Guarantied Obligations and take and hold security for the payment of this Guaranty or the Guarantied Obligations; (iv) release, surrender, exchange, substitute, compromise. settle, rescind, waive, alter, subordinate or modify, with or without consideration, any security for payment of the Guarantied Obligations, any other guaranties of the Guarantied Obligations, or any other obligation of any Person with respect to the Guarantied Obligations; (v) enforce and apply any security now or hereafter held by or for the benefit of the Administrative Agent or any Lender in respect of this Guaranty or the Guarantied Obligations and direct the order or manner of sale thereof, or exercise any other right or remedy that the Administrative Agent or Lenders, or any of them, may have against any such security, as the Administrative Agent in its discretion may determine consistent with the Credit Agreement and any applicable security agreement, including foreclosure on any such security pursuant to one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, and even though such action operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of Guarantor against the Borrower or any security for the Guarantied Obligations; and (vi) exercise any other rights available to it under the Loan Documents. (f) This Guaranty and the obligations of Guarantor hereunder shall be valid and enforceable and shall not be subject to any reduction, limitation, impairment, discharge or termination for any reason (other than indefeasible payment in full of the Guarantied Obligations), including without limitation the occurrence of any of the following, whether or not Guarantor shall have had notice or knowledge of any of them: (i) any failure or omission to assert or enforce or agreement or election not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy (whether arising under the Loan Documents, at law, in equity or otherwise) with respect to the Guarantied Obligations or any agreement relating thereto, or with respect to any other guaranty of or security for the payment of the Guarantied Obligations; (ii) any rescission, waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including without limitation provisions relating to events of default) of the Credit Agreement, any of the other Loan Documents or any agreement or instrument executed pursuant thereto, or of any other guaranty or security for the Guarantied Obligations, in each case whether or not in accordance with the terms of the Credit Agreement or such Loan Document or any agreement relating to such other guaranty or security; (iii) the Guarantied Obligations, or any agreement relating thereto, at any time being found to be illegal, invalid or unenforceable in any respect; (iv) the application of payments received from any source (other than payments received pursuant to the other Loan Documents or from the proceeds of any security for the Guarantied Obligations, except to the extent such security also serves as collateral for indebtedness other than the Guarantied Obligations) to the payment of indebtedness other than the Guarantied Obligations, even though the Administrative Agent or Lenders, or any of them, might have elected to apply such payment to any part or all of the Guarantied Obligations; (v) any Lender's or the Administrative Agent's consent to the change, reorganization or termination of the corporate structure or existence of the Borrower or any of its Subsidiaries and to any corresponding restructuring of the Guarantied Obligations; (vi) any -G-5- 84 failure to perfect or continue perfection of a security interest in any collateral which secures any of the Guarantied Obligations; (vii) any defenses (other than payment), set-offs or counterclaims which the Borrower may allege or assert against Administrative Agent or any Lender in respect of the Guarantied Obligations, including but not limited to failure of consideration, breach of warranty, payment, statute of frauds, statute of limitations, accord and satisfaction and usury; and (viii) any other act or thing or omission, or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of Guarantor as an obligor in respect of the Guarantied Obligations. 2.4. Waivers by Guarantor. Guarantor hereby waives, for the benefit of Lenders and the Administrative Agent: (a) any defense based upon any legal disability or other defense of any of any other Guarantor, or by reason of the cessation or limitation of the liability of any other Guarantor from any cause (other than full payment of all Guarantied Obligations), including, but not limited to, failure of consideration, breach of warranty, statute of frauds, statute of limitations, accord and satisfaction, and usury; (b) any defense based upon any legal disability or other defense of any other guarantor or other Person; (c) any defense based upon any lack of authority of the officers, directors, partners or agents acting or purporting to act on behalf of any of the other Guarantor or any principal of any other Guarantor or any defect in the formation of any of any other Guarantor or any principal of any other Guarantor; (d) any defense based upon the application by the Borrower of the proceeds of the Loans for purposes other than the purposes represented by the Borrower to Administrative Agent or intended or understood by Administrative Agent or such Guarantor; (e) any defense based on Guarantor's rights, under statute or otherwise, to require Administrative Agent to sue any other Guarantor or otherwise to exhaust its rights and remedies against any other Guarantor or any other Person or against any collateral before seeking to enforce its right to require such Guarantor to satisfy the Guarantied Obligations of any other Guarantor; (f) any defense based on Administrative Agent's failure at any time to require strict performance by any Guarantor of any provision of the Loan Documents. Guarantor agrees that no such failure shall waive, alter or diminish any right of Administrative Agent thereafter to demand strict compliance and performance therewith. Nothing contained herein shall prevent Administrative Agent from foreclosing on the Lien of any security agreement, or exercising any rights available to Administrative Agent thereunder, and the exercise of any such rights shall not constitute a legal or equitable discharge of such Guarantor; -G-6- 85 (g) any defense arising from any act or omission of Administrative Agent which changes the scope of Guarantor's risks hereunder; (h) any defense based upon Administrative Agent's election of any remedy against Guarantor or any other Guarantor or both; any defense based on the order in which Administrative Agent enforces its remedies; (i) any defense based on (A) Administrative Agent's surrender, release, exchange, substitution, dealing with or taking any additional collateral, (B) Administrative Agent's abstaining from taking advantage of or realizing upon any Lien or other guaranty, and (C) any impairment of collateral securing the Guarantied Obligations, including, but not limited to, Administrative Agent's failure to perfect or maintain a Lien in such collateral; (j) any defense based upon Administrative Agent's failure to disclose to Guarantor any information concerning another Guarantor's financial condition or any other circumstances bearing on another Guarantor's ability to pay the Guarantied Obligations; (k) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in any other respects more burdensome than that of a principal; (l) any defense based upon Administrative Agent's election, in any proceeding instituted under the Bankruptcy Code, of the application of Section 1111(b)(2) of the Bankruptcy Code or any successor statute; (m) any defense based upon any borrowing or any grant of a security interest under Section 364 of the Bankruptcy Code; (n) any defense based on Administrative Agent's failure to be diligent or to satisfy any other standard imposed on a secured party, in exercising rights with respect to collateral securing the Guarantied Obligations; (o) notice of acceptance hereof; notice of the existence, creation or acquisition of any Guarantied Obligation; notice of any Event of Default; notice of the amount of the Guarantied Obligations outstanding from time to time; notice of any other fact which might increase Guarantor's risk; diligence; presentment; demand of payment; protest; filing of claims with a court in the event of another Guarantor's receivership or bankruptcy and all other notices and demands to which such Guarantor might otherwise be entitled (and agrees the same shall not have to be made on the other Guarantor as a condition precedent to Guarantor's obligations hereunder); (p) any defense based on errors and omissions by Administrative Agent in connection with its administration of the Loans, other than those caused by the Administrative Agent's gross negligence or willful misconduct; -G-7- 86 (q) any defense based on application of fraudulent conveyance or transfer law or shareholder distribution law to any of the Guarantied Obligations or the security therefor; (r) any defense based on Administrative Agent's failure to seek relief from stay or adequate protection in the Borrower's or another Guarantor's bankruptcy proceeding or any other act or omission by Administrative Agent which impairs such Guarantor's prospective subrogation rights; (s) any defense based on legal prohibition of Administrative Agent's acceleration of the maturity of the Guarantied Obligations during the occurrence of an Event of Default or any other legal prohibition on enforcement of any other right or remedy of Administrative Agent with respect to the Guarantied Obligations and the security therefor; and (t) the benefit of any statute of limitations affecting the liability of Guarantor hereunder or the enforcement hereof. 2.5. Payment by Guarantor; Application of Payments. Subject to the provisions of subsection 2.2(a), Guarantor hereby agrees, in furtherance of the foregoing and not in limitation of any other right which the Administrative Agent or any other Person may have at law or in equity against Guarantor by virtue hereof, that upon the failure of the Borrower to pay any of the Guarantied Obligations when and as the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. Section 362(a)), Guarantor will forthwith pay, or cause to be paid, in cash, to the Administrative Agent for the ratable benefit of Lenders, an amount equal to the sum of the unpaid principal amount of all Guarantied Obligations then due as aforesaid, accrued and unpaid interest on such Guarantied Obligations (including, without limitation, interest which, but for the filing of a petition in bankruptcy with respect to the Borrower, would have accrued on such Guarantied Obligations, whether or not a claim is allowed against such Borrower for such interest in any such bankruptcy proceeding) and all other Guarantied Obligations then owed to the Administrative Agent and/or Lenders as aforesaid. All such payments shall be applied promptly from time to time by the Administrative Agent: First, to the payment of the reasonable costs and expenses of any collection or other realization under this Guaranty, including reasonable compensation to the Administrative Agent and its agents and counsel, and all expenses, liabilities and advances made or incurred by the Administrative Agent in connection therewith; Second, to the payment of all other Guarantied Obligations ratably to Lenders; and Third, after payment in full of all Guarantied Obligations, to the payment to Guarantor, or its successors or assigns, or to whoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct, of any surplus then remaining from such payments. -G-8- 87 2.6. Subrogation. Until the Guarantied Obligations shall have been indefeasibly paid in full, Guarantor shall withhold exercise of (a) any right of subrogation, (b) any right of contribution Guarantor may have against any other guarantor of the Guarantied Obligations (including without limitation any such right of contribution under a Related Guaranty as contemplated by subsection 2.2(b)), (c) any right to enforce any remedy which the Administrative Agent or any Lender now has or may hereafter have against the Borrower or (d) any benefit of, and any right to participate in, any security now or hereafter held by the Administrative Agent or any Lender. Guarantor further agrees that, to the extent the waiver of its rights of subrogation and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation Guarantor may have against the Borrower or against any collateral or security, and any rights of contribution Guarantor may have against any other guarantor, shall be junior and subordinate to any rights Administrative Agent or Lenders may have against the Borrower to all right, title and interest the Administrative Agent or Lenders may have in any such collateral or security, and to any right the Administrative Agent or Lenders may have against such other guarantor. The Administrative Agent, on behalf of Lenders, may use, sell or dispose of any item of collateral or security as it sees fit without regard to any subrogation rights Guarantor may have, and upon any such disposition or sale any rights of subrogation Guarantor may have shall terminate. If any amount shall be paid to Guarantor on account of such subrogation rights at any time when all Guarantied Obligations shall not have been paid in full, such amount shall be held in trust for Administrative Agent on behalf of Lenders and shall forthwith be paid over to Administrative Agent for the benefit of Lenders to be credited and applied against the Guarantied Obligations, whether matured or unmatured, in accordance with the terms of the Credit Agreement or any applicable security agreement. 2.7. Subordination of Other Obligations. Any indebtedness of the Borrower now or hereafter held by Guarantor is hereby subordinated in right of payment to the Guarantied Obligations, and any such indebtedness of the Borrower to Guarantor collected or received by Guarantor after an Event of Default has occurred and is continuing shall be held in trust for the Administrative Agent on behalf of Lenders and shall forthwith be paid over to the Administrative Agent for the benefit of Lenders to be credited and applied against the Guarantied Obligations but without affecting, impairing or limiting in any manner the liability of Guarantor under any other provision of this Guaranty. 2.8. Expenses. Guarantor agrees to pay, or cause to be paid, and to save the Administrative Agent and Lenders harmless against liability for, any and all costs and expenses (including fees and disbursements of counsel and allocated costs of internal counsel) incurred or expended by the Administrative Agent or any Lender in connection with the enforcement of or preservation of any rights under this Guaranty. 2.9. Continuing Guaranty: Termination of Guaranty. This Guaranty is a continuing guaranty and shall remain in effect until all of the Guarantied Obligations shall have been indefeasibly paid in full and the Commitments shall have terminated. -G-9- 88 2.10. Authority of Guarantor or Borrower. It is not necessary for Lenders or the Administrative Agent to inquire into the capacity or powers of Guarantor or the Borrower or the officers, directors or any agents acting or purporting to act on behalf of either of them. 2.11. Financial Condition of Borrower. Any Loans may be granted to the Borrower or continued from time to time without notice to or authorization from Guarantor regardless of the financial or other condition of the Borrower at the time of any such grant or continuation. Lenders and the Administrative Agent shall have no obligation to disclose or discuss with Guarantor their assessment, or Guarantor's assessment, of the financial condition of the Borrower. Guarantor has adequate means to obtain information from the Borrower on a continuing basis concerning the financial condition of the Borrower and its ability to perform its obligations under the Loan Documents, and Guarantor assumes the responsibility for being and keeping informed of the financial condition of the Borrower and of all circumstances bearing upon the risk of nonpayment of the Guarantied Obligations. Guarantor hereby waives and relinquishes any duty on the part of the Administrative Agent or any Lender to disclose any matter, fact or thing relating to the business, operations or conditions of the Borrower now known or hereafter known by the Administrative Agent or any Lender. 2.12. Rights Cumulative. The rights, powers and remedies given to Lenders and the Administrative Agent by this Guaranty are cumulative and shall be in addition to and independent of all rights, powers and remedies given to Lenders and the Administrative Agent by virtue of any statute or rule of law or in any of the other Loan Documents or any agreement between Guarantor and Lenders and/or the Administrative Agent or between the Borrower and Lenders and/or the Administrative Agent. Any forbearance or failure to exercise, and any delay by any Lender or the Administrative Agent in exercising, any right, power or remedy hereunder shall not impair any such right, power or remedy or be construed to be a waiver thereof, nor shall it preclude the further exercise of any such right, power or remedy. 2.13. Bankruptcy; Post-Petition Interest; Reinstatement of Guaranty. (a) So long as any Guarantied Obligations remain outstanding, Guarantor shall not, without the prior written consent of the Administrative Agent in accordance with the terms of the Credit Agreement, commence or join with any other Person in commencing any bankruptcy, reorganization or insolvency proceedings of or against the Borrower. The obligations of Guarantor under this Guaranty shall not be reduced, limited, impaired, discharged, deferred, suspended or terminated by any proceeding, voluntary or involuntary, involving the bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement of the Borrower or by any defense which the Borrower may have by reason of the order, decree or decision of any court or administrative body resulting from any such proceeding. (b) Guarantor acknowledges and agrees that any interest on any portion of the Guarantied Obligations which accrues after the commencement of any proceeding referred to in clause (a) above (or, if interest on any portion of the Guarantied Obligations ceases to accrue by operation of law by reason of the commencement of said proceeding, such interest as would have accrued on such portion of the Guarantied Obligations if said proceedings had not been commenced) shall be included in the Guarantied Obligations because it is the intention of -G-10- 89 Guarantor and the Administrative Agent that the Guarantied Obligations which are guarantied by Guarantor pursuant to this Guaranty should be determined without regard to any rule of law or order which may relieve any Borrower of any portion of such Guarantied Obligations. Guarantor will permit any trustee in bankruptcy, receiver, debtor in possession, assignee for the benefit of creditors or similar person to pay the Administrative Agent, or allow the claim of the Administrative Agent in respect of, any such interest accruing after the date on which such proceeding is commenced. (c) In the event that all or any portion of the Guarantied Obligations are paid by Borrowers, the obligations of Guarantor hereunder shall continue and remain in full force and effect or be reinstated, as the case may be, in the event that all or any part of such payment(s) are rescinded or recovered directly or indirectly from the Administrative Agent or any Lender as a preference, fraudulent transfer or otherwise, and any such payments which are so rescinded or recovered shall constitute Guarantied Obligations for all purposes under this Guaranty. 2.14. Notice of Events. As soon as Guarantor obtains knowledge thereof, Guarantor shall give the Administrative Agent written notice of any condition or event which has resulted or might reasonably be expected to result in (a) a material adverse change in the financial condition of Guarantor or the Borrower or (b) a breach of or noncompliance with any term, condition or covenant contained herein or in the Credit Agreement, any other Loan Document or in any document delivered pursuant hereto or thereto, or (c) a material breach of, or noncompliance with, any material term, condition or covenant of any material contract to which Guarantor or the Borrower is a party or by which Guarantor or the Borrower or Guarantor's or the Borrower's property may be bound. 2.15. Set Off. In addition to any other rights any Lender or the Administrative Agent may have under law or in equity, if any amount shall at any time be due and owing by Guarantor to any Lender or the Administrative Agent under this Guaranty, such Lender or the Administrative Agent is authorized at any time or from time to time, without notice (any such notice being hereby expressly waived), to set off and to appropriate and to apply any and all deposits (general or special, including but not limited to indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness of any Lender or the Administrative Agent owing to Guarantor and any other property of Guarantor held by any Lender or the Administrative Agent to or for the credit or the account of Guarantor against and on account of the Guarantied Obligations and liabilities of Guarantor to any Lender or the Administrative Agent under this Guaranty. SECTION 3. REPRESENTATIONS AND WARRANTIES In order to induce Lenders and the Administrative Agent to accept this Guaranty and to enter into the Credit Agreement and to make the Loans thereunder, Guarantor hereby represents and warrants to Lenders that the following statements are true and correct: 3.1. Organization. Guarantor is duly organized, validly existing and in good standing under the laws of the state of its formation. Guarantor is also duly authorized, qualified and -G-11- 90 licensed in all applicable jurisdictions, and under all applicable laws, regulations, ordinances or orders of public authorities, to carry on its business in the locations and in the manner presently conducted. 3.2. Authorization. The execution, delivery and performance by Guarantor of the Guaranty are within Guarantor's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) Guarantor's articles of incorporation, by-laws or other organizational document or (ii) any law or regulation or any contractual restriction binding on or affecting Guarantor. 3.3. Governmental Consents. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by Guarantor of this Guaranty. 3.4. Validity. This Guaranty is the binding obligation of Guarantor, enforceable in accordance with its terms; except as such enforceability may be limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar laws of general application and equitable principles relating to or affecting creditors' rights. SECTION 4. MISCELLANEOUS 4.1. Survival of Warranties. All agreements, representations and warranties made herein shall survive the execution and delivery of this Guaranty, any increase in the Commitments under the Credit Agreement and the execution and delivery of the Notes. 4.2. Notices. Except as otherwise set forth in this Guaranty, all notices and other communications provided for hereunder shall be in writing (including telegraphic, telex or facsimile communication) and mailed or telegraphed or telexed or sent by facsimile or delivered, if to Guarantor, at its address set forth on the signature page hereof; and if to the Administrative Agent, at its address set forth on the signature page hereof; or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall be effective three (3) Business Days after deposit in the U.S mail, postage prepaid, when sent by telex or sent by facsimile, or when delivered, respectively. 4.3. Separability of Provisions. In case any one or more of the provisions contained in this Guaranty should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 4.4. Amendments and Waivers. No amendment, modification, termination or waiver of any provision of this Guaranty, or consent to any departure by Guarantor therefrom, shall in any event be effective without the written concurrence of all Lenders under the Credit Agreement. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. -G-12- 91 4.5. Headings. Section and subsection headings in this Guaranty are included herein for convenience of reference only and shall not constitute a part of this Guaranty for any other purpose or be given any substantive effect. 4.6. Applicable Law. THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ITS CHOICE OF LAW DOCTRINE. 4.7. Successors and Assigns. This Guaranty is a continuing guaranty and shall be binding upon Guarantor and its successors and assigns. This Guaranty shall inure to the benefit of Lenders, the Administrative Agent and their respective successors and assigns. Guarantor shall not assign this Guaranty or any of the rights or obligations of Guarantor hereunder without the prior written consent of all Lenders. Any Lender may, without notice or consent, assign its interest in this Guaranty in whole or in part. The terms and provisions of this Guaranty shall inure to the benefit of any assignee or transferee of any Note, and in the event of such transfer or assignment the rights and privileges herein conferred upon Lenders and the Administrative Agent shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. 4.8. Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS GUARANTY, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF GUARANTOR, THE AGENTS, THE LENDERS OR THE BORROWER SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY (TO THE EXTENT PERMITTED UNDER APPLICABLE LAW) IN THE COURTS OF THE STATE OF NEW YORK, NEW YORK COUNTY OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE ADMINISTRATIVE AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. GUARANTOR HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. GUARANTOR IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. GUARANTOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS -G-13- 92 BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT GUARANTOR HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OF FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, GUARANTOR HEREBY IRREVOCABLY WAIVES (TO THE EXTENT PERMITTED UNDER APPLICABLE LAW) SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS GUARANTY AND THE OTHER LOAN DOCUMENTS. 4.9. Waiver of Trial by Jury. GUARANTOR AND THE ADMINISTRATIVE AGENT HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS GUARANTY OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF GUARANTOR OR THE ADMINISTRATIVE AGENT. GUARANTOR ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENTS AND THE LENDERS ENTERING INTO EACH SUCH OTHER LOAN DOCUMENT. 4.10. No Other Writing. This writing is intended by Guarantor and the Administrative Agent as the final expression of this Guaranty and is also intended as a complete and exclusive statement of the terms of their agreement with respect to the matters covered hereby. No course of dealing, course of performance or trade usage, and no parol evidence of any nature, shall be used to supplement or modify any terms of this Guaranty. There are no conditions to the full effectiveness of this Guaranty. 4.11. Further Assurances. At any time or from time to time, upon the request of the Administrative Agent or the Requisite Lenders, Guarantor shall execute and deliver such further documents and do such other acts and things as the Administrative Agent or the Requisite Lenders may reasonably request in order to effect fully the purposes of this Guaranty. -G-14- 93 IN WITNESS WHEREOF, Guarantor has executed this Guaranty by its duly authorized officer as of the date first above written. [GUARANTOR] Notice Address: By: Phase Metrics, Inc. ---------------------------------------- 10260 Sorrento Valley Road San Diego, California 92121 Attention: R. Joseph Saunders Telecopy No.: (619) 646-4990 Title: ------------------------------------- -G-15- 94 EXHIBIT H [FORM OF SECURITY AGREEMENT] This Security Agreement is entered into as of ____________, ____ between Phase Metrics, Inc., [a California corporation] [a Delaware corporation and the successor by merger to Phase Metrics, Inc., a California corporation] (the "Borrower"), and Fleet National Bank, as administrative agent for the Lenders as defined below ("[Administrative] Agent"). RECITALS WHEREAS, the Borrower has entered into a Credit Agreement dated as of [__________, ____] with certain financial institutions (each, a "Lender" and collectively, the "Lenders"), [DLJ Capital Funding, Inc., as Syndication Agent,] and [Administrative] Agent (the "Credit Agreement") and related documentation; WHEREAS, each of the Guarantors has entered into a Guaranty of the Obligations created under the Credit Agreement, and a Security Agreement dated as of December 4, 1996 ("Guarantor Security Agreements") granting to Lenders a security interest in all of their assets; WHEREAS, it is a condition precedent to the making of Loans to the Borrower under the Credit Agreement that the Borrower shall have executed and delivered to the Administrative Agent a Security Agreement granting to Lenders a security interest in all of its assets; NOW, THEREFORE, in consideration of the premises and in order to induce the Lenders to make the Loans under the Credit Agreement and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Borrower hereby agrees with Administrative Agent as follows: SECTION 1. Grant of Security. The Borrower hereby assigns to Administrative Agent, for the benefit of Administrative Agent and Lenders, and hereby grants to Administrative Agent, for the benefit of Administrative Agent and Lenders a security interest in, all of the Borrower's right, title and interest in and to the property described on Exhibit A attached hereto, in the Pledged Collateral (as defined in Section 10 hereof) and in the Intellectual Property Collateral (as defined in Section 5(e) hereof), in each case whether now or hereafter existing or in which the Borrower now has or hereafter acquires an interest and wherever the same may be located (the "Collateral"). Notwithstanding the foregoing, no security interest shall be granted by the Borrower in any of its right, title and interest under that certain Master Capital Lease Agreement, dated January 1, 1996, with NTFC Capital Corporation (the "Excluded Property"). Notwithstanding the foregoing, no security interest shall be granted, and the term "Collateral" shall not include, any general intangibles of the Borrower (whether owned or held as licensee or lessee, or otherwise), to the extent that (i) such general intangibles are not assignable or capable of being encumbered as a matter of law or under the terms of the license, lease or other agreement applicable thereto (but solely to the extent that any such restriction shall be -H-1- 95 enforceable under applicable law), without the consent of the licensor or lessor thereof or other applicable party thereto and (ii) such consent has not been obtained; provided, however, that the foregoing grant of security interest shall extend to, and the term "Collateral" shall include, (A) any general intangible which is a receivable, or goods which are the subject of any receivable, (B) any and all proceeds of any general intangibles which are otherwise excluded to the extent that the assignment or encumbrance of such proceeds is not so restricted, and (C) upon obtaining the consent of any such licensor, lessor or other applicable party's consent with respect to any such otherwise excluded general intangibles, such general intangibles as well as any and all proceeds thereof that might have theretofore been excluded from such grant of a security interest and the term "Collateral". The Borrower agrees to use its best efforts to obtain any such required consent. SECTION 2. (a) Security for Obligations. This Agreement secures, and the Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise, of all obligations and liabilities of every nature of the Borrower and each Obligor now or hereafter existing, under or arising out of or in connection with the Credit Agreement, the Notes, any other Loan Document or otherwise, and all extensions or renewals thereof, whether for principal, interest, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Administrative Agent or a Lender as a preference, fraudulent transfer or otherwise (all such obligations and liabilities being the "Underlying Debt"), and all obligations of every nature of the Borrower and each Obligor now or hereafter existing under this Agreement (all such obligations, together with the Underlying Debt, being the "Secured Obligations"). (b) This Agreement creates a continuing security interest in the Collateral and shall: (i) remain in full force and effect until payment in full of all Secured Obligations and the termination of all Commitments; (ii) be binding upon the Borrower, its successors, transferees and assigns; and (iii) inure, together with the rights and remedies of Administrative Agent hereunder, to the benefit of Administrative Agent and each Lender. Without limiting the generality of the foregoing clause (iii), any Lender may assign or otherwise transfer (in whole or in part) any Note or Loan held by it to any other Person or entity, and such other Person or entity shall thereupon become vested with all the rights and benefits in respect thereof granted to such Lender under any Loan Document (including this Agreement) or otherwise, subject, however, to any contrary provisions in such assignment or transfer, and to the -H-2- 96 provisions of Section 9.6 and Article VIII of the Credit Agreement. Upon the payment in full of all Secured Obligations and the termination of all Commitments, the security interest granted herein shall terminate and all rights to the Collateral shall revert to the Borrower. Upon any such termination, Administrative Agent will, at the Borrower's sole expense, execute and deliver to the Borrower such documents as the Borrower shall reasonably request to evidence such termination. SECTION 3. Borrower Remains Liable. Anything contained herein to the contrary notwithstanding, (a) the Borrower shall remain liable under any contracts and agreements included in the Collateral (the "Related Contracts"), to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Administrative Agent of any of its rights hereunder shall not release the Borrower from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) neither Administrative Agent nor any Lender shall have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Administrative Agent or any Lender be obligated to perform any of the obligations or duties of the Borrower thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 4. Representations and Warranties. The Borrower represents and warrants as follows: (a) Ownership of Collateral. Except for the security interest created by this Agreement and the Permitted Liens, the Borrower owns the Collateral free and clear of any Liens. Except such as may have been filed in favor of Administrative Agent relating to this Agreement and the Permitted Liens, no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office. (b) Location of Equipment and Inventory. All of the Equipment and Inventory is, as of the date hereof, located at the places specified in Schedule I annexed hereto. (c) Office Locations. The chief place of business and the chief executive office of the Borrower are located at 10260 Sorrento Valley Road, San Diego, CA 92121; the offices where the Borrower keeps its records regarding its Accounts and all originals of chattel paper which evidence Accounts are located at: 10260 Sorrento Valley Road, San Diego, CA 92121; 47475 Fremont Blvd., Fremont, CA 94538; 2260 American Ave., Unit #1, Hayward, CA 94545-1815; and 4040 Pike Lane, Concord, CA 94520. All records regarding the Accounts of the Borrower have been maintained in California for the preceding four months. -H-3- 97 (d) Fictitious Names, etc.. The Borrower does not conduct any business under any trade-name or fictitious business name. The Borrower is not a "retail merchant" within the meaning of Section 9102 of the Uniform Commercial Code - Secured Transactions of the State of California. (e) Governmental Authorizations. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the grant by the Borrower of the security interest granted hereby or for the execution, delivery or performance of this Agreement by the Borrower or (ii) the perfection of or the exercise by Administrative Agent of its rights and remedies hereunder. (f) Perfection. This Agreement creates a valid, perfected and first priority security interest in the Collateral, securing the payment of the Secured Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest have been duly made or taken. (g) Compliance with Laws. The Borrower is in compliance with the requirements of all applicable laws, rules, regulations and orders of every governmental authority, the non-compliance with which might materially adversely affect the business, properties, assets, operations, condition (financial or otherwise) or prospects of the Borrower or the value of the Collateral or the worth of the Collateral as collateral security. (h) Other Information. All information heretofore, herein or hereafter supplied to Administrative Agent by or on behalf of the Borrower with respect to the Collateral is (or, as to hereafter supplied information, will be) accurate and complete in all material respects. SECTION 5. Further Assurances. (a) The Borrower agrees that from time to time, at its expense, the Borrower will promptly execute and deliver all further instruments and documents, and take all further action that may be reasonably necessary or desirable, or that Administrative Agent may request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Administrative Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, the Borrower will: (i) if any Account shall be evidenced by a promissory note or other instrument (excluding checks), deliver and pledge to Administrative Agent hereunder such note or instrument, duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Administrative Agent; (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Administrative Agent may request, in order to perfect and preserve the security interests granted or purported to be granted hereby; (iii) at any reasonable time, upon demand by Administrative Agent, exhibit the Collateral to and allow inspection of the Collateral by Administrative Agent, or persons designated by Administrative Agent; (iv) mark conspicuously each document included in the Inventory and, at the request of the Administrative Agent, each chattel paper included in the Accounts, each Related Contract and each of its records -H-4- 98 pertaining to the Collateral with a legend, in form and substance satisfactory to Administrative Agent, indicating that such document, chattel paper, Related Contract or Collateral is subject to the security interest granted hereby; and (v) at Administrative Agent's request, appear in and defend any action or proceeding that may affect the Borrower's title to or Administrative Agent's security interest in all or any part of the Collateral. (b) The Borrower hereby authorizes Administrative Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of the Borrower. The Borrower agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. (c) The Borrower will furnish to Administrative Agent from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Administrative Agent may reasonably request, all in reasonable detail. (d) Upon the request of Administrative Agent at any time, the Borrower will, within ten (10) days thereafter, deliver to Administrative Agent to hold in escrow, a copy of all material software source codes, if any used by the Borrower in its business. Following any such request, the Borrower will promptly deliver to such escrow agent modifications and updates of all such material source codes from time to time as such modifications and updates are developed. (e) The Borrower shall execute and deliver a Collateral Assignment, Patent Mortgage and Security Agreement in substantially the form of Exhibit B to this Agreement covering the intellectual property rights described therein (the "Intellectual Property Collateral"). The Borrower shall register or cause to be registered (to the extent not already registered) with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, the Intellectual Property Collateral listed on Exhibits A, B and C to the Collateral Assignment, Patent Mortgage and Security Agreement within thirty (30) days of the date of this Agreement. The Borrower shall register or cause to be registered with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, the additional Intellectual Property Collateral developed or acquired by the Borrower from time to time in connection with any product prior to the sale or licensing of such product to any third party, including without limitation revisions or additions to the Intellectual Property Collateral listed on such Exhibits A, B and C. The Borrower shall execute and deliver such additional instruments and documents from time to time as Administrative Agent shall reasonably request to perfect Administrative Agent's security interest in such additional Intellectual Property Collateral. SECTION 6. Covenants of the Borrower. The Borrower shall: (a) not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statute, regulation or ordinance or any policy of -H-5- 99 insurance covering the Collateral where violation is likely to have a material adverse effect on Administrative Agent's rights in the Collateral or the value of the Collateral or Administrative Agent's ability to foreclose on the Collateral; (b) notify Administrative Agent of any change in the Borrower's name, identity or corporate structure within 15 days of such change; (c) give Administrative Agent 30 days' prior written notice of any change in the Borrower's chief place of business, chief executive office or residence; (d) if Administrative Agent gives value to enable the Borrower to acquire rights in or the use of any Collateral (as specified in writing by Administrative Agent to the Borrower at the time of the giving of such value), use such value for such purposes; and (e) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent the validity thereof is being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP have been set aside; provided that the Borrower shall in any event pay such taxes, assessments, charges, levies or claims not later than five days prior to the date of any proposed sale under any judgment writ or warrant of attachment entered or filed against the Borrower or any of the Collateral as a result of the failure to make such payment. SECTION 7. Special Covenants With Respect to Equipment and Inventory. The Borrower shall: (a) keep the Equipment and Inventory (other than Equipment consisting of laptop computers and other than Inventory sold in the ordinary course of business) at the places specified on Schedule I annexed hereto or, upon 30 days' prior written notice to Administrative Agent, at such other places in jurisdictions where all representations and warranties set forth in Section 4 (including subsection (f) thereof) shall be true and correct, and all actions required pursuant to the first sentence of Section 5(a) shall have been taken with respect to such Inventory and Equipment; (b) cause the Equipment to be maintained and preserved in the same condition, repair and working order as when new, ordinary wear and tear excepted, and in accordance with any manufacturer's manual, and shall forthwith, or, in the case of any loss or damage to any of the Equipment when subsection (c) of Section 8 is not applicable, as quickly as practicable after the occurrence thereof, make or cause to be made all repairs, replacements and other improvements in connection therewith that are necessary or desirable to such end. The Borrower shall promptly furnish to Administrative Agent a statement respecting any loss or damage to any of the Equipment in excess of $50,000; -H-6- 100 (c) keep correct and accurate records of the Inventory, in accordance with good business practices, including itemizing the Borrower's cost therefor and a (where applicable) the current list prices for the Inventory; and (d) if any Inventory is in possession or control of any of the Borrower's agents or processors, upon the occurrence of an Event of Default, instruct such agent or processor to hold all such Inventory for the account of Administrative Agent and subject to the instructions of Administrative Agent. SECTION 8. Insurance. (a) The Borrower shall, at its own expense, maintain insurance with respect to the Equipment and Inventory in which it has an interest in such amounts, against such risks, in such form and with such insurers as shall be satisfactory to Administrative Agent from time to time. Such insurance shall include, without limitation, property damage insurance and liability insurance. Each policy for property damage insurance shall provide for all losses to be paid directly to Administrative Agent, except that policies with respect to Capital Leases may name the lessor as primary loss payee and Administrative Agent as secondary loss payee. Each policy shall in addition name the Borrower and Administrative Agent as insured parties thereunder (without any representation or warranty by or obligation upon Administrative Agent) as their interests may appear and have attached thereto a loss payable clause acceptable to Administrative Agent that shall (i) contain an agreement by the insurer that any loss thereunder shall be payable to Administrative Agent notwithstanding any action, inaction or breach of representation or warranty by the Borrower, (ii) provide that there shall be no recourse against Administrative Agent for payment of premiums or other amounts with respect thereto, and (iii) provide that at least 30 days' prior written notice of cancellation, material amendment, reduction in scope or limits of coverage or of lapse shall be given to Administrative Agent by the insurer. The Borrower shall, if so requested by Administrative Agent, deliver to Administrative Agent original or duplicate policies of such insurance and, as often as Administrative Agent may reasonably request (but no more frequently than once per year, unless there is a change in the policy or the insurer), a report of a reputable insurance broker with respect to such insurance. Further, the Borrower shall, at the request of Administrative Agent, duly execute and deliver instruments of assignment of such insurance policies to comply with the requirements of Section 5(a) and cause the respective insurers to acknowledge notice of such assignment. (b) Payments for claims issued by any liability insurance maintained by the Borrower pursuant to this Section 8 may be paid directly to the Person who shall have incurred liability covered by such insurance. In case of any loss involving damage to Equipment or Inventory when subsection (c) of this Section 8 is not applicable, the Borrower shall make or cause to be made the necessary repairs to or replacements of such Equipment or Inventory, and any proceeds of insurance maintained by the Borrower pursuant to this Section 8 shall be paid to the Borrower as reimbursement for the costs of such repairs or replacements. (c) Upon (i) the occurrence and during the continuation of any Event of Default or (ii) the actual or constructive loss (in excess of $100,000 per occurrence) of any Equipment or -H-7- 101 Inventory, all insurance payments in respect of such Equipment or Inventory shall be paid to and applied by Administrative Agent as specified in Section 18. SECTION 9. Special Covenants with respect to Accounts and Related Contracts. (a) The Borrower shall keep its chief place of business and chief executive office and the office where it keeps its records concerning the Accounts and Related Contracts, and all originals of all chattel paper which evidences Accounts, at the locations specified in Section 4 or, upon 30 days' prior written notice to Administrative Agent, at such other location in a jurisdiction where all action required by the first sentence of Section 5(a) with respect to such Accounts and Related Contracts shall have been taken. The Borrower will hold and preserve such records and chattel paper and will permit representatives of Administrative Agent at any time during normal business hours to inspect and make copies and abstracts from such records, and the Borrower agrees to render to Administrative Agent, at the Borrower's cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto. (b) The Borrower shall, for not less than 3 years from the date on which such Account arose, maintain (i) complete records of each Account, including records of all payments received, credits granted and merchandise returned, and (ii) all documentation relating thereto. (c) Except as otherwise provided in this subsection (c), the Borrower shall continue to collect, at its own expense, all amounts due or to become due the Borrower under the Accounts and Related Contracts. Administrative Agent shall have the right at any time, upon the occurrence and during the continuation of an Event of Default or an event which with the giving of notice or the lapse of time, or both, would constitute an Event of Default, and upon written notice to the Borrower of its intention to do so, to notify the account debtors or obligors under any Accounts of the assignment of such Accounts to Administrative Agent, and to direct such account debtors or obligors to make payment of all amounts due or to become due to the Borrower thereunder directly to Administrative Agent, to notify each person maintaining a lockbox or similar arrangement to which account debtors or obligors under any Accounts have been directed to make payment to remit all amounts representing collections on checks and other payment items from time to time sent to or deposited in such lock box or other arrangement directly to Administrative Agent and, upon such notification and at the expense of the Borrower, to enforce collection of any such Accounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as the Borrower might have done. After receipt by the Borrower of the notice from Administrative Agent referred to in the preceding sentence, (i) all amounts and proceeds (including checks and other instruments) received by the Borrower in respect of the Accounts and the Related Contracts shall be received in trust for the benefit of Administrative Agent hereunder, shall be segregated from other funds of the Borrower and shall be forthwith paid over or delivered to Administrative Agent in the same form as so received (with any necessary endorsement) to be held as cash Collateral and applied as provided by Section 18, and (ii) the Borrower shall not adjust, settle or compromise the amount or payment of any Account, or release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon. If the Event of Default giving rise to the -H-8- 102 exercise of such remedies by Administrative Agent shall be cured or waived, then Administrative Agent shall reinstate the Borrower's collection rights with respect to such Accounts. SECTION 10. Special Provisions with Respect to Securities. As security for the Secured Obligations, the Borrower shall execute and deliver to Administrative Agent a Pledge Agreement in substantially the form of Exhibit C to this Agreement, pursuant to which the Borrower shall pledge, assign, grant and deliver to Administrative Agent, for the benefit of Lenders, a security interest in the shares of stock, notes, and other collateral described in the Pledge Agreement (the "Pledged Collateral"). The certificates and other instruments included in the Pledged Collateral, accompanied by an instrument of assignment duly executed in blank by the Borrower or its Subsidiary (as appropriate), have been, or will be immediately upon the subsequent receipt thereof by the Borrower, delivered by the Borrower to Administrative Agent. The Borrower will execute and deliver such documents and instruments, and take or cause to be taken such actions, as Administrative Agent may reasonably request to perfect or continue the perfection of Administrative Agent's security interest in the Pledged Collateral. The Borrower represents and warrants to and covenants with Administrative Agent, for the benefit of Administrative Agent and Lenders, that there are no subscriptions, warrants or other options exercisable with respect to the Pledged Collateral. SECTION 11. Deposit Accounts. Upon the occurrence and during the continuation of an Event of Default, Administrative Agent may exercise dominion and control over, and refuse to permit further withdrawals (whether of money, securities, instruments or other property) from any deposit accounts maintained with any Lender constituting part of the Collateral. SECTION 12. License of Patents, Trademarks, Copyrights, etc. The Borrower hereby assigns, transfers and conveys to Administrative Agent, for the benefit of Administrative Agent and Lenders, effective upon the occurrence of any Event of Default, the nonexclusive right and license to use all trademarks, trade names, copyrights, patents or technical processes owned or used by the Borrower that relate to the Collateral and any other collateral granted by the Borrower as security for the Secured Obligations, together with any goodwill associated therewith, all to the extent necessary to enable Administrative Agent to use, possess and realize on the Collateral for the benefit of Administrative Agent and Lenders and to enable any successor or assign to enjoy the benefits of the Collateral. This right and license shall inure to the benefit of all successors, assigns and transferees of Administrative Agent and its successors, assigns and transferees, whether by voluntary conveyance, operation of law, assignment, transfer, foreclosure, deed in lieu of foreclosure or otherwise. Such right and license is granted free of charge, without requirements that any monetary payment whatsoever be made to the Borrower. SECTION 13. Transfers and Other Liens. The Borrower shall not: (a) except to the extent permitted in the Credit Agreement, sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral; or -H-9- 103 (b) except for the security interest created by this Agreement, and except to the extent permitted in the Credit Agreement, create of suffer to exist any Lien upon or with respect to any of the Collateral to secure Debt or other obligations of any Person. SECTION 14. Administrative Agent Appointed Attorney-in-Fact. The Borrower hereby irrevocably appoints Administrative Agent as the Borrower's attorney-in-fact, with full authority in the place and stead of the Borrower and in the name of the Borrower, Administrative Agent or otherwise, from time to time in Administrative Agent's discretion to take any action and to execute any instrument that Administrative Agent may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation: (a) to sign and file on behalf of the Borrower any financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral; (b) upon the occurrence and during the continuation of an Event of Default, to obtain and adjust insurance required to be maintained by the Borrower or paid to Administrative Agent pursuant to Section 8; (c) upon the occurrence and during the continuation of an Event of Default, to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for monies due and to become due under or in respect of any of the Collateral; (d) upon the occurrence and during the continuation of an Event of Default, to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clauses (a) and (b) above; (e) upon the occurrence and during the continuation of an Event of Default, to file any claims or take any action or institute any proceedings that Administrative Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Administrative Agent with respect to any of the Collateral; (f) upon the occurrence and during the continuation of an Event of Default, to pay or discharge taxes or liens levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Administrative Agent in its sole discretion, any such payments made by Administrative Agent to become obligations of the Borrower to Administrative Agent, due and payable immediately without demand; (g) upon the occurrence and during the continuation of an Event of Default, to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with Accounts and other documents relating to the Collateral; and (h) upon the occurrence and during the continuation of an Event of Default, generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Administrative Agent were the absolute owner thereof for all purposes, and to do, at Administrative Agent's option and the Borrower's expense, at any time or from time to time, all acts and things that Administrative Agent deems necessary to protect, preserve or realize upon the Collateral and Administrative Agent's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as the Borrower might do. The Borrower hereby acknowledges and agrees that the power of attorney granted pursuant to this Section is irrevocable and coupled with an interest. SECTION 15. Administrative Agent May Perform. If the Borrower fails to perform any agreement contained herein, Administrative Agent may itself perform, or cause performance of, such agreement, and the expenses of Administrative Agent incurred in connection therewith shall be payable by the Borrower under Section 19. -H-10- 104 SECTION 16. Agent Has No Duty; Standard of Care. The powers conferred on Administrative Agent hereunder are solely to protect its interest and the interest of the Lenders in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Administrative Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to reserve rights against prior parties or any other rights pertaining to any Collateral. Administrative Agent shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Administrative Agent accords its own property. SECTION 17. Remedies. If any Event of Default shall have occurred and be continuing Administrative Agent may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "Code") (whether or not the Code applies to the affected Collateral), and also may (a) require the Borrower to, and the Borrower hereby agrees that it will at its expense and upon request of Administrative Agent forthwith, assemble all or part of the Collateral as directed by Administrative Agent and make it available to Administrative Agent at a place to be designated by Administrative Agent that is reasonably convenient to both parties, (b) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (c) prior to the disposition of the Collateral, store, process, repair or recondition the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Administrative Agent deems appropriate, (d) take possession of the Borrower's premises or place custodians in exclusive control thereof, remain on such premises and use the same and any of the Borrower's equipment for the purpose of completing any work in process, taking any actions described in the preceding clause (c) and collecting any Secured Obligation, and (e) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Administrative Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Administrative Agent may deem commercially reasonable. Administrative Agent may be the purchaser of any or all of the Collateral at any such sale and Administrative Agent shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Administrative Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of the Borrower, and the Borrower hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. The Borrower agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to the Borrower of (i) the time and place of any public sale or (ii) the time after which any private sale is to be made shall constitute reasonable notification. Administrative Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Administrative Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed there for, and such -H-11- 105 sale may, without further notice, be made at the time and place to which it was so adjourned. The Borrower hereby waives any claims against Administrative Agent arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Administrative Agent accepts the first offer received and does not offer such Collateral to more than one offeree, provided Administrative Agent acted in a commercially reasonable manner. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, the Borrower shall be liable to the maximum extent permitted by applicable law for the deficiency and the fees of any attorneys employed by Administrative Agent to collect such deficiency. SECTION 18. Application of Proceeds. Except as expressly provided elsewhere in this Agreement, all proceeds received by Administrative Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may in the discretion of Administrative Agent, be held by Administrative Agent for the benefit of Administrative Agent and Lenders as Collateral for, and/or then, or at any other time thereafter, applied in full or in part by Administrative Agent against, the Secured Obligations in the following order of priority: FIRST: To the payment of all costs and expenses of such sale, collection or other realization, including reasonable compensation to Administrative Agent and its agents and counsel, and all other expenses, liabilities and advances made or incurred by Administrative Agent in connection therewith, and all amounts for which Administrative Agent is entitled to indemnification hereunder and all advances made by Administrative Agent hereunder for the account of the Borrower, and to the payment of all costs and expenses paid or incurred by Administrative Agent in connection with the exercise of any right or remedy hereunder, all in accordance with Section 19; SECOND: To the payment of all other Secured Obligations pro rata to Lenders; and THIRD: To the payment to or upon the order of the Borrower, or to whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds. SECTION 19. Indemnity and Expenses. (a) The Borrower agrees to indemnify Administrative Agent and Lenders from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result solely from Administrative Agent's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) The Borrower will pay to Administrative Agent upon demand the amount of any and all costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Administrative Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale -H-12- 106 of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Administrative Agent hereunder, or (iv) the failure by the Borrower to perform or observe any of the provisions hereof. SECTION 20. Amendments, etc. Subject to Section 9.1 of the Credit Agreement, no amendment or waiver of any provision of this Agreement, or consent to any departure by the Borrower herefrom, shall in any event be effective unless the same shall be in writing and signed by Administrative Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 21. Notices. All notices and other communications provided for hereunder shall be in writing (including telegraph, telex or facsimile communication) and mailed or telegraphed or telexed or sent by facsimile or delivered, if to the Borrower or Administrative Agent, at its address set forth on the signature pages hereof; or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall be effective three (3) Business Days after deposit in the U.S. mail, postage prepaid, when sent by telex or sent by facsimile, or when delivered, respectively. SECTION 22. Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of Administrative Agent in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 23. Severability. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 24. Headings. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 25. Governing Law; Terms. THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK, EXCEPT AS REQUIRED BY MANDATORY PROVISION OF LAW AND EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Article 9 of the New York Uniform Commercial Code are used herein as therein defined. -H-13- 107 SECTION 26. Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE AGENTS, THE LENDERS OR THE BORROWER SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY (TO THE EXTENT PERMITTED UNDER APPLICABLE LAW) IN THE COURTS OF THE STATE OF NEW YORK, NEW YORK COUNTY OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE ADMINISTRATIVE AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. THE BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OF FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER HEREBY IRREVOCABLY WAIVES (TO THE EXTENT PERMITTED UNDER APPLICABLE LAW) SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. SECTION 27. Waiver of Jury Trial. THE AGENTS AND THE LENDERS AND THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE AGENTS, THE LENDERS OR THE BORROWER. THE BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS -H-14- 108 PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENTS AND THE LENDERS ENTERING INTO THIS AGREEMENT AND EACH SUCH OTHER LOAN DOCUMENT. SECTION 28. Counterparts. This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. -H-15- 109 IN WITNESS WHEREOF, The Borrower and Administrative Agent have caused this Agreement to be duly executed and delivered by their respective officers there unto duly authorized as of the date first written above. PHASE METRICS, INC. By: ----------------------------------------- Title: Vice President - Finance Notice Address: 10260 Sorrento Valley Road San Diego, CA 92121 Telephone: (619) 646-4850 Telecopier: (619) 646-4990 Attention: R. Joseph Saunders -H-16- 110 Fleet National Bank, as Administrative Agent for the Lenders By: ----------------------------------- Title: Notice Address: [75 State Street Mail Stop MA BO F04M Boston, MA 02109] [One Federal Street Mail Stop MA BO D07A Boston, MA 02110] -H-17- 111 EXHIBIT A The Collateral shall consist of all right, title and interest of the Borrower in and to the following: (a) All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; (b) All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of the Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and the Borrower's books relating to any of the foregoing; (c) All contract rights and general intangibles now owned or hereafter acquired, including, without limitation, goodwill, trademarks, service marks, trade styles, trade names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind; (d) All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to the Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by the Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by the Borrower and the Borrower's books relating to any of the foregoing; (e) All documents, cash, deposit accounts, securities, letters of credit, certificates of deposit and chattel paper now owned or hereafter acquired and the Borrower's books relating to the foregoing; (f) All copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired; all trade secret rights, including all rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; all mask work or similar rights available for the protection of semiconductor chips, now owned or hereafter acquired; all claims for damages by way of any past, present and future infringement of any of the foregoing; -A-1- 112 (g) All of the Borrower's other property and rights of every kind and description and interests therein; and (h) Any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof. -A-2- 113 EXHIBIT B FORM OF COLLATERAL ASSIGNMENT, PATENT MORTGAGE AND SECURITY AGREEMENT This Collateral Assignment, Patent Mortgage and Security Agreement is made as of ___________, ____, by and between ____________________, a ___________ corporation ("Assignor"), and Fleet National Bank, as Administrative Agent for Lenders as defined below ("Assignee"). RECITALS A. Phase Metrics, Inc., certain financial institutions (collectively, the "Lenders"), [DLJ Capital Funding, Inc., as Syndication Agent,] and Assignee, as Administrative Agent for the Lenders have entered into a Credit Agreement dated as of ___________, ____ (said Credit Agreement, as it may hereafter be amended from time to time, being the "Credit Agreement," the terms defined therein and not otherwise defined herein being used herein as therein defined), pursuant to which Assignee as Administrative Agent and Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement to extend certain credit facilities to Assignor. B. In order to induce Lenders to continue to make credit facilities available to Assignor under the Credit Agreement, Assignor has agreed to assign certain intangible property to Assignee for the benefit of Lenders to secure the obligations of Assignor under the Credit Agreement. NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS: 1. Assignment, Patent Mortgage and Grant of Security Interest. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, as collateral security for the prompt and complete payment and performance of all the Obligations, Assignor hereby assigns, transfers, conveys and grants a security interest and mortgage to Assignee, as security, in and to Assignor's entire right, title and interest in, to and under the following (all of which shall collectively be called the "Collateral"): (a) Any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether pending or in preparation, registered or unregistered or published or unpublished, and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held throughout the world, including without limitation those set forth on Exhibit A attached hereto (collectively, the "Copyrights"); 114 (b) Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held throughout the world; (c) Any and all design rights which may be available to Assignor now or hereafter existing, created, acquired or held throughout the world; (d) All patents, patent applications and like protections now or hereafter existing, created, acquired or held throughout the world, including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same, including without limitation the patents and patent applications set forth on Exhibit B attached hereto (collectively, the "Patents"); (e) Any and all trademarks, trade names, corporate names, business names, service marks, logos or other source of business identifiers, whether registered or not, applications to register and registrations of the same and like protections nor or hereafter, existing, created, acquired or held throughout the world, and the entire goodwill of the business of Assignor connected with and symbolized by the foregoing, including without limitation those set forth on Exhibit C attached hereto (collectively, the "Trademarks"); (f) Any and all claims for damages by way of past, present and future infringement of any of the Collateral, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the Collateral; (g) All licenses or other rights to use any of the Collateral and all license fees and royalties arising from such use to the extent permitted by such Collateral; and (h) All amendments, reissues, renewals and extensions of any of the Collateral; and (i) All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing. 2. Authorization and Request. Assignor authorizes and requests that the Register of Copyrights and the Commissioner of Patents and Trademarks record this conditional assignment. 3. Covenants and Warranties. Assignor represents, warrants, covenants and agrees as follows: (a) Assignor is now the sole owner of the Collateral, except for non-exclusive licenses granted by Assignor to its customers in the ordinary course of business. (b) Performance of this Assignment does not conflict with or result in a breach of any agreement to which Assignor is party or by which Assignor is bound, except to the extent -B-2- 115 that certain intellectual property agreements prohibit the assignment of the rights thereunder to a third party without the licensor's or other party's consent and this Assignment constitutes an assignment. (c) During the term of this Assignment, Assignor will not transfer or otherwise encumber any interest in the Collateral, except for non-exclusive licenses granted by Assignor in the ordinary course of business or as set forth in this Assignment. (d) To its knowledge, each of the Patents is valid and enforceable, and no part of the Collateral has been judged invalid or unenforceable, in whole or in part, and no claim has been made that any part of the Collateral violates the rights of any third party. (e) Assignor shall promptly advise Assignee of any material change in the composition of the Collateral, including but not limited to any subsequent ownership right of the Assignor in or to any Trademark, Patent or Copyright not specified in this Assignment. (f) Assignor shall (i) protect, defend and maintain the validity and enforceability of the Trademarks, Patents and Copyrights, (ii) use its best efforts to detect infringements of the Trademarks, Patents and Copyrights and promptly advise Assignee in writing of material infringements detected and (iii) not allow any Trademarks, Patents or Copyrights to be abandoned, forfeited or dedicated to the public without the written consent of Assignee, which shall not be unreasonably withheld, unless Assignor shall either (x) reasonably determine in good faith that such Collateral is of negligible economic value to Assignor (and notice of such determination is delivered to Assignee) or (y) have a valid business purpose to do so. (g) Assignor shall promptly register the most recent version of any of Assignor's Copyrights, if not so already registered, and shall, from time to time, execute and file such other instruments, and take such further actions as Assignee may reasonably request from time to time to perfect or continue the perfection of Assignee's interest in the Collateral. (h) This Assignment creates, and in the case of after acquired Collateral, this Assignment will create at the time Assignor first has rights in such after acquired Collateral, in favor of Assignee a valid and perfected first priority security interest in the Collateral securing the payment and performance of the Obligations upon making the filings referred to in clause (i) below. (i) To its knowledge, except for, and upon, the filing with the United States Patent and Trademark office with respect to the Patents and Trademarks and the Register of Copyrights with respect to the Copyrights necessary to perfect the security interests and assignment created hereunder, and except as has been already made or obtained, no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (i) for the grant by Assignor of the security interest granted hereby or for the execution, delivery or performance of this Assignment by Assignor or (ii) for the perfection or the exercise by Assignee of its rights and remedies hereunder. -B-3- 116 (j) All information heretofore, herein or hereafter supplied to Assignee by or on behalf of Assignor with respect to the Collateral is accurate and complete in all material respects. (k) Assignor shall not enter into any agreement that would materially impair or conflict with Assignor's obligations hereunder without Assignee's prior written consent, which consent shall not be unreasonably withheld. Assignor shall not permit the inclusion in any material contract to which it becomes a party of any provisions that could or might in any way prevent the creation of a security interest in Assignor's rights and interests in any property included within the definition of the Collateral acquired under such contracts, except that certain contracts may contain anti-assignment provisions that could in effect prohibit the creation of a security interest in such contracts. (l) Upon any executive officer of Assignor obtaining actual knowledge thereof, Assignor will promptly notify Assignee in writing of any event that materially adversely affects the value of any Collateral, the ability of Assignor to dispose of any Collateral or the rights and remedies of Assignee in relation thereto, including the levy of any legal process against any of the Collateral. 4. Assignee's Rights. Assignee shall have the right, but not the obligation, to take, at Assignor's sole expense, any actions that Assignor is required under this Assignment to take but which Assignor fails to take, after fifteen (15) days' notice to Assignor. Assignor shall reimburse and indemnify Assignee for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this section 4. 5. Inspection Rights. Assignor hereby grants to Assignee and its employees, representatives and agents the right to visit, during reasonable hours upon prior reasonable written notice to Assignor, any of Assignor's plants and facilities that manufacture, install or store products (or that have done so during the prior six-month period) that are sold utilizing any of the Collateral and to inspect the products and quality control records relating thereto upon reasonable written notice to Assignor and as often as may be reasonably requested. 6. Further Assurances; Attorney in Fact. (a) On a continuing basis, Assignor will, subject to any prior licenses, encumbrances and restrictions and prospective licenses, make, execute, acknowledge and deliver, and file and record in the proper filing and recording places in the United States, all such instruments, including appropriate financing and continuation statements and collateral agreements and filings with the United States Patent and Trademark Office and the Register of Copyrights, and take all such action as may reasonably be deemed necessary or advisable, or as requested by Assignee, to perfect Assignee's security interest in all Copyrights, Patents and Trademarks and otherwise to carry out the intent and purposes of this Collateral Assignment, or for assuring and confirming to Assignee the grant or perfection of a security interest in all Collateral. Without limiting the generality of the foregoing, Assignor shall notify Assignee immediately if it knows, or has reason to know, that any application or registration relating to any material part of the Collateral may become abandoned, forfeited or dedicated to the public or -B-4- 117 become invalid or unenforceable, or of any adverse determination or development regarding Assignor's ownership of any of the Collateral or its right to register the same or to keep and maintain and enforce the same. (b) Assignor hereby irrevocably appoints Assignee as Assignor's attorney-in-fact, with full authority in the place and stead of Assignor and in the name of Assignor, from time to time in Assignee's discretion, to take any action and to execute any instrument which Assignee may deem necessary or advisable to accomplish the purposes of this Collateral Assignment, including: (i) To modify, in its sole discretion, this Collateral Assignment without first obtaining Assignor's approval of or signature to such modification by amending Exhibit A, Exhibit B and Exhibit C, thereof, as appropriate, to include reference to any right, title or interest in any Copyrights, Patents or Trademarks acquired by Assignor after the execution hereof or to delete any reference to any right, title or interest in any Copyrights, Patents or Trademarks in which Assignor no longer has or claims any right, title or interest; and (ii) To file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of Assignor where permitted by law. 7. Events of Default. The occurrence of any of the following shall constitute an Event of Default under the Assignment: (a) An Event of Default occurs under the Credit Agreement; or (b) Assignor breaches any warranty or agreement made by Assignor in this Assignment and, as to any breach that is capable of cure, Assignor fails to cure such breach within five (5) days of the occurrence of such breach. 8. Remedies. Upon the occurrence and continuance of an Event of Default, Assignee shall have the right to exercise all the remedies of a secured party under the New York Uniform Commercial Code, including without limitation the right to require Assignor to assemble the Collateral and any tangible property in which Assignee has a security interest and to make it available to Assignee at a place designated by Assignee. Assignee shall have a nonexclusive, royalty free license to use the Copyrights, Patents and Trademarks to the extent reasonably necessary to permit Assignee to exercise its rights and remedies upon the occurrence of an Event of Default. Assignor will pay any expenses (including reasonable attorneys' fees) incurred by Assignee in connection with the exercise of any of Assignee's rights hereunder, including without limitation any expense incurred in disposing of the Collateral. All of Assignee's rights and remedies with respect to the Collateral shall be cumulative. 9. Indemnity. Assignor agrees to defend, indemnify and hold harmless Assignee and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this -B-5- 118 Agreement, and (b) all losses or expenses in any way suffered, incurred, or paid by Assignee as a result of or in any way arising out of, following or consequential to transactions between Assignee and Assignor, whether under this Assignment or otherwise (including without limitation reasonable attorneys' fees and reasonable expenses), except for losses arising from or out of Assignee's gross negligence or willful misconduct. 10. Reassignment. At such time as Assignor shall completely satisfy all of the Obligations, Assignee shall execute and deliver to Assignor all deeds, assignments and other instruments as may be necessary or proper to revest in Assignor full title to the property assigned hereunder, subject to any disposition thereof which may have been made by Assignee pursuant hereto. 11. Course of Dealing. No course of dealing, nor any failure to exercise, nor any delay in exercising any right, power or privilege hereunder shall operate as a waiver thereof. 12. Attorneys' Fees. If any action relating to this Assignment is brought by either party hereto against the other party, the prevailing party shall be entitled to recover reasonable attorneys' fees, costs and disbursements. 13. Amendments. This Assignment may be amended only by a written instrument signed by both parties hereto. 14. Counterparts. This Assignment may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute the same instrument. 15. Governing Law, Forum Selection and Consent to Jurisdiction. This Assignment shall be governed by the laws of the State of New York, without regard for choice of law provisions. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS ASSIGNMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ASSIGNOR OR ASSIGNEE, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY (TO THE EXTENT PERMITTED UNDER APPLICABLE LAW) IN THE COURTS OF THE STATE OF NEW YORK, NEW YORK COUNTY OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT ASSIGNEE'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. ASSIGNOR HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED -B-6- 119 THEREBY IN CONNECTION WITH SUCH LITIGATION. ASSIGNOR IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. ASSIGNOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT ASSIGNOR HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OF FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, ASSIGNOR HEREBY IRREVOCABLY WAIVES (TO THE EXTENT PERMITTED UNDER APPLICABLE LAW) SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS ASSIGNMENT AND THE OTHER LOAN DOCUMENTS. 16. Waiver of Jury Trial. ASSIGNEE AND ASSIGNOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS ASSIGNMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ASSIGNEE OR ASSIGNOR. ASSIGNOR ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR ASSIGNEE, THE AGENTS AND THE LENDERS ENTERING INTO THIS ASSIGNMENT AND EACH SUCH OTHER LOAN DOCUMENT. -B-7- 120 IN WITNESS WHEREOF, the parties hereto have executed this Assignment on the day and year first above written. Address of Assignor: ASSIGNOR: 10260 Sorrento Valley Road ------------------------------------------ San Diego, CA 92121 Attn: R. Joseph Saunders By: --------------------------------------- Title: ------------------------------------ Address of Assignee: ASSIGNEE: ------------------------------------------ By: --------------------------------------- Title: ------------------------------------ -B-8- 121 EXHIBIT A Copyrights -B-9- 122 EXHIBIT B Patents -B-10- 123 EXHIBIT C Trademarks -B-11- 124 SCHEDULE I TO SECURITY AGREEMENT Locations of Equipment: 10260 Sorrento Valley Road, San Diego, CA 92121 47475 Fremont Blvd., Fremont, CA 94538 4040 Pike Lane, Concord, CA 94518 5 Tampines Central Unit # 06-07, Telepark, Singapore 529482 2260 American Avenue, Unit 1, Hayward, CA 94545 Locations of Inventory: 10260 Sorrento Valley Road, San Diego, CA 92121 47475 Fremont Blvd., Fremont, CA 94538 4040 Pike Lane, Concord, CA 94518 5 Tampines Central Unit # 06-07, Telepark, Singapore 529482 2260 American Avenue, Unit 1, Hayward, CA 94545 The Borrower also owns certain goods and Inventory which from time to time, prior to the completion of the manufacturing process of such Inventory, may be temporarily in the possession of subcontractors for the purpose of adding value thereto. All such subcontractors are located in the state of California and the aggregate value of such goods and Inventory does not exceed $250,000 at any one time. -B-12- 125 EXHIBIT C FORM OF PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (this "Pledge Agreement"), dated as of __________, ____, made by Phase Metrics, Inc., a [California Corporation] [a Delaware corporation and the successor by merger to Phase Metrics, Inc., a California corporation] (the "Pledgor"), in favor of Fleet National Bank, as agent (together with any successor(s) thereto in such capacity, the "Agent") for each of the Lender Parties (as defined below). W I T N E S S E T H: WHEREAS, pursuant to a Credit Agreement, dated as of ___________, ____ (together with all amendments and other modifications, if any, from time to time thereafter made thereto, the "Credit Agreement"), among the Pledgor, the Lenders party thereto (individually a "Lender" and collectively the "Lenders"), [DLJ Capital Funding, Inc., as syndication agent,] and the Agent, the Lenders have extended Commitments to make Loans to the Pledgor; and WHEREAS, as a condition precedent to the making of the Loans under the Credit Agreement, the Pledgor is required to execute and deliver this Pledge Agreement; and WHEREAS, the Pledgor has duly authorized the execution, delivery and performance of this Pledge Agreement; NOW, THEREFORE, for good and valuable consideration the receipt of which is hereby acknowledged, and in order to induce the Lenders to make Loans (including the initial Loans) to the Pledgor pursuant to the Credit Agreement, the Pledgor agrees, for the benefit of each Lender Party, as follows: 126 ARTICLE I DEFINITIONS SECTION 1.1. Certain Terms. The following terms (whether or not underscored) when used in this Pledge Agreement, including its preamble and recitals, shall have the following meanings (such definitions to be equally applicable to the singular and plural forms thereof): "Agent" is defined in the preamble. "Collateral" is defined in Section 2.1. "Credit Agreement" is defined in the first recital. "Distributions" means all stock dividends, liquidating dividends, shares of stock resulting from (or in connection with the exercise of) stock splits, reclassifications, warrants, options, non-cash dividends, mergers, consolidations, and all other distributions (whether similar or dissimilar to the foregoing) on or with respect to any Pledged Shares or other shares of capital stock constituting Collateral, but shall not include Dividends. "Dividends" means cash dividends and cash distributions with respect to any Pledged Shares or other Pledged Property made in the ordinary course of business and not a liquidating dividend. "Lender" is defined in the first recital. "Lender Party" means, as the context may require, any Lender or the Agent and each of its respective successors, transferees and assigns. "Lenders" is defined in the first recital. "Pledge Agreement" is defined in the preamble. "Pledged Note Issuer" means each Person identified in Item A of Attachment 1 hereto as the issuer of the Pledged Note identified opposite the name of such Person. "Pledged Notes" means all promissory notes of any Pledged Note Issuer in the form or substantially in the form of Exhibit A hereto which are delivered by the Pledgor to the Agent as Pledged Property hereunder, as such promissory notes, in accordance with Section 4.5, are amended, modified or supplemented from time to time and together with any other promissory note of any Pledged Note Issuer taken in extension or renewal thereof or substitution therefor. -C-2- 127 "Pledged Property" means all Pledged Shares, all Pledged Notes, and all other pledged shares of capital stock or promissory notes, all other securities, all assignments of any amounts due or to become due, all other instruments which are now being delivered by the Pledgor to the Agent or may from time to time hereafter be delivered by the Pledgor to the Agent for the purpose of pledge under this Pledge Agreement or any other Loan Document, and all proceeds of any of the foregoing. "Pledged Share Issuer" means each Person identified in Item B of Attachment 1 hereto as the issuer of the Pledged Shares identified opposite the name of such Person. "Pledged Shares" means all shares of capital stock of any Pledged Share Issuer which are delivered by the Pledgor to the Agent as Pledged Property hereunder. "Pledgor" is defined in the preamble. "Secured Obligations" is defined in Section 2.2. "U.C.C." means the Uniform Commercial Code as in effect in the State of New York. SECTION 1.2. Credit Agreement Definitions. Unless otherwise defined herein or the context otherwise requires, terms used in this Pledge Agreement, including its preamble and recitals, have the meanings provided in the Credit Agreement. SECTION 1.3. U.C.C. Definitions. Unless otherwise defined herein or the context otherwise requires, terms for which meanings are provided in the U.C.C. are used in this Pledge Agreement, including its preamble and recitals, with such meanings. ARTICLE II PLEDGE SECTION 2.1. Grant of Security Interest. The Pledgor hereby pledges, hypothecates, assigns, charges, mortgages, delivers, and transfers to the Agent, for its benefit and the ratable benefit of each of the Lender Parties, and hereby grants to the Agent, for its benefit and the ratable benefit of the Lender Parties, a continuing security interest in, all of the following property (the "Collateral"): (a) all promissory notes of each Pledged Note Issuer identified in Item A of Attachment 1 hereto; (b) all other Pledged Notes issued from time to time; (c) all issued and outstanding shares of capital stock of each Pledged Share Issuer identified in Item B of Attachment 1 hereto; -C-3- 128 (d) all other Pledged Shares issued from time to time; (e) all other Pledged Property, whether now or hereafter delivered to the Agent in connection with this Pledge Agreement; (f) all Dividends, Distributions, interest, and other payments and rights with respect to any Pledged Property; and (g) all proceeds of any of the foregoing. SECTION 2.2. Security for Obligations. This Pledge Agreement secures the payment in full of all Obligations of the Pledgor and each other Obligor now or hereafter existing under the Credit Agreement, the Notes and each other Loan Document to which the Pledgor or such Obligor is or may become a party, whether for principal, interest, costs, fees, expenses, or otherwise (all such obligations being the "Secured Obligations"). SECTION 2.3. Delivery of Pledged Property. All certificates or instruments representing or evidencing any Collateral, including all Pledged Shares and all Pledged Notes, shall be delivered to and held by or on behalf of (and, in the case of the Pledged Notes, endorsed to the order of) the Agent pursuant hereto, shall be in suitable form for transfer by delivery, and shall be accompanied by all necessary instruments of transfer or assignment, duly executed in blank. SECTION 2.4. Dividends on Pledged Shares and Payments on Pledged Notes. In the event that any Dividend is to be paid on any Pledged Share or any payment of principal or interest is to be made on any Pledged Notes at a time when (x) no Potential Event of Default of the nature referred to in Section 7.1(g) or 7.1(h) of the Credit Agreement has occurred and is continuing, and (y) no Event of Default has occurred and is continuing, such Dividend or payment may be paid directly to the Pledgor. If any such Potential Event of Default or Event of Default has occurred and is continuing, then any such Dividend or payment shall be paid directly to the Agent. SECTION 2.5. Continuing Security Interest; Transfer of Note. This Pledge Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until payment in full of all Secured Obligations and the termination of all Commitments, (b) be binding upon the Pledgor and its successors, transferees and assigns, and (c) inure, together with the rights and remedies of the Agent hereunder, to the benefit of the Agent and each other Lender Party. -C-4- 129 Without limiting the foregoing clause (c), any Lender may assign or otherwise transfer (in whole or in part) any Note or Loan held by it to any other Person or entity, and such other Person or entity shall thereupon become vested with all the rights and benefits in respect thereof granted to such Lender under any Loan Document (including this Pledge Agreement) or otherwise, subject, however, to any contrary provisions in such assignment or transfer, and to the provisions of Section 9.6 and Article VIII of the Credit Agreement. Upon the payment in full of all Secured Obligations and the termination of all Commitments, the security interest granted herein shall terminate and all rights to the Collateral shall revert to the Pledgor. Upon any such termination, the Agent will, at the Pledgor's sole expense, deliver to the Pledgor, without any representations, warranties or recourse of any kind whatsoever, all certificates and instruments representing or evidencing all Pledged Shares and all Pledged Notes, together with all other Collateral held by the Agent hereunder, and execute and deliver to the Pledgor such documents as the Pledgor shall reasonably request to evidence such termination. SECTION 2.6. Security Interest Absolute. All rights of the Agent and the security interests granted to the Agent hereunder, and all obligations of the Pledgor hereunder, shall be absolute and unconditional, irrespective of (a) any lack of validity or enforceability of the Credit Agreement, any Note or any other Loan Document, (b) the failure of any Lender Party or any holder of any Note (i) to assert any claim or demand or to enforce any right or remedy against the Borrower, any Guarantor or any other Person under the provisions of the Credit Agreement, any Note, any other Loan Document or otherwise, or (ii) to exercise any right or remedy against any other guarantor of, or collateral securing, any Secured Obligations of the Borrower or any Guarantor, (c) any change in the time, manner or place of payment of, or in any other term of, all or any of the Secured Obligations or any other extension, compromise or renewal of any Secured Obligations of the Borrower or any Guarantor, (d) any reduction, limitation, impairment or termination of any Secured Obligations of the Borrower or any Guarantor for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to (and the Pledgor hereby waives any right to or claim of) any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality, nongenuineness, irregularity, compromise, unenforceability of, or any other event or occurrence affecting, any Secured Obligations of the Borrower, any Guarantor or otherwise, -C-5- 130 (e) any amendment to, rescission, waiver, or other modification of, or any consent to departure from, any of the terms of the Credit Agreement, any Note or any other Loan Document, (f) any addition, exchange, release, surrender or non-perfection of any collateral (including the Collateral), or any amendment to or waiver or release of or addition to or consent to departure from any guaranty, for any of the Secured Obligations, or (g) any other circumstances which might otherwise constitute a defense available to, or a legal or equitable discharge of, the Borrower, any Guarantor, any surety or any other guarantor. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1. Warranties, etc. The Pledgor represents and warrants unto each Lender Party, as at the date of each pledge and delivery hereunder (including each pledge and delivery of Pledged Shares and each pledge and delivery of a Pledged Notes) by the Pledgor to the Agent of any Collateral, as set forth in this Article. SECTION 3.1.1. Ownership, No Liens, etc. The Pledgor is the legal and beneficial owner of, and has good and marketable title to (and has full right and authority to pledge and assign) such Collateral, free and clear of all liens, security interests, options, or other charges or encumbrances, except any lien or security interest granted pursuant hereto in favor of the Agent. SECTION 3.1.2. Valid Security Interest. The delivery of such Collateral to the Agent is effective to create a valid, perfected, first priority security interest in such Collateral and all proceeds thereof, securing the Secured Obligations. No filing or other action will be necessary to perfect or protect such security interest. SECTION 3.1.3. As to Pledged Shares. In the case of any Pledged Shares constituting such Collateral, all of such Pledged Shares are duly authorized and validly issued, fully paid, and non-assessable, and constitute all of the issued and outstanding shares of capital stock of each Pledged Share Issuer. The Pledgor has no Subsidiary other than the Pledged Share Issuers. SECTION 3.1.4. As to Pledged Notes. In the case of each Pledged Notes, all of such Pledged Notes have been duly authorized, executed, endorsed, issued and delivered, and are the legal, valid and binding obligation of the issuers thereof, and are not in default. SECTION 3.1.5. Authorization, Approval, etc. No authorization, approval, or other action by, and no notice to or filing with, any governmental authority, regulatory body or any other Person is required either -C-6- 131 (a) for the pledge by the Pledgor of any Collateral pursuant to this Pledge Agreement or for the execution, delivery, and performance of this Pledge Agreement by the Pledgor, or (b) for the exercise by the Agent of the voting or other rights provided for in this Pledge Agreement, or, except with respect to any Pledged Shares, as may be required in connection with a disposition of such Pledged Shares by laws affecting the offering and sale of securities generally, the remedies in respect of the Collateral pursuant to this Pledge Agreement. SECTION 3.1.6. Compliance with Laws. The Pledgor is in compliance with the requirements of all applicable laws (including, without limitation, the provisions of the Fair Labor Standards Act), rules, regulations and orders of every governmental authority, the non-compliance with which might materially adversely affect the business, properties, assets, operations, condition (financial or otherwise) or prospects of the Pledgor or the value of the Collateral or the worth of the Collateral as collateral security. ARTICLE IV COVENANTS SECTION 4.1. Protect Collateral; Further Assurances, etc. The Pledgor will not sell, assign, transfer, pledge, or encumber in any other manner the Collateral (except in favor of the Agent hereunder). The Pledgor will warrant and defend the right and title herein granted unto the Agent in and to the Collateral (and all right, title, and interest represented by the Collateral) against the claims and demands of all Persons whomsoever. The Pledgor agrees that at any time, and from time to time, at the expense of the Pledgor, the Pledgor will promptly execute and deliver all further instruments, and take all further action, that may be necessary or desirable, or that the Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, the Pledgor will, upon obtaining any additional shares of capital stock, notes, or other securities required to be pledged hereunder or under the Security Agreement, promptly (and in any event within five Business Days) deliver to the Agent such additional securities and take any other action necessary to perfect and protect any security interest granted or purported to be granted hereby. SECTION 4.2. Stock Powers, etc. The Pledgor agrees that all Pledged Shares (and all other shares of capital stock constituting Collateral) delivered by the Pledgor pursuant to this Pledge Agreement will be accompanied by duly executed undated blank stock powers, or other equivalent instruments of transfer acceptable to the Agent. The Pledgor will, from time to time upon the request of the Agent, promptly deliver to the Agent such stock powers, instruments, and similar documents, satisfactory in form and substance to the Agent, with respect to the Collateral as the Agent may reasonably request and will, from time to time upon the request of the Agent -C-7- 132 after the occurrence of any Event of Default, promptly transfer any Pledged Shares or other shares of capital stock constituting Collateral into the name of any nominee designated by the Agent. SECTION 4.3. Continuous Pledge. Subject to Section 2.4, the Pledgor will, at all times, keep pledged to the Agent pursuant hereto all Pledged Shares and all other shares of capital stock constituting Collateral, all Dividends and Distributions with respect thereto, all Pledged Notes, all interest, principal and other proceeds received by the Agent with respect to the Pledged Notes, and all other Collateral and other securities, instruments, proceeds, and rights from time to time received by or distributable to the Pledgor in respect of any Collateral. SECTION 4.4. Voting Rights; Dividends, etc. The Pledgor agrees: (a) after any Potential Event of Default of the nature referred to in Section 7.1(g) or 7.1(h) of the Credit Agreement or an Event of Default shall have occurred and be continuing, promptly upon receipt thereof by the Pledgor and without any request therefor by the Agent, to deliver (properly endorsed where required hereby or requested by the Agent) to the Agent all Dividends, Distributions, all interest, all principal, all other cash payments, and all proceeds of the Collateral, all of which shall be held by the Agent as additional Collateral for use in accordance with Section 6.3; and (b) after any Event of Default shall have occurred and be continuing and the Agent has notified the Pledgor of the Agent's intention to exercise its voting power under this Section 4.4(b) (i) the Agent may exercise (to the exclusion of the Pledgor) the voting power and all other incidental rights of ownership with respect to any Pledged Shares or other shares of capital stock constituting Collateral and the Pledgor hereby grants the Agent an irrevocable proxy, exercisable under such circumstances, to vote the Pledged Shares and such other Collateral; and (ii) promptly to deliver to the Agent such additional proxies and other documents as may be necessary to allow the Agent to exercise such voting power. All Dividends, Distributions, interest, principal, cash payments, and proceeds which may at any time and from time to time be held by the Pledgor but which the Pledgor is then obligated to deliver to the Agent, shall, until delivery to the Agent, be held by the Pledgor separate and apart from its other property in trust for the Agent. The Agent agrees that unless an Event of Default shall have occurred and be continuing and the Agent shall have given the notice referred to in Section 4.4(b), the Pledgor shall have the exclusive voting power with respect to any shares of capital stock (including any of the Pledged Shares) constituting Collateral and the Agent shall, upon the written request of the Pledgor, promptly deliver such proxies and other documents, if any, as shall be reasonably requested by the Pledgor which are necessary to allow the Pledgor to exercise voting power with respect to any such share of capital stock (including any of the Pledged Shares) constituting Collateral; provided, however, that no vote shall be cast, or consent, -C-8- 133 waiver, or ratification given, or action taken by the Pledgor that would impair any Collateral or be inconsistent with or violate any provision of the Credit Agreement or any other Loan Document (including this Pledge Agreement). SECTION 4.5. Additional Undertakings. The Pledgor will not, without the prior written consent of the Agent: (a) enter into any agreement amending, supplementing, or waiving any provision of any Pledged Notes (including any underlying instrument pursuant to which such Pledged Notes is issued) or compromising or releasing or extending the time for payment of any obligation of the maker thereof; or (b) take or omit to take any action the taking or the omission of which would result in any impairment or alteration of any obligation of the maker of any Pledged Notes or other instrument constituting Collateral. ARTICLE V THE AGENT SECTION 5.1. Agent Appointed Attorney-in-Fact. The Pledgor hereby irrevocably appoints the Agent the Pledgor's attorney-in-fact, with full authority in the place and stead of the Pledgor and in the name of the Pledgor or otherwise, from time to time in the Agent's discretion, to take any action and to execute any instrument which the Agent may deem necessary or advisable to accomplish the purposes of this Pledge Agreement, including without limitation: (a) to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (b) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) above; and (c) to file any claims or take any action or institute any proceedings which the Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Agent with respect to any of the Collateral. The Pledgor hereby acknowledges, consents and agrees that the power of attorney granted pursuant to this Section is irrevocable and coupled with an interest. SECTION 5.2. Agent May Perform. If the Pledgor fails to perform any agreement contained herein, the Agent may itself perform, or cause performance of, such agreement, and the expenses of the Agent incurred in connection therewith shall be payable by the Pledgor pursuant to Section 6.4. -C-9- 134 SECTION 5.3. Agent Has No Duty. The powers conferred on the Agent hereunder are solely to protect its interest (on behalf of the Lender Parties) in the Collateral and shall not impose any duty on it to exercise any such powers. Except for reasonable care of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Agent shall have no duty as to any Collateral or responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Pledged Property, whether or not the Agent has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. SECTION 5.4. Reasonable Care. The Agent is required to exercise reasonable care in the custody and preservation of any of the Collateral in its possession; provided, however, the Agent shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral, if it takes such action for that purpose as the Pledgor reasonably requests in writing at times other than upon the occurrence and during the continuance of any Event of Default, but failure of the Agent to comply with any such request at any time shall not in itself be deemed a failure to exercise reasonable care. ARTICLE VI REMEDIES SECTION 6.1. Certain Remedies. If any Event of Default shall have occurred and be continuing: (a) The Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the U.C.C. (whether or not the U.C.C. applies to the affected Collateral) and also may, without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Agent may deem commercially reasonable. The Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' prior notice to the Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. -C-10- 135 (b) The Agent may (i) transfer all or any part of the Collateral into the name of the Agent or its nominee, with or without disclosing that such Collateral is subject to the lien and security interest hereunder, (ii) notify the parties obligated on any of the Collateral to make payment to the Agent of any amount due or to become due thereunder, (iii) enforce collection of any of the Collateral by suit or otherwise, and surrender, release or exchange all or any part thereof, or compromise or extend or renew for any period (whether or not longer than the original period) any obligations of any nature of any party with respect thereto, (iv) endorse any checks, drafts, or other writings in the Pledgor's name to allow collection of the Collateral, (v) take control of any proceeds of the Collateral, and (vi) execute (in the name, place and stead of the Pledgor) endorsements, assignments, stock powers and other instruments of conveyance or transfer with respect to all or any of the Collateral. SECTION 6.2. Compliance with Restrictions. The Pledgor agrees that in any sale of any of the Collateral whenever an Event of Default shall have occurred and be continuing, the Agent is hereby authorized to comply with any limitation or restriction in connection with such sale as it may be advised by counsel is necessary in order to avoid any violation of applicable law (including compliance with such procedures as may restrict the number of prospective bidders and purchasers, require that such prospective bidders and purchasers have certain qualifications, and restrict such prospective bidders and purchasers to persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of such Collateral), or in order to obtain any required approval of the sale or of the purchaser by any governmental regulatory authority or official, and the Pledgor further agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner, nor shall the Agent be liable nor accountable to the Pledgor for any discount allowed by the reason of the fact that such Collateral is sold in compliance with any such limitation or restriction. SECTION 6.3. Application of Proceeds. All cash proceeds received by the Agent in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral may, in the discretion of the Agent, be held by the Agent as additional collateral security for, or then or at any time thereafter be applied (after payment of any amounts payable to the Agent pursuant to Section 9.5 of the Credit Agreement and Section 6.4) in whole or in part by the Agent against, all or any part of the Secured Obligations pro rata to the Lenders. -C-11- 136 Any surplus of such cash or cash proceeds held by the Agent and remaining after payment in full of all the Secured Obligations, and the termination of all Commitments, shall be paid over to the Pledgor or to whomsoever may be lawfully entitled to receive such surplus. SECTION 6.4. Indemnity and Expenses. The Pledgor hereby indemnifies and holds harmless the Agent from and against any and all claims, losses, and liabilities arising out of or resulting from this Pledge Agreement (including enforcement of this Pledge Agreement), except claims, losses, or liabilities resulting from the Agent's gross negligence or willful misconduct. Upon demand, the Pledgor will pay to the Agent the amount of any and all reasonable expenses, including the reasonable fees and disbursements of its counsel and of any experts and agents, which the Agent may incur in connection with: (a) the administration of this Pledge Agreement, the Credit Agreement and each other Loan Document; (b) the custody, preservation, use, or operation of, or the sale of, collection from, or other realization upon, any of the Collateral; (c) the exercise or enforcement of any of the rights of the Agent hereunder; or (d) the failure by the Pledgor to perform or observe any of the provisions hereof. ARTICLE VII MISCELLANEOUS PROVISIONS SECTION 7.1. Loan Document. This Pledge Agreement is a Loan Document executed pursuant to the Credit Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof. SECTION 7.2. Amendments, etc. No amendment to or waiver of any provision of this Pledge Agreement nor consent to any departure by the Pledgor herefrom shall in any event be effective unless the same shall be in writing and signed by the Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it is given. SECTION 7.3. Protection of Collateral. The Agent may from time to time, at its option, perform any act which the Pledgor agrees hereunder to perform and which the Pledgor shall fail to perform after being requested in writing so to perform (it being understood that no such request need be given after the occurrence and during the continuance of an Event of Default) and the Agent may from time to time take any other action which the Agent reasonably deems necessary for the maintenance, preservation or protection of any of the Collateral or of its security interest therein. -C-12- 137 SECTION 7.4. Addresses for Notices. All notices and other communications provided for hereunder shall be in writing or by facsimile and, if to the Pledgor, addressed, delivered or transmitted to it at the address or facsimile number set forth below its signature hereto, if to the Agent, addressed, delivered or transmitted to it at the address or facsimile number of the Agent specified in the Credit Agreement or, as to either party, at such other address or facsimile number as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. Any notice, if mailed and properly addressed with postage prepaid or if properly addressed and sent by pre-paid courier service, shall be deemed given when received; any notice, if transmitted by facsimile, shall be deemed given when transmitted (upon receipt of electronic confirmation of transmission). SECTION 7.5. Headings. The various headings of this Pledge Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Pledge Agreement or any provisions hereof. SECTION 7.6. Severability. Wherever possible each provision of this Pledge Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Pledge Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Pledge Agreement. SECTION 7.7. Governing Law, Entire Agreement, etc. THIS PLEDGE AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. THIS PLEDGE AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE ENTIRE UNDERSTANDING AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND SUPERSEDE ANY PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH RESPECT THERETO. SECTION 7.8. Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS PLEDGE AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS OR THE PLEDGOR SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY (TO THE EXTENT PERMITTED UNDER APPLICABLE LAW) IN THE COURTS OF THE STATE OF NEW YORK, NEW YORK COUNTY OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE AGENT'S -C-13- 138 OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. THE PLEDGOR HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. THE PLEDGOR IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. THE PLEDGOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE PLEDGOR HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OF FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE PLEDGOR HEREBY IRREVOCABLY WAIVES (TO THE EXTENT PERMITTED UNDER APPLICABLE LAW) SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS PLEDGE AGREEMENT AND THE OTHER LOAN DOCUMENTS. SECTION 7.9. Waiver of Jury Trial. THE AGENT AND THE PLEDGOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS PLEDGE AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE AGENT OR THE PLEDGOR. THE PLEDGOR ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENT ENTERING INTO THIS PLEDGE AGREEMENT AND EACH SUCH OTHER LOAN DOCUMENT. SECTION 7.10. Counterparts. This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. -C-14- 139 -C-15- 140 IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the day and year first above written. PHASE METRICS, INC. By ----------------------------------------- Title: Vice President - Finance Address: 10260 Sorrento Valley Road San Diego, CA 92121 Telephone No.: (619) 646-4850 Facsimile No.: (619) 646-4990 Attention: R. Joseph Saunders FLEET NATIONAL BANK By ------------------------------------------ Name: Title: Address: ------------------------------------ ------------------------------------ Facsimile No.: ------------------------------- Attention: ---------------------------------- -C-16- 141 ATTACHMENT 1 to Pledge Agreement [TO BE UPDATED] Item A. Pledged Shares
Pledged Percentage of Certificate ownership Pledged Share Issuer Pledged Shares Number Pledged - -------------------- -------------- ------ ------- Air Bearings, Incorporated 2,000 7 100% Applied Robotic Technologies, Inc. 80,750 105 100% Helios Incorporated 1,600,000 23 100% Phase Metrics International, Incorporated 650 2* 65% Phase Metrics Japan Co., Ltd. 195 __** 65% Phase Metrics Korea Co., Ltd. 6,500 __*** 65% Phase Metrics Pacific (PTE) Ltd. 65,000 4**** 65%
- ---------- * / Certificate No. 2 represents 660 shares of common stock of Phase Metrics International, Incorporated, but the parties agree that only 650 shares of such stock are pledged pursuant to this Security Agreement. ** / Certificate No. __ represents 300 shares of common stock of Phase Metrics Japan Co., Ltd., but the parties agree that only 195 shares of such stock are pledged pursuant to this Security Agreement. *** / Certificate No. __ represents 10,000 shares of common stock of Phase Metrics Korea Co., Ltd., but the parties agree that only 6,500 shares of such stock are pledged pursuant to this Security Agreement. **** / Certificate No. __ represents 99,998 shares of common stock of Phase Metrics Pacific (PTE) Ltd., but the parties agree that only 65,000 shares of such stock are pledged pursuant to this Security Agreement. -C-17- 142 -C-18- 143 ATTACHMENT 1 to Pledge Agreement (continued) Item B. Pledged Notes Pledged Note Issuer Notes - ------------------- ----- -C-19- 144 EXHIBIT I FORM OF ASSIGNMENT AGREEMENT Reference is made to the Amended and Restated Credit Agreement dated as of January 30, 1998 (as it may be amended, supplemented or otherwise modified from time to time, the "Agreement") among Phase Metrics, Inc., a Delaware corporation (the "Borrower"), the Lenders named therein and Fleet National Bank, as Agent for the Lenders. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Agreement. ____________________ ("Assignor") and ____________________ ("Assignee") agree as follows: 1. Assignor hereby sells and assigns to Assignee, and Assignee hereby purchases and assumes from Assignor, a _% interest in and to all Assignor's rights and obligations under the Agreement and the Loan Documents as of the Assignment Effective Date (as defined below) (including such percentage interest in the pro rata share of the Commitment of Assignor on the Assignment Effective Date, and such percentage interest in the Loans owing to the Assignor outstanding on the Assignment Effective Date, together with such percentage interest in all unpaid interest and fees accrued to the Assignment Effective Date). 2. Assignor (i) represents that as of the date hereof, its pro rata share of the Commitment (without giving effect to assignments thereof which have not yet become effective) is $__________, and the outstanding balance of its Revolving Loans (not reduced by any assignments thereof which have not yet become effective is $____________; (ii) represents that this Assignment Agreement is entered into in accordance with the provisions of Section 9.6 of the Agreement; (iii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Agreement or the Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Agreement or the Loan Documents or any other instrument or document furnished pursuant thereto, other than that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim created by it and that it is legally authorized to enter into this Assignment Agreement; (iv) represents that no amendments or waivers to the Agreement have been entered into other than those that have been provided to Assignee; and (v) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or its Subsidiaries or the performance or observance by the Borrower or any of its Subsidiaries of any of its or their obligations under the Agreement or any other instrument or document furnished pursuant thereto. 3. Assignee (i) represents and warrants that it is legally authorized to enter into this Assignment Agreement; (ii) confirms that it has received a copy of the financial statements delivered pursuant to Sections 5.1(e) and 6.1(a) of the Agreement and such other documents and 145 information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment Agreement; (iii) agrees that it will, independently and without reliance upon the Administrative Agent, Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Agreement; (iv) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all the obligations which by the terms of the Agreement and the Loan Documents are required to be performed by it as a Lender; and (vi) agrees that it will keep confidential all information with respect to the Borrower furnished to it by the Borrower or Assignor as set forth in Section 9.6(e) of the Agreement. 4. The effective date for this Assignment Agreement shall be __________ __, ____, but in no event prior to the recording of this Assignment Agreement on the Register as provided in Section 9.6 of the Credit Agreement (the "Assignment Effective Date"). On the Assignment Effective Date, Assignee will pay to Assignor in immediately available funds the sum of $__________ representing the purchase price of the assignment under this Assignment Agreement. On the Assignment Effective Date, the Borrower shall deliver to each of Assignor and Assignee new Revolving Notes in the principal amount of each of their respective Commitments and Assignor shall return the Revolving Note currently in its possession. 5. From and after the Assignment Effective Date, (i) Assignee shall be a party to the Agreement, and to the extent provided in this Assignment Agreement, have the rights and obligations of a Lender, and (ii) Assignor shall, to the extent provided in this Assignment Agreement, relinquish its rights and be released from its obligations under the Agreement. 6. From and after the Assignment Effective Date, the Administrative Agent shall make all payments in respect of any interest assigned hereby (including payments of principal, interest, fees and other amounts) to Assignee. Assignor and Assignee shall make all appropriate adjustments for payments made and periods prior to the Assignment Effective Date by the Administrative Agent and with respect to the making of this assignment directly between themselves. Assignee's address for notices is set forth on the signature page hereof. 7. After giving effect to the assignment set forth herein and all assignments which will become effective on the Assignment Effective Date, the respective Commitments under the Revolving Loans of each Lender will be set forth on the attached Annex I, which shall be annexed to the Credit Agreement. -I-2- 146 8. This Assignment Agreement shall be governed by, and construed in accordance with, the laws of the state of New York without giving effect to its choice of law doctrine. [NAME OF ASSIGNOR] By: Title: [NAME OF ASSIGNEE] By: Title: Address: Telephone: Telecopier: Attention: Accepted this _____ day of _________________,____ FLEET NATIONAL BANK, as AGENT By: Title: PHASE METRICS, INC. By: Title: -I-3- 147 EXHIBIT J [FORM OF BORROWING BASE CERTIFICATE] BORROWING BASE CERTIFICATE ACCOUNTS RECEIVABLE 1. Accounts Receivable Book Value as of ________ $_______________ 2. Additions (please explain on reverse) $_______________ 3. TOTAL ACCOUNTS RECEIVABLE $_______________ ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) 4. Amounts over 90 days due $_______________ 5. Intercompany/Employee Accounts $_______________ 6. Insolvent Account Debtors $_______________ 7. Conditional Accounts $_______________ 8. Non-Dollar Accounts $_______________ 9. Contra Accounts $_______________ 10. Foreign Accounts $_______________ 11. Governmental Accounts $_______________ 12. Balance of 50% over 90 day accounts $_______________ 13. Other (please explain on reverse) $_______________ 14. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $_______________ 15. Eligible Accounts (#3 minus #14) $_______________ 16. LOAN VALUE OF ACCOUNTS (75% of #15 so long as ratio of Consolidated Total Debt to EBITDA >/= 3.5:1.0) $_______________ 17. Eligible Inventory $_______________ 18. Loan Value of Accounts and Inventory (80% of #15 plus lesser of (i) 25% of #17 and (ii) $10,000,000) $_______________ BALANCES 19. Borrowing Base (#16 or #18) $_______________ 20. Maximum Revolving Loan Amount $_______________ 21. Total Funds Available [Lesser of #21 or #20] $_______________ 22. Present balance owing on Revolving Facility $_______________ 23. RESERVE POSITION (#22 minus #23) $_______________ The undersigned represents and warrants that the foregoing is true, complete and correct, and that the information reflected in this Borrowing Base Certificate complies with the representations and warranties set forth in the Credit Agreement. COMMENTS: Phase Metrics, Inc. By: -------------------------------------------- Authorized Signer 1 148 SCHEDULE 5.1(f) LITIGATION 1 149 SCHEDULE 5.1(j) ENVIRONMENTAL MATTERS 1 150 SCHEDULE 6.2(f) PERMITTED LIENS 1 151 SCHEDULE 6.2(g) EXISTING DEBT 1 152 SCHEDULE 6.2(k) EXISTING INVESTMENTS 1 153 SCHEDULE 6.2(l) EXISTING CONTINGENT OBLIGATIONS 1 EX-12.1 18 STATEMENT REGARDING COMPUTATION OF RATIOS 1 EXHIBIT 12.1 PHASE METRICS, INC. STATEMENT REGARDING COMPUTATION OF RATIOS (IN THOUSANDS, EXCEPT RATIOS) RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1993 1994 1995 1996 1997 ---- ------ ------- -------- ------- Earnings: Income (loss) before income taxes and extraordinary items.................. $361 $ 943 $ 6,193 $(19,842) $(9,812) Fixed charges: Interest expense..................... -- 651 5,625 8,448 11,573 Rental expense interest factor(1).... 35 60 178 1,133 1,700 ---- ------ ------- -------- ------- Total fixed charges............. 35 711 5,803 9,581 13,273 ---- ------ ------- -------- ------- Earnings (loss) available to cover fixed charges................................. $396 $1,654 $11,996 $(10,261) $ 3,461 ==== ====== ======= ======== ======= Combined fixed charges and preferred stock dividend requirements................... $ 35 $1,023 $ 8,803 $ 12,581 $16,196 ==== ====== ======= ======== ======= Ratio of earnings (loss) to fixed charges(2).............................. 11.3x 1.6x 1.4x -- 0.2x ==== ====== ======= ======== =======
- --------------- (1) The portion of operating lease rental expense that is representative of the interest factor is deemed to be one-third of total operating lease rental expense. (2) For the year ended December 31, 1996, earnings were inadequate to cover Fixed Charges by $22.8 million. EX-21.1 19 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 SUBSIDIARIES OF PHASE METRICS, INC. SUBSIDIARIES Name of Entity Organized Under Laws of -------------- ----------------------- Air Bearings, Incorporated California Applied Robotic Technologies, Inc. California Helios, Incorporated California Santa Barbara Metric, Inc. California EX-23.1 20 INDEPENDENT AUDITORS CONSENT 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE To the Board of Directors and Stockholders of Phase Metrics, Inc. We consent to the use in this Registration Statement of Phase Metrics, Inc.; Air Bearings, Incorporated; Applied Robotic Technologies, Inc.; Helios, Incorporated; and Santa Barbara Metric, Inc. on Form S-4 of our reports dated January 30, 1998, with respect to the consolidated financial statements of Phase Metrics, Inc. and September 6, 1996 with respect to the financial statements of Air Bearings, Incorporated appearing in the Prospectus, which is a part of this Registration Statement, and to the references to us under the heading "Experts" in such Prospectus. Our audits of the financial statements referred to in our aforementioned report dated January 30, 1998 also included the consolidated financial statement schedule of Phase Metrics, Inc., listed in Item 21(b). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP San Jose, California March 24, 1998 EX-25.1 21 FORM T-1 STATEMENT 1 EXHIBIT 25.1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM T-1 --------- STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2) [X] STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A. (Exact name of trustee as specified in its charter) United States 06-1143380 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. national bank) Identification No.) 633 West 5th Street, 12th Floor, Los Angeles, California 90071 (Address of principal executive offices) (Zip Code) Lynda A. Vogel, Senior Vice President and Managing Director 633 West 5th Street, 12th Floor, Los Angeles, California 90071 (213) 362-7399 (Name, address and telephone number of agent for service) Phase Metrics, Inc. (Exact name of obligor as specified in its charter) Delaware 33-0328048 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10260 Sorrento Valley Road San Diego, California 92121 (Address of principal executive offices) (Zip Code) SENIOR NOTES 10-3/4% Senior Notes due 2005 2 GENERAL ITEM 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO WHICH IT IS SUBJECT. Comptroller of the Currency, Western District Office, 50 Fremont Street, Suite 3900, San Francisco, California, 94105-2292 (b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The obligor is not an affiliate of the trustee or of its parent, State Street Bank and Trust Company. (See note on page 2.) ITEM 3. THROUGH ITEM 15. NOT APPLICABLE. ITEM 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY. 1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN EFFECT. A copy of the Articles of Association of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibits with corresponding exhibit numbers to the Form T-1 of Oasis Residential, Inc., filed pursuant to Section 305(b)(2) of the Act, on November 18, 1996 (Registration No. 033-90488), and are incorporated herein by reference. 2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION. A Certificate of Corporate Existence (with fiduciary powers) from the Comptroller of the Currency, Administrator of National Banks is on file with the Securities and Exchange Commission as Exhibits with corresponding exhibit numbers to the Form T-1 of Oasis Residential, Inc., filed pursuant to Section 305(b)(2) of the Act, on November 18, 1996 (Registration No. 033-90488), and are incorporated herein by reference. 3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE. Authorization of the Trustee to exercise fiduciary powers (included in Exhibits 1 and 2; no separate instrument). 4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS CORRESPONDING THERETO. A copy of the by-laws of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibits with corresponding exhibit numbers to the Form T-1 of Oasis Residential, Inc., filed pursuant to Section 305(b)(2) of the Act, on November 18, 1996 (Registration No. 033-90488), and are incorporated herein by reference. 1 3 5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS IN DEFAULT. Not applicable. 6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY SECTION 321(b) OF THE ACT. The consent of the trustee required by Section 321(b) of the Act is annexed hereto as Exhibit 6 and made a part hereof. 7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING AUTHORITY. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority is annexed hereto as Exhibit 7 and made a part hereof. NOTES In answering any item of this Statement of Eligibility which relates to matters peculiarly within the knowledge of the obligor or any underwriter for the obligor, the trustee has relied upon information furnished to it by the obligor and the underwriters, and the trustee disclaims responsibility for the accuracy or completeness of such information. The answer furnished to Item 2. of this statement will be amended, if necessary, to reflect any facts which differ from those stated and which would have been required to be stated if known at the date hereof. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, State Street Bank and Trust Company of California, N.A., organized and existing under the laws of the United States of America, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Los Angeles, and State of California, on the February 27, 1998. STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A. By: /s/ JEANIE MAR -------------------------------------- NAME: JEANIE MAR TITLE: ASSISTANT VICE PRESIDENT 2 4 EXHIBIT 6 CONSENT OF THE TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, as amended, in connection with the proposed issuance by Phase Metrics, Inc. of its 10-3/4% Senior Notes due 2005, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A. By: /s/ JEANIE MAR -------------------------------------- NAME: JEANIE MAR TITLE: ASSISTANT VICE PRESIDENT DATED: FEBRUARY 27, 1998 3 5 EXHIBIT 7 Consolidated Report of Condition and Income for A Bank With Domestic Offices Only and Total Assess of Less Than $100 Million of State Street Bank and Trust Company of California, a national banking association duly organized and existing under and by virtue of the laws of the United States of America, at the close of business December 31, 1997, published in accordance with a call made by the Federal Deposit Insurance Corporation pursuant to the required law: 12 U.S.C. Section 324 (State member banks); 12 U.S.C. Section 1817 (State nonmember banks); and 12 U.S.C. Section 161 (National banks).
Thousands of Dollars ------------- ASSETS Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin .................... 5,580 Interest-bearing balances ............................................. 0 Securities ..................................................................... 38 Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and its Edge subsidiary ................................... 0 Loans and lease financing receivables: Loans and leases, net of unearned income .............................. 0 Allowance for loan and lease losses ................................... 0 Allocated transfer risk reserve ....................................... 0 Loans and leases, net of unearned income and allowances ............... 0 Assets held in trading accounts ................................................ 0 Premises and fixed assets ...................................................... 276 Other real estate owned ........................................................ 0 Investments in unconsolidated subsidiaries ..................................... 0 Customers' liability to this bank on acceptances outstanding ................... 0 Intangible assets .............................................................. 0 Other assets ................................................................... 726 ------------- Total assets ................................................................... 6,620 ============= LIABILITIES Deposits: In domestic offices . ................................................. 0 Noninterest-bearing .......................................... 0 Interest-bearing . ........................................... 0 In foreign offices and Edge subsidiary ................................ 0 Noninterest-bearing .......................................... 0 Interest-bearing ............................................. 0 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge subsidiary ................................... 0 Demand notes issued to the U.S. Treasury and Trading Liabilities ............... 0 Other borrowed money ........................................................... 0 Subordinated notes and debentures .............................................. 0 Bank's liability on acceptances executed and outstanding ....................... 0 Other liabilities .............................................................. 3,076 Total liabilities .............................................................. 3,076 ------------- EQUITY CAPITAL Perpetual preferred stock and related surplus .................................. 0 Common stock ................................................................... 500 Surplus ........................................................................ 750 Undivided profits and capital reserves/Net unrealized holding gains (losses) ... 2,294 Cumulative foreign currency translation adjustments ............................ 0 Total equity capital ........................................................... 3,544 ------------- Total liabilities and equity capital ........................................... 6,620 =============
4 6 I, Kevin R. Wallace, Vice President and Comptroller of the above named bank do hereby declare that this Report of Condition and Income for this report date have been prepared in conformance with the instructions issued by the appropriate Federal regulatory authority and is true to the best of my knowledge and belief. Kevin R. Wallace We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the appropriate Federal regulatory authority and is true and correct. Lynda A. Vogel Donald W. Beatty Stephen Rivero 5 7 Exhibit 1 ARTICLES OF ASSOCIATION OF STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, NATIONAL ASSOCIATION For the purpose of organizing an Association to carry on the business of a limited purpose trust company under the laws of the United States, the undersigned do enter into the following Articles of Association: FIRST. The title of this Association shall be State Street Bank and Trust Company of California, National Association. SECOND. The Main Office of the Association shall be in the City of Culver City, County of Los Angeles, State of California. The general business of the Association shall be conducted at its main office and its branches. THIRD. The Board of Directors of this Association shall consist of not less than five nor more than twenty-five shareholders, the exact number to be fixed and determined from time to time by resolution of a majority of the full Board of Directors or by resolution of the shareholders at any annual or special meeting thereof. Each Director, during the full term of his directorship, shall own a minimum of $1,000 aggregate par value of stock of this Association or a minimum par, market value or equity interest of $1,000 of stock in the bank holding company controlling this Association. Any vacancy in the Board of Directors may be filled by action of the Board of Directors. FOURTH. There shall be an annual meeting of the shareholders to elect Directors and transact whatever other business may be brought before the meeting. It shall be held at the main office or any other convenient place as the Board of Directors may designate, on the day of each year specified therefore in the By-laws, but if no election is held on that day, it may be held an any subsequent day according to such lawful rules as may be prescribed by the Board of Directors. FIFTH. The authorized amount of capital stock of this Association shall be 1,000,000 shares of common stock of the par value of one dollar ($1) each; but said capital stock may be increased or decreased from time to time, in accordance with the provisions of the laws of the United States. No holder of shares of the capital stock of any class of this Association shall have any pre-emptive or preferential right of subscription to any shares of any class of stock of this Association, whether now or hereafter authorized, or to any obligations convertible into stock of this Association, issued, or sold, nor any right of subscription to any thereof other than such, if any, as the Board of Directors, in its discretion may from time to time determine and at such price as the Board of Directors may from time to time fix. This Association, at any time and from time to 1 8 time, may authorize and issue debt obligations, whether or not subordinated, without the approval of the shareholders. SIXTH. The Board of Directors shall appoint one of its members President of this Association, who shall be Chairperson of the Board, unless the Board appoints another director to be the Chairperson. The Board of Directors shall have the power to appoint one or more Vice Presidents; and to appoint a Cashier and such other officers and employees as may be required to transact the business of this Association. The Board of Directors shall have the power to define the duties of the officers and employees of this Association; to fix the salaries to be paid to the officers and employees; to dismiss officers and employees; to require bonds from officers and employees and to fix the penalty thereof; to regulate the manner in which any increase of the capital of this Association shall be made; to manage and administer the business and affairs of this Association; to make all By-laws that it may be lawful for the Board of Directors to make; and generally to do and perform all acts that it may be legal for a Board of Directors to do and perform. SEVENTH. The Board of Directors shall have the power to change the location of the main office to any other place within the limits of the City of Culver City, without the approval of the shareholders, and shall have the power to establish or change the location of any branch or branches of this Association to any other location, without the approval of the shareholders. EIGHTH. The corporate existence of this Association shall continue until terminated in accordance with the laws of the United States. NINTH. The Board of Directors of this Association, or any shareholder owning, in the aggregate, not less than ten percent of the stock of this Association, may call a special meeting of shareholders at any time. Unless otherwise provided by the laws of the United States, a notice of the time, place, and purpose of every annual and special meeting of the shareholders shall be given by first-class mail, postage prepaid, mailed at least ten days prior to the date of such meeting to each shareholder of record at his address as shown upon the books of this Association. TENTH. This Association shall indemnify each person who is or was a director, officer, employee or other agent of this Association, and each person who is or was serving at the request of this Association as a director, trustee, officer, employee or other agent of another organization in which it directly or indirectly owns shares or of which it is directly or indirectly a creditor, against all liabilities, costs and expenses, including but not limited to amount paid in satisfaction of judgments, in settlements or as fines and penalties, and counsel fees and disbursements, reasonably incurred by such person in connection with the defense or disposition of or otherwise in connection with or resulting from any action, suit or other proceeding, whether civil, criminal, administrative or investigative, before any court or administrative or legislative or investigative body, in which such person may be or may have been involved as a party or otherwise or with which he may be or may have been threatened, while in office or thereafter, by reason of his being or having been such a director, officer, employee, agent or trustee, or by reason of any action taken or not taken in any such capacity, except with respect to any matter as to which he shall 2 9 have been finally adjudicated by a court of competent jurisdiction not to have acted in good faith in the reasonable belief that his action was in the best interests of this Association. Expenses, including but not limited to counsel fees and disbursements, so incurred by any such person in defending any such action, suit or proceeding, may be paid from time to time by this Association in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the person indemnified to repay the amount so paid if it shall ultimately be determined that indemnification of such expenses is not authorized hereunder. As to any matter disposed of by settlement by any such person, pursuant to a consent decree or otherwise, no such indemnification either for the amount of such settlement or for any other expenses shall be provided unless such settlement shall be approved as in the best interests of this Association, after notice that it involves such indemnification, (a) by vote of a majority of the disinterested directors then in office (even though the disinterested directors be less than a quorum), or (b) by any disinterested person or persons to whom the question may be referred by vote of a majority of such disinterested directors, or (c) by vote of the holders of a majority of the outstanding stock at the time entitled to vote for directors, voting as a single class, exclusive of any stock owned by any interested person, or (d) by any disinterested person or persons to whom the question may be referred by vote of the holders of a majority of such stock. No such approval shall prevent the recovery from any such officer, director, employee, agent or trustee of any amounts paid to such person or on his or her behalf as indemnification in accordance with the preceding sentence if such person is subsequently adjudicated by a court of competent jurisdiction not to have acted in good faith in the reasonable belief that his action was in the best interests of this Association. The right of indemnification hereby provided shall not be exclusive of or affect any other rights to which any director, officer, employee, agent or trustee may be entitled or which may lawfully be granted to such person. As used herein, the terms "director," "officer," "employee," "agent" and "trustee" include their respective executors, administrators and other legal representatives, an "interested" person is one against whom the action, suit or other proceeding in question or another action, suit or other proceeding on the same or similar grounds is then or had been pending or threatened, and a "disinterested" person is a person against whom no such action, suit or other proceeding is then or had been pending or threatened. By action of the Board of Directors, notwithstanding any interest of the directors in such action, this Association may purchase and maintain insurance, in such amounts as the Board of Directors may from time to time deem appropriate, on behalf of any person who is or was a director, officer, employee or other agent of this Association, or is or was serving at the request of this Association as a director, trustee, officer, employee or other agent of another organization in which it directly or indirectly owns shares or of which it is directly or indirectly a creditor, against any liability incurred by such person in any such capacity, or arising out of his or her status as such, whether or not this Association would have the power to indemnify such person against such liability. ELEVENTH. These Articles of Association may be amended at any regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the stock of this 3 10 Association, unless the vote of the holders of a greater amount of stock is required by law, and in that case by the vote of the holders of such greater amount. TWELFTH. This Association may be a partner in any business or enterprise which this Association would have power to conduct by itself. IN WITNESS WHEREOF, we have hereunto set our hands this 25th day of July, 1985. Peter E. Madden - ------------------------------- Peter E. Madden David A. Spina - ------------------------------- David A. Spina Charles J. Kelly - ------------------------------- Charles J. Kelly Richard J. Poznysz - ------------------------------ Richard J. Poznysz Vincent V. Grippa - ------------------------------- Vincent V. Grippa 4 11 [LOGO] Exhibit 2 - ------------------------------------------ COMPTROLLER OF THE CURRENCY ADMINISTRATOR OF NATIONAL BANKS - ------------------------------------------ Western District Office 50 Fremont Street, Suite 3900 San Francisco, CA. 94105-2292 CERTIFICATE OF CORPORATE EXISTENCE (WITH FIDUCIARY POWERS) I, NANETTE G. GOULET, on behalf of the Office of the Comptroller of the Currency, hereby certify that: 1. The OFFICE OF THE COMPTROLLER OF THE CURRENCY, pursuant to Revised Statutes 324, et seq., as amended, 12 U.S.C. 1, et seq., as amended, has possession, custody and control of all records pertaining to the chartering, regulation and supervision of all NATIONAL BANKING ASSOCIATIONS; 2. STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, NATIONAL ASSOCIATION, LOS ANGELES, CALIFORNIA, CHARTER NO. 18607, is a National Banking Association formed under the laws of the United States and authorized hereunder and continues to hold authority to transact the business of banking (and to act in all fiduciary capacities) permitted thereby on the date of this certificate. IN TESTIMONY WHEREOF, I have hereunto subscribed my name and caused the seal of office of the Office of the Comptroller of the Currency to be affixed, in the City of San Francisco, California this 3RD DAY OF FEBRUARY, 1995. Nanette G. Goulet - -------------------------- Nanette G. Goulet Director for Bank Analysis EX-27.1 22 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1997 AUDITED FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 2,977 0 30,393 (1,663) 55,585 103,375 49,103 (11,080) 154,730 37,300 119,272 0 3 6,090 (23,966) 154,730 184,660 184,660 101,294 101,294 80,200 1,405 11,573 (9,812) (4,268) 2,235 0 0 0 (5,544) 0 0
EX-99.1 23 FORM OF LETTER OF TRANSMITTAL 1 EXHIBIT 99.1 LETTER OF TRANSMITTAL FOR 10 3/4% SENIOR NOTES DUE 2005 OF PHASE METRICS, INC. PURSUANT TO THE EXCHANGE OFFER IN RESPECT OF ALL OF ITS OUTSTANDING 10 3/4% SENIOR NOTES DUE 2005 FOR 10 3/4% SENIOR NOTES DUE 2005 --------------------------- PURSUANT TO THE PROSPECTUS DATED _________, 1998 THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON ______ __, 1998 UNLESS THE EXCHANGE OFFER IS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 12:00 MIDNIGHT ON THE EXPIRATION DATE. TO: STATE STREET BANK AND TRUST OF CALIFORNIA, N.A., EXCHANGE AGENT By Mail, Hand or Overnight Carrier: The Exchange Agent State Street Bank and Trust Company of California, N.A State Street Bank and Trust Company of California, N.A. 633 West 5th Street, 12th Floor By Facsimile: Los Angeles, California 90071 (For Eligible Institutions Only) Attn: Jeanie Mar (213) 362-7357 Confirm by Telephone: (213) 362-7338
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION VIA FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER TRANSMITTAL IS COMPLETED. HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE NEW NOTES FOR THEIR NOTES PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE. By execution hereof, the undersigned acknowledges receipt of the Prospectus dated _______ ___, 1998 (the "Prospectus") of Phase Metrics, Inc., a Delaware corporation (the "Company"), which, together with this Letter of Transmittal and the instructions hereto (the "Letter of Transmittal"), constitutes the Company's offer (the "Exchange Offer") to exchange $1,000 principal amount of its new 10 3/4% Senior Notes Due 2005 (the "New Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which the Prospectus constitutes a part, for each $1,000 principal amount of its outstanding 10 3/4% Senior Notes Due 2005 (the "Notes"), upon the terms and subject to the conditions set forth in the Prospectus. 2 DESCRIPTION OF NOTES TENDERED HEREBY
- ----------------------------------------------------------------------------------------------------------------------- Aggregate Principal Name(s) and Address(es) of Certificate Amount Principal Registered Owner(s) or Registration Represented Amount (Please Fill In) Numbers* by Notes Tendered** - ----------------------------------------------------------------------------------------------------------------------- - ---------------------------------------- -------------------- ---------------------- -------------------- - ---------------------------------------- -------------------- ---------------------- -------------------- - ---------------------------------------- -------------------- ---------------------- -------------------- - ---------------------------------------- -------------------- ---------------------- -------------------- - ---------------------------------------- -------------------- ---------------------- -------------------- - ---------------------------------------- -------------------- ---------------------- -------------------- Total - -----------------------------------------------------------------------------------------------------------------------
* Need not be completed by Book-entry Holders. ** Unless otherwise indicated, the Holder will be deemed to have tendered the full aggregate principal amount represented by such Notes. All tenders must be in integral multiples of $1,000. This Letter of Transmittal is to be used (i) if certificates of Notes are to be forwarded herewith, (ii) if delivery of Notes is to be made by book-entry transfer to an account maintained by the Exchange Agent at The Depository Trust Company (the "Depository") pursuant to the procedures set forth in "The Exchange Offer -- Procedures for Tendering" in the Prospectus or (iii) tender of the Notes is to be made according to the guaranteed delivery procedures described in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery Procedures." See Instruction 2. Delivery of documents to a book-entry transfer facility does not constitute delivery to the Exchange Agent. The term "Holder" with respect to the Exchange Offer means any person in whose name Notes are registered on the books of the Company or Trustee, or any other person who has obtained a properly completed bond power from the registered holder. The undersigned has completed, executed and delivered this Letter of Transmittal to indicate the action the undersigned desires to take with respect to the Exchange Offer. Holders who wish to tender their Notes must complete this letter in its entirety. [ ] CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING: Name of Tendering Institution ------------------------------------------- Account Number ---------------------------------------------------------- Transaction Code Number ------------------------------------------------- Holders whose Notes are not immediately available or who cannot deliver their Notes and all other documents required hereby to the Exchange Agent on or prior to the Expiration Date must tender their Notes according to the guaranteed delivery procedure set forth in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery Procedures." See Instruction 2. 3 [ ] CHECK HERE IF NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name of Registered Holder(s) -------------------------------------------- Window Ticket (if any) -------------------------------------------------- Date of Execution of Notice of Guaranteed Delivery ---------------------- Name of Institution which guaranteed delivery --------------------------- IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING: Account Number ---------------------------------------------------------- Transaction Code Number ------------------------------------------------- [ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: ------------------------------------------------------------------- Address: ---------------------------------------------------------------- Telephone Number: ------------------------------------------------------- 4 PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to the Company the principal amount of the Notes indicated above. Subject to, and effective upon, the acceptance for exchange of such Notes tendered hereby, the undersigned hereby exchanges, assigns and transfers to, or upon the order of, the Company all right, title in and interest in and to such Notes as are being tendered hereby, including all rights to accrued and unpaid interest thereon as of the Expiration Date. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent the true and lawful agent and attorney-in-fact of the undersigned (with full knowledge that said Exchange Agent acts as the agent of the Company in connection with the Exchange Offer) to cause the Notes to be assigned, transferred and exchanged. The undersigned represents and warrants that it has full power and authority to tender, exchange, assign and transfer the Notes and to acquire New Notes issuable upon the exchange of such tendered Notes, and that when the same are accepted for exchange, the Company will acquire good and unencumbered title to the tendered Notes, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim. The undersigned represents to the Company that (i) the New Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is the undersigned, and (ii) neither the undersigned nor any such other person has an arrangement or understanding with any person to participate in a distribution of such New Notes. If the undersigned or the person receiving the New Notes covered hereby is a broker-dealer that is receiving the New Notes for its own account in exchange for Notes that were acquired as a result of market-making activities or other trading activities, the undersigned acknowledges that it or such other person will deliver a prospectus in connection with any resale of such New Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned and any such other person acknowledge that, if they are participating in the Exchange Offer for the purpose of distributing the New Notes, (i) they cannot rely on the position of the staff of the Securities and Exchange Commission enunciated in Exxon Capital Holdings Corporation (available April 13, 1989), Morgan Stanley & Co., Inc. (available June 5, 1991) Sherman & Sterling (available July 2, 1993) or similar no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction and (ii) failure to comply with such requirements in such instance could result in the undersigned or any such other person incurring liability under the Securities Act for which such persons are not indemnified by the Company. If the undersigned or the person receiving the New Notes covered by this letter is an "affiliate" (as defined under Rule 405 of the Securities Act) of the Company, the undersigned represents to the Company that the undersigned understands and acknowledges that such New Notes may not be offered for resale, resold or otherwise transferred by the undersigned or such other person without registration under the Securities Act or an exemption therefrom. The undersigned also warrants that it will, upon request, execute and deliver any additional documents deemed by the Exchange Agent or the Company to be necessary or desirable to complete the exchange, assignment and transfer of tendered Notes or transfer ownership of such Notes on the account books maintained by a book-entry transfer facility. The undersigned further agrees that acceptance of any tendered Notes by the Company and the issuance of New Notes in exchange therefor shall constitute performance in full by the Company of its obligations under the Registration Rights Agreement and that the Company shall have no further obligations or liabilities thereunder for the registration of the Notes or the New Notes. The Exchange Offer is subject to certain conditions set forth in the Prospectus under the caption "The Exchange Offer -- Conditions." The undersigned recognizes that as a result of these conditions (which may be waived, in whole or in part, by the Company), as more particularly set forth in the Prospectus, the Company may not be required to exchange any of the Notes tendered hereby and, in such event, the Notes not exchanged will be returned to the undersigned at the address shown below the signature of the undersigned. All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned and every obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Tendered Notes may be withdrawn at any time prior to the Expiration Date as described in the Prospectus. Unless otherwise indicated in the box entitled "Special Issuance Instructions" or the box entitled "Special Delivery Instruction" in this Letter of Transmittal, certificates for all New Notes delivered in exchange for tendered Notes, and any 5 Notes delivered herewith but not exchanged, will be registered in the name of the undersigned and shall be delivered to the undersigned at the address shown below the signature of the undersigned. If a New Note is to be issued to a person other than the person(s) signing this Letter of Transmittal, or if the New Note is to be mailed to someone other than the person(s) signing this Letter of Transmittal or to the person(s) signing this Letter of Transmittal at an address different than the address shown on this Letter of Transmittal, the appropriate boxes of this Letter of Transmittal should be completed. If Notes are surrendered by Holder(s) that have completed either the box entitled "Special Issuance Instructions" or the box entitled "Special Delivery Instructions" in this Letter of Transmittal, signature(s) on this Letter of Transmittal must be guaranteed by an Eligible Institution (defined in Instruction 4). THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF NOTES TENDERED HEREBY" ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE NOTES AS SET FORTH IN SUCH BOX ABOVE. SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 4 AND 5) To be completed ONLY if Notes for Notes not exchanged and/or New Notes are to be issued in the name of and sent to someone other than the person(s) whose signature(s) appear(s) on this Letter above, or if Notes delivered by book-entry transfer which are not accepted for exchange are to be returned by credit to an account maintained at the Book-Entry Transfer Facility other than the account indicated above. Issue New Notes and/or Notes to: Name(s): ------------------------------------------------------------------------ (PLEASE TYPE OR PRINT) - -------------------------------------------------------------------------------- (PLEASE TYPE OR PRINT) Address: - -------------------------------------------------------------------------------- (INCLUDING ZIP CODE) (Complete accompanying Substitute Form W-9) Credit unexchanged Notes delivered by book-entry transfer to the Book-Entry Transfer Facility account set forth below. - -------------------------------------------------------------------------------- (BOOK-ENTRY TRANSFER FACILITY ACCOUNT NUMBER, IF APPLICABLE) SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 4 AND 5) To be completed ONLY if Notes for Notes not exchanged and/or New Notes are to be sent to someone other than the person(s) whose signature(s) appear(s) on this Letter above or to such person(s) at an address other than shown in the box entitled "Description of Notes Tendered Hereby" on this Letter above. Mail New Notes and/or Notes to: Name(s): ------------------------------------------------------------------------ (PLEASE TYPE OR PRINT) - -------------------------------------------------------------------------------- (PLEASE TYPE OR PRINT) Address: - -------------------------------------------------------------------------------- (INCLUDING ZIP CODE) 6 REGISTERED HOLDER(S) OF NOTES SIGN HERE (IN ADDITION, COMPLETE SUBSTITUTE FORM W-9 BELOW) X - -------------------------------------------------------------------------------- X - -------------------------------------------------------------------------------- SIGNATURE(S) OF REGISTERED HOLDER(S): Must be signed by registered holder(s) exactly as name(s) appear(s) on the Notes or on a security position listing as the owner of the Notes or by person(s) authorized to become registered holder(s) by properly completed bond powers transmitted herewith. If signature is by attorney-in-fact, trustee, executor, administrator, guardian, officer of a corporation or other person acting in a fiduciary capacity, please provide the following information. (PLEASE PRINT OR TYPE). Name(s): ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- Capacity (full title): ---------------------------------------------------------- Address (including zip code): --------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Area Code and Telephone Number: ----------------------- Taxpayer Identification or Social Security No.: --------------------------------- Dated: ------------------------ SIGNATURE GUARANTEE (IF REQUIRED - SEE INSTRUCTION 4) Authorized Signature: ----------------------------------------------------------- (Signature of Representative of Signature Guarantor) Name and Title: ----------------------------------------------------------------- Name of Plan: ------------------------------------------------------------------- Area Code and Telephone Number: ----------------------------- Dated: ---------------------------------- IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 12:00 MIDNIGHT, NEW YORK TIME, ON THE EXPIRATION DATE. PLEASE READ THIS LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING ANY BOX ABOVE 7 PAYOR'S NAME: PHASE METRICS, INC. THIS SUBSTITUTE FORM W-9 MUST BE COMPLETED AND SIGNED Please provide your social security number or other taxpayer identification number on the following Substitute Form W-9 and certify therein that you are subject to backup withholding. - -------------------------------------------------------------------------------- Name - -------------------------------------------------------------------------------- Business name, if different from above Check appropriate box: [ ] Individual/Sole proprietor [ ] Corporation [ ] Partnership [ ] Other ----------------------------------------------------- - -------------------------------------------------------------------------------- Address (number, street, and apt. or suite no.) - -------------------------------------------------------------------------------- City, state, and ZIP code - -------------------------------------------------------------------------------- SUBSTITUTE Part 1 -- PLEASE PROVIDE YOUR TIN IN Social security number FORM W-9 THE BOX AT RIGHT AND CERTIFY BY _____________________ SIGNING AND DATING BELOW OR Employer identification number _____________________ ----------------------------------------------------------------------------------- Part 2 -- Check the box if you are NOT subject to backup withholding under the Department of the Treasury provisions of Section 2306(a)(1)(C) of the Internal Revenue Code because (1) Internal Revenue Service you are exempt from backup withholding, (2) you have not been notified that you are subject to backup withholding as a result of failure to report all interest or dividends or (3) the Internal Revenue Service has notified you that you are no longer subject to backup withholding. [ ] ----------------------------------------------------------------------------------- PAYER'S REQUEST FOR Part 3 -- CERTIFICATION -- UNDER THE PENALTIES OF PERJURY, I TAXPAYER IDENTIFICATION CERTIFY THAT THE INFORMATION PROVIDED ON THIS FORM IS NUMBER (TIN) TRUE, CORRECT AND COMPLETE. Awaiting TIN [ ] SIGNATURE: DATE: --------------------------- -------------
- -------------------------------------------------------------------------------- NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF PAYMENTS MADE TO YOU. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9. CERTIFICATE OF AWAITING TAX IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office, or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number within 60 days, 31% of all reportable payments made to me thereafter will be withheld, until I provide a number. - -------------------------------- ------------------------------------- Signature Date 8 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES. All physically delivered Notes or confirmation of any book-entry transfer to the Exchange Agent's account at a book-entry transfer facility of Notes tendered by book-entry transfer, as well as a properly completed and duly executed copy of this Letter of Transmittal or facsimile thereof, and any other documents required by this Letter of Transmittal, must be received by the Exchange Agent at its address set forth herein on or prior to the Expiration Date. The method of delivery of this Letter of Transmittal, the Notes and any other required documents is at the election and risk of the Holder, and except as otherwise provided below, the delivery will be deemed made only when actually received by the Exchange Agent. If such delivery is by mail, it is suggested that registered mail with return receipt requested, properly insured, be used. No alternative, conditional, irregular or contingent tenders will be accepted. All tendering Holders, by execution of this Letter of Transmittal (or facsimile thereof), shall waive any right to receive notice of the acceptance of the Notes for exchange. Delivery to an address of the Trustee other than as set forth herein, or instructions via a facsimile number other than the ones set forth herein, will not constitute a valid delivery. 2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their Notes, but whose Notes are not immediately available and thus cannot deliver their Notes, the Letter of Transmittal or any other required documents to the Exchange Agent (or comply with the procedures for book-entry transfer) prior to the Expiration Date, may effect a tender if: (a) the tender is made through a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution"); (b) prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder, the certificate number(s) of such Notes and the principal amount of Notes tendered, stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the Expiration Date, the Letter of Transmittal (or facsimile thereof), together with the Notes (or a confirmation of book-entry transfer of such Notes into the Exchange Agent's account at the Depository) and any other documents required by the Letter Of Transmittal, will be deposited by the Eligible Institution with the Exchange Agent; and (c) such properly completed and executed Letter of Transmittal (or facsimile thereof), as well as all tendered Notes in proper form for transfer (or a confirmation of book-entry transfer of such Notes into the Exchange Agent's account at the Depository) and all other documents required by the Letter of Transmittal, are received by the Exchange Agent within three New York Stock Exchange trading days after the Expiration Date. Upon request to the Exchange Agent, a Notice of Guaranteed Delivery form will be sent to Holders who wish to tender their Notes according to the guaranteed delivery procedures set forth above. Any Holder who wishes to tender Notes pursuant to the guaranteed delivery procedures described above must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery relating to such Notes prior to the Expiration Date. Failure to complete the guaranteed delivery procedures outlined above will not, of itself, affect the validity or effect a revocation of any Letter of Transmittal form properly completed and executed by a Holder who attempted to use the guaranteed delivery procedures. 9 3. PARTIAL TENDERS; WITHDRAWALS. If less than the entire principal amount of Notes evidenced by a submitted certificate is tendered, the tendering Holder should fill in the principal amount tendered in the column entitled "Principal Amount Tendered" of the box entitled "Description of Notes Tendered Hereby." A newly issued Note for the principal amount of Notes submitted but not tendered will be sent to such Holder as soon as practicable after the Expiration Date. All Notes delivered to the Exchange Agent will be deemed to have been tendered in full unless otherwise indicated. Notes tendered pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date as described in the Prospectus, after which tenders of Notes are irrevocable. 4. SIGNATURE ON THIS LETTER OF TRANSMITTAL, WRITTEN INSTRUMENTS AND ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed by the registered Holder(s) of the Notes tendered hereby, the signature must correspond with the name(s) as written on the face of the certificates without alternation or enlargement or any change whatsoever. If this Letter of Transmittal is signed by a participant in the Depository, the signature must correspond with the name as it appears on the security position listing as the owner of the Notes. If any of the Notes tendered hereby are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. If a number of Notes registered in different names are tendered, it will be necessary to complete, sign and submit as many separate copies of this Letter of Transmittal as there are different registrations of Notes. Signatures on this Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution unless the Notes tendered hereby are tendered (i) by a registered Holder who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. If this Letter of Transmittal is signed by the registered Holder or Holders of Notes (which term, for the purposes described herein, shall include a participant in the Depository whose name appears on a security listing as the owner of the Notes) listed and tendered hereby, no endorsements of the tendered Notes or separate written instruments of transfer or exchange are required. In any other case, the registered Holder (or acting Holder) must either properly endorse the Notes or transmit properly completed bond powers with this Letter of Transmittal (in either case, executed exactly as the name(s) of the registered Holder(s) appear(s) on the Notes, and, with respect to a participant in the Depository whose name appears on a security position listing as the owner of Notes, exactly as the name of the participant appears on such security position listing), with the signature on the Notes or bond power guaranteed by an Eligible Institution (except where the Notes are tendered for the account of an Eligible Institution). If this Letter of Transmittal, any certificates or separate written instruments of transfer or exchange are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority so to act must be submitted. Please contact the Company if there are any questions regarding what constitutes proper evidence. 5. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering Holders should indicate, in the applicable box, the name and address (or account at the Depository) in which the New Notes or substitute Notes for principal amounts not tendered or not accepted for exchange are to be issued (or deposited), if different from the names and addresses or accounts of the person signing this Letter of Transmittal. In the case of issuance in a different name, the employer identification number or social security number of the person named must also be indicated and the tendering Holder should complete the applicable box. 10 If no instructions are given, the New Notes (and any Notes not tendered or not accepted) will be issued in the name of and sent to the acting Holder of the Notes or deposited at such Holder's account at the Depository. 6. TRANSFER TAXES. The Company shall pay all transfer taxes, if any, applicable to the transfer and exchange of Notes to it or its order pursuant to the Exchange Offer. If a transfer tax is imposed for any other reason other than the transfer and exchange of Notes to the Company or its order pursuant to the Exchange Offer, the amount of any such transfer taxes (whether imposed on the registered Holder or any other person) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exception therefrom is not submitted herewith, the amount of such transfer taxes will be collected from the tendering Holder by the Exchange Agent. Except as provided in this Instruction 6, it will not be necessary for transfer stamps to be affixed to the Notes listed in this Letter of Transmittal. 7. WAIVER OF CONDITIONS. The Company reserves the right, in its reasonable judgment, to waive, in whole or in part, any of the conditions to the Exchange Offer set forth in the Prospectus. 8. MUTILATED, LOST, STOLEN OR DESTROYED NOTES. Any Holder whose Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. 9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the procedure for tendering as well as requests for additional copies of the Prospectus and this Letter of Transmittal, may be directed to the Exchange Agent at the address and telephone number(s) set forth above. In addition, all questions relating to the Exchange Offer, as well as requests for assistance or additional copies of the Prospectus and this Letter of Transmittal, may be directed to Phase Metrics, Inc., 10260 Sorrento Valley Road, San Diego, California, telephone (619) 646-4800. 10. VALIDITY AND FORM. All questions as to the validity, form, eligibility (including time of receipt), acceptance of tendered Notes and withdrawal of tendered Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Notes not properly tendered or any Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right, in its reasonable judgment, to waive any defects, irregularities or conditions of tender as to particular Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in this Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Notes must be cured within such time as the Company shall determine. Although the Company intends to notify Holders of defects or irregularities with respect to tenders of Notes, neither the Company, the Exchange Agent nor any other person shall incur any liability for failure to give such notification. Tenders of Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering Holder as soon as practicable following the Expiration Date. 11 IMPORTANT TAX INFORMATION Under federal income tax law, a Holder tendering Notes is required to provide the Exchange Agent with such Holder's correct TIN on Substitute Form W-9 above. If such Holder is an individual, the TIN is the Holder's social security number. The Certificate of Awaiting Taxpayer Identification Number should be completed if the tendering Holder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future. If the Exchange Agent is not provided with the correct TIN, the Holder may be subject to a penalty imposed by the Internal Revenue Service. In addition, payments that are made to such Holder with respect to tendered Notes may be subject to backup withholding. Certain Holders (including, among others, all domestic corporations and certain foreign individuals and foreign entities) are not subject to these backup withholding and reporting requirements. Such a Holder, who satisfies one or more of the conditions set forth in Part 2 of the Substitute Form W-9 should execute the certification following such Part 2. In order for a foreign Holder to qualify as an exempt recipient, that Holder must submit to the Exchange Agent a properly completed Internal Revenue Service Form W-8, signed under penalties of perjury, attesting to that Holder's exempt status. Such forms can be obtained from the Exchange Agent. If backup withholding applies, the Exchange Agent is required to withhold 31% of any amounts otherwise payable to the Holder. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. PURPOSE OF SUBSTITUTE FORM W-9 To prevent backup withholding on payments that are made to a Holder with respect to Notes tendered for exchange, the Holder is required to notify the Exchange Agent of his or her correct TIN by completing the form herein certifying that the TIN provided on Substitute Form W-9 is correct (or that such Holder is awaiting a TIN) and that (i) each Holder is exempt, (ii) such Holder has not been notified by the Internal Revenue Service that he or she is subject to backup withholding as a result of failure to report all interest or dividends or (iii) the Internal Revenue Service has notified such Holder that he or she is no longer subject to backup withholding. WHAT NUMBER TO GIVE THE EXCHANGE AGENT Each Holder is required to give the Exchange Agent the social security number or employer identification number of the record Holder(s) of the Notes. If Notes are in more than one name or are not in the name of the actual Holder, consult the instructions on Internal Revenue Service Form W-9, which may be obtained from the Exchange Agent, for additional guidance on which number to report. CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER If the tendering Holder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future, write "Applied For" in the space for the TIN on Substitute Form W-9, sign and date the form and the Certificate of Awaiting Taxpayer Identification Number and return them to the Exchange Agent. If such certificate is completed and the Exchange Agent is not provided with the TIN within 60 days, the Exchange Agent will withhold 31% of all payments made thereafter until a TIN is provided to the Exchange Agent. IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE THEREOF (TOGETHER WITH NOTES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL OTHER REQUIRED DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE. EX-99.2 24 GUIDELINES FOR CERTIFICATION OF TAXPAYER ID 1 EXHIBIT 99.2 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER. - -- Social Security numbers have nine digits separated by two hyphens: e.g., 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: e.g., 00-0000000. The table below will help determine the number to give the payer.
- --------------------------------------------------------------------------------------------------------- GIVE THE FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY NUMBER OF-- ========================================================================================================= GIVE THE EMPLOYER FOR THIS TYPE OF ACCOUNT: IDENTIFICATION NUMBER OF-- - --------------------------------------------------------------------------------------------------------- 1. An individual's account The individual 2. Two or more individuals (joint The actual owner of account) the account or, if combined funds, any one of the individuals (1) 3. Husband and wife (joint account) The actual owner of the account or, if joint funds, either person (1) 4. Custodian account of a minor (Uniform The minor (2) Gift to Minors Act) 5. Adult and minor (joint account) The adult or, if the minor is the only contributor, the minor (1) 6. Account in the name of guardian or The ward, minor, or incompetent person (3) committee for a designated ward, minor, or incompetent person 7. a. The usual revocable savings trust The grantor-trustee (1) account (grantor is also trustee) b. So-called trust account that is The actual owner (1) not a legal or valid trust under State law 8. Sole proprietorship account The owner (4) 9. A valid trust, estate, or Legal entity (Do not furnish pension trust the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title.) (5) 10. Corporate account The corporation 11. Religious, charitable, or educational The organization organization account 12. Partnership account held in the name The partnership of the business
2 13. Association, club, or other tax-exempt The organization organization 14. A broker or registered nominee The broker or nominee 15. Account with the Department of The public entity Agriculture in the name of a public entity (such as a State or local government, school district, or prison) that receives agricultural program payments
- -------------------------------------------------------------------------------- (1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Circle the ward's, minor's or incompetent person's name and furnish such person's social security number. (4) Show the name of the owner. You may also enter your business or "doing business as" name. Furnish the owner's social security number or the employer identification number of the sole proprietorship. (5) List first and circle the name of the legal trust, estate, or pension trust. NOTE: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. OBTAINING A NUMBER If you do not have a taxpayer identification number or you do not know your number, obtain Form SS-5, Application for a Social Security Number Card (for individuals), or Form SS-4, Application for Employer Identification Number (for businesses and all other entities), at an office of the Social Security Administration or the Internal Revenue Service. To complete Substitute Form W-9, if you do not have a taxpayer identification number, write "Applied For" in the space for the taxpayer identification number in Part I, sign and date the Form, and give it to the requester. Generally, you will then have 60 days to obtain a taxpayer identification number and furnish it to the requester. If the requester does not receive your taxpayer identification number within 60 days, backup withholding, if applicable, will begin and will continue until you furnish your taxpayer identification number to the requester. PAYEES EXEMPT FROM BACKUP WITHHOLDING Payees specifically exempted from backup withholding on ALL payments include the following: - A corporation - A financial institution - An organization exempt from tax under section 501(a), or an individual retirement plan, or a custodial account under section 403(b)(7) - The United States or any agency or instrumentality thereof - A State, the District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof - A foreign government or a political subdivision, agency or instrumentality thereof - An international organization or any agency or instrumentality thereof - A registered dealer in securities or commodities registered in the United States or a possession of the United States - A real estate investment trust - A common trust fund operated by a bank under section 584(a) - An entity registered at all times during the tax year under the Investment Company Act of 1940 - A foreign central bank of issue Payments of dividends and patronage dividends not generally subject to backup withholding include the following: - Payments to nonresident aliens subject to withholding under section 1441 3 - Payments to partnerships not engaged in a trade or business in the United States and which have at least one nonresident partner - Payments of patronage dividends where the account received is not paid in money - Payments made by certain foreign organizations - Payments made to a nominee Payments of interest not generally subject to backup withholding include the following: - Payments of interest on obligations issued by individuals. NOTE: You may be subject to backup withholding if (i) this interest is $600 or more, (ii) the interest is paid in the course of the payer's trade or business and (iii) you have not provided your correct taxpayer identification number to the payer - Payments of tax-exempt interest (including exempt-interest dividends under section 852) - Payments described in section 6049(b)(5) to nonresident aliens - Payments on tax-free covenant bonds under section 1451 - Payments made by certain foreign organizations - Payments made to a nominee EXEMPT PAYEES DESCRIBED ABOVE SHOULD FILE A SUBSTITUTE FORM W-9 TO AVOID POSSIBLE ERRONEOUS BACKUP WITHHOLDING. FILE THIS FORM WITH THE PAYER. FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, SIGN AND DATE THE FORM AND RETURN IT TO THE PAYER. Certain payments other than interest, dividends, and patronage dividends that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under 6041, 6041A(a), 6045, and 6050A. PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividends, interest, or other payments to give taxpayer identification numbers to payers who must report the payments to IRS. The IRS uses the numbers for identification purposes and to help verify the accuracy of your tax return. Payers must be given the numbers whether or not recipients are required to file tax returns. Payers must generally withhold 31% of taxable interest, dividends, and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you fail to furnish your correct taxpayer identification number to a payer, you are subject to a penalty of $50 for such failure unless your failure is due to reasonable cause and not to willful neglect. (2) CIVIL PENALTY FOR FALSE STATEMENTS WITH RESPECT TO WITHHOLDING.--If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--If you falsify certifications or affirmations, you are subject to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE Unless otherwise noted herein, all references to section numbers or to regulations are references to the Internal Revenue Code of 1984, as amended, and the regulations promulgated thereunder. EX-99.3 25 FORM OF NOTICE OF GUARANTEED DELIVERY 1 EXHIBIT 99.3 NOTICE OF GUARANTEED DELIVERY FOR 10 3/4% SENIOR NOTES DUE 2005 OF PHASE METRICS, INC. As set forth in the Prospectus dated __________ ___, 1998 (the "Prospectus") of Phase Metrics, Inc. (the "Company") and in the accompanying Letter of Transmittal and instructions thereto (the "Letter of Transmittal"), this form or one substantially equivalent hereto must be used to accept the Company's exchange offer (the "Exchange Offer") to purchase all of its outstanding 10 3/4% Senior Notes Due 2005 (the "Notes") if (i) certificates representing the Notes to be tendered for purchase and payment are not lost but are not immediately available, (ii) time will not permit the Letter of Transmittal, certificates representing such Notes or other required documents to reach State Street Bank and Trust Company of California, N.A. (the "Exchange Agent") prior to the Expiration Date or (iii) the procedures for book-entry transfer cannot be completed prior to the Expiration Date. This form may be delivered by an Eligible Institution by mail or hand delivery or transmitted, via facsimile (receipt confirmed by telephone) to the Exchange Agent as set forth below. All capitalized terms used herein but not defined herein shall have the meanings ascribed to them in the Prospectus. THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON __________ ___, 1998 UNLESS THE OFFER IS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF NOTES MAY BE WITHDRAWN UNDER THE PROCEDURES DESCRIBED IN THE PROSPECTUS AT ANY TIME PRIOR TO 12:00 MIDNIGHT ON THE EXPIRATION DATE. By Mail, Hand or Overnight Carrier: The Exchange Agent State Street Bank and Trust Company of State Street Bank and Trust Company of California, N.A. California,N.A. 633 West 5th Street, 12th Floor By Facsimile: Los Angeles, California 90071 (213) 362-7357 Attn: Jeanie Mar Confirm by Telephone: (213) 362-7338 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION VIA FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. This form is not to be used to guarantee signatures. If a signature on the Letter of Transmittal is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box on the Letter of Transmittal. Ladies and Gentlemen: The undersigned hereby tender(s) to the Company, upon the terms and subject to the conditions set forth in the Exchange Offer (as described in the Prospectus) and the Letter of Transmittal, receipt of which is hereby acknowledged, the aggregate principal amount of Notes set forth below pursuant to the guaranteed delivery procedures set forth in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery Procedures." The undersigned understands that tenders of Notes will be accepted only in principal amounts equal to $1,000 or integral multiples thereof. The undersigned understands that tenders of Notes pursuant to the Exchange Offer may not be withdrawn after 12:00 midnight, New York City time, on the Expiration Date. Tenders of Notes may also be withdrawn if the Exchange Offer is terminated without any such Notes being purchased thereunder or as otherwise provided in the Prospectus under the caption "The Exchange Offer -- Withdrawal of Tenders." 2 All authority herein conferred or agreed to be conferred by this Notice of Guaranteed Delivery shall survive the death or incapacity of the undersigned, and every obligation of the undersigned under this Notice of Guaranteed Delivery shall be binding upon the heirs, personal representatives, executors, administrators, successors, assigns, trustees in bankruptcy and other legal representatives of the undersigned. PLEASE COMPLETE AND SIGN SIGNATURE(S) OF REGISTERED HOLDER(S) NAME(S) OF REGISTERED HOLDER(S): OR AUTHORIZED SIGNATORY: ________________________________ __________________________________________ ________________________________ __________________________________________ __________________________________________ ADDRESS: __________________________________________ ________________________________ ________________________________ PRINCIPAL AMOUNT OF NOTES TENDERED: __________________________________________ AREA CODE AND TELEPHONE NO.: __________________________________________ ________________________________ CERTIFICATE NO(S). OF NOTES (IF AVAILABLE): IF NOTES WILL BE DELIVERED BY __________________________________________ BOOK-ENTRY TRANSFER AT THE __________________________________________ DEPOSITORY TRUST COMPANY, INSERT DEPOSITORY ACCOUNT NO.: ________________________________ DATE: __________________________________________ ________________________________ This Notice of Guaranteed Delivery must be signed by the registered holder(s) of Notes exactly as its (their) name(s) appear on certificates for Notes or on a security position listing as the owner of Notes, or by person(s) authorized to become registered holder(s) by endorsements and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must provide the following information. Please print name(s) and address(es) Name(s): ____________________________________________________________________ ____________________________________________________________________ Capacity: ____________________________________________________________________ Address(es):____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ Do not send Notes with this form. Notes should be sent to the Exchange Agent together with a properly completed and duly executed Letter of Transmittal. The undersigned, a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or a correspondent in the United States, hereby (a) represents that each holder of Notes on whose behalf this tender is being made "own(s)" the Notes covered hereby within the meaning of Rule 14e-4 under the Securities Exchange Act of 1934, as amended, (b) represents that such tender of Notes complies with such Rule 14e-4, and (c) guarantees that, within five New York Stock Exchange trading days from the date of this Notice of Guaranteed Delivery, a properly completed and duly executed Letter of Transmittal (or a facsimile thereof), together with certificates representing the Notes covered hereby in proper form for transfer (or confirmation of the book-entry transfer of such Notes into the Exchange Agent's account at The Depository Trust Company, pursuant to the procedure for book-entry transfer set forth in the Prospectus) and required documents will be deposited by the undersigned with the Exchange Agent. 3 The undersigned acknowledges that it must deliver the Letter of Transmittal and Notes tendered hereby to the Exchange Agent within the time period set forth above and that failure to do so could result in financial loss to the undersigned. Name of Firm:_________________________ _______________________________________ Authorized Signature Address:______________________________ Name:__________________________________ (Please Type or Print) ______________________________ Title:_________________________________ Area Code and Telephone No.:__________ Date:__________________________________ -----END PRIVACY-ENHANCED MESSAGE-----