-----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, DAxGq5woVkd5+NIIpkPPfSjJZfCInSLog4/tpTS6cCm+lPPA/F2iQdxuhqkP+aNL vTOxR0FlOzOWgLqRgjpP2w== 0001047469-98-022500.txt : 19980603 0001047469-98-022500.hdr.sgml : 19980603 ACCESSION NUMBER: 0001047469-98-022500 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 33 FILED AS OF DATE: 19980602 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELGAR HOLDINGS INC CENTRAL INDEX KEY: 0001061976 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510373329 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-55797 FILM NUMBER: 98640923 BUSINESS ADDRESS: STREET 1: 9250 BROWN DEER ROAD CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6194500085 MAIL ADDRESS: STREET 1: 9250 BROWN DEER ROAD CITY: SAN DIEGO STATE: CA ZIP: 92121 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELGAR ELECTRONICS CORP CENTRAL INDEX KEY: 0000808754 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 330198753 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-55797-01 FILM NUMBER: 98640924 BUSINESS ADDRESS: STREET 1: 9250 BROWN DEER ROAD CITY: SAN DIEGO STATE: CA ZIP: 92121 MAIL ADDRESS: STREET 1: 9250 BROWN DEER ROAD CITY: SAN DIEGO STATE: CA ZIP: 92121 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POWER TEN CENTRAL INDEX KEY: 0001062458 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 942783211 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-55797-02 FILM NUMBER: 98640925 BUSINESS ADDRESS: STREET 1: 120 KNOWLES DR CITY: LOS GATOS STATE: CA ZIP: 95030 BUSINESS PHONE: 4088711790 MAIL ADDRESS: STREET 1: 120 KNOWLES DR CITY: LOS GATOS STATE: CA ZIP: 95030 S-4 1 S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 2, 1998 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ ELGAR HOLDINGS, INC. (Exact name of each registrant as specified in its charter) DELAWARE 3699 51-0373329 (State of Incorporation (Primary standard industrial (I.R.S. employer or organization) classification code number) identification number)
9250 BROWN DEER ROAD SAN DIEGO, CALIFORNIA 92121 (619) 450-0085 (Address, including zip code, and telephone number, including area code, of registrants' principal executive offices) and the Notes Guarantors:
CALIFORNIA ELGAR ELECTRONICS CORPORATION 33-0198753 CALIFORNIA POWER TEN 94-2783211
KENNETH R. KILPATRICK PRESIDENT AND CHIEF EXECUTIVE OFFICER ELGAR HOLDINGS, INC. ELGAR ELECTRONICS CORPORATION 9250 BROWN DEER ROAD SAN DIEGO, CALIFORNIA 92121 (619) 450-0085 (Name, address, including zip code, and telephone number, including area code, of agent for service) With a copy to: KENNETH M. DORAN, ESQ. GIBSON, DUNN & CRUTCHER LLP 333 SOUTH GRAND AVENUE LOS ANGELES, CALIFORNIA 90071 (213) 229-7000 ------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. If any of the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE 9 7/8% Senior Notes due 2008.......... $90,000,000 100% $90,000,000 $26,550 Guarantees of the 9 7/8% Senior Notes due 2008............................ $90,000,000 None(2) None(2) None(2)
(1) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457. (2) Pursuant to Rule 457(n) under the Securities Act of 1933, no separate fee is payable for the Guarantee. ------------------------------ THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS 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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED JUNE 2, 1998 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS [LOGO] ELGAR HOLDINGS, INC. OFFER TO EXCHANGE ALL OUTSTANDING 9 7/8% SENIOR NOTES DUE 2008 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT (GUARANTEED BY ELGAR ELECTRONICS CORPORATION) ($90,000,000 PRINCIPAL AMOUNT OUTSTANDING) FOR 9 7/8% SENIOR NOTES DUE 2008 (GUARANTEED BY ELGAR ELECTRONICS CORPORATION) THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998 (AS SUCH DATE MAY BE EXTENDED, THE "EXPIRATION DATE"). Elgar Holdings, Inc., a Delaware corporation (the "Company" or "EHI"), hereby offers upon the terms and subject to the conditions set forth in this Prospectus (as the same may be amended or supplemented from time to time, the "Prospectus") and the accompanying letter of transmittal relating to the Old Notes (as defined) (the "Letter of Transmittal," which together with the Prospectus constitute the "Exchange Offer"), to exchange $1,000 principal amount of its 9 7/8% Senior Notes due 2008 (the "New Notes") for each $1,000 in principal amount of its outstanding 9 7/8% Senior Notes due 2008 (the "Old Notes") (the Old Notes and the New Notes are collectively referred to herein as the "Notes"). An aggregate principal amount of $90,000,000 of Old Notes is outstanding. See "The Exchange Offer." Each 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 any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a 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 broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date and ending on the close of business 180 days after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." The Company will accept for exchange any and all Old Notes validly tendered prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of the Old Notes being tendered for exchange. However, the Exchange Offer is subject to the terms and provisions of the Registration Rights Agreement, dated as of February 3, 1998 (the "Registration Rights Agreement"), among the Company, Elgar Electronics Corporation, a California corporation and wholly owned subsidiary of the Company ("Elgar") and BT Alex. Brown Incorporated (the "Initial Purchaser"). The Old Notes may be tendered only in multiples of $1,000. See "The Exchange Offer." ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 16 HEREIN FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY HOLDERS IN EVALUATING THE EXCHANGE OFFER. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. The date of this Prospectus is , 1998 The Old Notes were issued in a transaction (the "Prior Offering") pursuant to which the Company issued an aggregate of $90,000,000 principal amount of the Old Notes to the Initial Purchaser on February 3, 1998 (the "Closing Date") pursuant to a Purchase Agreement, dated January 30, 1998 (the "Purchase Agreement"), among the Company, Elgar and the Initial Purchaser. The Initial Purchaser subsequently resold the Old Notes in reliance on Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). The Company, Elgar and the Initial Purchaser also entered into the Registration Rights Agreement pursuant to which the Company granted certain registration rights for the benefit for the holders of the Old Notes. The Exchange Offer is intended to satisfy certain of the Company's obligations under the Registration Rights Agreement with respect to the Old Notes. See "The Exchange Offer--Purpose and Effect." The Old Notes were, and the New Notes will be, issued under the Indenture, dated as of February 3, 1998, between the Company and United States Trust Company of New York, as trustee (the "Trustee"), as supplemented by the First Supplemental Indenture thereto, dated as of February 3, 1998, by and among the Company, Elgar and the Trustee (the "Indenture"), and the New Notes and the Old Notes will constitute a single series of debt securities under the Indenture. The terms of the New Notes are identical in all material respects to the terms of the Old Notes except that (i) the New Notes will have been registered under the Securities Act and thus will not bear restrictive legends restricting their transfer pursuant to the Securities Act and will not be entitled to registration rights, (ii) holders of New Notes will not be entitled to Additional Interest (as defined) for the Company's failure to register the Old Notes or New Notes under the Registration Rights Agreement and (iii) holders of New Notes will not be, and upon the consummation of the Exchange Offer, holders of Old Notes will no longer be, entitled to certain rights under the Registration Rights Agreement intended for the holders of unregistered securities. The Exchange Offer shall be deemed consummated upon the occurrence of the delivery by the Company to United States Trust Company of New York, as registrar of the Old Notes (in such capacity, the "Registrar") under the Indenture, of New Notes in the same aggregate principal amount as the aggregate principal amount of Old Notes that are validly tendered by holders thereof pursuant to the Exchange Offer. See "The Exchange Offer--Termination of Certain Rights," "--Procedures for Tendering Old Notes" and "Description of Notes." In the event that the Exchange Offer is consummated, any Old Notes which remain outstanding after consummation of the Exchange Offer and the New Notes issued in the Exchange Offer will vote together as a single class for purposes of determining whether holders of the requisite percentage in outstanding principal amount of Notes have taken certain actions or exercised certain rights under the Indenture. The New Notes will bear interest at a rate of 9 7/8% per annum. Interest on the New Notes is payable semiannually, commencing August 1, 1998, on February 1 and August 1 of each year (each, an "Interest Payment Date"), and shall accrue from February 3, 1998 or from the most recent Interest Payment Date with respect to the Old Notes to which interest was paid or duly provided for. The New Notes will mature on February 1, 2008. See "Description of Notes." The New Notes will not be redeemable at the Company's option prior to February 1, 2003. Thereafter, the New Notes will be redeemable by the Company at the redemption prices and subject to the conditions set forth in "Description of Notes--Redemption--Optional Redemption." Notwithstanding the foregoing, at any time on or before February 1, 2001, the Company may redeem up to 35% in aggregate principal amount of the sum of (i) the initial aggregate principal amount of the Notes and (ii) the initial principal amount of any Additional Notes (as defined herein), on one or more occasions, with the net cash proceeds of one or more Public Equity Offerings (as defined herein) at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and Additional Interest (as defined herein), if any, thereon to the redemption date, PROVIDED THAT at least 65% of the sum of (i) the initial aggregate principal amount of the Notes and (ii) the initial aggregate principal amount of any Additional Notes remain outstanding immediately after redemption. See "Description of Notes--Redemption--Optional Redemption." Upon the occurrence of a Change of Control (as defined herein), (i) the Company will be ii required to make an offer to repurchase all outstanding Notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, and Additional Interest, if any, to the date of repurchase and (ii) prior to February 1, 2003, the Company will have the option to redeem the Notes, in whole or in part, at a redemption price equal to the principal amount thereof, plus accrued and unpaid interest, if any, and Additional Interest, if any, to the redemption date plus the Applicable Premium (as defined herein). See "Description of Notes--Redemption--Optional Redemption Upon Change of Control." Depending upon the circumstances prevailing at the time of such a Change of Control, there is a risk that the Company may be unable to satisfy such obligations. See "Risk Factors--Potential Inability to Fund Change of Control Offer." The New Notes will be general unsecured obligations of EHI, senior to all existing and future subordinated indebtedness of EHI and PARI PASSU in right of payment with all other existing and future unsubordinated indebtedness of EHI, including Elgar's indebtedness under the New Credit Facility (as defined herein) which EHI has unconditionally guaranteed. However, EHI's obligations under the New Credit Facility are secured by substantially all of its assets. Accordingly, such secured indebtedness will effectively rank senior to the Notes to the extent of such assets. As of March 28, 1998, the Company had no secured indebtedness outstanding which effectively ranked senior to the Notes. The Indenture restricts, but does not prohibit, the Company from incurring indebtedness. See "Description of Notes--Ranking." See also "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The New Notes will be unconditionally guaranteed (the "Note Guarantees") by Elgar and its wholly owned subsidiary, Power Ten, a California corporation ("Power Ten," and with Elgar, the "Subsidiary Guarantors") on an unsecured, senior subordinated basis. The Note Guarantees will rank senior to all of the Subsidiary Guarantors' existing and future subordinated indebtedness and PARI PASSU with all of their other unsubordinated indebtedness. The Subsidiary Guarantors' obligations under the New Credit Facility, however, are secured by substantially all of their assets. Accordingly, such secured indebtedness will rank prior to the Note Guarantees with respect to such assets. The Indenture restricts, but does not prohibit, the Company from incurring secured indebtedness. As of the date of this Prospectus, Elgar was the only significant subsidiary of the Company, and Power Ten was the only significant subsidiary of Elgar. See "Description of Notes--Note Guarantees." Based on existing interpretations of the Securities Act by the staff of the Securities and Exchange Commission (the "Commission") set forth in "no-action" letters issued to third parties in other transactions, the Company believes that New Notes issued pursuant to the Exchange Offer to any holder of Old Notes in exchange for Old Notes may be offered for resale, resold and otherwise transferred by such holder (other than a broker-dealer who purchased Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such holder is not an affiliate of the Company, is acquiring the New Notes in the ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in the distribution of the New Notes. Holders wishing to accept the Exchange Offer must represent to the Company, as required by the Registration Rights Agreement, that such conditions have been met. In addition, if such holder is not a broker-dealer, it must represent that it is not engaged in, and does not intend to engage in, a distribution of the New Notes. Each 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 any resale of such New Notes. See "The Exchange Offer--Resales of the New Notes." For a period of 180 days from the Expiration Date, the Company will make this Prospectus, as it may be amended or supplemented from time to time, available to any broker-dealer for use in connection with any such resale. There has previously been only a limited secondary market, and no public market, for the Old Notes. The Old Notes are eligible for trading in the Private Offering, Resales and Trading through Automatic iii Linkages ("PORTAL") market. In addition, the Initial Purchaser has advised the Company that it currently intends to make a market in the New Notes; however, the Initial Purchaser is not obligated to do so and any market-making activities may be discontinued by the Initial Purchaser at any time. Therefore, there can be no assurance that an active market for the New Notes will develop. If such a trading market develops for the New Notes, future trading prices will depend on many factors, including, among other things, prevailing interest rates, the Company's results of operations and the market for similar securities. Depending on such factors, the New Notes may trade at a discount from their face value. See "Risk Factors--Lack of Public Market." The Old Notes were issued originally in global form (the "Global Old Note"). The Global Old Note was deposited with, or on behalf of, The Depository Trust Company (the "DTC") and registered in the name of Cede & Co., as nominee of the DTC (such nominee being referred to herein as the "Global Note Holder"). The use of the Global Old Note to represent certain of the Old Notes permits the DTC's participants, and anyone holding a beneficial interest in an Old Note registered in the name of such a participant, to transfer interests in the Old Notes electronically in accordance with the DTC's established procedures without the need to transfer a physical certificate. New Notes issued in exchange for the Global Old Note will also be issued initially as a note in global form (the "Global New Note," and, together with the Global Old Note, the "Global Notes") and deposited with, or on behalf of, the DTC. After the initial issuance of the Global New Note, New Notes in certificated form will be issued in exchange for a holder's proportionate interest in the Global New Note only as set forth in the Indenture. See "Book-Entry; Delivery and Form." Any Old Notes not tendered and accepted in the Exchange Offer will remain outstanding and will be entitled to all the same rights and will be subject to the same limitations applicable thereto under the Indenture (except for those rights which terminate upon consummation of the Exchange Offer). Following consummation of the Exchange Offer, the Holders of Old Notes will continue to be subject to the existing restrictions upon transfer thereof and the Company will have no further obligation to such Holders (other than to certain Holders under certain limited circumstances) to provide for registration under the Securities Act of the Old Notes held by them. To the extent that Old Notes are tendered and accepted in the Exchange Offer, a Holder's ability to sell untendered Old Notes could be adversely affected. See "Risk Factors--Consequences of Failure to Exchange" and "The Exchange Offer--Consequences of Failure to Exchange Old Notes." This Prospectus, together with the Letter of Transmittal, is being sent to all registered Holders of Old Notes as of July , 1998. The Company will not receive any proceeds from this Exchange Offer. Pursuant to the Registration Rights Agreement, the Company will bear certain registration expenses. iv SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS The information included in this Prospectus contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. Such forward-looking statements are principally contained in the sections "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and include, without limitation, the Company's expectation and estimates as to its business operations, including the introduction of new products, future financial performance and growth in net sales, earnings and cash flows from operations. In addition, in those and other portions of this Prospectus, certain such forward-looking statements can be identified by the use of forward-looking terminology such as "anticipates," believes," "estimates," "expects," "plans," "intends," "may," "will," "should," "seeks," "approximately," "pro forma" or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions. Such forward-looking statements are necessarily dependent upon assumptions, data or methods that may be incorrect or imprecise and they may be incapable of being realized. In addition, such forward-looking statements reflect the current views of the Company, with respect to future events and are subject to certain risks, uncertainties and assumptions, including the risk factors described in this Prospectus. In addition to factors that may be described elsewhere in this Prospectus, the Company specifically wishes to advise readers that the factors listed under the caption "Risk Factors" could cause actual results to differ materially from those expressed in any forward-looking statement. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect (including the assumptions used in connection with the preparation of the Unaudited Pro Forma Consolidated Statement of Operations), actual results may vary materially from those described herein as anticipated, believed, estimated or expected. Readers are cautioned not to place undue reliance on forward-looking statements, as they reflect management's analysis only. The Company does not intend to update these forward-looking statements. ------------------------ SmartWave-TM- and GUPS-TM- are trademarks of, and ELGAR and SORENSEN are trade names used by, Elgar Electronics Corporation. All other trademarks and trade names appearing in this Prospectus are the property of their respective holders. ------------------------ The principal executive offices of the Company and Elgar are located at 9250 Brown Deer Road, San Diego, California 92121, and their telephone number is (619) 450-0085. The principal executive offices of Power Ten are located at 120 Knowles Drive, Los Gatos, California 95030, and its phone number is (408) 871-1700. v TABLE OF CONTENTS
PAGE ---- Available Information..................................................... 1 Prospectus Summary........................................................ 2 Risk Factors.............................................................. 16 The Recapitalization...................................................... 22 Use of Proceeds........................................................... 23 The Exchange Offer........................................................ 24 Capitalization............................................................ 32 Selected Historical Consolidated Financial Data........................... 33 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 35 Business.................................................................. 40 Management................................................................ 51 Security Ownership of Certain Beneficial Owners and Management............ 55 Certain Relationships and Related Transactions............................ 56 Description of Notes...................................................... 59 Description of New Credit Facility........................................ 88 Description of Preferred Stock and Warrants............................... 90 Book-Entry; Delivery and Form............................................. 96 Plan of Distribution...................................................... 97 Legal Matters............................................................. 97 Experts................................................................... 98 Index to Consolidated Financial Statements................................ F-1
vi AVAILABLE INFORMATION The Company has filed a registration statement on Form S-4 (together with any amendments thereto, the "Registration Statement") with the Commission under the Securities Act with respect to the New Notes. This Prospectus, which constitutes a part of the Registration Statement, omits certain information contained in the Registration Statement and reference is made to the Registration Statement and the exhibits and schedules thereto for further information with respect to the Company and the New Notes offered hereby. This Prospectus contains summaries of the material terms and provisions of certain documents and in each instance reference is made to the copy of such document filed as an exhibit to the Registration Statement. Each such summary is qualified in its entirety by such reference. The Company is not currently subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company has agreed that, at all times from and after the earlier of (i) the date of commencement of an Exchange Offer and (ii) the date 210 days after the Closing Date, in either case, whether or not the Company is then required to file reports with the Commission, the Company will file with the Commission (to the extent accepted by the Commission) all such annual reports, quarterly reports and other documents that the Company would be required to file if it were subject to Sections 13(a) or 15(d) under the Exchange Act. The Company will also be required (a) to supply to the Trustee and each holder of Notes, or supply to the Trustee for forwarding to each such holder, without cost to such holder, copies of such reports and other documents within 15 days after the date on which the Company files such reports and documents with the Commission or the date on which the Company would be required to file such reports and documents if the Company were so required and (b) if filing such reports and documents with the Commission is not accepted by the Commission or is prohibited under the Exchange Act, to supply at the Company's cost copies of such reports and documents to any prospective holder of Notes promptly upon written request. The Registration Statement (including the exhibits and schedules thereto) and the periodic reports and other information filed by the Company with the Commission may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference facilities in New York, New York and Chicago, Illinois, at prescribed rates. Such information may also be accessed electronically by means of the Commission's homepage on the Internet at http://www.sec.gov., which contains reports, proxy and information statements and other information regarding registrants, including the Company, that file electronically with the Commission. 1 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" SHALL REFER TO ELGAR HOLDINGS, INC. ("EHI") AND ITS WHOLLY OWNED SUBSIDIARY, ELGAR ELECTRONICS CORPORATION ("ELGAR"). THE COMPANY The Company is a leader in the design and manufacture of programmable power equipment and systems used to test electronic equipment during development, manufacture and operation. With one of the most recognized brand names and broadest product offerings in a fragmented industry, the Company is one of the largest manufacturers of programmable power equipment in the United States. The Company's products are an integral component of overall systems' testing conducted by a broad range of manufacturers and end-users of electronic equipment to ensure product quality and performance. Power testing is a critical procedure in a multitude of applications, including satellites, weapons systems and medical equipment, which demand zero-fault tolerance. Over the period from fiscal 1993 through the Company's fiscal year ended March 28, 1998 ("Fiscal 1998"), the Company's net sales grew at a compounded annual growth rate in excess of 22.2% principally due to significant growth in the market for programmable power equipment driven by the proliferation of increasingly sophisticated electronic components in a wide range of applications, particularly in telecommunications and computers. The Company's products are used in a broad range of testing applications, including semiconductor test equipment, computers and peripherals, satellite ground testing, weapons systems, avionics, communications systems, medical equipment and consumer electronics. Through Racal Instruments, Inc. ("Racal"), a leading automatic test equipment ("ATE") systems integrator, Elgar is the sole source supplier of programmable power supplies employed in testing microprocessors for a leading semiconductor manufacturer. In addition, the Company currently supplies virtually every major U.S. satellite manufacturer, including Hughes Space & Communications ("Hughes"), Loral Aerospace Corporation and Lockheed Martin Corporation, with fully integrated systems for mission-critical satellite power testing throughout the manufacturing process and just prior to launch. In addition, the Company is the sole supplier of the programmable power subsystem included in the U.S. Navy's Consolidated Automated Support System ("CASS") Program, a high-priority program to automate all test equipment for the Naval Air Systems Command. The Company also provides programmable power supplies to a wide range of customers in other industries, including Siemens Medical Systems for medical treatment equipment, Halliburton Company for oil exploration and The Boeing Company for aircraft avionics testing. Elgar's current management team has significantly increased net sales by successfully penetrating new markets, increased operating margins through a number of operating improvements and repositioned the Company as a leading supplier to rapidly growing markets. As a result of these initiatives, net sales have increased from $25.3 million in fiscal 1993 to $62.5 million for Fiscal 1998, and operating income as a percentage of net sales has improved from (1.6)% to 20.1% over the same period. Management has succeeded in repositioning Elgar from being predominantly a supplier of programmable power equipment to the U.S. military into a well-diversified supplier of such products both to commercial and military customers, with approximately 76.3% of its net sales derived from commercial applications in Fiscal 1998. The Company's growth over the last several years has reflected changes in the overall market for programmable power equipment. According to PRIME DATA, which publishes an annual review of the test and measurement market, the test and measurement market has changed significantly in the 1990s and is now driven by commercial applications instead of military/aerospace applications. Communications applications, particularly wireless technologies, have grown rapidly over the past five years and are expected to be one of the driving forces behind future test instrument sales growth. Furthermore, the continued proliferation of microprocessors and the increasing use of electronics in a wide range of applications are also fueling demand for test equipment. In addition, the stabilization of defense spending is expected to 2 again make the military a growth area for test and measurement equipment. Satellite production is increasing significantly in response to growing demand for wireless commercial communications, intelligence/defense and scientific uses. Management believes demand for its satellite ground test systems will be heavily influenced by this trend as new satellite production bays are built and test systems developed in-house are replaced by more versatile and cost-effective systems from outside suppliers. COMPETITIVE STRENGTHS The Company attributes its success in each of its principal markets and its significant opportunities for continued growth and profitability to its ability to provide products and services that are superior in meeting the requirements of its customers. Management believes that Elgar has several competitive advantages, including: PARTNERING RELATIONSHIPS WITH MAJOR CUSTOMERS. The Company's engineering staff often works directly with customers and potential customers to develop customized or modified products that meet customer requirements. This practice has enabled the Company to develop new markets for its products and to generate significant repeat business from its customers. For example, the Company has collaborated with Hughes to develop a fully integrated, comprehensive satellite test system. In addition, the Company presently enjoys sole-source supplier relationships with Racal for systems supplied to a leading semiconductor manufacturer and Lockheed Martin under its U.S. Navy CASS contract. As a direct result of its strong customer relationships, over 88% of Elgar's net sales in Fiscal 1998 was derived from customers which had purchased its products in the Company's fiscal year ended March 29, 1997 ("Fiscal 1997"). STRONG POSITION IN KEY GROWTH MARKETS. Most of Elgar's competitors are either small businesses, which do not match Elgar's array of product offerings, or noncore subsidiaries of much larger parent corporations, which tend to be less focused on this market than the Company. As a result of its position within the fragmented market, management believes the Company should continue to achieve revenue and profit growth which exceed the industry average. INDUSTRY LEADING PRODUCT TECHNOLOGY AND ENGINEERING CAPABILITIES. Management believes the Company has one of the largest and most qualified engineering teams dedicated to the development of programmable power supply equipment and systems in the industry, providing it with significant new product development capabilities. Elgar continues to invest heavily in engineering, having increased the size of its engineering staff from 39 in fiscal 1993 to its current level of 77, while engineering expense as a percentage of net sales decreased from 11.9% in fiscal 1993 to 10.0% in Fiscal 1998. As a result of these efforts, Elgar has distinguished itself in the marketplace by offering products integrating digital and hardware technologies which provide customers with versatile and easy-to-use programmable power supplies. The Company's leadership in the most technologically sophisticated segments of its market, solar array simulators and semiconductor testing, is a result of its strong technical and engineering capabilities. HIGHLY COMPETITIVE COST STRUCTURE. Management believes that its cost structure is very competitive. Through continuous process improvements, purchase-material cost reductions, selective outsourcing of subassemblies and rigid operating cost controls, management increased the Company's gross profit margin from 34.4% in fiscal 1993 to 47.3% for Fiscal 1998, while reducing operating expenses from 35.9% to 27.2% of net sales over those periods. Through the efficient use of facilities and equipment, management has been able to control capital expenditures to approximately $1.0 million per year. SUPERIOR BRAND NAME RECOGNITION AND SALES ORGANIZATION. The Company's Elgar and Sorensen brand names have been recognized leaders in their markets for over 30 years and, as a result, are among the 3 most well-known names in the industry. In addition to its 25-person in-house sales and marketing team, the Company relies on a global network of over 50 exclusive sales representative organizations to distribute its products. The Company has long-standing relationships with most of its representatives, averaging over 10 years in duration. Management believes the Company's sales network includes most of the industry's "Tier 1" representatives. These representatives, which are essentially extensions of the Company's sales and marketing team, work closely with the Company to identify new business opportunities, while providing superior service to the Company's customers. ENTREPRENEURIAL MANAGEMENT TEAM. Since its arrival at Elgar in fiscal 1992, the Company's senior management team has significantly increased revenues by successfully penetrating new markets, increasing profitability through a number of operating improvements and repositioning the Company as a leading supplier to its growing markets. Management has also demonstrated the ability to execute, restructure and integrate an important, strategic acquisition as well as lead a major shift in business focus by transitioning from being predominantly a military supplier of power test products in the early 1990s to deriving approximately 76.3% of net sales from commercial users in Fiscal 1998. On a fully diluted basis at the time of the Recapitalization, management owned approximately 9.4% of EHI's common stock (the "Common Stock"). In addition, management expects to receive incentive stock options for up to an additional 10.0% of the Common Stock. BUSINESS STRATEGY The Company's business strategy is focused on continuing its leadership and growth in its principal target markets and thereby increasing market share and maximizing revenues and profitability. The Company's growth strategy includes the following key initiatives: - CUSTOMER FOCUSED NEW PRODUCT DEVELOPMENT. The Company intends to continue focusing development resources toward new products which better meet the increasingly complex requirements of its existing customers. As an example of its commitment to new product development, the Company has five new programmable power supply products under development expected to be released in Fiscal 1999 and 2000 along with four product-line extensions slated for introduction in fiscal 1999. The Company designed and developed each of these new products and product-line extensions based on significant input from its customers. Customer-focused development substantially increases the probability of a rapid return on product development expense and helps further solidify the Company's key customer relationships. - INCREASE PENETRATION OF KEY GROWTH MARKETS. While Elgar has a strong position in satellite and semiconductor power test equipment, significant additional revenue opportunities exist in these markets. Management believes that the Company's strong product offerings to these markets and focused sales and marketing efforts should result in significant incremental revenue. Management is leveraging its established relationships with U.S. and European satellite manufacturers to supply all their power test equipment needs by offering a lower cost and more versatile alternative to in-house developed systems. In addition, as semiconductors become more complex and their production process more demanding, management believes semiconductor manufacturers will require more sophisticated and versatile automatic test equipment. - EXPAND PRESENCE IN THE OEM MARKET. Although programmable power supplies have historically been used primarily for test and evaluation purposes, the increased sophistication of certain electronic equipment has created a need for derivatives of Elgar's products for sale as components in original equipment manufacturer ("OEM") products. Elgar's OEM sales were approximately 2.6% of its total net sales for Fiscal 1998. Management believes that sales to OEMs could increase materially as it further penetrates this market. 4 - CONTINUED IMPROVEMENTS IN COSTS AND MANUFACTURING PROCESSES. The Company is continually introducing measures to increase its profitability and maintain a competitive advantage. Management is focusing on reducing material handling costs, further reducing inventory and improving manufacturing cycle times through initiatives such as adopting a "just in time" inventory system, integrating work cells on the production floor, utilizing cross-functional teams in the early stages of product development and continually seeking to improve quality control measures. Management believes it can significantly enhance the Company's already strong competitive position by improving product availability. RECENT DEVELOPMENTS ACQUISITION OF POWER TEN On May 29, 1998, Elgar acquired all of the outstanding capital stock of Power Ten, a California corporation ("Power Ten"), for $17,800,000 in cash, subject to a post-closing working capital adjustment (the "Power Ten Acquisition"). Power Ten specializes in developing and manufacturing high-quality, high-power DC power supplies. Headquartered in Los Gatos, California, Power Ten is a leader in the design and promotion of highly engineered switching-regulator supplies marketed under the Power Ten brand name to both leading semiconductor manufacturers and OEMs of production test equipment. For the latest twelve months ended April 4, 1998, Power Ten generated approximately $10.1 million of revenues and $2.4 million of earnings before interest, taxes and depreciation and amortization ("EBITDA"). Management believes the acquisition of Power Ten represents a strategic fit for Elgar's core programmable power supplies business. Power Ten is expected to add significant depth to Elgar's existing product offerings, OEM distribution channels and product development capabilities. In particular, management believes that Power Ten's high-power DC power supplies can be marketed effectively under the Sorensen brand name to Elgar's existing test and measurement customers, thus providing incremental revenues to the consolidated company. In addition, while approximately 25% of Power Ten's revenues in its fiscal year ended September 30, 1997 were generated from international sales, management believes it can improve Power Ten's European presence by utilizing Elgar's existing European distribution channels. Elgar funded the purchase price and certain transaction expenses through (i) a $15.0 million term loan under the New Credit Facility (as defined below) and (ii) the issuance by EHI of $5,000,000 in aggregate stated liquidation value of its Series B 6% Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock"). See "Description of the New Credit Facility" and "Description of Preferred Stock and Warrants--Convertible Preferred Stock." AMENDMENT AND RESTATEMENT OF EXISTING CREDIT FACILITY Concurrently with the consummation of the Recapitalization, Elgar and EHI entered into a Credit Agreement (the "Credit Agreement") with Bankers Trust Company, as agent (the "Agent") for the other lending institutions party thereto (the "Banks"). The Credit Agreement provided Elgar with a $15.0 million revolving credit facility (the "Revolving Facility") and was guaranteed by EHI and each subsidiary of Elgar. In connection with the Power Ten Acquisition, Elgar, EHI, the Agent and the Banks amended and restated the Credit Agreement as of May 29, 1998 (the "New Credit Agreement") to, among other things, increase the available borrowings thereunder to $30.0 million by including a $15.0 million term loan facility (the "Term Facility") and reconfirming the Revolving Facility (the Revolving Facility and Term Facility will be collectively referred to herein as the "New Credit Facility"). The proceeds of the Term Facility were used to finance a portion of the Power Ten Acquisition. Indebtedness under the New Credit Facility is (i) secured by a first priority security interest in substantially all of the assets of EHI, Elgar and Power Ten (including, without limitation, accounts receivable, inventory, machinery, equipment, contracts and contract rights, trademarks, copyrights, patents, license agreements and general intangibles), (ii) guaranteed by EHI and Power Ten on a senior basis and (iii) secured by a pledge of all of the 5 outstanding capital stock of Elgar and Power Ten. The New Credit Facility matures on February 3, 2003. See "Description of New Credit Facility." SUMMARY OF THE RECAPITALIZATION THE INVESTORS J.F. Lehman & Company ("Lehman") was established in 1992 by John F. Lehman, Donald Glickman and George Sawyer (the "Managing Principals") to acquire niche manufacturing and service companies operating in the electronics, engineering, aerospace and defense industries. The Managing Principals have significant operating and investing experience in these industries and have a proven track record in producing strong equity returns by employing this focused investment strategy. In 1993, Lehman purchased Sperry Marine Inc., a recognized world leader in the design and manufacture of advanced electronic maritime instruments and sensors, from Tenneco Inc. After working closely for over two years with Sperry's management to reposition the company and improve its profitability, Lehman sold Sperry to Litton Industries, realizing a substantial gain on its original equity investment. Similarly, in 1992, Lehman sponsored the acquisition of Astra Holdings Corporation, a leading manufacturer of electronic and electromechanical devices and subsystems for military and commercial uses, which it later sold to Alliant Techsystems in 1993, producing an annualized rate of return on its invested equity in excess of 100%. More recently, in August 1997, Lehman led the recapitalization of Burke Industries, Inc., a leading manufacturer of engineered elastomeric products for the aerospace, heavy-duty truck and commercial building markets. In each of its investments, Lehman has taken an active, hands-on approach toward portfolio company oversight. Lehman provides the Company with additional strategic opportunities utilizing the strong operating experience in the aerospace and electronics industries that its general and limited partners possess. In addition to the Managing Principals, Lehman's other partners include: Mr. Oliver C. Boileau, Jr., former President of Boeing Aerospace, General Dynamics and Northrop; Mr. Thomas G. Pownall, former Chairman and Chief Executive Officer of Martin Marietta; Sir Christopher Lewinton, Chairman of TI Group plc and Dowty Aerospace; Mr. William Paul, former Executive Vice President of United Technologies Corporation and President of Sikorsky Aircraft and Space Systems; and General P.X. Kelley, former Commandant of the United States Marine Corps. See "Management." THE RECAPITALIZATION The Company entered into an Agreement and Plan of Merger, dated as of January 2, 1998 (the "Recapitalization Agreement"), among JFL-EEC LLC, a Delaware limited liability company and an affiliate of Lehman ("JFL-EEC"), JFL-EEC Merger Sub Co., a Delaware corporation and wholly owned subsidiary of JFL-EEC ("MergerCo"), Carlyle-EEC Holdings, Inc. (which entity post-merger is Elgar Holdings, Inc.), a Delaware corporation and former wholly owned subsidiary of Carlyle-EEC Acquisition Partners, L.P. (the "Carlyle Partnership"), a Delaware limited partnership and an affiliate of The Carlyle Group, and TC Group, L.L.C., a Delaware limited liability company and the initial Holder Representative thereunder (as defined therein), pursuant to which the Company was recapitalized (the "Recapitalization") by means of a merger of MergerCo into the Company (the "Merger"), with the Company as the surviving corporation. In connection with the Merger, which was accounted for as a recapitalization, the partners from the Carlyle Partnership received approximately $102.3 million in cash and retained approximately 15.0% of the fully diluted Common Stock (collectively, the "Recapitalization Consideration"). As part of their participation in the Carlyle Partnership (which was liquidated upon consummation of the Recapitalization), (i) members of the Company's management retained 9.4% of the fully diluted Common Stock (the "Management Continuing Shareholders"), and (ii) the other partners from the Carlyle Partnership retained 5.6% of the fully diluted Common Stock (the "Non-Management Continuing 6 Shareholders" and, collectively with the Management Continuing Shareholders, the "Continuing Shareholders"). The Recapitalization was financed with approximately $19.0 million of new cash equity from JFL-EEC (the "Lehman Investment"), $10.0 million from the issuance of Series A 10% Cumulative Redeemable Preferred Stock (the "Redeemable Preferred Stock") and $90.0 million from the Prior Offering. Upon consummation of the Recapitalization, the fully diluted Common Stock was owned 71.7% by JFL-EEC, 15.0% by the Continuing Shareholders and 13.3% by the holders of the Redeemable Preferred Stock (through exercisable warrants). See "The Recapitalization," "Use of Proceeds," "Description of New Credit Facility" and "Description of Preferred Stock and Warrants." The following table sets forth the sources and uses of funds in connection with the Recapitalization:
(DOLLARS IN THOUSANDS) -------------------- SOURCES OF FUNDS: Issuance of Old Notes..................................................... $ 90,000 Lehman Investment......................................................... 19,014 Issuance of Redeemable Preferred Stock and Warrants....................... 10,000 Continuing Shares(1)...................................................... 3,986 Working Capital........................................................... 632 -------- $ 123,632 -------- -------- USES OF FUNDS: Aggregate Recapitalization Consideration(2)............................... $ 107,273 Repayment of Old Credit Facility and Term Debt............................ 10,859 Approximate Transaction Expenses.......................................... 5,500 -------- $ 123,632 -------- --------
- ------------------------------ (1) Represents the Continuing Shareholders' share of the fully diluted Common Stock at the time of the Recapitalization, of which 9.4% is held by the Management Continuing Shareholders and 5.6% by the Non-Management Continuing Shareholders. (2) Consists of approximately $103.3 million in cash and approximately $4.0 million aggregate value of Continuing Shares. Includes a $632 post-closing working capital adjustment pursuant to the Recapitalization Agreement. 7 THE PRIOR OFFERING The outstanding $90.0 million principal amount of Old Notes were sold by the Company to the Initial Purchaser on the Closing Date pursuant to the Purchase Agreement. The Initial Purchaser subsequently resold the Old Notes in reliance on Rule 144A under the Securities Act. The Company and the Initial Purchaser also entered into the Registration Rights Agreement pursuant to which the Company granted certain registration rights for the benefit of the holders of the Old Notes. The Exchange Offer is intended to satisfy certain of the Company's obligations under the Registration Rights Agreement with respect to the Old Notes. See "The Exchange Offer Purpose and Effect." THE EXCHANGE OFFER The Exchange Offer................ The Company is offering upon the terms and subject to the conditions set forth herein and in the accompanying letter of transmittal (the "Letter of Transmittal") to exchange $1,000 in principal amount of its 9 7/8% Senior Notes due 2008 (the "New Notes," with the Old Notes and the New Notes collectively referred to herein as the "Notes") for each $1,000 in principal amount of the outstanding Old Notes (the "Exchange Offer"). As of the date of this Prospectus, $90.0 million in aggregate principal amount of the Old Notes is outstanding. See "The Exchange Offer Terms of the Exchange Offer." Expiration Date................... 5:00 p.m., New York City time, on , 1998 as the same may be extended. See "The Exchange Offer--Expiration Date; Extensions; Amendments." Conditions of the Exchange The Exchange Offer is not conditioned upon any minimum Offer........................... principal amount of Old Notes being tendered for exchange. The only condition to the Exchange Offer is the declaration by the Commission of the effectiveness of the Registration Statement of which this Prospectus constitutes a part. See "The Exchange Offer--Conditions of the Exchange Offer." Termination of Certain Rights..... Pursuant to the Registration Rights Agreement and the Old Notes, holders of Old Notes (i) have rights to receive Additional Interest and (ii) have certain rights intended for the holders of unregistered securities. "Additional Interest" means additional interest of 0.35% per annum per $1,000 principal amount of Old Notes during the first 90-day period immediately following the occurrence of a Registration Default (as defined), increased by an additional 0.35% per annum per $1,000 principal amount of Old Notes during the second 90-day period following a Registration Default, pursuant to the terms of the Registration Rights Agreement. Holders of New Notes will not be, and upon consummation of the Exchange Offer, holders of Old Notes will no longer be, entitled to (i) the right to receive Additional Interest or (ii) certain other rights under the Registration Rights Agreement intended for holders of unregistered securities. See "The Exchange Offer--Termination of Certain Rights" and "--Procedures for Tendering Old Notes."
8 Accrued Interest.................. The New Notes will bear interest at a rate equal to 9 7/8% per annum. Interest shall accrue from February 3, 1998 or from the most recent Interest Payment Date with respect to the Old Notes to which interest was paid or duly provided for. See "Description of Notes--Principal, Maturity and Interest." Procedures for Tendering Old Notes....................... Unless a tender of Old Notes is effected pursuant to the procedures for book-entry transfer as provided herein, each holder desiring to accept the Exchange Offer must complete and sign the Letter of Transmittal, have the signature thereon guaranteed if required by the Letter of Transmittal, and mail or deliver the Letter of Transmittal, together with the Old Notes or a Notice of Guaranteed Delivery and any other required documents (such as evidence of authority to act, if the Letter of Transmittal is signed by someone acting in a fiduciary or representative capacity), to the Exchange Agent (as defined) at the address set forth on the back cover page of this Prospectus prior to 5:00 p.m., New York City time, on the Expiration Date. Any Beneficial Owner (as defined) of the Old Notes whose Old Notes are registered in the name of a nominee, such as a broker, dealer, commercial bank or trust company and who wishes to tender Old Notes in the Exchange Offer, should instruct such entity or person to promptly tender on such Beneficial Owner's behalf. See "The Exchange Offer--Procedures for Tendering Old Notes." Guaranteed Delivery Procedures.... Holders of Old Notes who wish to tender their Old Notes and (i) whose Old Notes are not immediately available or (ii) who cannot deliver their Old Notes or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date (or complete the procedure for book-entry transfer on a timely basis) may tender their Old Notes according to the guaranteed delivery procedures set forth in the Letter of Transmittal. See "The Exchange Offer Guaranteed Delivery Procedures." Acceptance of Old Notes and Delivery of New Notes........... Upon effectiveness of the Registration Statement (of which this Prospectus constitutes a part) and consummation of the Exchange Offer, the Company will accept any and all Old Notes that are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered promptly after acceptance of the Old Notes. See "The Exchange Offer--Acceptance of Old Notes for Exchange; Delivery of New Notes." Withdrawal Rights................. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer--Withdrawal Rights."
9 The Exchange Agent................ United States Trust Company of New York is the exchange agent (in such capacity, the "Exchange Agent"). The address and telephone number of the Exchange Agent are set forth in "The Exchange Offer--The Exchange Agent; Assistance." Fees and Expenses................. All expenses incident to the Company's consummation of the Exchange Offer and compliance with the Registration Rights Agreement will be borne by the Company. The Company will also pay certain transfer taxes applicable to the Exchange Offer. See "The Exchange Offer--Fees and Expenses." Resales of the New Notes.......... Based on existing interpretations by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that New Notes issued pursuant to the Exchange Offer to a holder in exchange for Old Notes may be offered for resale, resold and otherwise transferred by a holder (other than (i) a broker-dealer who purchased the Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act or (ii) a person that 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 holder is acquiring the New Notes in the ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in a distribution of the New Notes. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker as a result of market-making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "The Exchange Offer--Resales of the New Notes" and "Plan of Distribution." Effect of Not Tendering Old Notes for Exchange.................... Old Notes that are not tendered or that are not properly tendered will, following the expiration of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. The Company will have no further obligations to provide for the registration under the Securities Act of such Old Notes and such Old Notes will, following the expiration of the Exchange Offer, bear interest at the same rate as the New Notes. Certain Federal Income Tax Consequences.................... The Company believes that the exchange pursuant to the Exchange Offer will not be a taxable event for federal income tax purposes. See "Certain Federal Income Tax Consequences of the Exchange Offer."
10 DESCRIPTION OF NEW NOTES The form and terms of the New Notes will be identical in all material respects to the form and terms of the Old Notes, except that (i) the New Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof, (ii) holders of the New Notes will not be entitled to Additional Interest and (iii) holders of the New Notes will not be, and upon consummation of the Exchange Offer, holders of the Old Notes will no longer be, entitled to certain rights under the Registration Rights Agreement intended for the holders of unregistered securities, except in limited circumstances. The Exchange Offer shall be deemed consummated upon the occurrence of the delivery by the Company to the Registrar under the Indenture of the New Notes in the same aggregate principal amount as the aggregate principal amount of Old Notes that are validly tendered by holders thereof pursuant to the Exchange Offer. See "The Exchange Offer--Termination of Certain Rights" and "Procedures for Tendering Old Note" and "Description of Notes." Securities Offered................ $90,000,000 aggregate principal amount of 9 7/8% Senior Subordinated Notes due 2008. Maturity Date..................... February 1, 2008. Interest Payment Dates............ February 1 and August 1, commencing August 1, 1998 Ranking........................... The Notes are senior unsecured obligations of EHI, senior to all of its existing and future subordinated indebtedness and PARI PASSU in right of payment with all of its existing and future unsubordinated indebtedness. However, indebtedness under the New Credit Facility is secured by substantially all of the assets of EHI and the Subsidiary Guarantors and will effectively rank senior to the Notes and the Note Guarantees to the extent of such assets. As of March 28, 1998, the Company had no secured indebtedness outstanding which effectively ranked senior to the Notes. The Indenture restricts, but does not prohibit, the Company from incurring indebtedness. See "Description of Notes." Optional Redemption............... On or after February 1, 2003, EHI may redeem the Notes, in whole or in part, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. Notwithstanding the foregoing, at any time on or before February 1, 2001, EHI may redeem up to 35% of the sum of (i) the initial aggregate principal amount of the Notes issued in the Prior Offering and (ii) the respective initial aggregate principal amount of Notes issued under the Indenture after the Issue Date, on one or more occasions, with the net cash proceeds of one or more Public Equity Offerings (as defined herein) at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, provided that at least 65% of the sum of (i) the initial aggregate principal amount of Notes issued in the Offering and (ii) the respective initial aggregate principal amount of any Notes issued under the Indenture after the Issue Date remain outstanding immediately after redemption. See "Description of Notes--Redemption--Optional Redemption Upon Public Equity Offerings."
11 Guarantees........................ The Notes are guaranteed by the Subsidiary Guarantors. The Note Guarantees are general unsecured obligation of the Subsidiary Guarantors and rank senior to all existing and future subordinated indebtedness of the Subsidiary Guarantors and PARI PASSU with all other unsubordinated indebtedness of the Subsidiary Guarantors, including indebtedness under the New Credit Facility. However, indebtedness under the New Credit Facility is secured by substantially all of the assets of the Subsidiary Guarantors and effectively ranks senior to the Note Guarantees to the extent of such assets. The Indenture restricts, but does not prohibit, the Company from incurring secured indebtedness. See "Description of Notes--Note Guarantees." Change of Control................. Upon a Change of Control (as defined herein), (i) EHI is required to make an offer to repurchase all outstanding Notes at 101% of the principal amount thereof plus accrued and unpaid interest thereon, if any, to the date of repurchase or (ii) prior to February 1, 2003, EHI will have the option to redeem the Notes, in whole or in part, at a redemption price equal to the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date plus the Applicable Premium. See "Description of Notes--Redemption--Optional Redemption, Optional Redemption Upon Change of Control." Certain Covenants................. The Indenture restricts, among other things, the Company's ability to incur additional indebtedness, pay dividends or make certain other restricted payments, incur liens, apply net proceeds from certain asset sales, merge or consolidate with any other person, sell, assign, transfer, lease, convey or otherwise dispose of substantially all of its assets or enter into certain transactions with affiliates. See "Description of Notes--Certain Covenants." Use of Proceeds................... The proceeds of the Prior Offering and of other financing transactions described herein were used to pay the Recapitalization Consideration, to repay certain existing indebtedness of the Company and to pay fees and expenses of the Recapitalization, including the Prior Offering, and for general corporate purposes. See "The Recapitalization." Absence of a Public Market for the New Notes....................... The New Notes are a new issue of securities with no established market. Accordingly, there can be no assurance as to the development or liquidity of any market for the New Notes. The Initial Purchaser has advised the Company that it currently intends to make a market in the New Notes. However, the Initial Purchaser is not obligated to do so, and any market-making with respect to the New Notes may be discontinued at any time without notice. The Company does not intend to apply for listing of the New Notes on a securities exchange.
RISK FACTORS For a discussion of certain matters that should be considered by prospective investors in connection with the Exchange Offer, see "Risk Factors." 12 SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The summary consolidated financial data below as of and for the fiscal years ended April 3, 1996, March 29, 1997 and March 28, 1998 have been derived from the Consolidated Financial Statements of Carlyle-EEC Holdings, Inc. (which changed its name from Carlyle-EEC Holdings, Inc. to Elgar Holdings, Inc. in connection with the Recapitalization on February 3, 1998 and is referred to herein as "EHI" or the "Company") and Elgar Electronics Corporation (in this context, the "Predecessor"), which have been audited by Arthur Andersen LLP, independent public accountants, and are included elsewhere in this Prospectus. The unaudited pro forma combined operating data for the fiscal year ended March 28, 1998 assumes that both the Recapitalization and the Power Ten Acquisition occurred on March 30, 1997. This pro forma information is not necessarily indicative of the results that would have occurred had the Recapitalization and the Power Ten Acquisition been completed on March 30, 1997 or the Company's or Power Ten's actual or future results or financial position. The information presented below is qualified in its entirety by, and should be read in conjunction with, "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements of the Company and Power Ten and the notes thereto included elsewhere herein.
FISCAL YEAR ENDED COMBINED ----------------------------------- PRO FORMA APRIL 3, MARCH 29, MARCH 28, FISCAL YEAR 1996(1) 1997 1998 ENDED --------- ----------- ----------- MARCH 28, 1998 ----------- (UNAUDITED) (DOLLARS IN THOUSANDS) OPERATING DATA: Net sales........................................................................ $ 42,309 $ 45,578 $ 62,496 $ 72,572 Cost of sales.................................................................... 26,468 26,973 32,944 38,512 --------- ----------- ----------- ----------- Gross profit..................................................................... 15,841 18,605 29,552 34,060 Selling, general and administrative expense...................................... 7,406 7,770 9,434 10,903 Research and development and engineering expenses(2)............................. 4,168 3,973 6,242 6,831 Amortization expense(3).......................................................... 2,149 1,314 1,314 2,412 --------- ----------- ----------- ----------- Operating income................................................................. 2,118 5,548 12,562 13,914 Interest expense, net(4)......................................................... 3,578 1,839 3,341 10,704 --------- ----------- ----------- ----------- Income (loss) before income tax provision (benefit).............................. (1,460) 3,709 9,221 3,210 Income tax provision (benefit)(5)................................................ 176 1,872 4,448 2,557 --------- ----------- ----------- ----------- Net income (loss)................................................................ $ (1,636) $ 1,837 $ 4,773 $ 653 --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- OTHER DATA: EBITDA(6)........................................................................ $ 5,052 $ 7,668 $ 15,118 $ 17,268 EBITDA margin(6)................................................................. 11.9% 16.8% 24.2% 23.8% Depreciation..................................................................... $ 785 $ 806 $ 883 $ 942 Capital expenditures............................................................. $ 611 $ 621 $ 1,228 $ 1,318 BALANCE SHEET DATA: Total assets..................................................................... $ 37,891 $ 36,597 $ 44,912 $ 48,214 Total debt....................................................................... 19,676 15,216 90,000 105,000
- ---------------------------------- (1) The operating data for the fiscal year ended April 3, 1996 presents the results of operations of the Predecessor for the 12-month period immediately preceding the acquisition of Elgar by Carlyle-EEC Holdings, Inc. (2) In Fiscal 1998, selling, general and administrative expenses include approximately $359 of nonrecurring expenditures relating to the Recapitalization. The combined pro forma fiscal year ended March 28, 1998 excludes nonrecurring expenses of $2,202 ($359 relating to the Recapitalization and $1,843 relating to compensation to the principal stockholders of Power Ten). (3) Amortization expense of the Predecessor represents the amortization of goodwill associated with a prior acquisition of Elgar in 1989 and Elgar's acquisition of Sorensen in 1994. Amortization expense of the Company represents the amortization of goodwill associated with the acquisition of Elgar by Carlyle-EEC Holdings, Inc. on April 3, 1996. See Notes 1 and 2 to Consolidated Financial Statements. Amortization expense for the combined pro forma fiscal year ended March 28, 1998 includes additional amortization expense of $1,098 representing the excess of purchase price over net assets acquired of $16,469 which is expected to be recorded in connection with the Power Ten Acquisition and amortized over 15 years. (4) Interest expense for the combined pro forma fiscal year ended March 28, 1998 includes $1,275 of interest on the $15.0 million Term Facility obtained in connection with the Power Ten Acquisition assuming an interest rate of 8.5%, offset by $39 of interest expense on debt of Power Ten not expected to be assumed. (5) Reflects additional income tax provision of $132 arising from the pro forma adjustments described in Notes (2), (3) and (4) above on the Company's combined pro forma results of operations for the fiscal year ended March 28, 1998 at a 40.0% statutory tax rate. (6) EBITDA is the sum of income (loss) before income taxes, interest, depreciation and amortization expense. EBITDA is presented because the Company believes that it is a widely accepted financial indicator of a company's ability to service indebtedness. However, EBITDA should not be considered as an alternative to net income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of a company's operating performance or as a measure of liquidity. In Fiscal 1998 and combined pro forma Fiscal 1998, EBITDA excludes the nonrecurring expenditures described in note (2) above. 13 SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA The following unaudited Pro Forma Statement of Income Data of EHI for the fiscal year ended March 28, 1998 give effect to the Recapitalization as if it had occurred on March 30, 1997. The Unaudited Pro Forma Combined Statement of Income Data for EHI and Power Ten together for the fiscal year ended March 28, 1998, for EHI, and April 4, 1998, for Power Ten, have been further adjusted to give effect to the Power Ten Acquisition and the Prior Offering and the application of the funds therefrom as if they had occurred on March 30, 1997. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE FISCAL YEAR ENDED MARCH 28, 1998 (DOLLARS IN THOUSANDS)
ELGAR HOLDINGS, INC. ELGAR POWER TEN PRO FORMA HISTORICAL PRO FORMA HOLDINGS, HISTORICAL POWER TEN FISCAL YEAR RECAPITALIZATION INC. FISCAL YEAR ACQUISITION COMBINED ENDED 1998 ADJUSTMENTS PRO FORMA ENDED 1998 ADJUSTMENTS PRO FORMA ------------- ---------------- ------------- ----------- ----------- ----------- Net sales.................... $ 62,496 $ -- $ 62,496 $ 10,076 $ -- $ 72,572 Cost of sales................ 32,944 -- 32,944 5,568 -- 38,512 ------------- ------- ------------- ----------- ----------- ----------- Gross profit................. 29,552 -- 29,552 4,508 -- 34,060 Selling, general and administrative expenses.... 9,434 220(1) 9,654 3,451 (2,202)(4) 10,903 Research and development and engineering expenses....... 6,242 -- 6,242 589 -- 6,831 Amortization of intangibles................ 1,314 -- 1,314 -- 1,098(5) 2,412 ------------- ------- ------------- ----------- ----------- ----------- Operating income............. 12,562 (220) 12,342 468 1,104 13,914 Interest expense, net........ 3,341 6,088(2) 9,429 39 1,236(6) 10,704 ------------- ------- ------------- ----------- ----------- ----------- Income before provision (benefit) for income taxes...................... 9,221 (6,308) 2,913 429 (132) 3,210 Provision (benefit) for income taxes............... 4,448 (2,523)(3) 1,925 246 386(3) 2,557 ------------- ------- ------------- ----------- ----------- ----------- Net income................... $ 4,773 $ (3,785) $ 988 $ 183 $ (518) $ 653 ------------- ------- ------------- ----------- ----------- ----------- ------------- ------- ------------- ----------- ----------- ----------- EBITDA....................... $ 14,759 $ (220) $ 14,539 $ 527 $ 2,202 $ 17,268
The accompanying notes to the unaudited pro forma combined statement of income are an integral part of this statement. 14 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME (DOLLARS IN THOUSANDS) The unaudited pro forma combined financial data have been derived from the application of pro forma adjustments to both EHI's and Power Ten's historical financial statements for the periods noted. (1) The pro forma adjustment to selling, general and administrative expenses reflects elimination of annual management fees of approximately $280 payable to two former affiliates. In connection with the Recapitalization, the Company entered into a Management Agreement with Lehman whereby the Company pays Lehman an annual management fee equal to $500, which amount is also reflected in the pro forma Recapitalization adjustment. (2) The pro forma adjustment to interest expense, net, reflects the following:
YEAR ENDED MAR. 28, 1998 ------------- Interest expense on the Senior Notes...................................................... $ 8,888 Amortization of debt issuance costs (10 years)............................................ 541 Less historical net interest of existing debt refinanced.................................. (2,500) Less deferred debt issuance costs written-off in connection with the Recapitalization..... (841) ------------- Incremental Recapitalization interest expense............................................. $ 6,088 ------------- -------------
(3) The pro forma adjustment to income tax provision reflects the tax effect of the pro forma adjustments at a 40.0% statutory tax rate. (4) Selling, general and administrative expense reflects the exclusion of approximately $359 for EHI of nonrecurring expenditures relating to the Recapitalization and $1,843 of nonrecurring expenditures relating to compensation to the principal stockholders of Power Ten. (5) Adjustment to amortization expense reflects additional amortization expense of $1,098 calculated on a straight line basis over 15 years of the excess of purchase price over net assets acquired in the Power Ten Acquisition. (6) Adjustment to interest expense, net, reflects $1,275 of additional interest expense on the Term Facility obtained in connection with the Power Ten Acquisition assuming an interest rate of 8.5%, offset by $39 of interest expense on debt of Power Ten not expected to be assumed. 15 RISK FACTORS In addition to the other information contained in this Prospectus, holders of Notes should consider carefully the following Risk Factors affecting the business of the Company, as well as the other information set forth elsewhere in this Prospectus. SIGNIFICANT LEVERAGE AND DEBT SERVICE In connection with consummating the Recapitalization, the Company incurred significant outstanding indebtedness and, as a result, became highly leveraged. See "Capitalization." In addition, subject to the limitations set forth in the Indenture and the New Credit Agreement, the Company may incur additional indebtedness, including up to $30.0 million under the New Credit Facility. See "Description of New Credit Facility." The degree to which the Company is leveraged could have important consequences to the holders of the Notes, including (i) the Company's vulnerability to adverse general economic and industry conditions, (ii) the Company's ability to obtain additional financing for future capital expenditures, general corporate or other purposes may be limited and (iii) the dedication of a substantial portion of cash flow from the Company's operations to the payment of principal and interest on indebtedness, thereby reducing the funds available for the Company's operations and future business opportunities. The Company's ability to make scheduled payments on the principal of, or interest on, or to refinance, its indebtedness will depend on its future operating performance and cash flow, which are subject to prevailing economic conditions, prevailing interest rate levels, and financial, competitive, business and other factors, many of which are beyond its control, as well as the availability of borrowings under the New Credit Facility or successor facilities. However, based upon the current and anticipated level of operations, the Company believes that its cash flow from operations, together with amounts available under the New Credit Facility and the Company's other sources of liquidity, will be adequate to meet its anticipated cash requirements for the foreseeable future for working capital, capital expenditures, interest payments and principal payments. EHI must rely on dividends and other payments from Elgar to generate the funds necessary to meet its obligations, including the payment of principal of and interest on the Notes. EHI's ability to make such payments may be restricted by, among other things, applicable state corporate laws and other laws and regulations. See "Description of Notes" and "Description of New Credit Facility." There can be no assurance that the Company's business will continue to generate cash flow at or above current levels. If the Company is unable to generate sufficient cash flow from its operations in the future to service its indebtedness, EHI may be required to refinance all or a portion of its existing indebtedness, including the Notes, or to obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained. The inability to obtain refinancing or additional financing could have a material adverse effect on the Company. Finally, in order to pay the principal balance of the Notes due at maturity, EHI may have to obtain alternative financing. RANKING OF NOTES; ASSET ENCUMBRANCE The Notes and Note Guarantees are senior unsecured obligations and rank PARI PASSU in right of payment with all other existing and future unsubordinated obligations of EHI and the Subsidiary Guarantors, respectively. Indebtedness under the New Credit Facility is (i) secured by a first priority security interest in substantially all of the assets of EHI, Elgar and Power Ten (including, without limitation, accounts receivable, inventory, machinery, equipment, contracts and contract rights, trademarks, copyrights, patents, license agreements and general intangibles), (ii) guaranteed by EHI and Power Ten on a senior basis and (iii) secured by a pledge of all of the outstanding capital stock of Elgar and Power Ten. Accordingly, the Notes and the Note Guarantees are effectively subordinated to all secured indebtedness (including indebtedness under the New Credit Facility) to the extent of the collateral. Upon an event of default under any such secured indebtedness, the lenders could elect to declare all amounts outstanding, together with accrued and unpaid interest thereon, to be immediately due and payable. If EHI or the Subsidiary Guarantors were unable to repay those amounts, the lenders could proceed against the 16 collateral granted them to secure that indebtedness. There can be no assurance that the assets of EHI or the Subsidiary Guarantors would be sufficient to repay in full any such secured indebtedness. EHI must rely on dividends and other payments from the Subsidiary Guarantors to generate the funds necessary to meet EHI's obligations, including the payment of principal and interest on the Notes. EHI's ability to make such payments may be restricted by, among other things, applicable state corporate laws and other laws and regulations. See "Description of Notes" and "Description of New Credit Facility." RESTRICTIVE COVENANTS The New Credit Facility and the Indenture contain numerous restrictive covenants which limit the discretion of management with respect to certain business matters. These covenants place significant restrictions on, among other things, the Company's ability to incur additional indebtedness, to create liens or other encumbrances, to pay dividends or make other restricted payments, to make investments, loans and guarantees and to sell or otherwise dispose of a substantial portion of assets to, or merge or consolidate with, another entity. The New Credit Facility also contains a number of financial covenants that require the Company to meet certain financial ratios and tests and provide that a "change of control" will constitute an event of default. See "Description of Notes--Certain Covenants" and "Description of New Credit Facility." A failure to comply with the obligations contained in the New Credit Facility or the Indenture, if not cured or waived, could permit acceleration of the related indebtedness and acceleration of indebtedness under other instruments that contain cross-acceleration or cross-default provisions. In the case of an event of default under the New Credit Facility, the lenders under the New Credit Facility would be entitled to exercise the remedies available to a secured lender under applicable law, including the sale of the collateral to satisfy the debt. If EHI were obligated to repay all or a significant portion of its indebtedness, there can be no assurance that EHI would have sufficient cash to do so or that EHI could successfully refinance such indebtedness. Other indebtedness of the Company that may be incurred in the future may contain financial or other covenants more restrictive than those applicable to the New Credit Facility or the Notes. IMPORTANCE OF KEY CUSTOMERS Certain customers are material to the business and operations of the Company. In Fiscal 1998, (i) Racal, a systems integrator for test and measurement equipment which provides certain ATE systems utilizing the Company's programmable power supplies to manufacturers, including a leading semiconductor manufacturer, accounted for approximately $17.7 million, or 28.3%, of the Company's total net sales and (ii) Lockheed Martin, through various of its operating units, accounted for approximately $11.5 million, or 18.4%, of total net sales during Fiscal 1998. During Fiscal 1998, the Company's top five customers accounted for approximately $36.2 million of net sales, representing 57.9% of the Company's total net sales. The Company was recently notified by Racal that the leading semiconductor manufacturer referred to above has decided to cease orders for Elgar's current AT-8000 DC power supplies until anticipated "next generation" technology is available in early 1999. As a result, management expects that revenues from Racal will be significantly lower in fiscal 1999 than they were in Fiscal 1998. The Company's prospects will continue to depend on the success of Racal, Lockheed Martin and its other significant customers. Although the Company believes that it has strong, long-standing relationships with these customers and that such relationships are mutually beneficial, the loss of any significant customer, or a significant reduction in the Company's business with any of them, as with the anticipated decrease in revenues from Racal in fiscal 1999, could have a material adverse effect on the Company and its business, results of operations and financial condition. COMPETITION The Company experiences significant competition in the programmable power test equipment markets. Although the Company does not presently experience significant competition from third-party 17 suppliers in the Solar Array Simulator market, but rather competes against in-house systems produced by spacecraft and satellite manufacturers, the Company may experience significant third-party competition in this market as others attempt to enter this growing field. The Company has not yet experienced competition in its role as the sole source supplier of the programmable power subsystem to the CASS Program. Some of the Company's competitors (through parent corporations) are significantly larger and have greater financial resources than the Company, as these competitors are divisions or subsidiaries of large, diversified companies and have access to the financial resources of their parent companies. The Company believes that the principal competitive factors affecting the market for its products include vendor and product reputation, product performance, price, architecture, functionality and features, ease of implementation and use, availability and deliverability of product and quality of customer support. The Company believes that it has competed effectively to date in all of its markets. There can be no assurance, however, that the Company will be able to compete successfully against current and future competitors, and the failure to do so could have a material adverse effect upon the Company's business, operating results and financial condition. See "Business--Competition." DEPENDENCE ON KEY PERSONNEL The Company's operations are largely dependent on the efforts of its senior management. While the Company has entered into employment agreements with its key personnel in connection with the Recapitalization, there can be no assurance that the Company will be able to retain such persons. Additionally, in order to successfully manage its growth strategy, the Company must continue to attract qualified personnel. The Company does not maintain "key man" life insurance policies on any of its employees. If certain of the current key personnel should cease to be employed by the Company for any reason, or if the Company should be unable to continue to attract and retain qualified management personnel, the Company's business, financial condition and results of operations could suffer a material adverse effect. See "Management." CONTROL BY INVESTORS As of March 28, 1998, JFL-EEC beneficially owned shares of Common Stock representing approximately 71.7% of the voting interest in EHI, on a fully diluted basis (without giving effect to the issuance or conversion of the Convertible Preferred Stock), and has the right to designate seven of the nine directors of EHI. Accordingly, JFL-EEC has the power to elect a majority of EHI's board of directors, appoint new management and approve any action requiring the approval of the holders of EHI's Common Stock, including adopting amendments to the Certificate of Incorporation and approving mergers or sales of substantially all of EHI's assets. The directors elected by JFL-EEC have the authority to make decisions affecting EHI's capital structure, including the issuance of additional indebtedness and the declaration of dividends. See "Management," "Certain Relationships and Related Transactions" and "Security Ownership of Certain Beneficial Owners and Management." GOVERNMENT PROCUREMENT POLICIES Approximately 39.4% and 23.7% of the Company's net sales in Fiscal 1997 and Fiscal 1998, respectively, were made pursuant to contracts between the United States government, on the one hand, and the Company or a customer of the Company, on the other hand. Contracts with the United States government are subject to cancellation for default or for convenience by the government if deemed in its best interests. Contracts which are terminated for convenience generally provide for payments to a contractor for its costs and a proportionate share of profit for work accomplished through the date of termination. Contracts which are terminated for default generally provide that the government pay only for the work it has accepted, can require the contractor to pay the difference between the original contract price and the cost to reprocure the contract items net of the value of the work accepted from the original contractor, and can hold a contractor liable for damages. There can be no assurance that any current or 18 prospective contract on which the Company is a primary contractor or any such contract on which the Company is a subcontractor or supplier will not be terminated for default or for convenience by the government or that any such cancellation will not result in the Company realizing a loss or failing to realize the expected profit on any such contract. POTENTIAL INABILITY TO FUND CHANGE OF CONTROL OFFER Upon a Change in Control (as defined in the Indenture), unless an irrevocable notice of redemption for all of the Notes is given in accordance with the provisions of "Description of Notes--Redemption-- Optional Redemption Upon a Change of Control," each holder will have the right to require EHI to repurchase all or any part of such holder's Notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of repurchase. See "Description of Notes--Redemption--Change of Control." However, there can be no assurance that sufficient funds will be available to EHI at the time of the Change of Control to make any required repurchases of Notes tendered. Moreover, restrictions in the New Credit Facility prohibit EHI from making such required repurchases; therefore, any such repurchases would constitute an event of default under the New Credit Facility absent a waiver. In addition, the holders of the Redeemable Preferred Stock may also require EHI to repurchase their shares of Redeemable Preferred Stock upon a Change of Control (as defined in the Certificate of Designations for the Redeemable Preferred Stock), which would also constitute a default under the New Credit Facility, absent a waiver. Notwithstanding these provisions, EHI could enter into certain transactions, including certain recapitalizations, that would not constitute a Change of Control but would increase the amount of debt outstanding at such time. ENVIRONMENTAL MATTERS The Company is subject to various evolving federal, state and local environmental laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of hazardous and non-hazardous substances and wastes. These laws and regulations provide for substantial fees and sanctions for violations and, in many cases, could require the Company to remediate a site to meet applicable legal requirements. In connection with the Recapitalization, Lehman conducted certain investigations (including reviewing Phase I environmental reports prepared in 1996 with respect to two of the Company's four facilities) of the Company's operations and its compliance with applicable environmental laws. Pursuant to the Recapitalization Agreement, the Company is indemnified from an escrow account, subject to certain limitations as to survival and amount, against certain potential environmental liabilities. See "The Recapitalization." FRAUDULENT CONVEYANCE AND PREFERENCE CONSIDERATIONS Under applicable provisions of federal bankruptcy law or comparable provisions of state fraudulent conveyance law, if, among other things, EHI or a Subsidiary Guarantor, at the time it incurred the indebtedness evidenced by the Notes or its Note Guarantee, 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 of which the assets remaining with EHI or the Subsidiary Guarantors were unreasonably small or constitute unreasonably small capital or (c) intended or intends to incur, or believed, believes or should have believed that it would incur, debts beyond its ability to repay such debts as they mature AND (ii) EHI or the Subsidiary Guarantors received or receives less than reasonably equivalent value or fair consideration for the incurrence of such indebtedness, the Notes and the Note Guarantees could be invalidated or subordinated to all other debts of EHI or the Subsidiary Guarantors, as the case may be. The Notes or Note Guarantees could also be invalidated or subordinated if it were found that EHI or the Subsidiary Guarantors, as the case may be, incurred indebtedness in connection with the Notes or its Note Guarantee with the intent of hindering, delaying or defrauding current or future creditors of EHI or the Subsidiary Guarantors, as the case may be. In addition, the payment of interest and principal by EHI pursuant to the 19 Notes or the payment of amounts by the Subsidiary Guarantors pursuant to the Note Guarantees could be voided and required to be returned to the person making such payment, or to a fund for the benefit of the creditors of EHI or the Subsidiary Guarantors, 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, EHI or a Subsidiary Guarantor would be considered insolvent if (i) the sum of its debts, including contingent liabilities, were greater than the sum of all of its assets at a fair valuation or if the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability 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. Additionally, under federal bankruptcy or applicable state insolvency law, if certain bankruptcy or insolvency proceedings were initiated by or against EHI or a Subsidiary Guarantor within 90 days after any payment by EHI or such Subsidiary Guarantor with respect to the Notes or the Note Guarantee, respectively, or after the issuance of such Note Guarantee, or if EHI or such Subsidiary Guarantor anticipated becoming insolvent at the time of such payment or issuance, all or a portion of such payment or such Note Guarantee could be avoided as a preferential transfer, and the recipient of any such payment could be required to return such payment. To the extent a Note Guarantee were voided as a fraudulent conveyance or held unenforceable for any other reason, holders of Notes would cease to have any claim in respect of such Subsidiary Guarantor and would be creditors solely of EHI. In such event, the claims of holders of Notes against such Subsidiary Guarantor would be subject to the prior payment of all liabilities and preferred stock claims of the Subsidiary Guarantor. There can be no assurance that, after providing for all prior claims and preferred stock interests, if any, there would be sufficient assets to satisfy the claims of holders of Notes relating to any voided portions of the Note Guarantee. Currently, EHI's only significant subsidiary is Elgar, and Elgar's only significant subsidiary is Power Ten. On the basis of its historical financial information and recent operating history as discussed in "Prospectus Summary," "Unaudited Pro Forma Consolidated Statement of Operations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company believes that, after giving effect to the indebtedness incurred in connection with the Recapitalization, it will not be insolvent, will not have unreasonably small assets or capital for the businesses in which it is engaged and will not incur debts beyond its ability to pay such debts as they mature. There can be no assurance, however, as to what standard a court would apply in making such determinations. RISKS RELATING TO POWER TEN AND OTHER ACQUISITIONS Under the Stock Purchase Agreement pursuant to which the Company acquired all of the outstanding capital stock of Power Ten, certain of the representations and warranties and related indemnity obligations of the selling stockholders will survive the closing date for a limited time. There can be no assurances that (i) Power Ten will perform up to the expectations of the Company, (ii) the Company will not encounter unanticipated problems or liabilities with respect to the operations of Power Ten or (iii) the Company will be able to integrate efficiently the operations of Power Ten. From time to time, the Company may acquire the assets or capital stock of other complementary businesses. Any such acquisitions will entail the risks set forth above. ABSENCE OF PUBLIC MARKET FOR THE NOTES The New Notes are a new issue of securities, have no established trading market and may be widely distributed. The Company does not intend to list the New Notes on any national securities exchange or to seek the admission thereof to trading in the Nasdaq National Market System. The Company has been advised by the Initial Purchaser that it currently intends to make a market in the New Notes. However, the 20 Initial Purchaser 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 limitations imposed by the Securities Act and the Exchange Act, and may be limited during the Exchange Offer. See "Plan of Distribution." Accordingly, there can be no assurance that an active public or other market will develop for the New Notes or as to the liquidity of or the trading for the New Notes. 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 public trading market develops for the New Notes, future trading prices of the New Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's results of operations and the market for similar securities. Depending on prevailing interest rates, the market for similar securities and other facts, including the financial condition of the Company, the New Notes may trade at a discount from their principal amount. CONSEQUENCES OF FAILURE TO EXCHANGE Holders of Old Notes who do not exchange for New Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Notes as set forth in the legend thereon as a consequence of the issuance of the Old Notes pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not currently anticipate that it will register the Old Notes under the Securities Act. New Notes issued pursuant to the Exchange Offer may be offered for resale, resold or otherwise transferred by Holders thereof (other than any such holder which is an "affiliate" of the Company or any Guarantor 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 in the ordinary course of such holders' business and such holders have no arrangement with any person to participate in the distribution of such notes. Each 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 any resale of such New Notes. The Letter of Transmittal states that, by so acknowledging and delivering a Prospectus, a 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 broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the effective date of this Prospectus, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." However, to comply with the securities laws of certain jurisdictions, if applicable, the New Notes may not be offered or sold unless they have been registered or qualified for sale in such jurisdictions or an exemption from registration or qualification is available and is complied with. To the extent that Old Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Old Notes will be adversely affected. 21 THE RECAPITALIZATION Pursuant to the Recapitalization Agreement, MergerCo merged with and into EHI with EHI surviving the Merger. The Merger, together with the related transactions described below are collectively referred to as the "Recapitalization." All fully diluted ownership percentages indicated below exclude the dilution attributable to the Convertible Preferred Stock issued in connection with the Power Ten Acquisition. Pursuant to the terms of the Recapitalization Agreement: - All outstanding shares of EHI's Common Stock, other than those shares retained by the Continuing Shareholders, were canceled and the holders thereof received their PRO RATA cash portion of the Recapitalization Consideration in exchange for such shares. - The Continuing Shareholders retained approximately 15.0% of the Common Stock on a fully diluted basis. - EHI made certain customary representations, warranties and covenants to Lehman and its affiliates in connection with the Merger. EHI, as successor to MergerCo, is entitled to indemnification (capped at certain levels) for any losses brought about by a breach of these representations, warranties or covenants, the payment for which will be made from an escrow account established pursuant to the Recapitalization Agreement. With certain exceptions, this indemnity will expire on June 30, 1999. The Merger was financed through a series of related transactions: - JFL-EEC made a capital contribution in the amount of approximately $19.0 million to MergerCo and received shares of common stock of MergerCo in consideration thereof, which, on a fully diluted basis, now represent a 71.7% equity interest in EHI. - In consideration of $10.0 million, MergerCo issued 10,000 shares of Redeemable Preferred Stock, together with the Warrants to purchase an aggregate of 13.3% of the fully diluted common stock of MergerCo, to the purchasers thereof. Upon consummation of the Merger, the Redeemable Preferred Stock became Redeemable Preferred Stock of EHI and the Warrants became Warrants to purchase 13.3% of the Common Stock on a fully diluted basis. See "Description of Preferred Stock and Warrants." - The Old Notes were issued by MergerCo immediately prior to the Merger. By operation of law, the Old Notes became the obligations of EHI upon consummation of the Merger. Immediately following consummation of the Recapitalization, on a fully diluted basis, (i) JFL-EEC owned 71.7% of the Common Stock, (ii) the Continuing Shareholders owned 15.0% of the Common Stock and (iii) the holders of the Warrants have the right to purchase 13.3% of the Common Stock. 22 USE OF PROCEEDS The gross proceeds to the Company from the Offering were $90.0 million before deducting commissions and expenses of the Offering. The Company used the proceeds from the issuance of the Old Notes, the Lehman Investment and the issuance of the Redeemable Preferred Stock and Warrants (i) to pay the Continuing Shareholders the cash portion of the Recapitalization Consideration, (ii) to repay certain existing indebtedness of the Company, (iii) to pay certain expenses of the Recapitalization and (iv) for general corporate purposes. The following table sets forth the sources and uses of funds in connection with the Recapitalization:
(DOLLARS IN THOUSANDS) SOURCES OF FUNDS: Issuance of Old Notes..................................................... $ 90,000 Lehman Investment......................................................... 19,014 Issuance of Redeemable Preferred Stock and Warrants....................... 10,000 Continuing Shares(1)...................................................... 3,986 Working Capital........................................................... 632 -------- $ 123,632 -------- -------- USES OF FUNDS: Aggregate Recapitalization Consideration(2)............................... $ 107,273 Repayment of Old Credit Facility and Term Debt............................ 10,859 Approximate Transaction Expenses.......................................... 5,500 -------- $ 123,632 -------- --------
- ------------------------------ (1) Represents the Continuing Shareholders' share of the fully diluted Common Stock at the time of the Recapitalization, of which 9.4% is held by the Management Continuing Shareholders and 5.6% by the Non-Management Continuing Shareholders. (2) Consists of approximately $103.3 million in cash and approximately $4.0 million aggregate value of Continuing Shares. Includes a $632 post-closing working capital adjustment pursuant to the Recapitalization Agreement. 23 THE EXCHANGE OFFER PURPOSE AND EFFECT The Old Notes were sold by the Company to the Initial Purchaser on February 3, 1998 pursuant to the Purchase Agreement. The Initial Purchaser subsequently resold the Old Notes in reliance on Rule 144A under the Securities Act. The Company and the Initial Purchaser entered into the Registration Rights Agreement, pursuant to which the Company agreed, for the benefit of the Holders of the Old Notes, at the expense of the Company, to (i) file on or prior to the 120th calendar day following the Closing Date a registration statement (the "Exchange Offer Registration Statement") with the Commission, (ii) use its best efforts to cause the Exchange Offer Registration Statement to be declared effective under the Securities Act on or prior to the 180th calendar day following the Closing Date and (iii) use its best efforts to consummate the Exchange Offer on or prior to the 210th calendar day following the Closing Date. The Company will keep the Exchange Offer open for not less than 20 business days (or longer if required by applicable law) after the date notice of the Exchange Offer is mailed to the Holders of the Old Notes. The Exchange Offer is intended to satisfy the Company's exchange offer obligations under the Registration Rights Agreement. CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES Following the expiration of the Exchange Offer, holders of Old Notes not tendered, or not properly tendered, will not have any further registration rights and such Old Notes will continue to be subject to the existing restrictions on transfer thereof. Accordingly, the liquidity of the market for a holder's Old Notes could be adversely affected upon expiration of the Exchange Offer if such holder elects to not participate in the Exchange Offer. TERMS OF THE EXCHANGE OFFER The Company hereby offers, upon the terms and subject to the conditions set forth herein and in the accompanying Letter of Transmittal, to exchange $1,000 in principal amount of the New Notes for each $1,000 in principal amount of the outstanding Old Notes. The Company will accept for exchange any and all Old Notes that are validly tendered on or prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. However, the Exchange Offer is subject to the terms and provisions of the Registration Rights Agreement. See "Conditions of the Exchange Offer." Old Notes may be tendered only in multiples of $1,000. Subject to the foregoing, holders of Old Notes may tender less than the aggregate principal amount represented by the Old Notes held by them, provided that they appropriately indicate this fact on the Letter of Transmittal accompanying the tendered Old Notes (or so indicate pursuant to the procedures for book-entry transfer). As of the date of this Prospectus, $90.0 million in aggregate principal amount of the Old Notes is outstanding of the maximum of $150.0 million of Notes authorized for issuance under the Indenture. Solely for reasons of administration (and for no other purpose), the Company has fixed the close of business on July , 1998 as the record date (the "Record Date") for purposes of determining the persons to whom this Prospectus and the Letter of Transmittal will be mailed initially. Only a holder of the Old Notes (or such holder's legal representative or attorney-in-fact) may participate in the Exchange Offer. There will be no fixed record date for determining holders of the Old Notes entitled to participate in the Exchange Offer. The Company believes that, as of the date of this Prospectus, no such holder is an affiliate (as defined in Rule 405 under the Securities Act) of the Company. The Company shall be deemed to have accepted validly tendered Old Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as 24 agent for the tendering holders of Old Notes and for the purposes of receiving the New Notes from the Company. If any tendered Old Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, certificates for any such unaccepted Old Notes will be returned, without expense, to the tendering holder thereof as promptly as practicable after the Expiration Date. EXPIRATION DATE; EXTENSIONS; AMENDMENTS The Expiration Date shall be , 1998 at 5:00 p.m., New York City time, unless the Company, in its sole discretion, extends the Exchange Offer, in which case the Expiration Date shall be the latest date and time to which the Exchange Offer is extended. In order to extend the Exchange Offer, the Company will notify the Exchange Agent of any extension by oral or written notice and will make a public announcement thereof, each prior to 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 sole discretion, (i) to delay accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any of the conditions set forth below under "Conditions of the Exchange Offer" shall not have been satisfied, to terminate the Exchange Offer, by giving oral or written notice of such delay, extension or termination to the Exchange Agent and (iv) to amend the terms of the Exchange Offer in any manner. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendments by means of a prospectus supplement that will be distributed to the registered holders of the Old Notes. CONDITIONS OF THE EXCHANGE OFFER The Exchange Offer is not conditioned upon any minimum principal amount of the Old Notes being tendered for exchange. However, the Exchange Offer is conditioned upon the declaration by the Commission of the effectiveness of the Registration Statement of which this Prospectus constitutes a part. TERMINATION OF CERTAIN RIGHTS Pursuant to the Registration Rights Agreement, the Company agreed, at its own expense, to (i) file on or prior to the 120th calendar day following the Closing Date the Exchange Offer Registration Statement with the Commission with respect to a registered offer to exchange the Old Notes for the New Notes to be issued under the Indenture in the same aggregate principal amount as and with the terms that will be identical in all respects to the Old Notes (except that the New Notes will not contain terms that will be identical in all respects to Additional Interest, transfer restrictions and registration rights), (ii) use its best efforts to cause the Exchange Offer Registration Statement to be declared effective under the Securities Act on or prior to the 180th calendar day following the Closing Date and (iii) use its best effort to consummate the Exchange Offer on or prior to the 210th calendar day following the Closing Date. The Company has agreed to keep the Exchange Offer open for not less than 20 business days (or longer if required by applicable law) after the date notice of the Exchange Offer is mailed to the Holders of the Old Notes. In the event that changes in the law or applicable interpretations of the staff of the Commission do not permit the Company to effect the Exchange Offer, or if for any reason the Exchange Offer is not consummated within 210 days of the Closing Date or in certain other circumstances, the Registration Rights Agreement provides that the Company will, at its own expense, (i) as promptly as practicable, and in any event on or prior to 90 days after such filing obligation arises, file with the Commission a shelf registration statement (the "Shelf Registration Statement") covering resales of the Old Notes, (ii) use its best efforts to cause the Shelf Registration Statement to be declared effective under the Securities Act on 25 or prior to 45 days after such filing occurs and (iii) keep effective the Shelf Registration Statement until two years after its effective date (or such shorter period that will terminate when all the Old Notes covered thereby (i) have been sold pursuant thereto or (ii) are distributed to the public pursuant to Rule 144 under the Securities Act or are saleable pursuant to Rule 144(k) under the Securities Act). The Registration Rights Agreement provides that, subject to certain exceptions, in the event of a Registration Default (as defined below), holders of Old Notes are entitled to receive Additional Interest, with respect to the first 90-day period immediately following the occurrence of such Registration Default, at a rate of 0.35% per annum per $1,000 principal amount of Old Notes held by such holders, increasing by an additional 0.35% per annum per $1,000 principal amount of Old Notes with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum of Additional Interest of 1.5% per annum per $1,000 principal amount of Old Notes. A "Registration Default" with respect to the Exchange Offer shall occur if: (i) the Company fails to file any of the Registration Statements required by the Registration Rights Agreement on or before the date specified for such filing, (ii) any of such Registration Statements is not declared effective by the Commission on or prior to the date specified for such effectiveness (the "Effectiveness Target Date") or (iii) (A) the Company fails to exchange all New Notes for all Old Notes validly tendered and not withdrawn in accordance with the terms of the Exchange Offer on or prior to the 30th day after the date on which the Exchange Offer Registration Statement was declared effective or (B) if applicable, the Shelf Registration Statement is declared effective but thereafter ceases to be effective or usable in connection with resales of Notes during the periods specified in the Registration Rights Agreement. Holders of New Notes will not be, and upon consummation of the Exchange Offer, holders of Old Notes will no longer be, entitled to (i) the right to receive Additional Interest or (ii) certain other rights under the Registration Rights Agreement intended for holders of Old Notes. The Exchange Offer shall be deemed consummated upon the occurrence of the delivery by the Company to the Registrar under the Indenture of New Notes in the same aggregate principal amount as the aggregate principal amount of Old Notes that are validly tendered by holders thereof pursuant to the Exchange Offer. ACCRUED INTEREST The New Notes will bear interest at a rate equal to 9 7/8% per annum, which interest shall accrue from February 3, 1998 or from the most recent Interest Payment Date with respect to the Old Notes to which interest was paid or duly provided for. See "Description of Notes--Principal, Maturity and Interest." PROCEDURES FOR TENDERING OLD NOTES The tender of a holder's Old Notes as set forth below and the acceptance thereof by the Company will constitute a binding agreement between the tendering holder and the Company upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal. Except as set forth below, a holder who wishes to tender Old Notes for exchange pursuant to the Exchange Offer must transmit such Old Notes, together with a properly completed and duly executed Letter of Transmittal, including all other documents required by such Letter of Transmittal, to the Exchange Agent at the address set forth on the back cover page of this Prospectus prior to 5:00 p.m., New York City time, on the Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. Any financial institution that is a participant in the DTC's Book-Entry Transfer Facility system may make book-entry delivery of the Old Notes by causing the DTC to transfer such Old Notes into the 26 Exchange Agent's account in accordance with the DTC's procedures for such transfer. In connection with a book-entry transfer, a Letter of Transmittal need not be transmitted to the Exchange Agent, provided that the book-entry transfer procedure must be complied with prior to 5:00 p.m., New York City time, on the Expiration Date. Each signature on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed unless the Old Notes surrendered for exchange pursuant hereto are tendered (i) by a registered holder of the Old Notes who has not completed either the box entitled "Special Exchange Instructions" or the box entitled "Special Delivery Instructions" in the Letter of Transmittal, or (ii) by an Eligible Institution (as defined). In the event that a signature on a Letter of Transmittal or a notice of withdrawal, as the case may be, is required to be guaranteed, such guarantee must be by a firm which is a member of a registered national securities exchange or the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or otherwise be an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act (collectively, "Eligible Institutions"). If the Letter of Transmittal is signed by a person other than the registered holder of the Old Notes, the Old Notes surrendered for exchange must either (i) be endorsed by the registered holder, with the signature thereon guaranteed by an Eligible Institution or (ii) be accompanied by a bond power, in satisfactory form as determined by the Company in its sole discretion, duly executed by the registered holder, with the signature thereon guaranteed by an Eligible Institution. The term "registered holder" as used herein with respect to the Old Notes means any person in whose name the Old Notes are registered on the books of the Registrar. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of Old Notes tendered for exchange will be determined by the Company in its sole discretion, which determination shall be final and binding. The Company reserves the absolute right to reject any and all Old Notes not properly tendered and to reject any Old Notes the Company's acceptance of which might, in the judgment of the Company or its counsel, be unlawful. The Company also reserves the absolute right to waive any defects or irregularities or conditions of the Exchange Offer as to particular Old Notes either before or after the Expiration Date (including the right to waive the ineligibility of any holder who seeks to tender Old Notes in the Exchange Offer). The interpretation of the terms and conditions of the Exchange Offer (including the Letter of Transmittal and the instructions thereto) by the Company shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes for exchange must be cured within such period of time as the Company shall determine. The Company will use reasonable efforts to give notification of defects or irregularities with respect to tenders of Old Notes for exchange but shall not incur any liability for failure to give such notification. Tenders of the Old Notes will not be deemed to have been made until such irregularities have been cured or waived. If any Letter of Transmittal, endorsement, bond power, power of attorney or any other document required by the Letter of Transmittal is signed by a trustee, executor, corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing and, unless waived by the Company, proper evidence satisfactory to the Company, in its sole discretion, of such person's authority to so act must be submitted. Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender Old Notes in the Exchange Offer 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 directly, such Beneficial Owner must, prior to completing and executing the Letter of Transmittal and tendering Old Notes, make appropriate arrangements to register ownership of the Old Notes in such Beneficial Owner's name. Beneficial Owners should be aware that the transfer of registered ownership may take considerable time. 27 By tendering, each registered holder will represent to the Company that, among other things (i) the New Notes to be acquired in connection with the Exchange Offer by the holder and each Beneficial Owner of the Old Notes are being acquired by the holder and each Beneficial Owner in the ordinary course of business of the holder and each Beneficial Owner, (ii) the holder and each Beneficial Owner are not participating, do not intend to participate, and have no arrangement or understanding with any person to participate, in the distribution of the New Notes, (iii) the holder and each Beneficial Owner acknowledge and agree that any person participating in the Exchange Offer for the purpose of distributing the New Notes must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction of the New Notes acquired by such person and cannot rely on the position of the staff of the Commission set forth in no-action letters that are discussed herein under "Resales of New Notes," (iv) that if the holder is a broker-dealer that acquired Old Notes as a result of market-making or other trading activities, it will deliver a Prospectus in connection with any resale of New Notes acquired in the Exchange Offer, (v) the holder and each Beneficial Owner understand that a secondary resale transaction described in clause (iii) above should be covered by an effective registration statement containing the selling security holder information required by Item 507 of Regulation S-K of the Commission and (vi) neither the holder nor any Beneficial Owner is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company except as otherwise disclosed to the Company in writing. In connection with a book-entry transfer, each participant will confirm that it makes the representations and warranties contained in the Letter of Transmittal. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Old Notes and (i) whose Old Notes are not immediately available or (ii) who cannot deliver their Old Notes or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date (or complete the procedure for book-entry transfer on a timely basis) may tender their Old Notes according to the guaranteed delivery procedures set forth in the Letter of Transmittal. Pursuant to such procedures: (i) such tender must be made by or through an Eligible Institution and a Notice of Guaranteed Delivery (as defined in the Letter of Transmittal) must be signed by such Holder, (ii) on or prior to the Expiration Date, the Exchange Agent must have received from the Holder and the 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 or numbers of the tendered Old Notes, and the principal amount of tendered Old Notes, stating that the tender is being made thereby and guaranteeing that, within four business days after the date of delivery of the Notice of Guaranteed Delivery, the tendered Old Notes, a duly executed Letter of Transmittal and any other required documents will be deposited by the Eligible Institution with the Exchange Agent and (iii) such properly completed and executed documents required by the Letter of Transmittal and the tendered Old Notes in proper form for transfer (or confirmation of a book-entry transfer of such Old Notes into the Exchange Agent's account at the DTC) must be received by the Exchange Agent within four business days after the Expiration Date. Any Holder who wishes to tender Old Notes pursuant to the guaranteed delivery procedures described above must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old Notes prior to 5:00 p.m., New York City time, on the Expiration Date. ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES Upon satisfaction or waiver of all the conditions to the Exchange Offer, the Company will accept any and all Old Notes that are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered promptly after acceptance of the Old Notes. For purposes of the Exchange Offer, the Company shall be deemed to have accepted validly tendered Old Notes, when, as, and if the Company has given oral or written notice thereof to the Exchange Agent. 28 In all cases, issuances of New Notes for Old Notes that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of such Old Notes, a properly completed and duly executed Letter of Transmittal and all other required documents (or of confirmation of a book-entry transfer of such Old Notes into the Exchange Agent's account at the DTC); PROVIDED, HOWEVER, that the Company reserves the absolute right to waive any defects or irregularities in the tender or conditions of the Exchange Offer. If any tendered Old Notes are not accepted for any reason, such unaccepted Old Notes will be returned without expense to the tendering Holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. WITHDRAWAL RIGHTS Tenders of the Old Notes may be withdrawn by delivery of a written notice to the Exchange Agent, at its address set forth on the back cover page of this Prospectus, at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the certificate number or numbers and principal amount of such Old Notes, as applicable), (iii) be signed by the Holder in the same manner as the original signature on the Letter of Transmittal by which such Old Notes were tendered (including any required signature guarantees) or be accompanied by a bond power in the name of the person withdrawing the tender, in satisfactory form as determined by the Company in its sole discretion, duly executed by the registered holder, with the signature thereon guaranteed by an Eligible Institution together with the other documents required upon transfer by the Indenture and (iv) specify the name in which such Old Notes are to be re-registered, if different from the Depositor, pursuant to such documents of transfer. Any questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, in its sole discretion. The Old Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Old Notes which have been tendered for exchange but which are withdrawn will be returned to the Holder thereof without cost to such Holder as soon as practicable after withdrawal. Properly withdrawn Old Notes may be retendered by following one of the procedures described under "The Exchange Offer--Procedures for Tendering Old Notes" at any time on or prior to the Expiration Date. THE EXCHANGE AGENT; ASSISTANCE United States Trust Company of New York is the Exchange Agent. All tendered Old Notes, executed Letters of Transmittal and other related documents should be directed to the Exchange Agent. Questions and requests for assistance and requests for additional copies of the Prospectus, the Letter of Transmittal and other related documents should be addressed to the Exchange Agent as follows: BY REGISTERED OR CERTIFIED MAIL: UNITED STATES TRUST COMPANY OF NEW YORK P.O. BOX 844 COOPER STATION NEW YORK, NY 10276-0844 ATTN: CORPORATE TRUST SERVICES BY FACSIMILE: (212) 420-6152 29 BY OVERNIGHT COURIER: UNITED STATES TRUST COMPANY OF NEW YORK 770 BROADWAY, 13TH FLOOR NEW YORK, NEW YORK 10003 ATTN: CORPORATE TRUST SERVICES BY HAND: UNITED STATES TRUST COMPANY OF NEW YORK 111 BROADWAY LOWER LEVEL NEW YORK, NEW YORK 10006 ATTN: CORPORATE TRUST SERVICES CONFIRM BY TELEPHONE 800-548-6565 FEES AND EXPENSES All expenses incident to the Company's consummation of the Exchange Offer and compliance with the Registration Rights Agreement will be borne by the Company, including, without limitation: (i) all registration and filing fees (including, without limitation, fees and expenses of compliance with state securities or Blue Sky laws), (ii) printing expenses (including, without limitation, expenses of printing certificates for the New Notes in a form eligible for deposit with the DTC and of printing Prospectuses), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) fees and disbursements of independent certified public accountants, (vi) rating agency fees, (vii) internal expenses of the Company (including, without limitation, all salaries and expenses of officers and employees of the Company performing legal or accounting duties) and (viii) fees and expenses incurred in connection with the listing of the New Notes on a securities exchange, if any. The Company has not retained any dealer-manager in connection with the Exchange Offer and will not make any payments to brokers, dealers or others soliciting acceptance of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The Company will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If, however, a transfer tax is imposed for any reason other than the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. ACCOUNTING TREATMENT The New Notes will be recorded at the same carrying value as the Old Notes, as reflected in the Company's accounting records on the date of the exchange. Accordingly, no gain or loss will be recognized by the Company for accounting purposes. The expenses of the Exchange Offer will be amortized over the term of the New Notes. FEDERAL INCOME TAX CONSEQUENCES The following discussion summarizing federal income tax consequences of the Exchange Offer reflects the opinion of Gibson, Dunn, & Crutcher LLP, counsel to the Company, as to material federal income tax consequences expected to result from the Exchange Offer. An opinion of counsel is not binding on the Internal Revenue Service ("IRS") or the courts, and there can be no assurances that the IRS will not take, 30 and that a court would not sustain, a position contrary to that described below. Moreover, the following discussion is for general information only and does not constitute comprehensive tax advice to any particular Holder of Old Notes. The summary is based on the current provisions of the Internal Revenue Code of 1986, as amended, and applicable Treasury regulations, judicial authority and administrative pronouncements. The tax consequences described below could be modified by future changes in the relevant law, which could have retroactive effect. Each Holder of Old Notes should consult its own tax adviser as to these and any other federal income tax consequences of the Exchange Offer as well as any tax consequences to it under foreign, state, local or other law. Exchanges of Old Notes for Notes pursuant to the Exchange Offer should be treated as a modification of the Old Notes that does not constitute a material change in their terms, and the Company intends to treat the exchanges in that manner. Under that approach, a Note is treated as a continuation of the corresponding Old Note. An exchanging Holder's holding period for a Note would include such Holder's holding period for the Old Note. Such Holder would not recognize any gain or loss, and such Holder's basis in the Note would be the same as such Holder's basis in the Old Note. The Exchange Offer will result in no federal income tax consequences to a non-exchanging Holder. RESALES OF THE NEW NOTES Based on an interpretation by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that the New Notes issued pursuant to the Exchange Offer to a holder in exchange for Old Notes may be offered for resale, resold and otherwise transferred by such holder (other than (i) a broker-dealer who purchased Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act or (ii) a person that 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 holder is acquiring the New Notes in the ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in the distribution of the New Notes. The Company has not requested or obtained an interpretive letter from the Commission staff with respect to this Exchange Offer, and the Company and the holders are not entitled to rely on interpretive advice provided by the staff to other persons, which advice was based on the facts and conditions represented in such letters. However, the Exchange Offer is being conducted in a manner intended to be consistent with the facts and conditions represented in such letters. If any holder acquires New Notes in the Exchange Offer for the purpose of distributing or participating in a distribution of the New Notes, such holder cannot rely on the position of the staff of the Commission enunciated in MORGAN STANLEY & CO. INCORPORATED (available June 5, 1991) and EXXON CAPITAL HOLDINGS CORPORATION (available April 13, 1989), or interpreted in the Commission's letter to SHEARMAN AND STERLING (available July 2, 1993), or similar no-action or interpretive letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction, unless an exemption from registration is otherwise available. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker-dealer as a result of market-making or other trading activities, must acknowledge that it will deliver a Prospectus in connection with any resale of such New Notes. See "Plan of Distribution." It is expected that the New Notes will be freely transferable by the holders thereof, subject to the limitations described in the immediately preceding paragraph. Sales of New Notes acquired in the Exchange Offer by holders who are "affiliates" of the Company within the meaning of the Securities Act will be subject to certain limitations on resale under Rule 144 of the Securities Act. Such persons will only be entitled to sell New Notes in compliance with the volume limitations set forth in Rule 144, and sales of New Notes by affiliates will be subject to certain Rule 144 requirements as to the manner of sale, notice and the availability of current public information regarding the Company. The foregoing is a summary only of Rule 144 as it may apply to affiliates of the Company. Any such persons must consult their own legal counsel for advice as to any restrictions that might apply to the resale of their Notes. 31 CAPITALIZATION The following table sets forth, as of March 28, 1998, the capitalization of the Company on (i) a historical basis and (ii) a pro forma basis giving effect to the Power Ten Acquisition. The Old Notes surrendered in exchange for the New Notes will be retired and canceled and cannot be reissued. Accordingly, issuance of the New Notes will not result in any increase or decrease in the indebtedness of the Company. As such, no effect has been given to the Exchange Offer in the table below. This table should be read in conjunction with "The Recapitalization," "Description of Notes," "Description of New Credit Facility," "Description of Preferred Stock and Warrants" and the Consolidated Financial Statements of the Company and Power Ten and the notes thereto appearing elsewhere in this Prospectus.
MARCH 28, 1998 ----------------------- HISTORICAL PRO FORMA ---------- ----------- (UNAUDITED) (DOLLARS IN THOUSANDS) Debt: New Credit Facility(1)................................................. $ -- $ 15,000 9 7/8% Senior Notes due 2008........................................... 90,000 90,000 ---------- ----------- Total debt........................................................... 90,000 105,000 Series A Redeemable Preferred Stock(2)................................... 8,478 8,478 Stockholders' equity: Series B Convertible Preferred Stock(3)................................ -- 5,000 Common Stock........................................................... 23 23 Additional Paid-in-Capital............................................. (67,926) (67,926) Retained Earnings...................................................... 6,432 6,432 ---------- ----------- Total Stockholders' Deficit.......................................... (61,471) (56,471) ---------- ----------- Total Capitalization............................................... $ 37,007 $ 57,007 ---------- ----------- ---------- -----------
- ------------------------------ (1) The New Credit Facility contains a $15.0 million Revolving Facility and a $15.0 million Term Facility. All of the proceeds from the Term Facility were used to finance a portion of the Power Ten Acquisition. (2) Net of $1,700 attributed to the value of the Warrants. Dividends on the Redeemable Preferred Stock are cumulative, accrue quarterly at the rate of 10% per annum and are paid in-kind through January 31, 2001. Includes $150 of dividends accrued from February 3, 1998 through March 28, 1998 and $28 of accretion of discount on Preferred Stock. See "Description of Preferred Stock and Warrants." (3) The Series B Convertible Preferred Stock was issued in connection with the Power Ten Acquisition. See "Description of Preferred Stock and Warrants--Convertible Preferred Stock." 32 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA ELGAR HOLDINGS, INC.: The selected consolidated financial data below for the fiscal years ended April 3, 1996, March 29, 1997 and March 28, 1998 and as of March 29, 1997 and March 28, 1998 have been derived from the Consolidated Financial Statements of the Company which have been audited by Arthur Andersen LLP, independent public accountants, and are included elsewhere in this Prospectus. The Company changed its fiscal year from the Saturday closest to September 30 to the Saturday closest to March 31 after the completion of its fiscal year ended September 30, 1995. As a result, the data presented below for the fiscal years ended September 30, 1995 and April 3, 1996 contain an overlap of six months (from March 31, 1995 to September 30, 1995). The selected financial data as of and for the fiscal years ended October 1, 1994 and September 30, 1995 have been derived from the Predecessor's Unaudited Consolidated Financial Statements for those periods, which unaudited financial statements are not included elsewhere herein. The unaudited Consolidated Financial Statements for each of the periods referred to above include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited periods. The information presented below is qualified in its entirety by, and should be read in conjunction with, "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and related notes included elsewhere in this Prospectus.
PREDECESSOR(1) THE COMPANY --------------------------------- --------------------- FISCAL YEAR ENDED FISCAL YEAR ENDED --------------------------------- --------------------- OCT. 1, SEPT. 30, APR. 3, MAR. 29, MAR. 28, 1994 1995 1996 1997 1998 ---------- ---------- --------- --------- ---------- (UNAUDITED) (DOLLARS IN THOUSANDS) OPERATING DATA: Net sales............................................... $ 31,480 $ 42,880 $ 42,309 $ 45,578 $ 62,496 Cost of sales........................................... 19,896 27,313 26,468 26,973 32,944 ---------- ---------- --------- --------- ---------- Gross profit............................................ 11,584 15,567 15,841 18,605 29,552 Selling, general and administrative expense(2).......... 4,972 6,707 7,406 7,770 9,434 Research and development and engineering expenses....... 3,163 4,052 4,168 3,973 6,242 Amortization expense(3)................................. 2,051 2,149 2,149 1,314 1,314 ---------- ---------- --------- --------- ---------- Operating income........................................ 1,398 2,659 2,118 5,548 12,562 Interest expense, net................................... 2,736 3,017 3,578 1,839 3,341 ---------- ---------- --------- --------- ---------- Income (loss) before income tax provision (benefit)..... (1,338) (358) (1,460) 3,709 9,221 Income tax provision (benefit).......................... 285 716 176 1,872 4,448 ---------- ---------- --------- --------- ---------- Net income (loss)....................................... $ (1,623) $ (1,074) $ (1,636) $ 1,837 $ 4,773 ---------- ---------- --------- --------- ---------- ---------- ---------- --------- --------- ---------- OTHER DATA: EBITDA(4)............................................... $ 3,987 $ 5,495 $ 5,052 $ 7,668 $ 15,118 EBITDA margin(4)........................................ 12.7% 12.8% 11.9% 16.8% 24.2% Depreciation............................................ 538 687 785 806 883 Capital expenditures.................................... 1,155 780 611 621 1,228 Ratio of earnings to combined fixed charges and preferred stock dividends(5).......................... 0.52x 0.88x 0.59x 2.97x 3.52x BALANCE SHEET DATA:(6) Total assets............................................ $ 38,310 $ 38,992 $ 37,891 $ 36,597 $ 44,912 Total debt.............................................. 47,431 49,326 19,676 15,216 90,000 Stockholders' equity (deficit).......................... (13,485) (14,557) 14,000 15,837 (61,471)
- ------------------------------ (1) Presents certain data of the Predecessor prior to the acquisition of Elgar by Carlyle-EEC Holdings, Inc. on April 3, 1996. (2) In Fiscal 1998, selling, general and administrative expenses include approximately $359 of nonrecurring expenditures relating to the Recapitalization. 33 (3) Amortization expense of the Predecessor represents the amortization of goodwill associated with a prior acquisition of Elgar in 1989 and Elgar's acquisition of Sorensen in 1994. Amortization expense of the Company represents the amortization of goodwill associated with the acquisition of Elgar by Carlyle-EEC Holdings, Inc. on April 3, 1996. See Notes 1 and 2 to Consolidated Financial Statements. (4) EBITDA is the sum of income (loss) before income taxes, interest, depreciation and amortization expense. EBITDA is presented because the Company believes that it is a widely accepted financial indicator of a company's ability to service indebtedness. However, EBITDA should not be considered as an alternative to net income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of a company's operating performance or as a measure of liquidity. In fiscal 1998, EBITDA excludes the nonrecurring expenditures described in note (2) above. (5) In calculating the ratio of earnings to combined fixed charges and preferred stock dividends, earnings consist of income (loss) before income tax provision (benefit), plus fixed charges. Fixed charges consist of interest incurred (which includes amortization of deferred financing costs) whether expensed or capitalized and a portion of rental expense which management believes is a reasonable approximation of an interest factor. (6) Balance sheet data as of April 3, 1996 reflects the allocation of the purchase price associated with the acquisition of Elgar by Carlyle-EEC Holdings, Inc. on April 3, 1996. POWER TEN The selected financial data below for Power Ten as of and for the fiscal year ended April 4, 1998 have been derived from the unaudited financial statements of Power Ten and are included elsewhere in this Prospectus. The information presented below is qualified in its entirety by, and should be read in conjunction with the Financial Statements of Power Ten and related notes included elsewhere in this Prospectus.
FISCAL YEAR ENDED APRIL 4, 1998 (UNAUDITED) ---------------- (IN THOUSANDS) OPERATING DATA: Net sales................................................................... $ 10,076 Cost of sales............................................................... 5,568 ------- Gross profit................................................................ 4,508 Selling, general and administrative expense(1).............................. 3,451 Research and development and engineering expenses........................... 589 ------- Operating income............................................................ 468 Interest expense, net....................................................... 39 ------- Income before income tax provision.......................................... 429 Income tax provision........................................................ 246 ------- Net income.................................................................. $ 183 ------- ------- OTHER DATA: EBITDA(2)................................................................... $ 2,370 ------- ------- EBITDA margin(2)............................................................ 23.5% Depreciation................................................................ $ 59 Capital expenditures........................................................ $ 90 BALANCE SHEET DATA: Total assets................................................................ $ 3,302 Total debt.................................................................. 350 Stockholders' equity........................................................ 1,566
- ------------------------------ (1) Selling, general and administrative expense includes $1,843 of nonrecurring expenditures relating to compensation to the principal stockholders of Power Ten. (2) EBITDA is the sum of income before income taxes, interest, depreciation and amortization expense. EBITDA is presented because the Company believes that it is a widely accepted financial indicator of a company's ability to service indebtedness. However, EBITDA should not be considered as an alternative to net income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of a company's operating performance or as a measure of liquidity. EBITDA for the fiscal year ended April 4, 1998 excludes the nonrecurring expenditures described in Note (1) above. 34 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion and analysis should be read in conjunction with "Selected Historical Consolidated Financial Data" and the audited Consolidated Financial Statements of the Company and the notes thereto included elsewhere in this Prospectus. Management views the Company's business in five principal markets, which are (i) programmable DC power, which is a type of programmable power supply used to test products that require direct current ("DC") inputs, such as printed circuit boards, semiconductors, medical equipment, telecommunications equipment, avionics and numerous other types of electronic products, (ii) Solar Array Simulators ("SAS"), which are used for extensive testing of satellite systems throughout the manufacturing process and just prior to launch, (iii) the CASS Program for the U.S. Navy (for which the Company provides programmable AC and DC, fixed DC and power conditioning products, as discussed in this paragraph), (iv) programmable AC power, which is a type of programmable power supply used to test alternating current ("AC") products such as avionics, computers, DC power supplies, appliances and many other types of electronic products and (v) other products and services, which include power conditioning and uninterruptible power supply ("UPS") products (which supply back-up power principally to military computer and communications systems and oil exploration companies for data logging applications), and customer service, which provides repair service and spare parts to each of the markets listed above. Founded in 1965, Elgar initially focused on providing solid state line conditioning and frequency changers to the AC power test and measurement market. In 1987, Elgar was selected as a sole source supplier to Lockheed Martin (formerly GE Aerospace) for The Consolidated Automated Support System ("CASS") Program for the U.S. Navy. In the early 1990's, Elgar's current management team concluded that the large and diverse DC market was the most appropriate market to target in order to expand Elgar's commercial business. In an effort to enter the DC market quickly and efficiently, in 1994 Elgar acquired the Sorensen Division from a subsidiary of Raytheon Corporation for approximately $4 million. A market leader with a strong brand name, one of the broadest DC product lines on the market and a well-established customer base, Sorensen complemented the Company's leading position in the programmable AC market and provided the Company with one of the most comprehensive high-end product lines for both the AC and DC markets. For Fiscal 1998, the Company's net sales were derived (i) 52.2% from programmable DC power, (ii) 13.5% from Solar Array Simulators, (iii) 14.2% from the CASS Program, (iv) 11.3% from programmable AC power and (v) 8.8% from other products and services. The Company's revenues and EBITDA are subject to downturns in the U.S. and world economies which could have an effect on markets for computers and other electronic and telecommunications equipment in particular. Other factors that may have an influence on the Company's operating results include the timing of the receipt of major orders from major customers, product mix, competitive pricing pressures, and the Company's ability to design, manufacture and introduce new products on a cost effective and timely basis. The Company was recently notified by Racal that a significant end-user for Elgar's current AT-8000 DC power supplies has decided to cease orders for such product until anticipated "next generation" technology is available in early 1999. As a result, management expects that revenues from Racal will be significantly lower in fiscal 1999 than they were in fiscal 1998. See "Risk Factors--Importance of Key Customers." 35 RESULTS OF OPERATIONS The data and discussion contained herein do not include the pro forma results of Power Ten. The following table sets forth certain income statement information and other data for the Company as a percentage of net sales for the periods indicated:
FISCAL YEAR ENDED --------------------------------------- APRIL 3, MARCH 29, MARCH 28, 1996(1) 1997 1998 ----------- ------------ ------------ STATEMENT OF OPERATIONS DATA: Net sales................................................... 100.0% 100.0% 100.0% Cost of sales............................................... 62.6 59.2 52.7 ----- ----- ----- Gross profit................................................ 37.4 40.8 47.3 Selling, general and administrative expenses(2)............. 17.5 17.0 15.1 Research and development and engineering expenses........... 9.9 8.7 10.0 Amortization expense........................................ 5.0 2.9 2.1 ----- ----- ----- Operating income............................................ 5.0% 12.2% 20.1% ----- ----- ----- ----- ----- ----- OTHER DATA: EBITDA %(3)................................................. 11.9% 16.8% 24.2%
- ------------------------------ (1) Presents certain Results of Operations of the Predecessor prior to the acquisition of Elgar by Carlyle-EEC Holdings, Inc. on April 3, 1996. (2) In Fiscal 1998, selling, general and administrative expenses include approximately $359 of nonrecurring expenditures relating to the Recapitalization. (3) Fiscal 1998 EBITDA excludes nonrecurring expenditures described in note (2) above. FISCAL YEAR ENDED MARCH 28, 1998 VERSUS FISCAL YEAR ENDED MARCH 29, 1997 NET SALES. Net sales in Fiscal 1998 were $62.5 million, an increase of $16.9 million, or 37.1%, from net sales of $45.6 million in Fiscal 1997. This increase was primarily attributable to a $13.6 million increase in sales from the DC product line and a $3.3 million increase in SAS sales. GROSS PROFIT. Gross profit in Fiscal 1998 was $29.6 million, an increase of $11.0 million, or 59.1%, from gross profit of $18.6 million in Fiscal 1997. The increase in gross profit was primarily attributable to an increase in net sales, as discussed above, and to a lesser extent, to an increase in the gross profit percentage. An increase in the gross profit percentage from 40.8% to 47.3% was primarily due to a more favorable mix of business, improved manufacturing efficiencies and lower material costs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative ("SG&A") expenses were $9.4 million in Fiscal 1998, an increase of $1.6 million, or 20.5%, from SG&A expenses of $7.8 million in Fiscal 1997. SG&A expenses decreased as a percentage of net sales from 17.0% in Fiscal 1997 to 15.1% in Fiscal 1998. The increase in dollars was primarily due to higher sales volume, which generated an additional $0.6 million in commissions and merit increases for employees, along with $0.4 million of nonrecurring expenditures incurred in connection with the Recapitalization. RESEARCH AND DEVELOPMENT AND ENGINEERING EXPENSES. Research and development and engineering expenses in Fiscal 1998 were $6.2 million, an increase of $2.2 million, or 55.0%, from research and development and engineering expenses of $4.0 million in Fiscal 1997. Research and development and engineering expenses increased as a percentage of net sales from 8.7% to 10.0%. The increase was due to an increase in engineering personnel of six employees and a $0.5 million increase in fees paid to consultants primarily to support SAS development. 36 AMORTIZATION EXPENSE. Amortization expense was $1.3 million in each of Fiscal 1997 and Fiscal 1998. Amortization expense is comprised of the amortization of goodwill associated with the April 1996 acquisition of Elgar by Carlyle-EEC Holdings, Inc. OPERATING INCOME. Operating income was $12.6 million in Fiscal 1998, an increase of $7.1 million, or 129.1%, from operating income of $5.5 million in Fiscal 1997. Operating income increased as a percentage of net sales from 12.2% in Fiscal 1997 to 20.1% in Fiscal 1998. The increase was due to the factors set forth above. FISCAL YEAR ENDED MARCH 29, 1997 VERSUS FISCAL YEAR ENDED APRIL 3, 1996 NET SALES. Net sales in Fiscal 1997 were $45.6 million, an increase of $3.3 million, or 7.8%, from net sales of $42.3 million in the fiscal year ended April 3, 1996 ("Fiscal 1996"). The increase was primarily attributable to (i) a $2.7 million increase in SAS sales due to increased penetration of the European market, follow-on business from existing programs and customer-funded research and development, and (ii) an increase in DC sales of $1.9 million, both of which were offset by a decrease of $2.1 million in CASS sales in accordance with the Navy's implementation plan for test systems under the CASS Program. GROSS PROFIT. Gross profit in Fiscal 1997 was $18.6 million, the increase of $2.8 million from gross profit of $15.8 million in Fiscal 1996. The increase in gross profit was primarily attributable to an increase in gross profit percentage and an increase in net sales, as discussed above. An increase in the gross profit percentage from 37.4% to 40.8% was primarily due to a higher-margin mix of products and improved manufacturing efficiencies. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses were $7.8 million in Fiscal 1997, an increase of $0.4 million from SG&A expenses of $7.4 million in Fiscal 1996. SG&A expenses decreased as a percentage of net sales from 17.5% to 17.0%. The increase in dollars was primarily due to increased sales and the related increase in higher commissions, partially offset by lower bonus compensation and fringe benefit expense. RESEARCH AND DEVELOPMENT AND ENGINEERING EXPENSES. Research and development and engineering expenses in Fiscal 1997 were $4.0 million, a decrease of $0.2 million from research and development and engineering expenses of $4.2 million in Fiscal 1996. Research and development and engineering expenses decreased as a percentage of net sales from 9.9% to 8.7%. The decrease in dollars was due to an increase in customer-funded research and development that was charged to cost of sales in Fiscal 1997. AMORTIZATION EXPENSE. Amortization expense was $1.3 million in Fiscal 1997, a decrease of $0.8 million from amortization expense of $2.1 million in Fiscal 1996. The decrease was due to a lower amount of goodwill being amortized in Fiscal 1997 (associated with the April 1996 acquisition of Elgar by Carlyle-EEC Holdings, Inc.) as compared to Fiscal 1996 (associated with the 1989 acquisition of Elgar by Dobson Park Industries plc and the 1994 acquisition of Sorensen by Elgar). OPERATING INCOME. Operating income was $5.5 million in Fiscal 1997, an increase of $3.4 million from operating income of $2.1 million in Fiscal 1996. Operating income as a percentage of net sales increased from 5.0% to 12.2%. The increase was due to the factors set forth above. BACKLOG The Company's estimated backlog at March 28, 1998 was approximately $22.0 million, all of which is expected to be shipped in fiscal 1999. At March 28, 1998, approximately 37.7% of backlog was comprised of orders for the CASS Program and 35.0% of programmable DC orders, principally in connection with the Company's semiconductor business through Racal. See "Risk Factors--Importance of Key Customers" and "Business--Significant Customers." Backlog was $19.3 million at March 29, 1997 and $15.7 million at April 3, 1996. The Company's backlog consists of product orders for which a customer purchase order has 37 been received and accepted and which is scheduled for shipment. Orders are subject to rescheduling or cancellation by the customer, usually without penalty. Backlog also consists of customer-funded research and development payable under support contracts with the Company's customers and orders for billable services. Because of possible changes in product delivery schedules, cancellation of product orders and sales will sometimes reflect orders shipped in the same month they are received, the Company's backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. Moreover, the Company does not believe that backlog is necessarily indicative of its future results of operations or prospects. LIQUIDITY AND CAPITAL RESOURCES CASH FLOW. The Company's principal uses of cash are to finance working capital, debt service and capital expenditures. Historically, the Company has funded its activities principally from working capital and a line of credit. Cash flow provided by operating activities for Fiscal 1998 was $7.5 million, an increase of $2.2 million from cash flow of $5.3 million provided by operating activities in Fiscal 1997. The $2.2 million improvement was primarily due to the improvement in net income. CAPITAL REQUIREMENTS. Capital expenditures were $611,000, $621,000 and $1,228,000 in each of Fiscal 1996, 1997 and 1998, respectively. The Fiscal 1998 increase of $607,000 over Fiscal 1997 spending was primarily attributable to expenditures related to current facility expansion. SOURCES OF CAPITAL. The New Credit Facility, which provides for a $15.0 million Revolving Facility and a $15.0 million Term Facility, matures on February 3, 2003. Loans made pursuant to the Revolving Facility may be borrowed, repaid and reborrowed from time to time until February 3, 2003, subject to the satisfaction of certain conditions on the date of any such borrowing. Payments under the Term Facility will be pursuant to an amortization schedule with a final maturity date of February 3, 2003. Indebtedness under the New Credit Facility bears interest at a floating rate equal to, at Elgar's option, the Eurodollar Rate plus a margin of 2.75%, or the Base Rate plus a margin of 1.75%. The margins are subject to reduction as set forth in the New Credit Agreement. Indebtedness under the New Credit Facility is (i) secured by a first priority security interest in substantially all of the assets of EHI, Elgar and Power Ten (including, without limitation, accounts receivable, inventory, machinery, equipment, contracts and contract rights, trademarks, copyrights, patents, license agreements and general intangibles), (ii) guaranteed by EHI and Power Ten on a senior basis and (iii) secured by a pledge of all of the outstanding capital stock of Elgar and Power Ten. The New Credit Facility contains customary covenants restricting the Company's ability to, among other things, incur additional indebtedness, create liens or other encumbrances, pay dividends or make other restricted payments, make investments, loans and guarantees or sell or otherwise dispose of a substantial portion of assets to, or merge or consolidate with, another entity. The New Credit Facility also contains a number of financial covenants that require the Company to meet certain financial ratios and tests and provide that a "change of control" will constitute an event of default. For a more complete description of the New Credit Facility, see "Risk Factors--Significant Leverage and Debt Service," "--Ranking of Notes; Asset Encumbrance," "--Restrictive Covenants" and "Description of New Credit Facility." The Company anticipates that its principal uses of cash will be working capital requirements, debt service requirements and capital expenditures. Based upon current and anticipated levels of operations, management believes that its cash flow from operations, together with amounts available under the New Credit Facility, will be adequate to meet its anticipated requirements for the foreseeable future for working capital, interest payments, amortization of the Term Facility and capital expenditures. Management also believes that these funds will provide it with sufficient liquidity and capital resources for it to meet its current and future financial obligations, including the payment of interest on the Notes, as well as to provide funds for working capital, capital expenditures and other needs. No assurance can be given, however, that this will be the case. Depending upon its rate of growth and profitability, the Company may require additional equity or debt financing to meet its working capital requirements or capital equipment 38 needs. There can be no assurance that additional financing will be available when required, or if available, will be on terms satisfactory to the Company. The Company's future operating performance and ability to service or refinance the Notes and to repay, extend or refinance indebtedness drawn under the New Credit Facility will be subject to future economic conditions and to financial, business and other factors, many of which may be beyond the Company's control. INFLATION AND GENERAL ECONOMIC CONDITIONS Although the Company cannot accurately anticipate the effect of inflation on its operations, it does not believe that inflation has had, or is likely in the foreseeable future to have, a material impact on its results of operations. The Company does not have a significant number of fixed-price contracts where it bears the risk of cost increases. The only contract with fixed prices beyond 12 months is the CASS Program which has options for 24 months of production (representing $9.8 million of revenue to the Company for fiscal 2000 through fiscal 2001). There is an escalation factor of 4.5% per year per option on a cumulative basis. The Company's operating results would be adversely affected by increases in interest rates which would result in higher interest payments by the Company under its variable rate credit facilities. The Company has not historically entered into hedging transactions with respect to its variable rate debt other than interest rate ceilings on its senior debt which expire on April 1, 1999. YEAR 2000 COMPLIANCE The Company's current computer systems adequately provide for a four-digit year and, therefore, management does not believe the "year 2000" issue will materially affect its operations. Additionally, the Company currently does not expect that the year 2000 issue will materially affect its operations due to problems encountered by its suppliers, customers or end-users for its products, although no assurances can be given as to this. 39 BUSINESS RECENT DEVELOPMENTS On May 29, 1998, Elgar acquired all of the outstanding capital stock of Power Ten for $17,800,000 in cash, subject to a post-closing working capital adjustment. Power Ten specializes in developing and manufacturing high-quality, high-power DC power supplies. Headquartered in Los Gatos, California, Power Ten is a leader in the design and promotion of highly engineered switching-regulator supplies marketed under the Power Ten brand name to both leading semiconductor manufacturers and OEMs of production test equipment. For the latest twelve months ended April 4, 1998, Power Ten generated approximately $10.1 million of revenues and $2.4 million of EBITDA. Management believes the acquisition of Power Ten represents a strategic fit for Elgar's core programmable power supplies business. Power Ten is expected to add significant depth to Elgar's existing product offerings, OEM distribution channels and product development capabilities. In particular, management believes that Power Ten's high-power DC power supplies can be marketed effectively under the Sorensen brand name to Elgar's existing test and measurement customers, thus providing incremental revenues to the consolidated company. In addition, while approximately 25% of Power Ten's revenues in its fiscal year ended September 30, 1997 were generated from international sales, management believes it can improve Power Ten's European presence by utilizing Elgar's existing European distribution channels. OVERVIEW The Company is a leader in the design and manufacture of programmable power equipment and systems used to test electronic equipment during development, manufacture and operation. With one of the most recognized brand names and broadest product offerings in a fragmented industry, the Company is one of the largest manufacturers of programmable power equipment in the United States. The Company's products are an integral component of overall systems' testing conducted by a broad range of manufacturers and end-users of electronic equipment to ensure product quality and performance. Power testing is a critical procedure in a multitude of applications, including satellites, weapons systems and medical equipment, which demand zero-fault tolerance. Over the period from fiscal 1993 through Fiscal 1998, the Company's net sales grew at a compounded annual growth rate in excess of 22.2% principally due to significant growth in the market for programmable power equipment driven by the proliferation of increasingly sophisticated electronic components in a wide range of applications, particularly in telecommunications and computers. Management views the Company's business in five principal markets, which are (i) programmable DC power, which is a type of programmable power supply used to test products that require direct current ("DC") inputs, such as components, printed circuit boards, semiconductors, medical equipment, telecommunications equipment, avionics and numerous other types of electronic products, (ii) Solar Array Simulators, which are used for extensive testing of satellite systems throughout the manufacturing process and just prior to launch, (iii) the CASS Program for the U.S. Navy (for which the Company provides programmable AC and DC, fixed DC and power conditioning products), (iv) programmable AC power, which is a type of programmable power supply used to test alternating current ("AC") products such as avionics, computers, DC power supplies, appliances and many other types of electronic products and (v) other, which consists of power conditioning and uninterruptible power supply ("UPS") products, which supply back-up power principally to military computer and communications systems and oil exploration companies for data logging applications, and customer service, which provides repair service and spare parts to each of the markets listed above. BACKGROUND Founded in 1965, Elgar initially focused on providing solid state line conditioning and frequency changers to the AC power test and measurement market. In 1987, Elgar was selected as a sole source 40 supplier to Lockheed Martin (formerly GE Aerospace) for the CASS Program for the U.S. Navy. In the early 1990's, Elgar's current management team concluded that the large and diverse DC market was the most appropriate market to target in order to expand Elgar's commercial business. In an effort to enter the DC market quickly and efficiently, in 1994 Elgar acquired the Sorensen Division from a subsidiary of Raytheon Corporation for approximately $4.0 million. A market leader with a strong brand name, one of the broadest DC product lines on the market and a well-established customer base, Sorensen complemented the Company's leading position in the programmable AC market and provided the Company with one of the most comprehensive high-end product lines for both the AC and DC markets. Elgar was privately held from its founding until 1979, when it was purchased by Onan Corp. In September 1986, Elgar's then-existing management team took the Company private through a leveraged buyout. In 1989, Dobson Park Industries plc, a publicly-traded, UK-based conglomerate, acquired Elgar. During the fall of 1995, Dobson Park was acquired by Harnischfeger Industries, Inc., which was principally interested in Dobson Park's coal mining equipment business. Determining Elgar's operations to be noncore to its strategy, in April 1996 Harnischfeger sold Elgar to management, The Carlyle Group and GFI Energy Ventures LLC in a leveraged buyout. INDUSTRY OVERVIEW Test and measurement ("T&M") products are used to evaluate the design parameters, specifications and operation of a variety of electronic equipment in the commercial and military sectors at the development, manufacturing and/or deployment stages. The T&M market is fragmented with numerous companies operating in several specialized segments. Within the overall testing market, the Company competes in numerous programmable power niches, including programmable DC power, programmable AC power and satellite test systems. According to a FROST & SULLIVAN study of world T&M equipment manufacturers, growth in the T&M market has correlated with growth and advancements in the electronics industry. The use of test and measurement equipment instrumentation has increased significantly with the increased sophistication of electronic equipment and the associated need for reliable performance and demanding specifications. Power supplies are critical in the production process for a number of end-users that require versatile instruments to generate specified series of power conditions to evaluate performance of components, subassemblies or end-products under real world conditions. Power is conditioned and transformed into either an alternating current ("AC"), which is similar to that coming from an outlet, or direct current ("DC"), which is similar in form to the power coming from a battery. Programmable AC power supplies provide power which is converted to a form that changes voltage continuously and are used to test devices that require AC power such as consumer appliances and avionics. The output can be varied by computer program to determine susceptibility of a test item to changes in voltage, frequency and phase. AC customers include the military and appliance, computer and power supply manufacturers. Programmable DC power supplies provide output with steady voltage and are used to test or stress devices such as electronic printed circuit boards and avionics that require DC input power. The output can be varied by computer program to determine the susceptibility of test items to voltage and current. The segment has a diverse customer base that includes component, printed circuit board and computer manufactures as well as the military. Recently, OEMs have begun to purchase and integrate DC power supplies into their products for applications which include medical treatment equipment and semiconductor wafer manufacture. In the early 1990s, military applications traditionally dominated the market as the defense industry required sophisticated testing for the deployment of increasingly complex weapons systems. With decreased military requirements worldwide, market focus has shifted toward the industrial and consumer electronic industries. Companies primarily supplying equipment to the military and defense industry have begun to focus on a different end-user base which include the telecommunications, transportation, and 41 satellite communication industries. In recent years, the computer and telecommunications industries have been the primary markets driving growth. Three primary factors have been driving market demand for power testing supplies, which are: (i) the increased use of sophisticated electronics and microprocessors in consumer related applications; (ii) robust demand in rapidly growing emerging markets for electronics and electronic-related products; and (iii) increased compliance requirements due to new international standards. Technological changes have prompted many industries to begin using increasingly complex electronic equipment in products ranging from automotive components to florescent lighting, necessitating greater purchases of power supplies for testing. Demand for test and measurement equipment has also grown significantly as rapid growth in emerging market countries has lead to increased use of electronics and electronic products within their economies. Additionally, Japanese and European countries have generally been faster to adapt to international standards with the consequence that U.S.-based firms have been obligated to move in the same direction as their dependence on foreign sales increases. Adoption of standardized requirements for electronics in the European Community should provide future growth opportunities worldwide. BUSINESS STRATEGY The Company's business strategy is focused on continuing its leadership and growth in its principal target markets and thereby increasing market share and maximizing revenues and profitability. The Company's growth strategy includes the following key initiatives: - CUSTOMER FOCUSED NEW PRODUCT DEVELOPMENT. The Company intends to continue focusing development resources toward new products which better meet the increasingly complex requirements of its existing customers. As an example of its commitment to new product development, the Company has five new programmable power supply products under development expected to be released in Fiscal 1999 and 2000 along with four product-line extensions slated for introduction in fiscal 1999. The Company designed and developed each of these new products and product-line extensions based on significant input from its customers. Customer-focused development substantially increases the probability of a rapid return on product development expense and helps further solidify the Company's key customer relationships. - INCREASE PENETRATION OF KEY GROWTH MARKETS. While Elgar has a strong position in satellite and semiconductor power test equipment, significant additional revenue opportunities exist in these markets. Management believes that the Company's strong product offerings to these markets and focused sales and marketing efforts should result in significant incremental revenue. Management is leveraging its established relationships with U.S. and European satellite manufacturers to supply all their power test equipment needs by offering a lower cost and more versatile alternative to in-house developed systems. In addition, as semiconductors become more complex and their production process more demanding, management believes semiconductor manufacturers will require more sophisticated and versatile automatic test equipment. - EXPAND PRESENCE IN THE OEM MARKET. Although programmable power supplies have historically been used primarily for test and evaluation purposes, the increased sophistication of certain electronic equipment has created a need for derivatives of Elgar's products for sale as components in OEM products. Elgar's OEM sales were approximately 2.6% of its total net sales for Fiscal 1998. Management believes that sales to OEMs could increase materially as it further penetrates this market. - CONTINUED IMPROVEMENTS IN COSTS AND MANUFACTURING PROCESSES. The Company is continually introducing measures to increase its profitability and maintain a competitive advantage. Management is focusing on reducing material handling costs, further reducing inventory and improving manufacturing cycle times through initiatives such as adopting a "just in time" inventory system, integrating work cells on the production floor, utilizing cross-functional teams in the early stages of product 42 development and continually seeking to improve quality control measures. Management believes it can significantly enhance the Company's already strong competitive position by improving product availability. PRINCIPAL MARKETS AND PRODUCTS The Company's programmable power and related products are used in a broad range of commercial and military applications (i) to test design parameters in the development of new electronic equipment, (ii) to test specifications during manufacturing of such equipment, (iii) to confirm the operation of electronic equipment once field-deployed and (iv) for selected OEM applications. Elgar capitalizes on its in-house digital engineering expertise to develop versatile programmable equipment that is exceptionally flexible and adaptable in generating specified series of power conditions. While the Company's products have a life expectancy of at least 5-10 years, technological advances and customers' continual need for more features drives growth in demand and generates repeat sales to approximately 2,500 customers. The Company sells its products in two forms: (i) as test equipment for integration into comprehensive ATE systems, such as its semiconductor business through Racal; and (ii) as integrated power test systems for more complex applications, such as its Solar Array Simulators. In addition to its test and measurement business, Elgar also manufactures and provides highly durable power supplies for various other applications, and provides customer service for all of its products. The Company categorizes its sales along five product lines, which are:
NET SALES FOR THE FISCAL YEAR ENDED MARCH 28, 1998 ----------------------- PRODUCT LINE $(000S) % OF TOTAL - ----------------------------------------------------------------------- --------- ------------ Programmable DC Power.................................................. $ 32,625 52.2% Solar Array Simulators................................................. 8,424 13.5 CASS Program........................................................... 8,857 14.2 Programmable AC Power.................................................. 7,080 11.3 Other Products and Services............................................ 5,510 8.8 --------- ----- Total.............................................................. $ 62,496 100.0% --------- ----- --------- -----
PROGRAMMABLE DC POWER The Company's programmable DC product line includes over 130 products which are used by commercial companies and military programs for applications relating to computer and communication equipment, semiconductor and product burn-in, industrial process control and bench-top and research and development equipment. Typical customers for the Company's programmable DC products include Racal, Applied Materials, Inc., GenRad, Inc., Halliburton Company, Lucent Technologies Inc., Teradyne Inc. and Veeco Instruments, Inc. Elgar's programmable DC products generate a wide range of dynamic DC voltages and currents, providing the electrical power to test any type of DC electronic equipment from semiconductors to automobile electronics. Manufacturers of such electronic equipment conduct tests during production and prior to shipment to evaluate performance of the specific product or component during all possible input power variations. In addition to use in testing equipment, Elgar's programmable DC power products are also used by OEMs as power sources within end products, as discussed elsewhere herein. Through Racal, Elgar is the sole source supplier of programmable DC power equipment to a leading semiconductor manufacturer for use in ATE systems to test microprocessors. Since securing this business in Fiscal 1997, Elgar's revenue from this relationship has increased from $3.2 million in Fiscal 1997 to 43 $17.7 million in Fiscal 1998. See "Risk Factors--Importance of Key Customers" and "Business--Significant Customers." The Company was recently notified by Racal that the leading semiconductor manufacturer referred to above has decided to cease orders for Elgar's current AT-8000 DC power supplies until anticipated "next generation" technology is available in early 1999. As a result, management expects that revenues from Racal will be significantly lower in fiscal 1999 than they were in fiscal 1998. Elgar's prototype ATE for this next-generation technology is expected to be delivered to the end-user in July 1998 with production scheduled to commence in early calendar 1999. Management believes that as a result of industry growth and the brevity of product life cycles in the semiconductor industry, which continually require new generations of semiconductors and associated production and test equipment, this market segment presents a significant opportunity for long-term growth. Elgar is leveraging its expertise in test and measurement equipment to develop derivative programmable DC power supplies by offering modified or customized units for OEMs. To date, Elgar has provided programmable power supplies to OEMs such as Siemens Medical Systems for medical devices, Applied Materials and Veeco Instruments for semiconductor manufacturing equipment and Cellular One for inclusion in telecommunications equipment. To expand this line of business, management recently implemented a marketing plan to target other potential customers. Management believes that as electronic content in manufactured products continues to increase, Elgar's OEM business presents significant opportunities for growth. Some existing and potential customers do not require products with the power, sophistication and range of features as those which Elgar produces. Recognizing this, Elgar has secured a supply arrangement with Good Will Corporation of Taiwan and Chroma ATE, Inc. of Taiwan to manufacture less sophisticated, lower priced programmable DC product and AC product under the ELGAR and SORENSEN brand names, which are then resold through Elgar's distribution channels. SOLAR ARRAY SIMULATORS Given the significant cost involved in building, launching and insuring satellites, fully testing units prior to launch is absolutely critical. With the flexibility to generate any possible power scenario that solar panels may produce in space, the Company's fully integrated Solar Array Simulator ("SAS") test system performs mission-critical power testing throughout the satellite manufacturing process right up to launch. The SAS can be programmed to create the output power forms associated with a wide variety of solar array operating environments including direct solar illumination, spinning orbits, an eclipse, aging of the satellite, the solar array and many other conditions. The Company believes it is the leading third-party source for satellite ground power test systems in the United States and currently supplies its Solar Array Simulator test system to all major U.S. and some European satellite manufacturers. Historically, most satellite companies produced their own test equipment. However, satellite manufacturers are looking to reduce costs and shorten production times as competition in their industry intensifies and the demand for satellite production increases. As a result, satellite manufacturers are purchasing test equipment from third party manufacturers who can provide more versatile equipment at a lower cost. As third-party test systems continue to replace customers' in-house developed systems, management believes that Elgar's SAS business potential is in its early growth stages, as evidenced by the increase in revenues attributable to SAS of $1.8 million in fiscal 1994 to $5.1 million in Fiscal 1997 and $8.4 million in Fiscal 1998. Elgar introduced its Solar Array Simulator in 1993 and in 1994 was awarded a major contract to supply solar array simulators, battery simulators and telemetry components to Lockheed Martin, a subcontractor to Iridium Inc., Motorola's venture to develop a network of satellites to provide global mobile telephone service. Today, Elgar supplies virtually every major U.S. satellite program, including Lockheed Martin's Telstar 4, Stardust, MGS and A2100; Motorola's Iridium; Loral's Intelsat 7, MCI and 44 Tempo; TRW's EOS and SMTS; and Hughes' HS601, HS702 and Galaxy. In addition, the Company has received European orders for SAS from Matra Marconi Space (France) and Alcatel ETCA (Belgium). As a result of the explosive growth in commercial demand for digital communications, direct television and remote sensing technology, future satellite production is forecast to far exceed current and historical levels. Management expects demand for its SAS products to be impacted positively by (i) expected growth in the number of satellite production bays and the retrofitting of existing bays and (ii) a continuation in the trend of satellite manufacturers utilizing third-parties for solar array simulators rather than more expensive and less sophisticated in-house systems. The Company plans to further increase its SAS business by selling complete ground power test systems to its customers, such as a system recently shipped by Elgar to Hughes which included battery simulators, programmable loads and ancillary telemetry, safety and other related equipment. CASS PROGRAM The CASS Program is a long-term, high-priority U.S. Navy initiative designed to replace the proliferation of customized ATE and related test program sets for aircraft carriers, depots and test integration facilities in order to significantly reduce operating costs. Through a state-of-the-art, computer- controlled ATE station that tests avionics, the U.S. Navy has achieved its goal of eliminating the proliferation of customized ATE and reducing testing costs. Elgar's role in the CASS Program is to supply the entire power subsystem for the ATE stations, which consists of three types of power supplies: (i) a power conditioner, battery charger and batteries which together constitute an input power conditioning system as well as battery back-up in case of power failure; (ii) programmable AC and DC power supplies which provide the test stimulus for avionics testing; and (iii) nonprogrammable DC power supplies which supply the internal ATE station instruments with fixed supply voltages. The Company is the sole source supplier of the power subsystem to Lockheed Martin, the prime contractor for the CASS Program. Elgar has generated approximately $9.0 million or more in CASS sales annually since fiscal 1993, with $9.9 million and $8.9 million in Fiscal 1997 and Fiscal 1998, respectively. Having delivered 465 systems to date, Elgar's current contract for the CASS Program covers the delivery of 61 additional systems under a contract fully funded through fiscal 1999. In addition, the Navy has the option of extending the contract through 2001 for an additional 72 systems. The Navy estimates that a total of 790 units will be required under the CASS Program by the year 2005. The Navy is also considering an expansion of the CASS program to equip non-carrier ships. Based on its success, Lockheed Martin is marketing CASS aggressively to selected foreign militaries. If Lockheed Martin obtains any such business, this would represent additional opportunities for revenue growth for Elgar. Further, other branches of the military have initiated programs similar to CASS, including the U.S. Army's Intermediate Forward Test Equipment and the U.S. Air Force's deployable F-15 downsize program, both of which currently utilize the Company's products. AC POWER Elgar's programmable AC products generate a wide range of dynamic AC voltages, frequencies and currents, simulating all possible electrical power waveforms. In addition to pure AC waveforms, Elgar's AC products are capable of creating any distortion to the wave including noise, spikes, drop-outs and shifts in time. Like Elgar's DC products, its AC products are used to test electronic equipment such as consumer appliances, computers, DC power supplies and avionics, with the tests subjecting the equipment to all possible power variations to evaluate performance of the specific product or component. Elgar's high-end AC product line is recognized in the AC market for superior performance, reliability and durability. Elgar's leading AC product, the SmartWave-TM-, is widely recognized in the industry as one of the most technologically advanced AC products on the market. The AC power market, which has been dominated by military spending in the past, is a small but steady and attractive niche for the Company. 45 Management believes that the Company has the largest share of this AC power market. Elgar is currently an incumbent on virtually all major U.S. government ATE contracts, a position that management believes should afford it a high probability of winning contract renewals as well as provide it with a strong track record that can be leveraged to win new business from both military and commercial customers. In addition to providing AC power to the military markets, significant commercial opportunities for AC power in the European Community have arisen as well. The Company recently introduced an extension to its SmartWave product to provide power testing in compliance with the new European (IEC) testing standards for electricity and intends to introduce an integrated test system in February 1998 to perform the required tests. Accordingly, the Company anticipates demand for AC power supply products to increase as European and other electronics manufacturers are forced to comply with the new standards. OTHER PRODUCTS AND SERVICES The Company's "other" product line is comprised of two components, which are (i) power conditioning and uninterruptible power supply ("UPS") products and (ii) customer service. Elgar's power conditioning and UPS product line includes a range of instruments which are capable of providing precise AC output power regardless of the input power distortions or drop-outs. This type of product is used in critical applications where electrical power fluctuations could have severe consequences, such as with field-support for military operations and back-up for data logging in oil exploration missions. Elgar's Global Uninterruptible Power Supply (GUPS-TM-), its principal product in this line, is designed to handle any input power from anywhere in the world, including aircraft power, and generates a clean AC output even when the input power is lost. Elgar's power conditioning business was originally a product offering to its military customers. Today, Elgar's power conditioning products are sold largely to the military for power support for computer applications in the field, to utilities for control-room back-up power and to oil exploration companies for field support for data logging applications. While approximately 42% of these products are currently sold to the military, Elgar also supplies power conditioning units to laboratories which calibrate other electronic equipment. Elgar discontinued its higher power UPS lines in the late 1980s but maintained its lower power, ruggedized UPS products. Due to their rugged construction and relatively high price, Elgar's UPS products are usually not selected unless customers such as the military or oil service companies have particular needs for the level of reliability and durability offered by Elgar's products (such as the U.S. military's use of such power supplies in the battle fields in Operation Desert Storm). Additionally, Elgar offers comprehensive customer service for all of its product offerings through its in-house staff of eight customer service technicians, two service administrators and one customer service engineer. Elgar's customer service organization provides global repair and spare parts for all products Elgar offers, and provides technical assistance to Elgar's international distributors which are responsible for equipment repairs in their territories and to customers who repair equipment in-house. Approximately 4% of the Company's net sales in Fiscal 1998 was derived from customer service, with 45.2% of customer service revenues attributable to standard Elgar products, 38.4% attributable to spare parts and repairs of power conditioning and UPS systems and 16.4% attributable to Sorensen products. RESEARCH AND DEVELOPMENT At March 28, 1998, the Company's engineering department consisted of 77 people, 37 of whom are engineers. Twenty-eight of the engineers are actively involved in new product development, with the remainder involved in support or sustaining functions. The other 40 persons in the engineering organization include technicians, designers and drafters. As evidence of its commitment to new product development, the Company's research and development and engineering expenses were $4.0 million and $6.2 million in Fiscal 1997 and Fiscal 1998, respectively, and historically have been approximately 10% of net sales. 46 The development and introduction of new products has been and will continue to be an essential part of management's growth strategy to increase market share and expand into new markets. The current management team has had a clear record of successful and profitable new product introductions, including the SmartWave and the Solar Array Simulator products. These and other existing products are considered superior in the marketplace due to their digital capabilities, flexible format, superior engineering and long-term reliability. The Company's in-house development efforts are focused on leveraging its strong engineering capabilities to produce higher-end, more sophisticated products utilizing digital technology. As a highly focused company, Elgar can target market needs and new product areas with precision, giving it a substantial competitive advantage over most of its competitors. Management, in conjunction with the sales force and engineering department, has demonstrated a strong ability to identify potential product areas and create technical solutions. After conducting extensive market research and investing heavily in research and development over the last two years, Elgar is preparing to introduce four new programmable DC products and one new AC test system in fiscal 1999 which management believes will be superior in function and quality to, and at or below price points of, competitive products. In addition, over the next 12 to 24 months, management expects to introduce other new products and enhancements to the existing Sorensen (programmable DC), SmartWave and Solar Array Simulator product lines, as well as a new programmable controller that will provide a platform for these new and additional future products. COMPETITION The principal competitive factors affecting the market for the Company's products include vendor and product reputation, price, architecture, functionality and features, product performance, ease of implementation, ease of use and quality of customer support. The Company believes that it has competed effectively to date in all of its markets. Management believes that while the AC and DC markets are very competitive, the Company maintains an excellent competitive position in each, with the leading market share in the global AC market (approximately 15%) and the fourth largest market share in the global DC market (approximately 12%). As reported in a recent PRIME DATA study, Hewlett-Packard has the leading market share in the global DC market, with an approximate 28% market share. Notwithstanding Hewlett-Packard's leading position in the global DC market, the Company has competed favorably with Hewlett-Packard in the past, such as with securing the Company's test and measurement semiconductor business, and believes it will continue to do so in the future. Both markets are relatively fragmented, and most competitors are either small businesses or noncore subsidiaries of much larger parent corporations. The only currently viable competition for Elgar's Solar Array Simulators is presented by "in-house" engineering staffs of individual spacecraft and satellite manufacturers. With respect to the CASS Program, the Company is currently the sole source supplier of its product for the Program, and as such, does not face any competition with respect to this portion of its business. See "Risk Factors--Competition." SALES AND MARKETING Elgar sells its products through sales representatives in the U.S. and through distributors internationally. Elgar's sales organization includes 25 in-house employees (21 of whom are in sales and marketing, two in customer service support, one in general and administrative and one outside consultant), as well over 50 representative/distributor companies with more than 200 salespeople worldwide. Management believes that its sales network is one of its major assets and a significant competitive advantage over the sales channels of many if not all of its competitors. As an example of the effectiveness of the Company's sales channel, a key element in the successful integration of Sorensen was the sales force's ability to take on a new product line and launch immediate sales. After the acquisition, Sorensen's then-declining test and measurement sales went from $8.5 million in 1993 to $10.9 million in 1995 largely due to the efforts of the Company's internal and representative sales personnel. The Company's in-house sales force includes six sales managers who are each responsible for working with customers and prospective customers to provide existing or custom solutions to their needs. The 47 Company's seven sales engineers, who support the sales managers, representatives and customers, design solutions according to customers' applications. In turn, these 13 sales professionals are supported by an administrative staff of seven people. Elgar's sales and marketing team also includes three marketing professionals who conduct marketing research, create collateral material and training manuals, coordinate the placement of advertising in appropriate trade journals and other periodicals, as well as organize trade shows and perform general public relations work. With a view towards increasing revenues from programmable power products supplied for inclusion in OEM products, the Company has hired a sales and marketing person dedicated to developing leads and securing orders from other OEMs within industries which are potential customers for the Company's products. Elgar has strong relationships with the majority of its sales representatives. In the U.S., management believes it has retained the services of the top sales representative for the Company's products in each region of the U.S. Internationally, management believes it is represented by top-tier international distributors in the regions where it sells its products. Elgar's sales representatives are essentially field extensions of the Elgar sales team, helping to identify and pursue sales opportunities. As a result, the sales force, including the representative network, has been instrumental in identifying potential new product opportunities, thus helping to guide the Company's research and development efforts to the most promising areas. In an effort to maximize the effectiveness of its domestic sales network, Elgar has established a Representative Board, comprised of the chief executives of five of the Company's sales representative organizations, that meets with management on a quarterly basis to discuss marketing strategy and execution of the marketing plan. Elgar's sales representatives sell a variety of non-competing, complementary test and measurement products from a number of manufacturers to over 6,000 customers. Only two sales representatives accounted for 10% or more of Elgar's Fiscal 1998 revenues. Though domestic sales account for approximately 94% of total net sales in Fiscal 1998, management sees potential markets in the Asia-Pacific and European regions, as well as an eventual market in Latin America. FACILITIES AND MANUFACTURING OPERATIONS Located in San Diego, California, Elgar leases four facilities in close proximity totaling approximately 118,000 square feet, with lease terms expiring no sooner than 2001, which are used for (i) the design and production of Elgar's standard DC and AC products, production for the CASS Program and administrative headquarters (87,300 sq. ft.), (ii) the design and production of most Sorensen-brand products (14,600 sq. ft.), (iii) digital engineering and accounting (7,100 sq. ft.) and (iv) manufacturing of magnetics and PDU, a power conditioning product (9,100 sq. ft.). The Company believes that its facilities are in good condition with substantial capacity available for increased production of current product lines and new product introductions. As a result, no substantial capital expenditures are expected to be required to accommodate the projected revenue growth. Elgar's manufacturing facilities are organized and run efficiently with a focus on quality, productivity and cost and inventory management, and its manufacturing equipment is modern and allows for efficient and quality production. The Company has also designed and constructed its own in-house test stations to speed production. Operations management has identified four core manufacturing competencies, and has redesigned the production floor to use work cells and simplify material handling and assembly methodology based on these competencies, which are (i) wire harness/heatsink assembly, (ii) magnetics (transformer assembly), (iii) low-volume printed circuit board assembly and (iv) final assembly and testing. The redesign has allowed maximum productivity and leveraging of common processes across product lines, since the majority of Elgar's products use the same basic components. Management has invested in semi-automated test processes to reduce cycle times and labor costs and established cross-functional teams to reduce procurement costs. These teams have identified and implemented major product savings by selecting suppliers that have process methodologies that support Elgar's mix and volume. These efforts have enabled Elgar to reduce its average days inventory from 113 days in fiscal 1994 to 84 days in Fiscal 1998, and this efficiency has reduced the need for sizable working capital investments. As part of its cost 48 management program, management has outsourced certain lower-end, high volume subassemblies of transformers and printed circuit boards to two subcontract assembly plants in nearby Tijuana and Tecate, Mexico. All subcontract subassemblies are subjected to Elgar's inspection and test process as assurance that quality expectations are met. Management has also implemented a "red light" quality assurance system which has improved quality, reduced rework and obviated the need for some final testing processes. The basic strategy of the "red light" system is to empower front-line workers to identify a problem as early as possible during the production process and stop the entire effected production line until the problem is corrected. A cross-functional team is immediately dispatched to diagnose and solve the problem. Any affected components are sent back in the cycle to be fixed, and production is not allowed to resume until the problem is corrected. As a result of this system, warranty and rework expenses have been reduced from 2.5% of revenues in fiscal 1992 to less than 0.7% of revenues in Fiscal 1998. As a testament to its success in improving quality, Elgar was awarded the "Salty Dog" reliability and maintainability award from the U.S. Navy in 1994 and, in 1996, received Lockheed Martin's Certified Supplier Award for "zero defects shipped." SIGNIFICANT CUSTOMERS Certain customers are material to the business and operations of the Company. In Fiscal 1998, (i) Racal, a systems integrator for test and measurement equipment which provides certain ATE systems utilizing the Company's programmable power supplies to manufacturers, including a leading semiconductor manufacturer, accounted for approximately $17.7 million, or 28.3%, of the Company's total net sales and (ii) Lockheed Martin, through various of its operating units, accounted for approximately $11.5 million, or 18.4%, of total net sales during Fiscal 1998. During Fiscal 1998, the Company's top five customers accounted for approximately $36.2 million of net sales, representing 57.9% of the Company's total net sales. The Company was recently notified by Racal that the leading semiconductor manufacturer referred to above has decided to cease orders for Elgar's current AT-8000 DC power supplies until anticipated "next generation" technology is available in early 1999. As a result, management expects that revenues from Racal will be significantly lower in fiscal 1999 than they were in fiscal 1998. The Company's prospects will continue to depend on the success of Racal, Lockheed Martin and its other significant customers. Although the Company believes that it has strong, long-standing relationships with these customers and that such relationships are mutually beneficial, the loss of any significant customer, or a significant reduction in the Company's business with any of them, as with the anticipated decrease in revenues from Racal in fiscal 1999, could have a material adverse effect on the Company and its business, results of operations and financial condition. EMPLOYEES At March 28, 1998, the Company had 425 full-time employees, including 98 manufacturing personnel, 77 engineering personnel, 32 administrative personnel, 21 sales and marketing personnel, eight customer service personnel and 189 personnel involved in direct labor. No attempts to unionize any of the Company's employees have been made. The Company considers its relations with its employees to be good. INTELLECTUAL PROPERTY The Company has trademarked its SmartWave and GUPS products and has been operating under the ELGAR and SORENSEN trade names for over 30 years. In addition to the protection offered by trademark laws and regulations, the Company relies upon trade secret protection for its confidential and proprietary information and technology. 49 ENVIRONMENTAL The Company is subject to various evolving federal, state and local environmental laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of hazardous and non-hazardous substances and wastes. These laws and regulations provide for substantial fees and sanctions for violations and, in many cases, could require the Company to remediate a site to meet applicable legal requirements. In connection with the Recapitalization, Lehman conducted certain investigations (including reviewing Phase I environmental reports prepared in 1996 with respect to two of the Company's four facilities) of the Company's operations and its compliance with applicable environmental laws. Pursuant to the Recapitalization Agreement, certain Company stockholders have agreed, subject to certain limitations as to survival and amount, to indemnify the Company against environmental liabilities incurred prior to the consummation of the Recapitalization. See "The Recapitalization." The Company is not aware of any material environmental conditions affecting the properties it leases. LEGAL PROCEEDINGS The Company is routinely involved in legal proceedings related to the ordinary course of its business. Management does not believe any such matters will have a material adverse effect on the Company. The Company maintains property, general liability and product liability insurance in amounts which it believes are consistent with industry practices and adequate for its operations. 50 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth the name, age and position of the persons who became executive officers and directors of each of the Company upon consummation of the Recapitalization. Each director will hold office until the next annual meeting of the stockholders or until his successor has been elected and qualified. Officers will be elected by the Board of Directors and will serve at the discretion of the Board.
NAME AGE POSITIONS - --------------------------------------- --- ------------------------------------------------------------------ Kenneth R. Kilpatrick.................. 60 President and Chief Executive Officer, EHI and Elgar; Director, EHI and Elgar Samuel A. Lewis........................ 49 Vice President--Sales and Marketing, Elgar Christopher W. Kelford................. 47 Vice President--Finance, Chief Financial Officer and Treasurer, EHI and Elgar Normand Precourt....................... 55 Vice President--Engineering, Elgar Ronald Garrett......................... 64 Vice President--Operations, Elgar Daniel E. Donati....................... 41 Vice President--Program Management, Elgar Thomas Erickson........................ 55 Vice President--Human Resources, Elgar John F. Lehman......................... 55 Director, EHI and Elgar Donald Glickman........................ 65 Vice President, EHI and Elgar; Director, EHI and Elgar George Sawyer.......................... 67 Director, EHI and Elgar Keith Oster............................ 36 Secretary, EHI and Elgar; Director, EHI and Elgar Joseph A. Stroud....................... 42 Director, EHI and Elgar William Paul........................... 62 Director, EHI and Elgar Bruce D. Gorchow....................... 40 Director, EHI and Elgar Glenn A. Youngkin...................... 31 Director, EHI and Elgar
KENNETH R. KILPATRICK, who is President and Chief Executive Officer of Elgar and a Director of EHI and Elgar, has been with Elgar since July 1991 in his current position. Mr. Kilpatrick was appointed President and Chief Executive Officer of EHI in May 1998. Prior to joining Elgar, Mr. Kilpatrick was President of Machine Industries, Inc., an aerospace parts manufacturer, from 1989 to 1991, and with ACDC Electronics, a division of Emerson Electric Co. and a manufacturer of fixed power supplies, from 1964 to 1989. After beginning as an Assistant General Manager of ACDC Electronics in 1964, Mr. Kilpatrick was appointed President of the company in 1972. Mr. Kilpatrick is active in all aspects of Elgar's business. SAMUEL A. LEWIS, Vice President--Sales and Marketing of Elgar, with 25 years of experience in the test and measurement equipment industry, including 19 years with Elgar, is responsible for leading Elgar's sales efforts. Mr. Lewis, who began his career with Elgar in 1972, re-joined Elgar in January 1988 after spending the prior six years as the North American Sales Manager for Wavetek Corporation, a test and measurement company. At Wavetek, Mr. Lewis spearheaded the creation of a central sales management organization, set up area sales offices, and managed 18 representative organizations with 130 sales people. Prior to beginning work with Wavetek in 1982, Mr. Lewis spent nine years with Elgar in the positions of Customer Service Manager and National Sales Manager. CHRISTOPHER W. KELFORD, Vice President--Finance, Chief Financial Officer and Treasurer of Elgar and EHI, has been with Elgar since August 1990. Prior to joining Elgar, Mr. Kelford spent 12 years with TRW LSI Products, Inc., a semiconductor manufacturer, advancing from Finance Manager to Controller during that time. Mr. Kelford had significant experience in modernizing information infrastructures, overseeing foreign operations and managing the due diligence phases of five merger and acquisition transactions. 51 NORMAND PRECOURT, Vice President--Engineering of Elgar, has been with Elgar since July 1990. Prior to that time, Mr. Precourt was with Cipher Data Products, a computer peripherals company, advancing from Engineering Group Leader to Vice President, Engineering Technology during that time. RONALD GARRETT, Vice President--Operations of Elgar, joined Elgar in June 1992. Prior to that time, Mr. Garrett directed major "start up" operations at Sequent Computer, Memorex and the Automated Test System Division of John Fluke Manufacturing. In addition, Mr. Garrett gained extensive background in power electronics while serving as the senior manufacturing executive at both ACDC Electronics and the Qualidyne Division of Lambda Power Systems. Mr. Garrett is recognized for turnaround conversion of factory job shops to production process control operations. DANIEL E. DONATI, Vice President--Program Management of Elgar, joined Elgar in September 1991 and is responsible for overseeing Elgar's Space Systems and CASS Program operations. Prior to that time, Mr. Donati spent over 12 years with Aerojet Electronics Systems and Walt Disney where he gained valuable program management, operations and engineering experience. THOMAS ERICKSON, Vice President--Human Resources of Elgar, joined Elgar in October 1983. Prior to that time, he spent seven years at Solar Turbines as its Human Resources Manager. JOHN F. LEHMAN, who is a Director of EHI and Elgar, is a Managing Principal of Lehman. Prior to founding Lehman in 1990, Dr. Lehman was an investment banker with PaineWebber, Inc. from 1988 to 1990, and served as a Managing Director in Corporate Finance. Dr. Lehman served for six years as Secretary of the Navy, was a member of the National Security Council Staff, served as a delegate to the Mutual Balanced Force Reductions negotiations and was the Deputy Director of the Arms Control and Disarmament Agency. Dr. Lehman served as Chairman of the Board of Directors of Sperry Marine, Inc., and is a member of the Board of Directors of Sedgwick Group plc, Ball Corporation, ISO Inc. and Burke Industries, Inc., and is currently Vice Chairman of the Princess Grace Foundation, a director of OpiSail Foundation and a trustee of Spence School. DONALD GLICKMAN, who is Vice President and a Director both EHI and Elgar, is a Managing Principal of Lehman. From February 1998 to May 1998, Mr. Glickman was President of EHI. For the past five years, Mr. Glickman has also been the President of Donald Glickman Company, Inc., which together with Lehman, acquires as principal significant corporations in aerospace, marine and defense industries. Prior to forming Donald Glickman Company, Inc., Mr. Glickman was a principal of the Peter J. Solomon Company, a Managing Director of Shearson Lehman Brothers Merchant Banking Group and Senior Vice President and Regional Head of The First National Bank of Chicago. Mr. Glickman served as an armored calvary officer in the Seventh U.S. Army. Mr. Glickman is currently a director of Cal-Tex Industries, Inc., Monro Muffler Brake, Inc. and Burke Industries, Inc. and is a trustee of MassMutual Corporate Investors, MassMutual Participation Investors and Wolf Trap Foundation for the Performing Arts. GEORGE SAWYER, who is a Director of EHI and Elgar, has been affiliate with Lehman for the past five years. From 1993 to 1995, Mr. Sawyer served as the President and Chief Executive Officer of Sperry Marine, Inc. Prior to that time, Mr. Sawyer held a number of prominent positions in private industry and in the U.S. government, including serving as the President of John J. McMullen Associates, the President and Chief Operating Officer of TRE Corporation, the Vice President of International Operations for Bechtel Corporation and the Assistant Secretary of the Navy for Shipbuilding and Logistics under Dr. Lehman. Mr. Sawyer is currently a director of Burke Industries, Inc. KEITH OSTER, who is Secretary and a Director of each of EHI and Elgar, is a Principal of Lehman. Mr. Oster joined Lehman in 1992 and is principally responsible for financial structuring and analysis. Prior to joining Lehman, Mr. Oster was with the Carlyle Group, where he was responsible for analyzing acquisition opportunities and arranging debt financing, and was a Senior Financial Analyst with Prudential-Bache Capital Funding, working in the Mergers, Acquisitions and Leveraged Buyout Department. Mr. Oster is currently a director of Burke Industries, Inc. JOSEPH A. STROUD, who is a Director of EHI and Elgar, is a Principal of Lehman. Mr. Stroud joined Lehman in 1996 and is responsible for managing the financial and operational aspects of portfolio company value-enhancement. Prior to joining Lehman, Mr. Stroud was the Chief Financial Officer of 52 Sperry Marine, Inc. from 1993 until the company was purchased by Litton Industries, Inc. in 1996. From 1989 to 1993, Mr. Stroud was Chief Financial Officer of the Accudyne and Kilgore Corporations. WILLIAM PAUL is a Director of EHI and Elgar. Mr. Paul began his career with United Technologies Corporation ("UTC") at its Sikorsky Aircraft division in 1955. Mr. Paul progressed through a succession of several technical and managerial positions while at Sikorsky, including Vice President of Engineering and Programs and Executive Vice President and Chief Operating Officer, and in 1983 was named President and Chief Executive Officer of Sikorsky Aircraft. In 1994, Mr. Paul was appointed as the Executive Vice President of UTC, Chairman of UTC's international operations and became a member of UTC's management executive committee. Mr. Paul retired from these positions in 1997 and remains a consultant to UTC. Mr. Paul is a Fellow of the American Institute of Aeronautics and a Fellow of the Royal Aeronautical Society. BRUCE D. GORCHOW, who is a Director of EHI and Elgar, is a member of the investment advisory board of Lehman. Since 1991, Mr. Gorchow has been Executive Vice President and head of the Private Finance Group of PPM America, Inc. Mr. Gorchow is also a Director of Global Imaging Systems, Inc., Leiner Health Products, Inc., Tomah Products, Inc. and Burke Industries, Inc. and is an investment director of several investment limited partnerships. Mr. Gorchow also represents PPM America, Inc. on the boards of ten of its portfolio companies. Prior to his position at PPM America, Mr. Gorchow was a Vice President at Equitable Capital Management, Inc. GLENN A. YOUNGKIN, who is a Director of EHI and Elgar, is a Vice President of The Carlyle Group, where he has been employed since 1995. Prior to that time, Mr. Youngkin was a consultant with McKinsey & Company, a global management consulting firm, from 1994 to 1995. From 1990 to 1992, Mr. Youngkin worked in the Natural Resources Group of CS First Boston where he structured and executed merger and acquisition transactions and capital market financings. Mr. Youngkin is currently a director of InSight Health Services Corp. and represents The Carlyle Group on the boards of two of its portfolio companies. CERTAIN RIGHTS OF HOLDERS OF REDEEMABLE PREFERRED STOCK Under certain circumstances, the holders of the Series A Redeemable Preferred Stock may have the right to elect a majority of EHI's directors. See "Description of Preferred Stock and Warrants-- Redeemable Preferred Stock--Voting Rights." COMMITTEES OF THE BOARD OF DIRECTORS AUDIT COMMITTEE. The Audit Committee of the Board of Directors is comprised of Messrs. Glickman, Paul and Stroud. The Audit Committee makes recommendations concerning the engagement of independent public accountants, reviews with the independent public accountants the scope and results of the audit engagement, approves professional services provided by the independent public accountants, reviews the independence of the independent public accountants, considers the range of audit and non-audit fees and reviews the adequacy of the Company's internal accounting controls. COMPENSATION COMMITTEE. The Compensation Committee of the Board of Directors is comprised of Messrs. Glickman, Lehman and Sawyer. The Compensation Committee makes recommendations concerning the salaries and incentive compensation of employees of and consultants to the Company, and oversees and administers the Company's stock option plans. COMPENSATION OF DIRECTORS Other than Mr. Kilpatrick, directors will receive customary directors' fees for their services. In addition, the Company will pay Lehman certain fees for various management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analyses, negotiating and structuring financing and exploring expansion opportunities. See "Certain Relationships and Related Transactions." 53 EXECUTIVE COMPENSATION The following table sets forth for the fiscal years ended April 3, 1996, March 29, 1997 and March 28, 1998 the historical compensation for services to the Company of the Chief Executive Officer and the four other most highly compensated executive officers of the Company as of March 28, 1998 (collectively, the "Named Executive Officers").
LONG-TERM COMPENSATION ANNUAL COMPENSATION(1) ------------- SECURITIES ALL OTHER ---------------------- UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($)(2) OPTIONS ($) - --------------------------------------------------- ----------- --------- ----------- ------------- ------------- Kenneth R. Kilpatrick.............................. 1998 182,879 102,900 -- -- President and Chief Executive Officer, EHI and 1997 175,491 47,260 -- -- Elgar 1996 165,975 112,220 -- -- 1998 115,521 40,400 -- -- Samuel A. Lewis.................................... 1997 110,165 18,505 -- -- Vice President--Sales and Marketing of Elgar 1996 105,302 43,941 -- -- Christopher W. Kelford............................. 1998 106,150 37,200 -- -- Vice President--Finance, Chief Financial Officer 1997 101,024 16,854 -- -- and Treasurer of EHI and Elgar 1996 95,796 40,020 -- -- 1998 119,649 42,100 -- -- Normand Precourt................................... 1997 114,793 19,372 -- -- Vice President--Engineering of Elgar 1996 110,294 46,001 -- -- 1998 104,423 44,200 -- -- Ronald Garrett..................................... 1997 100,293 20,225 -- -- Vice President--Operations of Elgar 1996 95,662 48,024 -- --
- ------------------------------ (1) Perquisites and other personal benefits paid in the periods presented for the Named Executive Officers aggregated less than the lesser of (i) $50,000 and (ii) 10% of the total annual salary and bonus set forth in the columns entitled "Salary" and "Bonus" for each Named Executive Officer and, accordingly, are omitted from the table as permitted by the rules of the Commission. (2) Annual bonuses are indicated for the fiscal year in which they were earned and accrued. Annual bonuses for any fiscal year are generally paid in the following fiscal year. EMPLOYMENT AGREEMENTS In connection with the Recapitalization, the Company entered into employment agreements (each, an "Employment Agreement") with several key executives. Generally, each Employment Agreement provides for the executive's continued employment with the Company post-Recapitalization at an annual salary, bonus and with such other employment-related benefits comparable to those received by such executive immediately prior to the Recapitalization. Each Employment Agreement may be terminated by either party upon 30 days' prior written notice. If an executive is terminated under certain conditions, then the executive shall be entitled to payment of his annual base salary for a period of one year following the date of such termination. Each Employment Agreement contains provisions prohibiting the executive, during the period of his employment with the Company and for two years thereafter, from directly or indirectly engaging in competition with the Company. Each Employment Agreement also contains provisions requiring the executive to maintain the confidentiality of certain information related to the Company. 54 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the ownership of the Common Stock as of March 28, 1998 by (i) each director, (ii) each of the Named Executive Officers, (iii) all executive officers and directors as a group and (iv) each person who is the beneficial owner of more than 5% of the outstanding Common Stock. All fully diluted ownership percentages indicated below exclude the dilution attributable to the Convertible Preferred Stock issued in connection with the Power Ten Acquisition.
PERCENTAGE OF NUMBER OF SHARES NAME OF INDIVIDUAL OR ENTITY(1) SHARES(2) OUTSTANDING(3) - -------------------------------------------------------------------- ----------- -------------- JFL-EEC(4).......................................................... 1,901,400 71.7% John F. Lehman(5)................................................... 1,901,400 71.7 Donald Glickman(5).................................................. 1,901,400 71.7 George Sawyer(5).................................................... 1,901,400 71.7 Keith Oster(5)...................................................... 1,901,400 71.7 Joseph Stroud(5).................................................... 1,901,400 71.7 Kenneth R. Kilpatrick............................................... 60,000 2.3 Samuel A. Lewis..................................................... 40,000 1.5 Christopher W. Kelford.............................................. 28,000 1.1 Normand Precourt.................................................... 25,000 * Ronald Garrett...................................................... 12,000 * Bruce D. Gorchow(6)................................................. -- -- William Paul(7)..................................................... -- -- Glenn A. Youngkin................................................... -- -- Jackson National Life Insurance Company(8).......................... 278,750 10.5 All directors and executive officers as a group (17 persons)........ 2,151,400 81.1
- ------------------------------ * Less than 1% (1) The address of JFL-EEC and Messrs. Lehman, Glickman, Sawyer, Oster and Stroud is 2001 Jefferson Davis Highway, Suite 607, Arlington, Virginia 22202. The address of Mr. Gorchow and Jackson National Life Insurance Company ("Jackson National") is 225 West Wacker Drive, Chicago, Illinois 60606. The address of Mr. Paul is 21 Springwood Drive, Trumbull, Connecticut 06611. The address of Mr. Youngkin is c/o The Carlyle Group, 1001 Pennsylvania Avenue, N.W., Suite 2205, Washington, D.C. 20004. (2) As used in this table, beneficial ownership means the sole or shared power to vote, or to direct the voting of a security, or the sole or shared power to dispose, or direct the disposition of, a security. (3) Computed based upon the total number of shares of Common Stock outstanding and the number of shares of Common Stock underlying options or warrants held by that person exercisable within 60 days of March 28, 1998. In accordance with Rule 13(d)-3 of the Exchange Act, any Common Stock that will not be outstanding within 60 days of March 28, 1998 that is subject to options or warrants exercisable within 60 days of March 28, 1998 is deemed to be outstanding for the purpose of computing the percentage of outstanding shares of the Common Stock owned by the person holding such options or warrants, but is not deemed to be outstanding for the purpose of computing the percentage of outstanding shares of the Common Stock owned by any other person. (4) JFL-EEC is a Delaware limited liability company that is an affiliate of Lehman. Through JFL-EEC, J.F. Lehman Equity Investors I, L.P. ("JFLEI"), also an affiliate of Lehman, beneficially owns 62.2% of the Common Stock. Each of Messrs. Lehman, Glickman, Sawyer, Oster and Stroud, either directly (whether through ownership interest or position) or through one or more intermediaries, may be deemed to control JFL-EEC, Lehman and JFLEI. Lehman and JFLEI may be deemed to control the voting and disposition of the shares of the Common Stock owned by JFL-EEC. Accordingly, for certain purposes, Messrs. Lehman, Glickman, Sawyer, Oster and Stroud may be deemed to be beneficial owners of the shares of Common Stock owned by JFL-EEC. (5) Includes the shares beneficially owned by JFL-EEC, of which Messrs. Lehman, Glickman, Sawyer, Oster and Stroud are affiliates. (6) Mr. Gorchow is on the investment advisory board of Lehman and is an executive officer of PPM America, Inc., the agent for Jackson National. (7) Mr. Paul is a limited partner in an affiliate of JFLEI. (8) All shares are obtainable upon the exercise of the Warrants. Some of the Warrants are held by affiliates of Jackson National. See "The Recapitalization" and "Description of Preferred Stock and Warrants." Jackson National is a noncontrolling member of JFL-EEC. 55 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS MANAGEMENT PARTICIPATION IN THE RECAPITALIZATION COMMON STOCK. In connection with the Recapitalization, certain executive officers of the Company and other members of management (41 individuals in the aggregate) received Recapitalization Consideration comprising an aggregate of approximately $9.2 million in cash and a 9.4% interest in the Common Stock on a fully diluted basis (without giving effect to the Convertible Preferred Stock issued in connection with the Power Ten Acquisition). See "The Recapitalization" and "Security Ownership of Certain Beneficial Owners and Management." MANAGEMENT AGREEMENT Pursuant to the terms of a ten-year Management Agreement, dated the Closing Date (the "Management Agreement"), among Lehman, EHI and Elgar, (i) upon consummation of the Recapitalization, EHI paid to Lehman a transaction fee in the amount of $1,000,000 and (ii) Elgar has agreed to pay Lehman an annual management fee of $500,000 that commenced accruing on the Closing Date and is payable in advance on a semi-annual basis thereafter. As consideration for services rendered in connection with the Power Ten Acquisition, Elgar paid to Lehman an acquisition fee of $425,000 pursuant to the Management Agreement. SHAREHOLDERS AGREEMENT In connection with the Recapitalization, the Company and JFL-EEC, the Continuing Shareholders and, in their capacity as Warrantholders, Jackson National, Indosuez Electronics Partners ("Indosuez") and Old Hickory Fund I, L.L.C. ("Old Hickory") (collectively, the "Shareholders") entered into a Shareholders Agreement (the "Shareholders Agreement"), the principal terms of which are summarized below: CERTAIN VOTING RIGHTS. Pursuant to the Shareholders Agreement, so long as Jackson National holds in the aggregate Warrants and shares obtained upon exercise of the Warrants representing at least seventy-five percent (75%) of the Warrants initially issued to it, Jackson National shall have the right to designate one Director. So long as the Common Stock held by the Non-Management Continuing Shareholders constitutes in the aggregate at least five percent (5%) of the issued and outstanding Common Stock, then the Non-Management Continuing Shareholders shall have the right to designate one Director. Subject to the rights of the holders of the Redeemable Preferred Stock to elect Directors upon the occurrence of certain events pursuant to the Certificate of Designations governing the Redeemable Preferred Stock, JFL-EEC is entitled to designate all Directors of the Company not designated by Jackson National or the Non-Management Continuing Shareholders. RESTRICTIONS ON TRANSFER. The shares of the Common Stock held by each of the parties to the Shareholders Agreement, and certain of their transferees, are subject to restrictions on transfer. Shares of Common Stock may be transferred only to certain related transferees, including, (i) in the case of individual Shareholders, family members or their legal representatives or guardians, heirs and legatees and trusts, partnerships and corporations the sole beneficiaries, partners or shareholders, as the case may be, of which are family members, (ii) in the case of partnership or limited liability company Shareholders, the partners or members of such partnership or limited liability company, as the case may be, (iii) in the case of corporate Shareholders, affiliates of such corporation and (iv) transferees of shares sold in transactions complying with the applicable provisions of the Right of First Offer or the Tag-Along or Drag-Along Rights (as each term is defined below.) RIGHTS OF FIRST OFFER. If any Shareholder desires to transfer any shares of the Common Stock or Warrants (other than pursuant to certain permitted transfers), all other Shareholders have a right of first offer (the "Right of First Offer") to purchase the shares or warrants (the "Subject Shares") upon such 56 terms and subject to such conditions as are set forth in a notice (a "First Offer Notice") sent by the selling Shareholder to such other Shareholders. If the Shareholders elect to exercise their Rights of First Offer with respect to less than all of the Subject Shares, EHI has a right to purchase all of the Subject Shares that the Shareholders have not elected to purchase. If the Shareholders receiving the First Offer Notice and EHI wish to exercise their respective rights of first offer with respect to less than all of the Subject Shares, the selling Shareholder may solicit offers to purchase all (but not less than all) of the Subject Shares upon such terms and subject to such conditions as are, in the aggregate, no less favorable to the selling Shareholder than those set forth in the First Offer Notice. SUBSCRIPTION OFFER WITH RESPECT TO PRIMARY ISSUANCES. The Shareholders Agreement provides that EHI is not permitted to issue equity securities, or securities convertible into equity securities, to any person unless EHI has offered to issue to each of the other Shareholders, on a PRO RATA basis, an opportunity to purchase such securities on the same terms, including price, and subject to the same conditions as those applicable to such person. TAG-ALONG RIGHTS. The Shareholders Agreement provides that, if the Shareholders and EHI fail to exercise their respective rights of first refusal with respect to all of the Subject Shares, the Shareholders have the right to "tag along" (the "Tag-Along Right") upon the sale of the Common Stock by certain Shareholders pursuant to a third-party offer. DRAG-ALONG RIGHTS. The Shareholders Agreement provides that, subject to certain conditions, if one or more Shareholders holding a majority of the Common Stock (the "Majority Shareholders") propose to sell all of the Common Stock owned by the Majority Shareholders, the Majority Shareholders have the right (the "Drag-Along Right") to compel the other Shareholders to sell all of the shares of Common Stock held by such other Shareholders upon the same terms and subject to the same conditions as the terms and conditions applicable to the sale by the Majority Shareholders. REGISTERED OFFERINGS. The shares of Common Stock may be transferred in a bona fide public offering for cash pursuant to an effective registration statement (a "Registered Offering") without compliance with the provisions of the Shareholders Agreement related to the Right of First Offer or the Tag-Along or Drag-Along Rights. LEGENDS. The shares of Common Stock subject to the Shareholders Agreement bear a legend related to the Right of First Offer and the Tag-Along and Drag-Along Rights, which legend will be removed when the shares of Common Stock are, pursuant to the terms of the Shareholders Agreement, no longer subject to the restrictions on transfer imposed by the Shareholders Agreement. REGISTRATION RIGHTS. Pursuant to the terms of the Shareholders Registration Rights Agreement, dated as of February 3, 1998, among the Company and the Shareholders, JFL-EEC and certain other shareholders are entitled to one "demand" and unlimited piggyback registration rights, subject to additional customary rights and limitations. TERM. The term of the Shareholders Agreement is 10 years from the Closing Date, subject to earlier termination under certain conditions and upon certain events. REGISTRATION RIGHTS FOR WARRANTHOLDERS The holders of the shares issuable upon exercise of the Warrants are entitled to one "demand" registration right at any time on or after the later of (i) the fifth anniversary of the Closing Date and (ii) the 181st day after completion of EHI's initial public offering of its Common Stock, subject to additional customary rights and limitations. In addition, holders of the shares issuable upon exercise of the Warrants are entitled to unlimited "piggyback" registration rights after the date of EHI's initial public offering of its Common Stock, subject to customary rights and limitations. See "Description of Preferred Stock and Warrants-Registration Rights for Warrant Shares." 57 INDEMNIFICATION OF OFFICERS AND DIRECTORS EHI's Certificate of Incorporation contains provisions eliminating the personal liability of directors for monetary damages for breaches of their duty of care, except in certain prescribed circumstances. EHI's Bylaws also provide that directors and officers will be indemnified to the fullest extent authorized by Delaware law, as it now stands or may in the future be amended, against all expenses and liabilities reasonably incurred in connection with service for or on behalf of the Company. EHI's Bylaws provide that the rights of directors and officers to indemnification is not exclusive of any other right now possessed or hereinafter acquired under any statute, agreement or otherwise. 58 DESCRIPTION OF NOTES Except as otherwise indicated below, the following summary applies to both the Old Notes and the New Notes. As used herein, the term "Notes" shall mean the Old Notes and the New Notes, unless otherwise indicated. The form and terms of the New Notes are substantially identical to the form and terms of the Old Notes, except that the New Notes (i) will be registered under the Securities Act, (ii) will not provide for payment of Additional Interest, which terminates upon consummation of the Exchange Offer and (iii) will not bear any legends restricting transfer thereof. The New Notes will be issued solely in exchange for an equal principal amount of Old Notes. As of the date hereof, $90.0 million aggregate principal amount of Old Notes is outstanding. See "The Exchange Offer." GENERAL The Old Notes were issued and the New Notes will be issued under the Indenture. The following summary of certain provisions of the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Trust Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of the Indenture, including the definitions of certain terms therein and those terms made a part of the Indenture by reference to the TIA as in effect on the date of the Indenture. A copy of the Indenture is available as set forth under "Additional Information." The definitions of certain capitalized terms used in the following summary are set forth below under "--Certain Definitions." For purposes of this section, references to the "Company" initially are to JFL-EEC Merger Sub Co. and, following the merger of JFL-EEC Merger Sub Co. with and into Carlyle-EEC Holdings, Inc., are to the corporation surviving such merger, and in each case do not include the Subsidiaries of Carlyle-EEC Holdings, Inc. or such surviving corporation. The Notes will be senior unsecured obligations of the Company, ranking PARI PASSU in right of payment with all other unsubordinated obligations of the Company and senior in right of payment to all subordinated obligations of the Company. The Notes will also be effectively subordinated to (i) all senior secured Indebtedness of the Company and its Subsidiaries (including Indebtedness under the New Credit Facility) to the extent of the value of the assets securing such Indebtedness and (ii) all Indebtedness of the Company's Subsidiaries (other than Restricted Subsidiaries that are parties to the Note Guarantees). The Old Notes were issued, and the New Notes will be issued, in fully registered form only, without coupons, in denominations of $1,000 and integral multiples thereof. Initially, the Trustee will act as Paying Agent and Registrar for the Notes. The Notes may be presented for registration or transfer and exchange at the offices of the Registrar, which initially will be the Trustee's corporate trust office. The Company may change any Paying Agent and Registrar without notice to holders of the Notes (the "Holders"). The Company will pay principal (and premium, if any) on the Notes at the Trustee's corporate office in New York, New York. At the Company's option, interest may be paid at the Trustee's corporate trust office or by check mailed to the registered address of Holders. Any Notes that remain outstanding after the completion of the Exchange Offer, together with the New Notes issued in connection with the Exchange Offer, will be treated as a single class of securities under the Indenture. PRINCIPAL, MATURITY AND INTEREST The Notes are limited in aggregate principal amount to $150.0 million, $90.0 million in aggregate principal amount of which was issued in the Prior Offering, and will mature on February 1, 2008. Additional amounts may be issued from time to time, subject to the limitations set forth under "--Certain Covenants-- Limitation on Additional Indebtedness." Interest on the Notes will accrue at the rate of 9 7/8% per annum and will be payable semiannually in cash on each February 1 and August 1, commencing on August 1, 1998, to the persons who are registered Holders at the close of business on the January 15 and July 15 immediately preceding the applicable interest payment date. Interest on the Notes will accrue from 59 the most recent date to which interest has been paid or, if no interest has been paid, from and including the Issue Date The Notes will not be entitled to the benefit of any mandatory sinking fund. REDEMPTION OPTIONAL REDEMPTION. The Notes will be redeemable, at the Company's option, in whole at any time or in part from time to time, on and after February 1, 2003, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on February 1 of the year set forth below, plus, in each case, accrued and unpaid interest thereon, if any, to the date of redemption:
YEAR PERCENTAGE - --------------------------------------------------------------------------------- ----------- 2003............................................................................. 104.938% 2004............................................................................. 103.292% 2005............................................................................. 101.646% 2006 and thereafter.............................................................. 100.000%
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from time to time, on or prior to February 1, 2001, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings (as defined below) to redeem up to 35% of the sum of (i) the initial aggregate principal amount of Notes issued in the Prior Offering and (ii) the respective initial aggregate principal amounts of Notes issued under the Indenture after the Issue Date, at a redemption price equal to 109.875% of the principal amount thereof plus accrued and unpaid interest thereon and Additional Interest, if any, to the date of redemption; PROVIDED that at least 65% of the sum of (i) the initial aggregate principal amount of Notes issued in the Prior Offering and (ii) the respective initial aggregate principal amounts of Notes issued under the Indenture after the Issue Date remains outstanding immediately after any such redemption. In order to effect the foregoing redemption with the proceeds of any Public Equity Offering, the Company shall make such redemption not more than 120 days after the consummation of any such Public Equity Offering. As used in the preceding paragraph, "Public Equity Offering" means an underwritten public offering of Qualified Capital Stock of the Company pursuant to a registration statement filed with the Commission in accordance with the Securities Act. OPTIONAL REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of Control prior to February 1, 2003, the Notes will be redeemable, in whole or in part, at the option of the Company, upon not less than 30 nor more than 60 days prior notice to each holder of Notes to be redeemed, at a redemption price equal to the sum of (i) the then outstanding principal amount thereof plus (ii) accrued and unpaid interest thereon and Additional Interest, if any, to the redemption date plus (iii) the Applicable Premium. The following definitions are used to determine the Applicable Premium: "Applicable Premium" is defined, with respect to a Note, as the greater of (i) 1% of the then outstanding principal amount of such Note and (ii) the excess of (A) the present value of the remaining required interest and principal payments due on such Note (exclusive of accrued and unpaid interest), computed using a discount rate equal to the Treasury Rate plus 50 basis points, over (B) the then outstanding principal amount of such Note. "Treasury Rate" is defined as the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as complied and published in the most recent Federal Reserve Statistical Release H.15(519) which has become publicly available at least two Business Days prior to the date fixed for prepayment (or, if such Statistical Release is no longer published, any publicly available 60 source of similar market data)) most nearly equal to the then remaining Weighted Average Life to Maturity of the Notes; PROVIDED; HOWEVER, that if the Weighted Average Life to Maturity of the Notes is not equal to the constant maturity of a United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given, except that if the Weighted Average Life to Maturity of the Notes is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used. SELECTION AND NOTICE OF REDEMPTION In the event that less than all of the Notes are to be redeemed at any time, selection of such Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which such Notes are listed or, if such Notes are not then listed on a national securities exchange, on a PRO RATA basis, by lot or by such method as the Trustee shall deem fair and appropriate; provided, however, that no Notes of a principal amount of $1,000 or less shall be redeemed in part; PROVIDED, FURTHER, that if a partial redemption is made with the proceeds of a Public Equity Offering, selection of the Notes or portions thereof for redemption shall be made by the Trustee only on a PRO RATA basis or on as nearly a PRO RATA basis as is practicable (subject to DTC procedures), unless such method is otherwise prohibited. Notice 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. 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 a principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. On and after the redemption date, interest will cease to accrue on Notes or portions thereof called for redemption as long as the Company has deposited with the Paying Agent funds in satisfaction of the applicable redemption price pursuant to the Indenture. NOTE GUARANTEESS Each Subsidiary Guarantor will unconditionally guarantee, on a senior unsecured basis, jointly and severally, to each Holder and the Trustee, the full and prompt performance of the Company's obligations under the Indenture and the Notes, including the payment of principal of and interest on the Notes. The Note Guaranteess will be effectively subordinated in right of payment to all existing and future secured Indebtedness of the related Subsidiary Guarantor to the extent of the value of the assets securing such Indebtedness. The obligations of each Subsidiary Guarantor are limited to the maximum amount which, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under its Note Guarantee or pursuant to its contribution obligations under the Indenture, will result in the obligations of such Subsidiary Guarantor under the Note Guarantees not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Subsidiary Guarantor that makes a payment or distribution under a Note Guarantee shall be entitled to a contribution from each other Subsidiary Guarantor in an amount PRO RATA, based on the net assets of each Subsidiary Guarantor, determined in accordance with GAAP. Each Subsidiary Guarantor may consolidate with or merge into or sell its assets to the Company or another Subsidiary Guarantor that is a Restricted Subsidiary of the Company, or with other Persons upon the terms and conditions set forth in the Indenture. See "--Certain Covenants--Merger, Consolidation and Sale of Assets." In the event all of the Capital Stock of a Subsidiary Guarantor is (or all or substantially all of the assets of a Subsidiary Guarantor are) sold by the Company and the sale complies 61 with the provisions set forth in "--Certain Covenants--Limitation on Asset Sales," the Subsidiary Guarantor's Note Guarantee will be released. See "--Certain Covenants--Limitation of Guarantees by Restricted Subsidiaries." Separate financial statements of the Subsidiary Guarantors are not included herein because such Subsidiary Guarantors are jointly and severally liable with respect to the Company's obligations pursuant to the Notes, and the aggregate net assets, earnings and equity of the Subsidiary Guarantors and the Company are substantially equivalent to the net assets, earnings and equity of the Company on a consolidated basis. CHANGE OF CONTROL The Indenture provides that upon the occurrence of a Change of Control, unless irrevocable notice of redemption for all of the Notes is given within 30 days after the occurrence of such Change of Control in accordance with the provisions of "--Redemption--Optional Redemption Upon a Change of Control," each Holder will have the right to require that the Company purchase all or a portion of such Holder's Notes pursuant to the offer described below (the "Change of Control Offer"), at a purchase price equal to 101% of the principal amount thereof plus accrued interest to the date of purchase. Within 30 days following the date upon which the Change of Control occurred, unless irrevocable notice of redemption for all of the Notes shall then have been given in accordance with the provisions of "--Redemption--Optional Redemption Upon a Change of Control," the Company must send, by first class mail, a notice to each Holder, with a copy to the Trustee, which notice shall govern the terms of the Change of Control Offer. Such notice shall state, among other things, the purchase date, which must be no earlier than 30 days nor later than 45 days from the date such notice is mailed, other than as may be required by law (the "Change of Control Payment Date"). Holders electing to have a Note purchased pursuant to a Change of Control Offer will be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third business day prior to the Change of Control Payment Date. If a Change of Control Offer is made, there can be no assurance that the Company will have available funds sufficient to pay the Change of Control purchase price for all the Notes that might be delivered by Holders seeking to accept the Change of Control Offer. In the event the Company is required to purchase outstanding Notes pursuant to a Change of Control Offer, the Company expects that it would seek third-party financing to the extent it does not have available funds to meet its purchase obligations. However, there can be no assurance that the Company would be able to obtain such financing. Neither the Board of Directors of the Company nor the Trustee may waive the covenant relating to a Holder's right to redemption upon a Change of Control. Restrictions in the Indenture described herein on the ability of the Company and its Restricted Subsidiaries to incur additional Indebtedness, to grant liens on their property, to make Restricted Payments and to make Asset Sales may also make more difficult or discourage a takeover of the Company, whether favored or opposed by the management of the Company. Consummation of any such transaction in certain circumstances may require redemption or repurchase of the Notes, and there can be no assurance that the Company or the acquiring party will have sufficient financial resources to effect such redemption or repurchase. Such restrictions and the restrictions on transactions with Affiliates may, in certain circumstances, make more difficult or discourage any leveraged buyout of the Company or any of its Subsidiaries by the management of the Company. While such restrictions cover a wide variety of arrangements which have traditionally been used to effect highly leveraged transactions, the Indenture may not afford the Holders of Notes protection in all circumstances from the adverse aspects of a highly leveraged transaction, reorganization, restructuring, merger or similar transaction. 62 The Company will 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 Notes pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the "Change of Control" provisions of the Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the "Change of Control" provisions of the Indenture by virtue thereof. CERTAIN COVENANTS The Indenture contains, among others, the following covenants: LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume, guarantee, acquire, or become liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (other than Permitted Indebtedness); PROVIDED, HOWEVER, that if no Default or Event of Default shall have occurred and be continuing at the time of or as a consequence of the incurrence of any such Indebtedness, the Company and the Subsidiary Guarantors may incur Indebtedness (including, without limitation, Acquired Indebtedness) if on the date of the incurrence of such Indebtedness, after giving effect to the incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.0 to 1.0. For the 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 Indebtedness or is otherwise entitled to be incurred pursuant to this covenant, the Company shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this covenant and such items 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. The Company will not incur any Indebtedness which by its terms (or by the terms of any agreement governing such Indebtedness) is subordinated in right of payment to any other Indebtedness of the Company unless such Indebtedness is also by its terms (or by the terms of any agreement governing such Indebtedness) made expressly subordinate in right of payment to the Notes pursuant to subordination provisions that are substantively identical to the subordination provisions of such Indebtedness (or such agreement) that are most favorable to the holders of any other Indebtedness of the Company. LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, (a) declare or pay any dividend or make any distribution (other than dividends or distributions payable in Qualified Equity Interests of the Company) on or in respect of shares of the Company's Capital Stock to holders of such Capital Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital Stock of the Company or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock, (c) make any principal payment on, purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for value, prior to any scheduled final maturity, scheduled repayment or scheduled sinking fund payment, any Indebtedness of the Company that is subordinate or junior in right of payment to the Notes (except the prepayment, purchase, repurchase or other acquisition or retirement of Indebtedness in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of prepayment, purchase, repurchase or other acquisition or retirement) or (d) make any Investment (other than Permitted Investments) (each of the foregoing actions set forth in clauses (a), (b) (c) and (d) being referred to as a "Restricted Payment"), if at the time of such Restricted Payment or immediately after giving effect thereto, (i) a Default or an Event of Default shall have occurred and be continuing or (ii) the Company is not able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with the "Limitation on Incurrence of Additional Indebtedness" covenant or 63 (iii) the aggregate amount of Restricted Payments (including such proposed Restricted Payment) made subsequent to the Issue Date (the amount expended for such purposes, if other than in cash, being the fair market value of such property as determined in good faith by the Board of Directors of the Company) shall exceed the sum of: (w) 50% of the cumulative Consolidated Net Income (or if cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of the Company from the first day of the Company's first fiscal quarter commencing after the Issue Date to the last day of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such proposed Restricted Payment (the "Reference Date") (treating such period as a single accounting period); plus (x) 100% of the aggregate net cash proceeds received by the Company from any Person (other than a Restricted Subsidiary of the Company) from (i) the issuance and sale subsequent to the Issue Date and on or prior to the Reference Date of Qualified Equity Interests of the Company and (ii) Indebtedness or Disqualified Capital Stock that has been converted into or exchanged for Qualified Equity Interests together with the aggregate net cash proceeds received by the Company at the time of such conversion or exchange; plus (y) without duplication of any amounts included in clause (iii)(x) above, 100% of the aggregate net cash proceeds of any equity contribution received by the Company from a holder of the Company's Capital Stock; plus (z) an amount equal to the net reduction in Investment made pursuant to this first paragraph of the "Limitation on Restricted Payments" covenant in any Person resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances, or other transfers of assets, in each case to the Company or any Restricted Subsidiary (except to the extent any such payment is included in the calculation of Consolidated Net Income), or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (determined and valued in each case as provided in the definition of "Investments"), not to exceed the amount of Investments previously made by the Company or any Restricted Subsidiary in such Person. Notwithstanding the foregoing, the provisions set forth in the immediately preceding paragraph do not prohibit: (1) the payment of any dividend or the consummation of any purchase or redemption within 60 days after the date of declaration of such dividend or the giving of any irrevocable notice in respect of any such purchase or redemption if the dividend or purchase or redemption would have been permitted on the date of declaration or the giving of such irrevocable notice; (2) if no Default or Event of Default shall have occurred and be continuing, the acquisition of any shares of Capital Stock of the Company, either (i) solely in exchange for Qualified Equity Interests of the Company or (ii) through the application of net proceeds of a substantially concurrent sale for cash (other than to a Restricted Subsidiary of the Company) of Qualified Equity Interests of the Company; (3) if no Default or Event of Default shall have occurred and be continuing, the purchase, redemption, defeasance or other acquisition or retirement for value of any Indebtedness of the Company that is subordinate or junior in right of payment to the Notes either (i) solely in exchange for Qualified Equity Interests of the Company, or (ii) through the application of net proceeds of a substantially concurrent sale for cash (other than to a Restricted Subsidiary of the Company) of (A) Qualified Equity Interests of the Company or (B) Refinancing Indebtedness; (4) to the extent constituting Restricted Payments, the Specified Affiliate Payments; (5) (i) without limitation of the parenthetical in clause (a) of the preceding paragraph, the payment of any regular quarterly dividends in respect of the Redeemable Preferred Stock in the form of additional shares of Redeemable Preferred Stock having the terms and conditions set forth in the Certificate of Designations for the Redeemable Preferred Stock as in effect on the Issue Date; and (ii) commencing January 31, 2001, the payment of regular quarterly cash dividends (in the amount no greater than that provided for in the Certificate of Designations for the Redeemable Preferred Stock as in effect on the Issue Date), out of funds legally available therefor, on any of the shares of Redeemable Preferred Stock issued and outstanding on the Issue Date and on any shares of Redeemable Preferred Stock issued in payment of dividends made or subsequently issued in payment of dividends thereon in respect of such shares of Redeemable Preferred Stock outstanding on the Issue Date; PROVIDED that, at the time of and immediately after giving effect to the payment of such cash dividend, the Consolidated Fixed Charge Coverage Ratio, giving PRO FORMA effect to the payment of such dividend as if it had occurred at the beginning of the four full fiscal quarters immediately preceding the date on which the dividend is to be paid, would have been equal to at least 2.0 64 to 1.0 and (6) Restricted Payments in an aggregate amount not to exceed $2.5 million. In determining the aggregate amount of Restricted Payments made subsequent to the Issue Date in accordance with clause (iii) of the immediately preceding paragraph, amounts expended pursuant to clauses (1) without duplication, (2)(ii), 3(ii)(A), (4) (to the extent provided in the definition of "Specified Affiliate Payments"), (5)(ii) and (6) shall be included in such calculation and all other Restricted Payments permitted pursuant to this paragraph shall be excluded from such aggregate amount of Restricted Payments. 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 complies with the Indenture and setting forth in reasonable detail the basis upon which the required calculations were computed. In making the computations required by this covenant, (i) the Company may use audited financial statements for the portions of the relevant period for which audited financial statements are available on the date of determination and unaudited financial statements and other current financial data based on the books and records of the Company for the remaining portion of such period and (ii) the Company will be permitted to rely in good faith on the financial statements and other financial data derived from its books and records that are available on the date of determination. If the Company makes a Restricted Payment that, at the time of the making of such Restricted Payment, would in the good faith determination of the Company be permitted under the requirements of the Indenture, such Restricted Payment will be deemed to have been made in compliance with the Indenture notwithstanding any subsequent adjustments made in good faith to the Company's financial statements affecting Consolidated Net Income of the Company for any period. LIMITATION ON ASSET SALES. The Company will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company or the applicable Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold or otherwise disposed of (as determined in good faith by the Company's Board of Directors), (ii) at least 75% of the consideration received by the Company or the Restricted Subsidiary, as the case may be, from such Asset Sale shall be in the form of cash or Cash Equivalents and is received at the time of such disposition; PROVIDED that the amount of (x) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet), of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Notes or, in the case of liabilities of a Restricted Subsidiary, any Note Guarantee of such Subsidiary) that are assumed by the transferee of any such assets and (y) any securities, 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 (to the extent of the cash received) within 180 days after receipt, shall be deemed to be cash for purposes of this clause (ii); PROVIDED, further, however, that this clause (ii) shall not apply to any sale of Capital Stock of or other Investments in Unrestricted Subsidiaries and (iii) upon the consummation of an Asset Sale, the Company shall apply, or cause such Restricted Subsidiary to apply, the Net Cash Proceeds relating to such Asset Sale within 360 days of receipt thereof either (A) to prepay (and, in the case of any Indebtedness under any revolving credit facility, including the New Credit Facility, effect a permanent reduction in the availability under such revolving credit facility) any Indebtedness, (B) to make an investment in properties and assets that replace the properties and assets that were the subject of such Asset Sale or in properties and assets that will be used in the business of the Company and its Restricted Subsidiaries as existing on the Issue Date or in businesses reasonably related thereto ("Replacement Assets"), or (C) a combination of prepayment and investment permitted by the foregoing clauses (iii)(A) and (iii)(B). On the 361st day after an Asset Sale or such earlier date, if any, as the Board of Directors of the Company or of such Restricted Subsidiary determines not to apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such aggregate amount of such Net Cash Proceeds which have not been applied on or before such Net Proceeds Offer Trigger Date as permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each a "Net Proceeds Offer Amount") shall 65 be applied by the Company or such Restricted Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45 days following the applicable Net Proceeds Offer Trigger Date, from all Holders on a PRO RATA basis, that amount of Notes issued under the Indenture equal to the Net Proceeds Offer Amount at a price equal to 100% of the principal amount of the Notes to be purchased, plus accrued and unpaid interest thereon, if any, to the date of purchase; PROVIDED, HOWEVER, that if at any time any non-cash consideration received by the Company or any Restricted Subsidiary of the Company, as the case may be, in connection with any Asset Sale is converted into or sold or otherwise disposed of for cash (other than interest or dividends received with respect to any such non-cash consideration), then such conversion or disposition shall be deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be applied in accordance with this covenant. The Company may defer the Net Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to or in excess of $10.0 million resulting from one or more Asset Sales (at which time, the entire unutilized Net Proceeds Offer Amount, and not just the amount in excess of $10.0 million, shall be applied as required pursuant to this paragraph). In the event of the transfer of substantially all (but not all) of the property and assets of the Company and its Restricted Subsidiaries as an entirety to a Person in a transaction permitted under "--Merger, Consolidation and Sale of Assets," the successor corporation shall be deemed to have sold the properties and assets of the Company and its Restricted Subsidiaries not so transferred for purposes of this covenant, and shall comply with the provisions of this covenant with respect to such deemed sale as if it were an Asset Sale. In addition, the fair market value of such properties and assets of the Company or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash Proceeds for purposes of this covenant. Notwithstanding the two immediately preceding paragraphs, the Company and its Restricted Subsidiaries will be permitted to consummate an Asset Sale without complying with such paragraphs to the extent (i) at least 75% of the consideration for such Asset Sale constitutes Replacement Assets and (ii) such Asset Sale is for fair market value; PROVIDED that any consideration not constituting Replacement Assets received by the Company or any of its Restricted Subsidiaries in connection with any Asset Sale permitted to be consummated under this paragraph shall constitute Net Cash Proceeds subject to the provisions of the two preceding paragraphs. Each Net Proceeds Offer will be mailed to the record Holders as shown on the register of Holders within 25 days following the Net Proceeds Offer Trigger Date, with a copy to the Trustee, and shall comply with the procedures set forth in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may elect to tender their Notes in whole or in part in integral multiples of $1,000 in exchange for cash. To the extent Holders properly tender Notes in an amount exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be purchased on a PRO RATA basis (based on amounts tendered). A Net Proceeds Offer shall remain open for a period of 20 business days or such longer period as may be required by law. The Company will 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 Notes pursuant to a Net Proceeds Offer. To the extent that the provisions of any securities laws or regulations conflict with the "Asset Sale" provisions of the Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the "Asset Sale" provisions of the Indenture by virtue thereof. LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary of the Company to (a) pay dividends or make any other distributions on or in respect of its Capital Stock; (b) make loans or advances or to pay any Indebtedness or other obligation owed to the Company or any other Restricted Subsidiary of the Company; or (c) transfer any of its 66 property or assets to the Company or any other Restricted Subsidiary of the Company, except for such encumbrances or restrictions existing under or by reason of: (1) the Indenture; (2) any security or pledge agreements, leases or options (or similar agreements) containing customary restrictions on transfers of the assets encumbered thereby or leased or subject to option or on the transfer or subletting of the leasehold interest represented thereby; (3) any instrument governing Acquired Indebtedness, which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person or the properties or assets of the Person so acquired; (4) agreements existing on the Issue Date to the extent and in the manner such agreements are in effect on the Issue Date; (5) any contracts for the sale of assets, including, without limitation, any restriction with respect to a Restricted Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary, pending the closing of such sale or disposition, PROVIDED that any such restriction relates solely to the assets that are the subject of such agreement; (6) restrictions on cash or other deposits or net worth imposed by leases entered into in the ordinary course of business; (7) customary provisions in joint venture agreements and other similar agreements; (8) the New Credit Facility; (9) any agreement or instrument governing Capital Stock of any Person that is acquired; and (10) any encumbrances or restrictions imposed by any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings of contracts, instruments or obligations referred to in clauses (1) through (10), provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings are, in the good faith judgment of the Company, no more restrictive with respect to such dividend and other transfer restrictions than those contained in the dividend or other transfer restrictions prior to such amendment, modification, restatement, renewal, increase, supplement, refunding, replacement or refinancing. LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will not permit any of its Restricted Subsidiaries to issue any Preferred Stock (other than to the Company or to a Wholly Owned Restricted Subsidiary of the Company) or permit any Person (other than the Company or a Wholly Owned Restricted Subsidiary of the Company) to own any Preferred Stock of any Restricted Subsidiary of the Company. LIMITATION ON LIENS. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or permit or suffer to exist any Liens of any kind against or upon any property or assets of the Company or any of its Restricted Subsidiaries whether owned on the Issue Date or acquired after the Issue Date, or any proceeds therefrom, unless (i) in the case of Liens securing Indebtedness that is expressly subordinate or junior in right of payment to the Notes, the Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to such Liens and (ii) in all other cases, the Notes are equally and ratably secured, except in each case for (A) Liens existing as of the Issue Date to the extent and in the manner such Liens are in effect on the Issue Date; (B) Liens of the Company or a Restricted Subsidiary of the Company on assets of any Restricted Subsidiary of the Company; (C) Liens securing Refinancing Indebtedness which is incurred to Refinance any Indebtedness which has been secured by a Lien permitted under the Indenture and which has been incurred in accordance with the provisions of the Indenture; PROVIDED, HOWEVER, that such Liens do not extend to or cover any property or assets of the Company or any of its Restricted Subsidiaries not securing the Indebtedness so Refinanced; and (D) Permitted Liens. MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, in a single transaction or series of related transactions, consolidate or merge with or into any Person (except that MergerCo may merge with and into EHI as contemplated by the Recapitalization Agreement), or sell, assign, transfer, lease, convey or otherwise dispose of (or cause or permit any Restricted Subsidiary of the Company to sell, assign, transfer, lease, convey or otherwise dispose of) all or substantially all of the Company's assets (determined on a consolidated basis for the Company and the Company's Restricted Subsidiaries) to any Person unless: (i) either (1) the Company shall be the surviving or continuing corporation or (2) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which 67 acquires by sale, assignment, transfer, lease, conveyance or other disposition the properties and assets of the Company and of the Company's Restricted Subsidiaries substantially as an entirety (the "Surviving Entity") (x) shall be a corporation organized and validly existing under the laws of the United States or any State thereof or the District of Columbia and (y) shall expressly assume, by supplemental indenture (in form and substance satisfactory to the Trustee), executed and delivered to the Trustee, the due and punctual payment of the principal of, and premium, if any, and interest on all of the Notes and the performance of every covenant of the Notes, the Indenture and the Registration Rights Agreement on the part of the Company to be performed or observed; (ii) immediately after giving effect to such transaction and the assumption contemplated by clause (i)(2)(y) above (including giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction), the Company or such Surviving Entity, as the case may be, shall be able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the "--Limitation on Incurrence of Additional Indebtedness" covenant; (iii) immediately before and immediately after giving effect to such transaction and the assumption contemplated by clause (i)(2)(y) above (including, without limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred and any Lien granted in connection with or in respect of the transaction), no Default or Event of Default shall have occurred or be continuing; and (iv) the Company or the Surviving Entity shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that such consolidation, merger, sale, assignment, transfer, lease, conveyance or other disposition and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with the applicable provisions of the Indenture and that all conditions precedent in the Indenture relating to such transaction have been satisfied. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties or assets of one or more Restricted Subsidiaries of the Company the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. Notwithstanding the foregoing clauses (ii), (iii) and (iv), (a) any Restricted Subsidiary may consolidate with, merge into or transfer all or part of its properties and assets to the Company, and (b) the Company may merge with (i) Elgar Electronics Corporation at any time following the Issue Date, or (ii) an Affiliate incorporated solely for the purpose of reincorporating the Company in another jurisdiction. The Indenture provides that upon any consolidation, combination or merger or any transfer of all or substantially all of the assets of the Company in accordance with the foregoing, in which the Company is not the continuing corporation, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, lease or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture and the Notes with the same effect as if such surviving entity had been named as such. LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction or series of related transactions (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with, or for the benefit of, any of its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate Transactions permitted under paragraph (b) below and (y) Affiliate Transactions on terms that are no less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arm's-length basis from a Person that is not an Affiliate of the Company or such Restricted Subsidiary. All Affiliate Transactions (and each series of related Affiliate Transactions which are part of a common plan) involving aggregate payments or other property with a fair market value in excess of $2.5 million shall be approved by the Board of Directors of the Company or such Restricted Subsidiary, as the case may be, such approval to be evidenced by a Board Resolution stating that such Board of Directors has determined that such transaction complies with the foregoing provisions. If 68 the Company or any Restricted Subsidiary of the Company enters into an Affiliate Transaction (or a series of related Affiliate Transactions related to a common plan) that involves an aggregate fair market value of more than $7.5 million, the Company or such Restricted Subsidiary, as the case may be, shall, prior to the consummation thereof, obtain a favorable opinion as to the fairness of such transaction or series of related transactions to the Company or the relevant Restricted Subsidiary, as the case may be, from a financial point of view, from an Independent Financial Advisor and file the same with the Trustee. (b) The restrictions set forth in clause (a) above shall not apply to (i) reasonable fees and compensation paid to and indemnity provided for the benefit of officers, directors, employees or consultants of the Company or any Restricted Subsidiary of the Company as determined in good faith by the Company's Board of Directors or senior management; (ii) transactions exclusively between or among the Company and any of its Restricted Subsidiaries or exclusively between or among such Restricted Subsidiaries, provided such transactions are not otherwise prohibited by the Indenture; (iii) the transactions and payments contemplated by any agreement as in effect as of the Issue Date (including, without limitation, the Recapitalization Agreement and the Management Agreement) or any amendment thereto or any replacement agreement thereto so long as any such amendment or replacement agreement is not more disadvantageous to the Holders in any material respect than the original agreement as in effect on the Issue Date; (iv) the payment to the Principals or their Related Parties and affiliates of annual management and advisory fees and related expenses; PROVIDED that the amount of such fees shall not exceed $500,000 per fiscal year; (v) loans and advances (or guarantees of third party loans) to officers or employees of the Company or any of its Restricted Subsidiaries in the ordinary course of business not to exceed $250,000 at any time outstanding; (vi) the payment of fees and expenses related to the Recapitalization; (vii) Permitted Investments and Restricted Payments permitted by the Indenture and (viii) any employment agreement, collective bargaining agreement, employee benefit plan, related trust agreement, indemnification agreement, benefit plan or similar arrangement for the benefit of directors, officers entered into in the ordinary course of business. (c) In addition, the last sentence of paragraph (a) shall not apply to (i) payments by the Company or any of its Restricted Subsidiaries to the Principals or their Related Parties and Affiliates for any financial advisory, financing, underwriting or placement services or in respect of other investment banking activities, including in connection with acquisition or divestitures, which payments are approved by the Board of Directors of the Company in good faith, and (ii) Indebtedness permitted by paragraph (xiv) of the definition of "Permitted Indebtedness." LIMITATION OF GUARANTEES BY RESTRICTED SUBSIDIARIES. The Company will not permit any of its domestic Restricted Subsidiaries, directly or indirectly, by way of the pledge of any intercompany note or otherwise, to guarantee any Indebtedness of the Company unless, in any such case, (a) such Restricted Subsidiary executes and delivers a supplemental indenture to the Indenture providing a Note Guarantee by such Restricted Subsidiary and (b) if any such guarantee of such Restricted Subsidiary is provided in respect of Indebtedness that is expressly subordinated to the Notes, the guarantee or other instrument provided by such Restricted Subsidiary in respect of such subordinated Indebtedness shall be subordinated to the Note Guarantee pursuant to subordination provisions no less favorable to the Holders of the Notes than those contained in the Indenture. Notwithstanding the foregoing, any such Note Guarantee by a Restricted Subsidiary shall provide by its terms that it shall be automatically and unconditionally released and discharged, without any further action required on the part of the Trustee or any Holder, upon: (i) the unconditional release of such Restricted Subsidiary from its liability in respect of the Indebtedness in connection with which such Note Guarantee was executed and delivered pursuant to the preceding paragraph; (ii) any sale or other disposition (by merger or otherwise) to any Person which is not a Restricted Subsidiary of the Company of all of the Company's Capital Stock in, or all or substantially all of the assets of, such Restricted Subsidiary; PROVIDED that such sale or disposition of such Capital Stock or assets is otherwise in compliance with the terms of the Indenture, (iii) the designation of such Subsidiary as an Unrestricted Subsidiary in accordance 69 with the provisions of the Indenture or (iv) the sale or other disposition of shares of Capital Stock of such Subsidiary to a Person other than the Company or a Restricted Subsidiary such that such Subsidiary ceases to constitute a Subsidiary of the Company, provided such disposition is otherwise in accordance with the provisions of the Indenture. CONDUCT OF BUSINESS. The Company and its Restricted Subsidiaries will not engage in any businesses which are not the same, similar or reasonably related or complementary to the businesses in which the Company and its Restricted Subsidiaries are engaged on the Issue Date (as determined in good faith by the Board of Directors of the Company). REPORTS TO HOLDERS. The Indenture provides that the Company will deliver to the Trustee within 15 days after the filing of the same with the Commission, copies of the quarterly and annual reports and of the information, documents and other reports, if any, which the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further provides that, notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company will file with the Commission from and after the commencement of an Exchange Offer or the effectiveness of the Shelf Registration Statement but in any event not later than 210 days after the Issue Date, to the extent permitted, and provide the Trustee and Holders with such annual reports and such information, documents and other reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will also comply with the other provisions of TIA Section 314(a). EVENTS OF DEFAULT The following events are defined in the Indenture as "Events of Default": (i) the failure to pay interest on any Notes when the same becomes due and payable and the default continues for a period of 30 days; (ii) the failure to pay the principal on any Notes, when such principal becomes due and payable, at maturity, upon redemption or otherwise (including the failure to make a payment to purchase Notes tendered pursuant to a Change of Control Offer or a Net Proceeds Offer); (iii) a default in the observance or performance of any other covenant or agreement contained in the Indenture which default continues for a period of 60 days after written notice specifying the default (and demanding that such default be remedied) is given to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% of the outstanding principal amount of the Notes (except in the case of a default with respect to the "Merger, Consolidation and Sale of Assets" covenant, which will constitute an Event of Default with such notice requirement but without such passage of time requirement); (iv) the failure to pay at final maturity (giving effect to any applicable grace periods and any extensions thereof) the principal amount of any Indebtedness of the Company or any Restricted Subsidiary of the Company and such failure continues for a period of 20 days or more, or the acceleration of the final stated maturity of any such Indebtedness (which acceleration is not rescinded, annulled or otherwise cured within 20 days of receipt by the Company or such Restricted Subsidiary of notice of any such acceleration) if the aggregate principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal at final maturity or which has been accelerated, aggregates $5.0 million or more at any time; (v) one or more judgments in an aggregate amount in excess of $5.0 million shall have been rendered against the Company or any of its Significant Subsidiaries and such judgments remain undischarged, unpaid or unstayed for a period of 60 days after such judgment or judgments become final and non- appealable; or (vi) certain events of bankruptcy affecting the Company or any of its Significant Subsidiaries. 70 If an Event of Default (other than an Event of Default specified in clause (vi) above relating to the Company) shall occur and be continuing, the Trustee or the Holders of at least 25% in principal amount of outstanding Notes may declare the principal of and accrued interest on all the Notes to be due and payable by notice in writing to the Company and the Trustee specifying the respective Event of Default and that it is a "notice of acceleration" (the "Acceleration Notice"), and the same shall become immediately due and payable. If an Event of Default specified in clause (vi) above relating to the Company occurs and is continuing, then all unpaid principal of, and premium, if any, and accrued and unpaid interest on all of the outstanding Notes shall IPSO FACTO become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Indenture provides that, at any time after a declaration of acceleration with respect to the Notes as described in the preceding paragraph, the Holders of a majority in principal amount of the Notes may rescind and cancel such declaration and its consequences (i) if the rescission would not conflict with any judgment or decree, (ii) if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration, (iii) to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal, which has become due otherwise than by such declaration of acceleration, has been paid, (iv) if the Company has paid the Trustee its reasonable compensation and reimbursed the Trustee for its expenses, disbursements and advances and (v) in the event of the cure or waiver of an Event of Default of the type described in clause (vi) of the description above of Events of Default, the Trustee shall have received an officers' certificate and an opinion of counsel that such Event of Default has been cured or waived. No such rescission shall affect any subsequent Default or impair any right consequent thereto. The Holders of a majority in principal amount of the Notes may waive any existing Default or Event of Default under the Indenture, and its consequences, except a default in the payment of the principal of or interest on any Notes. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture and under the TIA. Subject to the provisions of the Indenture relating to the duties of the Trustee, the Trustee is under no obligation to exercise any of its rights or powers under the Indenture at the request, order or direction of any of the Holders, unless such Holders have offered to the Trustee reasonable indemnity. Subject to all provisions of the Indenture and applicable law, the Holders of a majority in aggregate principal amount of the then outstanding Notes have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. Under the Indenture, the Company is required to provide an officers' certificate to the Trustee promptly upon any Senior Officer obtaining actual knowledge of any Default or Event of Default (provided that such officers shall provide such certification at least annually whether or not they know of any Default or Event of Default) that has occurred and, if applicable, describe such Default or Event of Default and the status thereof. LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Company may, at its option and at any time, elect to have the obligations of the Company and the Subsidiary Guarantors discharged with respect to the outstanding Notes ("Legal Defeasance"), the Indenture and the Note Guaranteess. Such Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding Notes and cured all then existing Defaults and Events of Default, except for (i) the rights of Holders to receive payments in respect of the principal of, premium, if any, and interest on the Notes when such payments are due and of the defeasance trust referred to below, (ii) the Company's obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payments, (iii) the rights, powers, trust, duties and immunities of 71 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 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 Notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, reorganization and insolvency events) described under "Events of Default" will no longer constitute an Event of Default with respect to the 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 cash in U.S. dollars, non-callable U.S. government obligations, 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, if any, and interest on the Notes on the stated date for payment thereof or on the applicable redemption date, as the case may be; (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 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 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 and the grant of any Lien securing such borrowing) 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 shall not result in a breach or violation of, or constitute a default under any other material agreement or instrument 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 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 over any other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company or others; (vii) the Company shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance have been complied with; (viii) the Company shall have delivered to the Trustee an opinion of counsel to the effect that, subject to customary assumptions and exclusions, after the 91st day following the deposit, the trust funds will not be part of any "estate" formed by the bankruptcy or reorganization of the Company or subject to the "automatic stay" under the Bankruptcy Code or, in the case of Covenant Defeasance, will be subject to a first priority Lien in favor of the Trustee for the benefit of the Holders; and (ix) certain other customary conditions precedent are satisfied. Notwithstanding the foregoing, the Opinion of Counsel required by clause (ii) above with respect to a Legal Defeasance need not be delivered if all Notes not theretofore delivered to the Trustee for cancellation (x) have become due and payable, (y) will become due and payable on the maturity date within one year or (z) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company. 72 SATISFACTION AND DISCHARGE The Indenture, the Notes and the Note Guarantees will be discharged and will cease to be of further effect (except as to surviving rights or registration of transfer or exchange of the Notes, as expressly provided for in the Indenture) as to all outstanding Notes when (i) either (a) all the Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust) have been delivered to the Trustee for cancellation or (b) all Notes not theretofore delivered to the Trustee for cancellation have become due and payable and the Company has irrevocably deposited or caused to be deposited with the Trustee funds in an amount sufficient to pay and discharge the entire Indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for principal of, premium, if any, and interest on the Notes to the date of deposit together with irrevocable instructions from the Company directing the Trustee to apply such funds to the payment thereof at maturity or redemption, as the case may be; (ii) the Company has paid all other sums payable under the Indenture by the Company; and (iii) the Company has delivered to the Trustee an officers' certificate and an opinion of counsel stating that all conditions precedent under the Indenture relating to the satisfaction and discharge of the Indenture have been complied with. MODIFICATION OF THE INDENTURE From time to time, the Company and the Trustee, without the consent of the Holders, may amend the Indenture for any of the following purposes: (1) to evidence the succession of another person to the Company or any Subsidiary Guarantor and the assumption by any such successor of the covenants of the Company or any Subsidiary Guarantor in the Indenture and in the Notes; or (2) to add to the covenants of the Company or any Subsidiary Guarantor for the benefit of the Holders, or to surrender any right or power herein conferred upon the Company or any Subsidiary Guarantor; or (3) to add additional Events of Defaults; or (4) to provide for uncertificated Notes in addition to or in place of the certificated Notes; or (5) to evidence and provide for the acceptance of appointment under the Indenture by a successor Trustee; or (6) to secure the Notes or any Note Guarantee; or (7) to cure any ambiguity, to correct or supplement any provision in the Indenture that may be defective or inconsistent with any other provisions in the Indenture, or to make any other provisions with respect to matters or questions arising under the Indenture, provided that such actions pursuant to this clause (7) do not adversely affect the interests of the Holders in any material respect; or (8) to comply with any requirements of the Commission in order to effect and maintain the qualification of the Indenture under the TIA; or (9) to release any Subsidiary Guarantor from its Note Guarantee in accordance with the provisions of the Indenture (including in connection with a sale of all of the Capital Stock of such Subsidiary Guarantor). In formulating its opinion on the matters in clause (7), the Trustee will be entitled to rely on such evidence as it deems appropriate, including, without limitation, solely on an opinion of counsel. Other modifications and amendments of the Indenture may be made with the consent of the Holders of a majority in principal amount of the then outstanding Notes issued under the Indenture (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Notes), except that, without the consent of each Holder affected thereby, no amendment may: (i) reduce the amount of Notes whose Holders must consent to an amendment; (ii) reduce the rate of or change the time for payment of interest, including defaulted interest, on any Notes; (iii) reduce the principal of or change the fixed maturity of any Notes, or change the date on which any Notes may be subject to redemption or repurchase, or reduce the redemption or repurchase price therefor; (iv) make any Notes payable in money other than that stated in the Notes; (v) make any change in provisions of the Indenture protecting the right of each Holder to receive payment of principal of and interest on such Note on or after the due date thereof or to bring suit to enforce such payment, or permitting Holders of a majority in principal amount of Notes to waive Defaults or Events of Default; (vi) modify or change any provision of the Indenture or the related 73 definitions affecting the ranking of the Notes; or (vii) release any Subsidiary Guarantor from any of its obligations under its Note Guarantee other than in accordance with the terms of the Indenture. GOVERNING LAW The Indenture provides that it and the Notes are governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby. THE TRUSTEE The Indenture provides that, except during the continuance of an Event of Default, the Trustee will perform only such duties as are specifically set forth in the Indenture. During the existence of an Event of Default, the Trustee will exercise such rights and powers vested in it by the 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. The Indenture and the provisions of the TIA contain certain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payments of claims in certain cases or to realize on certain property received in respect of any such claim as security or otherwise. Subject to the TIA, the Trustee will be permitted to engage in other transactions; PROVIDED that if the Trustee acquires any conflicting interest as described in the TIA, it must eliminate such conflict or resign. CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all such terms, as well as any other terms used herein for which no definition is provided. "ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of the Company or at the time it merges or consolidates with the Company or any of its Subsidiaries or assumed in connection with the acquisition of assets from such Person and in each case not incurred by such Person in connection with, or in anticipation or contemplation of, such Person becoming a Restricted Subsidiary of the Company or such acquisition, merger or consolidation. "AFFILIATE" means, with respect to any specified Person, any other Person who directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such specified Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative of the foregoing. "ASSET ACQUISITION" means (a) an Investment by the Company or any Restricted Subsidiary of the Company in any other Person pursuant to which such Person shall become a Restricted Subsidiary of the Company or any Restricted Subsidiary of the Company, or shall be merged with or into the Company or any Restricted Subsidiary of the Company, or (b) the acquisition by the Company or any Restricted Subsidiary of the Company of the assets of any Person (other than a Restricted Subsidiary of the Company) which constitute all or substantially all of the assets of such Person or comprises any division or line of business of such Person or any other properties or assets of such Person other than in the ordinary course of business. "ASSET SALE" means any direct or indirect sale, issuance, conveyance, transfer, lease (other than operating leases entered into in the ordinary course of business), assignment or other transfer for value by 74 the Company or any of its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to any Person other than the Company or a Restricted Subsidiary of the Company of (a) any Capital Stock of any Restricted Subsidiary of the Company; or (b) any other property or assets of the Company or any Restricted Subsidiary of the Company other than in the ordinary course of business; PROVIDED, HOWEVER, that Asset Sales shall not include (i) a transaction or series of related transactions for which the Company or its Restricted Subsidiaries receive aggregate consideration of less than $500,000, (ii) the sale, lease, conveyance, disposition or other transfer of all or substantially all of the assets of the Company and the Restricted Subsidiaries of the Company (determined on a consolidated basis), or the consolidation or merger of the Company with any other Person, in each case as permitted under "--Merger, Consolidation and Sale of Assets," (iii) any disposition of property of the Company or any of its Restricted Subsidiaries that, in the reasonable judgment of the Company, has become uneconomic, obsolete or worn out, (iv) a Restricted Payment or Permitted Investment that is permitted by the covenant described above under the caption "--Certain Covenants-Limitation on Restricted Payments" (including, without limitation, any formation of or contribution of assets to a joint venture), (v) leases or subleases, in the ordinary course of business, to third parties of real property owned in fee or leased by the Company or its Subsidiaries, (vi) the sale of inventory in the ordinary course of business, (vii) the sale of Cash Equivalents or (viii) the sale or discount, in each case without recourse (other than recourse for a breach of a representation or warranty) of accounts receivable arising in the ordinary course of business, but only in connection with the compromise or collection thereof. "BOARD OF DIRECTORS" means, as to any Person, the board of directors of such Person or any duly authorized committee thereof. "BOARD RESOLUTION" means, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification, and delivered to the Trustee. "BORROWING BASE" means, as of any date, an amount equal to the sum of (a) 85% of the face amount of all accounts receivable owned by the Company and its Restricted Subsidiaries as of such date that are not more than 90 days past due, and (b) 60% of the book value of all inventory owned by the Company and its Restricted Subsidiaries as of such date, all calculated on a consolidated basis and in accordance with GAAP. To the extent that information is not available as to the amount of accounts receivable or inventory as of a specific date, the Company may utilize the most recent available information for the purpose of calculating the Borrowing Base. "CAPITALIZED LEASE OBLIGATION" means, as to any Person, the obligations of such Person under a lease that are required to be classified and accounted for as capital lease obligations under GAAP and, for purposes of this definition, the amount of such obligations at any date shall be the capitalized amount of such obligations at such date, determined in accordance with GAAP. "CAPITAL STOCK" means (i) with respect to any Person that is a corporation, any and all shares, interests, participations or other equivalents (however designated and whether or not voting) of corporate stock, including each class of Common Stock and Preferred Stock of such Person and (ii) with respect to any Person that is not a corporation, any and all partnership or other equity interests of such Person. "CASH EQUIVALENTS" means (i) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more than one year from the date of creation thereof and, at the time 75 of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit, Eurodollar deposits or bankers' acceptances maturing within one year from the date of acquisition thereof issued by any bank organized under the laws of the United States of America or any state thereof or the District of Columbia or any U.S. branch of a foreign bank or any foreign branch of a U.S. bank, in each case, having at the date of acquisition thereof combined capital and surplus of not less than $250,000,000; (v) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (i) above entered into with any bank meeting the qualifications specified in clause (iv) above; and (vi) investments in money market funds with assets at least equal to $500.0 million. "CHANGE OF CONTROL" means the occurrence of one or more of the following events: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company to any Person or group of related Persons for purposes of Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates thereof (whether or not otherwise in compliance with the provisions of the Indenture) other than to a Subsidiary of the Company, the Principals and their Related Parties; (ii) the liquidation or dissolution of the Company, other than in a transaction that complies with the provisions described under "--Certain Covenants--Consolidation, Merger and Sale of Assets"; (iii) any Person or Group (other than the Principals and their Related Parties) shall become the owner, directly or indirectly, beneficially or of record, of shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding Capital Stock of the Company; or (iv) the replacement of a majority of the Board of Directors of the Company over a two-year period from the directors who constituted the Board of Directors of the Company at the beginning of such period, and such replacement shall not have been approved by a vote of at least a majority of the Board of Directors of the Company then still in office who either were members of such Board of Directors at the beginning of such period or whose election as a member of such Board of Directors was previously so approved. "COMMON STOCK" of any Person means any and all shares, interests or other participations in, and other equivalents (however designated and whether voting or non-voting) of such Person's common stock, whether outstanding on the Issue Date or issued after the Issue Date, and includes, without limitation, all series and classes of such common stock. "CONSOLIDATED EBITDA" means, with respect to any Person, for any period, the sum (without duplication) of (i) Consolidated Net Income and (ii) to the extent Consolidated Net Income has been reduced thereby, (A) all income taxes of such Person and its Restricted Subsidiaries accrued in accordance with GAAP for such period, (B) Consolidated Fixed Charges and (C) Consolidated Non-cash Charges LESS any non-cash items increasing Consolidated Net Income for such period, all as determined on a consolidated basis for such Person and its Restricted Subsidiaries in accordance with GAAP. "CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to any Person, the ratio of Consolidated EBITDA of such Person during the four full fiscal quarters (the "Four Quarter Period") ending on or prior to the date of the transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of such Person for the Four Quarter Period. In addition to and without limitation of the foregoing, for purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated after giving effect on a PRO FORMA basis for the period of such calculation to (i) the incurrence or repayment of any Indebtedness of such Person or any of its Restricted Subsidiaries (and the application of the proceeds thereof) giving rise to the need to make such calculation and any incurrence or repayment of other Indebtedness (and the application of the proceeds thereof), other than the incurrence or repayment of Indebtedness in the ordinary course of business for working capital purposes pursuant to working capital facilities, occurring during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transaction Date, as if such incurrence or repayment, as the case may be (and the application of the proceeds thereof), occurred on the first day of the Four Quarter Period and (ii) any asset 76 sales, discontinuance of operations (as determined in accordance with GAAP) or Asset Acquisitions (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of such Person or one of its Restricted Subsidiaries (including any Person who becomes a Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming or otherwise being liable for Acquired Indebtedness and also including any Consolidated EBITDA (including any PRO FORMA expense and cost reductions as determined in accordance with Regulation S-X under the Exchange Act) attributable to the assets which are the subject of the Asset Acquisition or asset sale during the Four Quarter Period) occurring during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transaction Date, as if such asset sale, discontinuance or Asset Acquisition (including the incurrence, assumption or liability for any such Acquired Indebtedness) occurred on the first day of the Four Quarter Period. If such Person or any of its Restricted Subsidiaries directly or indirectly guarantees Indebtedness of a third Person, the preceding sentence shall give effect to the incurrence of such guaranteed Indebtedness as if such Person or any Restricted Subsidiary of such Person had directly incurred or otherwise assumed such guaranteed Indebtedness. If since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Acquisition or asset sale that would have required adjustment pursuant to this definition, then the Consolidated Fixed Charge Coverage Ratio shall be calculated giving PRO FORMA effect thereto as if such Asset Acquisition or asset sale had occurred at the beginning of the applicable Four Quarter Period. Furthermore, in calculating "Consolidated Fixed Charges" for purposes of determining the denominator (but not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1) interest on outstanding Indebtedness determined on a fluctuating basis as of the Transaction Date and which will continue to be so determined thereafter shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest on such Indebtedness in effect on the Transaction Date; and (2) notwithstanding clause (1) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Interest Swap Obligations, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of such agreements and (3) if it bears, at the option of the Company or the relevant Restricted Subsidiary of the Company, a fixed or floating rate of interest, interest thereon will be computed by applying, at the option of the Company, either the fixed or floating rate. For purposes of this definition, whenever PRO FORMA effect is to be given to a transaction, the PRO FORMA calculation shall be made in good faith by the Chief Financial Officer of the Company and ratified by the Board of Directors of the Company. "CONSOLIDATED FIXED CHARGES" means, with respect to any Person for any period, the sum, without duplication, of (i) Consolidated Interest Expense, plus (ii) the product of (x) the amount of all dividend payments on any series of Preferred Stock of such Person (other than dividends paid in Qualified Capital Stock) paid, accrued or scheduled to be paid or accrued during such period times (y) a fraction, the numerator of which is one and the denominator of which is one minus the then current effective consolidated federal, state and local income tax rate of such Person, expressed as a decimal, PROVIDED that Consolidated Fixed Charges shall not include (x) gain or loss from extinguishment of debt, including write off of debt issuance costs, commissions, fees and expenses, (y) amortization of debt issuance costs, commissions, fees and expenses, or (z) customary commitment, administrative and transaction fees or charges. "CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any period, the sum of, without duplication: (i) the aggregate of the interest expense of such Person and its Restricted Subsidiaries for such period determined on a consolidated basis in accordance with GAAP, including without limitation, (a) any amortization of debt discount and amortization or write-off deferred financing costs, (b) the net costs under Interest Swap Obligations, (c) all capitalized interest and (d) the interest portion of any deferred payment obligation; and (ii) the interest component of Capitalized Lease Obligations accrued by such Person and its Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP. 77 "CONSOLIDATED NET INCOME" means, with respect to any Person, for any period, the aggregate net income (or loss) of such Person and its Restricted Subsidiaries for such period on a consolidated basis, determined in accordance with GAAP; PROVIDED that there shall be excluded therefrom (a) after-tax gains or losses from Asset Sales or other sales of assets outside the ordinary course of business or abandonments or reserves relating thereto, (b) after-tax items classified as extraordinary or nonrecurring gains or losses, (c) solely for purposes of the covenant described under "--Certain Covenants--Limitation on Restricted Payments," the net income or loss of any Person acquired in a "pooling of interests" transaction accrued prior to the date it becomes a Restricted Subsidiary of the referent Person or is merged or consolidated with the referent Person or any Restricted Subsidiary of the referent Person, (d) the net income or loss of any Restricted Subsidiary of the referent Person to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is restricted by a contract, operation of law or otherwise, except to the extent that such net income is actually paid to the Company or a Restricted Subsidiary thereof by loans, advances, intercompany transfers, principal payments or otherwise, (e) the net income of any Person, other than a Restricted Subsidiary of the referent Person, except to the extent of cash dividends or distributions paid to the referent Person or subject to clause (d), to a Restricted Subsidiary of the referent Person by such Person, (f) the fees, expenses and other costs incurred in connection with the Recapitalization, including payments to management contemplated by the Recapitalization Agreement; PROVIDED, HOWEVER, that Net Income shall be deemed to include any increases during such period to consolidated shareholder's equity of such Person attributable to tax benefits from net operating losses and the exercise of stock options that are not otherwise included in Net Income for such period. "CONSOLIDATED NON-CASH CHARGES" means, with respect to any Person, for any period, the (a) sum of (i) aggregate depreciation, amortization and other non-cash expenses or charges of such Person and its Restricted Subsidiaries reducing Consolidated Net Income of such Person and its Restricted Subsidiaries for such period (including amortization of goodwill, the non-cash costs of agreements evidencing Interest Swap Obligations, Currency Agreements, license agreements, non-competition agreements, non-cash amortization of Capitalized Lease Obligations or management fees, and organization costs), (ii) expenses and charges related to any equity offering or incurrence of Indebtedness permitted to be incurred by the Indenture (including any such expenses or charges relating to the Recapitalization), (iii) the amount of any restructuring charge or reserve, (iv) unrealized gains and losses from hedging, foreign currency or commodities translations and transactions, and (v) the amount of any reduction representing a minority interest in Subsidiary Guarantors, MINUS (b) any cash payment with respect to which a charge or reserve referred to in clause (a) was taken in a prior period, in each case, determined on a consolidated basis in accordance with GAAP. "CURRENCY AGREEMENT" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company or any Restricted Subsidiary of the Company against fluctuations in currency values. "DEFAULT" means an event or condition the occurrence of which is, or with the lapse of time or the giving of notice or both would be, an Event of Default. "DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock which, 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 is redeemable at the sole option of the holder thereof on or prior to the final maturity date of the Notes; PROVIDED that (i) any Capital Stock that would not constitute Disqualified Capital Stock but for provisions therein giving holders thereof the right to cause the issuer thereof to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the Stated Maturity of the Notes will constitute Disqualified Capital Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the 78 provisions described under "--Change of Control" and (ii) the Redeemable Preferred Stock shall not constitute Disqualified Capital Stock. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any successor statute or statutes thereto. "FAIR MARKET VALUE" means, with respect to any asset or property, the price which could be negotiated in an arm's-length, free market transaction, for cash, between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction. For purposes of the covenant described under "--Certain Covenants-Limitations on Asset Sales," fair market value shall be determined by the Board of Directors of the Company acting in good faith and shall be evidenced by a Board Resolution of the Board of Directors of the Company delivered to the Trustee. "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 may be approved by a significant segment of the accounting profession of the United States, which are in effect as of the Issue Date. "INDEBTEDNESS" means with respect to any Person, without duplication, (i) all indebtedness of such Person for borrowed money, (ii) all indebtedness of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all Capitalized Lease Obligations of such Person, (iv) all obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations and all obligations under any title retention agreement (but excluding trade accounts payable and other accrued liabilities arising in the ordinary course of business), (v) all obligations for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction, (vi) guarantees and other contingent obligations in respect of Indebtedness referred to in clauses (i) through (v) above and clause (viii) below, (vii) all obligations of any other Person of the type referred to in clauses (i) through (vi) above which are secured by any lien on any property or asset of such Person, the amount of such obligation being deemed to be the lesser of the fair market value of such property or asset or the amount of the obligation so secured, (viii) all obligations under currency agreements and interest swap agreements of such Person and (ix) all Disqualified Capital Stock issued by such Person with the amount of Indebtedness represented by such Disqualified Capital Stock being equal to the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price, but excluding accrued dividends, if any. For purposes hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to the Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock, such fair market value shall be determined in good faith by the Board of Directors of the issuer of such Disqualified Capital Stock. Subject to the directly preceding sentence, 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 interests, and (ii) the principal amount thereof in the case of any other Indebtedness. Notwithstanding the foregoing, (i) (a) Obligations of such Persons other than principal, (b) any liability for federal, state or local taxes or other taxes owed by such Person and (c) obligations with respect to performance and surety bonds and completion guarantees in the ordinary course of business will not be considered Indebtedness for purposes of this definition and (ii) the accretion of original issue discount will not be considered the incurrence of Indebtedness. "INDEPENDENT FINANCIAL ADVISOR" means a firm (i) which does not, and whose directors, officers and employees or Affiliates do not, own more than 5% of the Capital Stock of the Company and (ii) which, in the judgment of the Board of Directors of the Company, is otherwise independent and qualified to perform the task for which it is to be engaged. 79 "INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant to any arrangement with any other Person, whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such other Person calculated by applying a fixed or a floating rate of interest on the same notional amount and shall include, without limitation, interest rate swaps, caps, floors, collars and similar agreements. "INVESTMENT" means, with respect to any Person, any direct or indirect loan or other extension of credit (including, without limitation, a guarantee) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition by such Person of any Capital Stock, bonds, debentures or other securities or evidences of Indebtedness issued by, any other Person. "Investment" shall exclude extensions of trade credit by the Company and its Restricted Subsidiaries on commercially reasonable terms in accordance with normal trade practices of the Company or such Restricted Subsidiary, as the case may be. For the purposes of the "Limitation on Restricted Payments" covenant, (i) "Investment" shall include and be valued at the fair market value of the net assets of any Restricted Subsidiary at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary and shall exclude the fair market value of the net assets of and the fair market value of Investments (other than common stock) in any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary and (ii) the amount of any Investment shall be the original cost of such Investment plus the cost of all additional Investments by the Company or any of its Restricted Subsidiaries, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment, reduced by the payment of interest, dividends or distributions in connection with such Investment or any other amounts or assets received in respect of such Investment; PROVIDED that no such payment of dividends or distributions or receipt of any such other amounts shall reduce the amount of any Investment if such payment of dividends or distributions or receipt of any such amounts would be included in Consolidated Net Income. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Common Stock of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, the Company no longer owns, directly or indirectly, 100% of the outstanding Common Stock of such Restricted Subsidiary, 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 Common Stock of such Restricted Subsidiary not sold or disposed of. "ISSUE DATE" means February 3, 1998. "LIEN" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement and any lease in the nature thereof). "NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds in the form of cash or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (other than the portion of any such deferred payment constituting interest or dividends) received by the Company or any of its Restricted Subsidiaries from such Asset Sale net of (a) reasonable out-of-pocket expenses and fees relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees and sales commissions), (b) taxes paid or payable, (c) repayment of Indebtedness that is secured by the subject assets or required to be repaid in connection with such Asset Sale, (d) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against any liabilities associated with such Asset Sale and retained by the Company or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale and (e) amounts required to be paid to any person (other than the Company or any 80 Restricted Subsidiary) owning a beneficial interest (by way of Capital Stock of the Person owning such assets or otherwise) in the assets that are subject to the Asset Sale. "NEW CREDIT FACILITY" means the Amended and Restated Credit Agreement, dated as of February 3, 1998, as amended and restated as of May 29, 1998, among the Company, Elgar Electronics Corporation, the lenders party thereto in their capacities as lenders thereunder and Bankers Trust Company, as agent, together with the related documents thereto (including, without limitation, any guarantee agreements and security documents), in each case as such agreements may be amended (including any amendment and restatement thereof), supplemented or otherwise modified from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring (including increasing the amount of available borrowings thereunder or adding Restricted Subsidiaries of the Company as additional borrowers or guarantors thereunder) all or any portion of the Indebtedness under such agreement or any successor or replacement agreement and whether by the same or any other agent, lender or group of lenders. "NOTE GUARANTEE" means the guarantee of the Obligations of the Company with respect to the Notes by each Subsidiary Guarantor pursuant to the terms of the Indenture. "OBLIGATIONS" means all obligations for principal, premium, interest, penalties, fees, indemnifications, reimbursements, and other liabilities payable under the documentation governing any Indebtedness. "PERMITTED INDEBTEDNESS" means, without duplication, each of the following: (i) Indebtedness under the Notes issued in the Offering and any Note Guarantees; (ii) Indebtedness incurred pursuant to the New Credit Facility and/or one or more other credit facilities (including any guarantees of such Indebtedness) in an aggregate principal amount at any time outstanding not to exceed the greater of (x) $15 million, and (y) the amount of the Borrowing Base; less, in the case of preceding clause (x), any amount applied to the permanent reduction of such credit facilities pursuant to the "Limitation on Asset Sales" covenant; (iii) other Indebtedness of the Company and its Restricted Subsidiaries outstanding on the Issue Date; (iv) Indebtedness in respect of Interest Swap Obligations of the Company or any of its Restricted Subsidiaries; PROVIDED, HOWEVER, that such Interest Swap Obligations are entered into to protect the Company and its Restricted Subsidiaries from fluctuations in interest rates on Indebtedness incurred in accordance with the Indenture to the extent the notional principal amount of such Interest Swap Obligation does not exceed the principal amount of the Indebtedness to which such Interest Swap Obligation relates; (v) Indebtedness under Currency Agreements; PROVIDED that in the case of Currency Agreements which relate to Indebtedness, such Currency Agreements do not increase the Indebtedness of the Company and its Restricted Subsidiaries outstanding other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder; (vi) Indebtedness of a Restricted Subsidiary of the Company to the Company or to a Wholly Owned Restricted Subsidiary of the Company for so long as such Indebtedness is held by the Company or a Wholly Owned Restricted Subsidiary of the Company or the lenders or collateral agent under the New Credit Facility; PROVIDED that if as of any date any Person other than the Company, a Wholly Owned Restricted Subsidiary of the Company or the lenders or collateral agent under the New Credit Facility owns or holds any such Indebtedness, such date shall be deemed the incurrence of Indebtedness; 81 (vii) Indebtedness of the Company to a Wholly Owned Restricted Subsidiary of the Company for so long as such Indebtedness is held by a Wholly Owned Restricted Subsidiary of the Company or the lenders or collateral agent under the New Credit Facility; PROVIDED that (a) any Indebtedness of the Company to any Wholly Owned Restricted Subsidiary of the Company which is not a Subsidiary Guarantor is unsecured and subordinated, pursuant to a written agreement, to the Company's obligations under the Indenture and the Notes and (b) if as of any date any Person other than a Wholly Owned Restricted Subsidiary of the Company owns or holds any such Indebtedness, such date shall be deemed the incurrence of Indebtedness; (viii) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; PROVIDED, HOWEVER, that such Indebtedness is extinguished within three business days of incurrence; (ix) Indebtedness of the Company or any of its Restricted Subsidiaries represented by letters of credit for the account of the Company or such Restricted Subsidiary, as the case may be, issued in the ordinary course of business, including without limitation letters of credit in respect of workers' compensation claims or self-insurance, or other Indebtedness with respect to reimbursement type obligations regarding worker's compensation claims; PROVIDED, HOWEVER that upon the drawing of such letters of credit or other obligations, such obligations are reimbursed within 30 days following such drawing; (x) Indebtedness (A) represented by Capitalized Lease Obligations and Purchase Money Indebtedness of the Company and its Restricted Subsidiaries or (B) Indebtedness under purchase money mortgages or secured by purchase money security interests, in the case of (A) or (B) incurred for the purpose of leasing or financing or refinancing all or any part of the purchase price or cost of construction or improvement of any property (real or personal) or other assets that are used or useful 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 and whether such Indebtedness is owed to the seller or Person carrying out such construction or improvement or to any third party), so long as (x) such Indebtedness is not secured by any property or assets of the Company or any Restricted Subsidiary other than the property or assets so leased, acquired (directly or indirectly), constructed or improved and (y) such Indebtedness is created within 90 days of the acquisition or completion of construction or improvement of the related property or asset, provided that the aggregate principal amount of Indebtedness under clause (A) and (B) does not exceed the greater of (a) $8.0 million or (b) 7.5% of Total Assets, and any Refinancing of Indebtedness permitted under clause (A) or (B) the aggregate amount of which does not exceed the greater of (a) $8.0 million or (b) 7.5% of Total Assets; (xi) Refinancing Indebtedness; (xii) Indebtedness of the Company or any Restricted Subsidiary consisting of guarantees, indemnities or obligations in respect of purchase price adjustments in connection with the acquisition or disposition of assets, including, without limitation, shares of Capital Stock; (xiii) guarantees of Indebtedness otherwise permitted under the Indenture; and (xiv) additional Indebtedness of the Company and its Restricted Subsidiaries in an aggregate principal amount not to exceed $10.0 million at any one time outstanding (which amount may, but need not, be incurred in whole or in part under the New Credit Facility). "PERMITTED INVESTMENTS" means (i) Investments by the Company or any Restricted Subsidiary of the Company in any Person that is or will become immediately after such Investment a Restricted Subsidiary of the Company or that will merge or consolidate into the Company or a Restricted Subsidiary of the Company, (ii) Investments in the Company by any Restricted Subsidiary of the Company; PROVIDED that any Indebtedness evidencing such Investment made by a Restricted Subsidiary that is not a Subsidiary 82 Guarantor is unsecured and subordinated, pursuant to a written agreement, to the Company's obligations under the Notes and the Indenture; (iii) investments in cash and Cash Equivalents; (iv) loans and advances to employees and officers of the Company and its Restricted Subsidiaries in the ordinary course of business for bona fide business purposes not in excess of $250,000 at any one time outstanding; (v) Currency Agreements and Interest Swap Obligations entered into in the ordinary course of the Company's or its Restricted Subsidiaries' businesses and otherwise in compliance with the Indenture; (vi) Investments in securities of trade creditors or customers received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers or otherwise in settlement of debts; (vii) Investments made by the Company or its Restricted Subsidiaries as a result of consideration received in connection with an Asset Sale or other disposition of assets made in compliance with the "Limitation on Asset Sales" covenant; (viii) Investments in existence on the Issue Date; (ix) any acquisition of assets solely in exchange for the issuance of Qualified Equity Interests of the Company; (x) commission, travel, payroll, entertainment, relocation and similar advances to officers and employees made in the ordinary course of business; (xi) guarantees of Indebtedness otherwise permitted under the Indenture; and (xii) other Investments that do not exceed the greater of $5.0 million or 10% of Total Assets in the aggregate at any time outstanding. "PERMITTED LIENS" means the following types of Liens: (i) Liens for taxes, assessments or governmental charges or claims either (a) not delinquent or (b) contested in good faith by appropriate proceedings and as to which the Company or its Restricted Subsidiaries shall have set aside on its books such reserves as may be required pursuant to GAAP; (ii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, including any Lien securing letters of credit issued in the ordinary course of business in connection therewith, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (iv) judgment Liens not giving rise to an Event of Default; (v) easements, rights-of-way, zoning restrictions, eminent domain proceedings and other similar charges or encumbrances in respect of real property not interfering in any material respect with the ordinary conduct of the business of the Company or any of its Restricted Subsidiaries; (vi) any interest or title of a lessor under any Capitalized Lease Obligation; PROVIDED that such Liens do not extend to any property or assets which is not leased property subject to such Capitalized Lease Obligation; (vii) purchase money Liens to finance the acquisition, construction or improvement of property or assets of the Company or any Restricted Subsidiary of the Company; PROVIDED, HOWEVER, that the related Indebtedness shall not exceed the cost of the acquisition, construction or improvement of such property or assets and shall not be secured by any property or assets of the Company or any Restricted Subsidiary of the Company other than the property and assets so acquired whether through the direct acquisition of such property or assets or indirectly through the acquisition of the Capital Stock of any Person owning such property or assets, constructed or improved, and (B) the Lien securing such Indebtedness shall be created within 90 days of such acquisition or completion of construction or improvement; 83 (viii) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods; (ix) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (x) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual, or warranty requirements of the Company or any of its Restricted Subsidiaries, including rights of offset and set-off; (xi) Liens securing Interest Swap Obligations which Interest Swap Obligations relate to Indebtedness that is otherwise permitted under the Indenture; (xii) Liens securing Indebtedness under Currency Agreements; (xiii) Liens securing Acquired Indebtedness incurred in accordance with the "Limitation on Incurrence of Additional Indebtedness" covenant; PROVIDED that (A) such Liens secured such Acquired Indebtedness at the time of and prior to the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary of the Company and were not granted in connection with, or in anticipation of, the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary of the Company and (B) such Liens do not extend to or cover any property or assets of the Company or of any of its Restricted Subsidiaries other than the property or assets that secured the Acquired Indebtedness prior to the time such Indebtedness became Acquired Indebtedness of the Company or a Restricted Subsidiary of the Company; (xiv) Liens on property or assets of the Company or any Restricted Subsidiary securing Indebtedness under the New Credit Facility or one or more other credit facilities in a principal amount not to exceed the sum of (1) the principal amount of Indebtedness permitted by clause (ii) of the definition of "Permitted Indebtedness" and (2) the principal amount of Indebtedness permitted by clause (xiv) of the definition of "Permitted Indebtedness" to the extent such Indebtedness is incurred under the New Credit Facility; (xv) Liens on property or assets of the Company or any Restricted Subsidiary securing Indebtedness incurred under clause (xiv) of the definition of "Permitted Indebtedness"; (xvi) Liens in favor of customs and revenues authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xvii) 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 the business of the Company or such Restricted Subsidiary; (xviii) leases or subleases to third parties; (xix) Liens in connection with workmen's compensation obligations and general liability exposure of the Company and its Restricted Subsidiaries; and (xx) any extension, renewal or replacement, in whole or in part, of any Lien described in the foregoing clauses (i) through (xix); provided that the Lien so extended, renewed or replaced does not extend to any additional property or assets. 84 "PERSON" means an individual, partnership, corporation, unincorporated organization, limited liability company, trust or joint venture, or a governmental agency or political subdivision thereof. "PREFERRED STOCK" of any Person means any Capital Stock of such Person that has preferential rights to any other Capital Stock of such Person with respect to dividends or redemptions or upon liquidation. "PRINCIPALS" means (i) Lehman and each Affiliate of Lehman as of the Issue Date, (ii) JFL-EEC, JFLEI and the other members of JFL-EEC on the Issue Date and their Affiliates, (iii) each officer or employee of Lehman or any such member referred to in clause (ii) as of the Issue Date and (iv) each of the foregoing's family members, legal representatives or guardians, heirs and legatees and trusts, partnerships and corporations the sole beneficiaries, partners or shareholders, as the case may be, of which are family members. "PURCHASE MONEY INDEBTEDNESS" means Indebtedness of the Company and its Restricted Subsidiaries incurred in the normal course of business for the purpose of financing all or any part of the purchase price, or the cost of installation, construction or improvement, of property or equipment. "QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified Capital Stock. "QUALIFIED EQUITY INTEREST" means any Qualified Capital Stock and all warrants, options or other rights to acquire Qualified Capital Stock (but excluding any debt security or Disqualified Capital Stock that is convertible into or exchangeable for Qualified Capital Stock). "REDEEMABLE PREFERRED STOCK" means the Series A Cumulative Redeemable Preferred Stock of the Company, no par value. "REFINANCE" means, in respect of any security or Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a security or Indebtedness in exchange or replacement for, such security or Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have correlative meanings. "REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any Restricted Subsidiary of the Company of Indebtedness incurred in accordance with the "Limitation on Incurrence of Additional Indebtedness" covenant (other than pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (ix), (x) or (xiv) of the definition of Permitted Indebtedness), in each case that does not (1) result in an increase in the aggregate principal amount of Indebtedness of such Person as of the date of such proposed Refinancing (plus the amount of any premium required to be paid under the terms of the instrument governing such Indebtedness and plus the amount of reasonable expenses incurred by the Company in connection with such Refinancing) or (2) create Indebtedness with (A) a Weighted Average Life to Maturity that is less than the Weighted Average Life to Maturity of the Indebtedness being Refinanced or (B) a final maturity earlier than the final maturity of the Indebtedness being Refinanced; PROVIDED that (x) if such Indebtedness being Refinanced is Indebtedness of the Company, then such Refinancing Indebtedness shall be Indebtedness solely of the Company and (y) if such Indebtedness being Refinanced is subordinate or junior to the Notes, then such Refinancing Indebtedness shall be subordinate to the Notes at least to the same extent and in the same manner as the Indebtedness being Refinanced. "RELATED PARTY" with respect to any Principal means (A) any controlling stockholder or 80% (or more) owned Subsidiary of such Principal or (B) 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 (A). "RESTRICTED SUBSIDIARY" of any Person means any Subsidiary of such Person which at the time of determination is not an Unrestricted Subsidiary. 85 "SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement with any Person or to which any such Person is a party, providing for the leasing to the Company or a Restricted Subsidiary of any property, whether owned by the Company or any Restricted Subsidiary at the Issue Date or later acquired, which has been or is to be sold or transferred by the Company or such Restricted Subsidiary to such Person or to any other Person from whom funds have been or are to be advanced by such Person on the security of such Property. "SENIOR OFFICER" means the Chief Executive Officer or the Chief Financial Officer of the Company. "SIGNIFICANT SUBSIDIARY," with respect to any Person, means any Restricted Subsidiary of such Person that satisfies the criteria for a "significant subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Exchange Act. "SPECIFIED AFFILIATE PAYMENTS" means: (i) the repurchase, redemption or other acquisition or retirement for value of any Capital Stock of the Company held by any future, present or former employee, director, officer or consultant of the Company (or any of its Restricted Subsidiaries) pursuant to any management equity subscription agreement, stock option agreement, put agreement, stockholder agreement or similar agreement that may be in effect from time to time; PROVIDED that the aggregate price paid for all such repurchased, redeemed, acquired or retired Capital Stock in any fiscal year shall not exceed the sum of (a) $250,000, (b) the cash proceeds received by the Company after the Issue Date from the sale of Qualified Capital Stock to employees, directors or officers of the Company and its Subsidiaries that occurs in such fiscal year (to the extent such proceeds do not provide the basis for any other Restricted Payment) and (c) amounts referred to in clauses (a) through (b) that remain unused from the immediately preceding fiscal year; (ii) repurchases of Capital Stock deemed to occur upon exercise of stock options or warrants as a result of the payment of all or a portion of the exercise price of such options or warrants with Capital Stock; (iii) payments by the Company to members of management of the Company and its Subsidiaries in connection with the Recapitalization to the extent disclosed in this Prospectus; and (iv) any transaction or payment contemplated by any tax sharing agreement or any other agreement as in effect on the Issue Date (including, without limitation, the Recapitalization Agreement and the Management Agreement) or any amendment thereto (so long as any such amendment is not disadvantageous to the Holders in any material respect), including distributions to effect the Recapitalization. Amounts referred to in clause (i), but not other Specified Affiliate Payments, shall constitute Restricted Payments for purposes of clause (iii) of the first paragraph of the covenant described under "--Certain Covenants--Restricted Payments." "STATED MATURITY" means, when used with respect to any Note or any installment of interest thereon, the date specified in such Note as the fixed date on which the principal of such Note or such installment of interest is due and payable and, when used with respect to any other Indebtedness, means the date specified in the instrument governing such Indebtedness as the fixed date on which the principal of such Indebtedness or any installment of interest thereon is due and payable. "SUBSIDIARY," with respect to any Person, means (i) any corporation of which the outstanding Capital Stock having at least a majority of the votes entitled to be cast in the election of directors under ordinary circumstances shall at the time be owned, directly or indirectly, by such Person or (ii) any other Person of which at least a majority of the voting interest under ordinary circumstances is at the time, directly or indirectly, owned by such Person. "SUBSIDIARY GUARANTOR" means any Restricted Subsidiary that is a party to a Note Guarantee pursuant to the terms of the Indenture. "TOTAL ASSETS" means, at any time, the total consolidated assets of the Company and its Restricted Subsidiaries at such time. For the purposes of paragraph (x) of the definition of "Permitted Indebtedness" and paragraph (xii) of the definition of "Permitted Investments," Total Assets shall be determined giving, PRO FORMA effect to the lease, acquisition, construction or improvement of the assets being leased, acquired, 86 constructed or improved with the proceeds of the relevant Indebtedness or the making of such Permitted Investment, as the case may be. "UNRESTRICTED SUBSIDIARY" of any Person means (i) any Subsidiary of such Person that at the time of determination shall be or continue to be designated an Unrestricted Subsidiary by the Board of Directors of such Person in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; PROVIDED that (x) the Company certifies to the Trustee that such designation complies with the "Limitation on Restricted Payments" covenant and (y) each Subsidiary to be so designated and each of its Subsidiaries has not at the time of designation, and does not thereafter, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to any Indebtedness pursuant to which the lender has recourse to any of the assets of the Company or any of its Restricted Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary only if (x) immediately after giving effect to such designation, the Company is able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with the "Limitation on Incurrence of Additional Indebtedness" covenant and (y) immediately before and immediately after giving effect to such designation, no Default or Event of Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an officers' certificate certifying that such designation complied with the foregoing provisions. "WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the then outstanding aggregate principal amount of such Indebtedness into (b) the sum of the total of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the making of such payment. "WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means any Restricted Subsidiary of such Person of which all the outstanding voting securities (other than in the case of a foreign Restricted Subsidiary, directors' qualifying shares or an immaterial amount of shares required to be owned by other Persons pursuant to applicable law) are owned by such Person or any Wholly Owned Restricted Subsidiary of such Person. 87 DESCRIPTION OF NEW CREDIT FACILITY Concurrently with the consummation of the Recapitalization, Elgar and EHI entered into the Credit Agreement with Bankers Trust Company, as Agent for the Banks. The Credit Agreement provided Elgar with a $15.0 million Revolving Facility and was guaranteed by EHI. In connection with the Power Ten Acquisition, Elgar, EHI, the Agent and the Banks amended and restated the Credit Agreement as of May 29, 1998 to, among other things, increase the available borrowings thereunder to $30.0 million by including a $15.0 million Term Facility and reconfirming the Revolving Facility. The proceeds of the Term Facility were used to finance a portion of the Power Ten Acquisition. Loans made pursuant to the Revolving Facility may be borrowed, repaid and reborrowed from time to time until February 3, 2003, subject to the satisfaction of certain conditions on the date of any such borrowing. Payments under the Term Facility will be made pursuant to an amortization schedule with a final maturity date of February 3, 2003. This information relating to the New Credit Facility is qualified in its entirety by reference to the complete text of the documents entered into in connection therewith which are filed as exhibits to the Registration Statement of which this Prospectus forms a part. The following is a description of the general terms of the New Credit Facility. Indebtedness under the New Credit Facility bears interest at a floating rate equal to, at Elgar's option, the Eurodollar Rate (as defined in the New Credit Agreement) for one, two, three or six months, plus a margin of 2.75%, or the Base Rate (defined as the higher of (i) the Prime Lending Rate and (ii) 0.5% in excess of the Federal Funds Rate, as such terms are defined in the New Credit Agreement), plus a margin of 1.75%. The margins are subject to a reduction of 0.25% if the Company has a leverage ratio less than 6.0 to 1 as set forth in the New Credit Agreement. Interest based on the Eurodollar Rate is payable in arrears at the earlier of the (a) end of the applicable interest period and (b) three months after the commencement of the period. Interest based on the Base Rate is payable quarterly in arrears. The New Credit Facility also provides for the payment of customary closing, commitment and certain other fees, reimbursement of expenses and indemnities. Indebtedness under the New Credit Facility is (i) secured by a first priority security interest in substantially all of the assets of EHI, Elgar and Power Ten (including, without limitation, accounts receivable, inventory, machinery, equipment, contracts and contract rights, trademarks, copyrights, patents, license agreements and general intangibles), (ii) guaranteed by EHI and Power Ten on a senior basis and (iii) secured by a pledge of all of the outstanding capital stock of Elgar and Power Ten. In connection with the New Credit Facility, JFLEI entered into a capital call agreement with the Agent (the "Capital Call Agreement"). The Capital Call Agreement requires a contribution of up to $4.0 million to be made to EHI by JFLEI upon the occurrence of certain events, including payment defaults, bankruptcy and certain financial trigger events. The New Credit Agreement contains customary covenants of the Company, including, without limitation, restrictions on (i) the incurrence of debt, (ii) the sale of assets, (iii) mergers, acquisitions and other business combinations, (iv) voluntary prepayment of other debt of the Company, (v) transactions with affiliates, (vi) investments, as well as prohibitions on the payment of certain dividends to, or, under certain circumstances, the repurchase or redemption of stock from, shareholders and (vii) various financial covenants, including covenants requiring the maintenance of fixed charge coverage, and maximum debt to EBITDA ratios and minimum consolidated EBITDA. The New Credit Agreement contains customary events of default under the New Credit Facility, including the non-payment of principal or interest when due under the notes issued in connection with the New Credit Facility or, subject to applicable grace periods in certain circumstances, upon the non-fulfillment of the covenants described above, certain changes in control of the ownership of EHI or Elgar, cross-defaults to certain other indebtedness, certain events of bankruptcy and insolvency, ERISA, judgment defaults and failure of any security agreement or guarantee supporting the New Credit Agreement to be in full force and effect. If any such event of default occurs, the Agent is entitled, on behalf of the Banks, 88 to take all actions permitted to be taken by a secured creditor under the Uniform Commercial Code and to accelerate the amounts due under the New Credit Facility and may require all such amounts outstanding thereunder to be immediately paid in full. Advances under the Revolving Facility are limited to the lesser of (a) $15.0 million and (b)(i) 85% of eligible accounts receivable plus (ii) 60% of eligible inventory minus (iii) the aggregate amount of all undrawn letters of credit issued under the Revolving Facility plus the aggregate amount of any unreimbursed drawings under any outstanding letters of credit. The Revolving Facility includes a subfacility for the issuance of letters of credit. Advances under the Revolving Facility initially will be limited to an aggregate of $10.0 million, which limit shall increase to $15.0 million (i) to the extent the outstanding amount of the Term Loan is reduced below $15.0 million and (ii) to the extent Elgar's "Borrowing Base" (as defined in the Indenture) exceeds $15.0 million. 89 DESCRIPTION OF PREFERRED STOCK AND WARRANTS In connection with the consummation of the Recapitalization, the Company issued (i) 7,880 shares of Redeemable Preferred Stock to Jackson National, (ii) 2,000 shares of Redeemable Preferred Stock to Indosuez and (iii) 120 shares of Redeemable Preferred Stock to Old Hickory, along with warrants (the "Warrants") to purchase an aggregate of 13.3% of the Company's fully diluted Common Stock at the time of the Recapitalization. In connection with the Power Ten Acquisition, the Company issued 5,000 shares of its Series B 6% Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock") to certain existing stockholders and warrantholders of the Company. The following is a description of the general terms of the Redeemable Preferred Stock, Convertible Preferred Stock and Warrants. This description is qualified in its entirety by reference to the Certificates of Designation for the Redeemable Preferred Stock and Convertible Preferred Stock and the form of Warrant Certificate for the Warrants which are filed as exhibits to the Registration Statement of which this Prospectus forms a part. REDEEMABLE PREFERRED STOCK RANKING. The Redeemable Preferred Stock ranks prior to the Common Stock with respect to dividend rights and rights on liquidation, winding up or dissolution of EHI, and to all other classes and series of equity securities of EHI as may hereafter be issued, other than any class or series of equity securities of EHI expressly designated as being on a parity with ("Parity Securities") or senior to the Redeemable Preferred Stock. Such other classes or series of equity securities of EHI not expressly designated as being on a parity with or senior to the Redeemable Preferred Stock are referred to hereafter as "Junior Securities." The rights of holders of shares of the Redeemable Preferred Stock are subordinate to the rights of EHI's general creditors. EHI may not create or issue other classes of stock ranking on a parity with or senior to the Redeemable Preferred Stock unless it receives approval or consent of the holders of at least a two-thirds of the Redeemable Preferred Stock. See "--Voting Rights" below. DIVIDEND RIGHTS. Dividends are payable to holders of Redeemable Preferred Stock, out of funds legally available therefor, at the annual rate per share of 10% times the sum of (i) $1,000 and (ii) accrued but unpaid dividends as of the immediately preceding Dividend Payment Date (as defined below). Dividends are payable (A) at the annual rate per share of 0.10 shares of Redeemable Preferred Stock per share of Redeemable Preferred Stock from the original issue date of the Redeemable Preferred Stock (the "Issue Date") through January 31, 2001, and (B) in cash on and after April 30, 2001. Dividends on the Redeemable Preferred Stock are payable quarterly on each January 31, April 30, July 31 and October 31 of each year (each a "Dividend Payment Date"), commencing April 30, 1998. Dividends payable for any period less than a full quarterly period shall be computed on the basis of a 360-day year with equal months of 30 days. Dividends for the first dividend period will accrue from the Issue Date. Dividends are fully cumulative and shall accrue on a quarterly basis (whether or not declared) from the Issue Date. Dividends declared will be payable to holders of record as they appear on EHI's stock books at the close of business on such record dates, not exceeding 60 days nor fewer than 10 days preceding the Dividend Payment Date therefor. If the cash dividends payable on the Redeemable Preferred Stock shall have been in arrears and unpaid for four or more successive Dividend Payment Dates, then until the date on which all such dividends in arrears are paid in full, dividends shall accrue and be payable to the holders of Redeemable Preferred Stock at the annual rate of 12% times the sum of (i) $1,000 per share and (ii) accrued but unpaid dividends thereon. Upon payment in full of all dividends in arrears, cash dividends will thereafter be payable at the 10% annual rate set forth above. In addition, no dividends in any form shall be declared or paid or set apart for payment on any Junior Securities or Parity Securities for any dividend period unless full dividends on the Redeemable Preferred Stock for the then current dividend period shall have been paid or declared and set aside. When dividends on the Redeemable Preferred Stock are in arrears, dividends declared upon shares of the Redeemable 90 Preferred Stock and Parity Securities shall be declared PRO RATA based upon the respective amounts that would have been paid on the Redeemable Preferred Stock and the Parity Securities had dividends been paid in full. The payment of dividends on the Redeemable Preferred Stock shall be subject in all respects to the applicable restrictions contained in the Indenture and the New Credit Agreement. So long as any shares of the Redeemable Preferred Stock are outstanding, EHI shall not, without the prior consent of the holders of two-thirds of the outstanding shares of Redeemable Preferred Stock, (i) make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or retirement of, any Junior Securities (other than dividends or distributions payable in additional shares of Junior Securities to holders of Junior Securities); (ii) permit any corporation or other entity directly or indirectly controlled by EHI to purchase or redeem any Junior Securities; (iii) declare, pay or set apart for payment, or permit any corporation or other entity directly or indirectly controlled by EHI to declare, pay or set apart for payment, any dividend or make any distribution or payment on any Junior Securities or Parity Securities, whether directly or indirectly and whether in cash, obligations or shares of EHI or other property (other than dividends or distributions payable in additional shares of Junior Securities to holders of Junior Securities); or (iv) make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or retirement of, any Parity Securities, whether directly or indirectly, and whether in cash, obligations, shares of EHI or other property (other than payments solely of Junior Securities), and shall not permit any corporation or other entity directly or indirectly controlled by EHI to purchase or redeem any Parity Securities, unless prior to or at the time of such payment or setting apart for payment, EHI shall have repurchased, redeemed or retired shares of Redeemable Preferred Stock on a pro rata basis with the Parity Securities as to which such sinking fund or similar fund payment, or such purchase, redemption or retirement, is being effected. LIQUIDATION PREFERENCE. Holders of shares of Redeemable Preferred Stock shall be entitled to receive the stated liquidation value of $1,000 per share ($10.0 million in the aggregate based on 10,000 shares of Redeemable Preferred Stock issued on the Issue Date), plus an amount per share equal to any dividends accrued but unpaid, without interest (the "Liquidation Preference"), in the event of any liquidation, dissolution or winding up of EHI, whether voluntary or involuntary, out of or to the extent of the net assets of EHI legally available for distribution, before any distributions are made with respect to any Common Stock of EHI or any other Junior Securities. After payment of the full amount of the Liquidation Preference, holders of shares of Redeemable Preferred Stock will not be entitled to any further participation in any distribution of assets of EHI. Upon any such liquidation, dissolution or winding up of EHI, such preferential amounts with respect to the Redeemable Preferred Stock and any class or series ranking on a parity with the Redeemable Preferred Stock if not paid in full shall be distributed PRO RATA in accordance with the aggregate preferential amounts of the Redeemable Preferred Stock and such other classes or series of stock. OPTIONAL REDEMPTION. EHI may, at its option, redeem at any time, out of funds legally available therefor, all or any portion of the shares (in whole shares only) of the Redeemable Preferred Stock on a pro rata basis, at a redemption price per share equal to 100% of the Liquidation Preference thereof on the date of redemption. MANDATORY REDEMPTION. On the date that is the one hundred and twenty-sixth (126th) month anniversary of the Issue Date (which is August 3, 2008), EHI shall redeem any and all outstanding shares of Redeemable Preferred Stock, out of funds legally available therefor, at a redemption price per share equal to 100% of the Liquidation Preference thereof on such date. REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of Control (as defined in the Certificate of Designations for the Redeemable Preferred Stock), the Redeemable Preferred Stock shall be redeemable at the option of the holders thereof, in whole or in part, at a redemption price per share equal 91 to 100% of the Liquidation Preference on the date of redemption provided, however, that EHI will not be obligated to redeem any Redeemable Preferred Stock upon a Change of Control prior to repurchase or redemption of such Notes then outstanding as EHI is required to repurchase or has called for redemption in connection with a Change of Control pursuant to the terms of the Indenture; provided, further, that any such redemption (and EHI's obligations with respect thereto) shall be subject in all respects to the applicable restrictions contained in the New Credit Agreement. RIGHTS TO ELECT DIRECTORS UPON CERTAIN EVENTS. If the cash dividends payable on the Redeemable Preferred Stock shall have been in arrears and unpaid for four or more successive Dividend Payment Dates, then the number of directors constituting the Board of Directors shall, without further action, be increased by the Dividend Arrears Number (as defined below) and, in addition to any other rights to elect directors which the holders of Redeemable Preferred Stock may have, the holders of all outstanding shares of Redeemable Preferred Stock, voting separately as a class and to the exclusion of the holders of all other classes and series of stock of EHI, shall be entitled to elect the directors of EHI to fill such newly created directorships. If EHI shall fail to redeem shares of Redeemable Preferred Stock in accordance with the mandatory redemption provisions described above, then the number of directors constituting the Board of Directors shall, without further action, be increased by the Control Number (as defined below) and, in addition to any other rights to elect directors which the holders of Redeemable Preferred Stock may have, the holders of all outstanding shares of Redeemable Preferred Stock, voting separately as a class and to the exclusion of the holders of all other classes and series of stock of EHI, shall be entitled to elect the directors of EHI to fill such newly created directorships. "Dividend Arrears Number" shall mean such number of additional directors of EHI which, when added to the number of directors otherwise nominated by the holders of Redeemable Preferred Stock, shall result in the number of directors elected by or at the direction of the holders of Redeemable Preferred Stock constituting one-third of the members of the Board of Directors of EHI. "Control Number" shall mean such number of additional directors of EHI which, when added to the number of directors otherwise nominated and elected by the holders of Redeemable Preferred Stock, shall result in the number of directors nominated and elected by or at the direction of the holders of Redeemable Preferred Stock constituting a majority of the members of the Board of Directors of EHI. Any additional directors elected by the Redeemable Preferred Stock pursuant to the provisions described above shall remain in office until such time as (i) all such dividends in arrears are paid in full or (ii) all shares of Redeemable Preferred Stock shall have been redeemed pursuant to the mandatory redemption provisions described above, as the case may be. VOTING RIGHTS. The holders of shares of Redeemable Preferred Stock shall not be entitled to any voting rights, except as required by applicable law and except as set forth as follows. Without the consent of the holders of at least eighty-five percent (85%) of the outstanding shares of Redeemable Preferred Stock, EHI may not (i) amend its Certificate of Incorporation in any way that would adversely alter or change the powers, preferences, special rights or economics of the Redeemable Preferred Stock, (ii) create, authorize or issue any shares of capital stock ranking senior to or on a parity with the Redeemable Preferred Stock, (iii) create, authorize or issue any shares of capital stock constituting Junior Securities, unless such Junior Securities are expressly subordinate in right of payment to the Redeemable Preferred Stock and such Junior Securities have no additional rights (directly or indirectly) upon EHI's failure to redeem such shares or to pay or declare a dividend or make a distribution with respect thereto, (iv) issue voting securities other than pursuant to a registered public offering, with certain exceptions or (v) enter into any agreement after the Issue Date which limits or otherwise adversely affects EHI's ability to comply with its mandatory redemption obligations described above, including, without limitation, any such agreement or plan entered into with respect to (a) the sale of all or substantially all of the assets of EHI, (b) the voluntary liquidation, dissolution or winding up of EHI or (c) the consolidation or merger of EHI with any one or more other corporations, other than a consolidation or merger in which shareholders of EHI holding more than 50% 92 of the equity securities of EHI immediately prior to such transaction will hold at least 50% of the equity securities of the surviving entity immediately after the consummation of such transaction. TRANSFER RESTRICTIONS. There are no restrictions on the transferability of the Redeemable Preferred Stock, except as required by applicable securities laws. CONVERTIBLE PREFERRED STOCK RANKING. The Convertible Preferred Stock shall, with respect to rights on bankruptcy, liquidation, winding up, dissolution and dividends, rank (i) junior to the Redeemable Preferred Stock and (ii) senior to the Company's Common Stock, and to all other classes and series of stock of the Company now or hereafter authorized, issued or outstanding, other than any class or series of stock of the Company expressly designated as being on a parity with ("Parity Securities") or senior to the Convertible Preferred Stock. Such other classes or series of stock of the Company not expressly designated as being on a parity with or senior to the Convertible Preferred Stock are referred to hereafter as "Junior Securities." The rights of holders of shares of the Convertible Preferred Stock are subordinate to the rights of the Company's general creditors, including the holders of the Company's Senior Notes. DIVIDEND RIGHTS. Dividends on the Convertible Preferred Stock, will accrue at the annual rate per share of 6% times the sum of (i) $1,000 and (ii) accrued but unpaid dividends as of the immediately preceding Dividend Payment Date (as defined below), compounding semi-annually. The holders of shares of the Convertible Preferred Stock will be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, dividends payable semi-annually in arrears on April 30 and October 31 of each year (each such date, a "Dividend Payment Date"). Notwithstanding the foregoing, no dividends on shares of Convertible Preferred Stock will be authorized, declared, paid or set apart for payment at such time as, and to the extent that, the terms and provisions of any agreement of the Company, including any agreement relating to its indebtedness, prohibits such authorization, declaration, payment or setting apart for payment. The declaration or payment of dividends on the Convertible Preferred Stock (i) is restricted under the Indenture and the New Credit Agreement. In the event that the Company elects to redeem all or any portion of the shares of the Convertible Preferred Stock or upon a redemption of the Convertible Preferred Stock upon a Change of Control, the Company shall pay, out of funds legally available therefor, all accrued but unpaid dividends to the holders thereof. Dividends are also payable to holders of the Convertible Preferred Stock, out of funds legally available therefor, if declared by the Board of Directors of the Company. So long as any shares of the Convertible Preferred Stock are outstanding, the Company shall not, without the prior consent of the holders of at least fifty-one percent (51%) of the shares of outstanding Convertible Preferred Stock, (i) make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or retirement of, any Junior Securities (other than dividends or distributions payable in additional shares of Junior Securities to holders of Junior Securities); (ii) permit any corporation or other entity directly or indirectly controlled by the Company to purchase or redeem any Junior Securities; (iii) declare, pay or set apart for payment, or permit any corporation or other entity directly or indirectly controlled by the Company to declare, pay or set apart for payment, any dividend or make any distribution or payment on any Junior Securities or Parity Securities, whether directly or indirectly and whether in cash, obligations or shares of the Company or other property (other than dividends or distributions payable in additional shares of Junior Securities to holders of Junior Securities); or (iv) make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or retirement of, any Parity Securities, whether directly or indirectly, and whether in cash, obligations, shares of the Company or other property (other than payments solely of Junior Securities), and shall not permit any corporation or other entity directly or indirectly controlled by the Company to purchase or redeem any Parity Securities, unless prior to or at the time of such payment or setting apart for payment, the Company shall have repurchased, redeemed or retired 93 shares of the Convertible Preferred Stock on a PRO RATA basis with the Parity Securities as to which such sinking fund or similar fund payment, or such purchase, redemption or retirement, is being effected. LIQUIDATION PREFERENCE. Holders of shares of Convertible Preferred Stock are entitled to receive the stated liquidation value of $1,000 per share ($5,000,000 in the aggregate based on 5,000 shares of Convertible Preferred Stock to be issued on the date of issuance), plus an amount per share equal to any dividends accrued but unpaid (whether or not declared by the Board of Directors of the Company), without interest (the "Liquidation Preference"), in the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, out of or to the extent of the net assets of the Company legally available for distribution, before any distributions are made with respect to any Common Stock of the Company or any other Junior Securities. After payment of the full amount of the Liquidation Preference, holders of shares of Convertible Preferred Stock will not be entitled to any further participation in any distribution of assets of the Company. CONVERSION. Each holder of shares of Convertible Preferred Stock will have the right, at such holder's option at any time following a Triggering Event (as defined below) to convert all or a portion of such shares into Common Stock of the Company at the conversion price of $10.00 per share of Convertible Preferred Stock, subject to adjustments pursuant to certain anti-dilution provisions from time to time. A Triggering Event shall include (i) a Change of Control (as defined in the New Certificate of Designation), (ii) an initial public offering of any class of equity securities of the Company pursuant to the Securities Act of 1933, as amended, (iii) the delivery of a notice from the Company to each holder of the Convertible Preferred Stock that the Company intends to redeem the Convertible Preferred Stock or (iv) the fifth anniversary of the date of issuance. For purposes of such conversion, each share of Convertible Preferred Stock will be valued at $1,000. Upon conversion of the Convertible Preferred Stock, holders of shares of the Convertible Preferred Stock shall not be entitled to receive any accrued but unpaid dividends. OPTIONAL REDEMPTION. The Company may, at its option, redeem at any time, out of funds legally available therefor, all or any portion of the shares (in whole shares only) of the Convertible Preferred Stock on a PRO RATA basis, at a redemption price per share equal to 100% of the Liquidation Preference thereof on the date of redemption, including dividends accrued through the Dividend Payment Date immediately preceding the redemption date, but not including any dividends for any period after such Dividend Payment Date. REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of Control, the Convertible Preferred Stock shall be redeemable at the option of the holders thereof, in whole or in part, at a redemption price per share equal to 100% of the Liquidation Preference on the date of redemption, including dividends accrued through the Dividend Payment Date immediately preceding the redemption date though not including any dividends for any period after such Dividend Payment Date; PROVIDED, HOWEVER, that the Company will not be obligated to redeem, and will not redeem or call for redemption, any Series B Preferred Stock upon a Change of Control until it has repurchased or redeemed (x) such of the $90,000,000 original principal amount of Senior Notes then outstanding as the Company is required to repurchase in connection with a change of control pursuant to the terms of the Indenture and (y) such of the shares of Redeemable Preferred Stock then outstanding as the Company is required to repurchase pursuant to the Certificate of Designation relating thereto; PROVIDED, FURTHER, that any such redemption (and the Company's obligations with respect thereto) shall be subject in all respects to the applicable restrictions contained in the New Credit Agreement. VOTING RIGHTS. The holders of shares of Convertible Preferred Stock are not entitled to any voting rights, except as required by applicable law and except as set forth in the next sentence. Without the consent of the holders of at least 51% of the outstanding shares of Convertible Preferred Stock, the Company may not amend its Certificate of Incorporation in any way that would adversely alter or change the powers, preferences or special rights of the Convertible Preferred Stock. 94 PIGGYBACK REGISTRATION RIGHTS. The holders of the Convertible Preferred Stock are not entitled to any "demand" registration rights. However, the holders of the Convertible Preferred Stock are entitled to unlimited "piggyback" registration rights with respect to the shares of Common Stock of the Company issuable upon conversion of the Convertible Preferred Stock after the date of the Company's initial public offering of its Common Stock, subject to customary rights and limitations. TRANSFER RESTRICTIONS. There are no restrictions on the transferability of the Convertible Preferred Stock, except as required by applicable securities laws. WARRANTS The Warrants issued in connection with the Recapitalization entitle the holders thereof to purchase up to an aggregate of 353,744 shares of Common Stock (the "Warrant Shares"), or 13.3% of the outstanding Common Stock on a fully diluted basis upon the completion of the Recapitalization. The Warrants are immediately exercisable until the one hundred and twenty-sixth (126th) month anniversary of the Issue Date (which is August 3, 2008) at an exercise price per share equal to $5.00 per share, payable in cash or by tendering shares of Redeemable Preferred Stock. The exercise price and number of Warrant Shares are both subject to adjustment in certain events. The Warrants are transferable separately from the Redeemable Preferred Stock. There are no restrictions on the transferability of the Warrants, except as required by applicable securities laws and as may be set forth in the Shareholders' Agreement. Unless and until the Warrants are exercised, the Warrantholders have no right to (i) vote on matters submitted to EHI's shareholders or (ii) receive dividends; provided, however, that upon exercise of the Warrants, the exercise price therefor shall be reduced by an amount equal to the dividends in respect of the Common Stock that the holder of the Warrants would have received had the Warrants been exercised on the Issue Date. The Warrantholders are not entitled to share in the assets of EHI in the event of liquidation or dissolution of EHI or the winding up of EHI's affairs; PROVIDED, HOWEVER, that the Warrantholders are entitled to receive at least 30 days' prior written notice of any such liquidation, dissolution or winding up of affairs and shall be afforded the opportunity to exercise the Warrants prior to such liquidation, dissolution or winding up of affairs. REGISTRATION RIGHTS FOR WARRANT SHARES The holders of the Warrant Shares are entitled to one "demand" registration right at any time on or after the later of (i) the fifth anniversary of the Issue Date and (ii) the 181st day after completion of the initial public offering by EHI of its Common Stock, subject to additional customary rights and limitations. In addition, the holders of the Warrant Shares are entitled to unlimited "piggyback" registration rights after the date of EHI's initial public offering of its Common Stock, subject to customary rights and limitations. 95 BOOK-ENTRY; DELIVERY AND FORM The New Notes (and the related Note Guarantees) initially will be issued in the form of one or more permanent global certificates in definitive, fully registered form (the "Global Notes"). The Global Notes will be deposited with, or on behalf of, the DTC, and registered in the name of a nominee of DTC. THE GLOBAL NOTES. EHI expects that pursuant to procedures established by DTC (i) upon the issuance of the Global Notes, DTC or its custodian will credit, on its internal system, the principal amount of Notes of the individual beneficial interests represented by such Global Notes to the respective accounts of persons who tender for exchange Old Notes for New Notes and (ii) ownership of beneficial interests in the Global Notes will be shown on, and the transfer of such ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of persons other than participants). So long as DTC or its nominee is the registered owner or holder of the Notes, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the Notes represented by such Global Notes for all purposes under the Indenture. No beneficial owner of an interest in the Global Notes will be able to transfer that interest except in accordance with DTC's procedures. Payments of the principal of, premium (if any) and interest on the Global Notes will be made to DTC or its nominee, as the case may be, as the registered owner thereof. None of EHI, the Trustee or any Paying Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Global Notes or for maintaining, supervising or reviewing any records relating to such beneficial ownership interest. EHI expects that DTC or its nominee, upon receipt of any payment of principal, premium, if any, and interest on the Global Notes, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of the Global Notes as shown on the records of DTC or its nominee. EHI also expects that payments by participants to owners of beneficial interests in the Global Notes held through such participants will be governed by standing instructions and customary practice, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants. Transfers between participants in DTC will be effected in the ordinary way through DTC's same-day funds system in accordance with DTC rules and will be settled in same day funds. If a holder requires physical delivery of Notes in registered form (the "Certificated Security") for any reason, including to sell Notes to persons in states that require physical delivery of such Notes, or to pledge such securities, such holder must transfer its interest in the Global Notes, in accordance with the normal procedures of DTC and with the procedures set forth in the Indenture. DTC has advised EHI that it will take any action permitted to be taken by a holder of Notes (including the presentation of Notes for exchange as described below) only at the direction of one or more participants to whose account the DTC interests in the Global Notes are credited and only in respect of such portion of the aggregate principal amount of Notes as to which such participant or participants has or have given such direction. However, if there is an Event of Default under the Indenture, DTC will exchange the Global Notes for Certificated Securities. DTC has advised EHI as follows: DTC is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations and certain other organizations. Indirect access to the DTC system is available to others such 96 as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly ("indirect participants"). Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in the Global Notes among participants of DTC, it is under no obligation to perform such procedures and such procedures may be discontinued at any time. Neither EHI nor the Trustee will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. CERTIFICATED SECURITIES. If DTC is at any time unwilling or unable to continue as a depositary for the Global Notes and a successor depositary is not appointed by EHI within 90 days, Certificated Securities will be issued in exchange for the Global Notes. PLAN OF DISTRIBUTION Each 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 any resale of such New Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for old Notes where such Old Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date and ending on the close of business 180 days after the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until October , 1998, all dealers effecting transactions in the New Notes may be required to deliver a Prospectus. The Company will not receive any proceeds from any sales of New Notes by broker-dealers. New Notes received by 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 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 broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer that resells New Notes that were received by it for its own account 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 of any such resale of New Notes and any commissions or concessions received by 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 broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 180 days after the Expiration Date, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay all expenses incident to the Exchange Offer (including the expenses of one counsel for the holders of the Notes) other than commissions or concessions of any brokers or dealers and will indemnify the holders of the Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS The legality of the New Notes will be passed upon for the Company by Gibson, Dunn & Crutcher LLP, Los Angeles, California. 97 EXPERTS The Consolidated Balance Sheets of Elgar Holdings, Inc. as of March 29, 1997 and March 28, 1998, and the related Consolidated Statements of Operations, Stockholders' Equity (Deficit) and Cash Flows of Elgar Holdings, Inc. for each of the fiscal years ended April 3, 1996, March 29, 1997 and March 28, 1998 included in this Prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. 98 ELGAR HOLDINGS, INC. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ELGAR HOLDINGS, INC.
PAGE --------- Report of Arthur Andersen LLP, Independent Public Accountants.............................................. F-2 Consolidated Balance Sheets as of March 29, 1997 and March 28, 1998........................................ F-3 Consolidated Statements of Operations for the fiscal years ended April 3, 1996 (Predecessor Company), March 29, 1997 and March 28, 1998.............................................................................. F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the fiscal years ended April 3, 1996 (Predecessor Company), March 29, 1997 and March 28, 1998................................................. F-5 Consolidated Statements of Cash Flows for the fiscal years ended April 3, 1996 (Predecessor Company), March 29, 1997 and March 28, 1998.............................................................................. F-6 Notes to Consolidated Financial Statements................................................................. F-7 POWER TEN PAGE --------- Report of Arthur Andersen LLP, Independent Public Accountants (1).......................................... Unaudited Balance Sheet as of April 4, 1998................................................................ F-18 Unaudited Statement of Income for the fiscal year ended April 4, 1998...................................... F-19 Unaudited Statement of Stockholders' Equity for the fiscal year ended April 4, 1998........................ F-20 Unaudited Statement of Cash Flows for the fiscal year ended April 4, 1998.................................. F-21 Notes to Unaudited Financial Statements.................................................................... F-22
- ------------------------ (1) To be filed by amendment. F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Elgar Holdings, Inc.: We have audited the accompanying consolidated balance sheets of ELGAR HOLDINGS, INC. (a Delaware corporation) and subsidiary (the "Company"), as of March 29, 1997 and March 28, 1998, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the two years in the period ended March 28, 1998. We have also audited the statements of operations, stockholders' deficit and cash flows for Elgar Electronics Corporation (the "Predecessor") for the year ended April 3, 1996. 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Elgar Holdings, Inc. and subsidiary, as of March 29, 1997 and March 28, 1998, and the results of their operations and their cash flows for each of the two years in the period ended March 28, 1998, and also presents fairly, in all material respects, the results of operations and cash flows of Elgar Electronics Corporation for the year ended April 3, 1996, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, effective April 3, 1996, the Company acquired all of the outstanding stock of Elgar Electronics Corporation in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the period after the acquisition is presented on a different cost basis than that for the period before the acquisition and, therefore, is not comparable. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in the index to financial statement schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP San Diego, California May 1, 1998 (Except with respect to the matter discussed in Note 11 as to which the date is May 5, 1998) F-2 ELGAR HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
MARCH 29, MARCH 28, 1997 1998 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................................................ $ 691 $ 2,666 Accounts receivable, net of allowance for doubtful accounts of $189 and $197, respectively........................................................................... 6,359 6,453 Inventories (Note 2)..................................................................... 5,829 8,305 Deferred tax assets (Note 7)............................................................. 992 1,098 Prepaids and other....................................................................... 55 373 ----------- ----------- Total current assets................................................................... 13,926 18,895 PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated depreciation and amortization of $795 and $1,643, respectively (Note 2)................................................... 2,612 2,952 INTANGIBLE ASSETS, net of accumulated amortization of $1,489 and $2,711, respectively (Note 2) 19,193 22,412 DEFERRED TAX ASSETS, net of current portion (Note 7)....................................... 866 653 ----------- ----------- $ 36,597 $ 44,912 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable......................................................................... $ 2,612 $ 3,068 Accrued liabilities (Note 3)............................................................. 2,860 4,801 Current portion of long-term debt (Note 4)............................................... 1,739 -- Current portion of capital lease obligations (Note 8).................................... 37 17 ----------- ----------- Total current liabilities.............................................................. 7,248 7,886 CAPITAL LEASE OBLIGATIONS, net of current portion (Note 8)................................. 35 19 LONG-TERM DEBT, net of current portion (Note 4)............................................ 13,477 90,000 ----------- ----------- Total liabilities...................................................................... 20,760 97,905 ----------- ----------- SERIES A 10% CUMULATIVE REDEEMABLE PREFERRED STOCK, no par value; 20,000 shares authorized; 10,000 shares issued and outstanding in 1998 (Note 5).................................... -- 8,478 ----------- ----------- STOCKHOLDERS' EQUITY (DEFICIT): Common stock, $.01 par value, 9,340,000 and 5,000,000 shares authorized in 1997 and 1998, respectively; 9,340,000 and 2,300,000 shares issued and outstanding in 1997 and 1998, respectively........................................................................... 93 23 Additional paid-in capital............................................................... 13,907 (67,926) Retained earnings........................................................................ 1,837 6,432 ----------- ----------- 15,837 (61,471) ----------- ----------- $ 36,597 $ 44,912 ----------- ----------- ----------- -----------
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-3 ELGAR HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
PREDECESSOR THE COMPANY YEAR ENDED YEARS ENDED ----------- ------------------------ APRIL 3, MARCH 29, MARCH 28, 1996 1997 1998 ----------- ----------- ----------- NET SALES.................................................................... $ 42,309 $ 45,578 $ 62,496 COST OF SALES................................................................ 26,468 26,973 32,944 ----------- ----------- ----------- Gross profit........................................................... 15,841 18,605 29,552 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................................. 7,406 7,770 9,434 RESEARCH & DEVELOPMENT AND ENGINEERING EXPENSES.............................. 4,168 3,973 6,242 AMORTIZATION OF INTANGIBLES (Note 2)......................................... 2,149 1,314 1,314 ----------- ----------- ----------- Operating income....................................................... 2,118 5,548 12,562 INTEREST EXPENSE, NET:....................................................... 3,578 1,839 3,341 ----------- ----------- ----------- Income (loss) before provision for income taxes........................ (1,460) 3,709 9,221 PROVISION FOR INCOME TAXES (Note 7).......................................... 176 1,872 4,448 ----------- ----------- ----------- Net income(loss)....................................................... $ (1,636) $ 1,837 $ 4,773 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-4 ELGAR HOLDINGS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARES)
COMMON STOCK ADDITIONAL ---------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ----------- --------- ----------- ---------- ----------- PREDECESSOR COMPANY BALANCE, April 2, 1995........................... 200 $ 12,733 $ -- $ (28,053) $ (15,320) Net loss....................................... -- -- -- (1,636) (1,636) ----------- --------- ----------- ---------- ----------- BALANCE, April 3, 1996........................... 200 $ 12,733 $ -- $ 29,689 $ (16,956) ----------- --------- ----------- ---------- ----------- ----------- --------- ----------- ---------- ----------- THE COMPANY BALANCE, April 3, 1996........................... -- $ -- $ -- $ -- $ -- Issuance of stock.............................. 9,340,000 93 13,907 -- 14,000 Net income..................................... -- -- -- 1,837 1,837 ----------- --------- ----------- ---------- ----------- BALANCE, March 29, 1997.......................... 9,340,000 93 13,907 1,837 15,837 Recapitalization of Company.................... (8,941,400) (89) (102,528) -- (102,617) Common stock warrants issued on sale of preferred stock.............................. -- -- 1,700 -- 1,700 Issuance of common stock....................... 1,901,400 19 18,995 -- 19,014 Preferred stock dividend in kind............... -- -- -- (150) (150) Accretion of preferred stock discount.......... -- -- -- (28) (28) Net income..................................... -- -- -- 4,773 4,773 ----------- --------- ----------- ---------- ----------- BALANCE, March 28, 1998.......................... 2,300,000 $ 23 $ (67,926) $ 6,432 $ (61,471) ----------- --------- ----------- ---------- ----------- ----------- --------- ----------- ---------- -----------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5 ELGAR HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THE COMPANY PREDECESSOR ------------------------ ------------- YEARS ENDED YEAR ENDED ------------------------ ------------- MARCH 29, MARCH 28, APRIL 3, 1996 1997 1998 ------------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (1,636) $ 1,837 $ 4,773 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Amortization of intangibles............................................ 2,149 1,314 1,314 Amortization of deferred loan costs.................................... -- 175 83 Write-off of deferred loan costs....................................... -- -- 797 Depreciation and amortization on property, plant and equipment......... 785 806 883 Gain (loss) on sale of property, plant and equipment................... 10 (3) (4) (Increases) decreases in assets: Accounts receivable.................................................. 1,382 (1,751) (94) Inventories.......................................................... (187) 1,308 (2,476) Prepaids and other................................................... 35 5 (318) Deferred tax assets.................................................. (141) 251 107 Increases (decreases) in liabilities: Accounts payable..................................................... (755) 1,640 456 Accrued liabilities.................................................. 315 (270) 1,941 Income taxes payable................................................. 235 -- -- ------------- ----------- ----------- Net cash provided by operating activities............................ 2,192 5,312 7,462 ------------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Predecessor........................................... -- (14,000) -- Purchases of property, plant and equipment........................... (611) (621) (1,228) Proceeds from sale of property, plant and equipment.................. -- 28 10 ------------- ----------- ----------- Net cash used in investing activities................................ (611) (14,593) (1,218) ------------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from stock issuance............................................... -- 14,000 19,014 Proceeds from preferred stock/warrant issuance............................. -- -- 10,000 Issuance of senior notes................................................... -- -- 90,000 Net repayments on debt..................................................... (442) (4,460) (15,216) Payments under capital leases.............................................. -- (41) (36) Deferred financing costs................................................... -- -- (5,414) Recapitalization consideration............................................. -- -- (102,617) ------------- ----------- ----------- Net cash provided by (used in) financing activities.................. (442) 9,499 (4,269) ------------- ----------- ----------- NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS.......................... 1,139 218 1,975 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................... 1,071 473 691 ------------- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD..................................... $ 2,210 $ 691 $ 2,666 ------------- ----------- ----------- ------------- ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest..................................................... $ 869 $ 1,480 $ 1,140 ------------- ----------- ----------- ------------- ----------- ----------- Cash paid for income taxes................................................. $ 102 $ 1,638 $ 4,450 ------------- ----------- ----------- ------------- ----------- ----------- NON-CASH INVESTING AND FINANCING ACTIVITIES: Preferred stock dividend-in-kind........................................... $ -- $ -- $ 150 ------------- ----------- ----------- ------------- ----------- ----------- Accretion of discount on preferred stock................................... $ -- $ -- $ 28 ------------- ----------- ----------- ------------- ----------- -----------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-6 ELGAR HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. INCORPORATION AND COMPANY OPERATIONS Elgar Holdings, Inc., a Delaware corporation (the "Company") (formerly known as Carlyle-EEC Holdings, Inc.), manufactures and sells programmable power supply units through its subsidiary, Elgar Electronics Corporation, to commercial and defense entities as well as to governmental agencies. The Company's primary sales are within the United States and Europe. The Company was incorporated on March 27, 1996 and had no operations from that date to April 3, 1996. On April 3, 1996, the Company acquired all of the outstanding common stock of Elgar Electronics Corporation, a California corporation (the "Predecessor" or "Elgar") (the "Acquisition"). The Acquisition was accounted for as a purchase and, accordingly, the purchase price of $33 million was allocated to the assets acquired and liabilities assumed at their fair values. The excess of purchase price over the net assets acquired of approximately $19.7 million was recorded as goodwill and is being amortized over 15 years on a straight line basis. The acquisition was funded with $14 million in cash and the proceeds from $19 million in term debt, which was paid off in connection with the Recapitalization (as defined below). On January 2, 1998, the Company entered into an Agreement and Plan of Merger (the "Recapitalization Agreement") pursuant to which the Company was recapitalized (the "Recapitalization"). Pursuant to the Recapitalization Agreement, all shares of the Company's common stock, other than those retained by certain members of management and certain other shareholders (the "Continuing Shareholders"), were converted into the right to receive cash based upon a formula. The Continuing Shareholders agreed to retain approximately 15% of the common equity of the Company. In order to finance the Recapitalization, the Company (i) issued $90 million of senior notes in a debt offering, (ii) received $19 million in cash from an investor group for common stock and (iii) received $10 million in cash for the issuance of redeemable preferred stock. In connection with the Recapitalization, the Company changed its name to Elgar Holdings, Inc. Elgar, as borrower, and the Company, as guarantor, also entered into a new $15 million revolving credit facility. Loans under the new facility are secured by substantially all of the Company's assets and are guaranteed by the Company and secured by a pledge of all the outstanding capital stock of Elgar. The credit agreement governing the facility contains customary financial covenants and defined events of default (see Note 4). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Elgar Electronics Corporation. All significant intercompany accounts and transactions have been eliminated. The accompanying financial statements of the Predecessor include only the accounts of Elgar. The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending the Saturday closest to March 31. Accordingly, fiscal 1996 ended on April 3, 1996, fiscal 1997 ended on March 29, 1997 and fiscal 1998 ended on March 28, 1998, and they comprised 52.5, 51.5 and 52 weeks, respectively. CASH EQUIVALENTS Cash equivalents in 1997 and 1998 consist of a money market account in a financial institution. F-7 ELGAR HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES Inventories, which include materials, direct labor and manufacturing overhead, are stated at the lower of cost (first-in, first-out) or market and are comprised of the following (in thousands):
MARCH 29, MARCH 28, 1997 1998 ----------- ----------- Raw materials.......................................................... $ 2,848 $ 3,745 Work-in-process........................................................ 2,119 3,677 Finished goods......................................................... 862 883 ----------- ----------- $ 5,829 $ 8,305 ----------- ----------- ----------- -----------
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost. Depreciation of property, plant and equipment is provided using the straight-line method over the estimated useful lives of the related assets. Property, plant and equipment and the related depreciable lives are as follows (in thousands):
MARCH 29, MARCH 28, ASSET TYPE/DEPRECIABLE LIFE 1997 1998 - ----------------------------------------------------------------------- ----------- ----------- Machinery and equipment--4 - 6 years................................... $ 2,530 $ 2,964 Leasehold improvements--Lease term..................................... 421 739 Furniture and fixtures--4 years........................................ 277 384 Construction in progress............................................... 179 508 ----------- ----------- 3,407 4,595 Less: Accumulated depreciation and amortization........................ (795) (1,643) ----------- ----------- ----------- ----------- $ 2,612 $ 2,952 ----------- ----------- ----------- -----------
INTANGIBLE ASSETS As of March 28, 1998, intangible assets represent the excess of purchase price over net book value of assets acquired in connection with the April 3, 1996, acquisition of Elgar Electronics Corporation by the Company and certain financing costs incurred in the Recapitalization. As of March 29, 1997, intangible assets included certain financing costs incurred in connection with the acquisition of the Predecessor that were written off in connection with the Recapitalization. The components of intangible assets are being amortized on a straight-line basis over their estimated useful lives ranging from 5 to 15 years. The Company periodically re-evaluates the original assumptions and rationale utilized in the establishment of the carrying value and estimated useful lives of these assets. The criteria used for these evaluations include management's estimate of the assets' continuing ability to generate income from operations and positive cash flows in future periods as well as the strategic significance of the intangible assets to the Company's business activity. F-8 ELGAR HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which requires the use of the liability method in providing for income taxes. Current income tax expense is the amount of income taxes expected to be payable in the current year. REVENUE RECOGNITION The Company recognizes revenue when goods are shipped to the customer, net of sales returns. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior-year amounts have been reclassified to conform to the current-year presentation. CONCENTRATION OF CREDIT RISK Sales to one customer accounted for approximately 37% of the Company's total revenue for the fiscal year ended April 3, 1996, sales to two customers, in the aggregate, accounted for approximately 39% and 47% of the Company's total revenue for the fiscal years ended March 29, 1997 and March 28, 1998, respectively. The Company performs ongoing credit evaluation of its customers' financial condition. The Company maintains reserves for potential credit losses. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of certain of the Company's financial instruments, including accounts receivable, accounts payable and accrued liabilities, approximates fair value due to their short term nature. Based on borrowing rates currently available to the Company for credit arrangements with similar terms, the carrying amount of balances under the credit facilities (Note 4) and capital lease obligations approximate fair value. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting of comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 131 requires reporting certain information about operating segments in annual and interim-period financial statements. Both standards are required to be adopted beginning March 29, 1998. Management does not expect the adoption of these F-9 ELGAR HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) standards to have a material effect on the Company's financial position or results of operations as presented in the accompanying financial statements. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits." SFAS No. 132 revises and standardizes employers' disclosures about pension and other postretirement benefits, but it does not change the measurement or recognition of those benefits. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. SFAS No. 132 further requires restatement of disclosures for earlier periods provided for comparative purposes. Management believes that the adoption of SFAS No. 132 will not have a material impact on the consolidated financial statements or disclosures thereto. In March 1998, the Accounting Standards Executive Committee (AcSEC) issued AICPA Statement of Position (SOP) 98-1, "Accounting for costs of computer software developed or obtained for internal use." This statement provides guidance on accounting for the costs of computer software developed or obtained for internal use and identifies characteristics of internal-use software and provides assistance in determining when computer software is for internal use. SOP 98-1 is effective for fiscal years beginning after December 15, 1998, with earlier application permitted. The Company has not yet determined what impact, if any, the adoption of SOP 98-1 will have on the Company's consolidated financial statements, results of operations, or related disclosures thereto. In April 1998, the Accounting Standards Executive Committee (AcSEC) issued AICPA Statement of Position (SOP) 98-5, "Reporting on the costs of start-up activities." This statement provides guidance on financial reporting of start-up costs and organization costs and requires that such costs of start-up activities be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998, with earlier application permitted. The Company has not yet determined what impact, if any, the adoption of SOP 98-5 will have on the Company's consolidated financial statements, results of operations, or related disclosures thereto. 3. SUPPLEMENTARY FINANCIAL INFORMATION Accrued liabilities consist of the following (in thousands):
MARCH 29, MARCH 28, 1997 1998 ----------- ----------- Payroll and related.................................................... $ 1,547 $ 1,965 Warranty reserve....................................................... 439 433 Commissions............................................................ 292 317 Interest payable....................................................... 121 1,364 Management fees payable................................................ 70 68 Other.................................................................. 391 654 ----------- ----------- $ 2,860 $ 4,801 ----------- ----------- ----------- -----------
4. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT In connection with the Recapitalization (see Note 1), all outstanding borrowings under the then existing revolving line of credit agreement and term loans payable to a bank aggregating approximately F-10 ELGAR HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT (CONTINUED) $10.9 million were repaid and, concurrently, the Company issued $90 million of Senior Notes and entered into a new credit facility with a bank. The Senior Notes bear interest at a rate of 9.875% per annum. Interest on the Senior Notes is payable semi-annually, commencing on August 1, 1998. The Senior Notes mature on February 1, 2008. At any time on or before February 1, 2003, the Company may redeem up to 35% in aggregate principal amount of (i) the initial aggregate principal amount of the Senior Notes and (ii) the initial principal amount of any additional notes issued under the indenture after the issue date, on one or more occasions, with the net cash proceeds of one or more public equity offerings at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest thereon to the redemption date, provided that at least 65% of the sum of (i) the initial aggregate principal amount of the Senior Notes and (ii) the initial aggregate principal amount of additional notes remain outstanding immediately after redemption. The Senior Notes are redeemable by the Company at stated redemption prices beginning in February 2003. The Senior Notes are general unsecured obligations of the Company and rank senior to all existing and future subordinated indebtedness of the Company. The obligations of the Company as a guarantor of Elgar's obligations under the bank credit facility are secured by substantially all of the assets of the Company. Accordingly, such secured indebtedness effectively ranks senior to the Senior Notes to the extent of such assets. The Senior Notes restrict, among other things, the Company's ability to incur additional indebtedness, pay dividends or make certain other restricted payments, incur liens, sell preferred stock of subsidiaries, apply net proceeds from certain asset sales, merge or consolidate with any other person, sell, assign, transfer, lease, convey or otherwise dispose of substantially all of the assets of the Company or enter into certain transactions with affiliates. The Senior Notes were issued on February 3, 1998. As such, the Company believes the fair value of the Senior Notes approximates the carrying value of such debt at March 28, 1998. CREDIT FACILITY In connection with Recapitalization, Elgar, as borrower, and the Company, as guarantor, entered into a Loan and Security Agreement with a bank to provide Elgar with a $15 million revolving credit facility which matures on February 3, 2003. No amounts are outstanding under this credit facility as of March 28, 1998. Indebtedness of Elgar under the agreement is secured by a first priority security interest in substantially all of the Company's assets. Indebtedness under the agreement bears interest at a floating rate of interest equal to, at Elgar's option, the eurodollar rate for one, two, three or six months, plus 2.50%, or the bank's prime rate plus a margin of 1.50%. Advances under the agreement are limited to the lesser of (a) $15 million and (b)(i) 85% of eligible accounts receivable plus (ii) 60% of eligible inventory minus (iii) the aggregate amount of all undrawn letters of credit issued under the Credit Facility plus the aggregate amount of any unreimbursed drawings under any outstanding letters of credit. F-11 ELGAR HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT (CONTINUED) The credit agreement contains restrictions on the incurrence of debt, the sale of assets, mergers, acquisitions and other business combinations, voluntary prepayment of other debt of the Company, transactions with affiliates, repurchase or redemption of stock from stockholders, and various financial covenants, including covenants requiring the maintenance of fixed charge coverage, and maximum debt to earnings, before interest, taxes, depreciation and amortization (EBITDA) ratios and minimum consolidated EBITDA. As of March 28, 1998, the Company was in compliance with all required covenants under the credit facility. The Company's long-term debt consisted of the following (in thousands):
MARCH 29, MARCH 28, 1997 1998 ----------- ----------- Senior Notes due February 1, 2008 with an interest rate of 9.875% at March 28, 1998....................................................... $ -- $ 90,000 Revolving credit facility due March 31, 2001 with an interest rate of 10% at March 29, 1997................................................ 643 -- Term Notes due through March 31, 2003 with interest rates ranging from 8.5% to 10.5% at March 29, 1997...................................... 14,573 -- ----------- ----------- 15,216 90,000 Less: current portion.................................................. 1,739 -- ----------- ----------- $ 13,477 $ 90,000 ----------- ----------- ----------- -----------
Interest expense under these facilities for the fiscal years ended March 29, 1997 and March 28, 1998 approximated $1.6 million and $2.4 million, respectively. An affiliate of the bank that provided the revolving credit facility in place at March 29, 1997 is a shareholder of the Company. DEFERRED FINANCING COSTS In connection with the issuance of the Senior Notes and entering into the credit facility agreement, the Company incurred debt issuance costs of approximately $5.4 million that are being amortized to interest expense over the term of the related debt. Accumulated amortization at March 28, 1998 is approximately $83,000. 5. REDEEMABLE PREFERRED STOCK In connection with the Recapitalization, the Company issued 10,000 shares of redeemable preferred stock, designated as Series A 10% Cumulative Redeemable Preferred Stock, for cash proceeds of $10 million. In connection with such issuance, the Company also issued to the purchasers warrants to purchase 353,744 shares of the Company's common stock. A value of $1.7 million has been attributed to the warrants. The $1.7 million warrant value is included in additional paid-in-capital as of March 28, 1998. Dividends are payable to the holders of the redeemable preferred stock at the annual rate per share of 10% times the sum of $1,000 and accrued but unpaid dividends. Dividends shall be payable at the rate per share of 0.10 shares of redeemable preferred stock through January 31, 2001, and in cash on and after April 30, 2001. Dividends are payable quarterly on January 31, April 30, July 31, and October 31 of each year, commencing April 30, 1998. Dividends shall be fully cumulative and shall accrue on a quarterly basis. F-12 ELGAR HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. REDEEMABLE PREFERRED STOCK (CONTINUED) If the cash dividends payable on the redeemable preferred stock shall have been in arrears and unpaid for four or more successive dividend payment dates, then until the date on which all such dividends in arrears are paid in full, dividends shall accrue and be payable to the holders at the annual rate of 12% times the sum of $1,000 per share and accrued but unpaid dividends thereon. Upon payment in full of all dividends in arrears, cash dividends will thereafter be payable at the 10% annual rate set forth above. There were no dividends in arrears as of March 28, 1998. Holders of shares of redeemable preferred stock shall be entitled to receive the stated liquidation value of $1,000 per share, plus an amount per share equal to any dividends accrued but unpaid, in the event of any liquidation or dissolution of the Company. After payment of the full amount of the liquidation preference, holders of shares of redeemable preferred stock will not be entitled to any further participation in any distribution of assets of the Company. The Company may, at its option, redeem at any time, all or any part of the shares of the redeemable preferred stock at a redemption price per share equal to 100% of the liquidation preference on the date of redemption. On August 3, 2008, the Company shall redeem any and all outstanding shares of redeemable preferred stock at a redemption price per share equal to 100% of the liquidation preference on the date of redemption. Upon the occurrence of a change in control (as defined), the redeemable preferred stock shall be redeemable at the option of the holders, at a redemption price per share equal to 100% of the liquidation preference. The holders of shares of redeemable preferred stock shall not be entitled to any voting rights. However, without the consent of the holders of at least 85% of the outstanding shares of redeemable preferred stock, the Company may not change the powers or preferences of the redeemable preferred stock, create, authorize or issue any shares of capital stock ranking senior to or on a parity with the redeemable preferred stock or create, authorize or issue any shares of capital stock constituting junior securities, unless such junior securities are subordinate in right of payment to the redeemable preferred stock. If any amount of cash dividends payable on the redeemable preferred stock shall have been in arrears and unpaid for four or more successive dividend payment dates, then the number of directors constituting the board of directors shall increase, as defined, and the holders of the redeemable preferred stock shall have the right to elect the newly-created directors. If the Company fails to redeem shares of redeemable preferred stock in accordance with the mandatory redemption provisions described above, then the number of directors constituting the Board of Directors shall increase, as defined, and the holders of the redeemable preferred stock shall have the right to elect directors to fill the newly-created directorships. 6. COMMON STOCK On February 3, 1998, immediately prior to the Recapitalization, the Company effected a 9,340 to 1 stock split of the common stock to be distributed in the form of a stock dividend and an increase in the number of shares authorized from 1,000 to 9,340,000 shares. As a result of this action, 9,339,000 shares were issued to shareholders of record on February 3, 1998. All references throughout the accompanying consolidated financial statements to the number of shares of the Company's common stock and earnings F-13 ELGAR HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. COMMON STOCK (CONTINUED) per share have been restated to reflect the effect of the stock split. In connection with the Recapitalization, the number of authorized shares of common stock was reduced to 5,000,000 shares. At March 28, 1998, a total of 353,744 shares of common stock were reserved for issuance for the exercise of warrants at the initial exercise price of $5.00 per share to the holders of the preferred stock. The exercise price and number of warrant shares are both subject to adjustment in certain events. 7. INCOME TAXES The provision for income taxes consists of the following (in thousands):
YEARS ENDED --------------------------------------- THE COMPANY PREDECESSOR ------------------------ ------------- MARCH 29, MARCH 28, APRIL 3, 1996 1997 1998 ------------- ----------- ----------- Current Federal............................................... $ 97 $ 1,517 $ 3,753 State................................................. 220 105 588 ----- ----------- ----------- 317 1,622 4,341 ----- ----------- ----------- Deferred Federal............................................... 69 116 (286) State................................................. (210) 134 393 ----- ----------- ----------- (141) 250 107 ----- ----------- ----------- Provision for income taxes.............................. $ 176 $ 1,872 $ 4,448 ----- ----------- ----------- ----- ----------- -----------
The provision for income taxes reconciles to the amounts computed by applying the Federal statutory rate to income before taxes as follows (dollars in thousands):
YEARS ENDED -------------------------------------------------------------------- PREDECESSOR THE COMPANY -------------------- ---------------------------------------------- APRIL 3, 1996 MARCH 29, 1997 MARCH 28, 1998 -------------------- ---------------------- ---------------------- Computed statutory tax.............. 34.00% $ (565) 34.00 % $ 1,261 34.00 % $ 3,135 State income taxes, net of federal benefit........................... 6.00% (100) 6.00 % 223 6.00 % 552 Permanent differences from amortization of intangible assets............................ (51.70)% 860 14.17 % 525 5.70 % 526 Other............................... 1.12% (19) (3.70)% (137) 2.55 % 235 --------- --------- ----------- --------- ----------- --------- Provision for income taxes.......... (10.58)% $ 176 50.47 % $ 1,872 48.25 % $ 4,448 --------- --------- ----------- --------- ----------- --------- --------- --------- ----------- --------- ----------- ---------
F-14 ELGAR HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. INCOME TAXES (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets are as follows (in thousands):
MARCH 29, MARCH 28, 1997 1998 ----------- ----------- Current Deferred Taxes Section 163(j) interest carryforwards................................ $ 546 $ 451 State taxes.......................................................... 90 193 Other reserves....................................................... 104 166 Accrued expenses..................................................... 252 288 ----------- ----------- Total current deferred taxes....................................... 992 1,098 Noncurrent Deferred Taxes Section 163(j) interest carryforwards................................ 326 -- Depreciation and UNICAP.............................................. 218 249 Inventory reserves................................................... 322 321 Other................................................................ -- 83 ----------- ----------- Total noncurrent deferred taxes.................................... 866 653 Total deferred tax assets............................................ $ 1,858 $ 1,751 ----------- ----------- ----------- -----------
Management believes that it is more likely than not that the Company will realize its deferred tax assets; therefore, no valuation allowance has been reflected in the accompanying consolidated financial statements. 8. COMMITMENTS AND CONTINGENCIES (DOLLARS IN THOUSANDS) LITIGATION The Company is subject to various claims as a result of its ongoing business activities. Management believes that the outcome of any such claims will not have a material adverse effect on the Company's financial position or results of operations. LEASE COMMITMENTS The Company leases its facilities and certain equipment under non-cancelable operating leases that expire through fiscal year 2003. The Company's primary facility lease expires in fiscal year 2003 and contains an option to extend the lease for two additional five-year periods. The Company's secondary facility lease expires in fiscal year 2002 and contains an option to extend the lease for an additional two-year period. Rent expense under operating leases amounted to $776, $722 and $807 for the fiscal years ended April 3, 1996, March 29, 1997 and March 28, 1998, respectively. The Company also leases certain equipment under capital leases which expire through fiscal year 2001. Cost of equipment under capital leases included in property, plant and equipment in the accompanying balance sheets at March 29, 1997 and March 28, 1998, is $105 and $55, respectively, and the related accumulated depreciation is $13 and $21, respectively. F-15 ELGAR HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. COMMITMENT AND CONTINGENCIES (DOLLARS IN THOUSANDS) (CONTINUED) Minimum future lease payments as of March 28, 1998 under capital and operating leases are as follows (in thousands):
CAPITAL OPERATING YEAR ENDING LEASES LEASES - ------------------------------------------------------------------------- ----------- ----------- 1999..................................................................... $ 19 883 2000..................................................................... 16 914 2001..................................................................... 5 920 2002..................................................................... -- 735 2003..................................................................... -- 536 Thereafter............................................................... -- -- --- ----------- Total................................................................ 40 $ 3,988 ----------- ----------- Less: amount representing interest....................................... (4) --- Present value of obligations under capital lease......................... 36 Less: current portion.................................................... 17 --- Long-term capital lease obligation....................................... $ 19 --- ---
9. INCENTIVE COMPENSATION ARRANGEMENTS (DOLLARS IN THOUSANDS) The Company instituted an employee bonus program on September 29, 1996 under which all non-management employees are paid bonuses based on the achievement of certain performance criteria, as defined in the bonus program. The Company incurred expenses of $191 and $480 for the fiscal years ended March 29, 1997 and March 28, 1998, respectively, under this compensation arrangement. The Company also has a management incentive program under which the management-level employees are paid incentives based on the achievement of certain performance criteria. The Company incurred expenses of $356 and $467 for the fiscal years ended March 29, 1997 and March 28, 1998, respectively, under this compensation arrangement. The Company also maintains a defined contribution 401(k) plan (the "Plan") for all of its employees. Those employees who participate in the Plan are entitled to make contributions of up to 15 percent of their compensation, limited by IRS statutory contribution limits. In addition to employee contributions, the Company also contributes to the Plan by matching 40 percent of employee contributions up to the first six percent of contributions. Amounts contributed to the Plan by the Company were $202 and $226 for the fiscal years ended March 29, 1997 and March 28, 1998, respectively. In connection with the Recapitalization, the Company entered into employment agreements with certain of its officers and executives that provide for stipulated annual salary payments. Termination of the agreements may occur by either party upon 30 days prior written notice or in the event of death or permanent disability. The agreements contain certain payment provisions in the event the employee is terminated due to permanent disability or in the event of death, conviction of a crime, or material breach or failure to perform obligations under the agreements. F-16 ELGAR HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. RELATED PARTY TRANSACTION Pursuant to the terms of a ten-year Management Agreement entered into between the Company and an affiliate of its principal shareholder, the Company paid such affiliate a transaction fee of $1.0 million in connection with the Recapitalization, and has also agreed to pay such affiliate an annual management fee of $500,000, commencing February 3, 1998. 11. SUBSEQUENT EVENT On May 5, 1998, the Company entered into a Stock Purchase Agreement with the shareholders of Power Ten pursuant to which the Company will acquire all of the issued and outstanding shares of capital stock for $17.8 million in cash. The transaction is expected to close no later than May 29, 1998. F-17 POWER TEN BALANCE SHEET AS OF APRIL 4, 1998 (IN THOUSANDS EXCEPT FOR SHARE INFORMATION) (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents......................................................... $ 1,240 Accounts receivable............................................................... 844 Inventories (Note 2).............................................................. 1,046 Prepaids and other................................................................ 30 --------- Total current assets............................................................ 3,160 PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated depreciation and amortization of $435 (Note 2)...................................................... 101 OTHER ASSETS........................................................................ 41 --------- $ 3,302 --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.................................................................. $ 372 Accrued liabilities (Note 3)...................................................... 1,014 --------- Total current liabilities....................................................... 1,386 LONG-TERM DEBT (Note 4)............................................................. 350 --------- Total liabilities............................................................... 1,736 --------- COMMITMENTS AND CONTINGENCIES (Note 5) STOCKHOLDERS' EQUITY: Common stock, no par value, 10,000,000 shares authorized, 768,000 shares issued and outstanding................................................................. 141 Retained earnings................................................................. 1,425 --------- Total stockholders' equity...................................................... 1,566 --------- $ 3,302 --------- ---------
The accompanying notes to financial statements are an integral part of this balance sheet. F-18 POWER TEN STATEMENT OF INCOME FOR THE YEAR ENDED APRIL 4, 1998 (IN THOUSANDS) (UNAUDITED) NET SALES.......................................................................... $ 10,076 COST OF SALES...................................................................... 5,568 --------- Gross profit................................................................... 4,508 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................................... 3,451 RESEARCH & DEVELOPMENT AND ENGINEERING EXPENSES.................................... 589 --------- Operating income............................................................... 468 INTEREST EXPENSE................................................................... 39 --------- Income before provision for income taxes....................................... 429 PROVISION FOR INCOME TAXES......................................................... 246 --------- Net income..................................................................... $ 183 --------- ---------
The accompanying notes to financial statements are an integral part of this financial statement. F-19 POWER TEN STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED APRIL 4, 1998 (IN THOUSANDS, EXCEPT SHARES) (UNAUDITED)
COMMON STOCK ---------------------- RETAINED SHARES AMOUNT EARNINGS TOTAL --------- ----------- ----------- --------- BALANCE, March 29, 1997.................................................. 768,000 $ 141 $ 1,242 $ 1,383 Net income............................................................. -- -- 183 183 --------- ----- ----------- --------- BALANCE, April 4, 1998................................................... 768,000 $ 141 $ 1,425 $ 1,566 --------- ----- ----------- --------- --------- ----- ----------- ---------
The accompanying notes to financial statements are an integral part of this statement. F-20 POWER TEN STATEMENT OF CASH FLOWS FOR THE YEAR ENDED APRIL 4, 1998 (IN THOUSANDS) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................................ $ 183 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................................. 59 Gain on sale of property, plant and equipment................................. (16) (Increases) decreases in assets: Accounts receivable........................................................... 163 Inventories................................................................... 111 Prepaids and other............................................................ (29) Increases (decreases) in liabilities: Accounts payable.............................................................. 30 Accrued liabilities........................................................... 546 --------- Net cash provided by operating activities................................... 1,047 --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment........................................ (90) Proceeds from sale of property, plant and equipment............................... 35 --------- Net cash used in investing activities....................................... (55) --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net repayments on debt............................................................ (125) --------- Net cash used in financing activities....................................... (125) --------- NET INCREASE IN CASH AND CASH EQUIVALENTS........................................... 867 CASH AND CASH EQUIVALENTS, beginning of period...................................... 373 --------- CASH AND CASH EQUIVALENTS, end of period............................................ $ 1,240 --------- --------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest............................................................ $ 39 --------- --------- Cash paid for income taxes........................................................ $ 243 --------- ---------
The accompanying notes to financial statements are an integral part of this statement. F-21 POWER TEN NOTES TO UNAUDITED FINANCIAL STATEMENTS APRIL 4, 1998 1. INCORPORATION AND COMPANY OPERATIONS Power Ten, a California corporation (the "Company"), manufactures and sells programmable power supply units to commercial and defense entities. The Company's sales are primarily within the United States, Europe and Asia. The unaudited financial statements have been prepared in conformity with generally accepted accounting principles and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for fair presentation. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS Cash equivalents include short term investments with original maturities of three months or less. INVENTORIES Inventories, which include materials, direct labor and manufacturing overhead, are stated at the lower of cost or market and are comprised of the following (in thousands):
APRIL 4, 1998 --------- Raw materials........................................................................ $ 413 Work-in-process...................................................................... 633 --------- $ 1,046 --------- ---------
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost. Depreciation of property, plant and equipment is provided using the straight-line method over the estimated useful lives of the related assets, which range from five to seven years. Property, plant and equipment are as follows (in thousands):
APRIL 4, 1998 ----------- Machinery and equipment.............................................................. $ 393 Furniture and fixtures............................................................... 143 ----- 536 Less: Accumulated depreciation and amortization...................................... (435) ----- $ 101 ----- -----
INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which requires the use of the liability method F-22 POWER TEN NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED) APRIL 4, 1998 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) in providing for income taxes. Current income tax expense is the amount of income taxes expected to be payable in the current year, based on the statutory rate. REVENUE RECOGNITION The Company recognizes revenue when goods are shipped to the customer. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. SIGNIFICANT CUSTOMERS Sales to two customers accounted for approximately 36% of the Company's total revenue, and three customers accounted for 44% of the Company's total accounts receivable balance, for the fiscal year ended April 4, 1998. The Company performs ongoing credit evaluation of its customers' financial condition. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting of comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 131 requires reporting certain information about operating segments in annual and interim-period financial statements. Both standards are required to be adopted beginning April 5, 1998. Management does not expect the adoption of these standards to have a material effect on the Company's financial position or results of operations as presented in the accompanying financial statements. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits." SFAS No. 132 revises and standardizes employers' disclosures about pension and other postretirement benefits, but it does not change the measurement or recognition of those benefits. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. SFAS No. 132 further requires restatement of disclosures for earlier periods provided for comparative purposes. Management believes that the adoption of SFAS No. 132 will not have a material impact on the financial statements or disclosures thereto. In March 1998, the Accounting Standards Executive Committee (AcSEC) issued AICPA Statement of Position (SOP) 98-1, "Accounting for costs of computer software developed or obtained for internal use." This statement provides guidance on accounting for the costs of computer software developed or obtained for internal use and identifies characteristics of internal-use software and provides assistance in determining when computer software is for internal use. SOP 98-1 is effective for fiscal years beginning after December 15, 1998, with earlier application permitted. The Company has not yet determined what impact, F-23 POWER TEN NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED) APRIL 4, 1998 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) if any, the adoption of SOP 98-1 will have on its financial statements, results of operations or related disclosures thereto. In April 1998, the Accounting Standards Executive Committee (AcSEC) issued AICPA Statement of Position (SOP) 98-5, "Reporting on the costs of start-up activities." This statement provides guidance on financial reporting of start-up costs and organization costs and requires that such costs of start-up activities be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998, with earlier application permitted. The Company has not yet determined what impact, if any, the adoption of SOP 98-5 will have on its financial statements, results of operations or related disclosures thereto. 3. SUPPLEMENTARY FINANCIAL INFORMATION Accrued liabilities consist of the following (in thousands):
APRIL 4, 1998 --------- Payroll and related.................................................................. $ 230 Warranty reserve..................................................................... 34 Bonuses.............................................................................. 543 Professional fees.................................................................... 160 Other................................................................................ 47 --------- $ 1,014 --------- ---------
4. LONG-TERM DEBT The Company's long-term debt consisted of the following (in thousands):
APRIL 4, 1998 ----------- Related-party term notes due December 31, 1999 with an annual interest rate of 11.25% at April 4, 1998, unsecured......................................................... $ 350 ----- 350 Less: current portion................................................................ -- ----- $ 350 ----- -----
The Company's revolving credit line provided for borrowings up to a maximum of $125,000, bearing interest at prime plus three quarters of one percent annually, secured by the assets of the Company and requiring that interest-only payments be made monthly. The agreement expired in January 1998. The Company did not utilize the credit line during the fiscal year ended April 4, 1998. Interest expense under the related-party term notes for the year ended April 4, 1998 approximated $39,000. F-24 POWER TEN NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED) APRIL 4, 1998 5. COMMITMENTS AND CONTINGENCIES LITIGATION On February 24, 1998, Rapid Power Technologies, Inc., a New York corporation, filed a third-party complaint against certain parties, including the Company, alleging breach of warranties, product liability and negligence. The case is in the early stages and the ultimate outcome is uncertain. Accordingly, no provision has been made in the accompanying financial statements to reflect any amounts that may be due or payable in the event that an unfavorable outcome occurs. The Company is also subject to various claims and litigation as a result of its ongoing business activities. Management believes that the outcome of any such claims will not have a material adverse effect on the Company's financial position or results of operations. LEASE COMMITMENTS The Company leases its facilities and certain equipment under non-cancelable operating leases that expire through fiscal year 2000. The Company's primary facility lease expires in fiscal year 2000. Rent expense under operating leases, net of sub-lease income of approximately $82,000, amounted to $390,000 for the year ended April 4, 1998. Minimum future lease payments as of April 4, 1998 under operating leases are as follows (in thousands):
OPERATING FISCAL YEAR ENDING LEASES - ----------------------------------------------------------------------------------- ----------- 1999............................................................................... $ 472 2000............................................................................... 484 2001............................................................................... 143 ----------- Total.......................................................................... $ 1,099 ----------- -----------
LEASE INCOME The Company sub-leases certain of its office space for approximately $7,200 per month. The lease expires in July 2000. As of April 4, 1998, the sub-lessee was in default on certain payments required under the sub-lease agreement. In May 1998, the sub-lessee cured the default by paying all past-due amounts. Future income expected under the sub-lease is as follows (in thousands):
FISCAL YEAR ENDING INCOME - ------------------------------------------------------------------------------------- ----------- 1999................................................................................. $ 86 2000................................................................................. 88 2001................................................................................. 26 ----- $ 286 ----- -----
6. RELATED PARTY TRANSACTIONS In 1996, the Company obtained unsecured loans from each of its two principal stockholders totaling $350,000 (See Note 4). The loans call for monthly interest payments at an annual interest rate of 11.25% with the balance due on December 31, 1999. In April 1998, the Company paid these notes in full. 7. SUBSEQUENT EVENT On May 5, 1998, the Company entered into a Stock Purchase Agreement with Elgar pursuant to which Elgar agreed to acquire all of the Company's issued and outstanding shares of capital stock for $17.8 million in cash. The transaction is expected to close no later than May 29, 1998. F-25 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, LETTER OF TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE AGENT AS FOLLOWS: BY REGISTERED OR CERTIFIED MAIL: UNITED STATES TRUST COMPANY OF NEW YORK P.O. BOX 844 COOPER STATION NEW YORK, NY 10276-0844 ATTN: CORPORATE TRUST SERVICES BY FACSIMILE: (212) 420-6152 BY OVERNIGHT COURIER: UNITED STATES TRUST COMPANY OF NEW YORK 770 BROADWAY, 13TH FLOOR NEW YORK, NEW YORK 10003 ATTN: CORPORATE TRUST SERVICES BY HAND: UNITED STATES TRUST COMPANY OF NEW YORK 111 BROADWAY LOWER LEVEL NEW YORK, NEW YORK 10006 ATTN: CORPORATE TRUST SERVICES CONFIRM BY TELEPHONE 800-548-6565 (ORIGINALS OF ALL DOCUMENTS SUBMITTED BY FACSIMILE SHOULD BE SENT PROMPTLY BY HAND, OVERNIGHT COURIER, OR REGISTERED OR CERTIFIED MAIL) NO BROKER DEALER OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFER MADE HEREBY TO GIVE ANY 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 A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY 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 TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL OCTOBER , 1998 (90 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN THIS EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS. OFFER TO EXCHANGE ALL OUTSTANDING 9 7/8% SENIOR NOTES DUE 2008 ($90,000,000 PRINCIPAL AMOUNT) FOR 9 7/8% SENIOR NOTES DUE 2008. ELGAR HOLDINGS, INC. PAYMENT OF PRINCIPAL AND INTEREST UNCONDITIONALLY GUARANTEED BY ELGAR ELECTRONICS CORPORATION AND POWER TEN --------------------- PROSPECTUS --------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the General Corporation Law of the State of Delaware (the "Delaware Corporation Law") gives Delaware corporations broad powers to indemnify their present and former directors and officers against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with threatened, pending or completed actions, suits or proceedings to which they are parties or are threatened to be made parties by reason of being or having been such directors or officers, subject to specified conditions and exclusions; gives a director or officer who successfully defends an action the right to be so indemnified; and permits a corporation to buy directors' and officers' liability insurance. Such indemnification is not exclusive of any other rights to which those indemnified may be entitled under any by-law, agreement, vote of stockholders or otherwise. As permitted by Section 145 of the Delaware Corporation Law, Article VII of the Bylaws of the Company and Article VIII of the Certificate of Incorporation of the Company provide for the indemnification by the Company of its directors, officers, employees and agents against liabilities and expenses incurred in connection with actions, suits or proceedings brought against them by a third party or in the rights of the corporation, by reason of the fact that they were or are such officers, employees or agents. Article EIGHTH of the Company's Certificate of Incorporation provides that to the fullest extent permitted by the Delaware Corporation Law as the same exists or may hereafter be amended, a director of the Company shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS.
EXHIBIT NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 1.1 Purchase Agreement, dated January 30, 1998, between the Company and the Initial Purchaser 2.1 Agreement and Plan of Merger, dated as of January 2, 1998, by and among the Company, JFL-EEC LLC, JFL-EEC Merger Sub Co. and T.C. Group, L.L.C. 3.1 Amended and Restated Certificate of Incorporation of the Company 3.2 Certificate of Designations for the Series A 10% Cumulative Redeemable Preferred Stock 3.3 Certificate of Designations for the Series B 6% Cumulative Convertible Preferred Stock 3.4 Amended and Restated Bylaws of the Company 3.5 Articles of Incorporation of Elgar Electronics Corporation 3.6 Bylaws of Elgar Electronics Corporation 4.1 Indenture, dated as of February 3, 1998, between the Company and United States Trust Company of New York 4.2 First Supplemental Indenture, dated as of February 3, 1998, among the Company, Elgar Electronics Corporation and United States Trust Company of New York *4.3 Second Supplemental Indenture, dated as of May 29, 1998, among the Company, Elgar Electronics Corporation, Power Ten and United States Trust Company of New York 4.4 Form of Note (included in Exhibits 4.1 and 4.2) 4.5 Registration Rights Agreement, dated February 3, 1998, between the Company and the Holders of Old Notes 4.6 Form of Warrant Certificate. *5.1 Opinion of Gibson, Dunn & Crutcher LLP, including consent
II-1 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (CONTINUED)
EXHIBIT NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- * 8.1 Opinion of Gibson, Dunn & Crutcher LLP with regard to federal income tax consequences of the Exchange Offer 10.1 Assumption Agreement, dated as of February 3, 1998, between the Company and Elgar Electronics Corporation, assuming, among other things, the obligations of MergerCo under the Purchase Agreement and the Registration Rights Agreement 10.2 Investment Agreement, dated as of February 3, 1998, between the Company and Series A preferred shareholders 10.3 Shareholders Agreement, dated as of February 3, 1998, between the Company and the shareholders 10.4 Shareholders Registration Rights Agreement, dated as of February 3, 1998, between the Company and the shareholders 10.5 Warrantholders' Registration Rights Agreement, dated as of February 3, 1998, between the Company and the warrantholders 10.6 Management Agreement, dated as of February 3, 1998, among the Company, Elgar Electronics Corporation and J. F. Lehman & Company 10.7 Stock Purchase Agreement, dated as of May 5, 1998, among Elgar Electronics Corporation, Joseph A. Varozza, Jr. and Vincent S. Mutascio 10.8 Employment Agreement, dated as of May 29, 1998, between Elgar Electronics Corporation and Joseph A. Varozza, Jr. 10.9 Employment Agreement, dated as of May 29, 1998, between Elgar Electronics Corporation and Vincent S. Mutascio 10.10 Employment Agreement, dated as of February 3, 1998, between Elgar Electronics Corporation and Kenneth R. Kilpatrick 10.11 Form of Employment Agreement entered into between Elgar Electronics Corporation and certain of its executive officers (other than Kenneth R. Kilpatrick) on February 3, 1998 10.12 Lease Agreement, dated February 1, 1984, between the Company and Carroll Park Ridge, for the Company's principal facilities 10.13 First Amendment to Lease, dated November 5, 1992, between RREEF WEST-IV and the Company 10.14 Second Amendment to Lease, dated February 12, 1998, between The Irvine Company and the Company *10.15 Amended and Restated Credit Agreement, dated as of February 3, 1998 and amended and restated as of May 29, 1998, among the Company, Elgar Electronics Corporation and Bankers Trust Company, as Agent *10.16 Amended and Restated Pledge Agreement, dated as of February 3, 1998 and amended and restated as of May 29, 1998, among the Company, Elgar Electronics Corporation and Bankers Trust Company, as Pledgee and Collateral Agent *10.17 Amended and Restated Security Agreement, dated as of February 3, 1998 and amended and restated as of May 29, 1998, among the Company, Elgar Electronics Corporation, Power Ten and Bankers Trust Company, as Collateral Agent *10.18 Subsidiary Guaranty, dated as of May 29, 1998, made by Power Ten if favor of Bankers Trust Company, as Agent *10.19 Capital Call Agreement, dated as of May 29, 1998, among J.F. Lehman Equity Investors I, L.P., the Company, Elgar Electronics Corporation and Bankers Trust Company, as Agent *10.20 Form of Term Loan Note *10.21 Form of Revolving Note
II-2 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (CONTINUED)
EXHIBIT NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- *10.22 Form of Swingline Note 12.1 Statement re: Computation of Ratios of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends 21.1 Subsidiaries of the Company *23.1 Consent of Gibson, Dunn & Crutcher LLP (to be included in Exhibit 5.1) 23.2 Consent of Arthur Andersen LLP 24.1 Powers of Attorney (see page II-4 of this Registration Statement) 25.1 Statement of Eligibility of United States Trust Company of New York, as trustee under the Indenture filed as Exhibits 4.1 and 4.2, on Form T-1 27.1 Financial Data Schedule for Elgar Holdings, Inc. 27.2 Financial Data Schedule for Power Ten *99.1 Form of Letter of Transmittal to be used in connection with the Notes Exchange Offer *99.2 Notice of Guaranteed Delivery regarding Old Notes
- ------------------------ * To be filed by amendment. (B) FINANCIAL STATEMENT SCHEDULE. The following financial statement schedule is filed with Part II of this Registration Statement:
SCHEDULE NUMBER DESCRIPTION OF SCHEDULE - ----------------------------------------------------- --------------------------------------- II................................................... Valuation and Qualifying Accounts
ITEM 22. UNDERTAKINGS. The undersigned registrants hereby undertake with respect to the securities offered by them: 1. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act") may be permitted as to directors, officers and controlling persons of any Registrant pursuant to the provisions described in Item 20 or otherwise, the Registrants have been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore unenforceable. In the event a claim for indemnification against such liabilities (other than the payment by any Registrant of expenses incurred or paid by a director, officer or controlling person of such 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, such Registrant will, unless in the opinion of its 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 Act and will be governed by the final adjudication of such issue. 2. The undersigned Registrants hereby undertake to respond to requests for information that is incorporated by reference into the Prospectus pursuant to Items 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 the registration statement through the date of responding to the request. 3. The undersigned Registrants hereby undertake to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, each of the Registrants 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 29th day of May, 1998. ELGAR HOLDINGS, INC. By: /s/ KENNETH R. KILPATRICK ----------------------------------------- Kenneth R. Kilpatrick, PRESIDENT AND CHIEF EXECUTIVE OFFICER ELGAR ELECTRONICS CORPORATION By: /s/ KENNETH R. KILPATRICK ----------------------------------------- Kenneth R. Kilpatrick, PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Kenneth R. Kilpatrick, Keith Oster and Christopher W. Kelford his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, 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 file the same, with all exhibits thereto and other 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 all that said attorney-in-fact and agent or his substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated (unless otherwise noted below, each person holds the directorships and offices listed below for each Registrant). SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- Director and President and /s/ KENNETH R. KILPATRICK Chief Executive Officer - ------------------------------ (Principal Executive May 29, 1998 Kenneth R. Kilpatrick Officer) Vice President--Finance, /s/ CHRISTOPHER W. KELFORD Chief Financial Officer - ------------------------------ and Treasurer (Principal May 29, 1998 Christopher W. Kelford Financial and Accounting Officer) /s/ DONALD GLICKMAN - ------------------------------ Director and Vice May 29, 1998 Donald Glickman President II-4 SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ JOHN F. LEHMAN - ------------------------------ Director May 29, 1998 John F. Lehman /s/ GEORGE SAWYER - ------------------------------ Director May 29, 1998 George Sawyer /s/ KEITH OSTER - ------------------------------ Director and Secretary May 29, 1998 Keith Oster /s/ JOSEPH A. STROUD - ------------------------------ Director May 29, 1998 Joseph A. Stroud /s/ WILLIAM PAUL - ------------------------------ Director May 29, 1998 William Paul /s/ BRUCE D. GORCHOW - ------------------------------ Director May 29, 1998 Bruce D. Gorchow /s/ GLENN A. YOUNGKIN - ------------------------------ Director May 29, 1998 Glenn A. Youngkin II-5 INDEX TO FINANCIAL STATEMENT SCHEDULE
PAGE ----- Schedule II--Valuation and Qualifying Accounts............................................................. S-2
S-1 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS ELGAR HOLDINGS, INC. (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING OF COSTS AND (A) END OF DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD - --------------------------------------------------------------- --------------- --------------- ------------- ------------- Allowance for doubtful accounts (deducted from accounts receivable) Fiscal year ended March 28, 1998............................. $ 189 $ 15 $ (7) $ 197 Fiscal year ended March 29, 1997............................. 184 5 -- 189 Fiscal year ended April 3, 1996.............................. 170 33 (19) 184
- ------------------------ (a) Includes write-offs and reversals. S-2 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ EXHIBITS TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ ELGAR HOLDINGS, INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 1.1 Purchase Agreement, dated January 30, 1998, between the Company and the Initial Purchaser 2.1 Agreement and Plan of Merger, dated as of January 2, 1998, by and among the Company, JFL-EEC LLC, JFL-EEC Merger Sub Co. and T.C. Group, L.L.C. 3.1 Amended and Restated Certificate of Incorporation of the Company 3.2 Certificate of Designations for the Series A 10% Cumulative Redeemable Preferred Stock 3.3 Certificate of Designations for the Series B 6% Cumulative Convertible Preferred Stock 3.4 Amended and Restated Bylaws of the Company 3.5 Articles of Incorporation of Elgar Electronics Corporation 3.6 Bylaws of Elgar Electronics Corporation 4.1 Indenture, dated as of February 3, 1998, between the Company and United States Trust Company of New York 4.2 First Supplemental Indenture, dated as of February 3, 1998, among the Company, Elgar Electronics Corporation and United States Trust Company of New York *4.3 Second Supplemental Indenture, dated as of May 29, 1998, among the Company, Elgar Electronics Corporation, Power Ten and United States Trust Company of New York 4.4 Form of Note (included in Exhibits 4.1 and 4.2) 4.5 Registration Rights Agreement, dated February 3, 1998, between the Company and the Holders of Old Notes 4.6 Form of Warrant Certificate. *5.1 Opinion of Gibson, Dunn & Crutcher LLP, including consent *8.1 Opinion of Gibson, Dunn & Crutcher LLP with regard to federal income tax consequences of the Exchange Offer 10.1 Assumption Agreement, dated as of February 3, 1998, between the Company and Elgar Electronics Corporation, assuming, among other things, the obligations of MergerCo under the Purchase Agreement and the Registration Rights Agreement 10.2 Investment Agreement, dated as of February 3, 1998, between the Company and Series A preferred shareholders 10.3 Shareholders Agreement, dated as of February 3, 1998, between the Company and the shareholders 10.4 Shareholders Registration Rights Agreement, dated as of February 3, 1998, between the Company and the shareholders 10.5 Warrantholders' Registration Rights Agreement, dated as of February 3, 1998, between the Company and the warrantholders 10.6 Management Agreement, dated as of February 3, 1998, among the Company, Elgar Electronics Corporation and J. F. Lehman & Company 10.7 Stock Purchase Agreement, dated as of May 5, 1998, among Elgar Electronics Corporation, Joseph A. Varozza, Jr. and Vincent S. Mutascio 10.8 Employment Agreement, dated as of May 29, 1998, between Elgar Electronics Corporation and Joseph A. Varozza, Jr. 10.9 Employment Agreement, dated as of May 29, 1998, between Elgar Electronics Corporation and Vincent S. Mutascio 10.10 Employment Agreement, dated as of February 3, 1998, between Elgar Electronics Corporation and Kenneth R. Kilpatrick 10.11 Form of Employment Agreement entered into between Elgar Electronics Corporation and certain of its executive officers (other than Kenneth R. Kilpatrick) on February 3, 1998 10.12 Lease Agreement, dated February 1, 1984, between the Company and Carroll Park Ridge, for the Company's principal facilities 10.13 First Amendment to Lease, dated November 5, 1992, between RREEF WEST-IV and the Company
EXHIBIT NO. DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 10.14 Second Amendment to Lease, dated February 12, 1998, between The Irvine Company and the Company *10.15 Amended and Restated Credit Agreement, dated as of February 3, 1998 and amended and restated as of May 29, 1998, among the Company, Elgar Electronics Corporation and Bankers Trust Company, as Agent *10.16 Amended and Restated Pledge Agreement, dated as of February 3, 1998 and amended and restated as of May 29, 1998, among the Company, Elgar Electronics Corporation and Bankers Trust Company, as Pledgee and Collateral Agent *10.17 Amended and Restated Security Agreement, dated as of February 3, 1998 and amended and restated as of May 29, 1998, among the Company, Elgar Electronics Corporation, Power Ten and Bankers Trust Company, as Collateral Agent *10.18 Subsidiary Guaranty, dated as of May 29, 1998, made by Power Ten if favor of Bankers Trust Company, as Agent *10.19 Capital Call Agreement, dated as of May 29, 1998, among J.F. Lehman Equity Investors I, L.P., the Company, Elgar Electronics Corporation and Bankers Trust Company, as Agent *10.20 Form of Term Loan Note *10.21 Form of Revolving Note *10.22 Form of Swingline Note 12.1 Statement re: Computation of Ratios of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends 21.1 Subsidiaries of the Company *23.1 Consent of Gibson, Dunn & Crutcher LLP (to be included in Exhibit 5.1) 23.2 Consent of Arthur Andersen LLP 24.1 Powers of Attorney (see page II-4 of this Registration Statement) 25.1 Statement of Eligibility of United States Trust Company of New York, as trustee under the Indenture filed as Exhibits 4.1 and 4.2, on Form T-1 27.1 Financial Data Schedule for Elgar Holdings, Inc. 27.2 Financial Data Schedule for Power Ten *99.1 Form of Letter of Transmittal to be used in connection with the Notes Exchange Offer *99.2 Notice of Guaranteed Delivery regarding Old Notes
- ------------------------ * To be filed by amendment. EX-1.1 2 EXHIBIT 1.1 JFL-EEC MERGER SUB CO. $90,000,000 9 7/8% Senior Notes due 2008 PURCHASE AGREEMENT January 30, 1998 BT ALEX. BROWN INCORPORATED One Bankers Trust Plaza 130 Liberty Street New York, New York 10006 Ladies and Gentlemen: JFL-EEC Merger Sub Co., a Delaware corporation ("MERGERCO"), hereby confirms its agreement with you (the "INITIAL PURCHASER"), as set forth below. 1. THE NOTES. Subject to the terms and conditions herein contained, MergerCo proposes to issue and sell to the Initial Purchaser $90,000,000 aggregate principal amount of its 9 7/8% Senior Notes due 2008 (the "NOTES"). The Notes are being sold in connection with the recapitalization (the "RECAPITALIZATION") of Elgar Holdings, Inc. ("EHI") pursuant to the Agreement and Plan of Merger dated as of January 2, 1998 by and among JFL-EEC LLC, a Delaware limited liability company, Carlyle-EEC Holdings, Inc., a Delaware corporation ("CARLYLE-EEC"), TC Group, L.L.C., a Delaware limited liability company, and MergerCo (as it may be amended through the date hereof and together with all ancillary agreements entered into in connection therewith, the "RECAPITALIZATION AGREEMENT"). The Recapitalization Agreement provides for the merger (the "MERGER") of MergerCo with and into Carlyle-EEC with Carlyle-EEC surviving the Merger and changing its name to EHI. The time of the consummation of the Recapitalization and the Merger is referred to herein as the "EFFECTIVE TIME." Financing for the Recapitalization will be provided by (i) approximately $19.0 million of new cash equity from JFL-EEC LLC (the "LEHMAN INVESTMENT"), (ii) $10.0 million from the issuance of Series A 10% Cumulative Redeemable Preferred Stock and Warrants and (iii) $90.0 million from the offering of the -2- Notes. Concurrently with the consummation of the Recapitalization, EHI and Elgar Electronics Corporation, a California corporation and a wholly owned subsidiary of EHI ("ELGAR"), will enter into a Credit Agreement (the "CREDIT AGREEMENT") with Bankers Trust Company, as agent, and the other lending institutions party thereto, pursuant to which Elgar will be provided with a $15,000,000 revolving credit facility. Immediately after the Effective Time, EHI and Elgar will execute an assumption agreement (the "ASSUMPTION AGREEMENT"), substantially in the form attached hereto as EXHIBIT A, pursuant to which EHI, as survivor of the Merger, will assume all of the obligations of MergerCo under this Purchase Agreement, and Elgar will become a party to this Purchase Agreement as a subsidiary guarantor (the "SUBSIDIARY GUARANTOR") and unconditionally guarantee the Notes (the "GUARANTEE") on a senior unsecured basis. The Notes and the Guarantee are collectively referred to herein as the "SECURITIES." The Notes are to be issued under an indenture (the "INDENTURE") to be dated as of February 3, 1998 by and between MergerCo and United States Trust Company, as Trustee (the "TRUSTEE"). Immediately after the Effective Time, EHI, the Subsidiary Guarantor and the Trustee will enter into a first supplemental indenture to the Indenture (the "SUPPLEMENTAL INDENTURE") providing for the express assumption by EHI, as survivor of the Merger, of the covenants, agreements and undertakings of MergerCo in the Indenture and under the Notes, and the guarantee of the Notes by the Subsidiary Guarantor. EHI and the Subsidiary Guarantor will issue the Securities pursuant to the Supplemental Indenture. References to this Purchase Agreement as of and after the Effective Time will refer to this Purchase Agreement together with the Assumption Agreement and references to the Indenture as of and after the Effective Time will refer to the Indenture and the Supplemental Indenture. The Notes will be offered and sold to the Initial Purchaser without being registered under the Securities Act of 1933, as amended (the "ACT"), in reliance on exemptions therefrom. In connection with the sale of the Securities, EHI has prepared a preliminary offering memorandum dated January 19, 1998 (the "PRELIMINARY MEMORANDUM") and a final offering memorandum dated January 30, 1998 (the "FINAL MEMORANDUM"; the Preliminary Memorandum and the Final Memorandum each herein being referred to as a "MEMORANDUM"), each setting forth or in- -3- cluding a description of the terms of the Securities, the terms of the offering of the Securities, a description of EHI and any material developments relating to EHI occurring after the date of the most recent historical financial statements included therein. Any references herein to the Preliminary Memorandum, the Final Memorandum and a Memorandum shall be deemed to include all amendments and supplements thereto, unless otherwise noted. MergerCo understands that the Initial Purchaser proposes to make an offering of the Notes only on the terms and in the manner set forth in the Final Memorandum and Section 8 hereof, as soon as the Initial Purchaser deems advisable after this Purchase Agreement has been executed and delivered, to qualified institutional buyers ("QUALIFIED INSTITUTIONAL BUYERS" or "QIBS") as defined in Rule 144A under the Act, as such rule may be amended from time to time ("RULE 144A"), in transactions under Rule 144A, and outside the United States to certain persons in reliance on Regulation S under the Act. ("REGULATION S") The Initial Purchaser and its direct and indirect transferees of the Securities will be entitled to the benefits of the Registration Rights Agreement, substantially in the form attached hereto as EXHIBIT B (the "REGISTRATION RIGHTS AGREEMENT"), to be dated the Closing Date (as defined in Section 3 below), pursuant to which MergerCo will agree, among other things, to file a registration statement (the "REGISTRATION STATEMENT") with the Securities and Exchange Commission (the "COMMISSION") registering the Notes or the Exchange Notes (as defined in the Registration Rights Agreement) under the Act. Immediately after the Effective Time, EHI, as survivor of the Merger, will assume all of the obligations of MergerCo under the Registration Rights Agreement, and Elgar will become a party to the Registration Rights Agreement as the Subsidiary Guarantor, in each case, by executing the Assumption Agreement. 2. REPRESENTATIONS AND WARRANTIES. MergerCo and, at and as of the Effective Time, the Subsidiary Guarantor, jointly and severally, represent and warrant to and agree with the Initial Purchaser that: (a) Neither the Preliminary Memorandum as of the date thereof nor the Final Memorandum nor any amendment or supplement thereto as of the date thereof and at all times subsequent thereto up to the Closing Date contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary to make -4- the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this Section 2(a) do not apply to statements or omissions made in reliance upon and in conformity with information relating to the Initial Purchaser furnished to MergerCo, EHI, Elgar, or any of the agents or advisors of the foregoing in writing by or on behalf of the Initial Purchaser expressly for use in the Preliminary Memorandum, the Final Memorandum or any amendment or supplement thereto specified in Section 12 hereof. (b) As of the Closing Date, EHI will have the authorized, issued and outstanding capitalization set forth in the Final Memorandum; as of the date hereof and at the Effective Time, the only subsidiaries of EHI will be Elgar (the "SUBSIDIARY") and Elgar FSC Corporation; all of the outstanding shares of capital stock of EHI and the Subsidiary have been, and as of the Closing Date will be, duly authorized and validly issued, are fully paid and nonassessable and were not issued in violation of any preemptive or similar rights; except as set forth in the Final Memorandum, all of the outstanding shares of capital stock of each of EHI and the Subsidiary will be free and clear of all liens, encumbrances, equities and claims or restrictions on transferability (other than those imposed by the Act and the securities or "Blue Sky" laws of certain jurisdictions) or voting; except as set forth in the Final Memorandum, there are no (i) options, warrants or other rights to purchase, (ii) agreements or other obligations to issue or (iii) other rights to convert any obligation into, or exchange any securities for, shares of capital stock of or ownership interests in EHI or the Subsidiary outstanding. Except for the Subsidiary and Elgar FSC Corporation, EHI does not own, directly or indirectly, any material interests in the capital stock or any other equity or long-term debt securities or have any equity interest in any firm, partnership, joint venture or other entity. (c) Each of MergerCo, EHI and the Subsidiary is duly incorporated and validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, with all requisite corporate power and authority to own its properties and conduct its business as now conducted and as described in the Final Memorandum and each of MergerCo, EHI and the Subsidiary is duly qualified to do business as a foreign corporation in good standing in -5- all other jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified could not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the business, condition (financial or otherwise) or results of operations of EHI and the Subsidiary, taken as a whole (any such event, a "MATERIAL ADVERSE EFFECT"). (d) MergerCo has and, immediately after the Effective Time, EHI will have all requisite corporate power and authority to execute, deliver and perform their respective obligations under the Notes, the Exchange Notes and the Private Exchange Notes (as defined in the Registration Rights Agreement). The Notes, when issued, will be in the form contemplated by the Indenture and the Supplemental Indenture. Each of the Notes, the Exchange Notes and the Private Exchange Notes has been duly and validly authorized by MergerCo and, immediately after the Effective Time, will have been duly and validly authorized by EHI and, when executed by MergerCo and EHI, as the case may be, and authenticated by the Trustee in accordance with the provisions of the Indenture and, in the case of the Notes, when delivered to and paid for by the Initial Purchaser in accordance with the terms of this Purchase Agreement, will have been duly executed, issued and delivered and will constitute valid and legally binding obligations of MergerCo and, immediately after the Effective Time, of EHI, as the case may be, entitled to the benefits of the Indenture and enforceable against MergerCo and EHI, as the case may be, in accordance with their terms, except that the enforcement thereof may be subject to (i) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally, and (ii) general principles of equity and the discretion of the court before which any proceeding therefor may be brought. (e) Immediately after the Effective Time, the Subsidiary Guarantor will have all requisite corporate power and authority to execute, deliver and perform its obligations under the Guarantee. The Guarantee will have been duly and validly authorized by the Subsidiary Guarantor and, when executed and delivered by the Subsidiary Guarantor, will constitute the valid and legally binding obligation of the Subsidiary Guarantor, entitled to the benefits of the Indenture and enforceable against the Subsidiary -6- Guarantor in accordance with its terms, except that the enforcement thereof may be subject to (i) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally, and (ii) general principles of equity and the discretion of the court before which any proceeding therefor may be brought. (f) MergerCo has and, immediately after the Effective Time, each of EHI and the Subsidiary Guarantor will have all requisite corporate power and authority to execute, deliver and perform its respective obligations under the Indenture. The Indenture meets the requirements for qualification under the Trust Indenture Act of 1939, as amended (the "TIA"). The Indenture has been duly and validly authorized by MergerCo. Immediately after the Effective Time, the Supplemental Indenture will have been duly and validly authorized by each of EHI and the Subsidiary Guarantor. Assuming the due authorization, execution and delivery of the Indenture and the Supplemental Indenture by the Trustee, each of the Indenture and the Supplemental Indenture will have been duly executed and delivered and, as applicable, will constitute valid and legally binding agreements of MergerCo and, immediately after the Effective Time, EHI and the Subsidiary Guarantor, enforceable against MergerCo and, at and as of the Effective Time, EHI and the Subsidiary Guarantor, in accordance with its terms, except that the enforcement thereof may be subject to (i) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity and the discretion of the court before which any proceeding therefor may be brought. (g) MergerCo has and, immediately after the Effective Time, EHI and the Subsidiary Guarantor will have all requisite corporate power and authority to execute, deliver and perform their respective obligations under the Registration Rights Agreement. The Registration Rights Agreement has been duly and validly authorized by MergerCo and, immediately after the Effective Time, will have been duly and validly authorized by each of EHI and the Subsidiary Guarantor and, when executed and delivered by MergerCo and, immediately after the Effective Time, assumed by each of EHI and the Subsidiary Guarantor, will have been duly executed and delivered and will constitute a valid and legally binding agreement of MergerCo and, im- -7- mediately after the Effective Time, each of EHI and the Subsidiary Guarantor, enforceable against MergerCo and, immediately after the Effective Time, each of EHI and the Subsidiary Guarantor in accordance with its terms, except that (i) the enforcement thereof may be subject to (A) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (B) general principles of equity and the discretion of the court before which any proceeding therefor may be brought and (ii) any rights to indemnity or contribution thereunder may be limited by federal and state securities laws and public policy considerations. (h) MergerCo has and, at and as of the Effective Time, EHI and the Subsidiary Guarantor will have, all requisite corporate power and authority to execute, deliver and perform their respective obligations under this Purchase Agreement and to consummate the transactions contemplated hereby. This Purchase Agreement and the transactions contemplated hereby have been duly and validly authorized by MergerCo and, at and as of the Effective Time, will have been duly and validly authorized by each of EHI and the Subsidiary Guarantor. This Purchase Agreement has been duly and validly executed and delivered by MergerCo. (i) Immediately after the Effective Time, each of EHI and the Subsidiary Guarantor will have all requisite corporate power and authority to execute, deliver and perform its respective obligations under the Assumption Agreement and to consummate the transactions contemplated thereby. The Assumption Agreement and the transactions contemplated thereby have been duly and validly authorized by each of EHI and the Subsidiary Guarantor and, when executed and delivered by each of EHI and the Subsidiary Guarantor, will have been duly executed and delivered and will constitute a valid and legally binding agreement of each of EHI and the Subsidiary Guarantor, enforceable against each of EHI and the Subsidiary Guarantor in accordance with its terms, except that (i) the enforcement thereof may be subject to (A) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (B) general principles of equity and the discretion of the court before which any proceeding therefor may be brought and (ii) any rights to indemnity or contribution thereunder may be limited by fed- -8- eral and state securities laws and public policy considerations. (j) No consent, approval, authorization or order of any court, governmental agency or body or third party is required for the issuance and sale by MergerCo of the Notes to the Initial Purchaser or the consummation by MergerCo, EHI and the Subsidiary of the other transactions contemplated hereby, except such consents, approvals, authorizations or orders (i) as have been or, prior to the Closing Date, will have been obtained, (ii) as may be required under state securities or "Blue Sky" laws in connection with the purchase and resale of the Notes by the Initial Purchaser, (iii) as may be required by federal or state securities regulatory authorities in connection with or pursuant to the Registration Rights Agreement or (iv) that if not obtained could not reasonably be expected to have a Material Adverse Effect. None of MergerCo or, to the knowledge of MergerCo after due inquiry, EHI or the Subsidiary is (i) in violation of its certificate of incorporation or bylaws, (ii) in breach or violation of any statute, judgment, decree, order, rule or regulation applicable to any of them or any of their respective properties or assets, except for any such breach or violation that could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, or (iii) in breach of or default under (nor has any event occurred that, with notice or passage of time or both, would constitute a default under) or in violation of any of the terms or provisions of any indenture, mortgage, deed of trust, loan agreement, note, lease, license, franchise agreement, permit, certificate, contract or other agreement or instrument to which any of them is a party or to which any of them or their respective properties or assets is subject (collectively, "CONTRACTS"), except for any such breach, default, violation or event that could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. (k) The execution, delivery and performance by MergerCo and, immediately after the Effective Time, by EHI and the Subsidiary Guarantor of this Purchase Agreement, the Registration Rights Agreement and the Indenture and, in the case of EHI and the Subsidiary Guarantor, of the Assumption Agreement and the Supplemental Indenture, and the consummation by MergerCo and, immediately after the Effective Time, by EHI and the Subsidiary Guarantor of the transactions contemplated hereby and thereby (including, -9- without limitation, the issuance and sale of the Securities to the Initial Purchaser) and the fulfillment of the terms hereof and thereof will not conflict with or constitute or result in a breach of or a default under (or an event that with notice or passage of time or both would constitute a default under) or violation of any of (i) to the knowledge of MergerCo after due inquiry, the terms or provisions of any Contract, except for any such conflict, breach, violation, default or event that could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, (ii) the certificate of incorporation or bylaws of MergerCo, EHI or the Subsidiary, or (iii) (assuming (a) compliance with all applicable state securities or "Blue Sky" laws, (b) the accuracy of the representations and warranties of the Initial Purchaser in Section 8 hereof and (c) compliance with the Act with respect to the exchange of the Notes for Exchange Notes and the obligations of the parties hereto under the Registration Rights Agreement) to the knowledge of MergerCo after due inquiry, any statute, judgment, decree, order, rule or regulation applicable to MergerCo, EHI or the Subsidiary or any of their respective properties or assets, except for any such conflict, breach or violation that could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. (l) The audited consolidated financial statements of Carlyle-EEC Holdings, Inc. and of Elgar and the related notes thereto included in the Final Memorandum present fairly in all material respects the financial position, results of operations and changes in shareholders' equity and cash flows of Carlyle-EEC Holdings, Inc. and of Elgar at the dates and for the periods to which they relate and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis, except as otherwise stated therein. The summary and selected financial and statistical data in the Final Memorandum present fairly, in all material respects, the information shown therein and have been prepared and compiled on a basis consistent with the audited financial statements included therein, except as otherwise stated therein. Arthur Andersen LLP (the "INDEPENDENT ACCOUNTANT") is an independent public accounting firm within the meaning of the Act and the rules and regulations promulgated thereunder. (m) The pro forma financial statements (including the notes thereto) and the other pro forma financial in- -10- formation included in the Final Memorandum (i) comply as to form in all material respects with the applicable requirements of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), (ii) have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements, and (iii) have been properly computed on the basis described therein. The assumptions used in the preparation of the pro forma financial data and other pro forma financial information included in the Final Memorandum are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (n) There is not pending or, to the knowledge of MergerCo after due inquiry, threatened any action, suit, proceeding, inquiry or investigation to which MergerCo or, immediately after the Effective Time, EHI or the Subsidiary is a party, or to which the property or assets of MergerCo or, immediately after the Effective Time, EHI or the Subsidiary are subject, before or brought by any court, arbitrator or governmental agency or body that could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect or that seeks to restrain, enjoin, prevent the consummation of or otherwise challenge the issuance or sale of the Securities to be sold hereunder or the consummation of the other transactions described in the Final Memorandum. (o) To the knowledge of MergerCo after due inquiry, EHI and the Subsidiary own or possess and, as of the Effective Time, will own or possess all licenses or other rights to use all patents, trademarks, service marks, trade names, copyrights and know-how necessary to conduct the businesses now or proposed to be operated, as described in the Final Memorandum, except where the failure to own or possess such licenses or other rights could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect and, to the knowledge of MergerCo after due inquiry, neither EHI nor the Subsidiary has received any notice of infringement of or conflict with (or knows of any such infringement of or conflict with) asserted rights of others with respect to any patents, trademarks, service marks, trade names, copyrights or know-how that could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. -11- (p) To the knowledge of MergerCo after due inquiry, EHI and the Subsidiary possess and, as of the Effective Time, will possess all licenses, permits, certificates, consents, orders, approvals and other authorizations from, and have made all declarations and filings with, all federal, state, local and other governmental authorities, all self-regulatory organizations and all courts and other tribunals, presently required or necessary to own or lease, as the case may be, and to operate their respective properties and to carry on their respective businesses as now or proposed to be conducted as set forth in the Final Memorandum ("PERMITS"), except where the failure to obtain or possess such Permits could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; and none of MergerCo, EHI or the Subsidiary has received any notice of any proceeding relating to revocation or modification of any such Permit except where such revocation or modification could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. (q) Since the date of the most recent financial statements appearing in the Final Memorandum, except as described therein, (i) none of MergerCo, EHI or the Subsidiary has incurred any liabilities or obligations, direct or contingent, or entered into or agreed to enter into any transactions or contracts (written or oral) not in the ordinary course of business, which liabilities, obligations, transactions or contracts could reasonably be expected to be, individually or in the aggregate, material to the management, business, condition (financial or otherwise), or results of operations of EHI and the Subsidiary, taken as a whole, (ii) none of MergerCo, EHI or the Subsidiary has purchased any of its outstanding capital stock, or declared, paid or otherwise made any dividend or distribution of any kind on its capital stock and (iii) there shall not have been any change in the capital stock or long-term indebtedness of MergerCo, EHI or the Subsidiary (other than in the ordinary course of business). (r) Each of MergerCo, EHI and the Subsidiary has filed all necessary federal, state and foreign income and franchise tax returns, except where the failure to so file such returns could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, and has paid all material taxes shown as due thereon except for taxes for which there is an accrual on EHI's books and records; and other than tax deficiencies that -12- EHI or the Subsidiary is contesting in good faith and for which EHI or the Subsidiary has provided adequate reserves, there is no tax deficiency that has been asserted against EHI or the Subsidiary that could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. (s) The statistical and market-related data included in the Final Memorandum are based on or derived from sources that MergerCo believes to be reliable and accurate in all material respects. (t) None of MergerCo, EHI or the Subsidiary or any agent acting on any of their behalf has taken or will take any action that might cause this Purchase Agreement or the sale of the Securities to violate Regulation G, T, U or X of the Board of Governors of the Federal Reserve System, in each case as in effect, or as the same may hereafter be in effect, on the Closing Date. (u) Each of EHI and the Subsidiary has and, at and as of the Effective Time, will have good and marketable title to all real property and good title to all personal property described in the Final Memorandum as being owned by it and good and marketable title to a leasehold estate in the real and personal property described in the Final Memorandum as being leased by it free and clear of all liens, charges, encumbrances or restrictions, except as described in the Final Memorandum or to the extent the failure to have such title or the existence of such liens, charges, encumbrances or restrictions could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. All leases, contracts and agreements to which MergerCo is or, at and as of the Effective Time, EHI or the Subsidiary will be a party or by which any of them is or will be bound are valid and enforceable against MergerCo, EHI or the Subsidiary, as the case may be, and are valid and enforceable against the other party or parties thereto and are in full force and effect except where the failure to be valid and enforceable or be in full force and effect could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. (v) There are no legal or governmental proceedings involving or affecting EHI or the Subsidiary or any of their respective properties or assets that would be required to be described in a prospectus pursuant to the Act -13- that are not described in the Final Memorandum, nor are there any material contracts or other documents that would be required to be described in a prospectus pursuant to the Act that are not described in the Final Memorandum. (w) Except as described in the Final Memorandum or except as could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, to the knowledge of MergerCo after due inquiry (i) each of EHI and the Subsidiary immediately after the Effective Time will be in compliance with and not subject to liability under applicable Environmental Laws (as defined below), (ii) each of EHI and the Subsidiary, at and as of the Effective Time, will have made all filings and provided all notices required under any applicable Environmental Law, will have and be in compliance with all Permits required under any applicable Environmental Laws and each such Permit will be in full force and effect, (iii) there is no civil, criminal or administrative action, suit, demand, claim, hearing, notice of violation, investigation, proceeding, notice or demand letter or request for information pending or threatened against EHI or the Subsidiary under any Environmental Law, (iv) no lien, charge, encumbrance or restriction will be recorded under any Environmental Law with respect to any assets, facility or property owned, operated, leased or controlled by EHI or the Subsidiary, (v) none of MergerCo, EHI or the Subsidiary has received notice that it has been identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), or any comparable state law, (vi) no property or facility of MergerCo, EHI or the Subsidiary is (A) listed or proposed for listing on the National Priorities List under CERCLA or (B) listed in the Comprehensive Environmental Response, Compensation, Liability Information System List promulgated pursuant to CERCLA or any comparable list maintained by any state or local governmental authority. For purposes of this Purchase Agreement, "ENVIRONMENTAL LAWS" means the common law and all applicable federal, state and local laws or regulations, codes, orders, decrees, judgments or injunctions issued, promulgated, approved or entered thereunder, relating to pollution or protection of public or employee health and safety or the environment, including, without limitation, laws relating to (i) emissions, discharges, releases or threatened releases of hazardous materials, into the environment -14- (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata), (ii) the manufacture, processing, distribution, use, generation, treatment, storage, disposal, transport or handling of hazardous materials and (iii) underground and above ground storage tanks, and related piping, and emissions, discharges, releases or threatened releases therefrom. (x) There is no strike, labor dispute, slowdown or work stoppage with the employees of EHI or the Subsidiary that is pending or, to the knowledge of MergerCo or the Subsidiary Guarantor after due inquiry, threatened, except for such strikes, labor disputes, slowdowns or work stoppages that could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. (y) EHI and the Subsidiary carry insurance in such amounts and covering such risks as in their reasonable determination are adequate for the conduct of their business and the value of their properties except where the failure to carry such insurance could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. (z) None of MergerCo or, to the knowledge of MergerCo after due inquiry, EHI or the Subsidiary has any liability for any prohibited transaction or funding deficiency or any complete or partial withdrawal liability with respect to any pension, profit sharing or other plan that is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), to which any of them makes or ever has made a contribution and in which any employee of any of them is or has ever been a participant, except for such liabilities or deficiencies that could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. With respect to such plans, MergerCo, EHI and the Subsidiary is in compliance in all material respects with all applicable provisions of ERISA. (aa) To the knowledge of MergerCo after due inquiry, EHI and the Subsidiary (i) make and keep accurate books and records and (ii) maintain internal accounting controls that provide reasonable assurance that (A) transactions are executed in accordance with management's authorization, (B) transactions are recorded as necessary to permit preparation of their financial statements and to maintain -15- accountability for their assets, (C) access to their assets is permitted only in accordance with management's authorization and (D) the reported accountability for their assets is compared with existing assets at reasonable intervals. (bb) None of MergerCo, EHI or the Subsidiary will be an "investment company" or "promoter" or "principal underwriter" for an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended, and the rules and regulations thereunder. (cc) The Notes, the Exchange Notes, the Indenture, the Registration Rights Agreement, this Purchase Agreement and the Recapitalization Agreement will conform in all material respects to the descriptions thereof in the Final Memorandum. (dd) No holder of securities of MergerCo, EHI or the Subsidiary will be entitled to have such securities registered under any Registration Statements required to be filed by EHI and the Subsidiary Guarantor pursuant to the Registration Rights Agreement other than as expressly permitted thereby. (ee) Immediately after consummation of the transactions contemplated by this Purchase Agreement and the Recapitalization, the fair value and present fair saleable value of the assets of each of EHI and the Subsidiary Guarantor will exceed the sum of its stated liabilities and identified contingent liabilities; EHI and the Subsidiary Guarantor (on a consolidated basis) are not, nor will EHI and the Subsidiary Guarantor (on a consolidated basis) be, after giving effect to the execution, delivery and performance of this Purchase Agreement, and the consummation of the transactions contemplated hereby and the consummation of the Recapitalization, (i) left with unreasonably small capital with which to carry on their business as it is proposed to be conducted, (ii) unable to pay their debts (contingent or otherwise) as they mature or (iii) otherwise insolvent. (ff) None of MergerCo, EHI, the Subsidiary or any of their respective Affiliates (as defined in Rule 501(b) of Regulation D under the Act) has directly, or through any agent (other than the Initial Purchaser and persons acting on its behalf as to which no representation is made), (i) sold, offered for sale, solicited offers to buy or -16- otherwise negotiated in respect of, any "security" (as defined in the Act) that is or could be integrated with the sale of the Securities in a manner that would require the registration under the Act of the Securities or (ii) engaged in any form of general solicitation or general advertising (as those terms are used in Regulation D under the Act) in connection with the offering of the Securities or in any manner involving a public offering within the meaning of Section 4(2) of the Act. Assuming the accuracy of the representations and warranties of the Initial Purchaser in Section 8 hereof and compliance with all agreements contained therein, it is not necessary in connection with the offer, sale and delivery of the Securities to the Initial Purchaser in the manner contemplated by this Purchase Agreement to register any of the Securities under the Act or to qualify the Indenture under the TIA. (gg) No securities of EHI are of the same class (within the meaning of Rule 144A under the Act) as the Notes and listed on a national securities exchange registered under Section 6 of the Exchange Act, or quoted in a U.S. automated inter-dealer quotation system. (hh) None of MergerCo, EHI or the Subsidiary has taken, nor will any of them take, directly or indirectly, any action designed to, or that might be reasonably expected to, cause or result in stabilization or manipulation of the price of the Notes. Any certificate signed by any officer of MergerCo, EHI or the Subsidiary and delivered to the Initial Purchaser or to counsel for the Initial Purchaser pursuant to this Purchase Agreement shall be deemed a joint and several representation and warranty by MergerCo, EHI and the Subsidiary to the Initial Purchaser as to the matters covered thereby. 3. PURCHASE, SALE AND DELIVERY OF THE NOTES. On the basis of the representations, warranties, agreements and covenants herein contained and subject to the terms and conditions herein set forth, MergerCo and, at and as of the Effective Time, EHI and the Subsidiary Guarantor agree to issue and sell to the Initial Purchaser, and the Initial Purchaser agrees to purchase, the Securities at 97% of their principal amount. One or more certificates in definitive form for the Securities that the Initial Purchaser has agreed to purchase hereunder, and in such denomination or denominations and regis- -17- tered in such name or names as the Initial Purchaser requests upon notice to MergerCo at least 36 hours prior to the Closing Date, shall be delivered by or on behalf of MergerCo to the Initial Purchaser, against payment by or on behalf of the Initial Purchaser of the purchase price therefor by wire transfer of immediately available funds to such account or accounts as MergerCo shall specify prior to the Closing Date, or by such means as the parties hereto shall agree prior to the Closing Date. All certificates will be signed by EHI and Elgar. Such delivery of and payment for the Securities shall be made at the offices of Gibson Dunn & Crutcher, LLP, 200 Park Avenue, New York, New York at 9:00 A.M., New York time, on February 3, 1998, or at such other place, time or date as the Initial Purchaser, on the one hand, and MergerCo, on the other hand, may agree upon, such time and date of delivery against payment being herein referred to as the "CLOSING DATE." MergerCo will make such certificate or certificates for the Notes available for checking and packaging by the Initial Purchaser at the offices of BT Alex. Brown Incorporated in New York, New York, or at such other place as BT Alex. Brown Incorporated may designate, at least 24 hours prior to the Closing Date. 4. OFFERING BY THE INITIAL PURCHASER. The Initial Purchaser proposes to make an offering of the Securities at the price and upon the terms set forth in the Final Memorandum, as soon as practicable after this Purchase Agreement is entered into and as in the reasonable judgment of the Initial Purchaser is advisable. 5. COVENANTS OF MERGERCO AND THE SUBSIDIARY GUARANTOR. MergerCo and, at and as of the Effective Time, the Subsidiary Guarantor, covenant and agree with the Initial Purchaser that: (a) MergerCo will not and, at and after the Effective Time, EHI and the Subsidiary Guarantor will not, amend or supplement the Final Memorandum or any amendment or supplement thereto of which the Initial Purchaser shall not previously have been advised and furnished a copy for a reasonable period of time prior to the proposed amendment or supplement and as to which the Initial Purchaser shall not have given its consent which consent shall not unreasonably be withheld. MergerCo will and, at and after the Effective Time, EHI and the Subsidiary Guarantor will, promptly, upon the reasonable request of the Initial Purchaser or counsel for the Initial Purchaser, make any amendments or supplements to the Final Memorandum that may -18- be necessary or advisable in connection with the resale of the Securities by the Initial Purchaser. (b) MergerCo will and, at and after the Effective Time, EHI and the Subsidiary Guarantor will, cooperate with the Initial Purchaser in arranging for the qualification of the Securities for offering and sale under the securities or "Blue Sky" laws of such jurisdictions as the Initial Purchaser may designate and will continue such qualifications in effect for as long as may be necessary to complete the resale of the Securities; PROVIDED, HOWEVER, that in connection therewith, MergerCo and EHI shall not be required to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction or subject itself to taxation in excess of a nominal dollar amount in any such jurisdiction where it is not then so subject. (c) If, at any time prior to the completion of the distribution by the Initial Purchaser of the Notes or the Private Exchange Notes, any event occurs or information becomes known as a result of which the Final Memorandum as then amended or supplemented would include any untrue statement of a material fact, or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if for any other reason it is necessary at any time to amend or supplement the Final Memorandum to comply with applicable law, MergerCo will and, at and after the Effective Time, EHI will, promptly notify the Initial Purchaser thereof and will prepare, at their own expense, an amendment or supplement to the Final Memorandum that corrects such statement or omission or effects such compliance. (d) MergerCo will and, at and after the Effective Time, EHI will, without charge, provide to the Initial Purchaser and to counsel for the Initial Purchaser as many copies of the Preliminary Memorandum and the Final Memorandum or any amendment or supplement thereto as the Initial Purchaser may reasonably request. (e) MergerCo will and, at and after the Effective Time, EHI will apply the net proceeds from the sale of the Securities as set forth under "Use of Proceeds" in the Final Memorandum. -19- (f) For so long as the Securities remain outstanding, MergerCo will and, at and after the Effective Time, EHI will, furnish to the Initial Purchaser copies of all reports and other communications (financial or otherwise) furnished by MergerCo and, at and after the Effective Time, by EHI, to the Trustee or the holders of the Securities and, as soon as available, copies of any reports or financial statements furnished to or filed by MergerCo or EHI with the Commission or any national securities exchange on which any class of securities of MergerCo or EHI may be listed. (g) None of MergerCo, EHI or the Subsidiary Guarantor nor any of their respective affiliates will sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any "security" (as defined in the Act) that could be integrated with the sale of the Securities in a manner that would require the registration under the Act of the Securities. (h) MergerCo will not and, at and after the Effective Time, EHI and the Subsidiary Guarantor will not engage in any form of general solicitation or general advertising (as those terms are used in Regulation D under the Act) in connection with the offering of the Securities or in any manner involving a public offering within the meaning of Section 4(2) of the Act. (i) For so long as any of the Securities remain outstanding and are "restricted securities" within the meaning of Rule 144(a)(3) under the Act, EHI will make available at its expense, upon written request, to any holder of such Securities and any prospective purchasers thereof the information specified in Rule 144A(d)(4) under the Act, unless EHI is then subject to Section 13 or 15(d) of the Exchange Act. (j) Each of MergerCo and, at and after the Effective Time, EHI and the Subsidiary Guarantor, will use its reasonable best efforts to (i) permit the Securities to be designated PORTAL securities in accordance with the rules and regulations adopted by the NASD relating to trading in the Private Offerings, Resales and Trading through Automated Linkages market (the "PORTAL MARKET") and (ii) permit the Notes to be eligible for clearance and settlement through The Depository Trust Company. -20- 6. EXPENSES. MergerCo agrees to pay and MergerCo will cause EHI to pay all costs and expenses incident to the performance of their obligations under this Purchase Agreement, whether or not the transactions contemplated herein are consummated or this Purchase Agreement is terminated pursuant to Section 11 hereof, including all costs and expenses incident to (i) the printing, word processing or other production of documents with respect to the transactions contemplated hereby, including any costs of printing the Preliminary Memorandum and the Final Memorandum and any amendment or supplement thereto and any "Blue Sky" memoranda, (ii) all arrangements relating to the delivery to the Initial Purchaser of copies of the foregoing documents, (iii) the fees and disbursements of counsel, accountants and any other experts or advisors retained by MergerCo, (iv) preparation (including printing), issuance and delivery to the Initial Purchaser of the Securities, (v) the qualification of the Notes under state securities and "Blue Sky" laws, including filing fees and reasonable fees and disbursements of counsel for the Initial Purchaser relating thereto, (vi) expenses in connection with any meetings with prospective investors in the Notes, (vii) reasonable fees and expenses of the Trustee including fees and expenses of counsel, (viii) all expenses and listing fees incurred in connection with the application for quotation of the Notes on the Portal Market and (ix) any fees charged by investment rating agencies for the rating of the Notes. In addition, if the sale of the Notes provided for herein is not consummated because (i) any condition to the obligations of the Initial Purchaser set forth in Section 7 hereof is not satisfied, (ii) this Purchase Agreement is terminated by the Initial Purchaser or (iii) of any failure, refusal or inability on the part of MergerCo, EHI or the Subsidiary Guarantor to perform all obligations and satisfy all conditions on their part to be performed or satisfied hereunder in all material respects (in each case, other than by reason of a default by the Initial Purchaser of its obligations hereunder, MergerCo agrees to promptly reimburse the Initial Purchaser upon demand for all reasonable out-of-pocket expenses (including reasonable fees, disbursements and charges of Cahill Gordon & Reindel, counsel for the Initial Purchaser) that shall have been incurred by the Initial Purchaser in connection with the proposed purchase and sale of the Securities. Except as specifically set forth herein, the Initial Purchaser shall pay its own costs and expenses including the costs and expenses of its counsel. 7. CONDITIONS OF THE INITIAL PURCHASER'S OBLIGATIONS. The obligation of the Initial Purchaser to purchase and pay for the Notes shall, in its sole discretion, be subject to -21- the satisfaction or waiver of the following conditions on or prior to the Closing Date: (a) On the Closing Date, the Initial Purchaser shall have received the opinion, dated as of the Closing Date and addressed to the Initial Purchaser, from Gibson Dunn & Crutcher LLP, counsel for MergerCo, or, as to such of the following matters as EHI may request, Latham & Watkins, counsel for EHI and the Subsidiary Guarantor, in form and substance satisfactory to counsel for the Initial Purchaser, to the effect that: (i) MergerCo is duly incorporated and each of MergerCo, EHI and the Subsidiary is a validly existing corporation in good standing under the laws of its jurisdiction of incorporation, with all requisite corporate power and authority to own its properties and conduct its business as now conducted and as described in the Final Memorandum; each of MergerCo, EHI and the Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in all other jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. (ii) All of the outstanding shares of the Subsidiary are owned by EHI. (iii) MergerCo and EHI have all requisite corporate power and authority to execute, deliver and perform their respective obligations under the Notes, the Exchange Notes and the Private Exchange Notes. The Notes are in the form contemplated by the Indenture and the Supplemental Indenture. Each of the Notes, the Exchange Notes and the Private Exchange Notes has been duly and validly authorized and, in the case of the Notes, executed and delivered by EHI (assuming authentication by the Trustee in accordance with the provisions of the Indenture and, in the case of the Notes, delivery to and payment for by the Initial Purchaser in accordance with the terms of this Purchase Agreement) and constitute or, in the case of such Exchange Notes or Private Exchange Notes, will constitute valid and legally binding obligations of MergerCo and EHI, entitled to the benefits of the In- -22- denture and enforceable against MergerCo and EHI in accordance with their terms, except that the enforcement thereof may be subject to (A) bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers, preferential transfers or distributions by corporations to shareholders, or (B) general principles of equity, whether considered at law or at equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing. (iv) The Subsidiary Guarantor has all requisite corporate power and authority to execute, deliver and perform its obligations under the Guarantee. The Guarantee has been duly and validly authorized, executed and delivered by the Subsidiary Guarantor and constitutes the valid and legally binding obligation of the Subsidiary Guarantor, entitled to the benefits of the Indenture and enforceable against the Subsidiary Guarantor in accordance with its terms, except that the enforcement thereof may be subject to (A) bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers, preferential transfers or distributions by corporations to shareholders, or (B) general principles of equity, whether considered at law or at equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing. (v) MergerCo and EHI and the Subsidiary Guarantor have all requisite corporate power and authority to execute, deliver and perform their respective obligations under the Indenture. The Indenture conforms in all material respects with the provisions of the TIA applicable to an indenture which is qualified thereunder. The Indenture has been duly and validly authorized, executed and delivered by MergerCo. The Supplemental Indenture has been duly and validly authorized, executed and delivered by each of EHI and the Subsidiary Guarantor. The Indenture as supplemented by the Supplemental Indenture (assuming, in each case, the due authorization, execution and delivery thereof by the Trustee), constitutes a valid -23- and legally binding agreement, in the case of the Indenture, of MergerCo and, in the case of the Indenture and the Supplemental Indenture, of EHI and the Subsidiary Guarantor, enforceable against MergerCo, EHI and the Subsidiary Guarantor, respectively, in accordance with their respective terms, except that the enforcement thereof may be subject to (A) bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers, preferential transfers or distributions by corporations to shareholders, or (B) general principles of equity, whether considered at law or at equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing. (vi) MergerCo and EHI and the Subsidiary Guarantor have all requisite corporate power and authority to execute, deliver and perform their respective obligations under the Registration Rights Agreement. The Registration Rights Agreement has been duly and validly authorized by MergerCo and EHI and the Subsidiary Guarantor. The Registration Rights Agreement has been duly and validly executed and delivered by MergerCo and assumed by each of EHI and the Subsidiary Guarantor, and constitutes a valid and legally binding agreement of MergerCo, EHI and the Subsidiary Guarantor, enforceable against MergerCo and EHI and the Subsidiary Guarantor, respectively, in accordance with its terms, except that (A) the enforcement thereof may be subject to (1) bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers, preferential transfers or distributions by corporations to shareholders, or (2) general principles of equity, whether considered at law or at equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the discretion of the court before which any proceeding therefor may be brought and (B) any rights to indemnity or contribution thereunder may be limited by federal and state securities laws and public policy considerations. -24- (vii) MergerCo and EHI and the Subsidiary Guarantor have all requisite corporate power and authority to execute, deliver and perform their obligations under this Purchase Agreement and to consummate the transactions contemplated hereby. This Purchase Agreement and the transactions contemplated hereby have been duly and validly authorized by MergerCo and EHI and the Subsidiary Guarantor. This Purchase Agreement has been duly and validly executed and delivered by MergerCo. (viii) EHI and the Subsidiary Guarantor have all requisite corporate power and authority to execute, deliver and perform their obligations under the Assumption Agreement and to consummate the transactions contemplated thereby. The Assumption Agreement and the transactions contemplated thereby have been duly and validly authorized, executed and delivered by each of EHI and the Subsidiary Guarantor and constitutes a valid and legally binding agreement of EHI and the Subsidiary Guarantor, enforceable against EHI and the Subsidiary Guarantor in accordance with its terms, except that (A) the enforcement thereof may be subject to (1) bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers, preferential transfers or distributions by corporations to shareholders, or (2) general principles of equity, whether considered at law or at equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing. (ix) The statements set forth under the heading "Employment Agreements" under the caption "Management," under the headings "Management Agreement" and "Shareholders Agreement" under the caption "Certain Relationships and Related Transactions," and under the captions "Description of Notes," "Description of New Credit Facility," "Description of Redeemable Preferred Stock and Warrants," and "Exchange Offer; Registration Rights" in the Final Memorandum, insofar as such statements purport to summarize certain provisions of the Employment Agreements, Management Agreement, Shareholders Agreement, Indenture, Securities, Exchange Notes, Private Exchange Notes, Registration Rights Agreement, Series A -25- 10% Cumulative Redeemable Preferred Stock and Warrants, and Credit Agreement, constitute a fair summary of such provisions. (x) To the knowledge of such counsel, no legal or governmental proceedings are pending or threatened to which MergerCo, EHI or the Subsidiary is a party or to which the property or assets of MergerCo, EHI or the Subsidiary are subject that could reasonably be expected to result, individually or in the aggregate, in a Material Adverse Effect, or that seek to restrain, enjoin, prevent the consummation of or otherwise challenge the issuance or sale of the Securities to be sold hereunder or the consummation of the other transactions described in the Final Memorandum. (xi) To the knowledge of such counsel, no consent, approval, authorization or order of any court or governmental body is required for the issuance and sale by MergerCo and, at and as of the Effective Time, by EHI, as guaranteed by the Subsidiary Guarantor, of the Notes to the Initial Purchaser or the consummation by MergerCo, EHI and the Subsidiary of the other transactions contemplated hereby, except such (i) as have been obtained, (ii) as may be required under state securities or "Blue Sky" laws in connection with the sale to or purchase and resale of the Notes by the Initial Purchaser, (iii) as may be required by federal or state securities regulatory authorities in connection with or pursuant to the Registration Rights Agreement, or (iv) that if not obtained could not reasonably be expected to have a Material Adverse Effect. (xii) The execution, delivery and performance by each of MergerCo, EHI and the Subsidiary Guarantor as is a party thereto of this Purchase Agreement, the Registration Rights Agreement, the Assumption Agreement, the Indenture and the Supplemental Indenture will not constitute or result in a breach of or a default under (or an event that with notice or passage of time or both would constitute a default under) or violation of any of (i) the terms or provisions of any Contracts that have been identified to such counsel by EHI as being the only such Contracts that are material to MergerCo, EHI and/or Elgar, as the case may be, except for any such breach, violation, default or event that could not reasonably be expected -26- to have, individually or in the aggregate, a Material Adverse Effect, (ii) the certificate of incorporation or bylaws of MergerCo, EHI or the Subsidiary, or (iii) (assuming compliance with all applicable state securities or "Blue Sky" laws and assuming the accuracy of the representations and warranties of the Initial Purchaser in Section 8 hereof and compliance with the Act with respect to the exchange of the Notes for Exchange Notes and Private Exchange Notes and the obligations of the parties hereto under the Registration Rights Agreement) any statute, rule or regulation that in the experience of such counsel is generally applicable to transactions of the type contemplated by the Final Memorandum or, to the knowledge of such counsel, any judgment, order or decree applicable to MergerCo, EHI or the Subsidiary or any of their respective properties or assets, except for any such conflict, breach or violation that could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, and except as rights to indemnity and contribution may be limited by federal or state securities laws or public policy. (xiii) The execution, delivery and performance by MergerCo, EHI or the Subsidiary of this Purchase Agreement or the sale of the Securities does not violate Regulation G, T, U or X of the Board of Governors of the Federal Reserve System, in each case as in effect, or as the same may hereafter be in effect, on the Closing Date. (xiv) None of MergerCo, EHI or the Subsidiary will be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended, and the rules and regulations thereunder. (xv) Assuming the accuracy of the representations and warranties and compliance with the agreements of MergerCo, EHI, the Subsidiary Guarantor and the Initial Purchaser contained in this Purchase Agreement, no registration of the Securities under the Securities Act or qualification of the Indenture under the Trust Indenture Act is required in connection with the issuance and sale of the Securities by MergerCo, EHI, and the Subsidiary Guarantor to the Initial Purchaser and the offer, resale and delivery -27- of the Securities by the Initial Purchaser in the manner contemplated by this Purchase Agreement. (xvi) The Recapitalization Agreement has been duly authorized, executed and delivered by MergerCo and Carlyle-EEC Holdings, Inc. (xvii) The Credit Agreement has been duly authorized, executed and delivered by EHI and Elgar. In rendering such opinion, such counsel may (A) rely as to matters of fact, to the extent they deem proper, on certificates of officers of MergerCo, EHI and the Subsidiary and public officials, (B) state that they express no opinion with respect to the laws of any jurisdiction other than the laws of the State of California, the State of New York, the General Corporation Law of the State of Delaware and the federal laws of the United States and (C) subject such opinion to such exceptions, qualifications and limitations as are reasonably acceptable to the Initial Purchaser. At the time the foregoing opinion is delivered, Gibson Dunn & Crutcher LLP shall additionally state that it has participated in conferences with officers and other representatives of MergerCo, EHI and the Subsidiary, representatives of the Independent Accountant for Carlyle-EEC Holdings, Inc. and Elgar, representatives of the Initial Purchaser and counsel for the Initial Purchaser, at which conferences the contents of the Final Memorandum and related matters were discussed, and, although it has not independently verified and is not passing upon and assumes no responsibility for the accuracy, completeness or fairness of the statements contained in the Final Memorandum (except to the extent specified in subsection 7(a)(ix)), no facts have come to its attention that lead it to believe that the Final Memorandum, on the date thereof or at the Closing Date, 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 contained therein, in the light of the circumstances under which they were made, not misleading (it being understood that such firm need express no opinion with respect to the financial statements and related notes thereto and the other financial, statistical and accounting data included in the Final Memorandum). The opinion of Gibson Dunn & Crutcher, LLP described in this Section shall be rendered -28- to the Initial Purchaser at the request of MergerCo and shall so state therein. References to the Final Memorandum in this subsection (a) shall include any amendment or supplement thereto prepared in accordance with the provisions of this Purchase Agreement at the Closing Date. (b) On the Closing Date, the Initial Purchaser shall have received the opinion, in form and substance satisfactory to the Initial Purchaser, dated as of the Closing Date and addressed to the Initial Purchaser, of Cahill Gordon & Reindel, counsel for the Initial Purchaser, with respect to certain legal matters relating to this Purchase Agreement and such other related matters as the Initial Purchaser may reasonably require. In rendering such opinion, Cahill Gordon & Reindel shall have received and may rely upon such certificates and other documents and information as it may reasonably request to pass upon such matters. (c) The Initial Purchaser shall have received from the Independent Accountant a "comfort letter" dated the date hereof and the Closing Date, in form and substance reasonably satisfactory to counsel for the Initial Purchaser. The Initial Purchaser shall also have received from Price Waterhouse LLP a letter relating to its procedures with respect to Elgar for the fiscal years ended September 30, 1995, October 1, 1994 and October 2, 1993, which letter shall be in form and substance reasonably satisfactory to the Initial Purchaser. (d) The representations and warranties of MergerCo contained in this Purchase Agreement shall be true and correct on and as of the date hereof and the representations and warranties of MergerCo and the Subsidiary Guarantor contained in this Purchase Agreement shall be true and correct on and as of the Closing Date as if made on and as of the Closing Date; the statements of the officers of MergerCo, EHI and the Subsidiary Guarantor made pursuant to any certificate delivered in accordance with the provisions hereof shall be true and correct on and as of the date made and on and as of the Closing Date; MergerCo and EHI and the Subsidiary Guarantor in all material respects shall have performed all covenants and agreements and satisfied all conditions on their part to be performed or satisfied hereunder at or prior to the Closing Date; and, except as described in the Final Memorandum -29- (exclusive of any amendment or supplement thereto after the date hereof), subsequent to the date of the most recent financial statements in such Final Memorandum, there shall have been no event or development that, individually or in the aggregate, has or could reasonably be expected to have a Material Adverse Effect. (e) The sale of the Securities hereunder shall not be enjoined (temporarily or permanently) on the Closing Date. (f) The Initial Purchaser shall have received a certificate of MergerCo, dated the Closing Date, signed on behalf of MergerCo by its President and Secretary, to the effect that: (i) The representations and warranties of MergerCo contained in this Purchase Agreement are true and correct in all material respects as of the date hereof and as of the Closing Date, and MergerCo in all material respects has performed all covenants and agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date; (ii) At the Closing Date, since the date hereof or since the date of the most recent financial statements in the Final Memorandum (exclusive of any amendment or supplement thereto after the date hereof), no event or events have occurred, no information has become known nor does any condition exist that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect; and (iii) The sale of the Notes hereunder has not been enjoined (temporarily or permanently). (g) The Initial Purchaser shall have received a certificate of each of EHI and the Subsidiary Guarantor, dated the Closing Date, signed on behalf of EHI by its President and Secretary and of the Subsidiary Guarantor by its Chairman of the Board, President and Chief Executive Officer or any Vice President and the Chief Financial Officer, to the effect that: (i) The representations and warranties of EHI or the Subsidiary Guarantor contained in this Pur- -30- chase Agreement are true and correct in all material respects as of the Closing Date, and EHI by the Subsidiary Guarantor in all material respects has performed all covenants and agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date; (ii) At the Closing Date, since the date hereof or since the date of the most recent financial statements in the Final Memorandum (exclusive of any amendment or supplement thereto after the date hereof), no event or events have occurred, no information has become known nor does any condition exist that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect; and (iii) The sale of the Notes hereunder has not been enjoined (temporarily or permanently). (h) On the Closing Date, the Initial Purchaser shall have received the Registration Rights Agreement executed by MergerCo and such agreement shall be in full force and effect at all times from and after the Closing Date. (i) The Indenture shall have been duly executed and delivered by MergerCo and the Trustee. The Supplemental Indenture shall have been duly executed and delivered by EHI and the Subsidiary Guarantor and the Securities shall have been duly executed and delivered by EHI and the Subsidiary Guarantor and duly authenticated by the Trustee. (j) The Assumption Agreement shall have been duly authorized, executed and delivered by EHI and the Subsidiary Guarantor and such agreement shall be in full force and effect at all times from and after the Closing Date. (k) The Initial Purchaser shall have received a true and correct copy of the Recapitalization Agreement and any amendments thereto, and there shall have been no material amendments, alterations, modifications or waivers of any provisions of the Recapitalization Agreement since the date of this Purchase Agreement; all conditions to effect the Merger shall have been satisfied without waiver; the Certificate of Merger with respect to the Merger shall have been filed with the Office of the Secretary of the State of Delaware and the Merger shall have become effective. -31- (l) The Initial Purchaser shall have received a true and correct copy of an opinion from Houlihan, Lokey, Howard & Zukin Financial Advisors, Inc., regarding the solvency, at and as of the Effective Time, of Elgar immediately after the consummation of the Recapitalization. (m) The Initial Purchaser shall have received a true and correct copy of the Credit Agreement, dated the Closing Date, and there exists as of the Closing Date (after giving effect to the transactions contemplated by the Recapitalization and the financing thereof) no condition that would constitute a Default or an Event of Default (each as defined in the Credit Agreement) under the Credit Agreement. (n) All conditions to effect the consummation of the Recapitalization shall have been satisfied without waiver, including without limitation, the Lehman Investment and the issuance of the Series A 10% Cumulative Redeemable Preferred Stock and Warrants, concurrently with the sale of the Securities. All such documents, opinions, certificates, letters, schedules or instruments delivered pursuant to this Purchase Agreement will comply with the provisions hereof only if they are reasonably satisfactory in all material respects to the Initial Purchaser and counsel for the Initial Purchaser. MergerCo and EHI shall furnish to the Initial Purchaser such conformed copies of such documents, opinions, certificates, letters, schedules and instruments in such quantities as the Initial Purchaser shall reasonably request. 8. OFFERING OF NOTES; RESTRICTIONS ON TRANSFER. (a) The Initial Purchaser represents and warrants to MergerCo, EHI, and Elgar that it is a QIB. The Initial Purchaser represents, warrants and agrees that (i) it or any person acting for its benefit has not and will not solicit offers for, or offer or sell, the Securities by any form of general solicitation or general advertising (as those terms are used in Regulation D under the Act) or in any manner involving a public offering within the meaning of Section 4(2) of the Act; and (ii) its acquisition of the Notes does not constitute a "prohibited transaction" (as defined in ERISA); and (iii) it or any person acting for its benefit has solicited and will solicit offers for the Securities only from, and will offer the Securities only to (A) in the case of offers inside the United -32- States, persons whom the Initial Purchaser reasonably believes to be QIBs or, if any such person is buying for one or more institutional accounts for which such person is acting as fiduciary or agent, only when such person has represented to the Initial Purchaser that each such account is a QIB to whom notice has been given that such sale or delivery is being made in reliance on Rule 144A, and, in each case, in transactions under Rule 144A; and (B) in the case of offers outside the United States, to persons other than U.S. persons ("FOREIGN PURCHASER," which term shall include dealers or other professional fiduciaries in the United States acting on a discretionary basis for foreign beneficial owners (other than an estate or trust)) in reliance on Regulation S; PROVIDED, HOWEVER, that, in the case of clause (A) or (B), in purchasing such Securities such persons are deemed to have represented and agreed as provided under the caption "Transfer Restrictions" contained in the Final Memorandum. (b) The Initial Purchaser represents and warrants with respect to offers and sales outside the United States that (i) it has and will comply with all applicable laws and regulations in each jurisdiction in which it acquires, offers, sells or delivers Notes or has in its possession or distributes any Memorandum or any such other material, in all cases at its own expense; (ii) the Notes have not been and will not be offered or sold within the United States or to, or for the account or benefit of U.S. persons except in accordance with Regulation S or pursuant to an exemption from the registration requirements of the Act; (iii) it has offered the Notes and will offer and sell the Notes (A) as part of its distribution at any time and (B) otherwise until 40 days after the later of the commencement of the offering and the Closing Date, only in accordance with Rule 903 of Regulation S and, accordingly, neither it nor any persons acting on its behalf have engaged or will engage in any directed selling efforts (within the meaning of Regulation S) with respect to the Notes, and any such persons have complied and will comply with the offering restrictions requirement of Regulation S; and (iv) it agrees that, at or prior to confirmation of sales of the Notes, it will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases Notes from it during the restricted period a confirmation or notice to substantially the following effect: -33- "The Securities covered hereby have not been registered under the United States Securities Act of 1933 (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 the distribution of the Securities at any time or (ii) otherwise until 40 days after the later of the commencement of the offering and the closing date of the offering, except in either case in accordance with Regulation S (or Rule 144A if available) under the Securities Act. Terms used above have the meaning given to them in Regulations S." (c) The Initial Purchaser agrees that prior to or simultaneously with the confirmation of sale by it to any purchaser of any of the Notes purchased by such Initial Purchaser from MergerCo pursuant hereto, it shall furnish to that purchaser a copy of the Final Memorandum. (d) In addition to the foregoing, the Initial Purchaser acknowledges and agrees that MergerCo, EHI and Elgar and for purposes of delivering their opinions pursuant to Sections 7(a) and (b), counsel for MergerCo and for the Initial Purchaser, respectively, may rely upon the accuracy and truth of the representations, warranties and agreements of the Initial Purchaser and its compliance with its agreements contained in this Section 8, and the Initial Purchaser hereby consents to such reliance. 9. INDEMNIFICATION AND CONTRIBUTION. (a) MergerCo and the Subsidiary Guarantor, jointly and severally, agree to indemnify and hold harmless the Initial Purchaser, and each person, if any, who controls the Initial Purchaser within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any losses, claims, damages or liabilities to which the Initial Purchaser or such controlling person may become subject under the Act, the Exchange Act or otherwise, insofar as any such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of any material fact contained in (A) any Memorandum or any amendment or supplement thereto or (B) any application or other document, or any amendment or supplement thereto, executed by MergerCo, EHI or the Subsidiary Guarantor or based upon written information furnished by or on behalf of MergerCo, EHI or the Subsidiary Guarantor filed in any jurisdiction in order to qualify the Securities under the securities or "Blue Sky" laws thereof or filed with any -34- securities association or securities exchange (each, an "APPLICATION"); or (ii) the omission or alleged omission to state, in any Memorandum or any amendment or supplement thereto, or any Application, a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse, as incurred, the Initial Purchaser and each such controlling person for any reasonable legal or other reasonable expenses incurred by the Initial Purchaser or such controlling person in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that MergerCo and the Subsidiary Guarantor will not be liable (i) in any such case to the extent that any such loss, claim, damage, or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in any Memorandum or any amendment or supplement thereto, or any Application, in reliance upon and in conformity with written information concerning the Initial Purchaser furnished to MergerCo, EHI, Elgar or their agents by or on behalf of the Initial Purchaser specifically for use therein or (ii) with respect to the Preliminary Memorandum, to the extent that any such loss, claim, damage or liability arises solely from the fact that the Initial Purchaser sold Securities to a person to whom there was not sent or given a copy of the Final Memorandum (as amended or supplemented) at or prior to the written confirmation of such sale if MergerCo and, at and after the Effective Time, EHI shall have previously furnished copies thereof to the Initial Purchaser in accordance with Section 5(d) hereof and the Final Memorandum (as amended or supplemented) would have corrected any such untrue statement or omission. This indemnity agreement will be in addition to any liability that MergerCo and the Subsidiary Guarantor may otherwise have to the indemnified parties. MergerCo and the Subsidiary Guarantor shall not be liable under this Section 9 for any settlement of any claim or action effected without its prior written consent, which shall not be unreasonably withheld. (b) The Initial Purchaser agrees to indemnify and hold harmless MergerCo and the Subsidiary Guarantor, their respective directors, officers and each person, if any, who controls MergerCo or the Subsidiary Guarantor within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any losses, claims, damages or liabilities to which -35- MergerCo or the Subsidiary Guarantor, or any such director, officer or controlling person may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any Memorandum or any amendment or supplement thereto, or (ii) the omission or the alleged omission to state therein a material fact required to be stated in any Memorandum or any amendment or supplement thereto, or any Application, or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information concerning the Initial Purchaser, furnished to MergerCo, EHI, Elgar or their agents by or on behalf of the Initial Purchaser specifically for use therein; and subject to the limitation set forth immediately preceding this clause, will reimburse, as incurred, any reasonable legal or other expenses incurred by MergerCo or the Subsidiary Guarantor, or any such director, officer or controlling person in connection with investigating or defending against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action in respect thereof. This indemnity agreement will be in addition to any liability that the Initial Purchaser may otherwise have to the indemnified parties. The Initial Purchaser shall not be liable under this Section 9 for any settlement of any claim or action effected without its consent, which shall not be unreasonably withheld. MergerCo, EHI and the Subsidiary Guarantor shall not, without the prior written consent of the Initial Purchaser which shall not be unreasonably withheld, effect any settlement or compromise of any pending or threatened proceeding in respect of which the Initial Purchaser is or could have been a party, or indemnity could have been sought hereunder by the Initial Purchaser, unless such settlement (A) includes an unconditional written release of the Initial Purchaser, in form and substance reasonably satisfactory to the Initial Purchaser, from all liability on claims that are the subject matter of such proceeding and (B) does not include any statement as to an admission of fault, culpability or failure to act by or on behalf of the Initial Purchaser. (c) Promptly after receipt by an indemnified party under this Section 9 of notice of the commencement of any action for which such indemnified party is entitled to indemnification under this Section 9, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 9, notify the indemnifying party of -36- the commencement thereof in writing; but the omission to so notify the indemnifying party (i) will not relieve the indemnifying party from any liability under paragraph (a) or (b) above unless and to the extent such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraphs (a) and (b) above. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; PROVIDED, HOWEVER, that if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have been advised by counsel that there may be one or more legal defenses available to it and/or other indemnified parties that are different from or additional to those available to the indemnifying party, or (iii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after receipt by the indemnifying party of notice of the institution of such action, then, in each such case, the indemnifying party shall not have the right to direct the defense of such action on behalf of such indemnified party or parties and such indemnified party or parties shall have the right to select separate counsel to defend such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section 9 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the immediately preceding sentence (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel (in addition to local counsel) in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, designated by the Initial Purchaser in the -37- case of paragraph (a) of this Section 9 or MergerCo in the case of paragraph (b) of this Section 9, representing the indemnified parties under such paragraph (a) or paragraph (b), as the case may be, who are parties to such action or actions) or (ii) the indemnifying party has authorized in writing the employment of counsel for the indemnified party at the expense of the indemnifying party. After such notice from the indemnifying party to such indemnified party, the indemnifying party will not be liable for the costs and expenses of any settlement of such action effected by such indemnified party without the prior written consent of the indemnifying party (which consent shall not be unreasonably withheld), unless such indemnified party waived in writing its rights under this Section 9, in which case the indemnified party may effect such a settlement without such consent. (d) In circumstances in which the indemnity agreement provided for in the preceding paragraphs of this Section 9 is unavailable to, or insufficient to hold harmless, an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof), each indemnifying party, in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect (i) the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party on the other from the offering of the Securities or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, not only such relative benefits but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof). The relative benefits received by MergerCo, EHI and the Subsidiary Guarantor on the one hand and the Initial Purchaser on the other shall be deemed to be in the same proportion as the total proceeds from the offering (before deducting expenses) received by MergerCo bear to the total discounts and commissions received by the Initial Purchaser. The relative fault of the parties 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 MergerCo, EHI and the Subsidiary Guarantor on the one hand, or the Initial Purchaser on the other, the parties' relative intent, knowledge, access to information and opportunity to correct or pre- -38- vent such statement or omission or alleged statement or omission, and any other equitable considerations appropriate in the circumstances. MergerCo, EHI, the Subsidiary Guarantor and the Initial Purchaser agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the first sentence of this paragraph (d). Notwithstanding any other provision of this paragraph (d), the Initial Purchaser shall not be obligated to make contributions hereunder that in the aggregate exceed the total discounts, commissions and other compensation received by the Initial Purchaser under this Purchase Agreement, less the aggregate amount of any damages that such Initial Purchaser has otherwise been required to pay by reason of the untrue or alleged untrue statements or the omissions or alleged omissions to state a material fact, and 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. For purposes of this paragraph (d), each person, if any, who controls the Initial Purchaser within the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Initial Purchaser, and each director and officer of MergerCo, EHI and the Subsidiary Guarantor, and each person, if any, who controls MergerCo, EHI or the Subsidiary Guarantor within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall have the same rights to contribution as MergerCo. 10. SURVIVAL CLAUSE. The respective representations, warranties, agreements, covenants, indemnities and other statements of MergerCo, EHI and the Subsidiary Guarantor, their respective officers and the Initial Purchaser set forth in this Purchase Agreement or made by or on behalf of them pursuant to this Purchase Agreement shall survive the delivery of and payment for the Securities and shall remain in full force and effect, regardless of any investigation made by or on behalf of MergerCo, EHI or the Subsidiary Guarantor, any of its officers or directors, the Initial Purchaser or any controlling person referred to in Section 9 hereof. The respective agreements, covenants, indemnities and other statements set forth in Sections 6, 9 and 15 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Purchase Agreement. 11. TERMINATION. (a) This Purchase Agreement may be terminated in the sole discretion of the Initial Purchaser -39- by written notice to MergerCo given prior to the Closing Date in the event that any of MergerCo, EHI or the Subsidiary Guarantor shall have failed, refused or been unable to perform in all material respects all obligations and satisfy all conditions on its part to be performed or satisfied hereunder at or prior thereto or, if at or prior to the Closing Date: (i) Any of MergerCo, EHI or the Subsidiary Guarantor shall have sustained any loss or interference with respect to its businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any strike, labor dispute, slow down or work stoppage or any legal or governmental proceeding, which loss or interference, in the sole judgment of the Initial Purchaser, has had or has a Material Adverse Effect, or there shall have been, in the sole judgment of the Initial Purchaser, any event or development that, individually or in the aggregate, has or could be reasonably likely to have a Material Adverse Effect (including without limitation a change in control of MergerCo, EHI or the Subsidiary Guarantor), except in each case as described in the Final Memorandum (exclusive of any amendment or supplement thereto); (ii) trading in securities generally on the New York Stock Exchange, American Stock Exchange or the Nasdaq National Market shall have been suspended or minimum or maximum prices shall have been established on any such exchange or market; (iii) a banking moratorium shall have been declared by New York or United States authorities; (iv) there shall have been (A) a significant outbreak or escalation of hostilities between the United States and any foreign power, or (B) a significant outbreak or escalation of any other insurrection or armed conflict involving the United States or any other significant national or international calamity or emergency or (C) any material change in the financial markets of the United States which, in the case of (A), (B) or (C) above and in the sole judgment of the Initial Purchaser, makes it impracticable or inadvisable to proceed with the offering or the delivery of the Securities as contemplated by the Final Memorandum; or (v) any securities of MergerCo, EHI or the Subsidiary Guarantor shall have been downgraded or placed on any -40- "watch list" for possible downgrading by any nationally recognized statistical rating organization. (b) Termination of this Purchase Agreement pursuant to this Section 11 shall be without liability of any party to any other party except as provided in Section 10 hereof. 12. INFORMATION SUPPLIED BY THE INITIAL PURCHASER. The statements set forth in the last paragraph on the front cover page, the legend on the inside front cover of the Final Memorandum, the third sentence of the fifth paragraph and the sixth and seventh paragraphs under the heading "Private Placement" in the Final Memorandum (to the extent such statements relate to the Initial Purchaser) constitute the only information furnished by the Initial Purchaser or on its behalf to MergerCo, EHI, Elgar or their agents for the purposes of Sections 2(a) and 9 hereof. 13. NOTICES. All communications hereunder shall be in writing and, if sent to the Initial Purchaser, shall be mailed or delivered to BT Alex. Brown Incorporated, 130 Liberty Street, New York, New York 10006, Attention: Corporate Finance Department; if sent to MergerCo, EHI or the Subsidiary Guarantor, shall be mailed or delivered to Elgar Holdings, Inc., 9250 Brown Deer Road, San Diego, California 92121, Attention: Chris W. Kelford, with copies to J.F. Lehman & Company, 450 Park Avenue, New York, NY 10022, Attn: Keith Oster and Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071-3197, Attn: Kenneth M. Doran. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; and one business day after being timely delivered to a next-day courier. 14. SUCCESSORS. This Purchase Agreement shall inure to the benefit of and be binding upon the Initial Purchaser and MergerCo, EHI and the Subsidiary Guarantor and their successors and legal representatives, and nothing expressed or mentioned in this Purchase Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Purchase Agreement, or any provisions herein contained; this Purchase Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person except that (i) the indemnities of MergerCo, EHI and the Subsidiary Guarantor contained in Sec- -41- tion 9 of this Purchase Agreement shall also be for the benefit of any person or persons who control the Initial Purchaser within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the indemnities of the Initial Purchaser contained in Section 9 of this Purchase Agreement shall also be for the benefit of the directors and officers of MergerCo, EHI and the Subsidiary Guarantor, and any person or persons who control MergerCo, EHI or the Subsidiary Guarantor within the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of Securities from the Initial Purchaser will be deemed a successor because of such purchase. 15. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS PURCHASE AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY THEREIN, WITHOUT GIVING EFFECT TO ANY PROVISIONS THEREOF RELATING TO CONFLICTS OF LAW. 16. COUNTERPARTS. This Purchase Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement by and between MergerCo and the Initial Purchaser. Very truly yours, JFL-EEC Merger Sub Co., as Issuer By: /s/ Keith Oster ------------------------------------ Name: Keith Oster Title: Secretary BT ALEX. BROWN INCORPORATED, as Initial Purchaser By: /s/ Pedro Garcia ------------------------------------ Name: Pedro Garcia Title: Vice President EX-2.1 3 EXHIBIT 2.1 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (the "AGREEMENT") is entered into as of January 2, 1998 by and among JFL-EEC LLC, a Delaware limited liability company ("PARENT"), JFL-EEC Merger Sub Co., a Delaware corporation and wholly-owned subsidiary of Parent ("MERGER SUB"), Carlyle-EEC Holdings, Inc., a Delaware corporation ("HOLDINGS"), and TC Group, L.L.C., a Delaware limited liability company ("TC GROUP"), solely in its capacity as the initial Holder Representative hereunder. RECITALS WHEREAS, Parent and the respective Boards of Directors of Merger Sub and Holdings (Merger Sub and Holdings sometimes being referred to herein as the "CONSTITUENT CORPORATIONS") have each (i) determined that a plan of merger providing for the merger of Merger Sub with and into Holdings, with Holdings being the surviving corporation (the "MERGER"), is in the best interest of their respective stockholders and (ii) approved the Merger upon the terms and subject to the conditions set forth in this Agreement; WHEREAS, the Merger will be consummated in accordance with the Delaware General Corporation Law (the "DGCL") and this Agreement and evidenced by a Certificate of Merger between Parent, Merger Sub and Holdings executed in accordance with the relevant provisions of the DGCL (the "CERTIFICATE OF MERGER"), such Merger to be consummated as of the Effective Time (as defined below); WHEREAS, Carlyle-EEC Acquisition Partners, L.P., a Delaware limited partnership ("CARLYLE-EEC"), owns 1,000 shares of common stock, $.01 par value per share (the "HOLDINGS COMMON STOCK"), of Holdings, which shares constitute all of the issued and outstanding capital stock of Holdings; WHEREAS, Parent owns all of the issued and outstanding shares of common stock, $.01 par value per share ("MERGER SUB COMMON STOCK") of Merger Sub, which constitutes all of the issued and outstanding capital stock of Merger Sub; WHEREAS, prior to the Effective Time (as defined herein), it is contemplated that Merger Sub shall issue shares of preferred stock ("Merger Sub Preferred Stock"); WHEREAS, pursuant to the Merger, certain shares of Holdings Common Stock (referred to herein as the "CANCELLED SHARES") will be cancelled and converted into the right to receive the merger consideration described herein and certain shares of Holdings Common Stock (referred to herein as the "CONTINUING SHARES") will, through the process described herein, be retained as shares of common stock of the surviving corporation in the Merger; WHEREAS, it is contemplated that immediately prior to the Effective Time, (i) Holdings will effect an approximately 9,220 to 1 stock split, such that as of the Effective Time there will be approximately 9,220,000 shares of Holdings Common Stock outstanding (the "STOCK SPLIT"), and (ii) Carlyle-EEC will liquidate pursuant to a liquidation agreement (the "LIQUIDATION AGREEMENT") by and among Carlyle-EEC and the general and limited partners of Carlyle-EEC, pursuant to which Carlyle-EEC will distribute all of the shares of Holdings Common Stock to such partners (the "DISTRIBUTION"); WHEREAS, concurrently with the execution of this Agreement, Carlyle-EEC has voted all issued and outstanding shares of Holdings Common Stock in favor of the adoption and approval of this Agreement and the transactions contemplated hereby and Parent has voted in favor of the adoption and approval of this Agreement and the transactions contemplated hereby; WHEREAS, it is intended that the Merger be treated as a recapitalization for financial accounting purposes; WHEREAS, for certain limited purposes, and subject to the terms set forth herein, the Holder Representative (as defined herein) shall serve as a representative of the holders of the outstanding shares of the Holdings Common Stock as of the Effective Time (the "HOLDERS"); and WHEREAS, certain capitalized terms used herein have the meanings ascribed to such terms in Article X hereof. AGREEMENT NOW THEREFORE, in consideration of the mutual premises and covenants contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto covenant and agree as follows: 2 ARTICLE I. THE MERGER 1.1. THE MERGER. At the Effective Time (as defined in SECTION 1.2 hereof), and subject to and upon the terms and conditions of this Agreement and the DGCL, Merger Sub shall be merged with and into Holdings, the separate corporate existence of Merger Sub shall cease, and Holdings shall continue as the surviving corporation. Holdings, as the surviving corporation after the Merger is hereinafter sometimes referred to as the "SURVIVING CORPORATION." 1.2. EFFECTIVE TIME. As promptly as practicable after the satisfaction or, to the extent permitted, the waiver, of the conditions set forth in Article VIII, and provided that this Agreement has not been terminated pursuant to the provisions hereof, the parties hereto shall cause the Merger to be consummated by causing the Certificate of Merger to be executed and filed with the Office of the Secretary of State of the State of Delaware as provided in Section 251 of the DGCL. For purposes of this Agreement, the "EFFECTIVE TIME" of the Merger shall mean the time at which the Certificate of Merger has been duly filed in the Office of the Secretary of State of the State of Delaware and has become effective in accordance with the DGCL; and the term "CLOSING DATE" shall mean the date on which the Effective Time occurs. 1.3. EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time the Surviving Corporation shall thereupon and thereafter possess all of the rights, privileges, powers and franchises of a public as well as a private nature of the Constituent Corporations, and shall become subject to all of the restrictions, disabilities and duties of each of the Constituent Corporations; and all rights, privileges, powers and franchises of each Constituent Corporation, and all property, real, personal and mixed, and all debts to each such Constituent Corporation, on whatever account, as well as all choses in action belonging to each such corporation, shall become vested in the Surviving Corporation; and all property, rights, privileges, powers and franchises, and all and every other interests shall become thereafter the property of the Surviving Corporation as they are of the Constituent Corporations; and the title to any real property vested by deed or otherwise or any other interest in real estate vested by any instrument or otherwise in either of such Constituent Corporations shall not revert or become in any way impaired by reason of the Merger; but all rights of creditors and Liens upon any property of either Constituent Corporation shall thenceforth attach to the Surviving Corporation and shall be preserved unimpaired, and all debts, liabilities and duties of each Constituent Corporation shall attach to the Surviving Corporation and may be enforceable against it to the same extent as if said debts, liabilities and duties had been incurred or contracted by it; all of the foregoing in accordance with the applicable provisions of the DGCL. 1.4. CERTIFICATE OF INCORPORATION; BYLAWS. (a) CERTIFICATE OF INCORPORATION. At the Effective Time, the Certificate of Incorporation of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation until thereafter duly amended in accordance with applicable law and such Certificate of Incorporation. 3 (b) BYLAWS. At the Effective Time, the Bylaws of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Surviving Corporation until thereafter duly amended in accordance with applicable law, the Certificate of Incorporation of the Surviving Corporation and such Bylaws. 1.5. DIRECTORS AND OFFICERS. (a) The directors of Merger Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and Bylaws of the Surviving Corporation. The officers of Merger Sub immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and Bylaws of the Surviving Corporation. Immediately after the Effective Time, Parent shall take all action necessary to elect one individual designated by the Holder Representative on behalf of the holders of Retained Surviving Corporation Common Stock (as defined below). Holdings shall cause each director and officer of Holdings to tender his or her resignation (collectively, the "RESIGNATIONS") prior to the Effective Time, with each such Resignation to be effective as of the Effective Time. (b) At the Effective Time, the Surviving Corporation and all Persons who as a result of the Merger are holders of Surviving Corporation Common Stock and Surviving Corporation Preferred Stock (together, the "SURVIVING CORPORATION HOLDERS") shall enter into a stockholders agreement, in form and substance reasonably acceptable to the Non-Management Holders, which will provide, in part, that, for so long as the Retained Surviving Corporation Common Stock held by the Non-Management Holders constitutes at least 5% of the issued and outstanding Surviving Corporation Common Stock, then the Non-Management Holders will have the right to designate one director of the Board of Directors of the Surviving Corporation and the Surviving Corporation and the Surviving Corporation Holders will take all actions necessary to cause the individual designated by the Holder Representative on behalf of the Non-Management Holders to be elected and qualified as a director of the Surviving Corporation. Additionally, the stockholders agreement shall provide that the Non-Management Holders will be entitled to piggyback registration rights unlimited in number and subject to additional customary rights and limitations; PROVIDED, HOWEVER, that such registration rights shall not apply to an initial public offering of the Surviving Corporation Common Stock or any registration on Form S-4 or Form S-8 of such Surviving Corporation Common Stock. 1.6. EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue of the Merger and without any action on the part of Merger Sub, Holdings or the holders of any shares of Holdings Common Stock or any shares of capital stock of Merger Sub: (a) CONVERSION OF THE CANCELLED SHARES. Each share of Holdings Common Stock that is issued and outstanding as of the Effective Time other than (i) the Continuing Shares and (ii) shares held in the treasury of Holdings, if any (such shares, exclusive of the shares provided for in clauses (i) and (ii), collectively, the "CANCELLED SHARES") shall be converted into and become the right to receive (i) a PRO RATA portion of the Cash Available at Closing (as defined below), as set forth in Section 1.7(c) and (ii) a portion of the Contingent Distributions, 4 determined in accordance with the applicable Holder's Contingent Distribution Percentage, as set forth in Section 1.9. (b) RETENTION OF THE CONTINUING SHARES. A portion of the shares of Holding Common Stock outstanding as of the Effective Time, in the amounts and held by such Holders as are set forth in EXHIBIT A hereto (the "CONTINUING SHARES"), shall not be converted in the Merger but rather shall remain outstanding as fully paid and non-assessable shares of common stock, $.01 par value per share ("SURVIVING CORPORATION COMMON STOCK") of the Surviving Corporation (such shares following the Merger referred to as the "RETAINED SURVIVING CORPORATION COMMON STOCK"). (c) TREATMENT OF MERGER SUB CAPITAL STOCK. (i) Each share of Merger Sub Preferred Stock issued and outstanding as of the Effective Time (other than shares held in the treasury of Merger Sub) shall be converted into one share of preferred stock of the Surviving Corporation having substantially identical powers, preferences and relative rights as the Merger Sub Preferred Stock. (ii) Each share of Merger Sub Common Stock issued and outstanding as of the Effective Time (other than shares held in the treasury of Merger Sub) shall be converted into the number of shares of Surviving Corporation Common Stock that will result in the Retained Surviving Corporation Common Stock comprising a percentage of the aggregate shares of Surviving Corporation Common Stock issued and outstanding immediately following the Effective Time (the "RETAINED PERCENTAGE") equal to (x) $3.986 million DIVIDED BY (y) the sum of the total capital contributions paid to Merger Sub in respect of Merger Sub Common Stock (the "PAID-IN CAPITAL") plus $3.986 million (expressed as a percentage). Based on the parties' current expectations that (A) the Paid-in Capital will be $19.014 million, (B) the number of Continuing Shares will be 398,600 and (C) there will be 1,901,400 shares of Merger Sub Common Stock issued and outstanding as of the Effective Time, then (x) the Retained Percentage would be 17.331% and (y) each share of Merger Sub issued and outstanding as of the Effective Time would be converted into one share of the Surviving Corporation. (d) CANCELLATION OF TREASURY SHARES. Each share of capital stock of Merger Sub held in the treasury of Merger Sub as of the Effective Time shall, by virtue of the Merger, automatically cease to be outstanding, be cancelled and retired without payment of any consideration therefor and cease to exist. 1.7. MERGER CONSIDERATION. (a) The "MERGER CONSIDERATION" shall consist of (i) One Hundred Thirteen Million Five Hundred Fourteen Thousand Dollars ($113,514,000) in cash, MINUS (ii) the aggregate amount of Bank Indebtedness, if any, that remains unpaid as of the Closing (which amount shall be repaid by Parent and/or Merger Sub pursuant to Section 1.7(d)), PLUS or MINUS (as applicable) (iii) the Net Working Capital Adjustment Amount (as defined below). 5 (b) The parties acknowledge that the Net Working Capital Adjustment Amount will not be determinable until after the Closing. Accordingly, notwithstanding anything else in this Article I to the contrary, for purposes of calculating the amount of the Merger Consideration payable on the Closing Date, the Merger Consideration will be increased or decreased (as applicable) pursuant to clause (iii) of Section 1.7(a) by the Estimated Net Working Capital Adjustment Amount. After the Closing, the parties will determine the Net Working Capital Adjustment Amount, and make such payments as provided in Section 1.9. (c) At Closing, Parent and Merger Sub shall cause the Merger Consideration (calculated as provided in Section 1.7(a) and (b)) to be paid as follows: (i) Seven Million Dollars ($7,000,000) shall be paid to the Exchange Agent as "Escrow Agent" to be held in escrow as an "INDEMNIFICATION ESCROW AMOUNT," in accordance with the terms of an Escrow Agreement in a form customary for transactions such as the transactions contemplated herein and reasonably satisfactory to Parent and Holdings (the "INDEMNIFICATION ESCROW AGREEMENT"). The Indemnification Escrow Amount shall be held, invested and distributed in accordance with the terms of the Indemnification Escrow Agreement and in accordance with Article IX hereof. (ii) The sum of (A) One Million Dollars ($1,000,000) PLUS (B) the Estimated Net Working Capital Adjustment Amount, if, and only if, such amount is greater than zero, shall be paid to the Exchange Agent as "Escrow Agent" to be held in escrow for potential payments owing to the Surviving Corporation in accordance with Section 1.9(d) (the "ADJUSTMENT ESCROW AMOUNT"). The Adjustment Escrow Amount shall be held, invested and distributed by the Exchange Agent in accordance with the terms of an Escrow Agreement in a form customary for transactions such as the transactions contemplated herein and reasonably satisfactory to Parent and Holdings (the "ADJUSTMENT ESCROW AGREEMENT"). (iii) An amount equal to the estimated Holder Allocable Expenses, determined as set forth in Section 1.11, shall be paid to the Holder Representative. (iv) The remainder of the Merger Consideration payable on the Closing Date (the "CASH AVAILABLE AT CLOSING") shall be paid to the Exchange Agent, for allocation and distribution to the holders of the Cancelled Shares, PRO RATA in accordance with the number of Cancelled Shares held by each of them. (d) Elgar currently has outstanding Bank Indebtedness of approximately Twelve Million Dollars ($12,000,000). From and after the date hereof, Holdings and Elgar intend (although neither shall be required) to apply all cash available of Elgar to the repayment of Bank Indebtedness. To the extent that any portion of the Bank Indebtedness remains outstanding at the Closing, Parent and/or Merger Sub will repay such Bank Indebtedness at Closing and the amount of Bank Indebtedness as repaid shall reduce the amount of Merger Consideration pursuant to clause (ii) of the definition thereof. 6 1.8. PAYMENT OF CASH AVAILABLE AT CLOSING AND EXCHANGE OF CERTIFICATES. (a) The Cash Available at Closing will be paid to an exchange agent selected by Holdings and reasonably acceptable to Parent ("EXCHANGE AGENT") by wire transfer of immediately available funds, as set forth in Section 1.7(c) above. At or after the Effective Time, each holder of an outstanding certificate or certificates for Cancelled Shares upon surrender of such certificate(s) to the Exchange Agent shall be entitled to receive from the Exchange Agent in exchange therefor that portion of the Cash Available at Closing into which such Cancelled Shares shall have been converted as a result of the Merger. Pending such surrender and exchange, a Holder's certificate or certificate for Cancelled Shares shall be deemed for all purposes to evidence the portion of the Cash Available at Closing into which such Cancelled Shares shall have been converted by the Merger (plus the applicable portion of any Contingent Distributions). (b) At the Closing, (i) each holder of Merger Sub Common Stock shall receive one or more certificates representing the shares of Surviving Corporation Common Stock upon cancellation of the shares of Merger Sub Common Stock pursuant to the Merger; and (ii) each holder of Merger Sub Preferred Stock shall receive one or more certificates representing the shares of Surviving Corporation Preferred Stock upon cancellation of the shares of Merger Sub Preferred Stock pursuant to the Merger. The certificates representing Continuing Shares shall continue to represent the same number of shares of Retained Surviving Corporation Common Stock, but may (at the option of the Holder) be exchanged for new certificates bearing the name of the Surviving Corporation. 1.9. NET WORKING CAPITAL ADJUSTMENT. (a) ESTIMATED NET WORKING CAPITAL ADJUSTMENT AMOUNT. Not later than three (3) days prior to the Closing, the Holder Representative shall deliver to Parent its good faith estimate of the Net Working Capital of Holdings as of the Closing Date (the "ESTIMATED CLOSING NET WORKING CAPITAL"), together with a reasonably detailed explanation of the calculation thereof. The "ESTIMATED NET WORKING CAPITAL ADJUSTMENT AMOUNT," which may be positive or negative, shall mean (i) the Estimated Closing Net Working Capital, MINUS $10,085,644, representing the Net Working Capital of Holdings (excluding cash and cash equivalents) as set forth on the consolidated balance sheet (the "REFERENCE BALANCE SHEET") of Holdings and its Subsidiaries as of November 22, 1997 (the "BASE WORKING CAPITAL"). The calculation of the Base Working Capital is set forth on EXHIBIT B hereto. As set forth in Section 1.7(b), the Estimated Net Working Capital Adjustment Amount shall be used to calculate the Merger Consideration payable at Closing. (b) CLOSING BALANCE SHEET. As soon as reasonably practicable following the Effective Time, and in any event within sixty (60) calendar days thereafter, the Surviving Corporation shall prepare and deliver to the Holder Representative (i) a consolidated balance sheet of Holdings and its Subsidiaries as of the Effective Time (the "CLOSING BALANCE SHEET") and (ii) a calculation of the Net Working Capital of Holdings and its Subsidiaries as reflected on the Closing Balance Sheet (the "CLOSING NET WORKING CAPITAL"). The Closing Balance Sheet shall be prepared in accordance with GAAP and on a basis consistent with the preparation of the historical financial statements of Holdings and its Subsidiaries; and Closing Net Working Capital shall be 7 calculated on a basis consistent with the calculation of Base Working Capital (except that cash and cash equivalents, which were excluded in calculating Base Working Capital, shall be included in determining Closing Net Working Capital). (c) DISPUTES. Upon delivery of the Closing Balance Sheet, the Surviving Corporation will provide to the Holder Representative and its accountants full access to Holdings' and Elgar's records, to the extent reasonably related to the Holder Representative's evaluation of the Closing Balance Sheet and the calculation of the Closing Net Working Capital. If the Holder Representative disagrees with the calculation of the Closing Net Working Capital or any element of the Closing Balance Sheet relevant thereto, it shall notify the Surviving Corporation in writing within thirty (30) days after its receipt of the Closing Balance Sheet of such disagreement, setting forth in detail the particulars of such disagreement. In the event that the Holder Representative does not provide such a notice of disagreement within such thirty (30) day period, the Holder Representative shall be deemed to have accepted the Closing Balance Sheet and the calculation of the Closing Net Working Capital delivered by the Surviving Corporation, which shall be final, binding and conclusive for all purposes hereunder. In the event any such notice of disagreement is timely provided, the Holder Representative and the Surviving Corporation shall use their reasonable best efforts for a period of thirty (30) days (or such longer period as they may mutually agree) to resolve any disagreements with respect to the calculation of the Closing Net Working Capital. If, at the end of such period, they are unable to resolve such disagreements, then Coopers & Lybrand LLP (or such other independent accounting firm of recognized national standing as may be mutually selected by the Holder Representative and the Surviving Corporation) (the "AUDITOR") shall resolve any remaining disagreements. The Auditor shall determine as promptly as practicable, but in any event within thirty (30) days of the date on which such dispute is referred to the Auditor, based solely on written submissions forwarded by the Surviving Corporation and the Holder Representative to the Auditor within ten (10) business days following the Auditor's selection, whether the Closing Balance Sheet was prepared in accordance with the standards set forth in Section 1.9(b) and (only with respect to the remaining disagreements submitted to the Auditor) whether and to what extent (if any) the Closing Net Working Capital determination requires adjustment. The fees and expenses of the Auditor shall be paid one-half by the Surviving Corporation and one-half by the Holder Representative. The determination of the Auditor shall be final, conclusive and binding on the parties. The date on which the Closing Net Working Capital is finally determined in accordance with this Section 1.9(c) is referred as to the "DETERMINATION DATE." (d) PAYMENT. The "NET WORKING CAPITAL ADJUSTMENT AMOUNT," which may be positive or negative, shall mean (i) the Closing Net Working Capital, MINUS (ii) the Base Working Capital. If the Net Working Capital Adjustment Amount is greater than the Estimated Net Working Capital Adjustment Amount (such difference, the "INCREASE AMOUNT"), then within three (3) days after the Determination Date (i) the Escrow Agent shall pay the Adjustment Escrow Amount together with any earnings thereon to the Holder Representative for distribution to the Holders of Cancelled Shares, in accordance with their Contingent 8 Distribution Percentages, (minus any amounts to which the Holder Representative is entitled under Section 1.10 or Section 1.11), and (ii) the Surviving Corporation shall deliver to the Holder Representative, for distribution (minus any amounts to which the Holder Representative is entitled under Section 1.10 or Section 1.11) to the Holders of Cancelled Shares, in accordance with their Contingent Distribution Percentages, an additional payment equal to the Increase Amount together with interest thereon from the Closing Date to the date of payment calculated at a rate equal to the rate of earnings on the Adjustment Escrow Amount from the Closing Date through such date; PROVIDED, HOWEVER that, in no event shall the Increase Amount paid by the Surviving Corporation pursuant to this clause (ii) (which shall be in addition to all amounts paid to the Holder Representative pursuant to clause (i) above) exceed an amount equal to the dollar amount of the Adjustment Escrow Amount and any earnings thereon. If the Estimated Net Working Capital Adjustment Amount is greater than the Net Working Capital Adjustment Amount (such difference, the "DEFICIT AMOUNT"), then within three (3) days after the Determination Date (i) the Escrow Agent shall pay to the Surviving Corporation out of the Adjustment Escrow Amount an amount equal to the Deficit Amount and any earnings thereon, and (ii) if the Deficit Amount is less than the Adjustment Escrow Amount, the Escrow Agent shall pay to the Holder Representative the balance of the Adjustment Escrow Amount and any earnings thereon for distribution to the Holders of Cancelled Shares, in accordance with their Contingent Distribution Percentages, (minus any amounts to which the Holder Representative is entitled under Section 1.10 or Section 1.11). In no event shall the Surviving Corporation be entitled to payment pursuant to this Section 1.9 of any amount in excess of the Adjustment Escrow Amount plus any earnings thereon. Upon determination of the Adjustment Escrow Amount in accordance with this Section 1.9, each of the Surviving Corporation and the Holder Representative shall execute joint instructions to the Escrow Agent instructing the Escrow Agent to disburse the Adjustment Escrow Amount in accordance with this Section 1.9. 1.10. HOLDER REPRESENTATIVE. (a) DESIGNATION AND REPLACEMENT OF HOLDER REPRESENTATIVE. The Holders have agreed that it is desirable to designate a representative to act on their behalf for certain limited purposes, as specified herein (the "HOLDER REPRESENTATIVE"). Pursuant to the Liquidation Agreement, each Holder has approved the designation of TC Group, L.L.C. as the initial Holder Representative. The Holder Representative may resign at any time, and the Holder Representative may be removed by the vote of Holders which collectively owned more than 50% of the Holdings Common Stock as of the Effective Time ("MAJORITY HOLDERS"). In the event that a Holder Representative has resigned or been removed, a new Holder Representative shall be appointed by a vote of Majority Holders, such appointment to become effective upon the written acceptance thereof by the new Holder Representative. (b) AUTHORITY AND RIGHTS OF HOLDER REPRESENTATIVE; LIMITATIONS ON LIABILITY. The Holder Representative shall have such powers and authority as are necessary to carry out the functions assigned to it under this Agreement; PROVIDED, HOWEVER, that the Holder Representative will have no obligation to act on behalf of the Holders, except as expressly provided herein. Without limiting the generality of the foregoing, the Holder Representative shall have full power, authority and discretion to estimate and determine the amounts of Holder Allocable Expenses and to pay such Holder Allocable Expenses in accordance with Section 1.11 hereof. The Holder Representative will have no liability to Parent, the Surviving Corporation or the Holders with respect to actions taken or omitted to be taken in its capacity as Holder Representative, except with respect to the Holder Representative's gross negligence or willful misconduct. The Holder Representative will at all times be entitled to rely on any directions 9 received from the Majority Holders; PROVIDED, HOWEVER, that the Holder Representative shall not be required to follow any such direction, and shall be under no obligation to take any action in its capacity as Holder Representative, unless the Holder Representative is holding funds delivered to it under this Agreement and/or has been provided with other funds, security or indemnities which, in the sole determination of the Holder Representative, are sufficient to protect the Holder Representative against the costs, expenses and liabilities which may be incurred by the Holder Representative in responding to such direction or taking such action. The Holder Representative shall be entitled to engage such counsel, experts and other agents and consultants as it shall deem necessary in connection with exercising its powers and performing its functions hereunder and (in the absence of bad faith on the part of the Holder Representative) shall be entitled to conclusively rely on the opinions and advice of such Persons. The Holder Representative shall be entitled to reimbursement, from funds paid to it under Section 1.11 of this Agreement and/or otherwise received by it in its capacity as Holder Representative pursuant to or in connection with this Agreement (other than any portion of the Indemnification Escrow Amount or the Adjustment Escrow, unless and until released for distribution to the Holders pursuant to the terms of this Agreement), for all reasonable expenses, disbursements and advances (including fees and disbursements of its counsel, experts and other agents and consultants) incurred by the Holder Representative in such capacity, and for indemnification against any loss, liability or expenses arising out of actions taken or omitted to be taken in its capacity as Holder Representative (except for those arising out of the Holder Representative's gross negligence or willful misconduct), including the costs and expenses of investigation and defense of claims. (c) REPRESENTATIONS OF THE HOLDER REPRESENTATIVE. The Holder Representative represents and warrants to Parent and Merger Sub as follows: (i) The Holder Representative is a limited liability company duly formed and validly existing and in good standing as a limited liability company under the laws of the State of Delaware and has full limited liability company power and authority to carry on its business as is currently being conducted. The Holder Representative is duly licensed or qualified and in good standing in each jurisdiction in which the ownership of its property or the character of its activities is such as to require it to be so licensed or qualified, except where the failure to be so licensed or qualified would not have a Material Adverse Effect on the Holder Representative or would not affect the ability of the Holder Representative in its capacity as Holder Representative to enter into this Agreement or consummate the transactions contemplated hereby; (ii) The Holder Representative has all requisite power and authority to execute and deliver this Agreement and to perform all obligations to be performed by it. The execution and delivery of this Agreement and the consummation of the transactions contemplated thereby have been duly and validly authorized by all necessary limited liability company action of the Holder Representative. No other limited liability company proceedings on the part of the Holder Representative is necessary to authorize this Agreement. This Agreement has been duly and validly executed and delivered by the Holder Representative in its capacity as Holder Representative and constitutes a legal, valid and binding obligation of the Holder Representative in its capacity as Holder Representative, enforceable against the Holder Representative in such capacity in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent 10 conveyance, reorganization, moratorium and similar laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity; and (iii) The execution and delivery of this Agreement by the Holder Representative in its capacity as Holder Representative and the consummation of the transactions contemplated hereby does not and will not violate any provision of, or result in the breach of any applicable law, rule or regulation of any Governmental Body, organizational documents of the Holder Representative, or any agreement, indenture or other instrument to which the Holder Representative is a party or by which the Holder Representative is bound, or of any Court Order or decree applicable to it or terminate or result in the termination of any such agreement, indenture or instrument, or result in the creation of any Lien upon any of the properties or assets of the Holder Representative or constitute an event which, after notice or lapse of time or both, would result in the violation, breach, acceleration, termination or creation of a Lien, except to the extent that the occurrence of the foregoing would not affect the ability of the Holder Representative to enter into and perform its obligations under this Agreement. 1.11. HOLDER ALLOCABLE EXPENSES. On or prior to the Closing Date, the Holder Representative will provide to Parent an estimate (which estimate shall include such reserves as the Holder Representative determines in good faith to be appropriate for any Holder Allocable Expenses that are not then known or determinable) of the following fees and expenses that may be incurred on behalf of Holdings or the Holders in connection with the preparation, negotiation and execution of this Agreement and the consummation of the transactions contemplated hereby: (i) the fees and disbursements of special outside counsel to Holdings and/or the Holder Representative incurred in connection with the transactions contemplated hereby, (ii) the fees and expenses of any other agents, advisors, consultants and experts employed by Holdings and/or the Holder Representative in connection with the Merger, (iii) if necessary, one-half of the fees and expenses of the Auditor, (iv) the amount payable to Kenneth R. Kilpatrick by Elgar pursuant to paragraph 7 of that certain Agreement dated as of April 4, 1996 between Kilpatrick and Elgar; and (v) the expenses of the Holder Representative incurred in such capacity (the "HOLDER ALLOCABLE EXPENSES"). On the Closing Date, the Holder Representative shall be entitled to receive a portion of the Merger Consideration in the amount of such estimated Holder Allocable Expenses (as provided in Section 1.7(c)(iii)) and the Holder Representative shall use such cash to pay the Holder Allocable Expenses. In no event will Parent, the Surviving Corporation or the Holder Representative be responsible for payment of Holder Allocable Expenses in excess of the cash amounts paid to the Holder Representative pursuant to this Section 1.11; and no Holder Allocable Expenses will be included as liabilities on the Closing Balance Sheet. ARTICLE II. CLOSING 2.1. CLOSING. The closing of the transactions contemplated herein (the "CLOSING") shall commence at 10:00 a.m. Eastern Time on the fifth (5th) business day following the date on which the last of the conditions to the Closing set forth in Section 8.1 have been fulfilled or waived. At Closing, Parent and Merger Sub shall effect the payment of the Merger Consideration as provided 11 in Section 1.7(c) and the parties shall deliver such documents and take such other actions as provided in Article I and Article VIII. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF HOLDINGS Holdings represents and warrants to Parent and Merger Sub, as of the date of this Agreement, as follows. For purposes of this Article III, any reference to the "knowledge" or "best knowledge" of Holdings shall refer to the actual knowledge of the directors and officers of Holdings and the directors and officers of Elgar. 3.1. CORPORATE ORGANIZATION OF HOLDINGS AND ELGAR. Holdings and Elgar are duly incorporated and are validly existing as corporations in good standing under the laws of the States of Delaware and California, respectively, and have the corporate power and authority to own or lease their respective properties and to conduct their respective businesses as they are now being conducted. The copies of the Certificates of Incorporation and Bylaws of each of Holdings and Elgar previously delivered by Holdings to Parent or its Affiliates are each true, correct and complete. Each of Holdings and Elgar is duly licensed or qualified and in good standing as a foreign corporation in each jurisdiction in which the ownership of its property or the character of its activities is such as to require it to be so licensed or qualified, except where the failure to be so licensed or qualified would not have a Material Adverse Effect on Holdings or Elgar. 3.2. CAPITALIZATION OF HOLDINGS. (a) The authorized capital stock of Holdings consists of 1,000 shares of Holdings Common Stock, all of which are issued and outstanding. Such shares of Holdings Common Stock have been duly authorized and validly issued and are fully paid and nonassessable and are not subject to any preemptive rights. (b) Holdings has not granted any outstanding options, warrants, rights or other securities convertible into or exchangeable or exercisable for shares of Holdings Common Stock or any other commitments or agreements providing for the issuance of additional shares, the sale of treasury shares, or for the repurchase or redemption of shares of Holdings' capital stock. There are no agreements of any kind which obligate Holdings to issue, purchase, redeem or otherwise acquire any of its capital stock. (c) Except as set forth on SCHEDULE 3.2, Holdings has no Subsidiaries other than Elgar. 3.3. CAPITAL STOCK OF ELGAR. (a) The authorized capital stock of Elgar consists of 200 shares of common stock, all of which are issued and outstanding, fully paid and nonassessable, not subject to any preemptive rights and held by Holdings free and clear of all Liens except for (i) Permitted Liens and (ii) Liens securing the Bank Indebtedness. 12 (b) There are no outstanding options, warrants, rights or other securities convertible into or exchangeable or exercisable for shares of capital stock of Elgar or any other commitments or agreements providing for the issuance of additional shares, the sale of treasury shares, or for the repurchase or redemption of shares of Elgar's capital stock. There are no agreements of any kind which may obligate Elgar to issue, purchase, redeem or otherwise acquire any of its capital stock. (c) Except as set forth on SCHEDULE 3.2, Elgar has no Subsidiaries. 3.4. DUE AUTHORIZATION. Holdings has all requisite corporate power and authority to execute and deliver this Agreement and to perform all obligations to be performed by it hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized and approved by Holdings and no other proceeding on its part are necessary to authorize this Agreement. This Agreement has been duly and validly executed and delivered by Holdings, and constitutes a legally valid and binding obligation of Holdings, enforceable against Holdings in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity. 3.5. NO CONFLICT. Except as set forth in SCHEDULE 3.5, the execution and delivery of this Agreement by Holdings and the consummation of the transactions contemplated hereby do not and will not violate any provision of, or result in the breach of, any applicable law, rule or regulation of any Governmental Body, the Certificate of Incorporation, Bylaws or other organizational documents, as applicable, of Holdings or Elgar, or any agreement, indenture or other instrument to which Holdings or Elgar is a party or by which Holdings or Elgar is bound, or of any Court Order or decree applicable to any of them, or terminate or result in the termination of any such agreement, indenture or instrument, or result in the creation of any Lien upon any of the properties or assets of Holdings or Elgar or constitute an event which, after notice or lapse of time or both, would result in the violation, breach, acceleration, termination or creation of a Lien or result in a violation or revocation of any required license, permit or approval from any government or other third party, except to the extent that the occurrence of any of the foregoing would not have a Material Adverse Effect on Holdings or Elgar or materially adversely effect the ability of Holdings to enter into and perform its obligations under this Agreement. 3.6. FINANCIAL STATEMENTS. (a) Holdings has heretofore delivered to Parent or its Affiliates: (i) an audited consolidated balance sheet of Holdings and its Subsidiaries as of March 29, 1997 and the related audited consolidated statements of income and changes in cash flows for the fiscal year ended March 29, 1997, together with the report thereon of Arthur Andersen LLP (the "ANNUAL FINANCIAL STATEMENTS") and (ii) the unaudited consolidated balance sheet of Elgar and its Subsidiary as of November 22, 1997 and the related unaudited consolidated statements of income and changes in cash flow for the eight months then ended (the "INTERIM FINANCIAL STATEMENTS"). 13 (b) The Annual Financial Statements (i) fairly present, in all material respects, the financial condition and the results of operations and changes in cash flow of Holdings and its Subsidiaries, on a consolidated basis at the date of and for the period referred to in such Annual Financial Statements, all in accordance with GAAP, and (ii) reflect the consistent application of GAAP throughout the period involved, except as disclosed in the notes to the Annual Financial Statements. The Interim Financial Statements (i) fairly present, in all material respects, the financial condition and the results of operation and changes in cash flow of Elgar [and its Subsidiary on a consolidated basis] at the date of and for the period referred to in such Interim Financial Statements, all in accordance with GAAP, subject to normal year-end adjustments and the absence of notes and (ii) reflect the consistent application of GAAP throughout the periods involved. 3.7. CONTRACTS; NO DEFAULTS (a) SCHEDULE 3.7 contains a listing of all contracts described in clauses (i) through (viii) below to which Holdings or Elgar is a party ("CONTRACTS"). True, correct and complete copies of such Contracts have been delivered to or made available to Parent or its Affiliates. (i) Purchase agreements for each customer with respect to which Elgar had a backlog in excess of $200,000 as of September 29, 1997 and supply agreements for each supplier to which Elgar gave aggregate purchase orders in excess of $500,000 during the first half of the 1998 fiscal year; (ii) Each note, debenture, other evidence of indebtedness, guarantee, loan, credit or financing agreement or instrument or other contract for money borrowed, including any agreement or commitment for future loans, credit or financing entered into by Holdings or Elgar; (iii) Each lease, rental or occupancy agreement, license, installment and conditional sale agreement, and other contract affecting the ownership of, leasing of, title to, use of, or any leasehold or other interest in, any real or personal property and involving aggregate payments in excess of $100,000; (iv) Each material licensing agreement or other agreement with respect to patents, trademarks, copyrights, or other intellectual property, including agreements with current or former employees, consultants, or contractors regarding the appropriation or the nondisclosure of Intellectual Property; (v) Each collective bargaining agreement or other agreement to or with any labor union or other employee representative of a group of employees relating to wages, hours and other conditions of employment; (vi) Each joint venture agreement, partnership agreement, or limited liability company agreement; and 14 (vii) Each agreement that commits capital expenditures after the date hereof in an amount in excess of $50,000. (b) Except as set forth on SCHEDULE 3.7, no condition exists or event has occurred which, with notice or lapse of time or both, would constitute a default under any such Contract by Holdings or Elgar or, to the best knowledge of Holdings, any other party thereto, except where the occurrence of such event or existence of any such condition would not have a Material Adverse Effect on Holdings or Elgar. 3.8. GOVERNMENT CONTRACTS. Except as set forth on SCHEDULE 3.8, neither Holdings nor Elgar has received any oral or written notice of any claim, suit or investigation (including as a result of a QUI TAM action brought under the Civil False Claims Act) asserting or alleging (i) the commission of criminal acts or bribery, or other violation of applicable law, by Holdings or Elgar or any director, officer or employee of Holdings or Elgar with respect to any Government Contract, (ii) any irregularity, misstatement or omission arising under or relating to any Government Contract; or (iii) default, breach or any other failure to comply with the material terms of any Government Contract or for equitable adjustment to any Government Contract. No termination for default, cure notice, or show cause notice, has been issued by the U.S. Government or by any prime contractor or subcontractor with respect to performance by Holdings or Elgar as a subcontractor of any portion of the obligation of a Government Contract. Neither Holdings nor Elgar nor any of Holdings or Elgar's directors, officers or employees has been debarred or suspended from participation in the award of contracts with any Government Body or has been declared nonresponsible (it being understood that debarment and suspension and nonresponsibility does not include ineligibility to bid for certain contracts due to generally applicable bidding requirements). To the best knowledge of Holdings, no payment has been made by Holdings or Elgar or any director, officer or employee of Holdings or Elgar or by any Person acting on their behalf, to any Person in connection with any Government Contract or bid or proposal for a Government Contract in violation of applicable procurement laws or regulations or in violation of (or requiring disclosure pursuant to) the Foreign Corrupt Practices Act. Except as disclosed in SCHEDULE 3.8 and except where any exception to the following, individually or in the aggregate, would not have a Material Adverse Effect on Holdings or Elgar, (i) the cost accounting and procurement systems maintained by Holdings and Elgar with respect to Government Contracts are in compliance with all applicable United States laws and regulations, (ii) no costs incurred by Holdings or Elgar have been questioned or disallowed in connection with any Government Contract; and (iii) Holdings and Elgar have fully complied with all material terms and conditions of such Government Contracts. 3.9. MACHINERY, EQUIPMENT AND OTHER TANGIBLE PROPERTY. Except as set forth on SCHEDULE 3.9, Elgar owns and has good title to all material machinery, equipment and other tangible property reflected on the books of Elgar as owned by Elgar (the "MACHINERY AND EQUIPMENT"), free and clear of all Liens other than Permitted Liens and Liens securing the Bank Indebtedness. Except as set forth on SCHEDULE 3.9, the Machinery and Equipment is in good operating condition and repair, ordinary wear and tear excepted. 3.10. INTELLECTUAL PROPERTY. 15 (a) SCHEDULE 3.10 sets forth a list of all (i) United States and foreign patents and patent applications, (ii) registered trademarks, trade names and logos, (iii) registered copyrights and applications therefor, (iv) material unregistered trademarks, copyrights, or proprietary software (except for mass-marketed third party PC software) owned or used by Holdings or Elgar in the conduct of their respective businesses (the "INTELLECTUAL PROPERTY RIGHTS"), together with a listing of all material licenses, franchises or other agreements (whether as licensor or licensee) to which either Holdings or Elgar is a party with respect to such Intellectual Property Rights. Except as disclosed on SCHEDULE 3.10, to the best knowledge of Holdings, each of Holdings and Elgar has full title and ownership of, or rights to use, all Intellectual Property Rights without any infringement of the rights of others. All of the Intellectual Property Rights owned by Holdings and Elgar are owned free and clear of any and all Liens except for Permitted Liens and Liens securing the Bank Indebtedness. (b) To the best knowledge of Holdings, all Intellectual Property Rights are valid, subsisting, unexpired and enforceable and all licenses, if any, of the Intellectual Property Rights are in full force and effect. No proceedings have been instituted or are pending or, to best knowledge of Holdings, threatened, that challenge the rights of either Holdings or Elgar to use or register, or maintain any registration of, any of the Intellectual Property Rights. (c) Neither Holdings nor Elgar is making or has made any unauthorized and improper use of any confidential information of third parties other than any such unauthorized and improper use which, individually or in the aggregate, would not have a Material Adverse Effect on Holdings or Elgar. 3.11. REAL PROPERTY. Neither Holdings nor Elgar owns any real property in fee. SCHEDULE 3.11 lists all material real property leased by Holdings or Elgar ("REAL PROPERTY"). Except as set forth on SCHEDULE 3.11, either Holdings or Elgar has a valid leasehold interest in all Real Property, subject only to any Permitted Liens and Liens securing the Bank Indebtedness. 3.12. LITIGATION AND PROCEEDINGS. Except as set forth on SCHEDULE 3.12, there are no lawsuits, actions, suits, claims or other proceedings at law or in equity, or to the knowledge of Holdings, investigations, before or by any court or Governmental Body or before any arbitrator pending or, to the knowledge of Holdings, threatened, against Holdings or Elgar (i) in which the relief sought includes damages in excess of $25,000 in any individual case or $100,000 in the aggregate or that seek injunctive relief, or (ii) for injury to any person or any property suffered as a result of the manufacture, distribution or sale of any product or material by Holdings or Elgar, including any claim arising out of the defective or unsafe nature, or allegedly defective or unsafe nature, of any such product or material, other than any claim for which Holdings has established adequate reserves in accordance with GAAP and/or which is within the scope and limits of coverage of a policy of insurance identified in SCHEDULE 3.20. Except as set forth on SCHEDULE 3.12, there is no Court Order requiring payment in excess of $50,000 or any open injunction binding upon Holdings or Elgar. 16 3.13. EMPLOYEE BENEFIT PLANS. (a) DEFINITIONS. The following terms, when used in this SECTION 3.13, shall have the following meanings. Any of these terms may, unless the context otherwise requires, may be used in the singular or the plural depending on the reference. (i) BENEFIT ARRANGEMENT. "BENEFIT ARRANGEMENT" shall mean any employment, consulting, severance or other similar contract, arrangement or policy and each plan, arrangement (written or oral), program, agreement or commitment providing for insurance coverage (including without limitation any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, life, health, disability or accident benefits (including without limitation any "voluntary employees' beneficiary association" as defined in Section 501(c)(9) of the Code providing for the same or other benefits) or for deferred compensation, profit-sharing bonuses, stock options, stock appreciation rights, stock purchases or other forms of incentive compensation or post-retirement insurance, compensation or benefits which (A) is not a Welfare Plan, Pension Plan or Multiemployer Plan, (B) is entered into, maintained, contributed to or required to be contributed to, as the case may be, by Elgar or any ERISA Affiliate and (C) covers any employee or former employee of Elgar or any ERISA Affiliate (with respect to their relationship with any such entity). Holdings has delivered or made available to Parent or its Affiliates a copy of each written Benefit Arrangement that covers employees or former employees of Elgar or any of its Subsidiaries. (ii) EMPLOYEE PLANS. "EMPLOYEE PLANS" shall mean all Benefit Arrangements, Multiemployer Plans, Pension Plans and Welfare Plans. (iii) ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. (iv) ERISA AFFILIATE. "ERISA AFFILIATE" shall mean any entity which is (or at any relevant time was) a member of a "controlled group of corporations" with, under "common control" with, or a member of an "affiliated service group" with Elgar as defined in Section 414(b), (c), (m) or (o) of the Code. (v) MULTIEMPLOYER PLAN. "MULTIEMPLOYER PLAN" shall mean any "multiemployer plan," as defined in Section 4001(a)(3) of ERISA, (A) to which Elgar or any ERISA Affiliate maintains, administers, contributes or is required to contribute and (B) which covers any employee or former employee of Elgar or any ERISA Affiliate (with respect to their relationship with such entities). (vi) PBGC. "PBGC" shall mean the Pension Benefit Guaranty Corporation. (vii) PENSION PLAN. "PENSION PLAN" shall mean any "employee pension benefit plan" as defined in Section 3(2) of ERISA (other than a Multiemployer Plan) (A) which Elgar or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to and (B) which covers any employee or former employee of Elgar or any ERISA Affiliate (with 17 respect to their relationship with such entities). Holdings has delivered or made available to Parent or its Affiliates a copy of each Pension Plan as well as the most recent annual report on Form 5500 with respect to each such Pension Plan. (viii) WELFARE PLAN. "WELFARE PLAN" shall mean any "employee welfare benefit plan" as defined in Section 3(1) of ERISA, (A) which Elgar or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, and (B) which covers any employee or former employee of Elgar or any ERISA Affiliate (with respect to their relationship with such entities). Holdings has delivered or made available to Parent or its Affiliates a copy of each Welfare Plan as well as the most recent annual report on Form 5500 with respect to each such Welfare Plan. (b) DISCLOSURE. SCHEDULE 3.13 contains a complete list of Employee Plans which cover employees of Elgar or any Subsidiary (with respect to their relationship with such entities). (c) REPRESENTATIONS. Except as set forth in SCHEDULE 3.13, Holdings represents and warrants as follows: (i) PENSION PLANS. (A) No "accumulated funding deficiency" (for which an excise tax is due or would be due in the absence of a waiver) as defined in Section 412 of the Code or as defined in Section 302(a)(2) of ERISA, whichever may apply, has been incurred with respect to any Pension Plan with respect to any plan year, whether or not waived. Neither Elgar nor any ERISA Affiliate has failed to pay when due any "required installment," within the meaning of Section 412(m) of the Code and Section 302(e) of ERISA, whichever may apply, with respect to any Pension Plan. Neither Elgar nor any ERISA Affiliate is subject to any lien imposed under Section 412(n) of the Code or Section 302(f) of ERISA, whichever may apply, with respect to any Pension Plan. Neither Elgar nor any ERISA Affiliate has any liability for unpaid contributions with respect to any Pension Plan. (B) Neither Elgar nor any ERISA Affiliate is required to provide security to a Pension Plan which covers employees or former employees of Elgar under Section 401(a)(29) of the Code. (C) Each Pension Plan and each related trust agreement, annuity contract or other funding instrument which covers employees or former employees of Elgar has been determined by the Internal Revenue Service to be qualified and tax-exempt under the provisions of Code Sections 401(a) and 501(a), or application for such determination has been made. (D) Each Pension Plan, each related trust agreement, annuity contract or other funding instrument which covers employees or former employees of Elgar or any of its Subsidiaries (with respect to their relationship with such entities) ("ELGAR PENSION PLAN") is in material compliance with its terms and, both as to form and in operation, with the 18 requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such plans, including without limitation ERISA and the Code. (E) Elgar or an ERISA Affiliate has paid all premiums (and interest charges and penalties for late payment, if applicable) due the PBGC with respect to each Pension Plan for each plan year thereof for which such premiums are required. To the best knowledge of Holdings, neither Elgar nor any ERISA Affiliate has engaged in, or is a successor or parent corporation to an entity that has engaged in, a transaction which is described in Section 4069 of ERISA. There has been no unreported "reportable event" (as defined in Section 4043(b) of ERISA and the PBGC regulations under such Section) requiring notice to the PBGC with respect to any Pension Plan. Neither Elgar nor any ERISA Affiliate has, at any time, (1) ceased operations at a facility so as to become subject to the provisions of Section 4062(e) of ERISA, (2) withdrawn as a substantial employer so as to become subject to the provisions of Section 4063 of ERISA, or (3) ceased making contributions on or before the Closing Date to any Pension Plan subject to Section 4064(a) of ERISA to which Elgar or any ERISA Affiliate made contributions during the six years prior to the Closing Date. (ii) MULTIEMPLOYER PLANS. Neither Elgar nor any ERISA Affiliate has, within the last 21 months, had any obligation to contribute to any Multiemployer Plan. (iii) WELFARE PLANS (A) Each Welfare Plan which covers employees or former employees of Elgar ("ELGAR WELFARE PLAN") is in material compliance with its terms and, both as to form and operation, with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Welfare Plan, including without limitation ERISA and the Code. (B) Each Elgar Welfare Plan which is a "group health plan," as defined in Section 607(1) of ERISA, has been operated in material compliance with provisions of Part 6 of Title I, Subtitle B of ERISA and Section 4980B of the Code ("COBRA") at all times. No Welfare Plan provides benefits to former employees of Elgar or any of its Subsidiaries other than pursuant to COBRA. (iv) BENEFIT ARRANGEMENTS. Each Benefit Arrangement is in material compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Benefit Arrangement. (v) FIDUCIARY DUTIES AND PROHIBITED TRANSACTIONS. To Holding's knowledge, neither Elgar nor any ERISA Affiliate has any liability with respect to any transaction in violation of Sections 404 or 406 of ERISA or any "prohibited transaction," as defined in Section 4975(c)(1) of the Code, for which no exemption exists under Section 408 of ERISA or Section 4975(c)(2) or (d) of the Code. Neither Elgar nor any of its Subsidiaries (A) has knowingly participated in a violation of Part 4 of Title I, Subtitle B of ERISA by any plan fiduciary of any Elgar Welfare Plan or Pension Plan or (B) has any unpaid civil penalty under Section 502(l) of ERISA. 19 3.14. LABOR RELATIONS. Elgar is not a party to any collective bargaining agreements. The agreements listed on SCHEDULE 3.14 include all written employment or severance agreements to which Elgar is a party with respect to any employee or former employee whose compensation or severance benefits during the fiscal year ended March 29, 1997 exceeded $75,000 and which may not be terminated at will, or by giving notice of thirty (30) days or less, without cost or penalty. Holdings has delivered or made available to Parent true, correct and complete copies of each such agreement, as amended to date. 3.15. LEGAL COMPLIANCE. Except with respect to (i) matters set forth on SCHEDULE 3.15, (ii) compliance with Environmental Laws (as to which certain representations and warranties are made pursuant to SECTION 3.16), and (iii) compliance with laws applicable to Government Contracts (as to which certain representations and warranties are made pursuant to SECTION 3.8), Holdings and Elgar are in compliance with all laws (including rules and regulations thereunder) of federal, state, local and foreign governments (and all agencies thereof) applicable thereto, except where such instances of noncompliance would not have a Material Adverse Effect on Holdings or Elgar. 3.16. ENVIRONMENTAL MATTERS. (a) Except as set forth on SCHEDULE 3.16, Holdings and Elgar are in compliance with all Environmental Laws, except where any such instance of non-compliance, individually or in the aggregate, would not have a Material Adverse Effect on Holdings or Elgar. Except as set forth on SCHEDULE 3.16, neither Holdings nor Elgar has received any notification of any asserted present or past failure by Holdings or Elgar to comply with any Environmental Law other than failures which, individually or in the aggregate, would not have a Material Adverse Effect on Holdings or Elgar. Except as set forth on SCHEDULE 3.16, or for instances which, individually or in the aggregate, would not have a Material Adverse Effect on Holdings or Elgar, (i) Holdings and Elgar have at all times possessed and have been, and are, in compliance with all Environmental Permits; (ii) Holdings and Elgar are in compliance with all limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in the Environmental Laws or contained in any regulation, code, plan, order, decree, judgment, notice or demand letter issued, entered, promulgated or approved thereunder, and (iii) no Hazardous Material has been treated, stored, released, disposed of, or discharged into the environment, on or from the current or any prior premises of Holdings or Elgar. Except as set forth on SCHEDULE 3.16, or for instances which, individually or in the aggregate, would not have a Material Adverse Effect on Holdings or Elgar, there is no (i) asbestos-containing material installed at any Facility or (ii) polychlorinated biphenyls deposited or contained in any existing equipment or otherwise located at any Facility. Holdings has no knowledge of any liability to any third party for any illness, disability, injury or death of any person, including, without limitation, any employee or former employee of Holdings or Elgar, caused by any Hazardous Material present at or generated on any Real Property or Facility. (b) Complete copies of all environmental reports, if any, relating to the Real Property and each Facility have been delivered or made available to Parent or its representative. 20 3.17. TAXES. Except as otherwise disclosed in SCHEDULE 3.17: (a) All Tax Returns of Holdings and Elgar have been duly and timely filed and are correct and complete in all material respects, except for those returns for which the time for filing thereof has been validly extended. (b) Neither Holdings nor Elgar has any liability for Taxes for any Tax period of Holdings or Elgar (as the case may be) that ended before the Closing other than Taxes for which there is an accrual reflected on the Reference Balance Sheet. (c) Neither Holdings nor Elgar has any liability for any Tax liability of any other person or entity including, without limitation (i) as a successor or transferee liability, (ii) as a joint and several liability pursuant to Section 1.1502-6 of the Treasury Regulations or comparable provisions of state, local or foreign law, and (iii) pursuant to a Tax sharing, Tax indemnification or Tax reimbursement agreement. (d) Neither Holdings nor Elgar has any liability to pay to or reimburse any person or entity for any Tax savings or Tax benefits. (e) There are no "excess loss accounts" or "intercompany items" between Holdings and Elgar within the meaning of Treasury Regulations Section 1.1502-13 or any predecessor regulations. (f) None of the Tax Returns has been audited or is being audited by any taxing authority. (g) No assessment, audit or other proceeding by any taxing authority, court, or other governmental or regulatory authority is proposed, pending or, to the knowledge of Holdings, threatened with respect to the Taxes or Tax Returns of Holdings or Elgar. (h) There are no outstanding agreements, waivers, or arrangements extending the statutory period of limitations applicable to any claim for or the period for the collection or assessment of Taxes due for any taxable period. (i) Neither Holdings nor Elgar have entered into any agreements, the payments under which would result in a nondeductible expense to Holdings or Elgar under Section 280G of the Code. Neither Holdings nor Elgar is a United States real property holding corporation within the meaning of Section 897 of the Code. 3.18. GOVERNMENTAL AUTHORITIES; CONSENTS. Assuming the truth and completeness of the representations and warranties of Parent contained in this Agreement, no consent, approval or authorization of, or designation, declaration or filing with, any Governmental Body or other third party is required on the part of Holdings with respect to the execution or delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) applicable requirements of the HSR Act, (ii) any novations or consents required in connection with Government Contracts or subcontracts thereunder, (iii) any consents under Contracts the 21 failure of which to obtain would not have a Material Adverse Effect on Holdings or Elgar, and (iv) as otherwise disclosed in SCHEDULE 3.18. 3.19. LICENSES, PERMITS AND AUTHORIZATIONS. SCHEDULE 3.19 contains a list of all material licenses, franchises and other permits of, or with, any Governmental Body, whether foreign, federal, state or local, which are held by either Holdings or Elgar ("GOVERNMENTAL PERMITS"). All such Governmental Permits are in full force and effect and there are no proceedings pending or, to the best knowledge of Holdings, threatened that seek the revocation, cancellation, suspension or adverse modification thereof, except to the extent such revocation, cancellation, suspension or adverse modification would not have a Material Adverse Effect on Holdings or Elgar. Such Governmental Permits constitute all of the material licenses, franchises and other permits necessary to permit Holdings or Elgar to own, operate, use and maintain their assets in the manner in which they are now operated and maintained and to conduct the Business as currently conducted, except where the absence of any such license, approval, consent franchise or permit would not have a Material Adverse Effect on Holdings or Elgar. 3.20. INSURANCE. SCHEDULE 3.20 contains a summary description of all policies of property, fire and casualty, product liability, workers' compensation, and other forms of insurance held by either Holdings or Elgar. All such policies are in full force and effect, all premiums due with respect thereto have been paid or accrued, and no notice of cancellation or termination has been received with respect to any such policy. Neither Holdings nor Elgar has received any notification that material changes are required in the conduct of the business of either Holdings or Elgar as a condition to the continuation of coverage under or renewal of any such policy. True, correct and complete copies of such insurance policies have been made available to Parent. 3.21. BACKLOG. SCHEDULE 3.21 contains a true and complete listing of Elgar's sales backlog and a breakdown of the product mix, in each case prepared as of the most recent practicable date. Such backlog has been calculated in a manner consistent with Elgar's past practices. Holdings has no reason to believe that the backlog is not firm or will otherwise fail to result in completed sales as contemplated. 3.22. CUSTOMERS AND SUPPLIERS. SCHEDULE 3.22 lists the ten largest customers of Elgar and the ten largest suppliers of Elgar for the fiscal year ended March 29, 1997. To the knowledge of Holdings, since January 1, 1997, there has been no Material Adverse Change in the business relationship of Elgar with any customer or supplier named on SCHEDULE 3.22. 3.23. ABSENCE OF CERTAIN CHANGES OR EVENTS. (a) Except as otherwise specifically disclosed in SCHEDULE 3.23, since the date of the Reference Balance Sheet, there has not been (i) any damage to, or destruction or loss (whether or not covered by insurance) of, any asset or property which has had, or which is reasonably likely to have, a Material Adverse Effect on Holdings or Elgar, (ii) any labor dispute which has had, or which is reasonably likely to have, a Material Adverse Effect on Holdings or Elgar, (iii) any disposition of any capital asset of Holdings or Elgar having a net book value in excess of $100,000, or (iv) any incurrence, discharge or satisfaction of any obligation or liability of Holdings or Elgar other than in the ordinary course of business. 22 (b) Since the date of the Reference Balance Sheet, except in connection with the transactions contemplated hereby, neither Holdings nor Elgar has engaged in any of the following transactions: (i) issued or committed to issue any shares of capital stock or other ownership interest; (ii) directly or indirectly, declared, paid or set aside for payment of any dividend or other distribution in respect of its capital stock, or redeemed, purchased or otherwise acquired or committed to acquire any shares or other ownership interest of Holdings or Elgar, as the case may be; (iii) effected a split or reclassification of any shares of Holdings or Elgar or a recapitalization of Holdings or Elgar; (iv) increased compensation or other benefits available to any officer, employee, sales agent or representative of Holdings or Elgar under any bonus or pension plan or other contract or commitment, other than in the ordinary course of business in accordance with Elgar's customary practices (including normal periodic performance reviews and related compensation and benefit increases) or as required by any pre-existing contract; (v) other than in the ordinary course of business, created or permitted to arise any Lien upon any of the assets of Holdings or Elgar, except for Permitted Liens and Liens securing the Bank Indebtedness; or (vi) materially changed the accounting methods used by Elgar or Holdings. 3.24. AFFILIATED TRANSACTIONS. Except as set forth in SCHEDULE 3.24 and except for payments under an individual's compensation arrangements with Holdings or Elgar, none of the officers, directors or other Affiliates of Holdings or Elgar or members of their families is a party to any agreement, understanding, indebtedness or proposed transaction with Holdings or Elgar or is directly interested in any material contract with Holdings or Elgar. Neither Holdings nor Elgar has guaranteed or assumed any obligations of their respective officers, directors or other Affiliates or members of any of their families. 3.25. BROKERS' FEES. Except as otherwise disclosed in SCHEDULE 3.25, no broker, finder, investment banker or other Person is entitled to any brokerage fee, finders' fee or other commission in connection with the transactions contemplated by this Agreement based upon arrangements made by Holdings or any of its Affiliates. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB Parent and Merger Sub represent and warrant to Holdings as of the date of this Agreement as follows: 4.1. ORGANIZATION. Parent is a limited liability company duly formed and validly existing and in good standing as a limited liability company under the laws of the State of Delaware and has full limited liability company power and authority to carry on its business as currently being conducted. Merger Sub has been duly incorporated and is validly existing as a corporation in good standing under the laws of the state of Delaware, and has the corporate power and authority to own or lease its properties and to conduct its business as it is now being conducted. Each of Parent and Merger Sub is duly licensed or qualified and in good standing in each jurisdiction in which the ownership of its property or the character of its activities is such as to require it to be so licensed or qualified, except where the failure to be so licensed or qualified would not have a Material Adverse Effect on Parent or Merger Sub or would not affect the ability 23 of Parent or Merger Sub to enter into this Agreement or consummate the transactions contemplated hereby. 4.2. DUE AUTHORIZATIONS. Each of Parent and Merger Sub has all requisite power and authority to execute and deliver this Agreement and to perform all obligations to be performed by it thereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary limited liability company action of Parent and approved by the Board of Directors of Merger Sub. No other limited liability company proceedings on the part of Parent or corporate proceeding on the part of Merger Sub is necessary to authorize this Agreement. This Agreement has been duly and validly executed and delivered by each of Parent and Merger Sub and constitutes a legal, valid and binding obligation of each of Parent and Merger Sub, enforceable against each of Parent and Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity. 4.3. NO CONFLICT. The execution and delivery of this Agreement by each of Parent and Merger Sub and the consummation of the transactions contemplated hereby does not and will not violate any provision of, or result in the breach of any applicable law, rule or regulation of any Governmental Body, organizational documents of either Parent or Merger Sub, or any agreement, indenture or other instrument to which either Parent or Merger Sub is a party or by which either Parent or Merger Sub is bound, or of any Court Order or decree applicable to it or terminate or result in the termination of any such agreement, indenture or instrument, or result in the creation of any Lien upon any of the properties or assets of either Parent or Merger Sub or constitute an event which, after notice or lapse of time or both, would result in the violation, breach, acceleration, termination or creation of a Lien, except to the extent that the occurrence of the foregoing would not affect the ability of either Parent or Merger Sub to enter into and perform its obligations under this Agreement. 4.4. LITIGATION AND PROCEEDINGS. There are no lawsuits, actions, suits, claims or other proceedings at law or in equity or, to the knowledge of Parent or Merger Sub, investigations, before or by any court or Governmental Body or before any arbitrator pending or, to the knowledge of Parent or Merger Sub, threatened, against Parent or Merger Sub which, if determined adversely, could reasonably be expected to adversely affect the ability of Parent or Merger Sub to enter into and perform its obligations under this Agreement. There is no Court Order or any open injunction binding upon either Parent or Merger Sub which could reasonably be expected to materially adversely affect the ability of Parent or Merger Sub to enter into and perform its obligations under this Agreement. 4.5. GOVERNMENTAL AUTHORITIES; CONSENTS. Assuming the truth and completeness of the representations and warranties of Holdings contained in this Agreement, no consent, approval or authorization of, or designation, declaration or filing with, any Governmental Body or other third party is required on the part of Parent or Merger Sub with respect to the execution or delivery of this Agreement by Parent and Merger Sub or the consummation of the transactions contemplated hereby, except for (i) applicable requirements of the HSR Act and (ii) any novations or consents required in connection with Government Contracts or subcontracts thereunder. 24 4.6. FINANCIAL ABILITY. Parent and Merger Sub have commitments to obtain debt and equity financing sufficient to consummate the transactions contemplated by this Agreement, including, without limitation, the ability to pay the Merger Consideration at the Closing. 4.7. BROKERS' FEES. No broker, finder, investment banker or other Person is entitled to any brokerage fee, finder's fee or other commission in connection with the transactions contemplated by this Agreement based upon arrangements made by Parent, Merger Sub or any of their Affiliates. 4.8. NO ADDITIONAL REPRESENTATIONS; DISCLAIMER REGARDING ESTIMATES AND PROJECTIONS. Parent and Merger Sub acknowledge that none of Holdings, Elgar, their Affiliates or any other Person acting on behalf of Holdings, Elgar, the Holder Representative, or their respective Affiliates (i) has made any representation or warranty, express or implied, including any implied representation or warranty as to the condition, merchantability, suitability or fitness for a particular purpose of any of the assets used in the Business or held by Holdings or Elgar, or (ii) has made any representation or warranty, express or implied, as to the accuracy or completeness of any information regarding the Business, Holdings or Elgar or any of their Affiliates, in each case except as expressly set forth in this Agreement or as and to the extent required by this Agreement to be set forth in the Schedules hereto. Parent and Merger Sub further agree that none of Holdings, their Affiliates or any other Person acting on behalf of Holdings, their Affiliates, the Holder Representative, or their respective Affiliates will have or be subject to any liability, except as specifically set forth in this Agreement, to Parent or Merger Sub or any other Person resulting from the distribution to Parent, for Parent's use, of any such information, including the Confidential Information Memorandum distributed by Bowles Hollowell Conner & Co. and any information, document, or material made available to Parent in certain "data rooms," management presentations or any other form in expectation of the transactions contemplated by the Agreement. In connection with Parent's investigation of Holdings and Elgar, Parent has received certain projections, including projected statements of operating revenues and income from operations of Holdings and Elgar for the fiscal year ending March 1998 and for subsequent fiscal years and certain business plan information for such fiscal year and succeeding fiscal years. Parent and Merger Sub acknowledge that there are uncertainties inherent in attempting to make such estimates, projections and other forecasts and plans, that Parent and Merger Sub are familiar with such uncertainties and that Parent and Merger Sub are taking full responsibility for making their own evaluation of the adequacy and accuracy of all estimates, projections and other forecasts and plans so furnished to them (including the reasonableness of the assumptions underlying such estimates, projections and forecasts). Accordingly, neither Holdings nor Elgar makes any representation or warranty with respect to such estimates, projections and other forecasts and plans (including the reasonableness of the assumptions underlying such estimates, projections and forecasts). 25 ARTICLE V. COVENANTS OF HOLDINGS 5.1. CONDUCT OF BUSINESS. From the date hereof through the Closing, Holdings shall, or shall cause Elgar, except as contemplated by this Agreement or as consented to by Parent in writing (which consent will not be unreasonably withheld), to operate the Business in the ordinary course and substantially in accordance with past practice and will use its reasonable efforts not to take any action inconsistent with this Agreement. Without limiting the generality of the foregoing, unless consented to by Parent in writing (which consent shall not be unreasonably withheld), neither Holdings nor Elgar shall except as specifically contemplated by this Agreement: (a) change or amend the Certificate of Incorporation, Bylaws or other organizational documents of Holdings or Elgar except as otherwise required by law; (b) enter into, extend, materially modify, terminate or renew any Contract of a type required to be listed on SCHEDULE 3.7, except in the ordinary course of business; (c) sell, assign, transfer, convey, lease or otherwise dispose of any material assets or properties except in the ordinary course of business; (d) (i) except as otherwise required by law or consistent with past practices or existing agreements, take any action with respect to the grant of any severance or termination pay (otherwise than pursuant to policies or agreements of Elgar in effect on the date hereof) which will become due and payable on or after the Closing; (ii) make any change in the key management structure of Elgar including, without limitation, the hiring of additional officers or the termination of existing officers, other than in the ordinary course of business; or (iii) except in the ordinary course of business, adopt, enter into or amend any employee benefit plan; (e) acquire by merger or consolidation with, or merge or consolidate with, or purchase substantially all of the assets of, or otherwise acquire any material assets or business of any corporation, partnership, association or other business organization or division thereof; (f) make any material loans or advances to any partnership, firm, corporation or any individual, except for expenses incurred in the ordinary course of business; (g) make any income tax election; (h) acquire, directly or indirectly, by redemption or otherwise any shares of capital stock of Holdings or Elgar; (i) declare or pay any dividends on any shares of capital stock of Holdings or Elgar; or (j) incur any indebtedness for borrowed money other than Bank Indebtedness or enter into any guarantee of indebtedness for borrowed money; 26 (k) enter into any agreement, or otherwise become obligated, to do any action prohibited hereunder. 5.2. INSPECTION. Subject to confidentiality obligations and similar restrictions that may be applicable to information furnished to Elgar by third-parties that may be in Elgar's possession from time to time (including restrictions on the disclosure of government-classified information), Holdings shall, or shall cause Elgar to, allow Parent and its accountants, counsel and other representatives reasonable access, during normal business hours, to all of its respective properties, books, contracts, commitments, tax returns, records and appropriate officers and employees of Elgar, and shall furnish such representatives with all financial and operating data and other information concerning the affairs of Holdings and Elgar as they may reasonably request. 5.3. HSR ACT. (a) In connection with the transactions contemplated by this Agreement, Holdings (and, to the extent required, its Affiliates) shall comply promptly with the notification and reporting requirements of the HSR Act and use its reasonable best efforts to obtain early termination of the waiting period under the HSR Act. Holdings shall substantially comply with any additional requests for information, including requests for production of documents and production of witnesses for interviews or depositions by the Antitrust Division of the U.S. Department of Justice, the U.S. Federal Trade Commission or the antitrust or competition law authorities of any other jurisdiction (whether United States, foreign or multinational) (collectively, "ANTITRUST AUTHORITIES"). (b) Holdings shall exercise commercially reasonable efforts to prevent the entry in any claim, action, suit, audit, assessment, arbitration or inquiry, or any proceeding or investigation, by or before any Governmental Body brought by any Antitrust Authorities or any other Person for any order, writ, rule, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Body ("GOVERNMENTAL ORDER") which would prohibit, make unlawful or delay the consideration of the transactions contemplated by this Agreement. 5.4. NO SOLICITATIONS. From the date hereof through the Closing Date or termination of this Agreement pursuant to SECTION 11.1, Holdings shall not, and Holdings shall not knowingly permit its Affiliates, officers, directors, employees, representatives and agents to, directly or indirectly, encourage, solicit, participate in or initiate discussions or negotiations with, or provide any information to, any Person or group of Persons (other than Parent or any of its Affiliates) in furtherance of any merger, sale of assets, sale of shares of capital stock or similar transactions involving Holdings or Elgar. ARTICLE VI. COVENANTS OF PARENT AND MERGER SUB 6.1. HSR ACT. (a) In connection with the transactions contemplated by this Agreement, Parent and Merger Sub (and, to the extent required, their Affiliates) shall comply promptly with 27 the notification and reporting requirements of the HSR Act and use its reasonable best efforts to obtain early termination of the waiting period under the HSR Act. Parent and Merger Sub shall substantially comply with any additional requests for information, including requests for production of documents and production of witnesses for interviews or depositions, by any Antitrust Authorities. (b) Parent and Merger Sub shall exercise commercially reasonable efforts to prevent the entry in any claim, action, suit, audit, assessment arbitration or inquiry, or any proceeding or investigation, by or before any Governmental Body brought by any Antitrust Authorities or any other Person of any Governmental Order which would prohibit, make unlawful or delay the consummation of the transactions contemplated by this Agreement. (c) Parent and Merger Sub shall cooperate in good faith with the Antitrust Authorities and undertake promptly any and all action required to complete lawfully the transactions contemplated by this Agreement, including proffering and consenting to a Governmental Order providing for the sale or other disposition, or the holding separate, of particular assets, categories of assets or lines of business, of either assets or lines of business of Elgar, or any other assets or lines of business of Parent or Merger Sub. The entry by any Governmental Body of a Governmental Order permitting the consummation of the transactions contemplated hereby but requiring any of the assets or lines of business of Parent or Merger Sub to be held separate thereafter (including the Business and assets of Elgar) shall not be deemed a failure to satisfy the conditions specified herein. 6.2. INDEMNIFICATION AND INSURANCE. (a) From and after the Closing, Parent and Merger Sub agree that they will cause Holdings and Elgar to continue to indemnify and hold harmless each present and former director and officer of Holdings or Elgar against any costs or expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages or liabilities incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to matters existing or occurring at or prior to the Closing, whether asserted or claimed prior to, at or after the Closing, to the fullest extent that Holdings or Elgar would have been permitted under Delaware or California law and its charter, by-laws or other organizational documents in effect on the date hereof to indemnify such person (including the advancing of expenses as incurred to the fullest extent permitted under applicable law), provided the person to whom such expenses are advanced provides an undertaking to Holdings or Elgar (as appropriate) to repay such advances if it is ultimately determined by a court of competent jurisdiction (which determination shall have become final) that such person is not entitled to indemnification. (b) For six (6) years from the Closing, Parent shall cause Elgar to use its best efforts to maintain in effect directors' and officers' liability insurance covering those Persons who are currently covered by Elgar's directors' and officers' liability insurance policy (a true, correct and complete copy of which has been heretofore delivered to Parent) on terms not materially less favorable than the terms of such current insurance coverage; PROVIDED, HOWEVER, that if any claim 28 is asserted or made within such six-year period, such insurance will be continued in respect of such claim until the final disposition thereof. 6.3. INSPECTION. Subject to confidentiality obligations and similar restrictions that may be applicable to information furnished to Elgar by third-parties that may be in Elgar's possession from time to time (including restrictions on the disclosure of government-classified information), from and after the Closing Date, Parent shall, or shall cause, Holdings and Elgar to allow the Holders Representative and its accountants, counsel and other representatives reasonable access, during normal business hours, to all of their respective properties, books, contracts, commitments, tax returns, records and appropriate officers and employees of Elgar, and shall furnish such representatives with all financial and operating data and other information concerning the pre-Closing operations of Holdings and Elgar as they may reasonably request. 6.4. PROHIBITED ACTIONS. None of Parent, Surviving Corporation, Elgar or any Affiliate thereof, shall take, or cause to be taken, any action on the Closing Date which is outside the ordinary course of business and that will have the effect of causing a breach of any representation or warranty by Holdings contained in Section 3.17 for which indemnity may be claimed under Article IX hereof. 6.5. FINANCING. On the Closing Date, Parent and Merger Sub shall have funds sufficient to consummate the transactions contemplated by this Agreement, including, without limitation, the payment of the Merger Consideration at the Closing. ARTICLE VII. JOINT COVENANTS 7.1. SUPPORT OF TRANSACTION. Holdings, Parent and Merger Sub shall each (a) use its reasonable best efforts to assemble, prepare and file any information (and, as needed, to supplement such information) as may be reasonably necessary to obtain as promptly as practicable all governmental and regulatory consents required to be obtained in connection with the transactions contemplated hereby, (b) use its reasonable best efforts to obtain all material consents and approvals of third parties that any of Holdings, Parent or Merger Sub or their respective Affiliates are required to obtain in order to consummate this transaction, (c) take such other action as may reasonably be necessary or as another party may reasonably request to satisfy the conditions of Article IX or otherwise to comply with this Agreement, and (d) provide the other party and such other party's employees, officers, accountants, lawyers, financial advisors and other representatives with access to its personnel, properties, business and records under all reasonable circumstances to the extent reasonably required for any legitimate business purpose. Without limiting the foregoing, Holdings shall, and shall cause Elgar to, cooperate in a commercially reasonable manner with Parent and Merger Sub prior to the Closing in connection with the efforts of Parent and Merger Sub to obtain financing for the transactions contemplated hereby, which efforts shall be at the expense of Parent and Merger Sub. The foregoing cooperation shall be limited to (i) granting Parent and Merger Sub, their bankers and their respective legal counsel and accountants access to the books and records of Elgar and Holdings and to any personnel knowledgeable about such books and records, in each case, to the extent 29 reasonably requested by Parent or Merger Sub, and (ii) using commercially reasonable efforts to furnish necessary financial information in connection with such financings. ARTICLE VIII. CONDITIONS TO OBLIGATION OF PARTIES TO CONSUMMATE CLOSING 8.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of each party to consummate the transaction contemplated hereby on the Closing Date is subject to the satisfaction or waiver, on or prior to the Closing Date, of each of the following conditions. (a) NO GOVERNMENTAL OR OTHER PROCEEDINGS OR LITIGATION. There shall be no injunction or court order restraining consummation of the transactions contemplated hereunder and there shall be no pending or threatened action or proceeding by or before a court or Governmental Body brought by or on behalf of any Governmental Body seeking to restrain or invalidate all or any portion of the transactions contemplated hereunder, and there shall not have been adopted any law or regulation making all or any portion of the transactions contemplated hereunder illegal. (b) HSR ACT. All waiting periods under the HSR Act (and any extension thereof) applicable to the Merger shall have expired or terminated. 8.2. CONDITIONS TO THE OBLIGATIONS OF PARENT AND MERGER SUB. The obligations of Parent and Merger Sub under this Agreement to consummate the Closing is subject to the conditions that: (a) COVENANTS, REPRESENTATIONS AND WARRANTIES. Holdings shall have performed in all material respects all agreements and complied in all material respects with all covenants contained in this Agreement to be performed and complied with by it prior to or on the Closing Date. The representations and warranties of Holdings set forth in this Agreement shall be accurate in all material respects, as of the Effective Time, with the same force and effect as though made as of the Effective Time except for any changes resulting from activities or transactions which may have taken place after the date hereof and which are permitted or contemplated by the Agreement or which have been entered into in the ordinary course of business and except to the extent that such representations and warranties are expressly made as of another specified date and, as to such representations, the same shall be true as of such specified date. (b) CONSENTS. All statutory requirements for the valid consummation by Holdings of the transactions contemplated by this Agreement shall have been fulfilled and all authorizations, consents and approvals, including those of all federal, state, local and foreign governmental agencies and regulatory authorities required to be obtained in order to permit the consummation by Holdings of the transactions contemplated hereby shall have been obtained in form and substance reasonably satisfactory to Parent, it being understood, however, that (i) any novations or consents required in connection with any Government Contracts and (ii) any other consents or approvals, the failure of which to obtain would not have a Material Adverse Effect on Holdings or Elgar, need not be obtained prior to Closing. All approvals from the boards of 30 directors of Holdings and Elgar necessary for the consummation of this Agreement and the transactions contemplated hereby shall have been obtained. (c) DISCHARGE OF INDEBTEDNESS AND LIENS. The amount contemplated by the parties to be applied to Bank Indebtedness as provided in Section 1.7(d) shall be sufficient to repay all of Holdings' and Elgar's Bank Indebtedness on the Closing Date; and the termination of all Liens with respect to such Bank Indebtedness shall have been provided for. (d) OPINION OF HOLDINGS COUNSEL. Parent shall have received an opinion of Latham & Watkins, counsel to Holdings, dated as of the Closing Date, in substantially the same form as the form of opinion that is EXHIBIT C hereto. (e) OFFICER'S CERTIFICATES. Parent shall have received an officer's certificate executed by an officer of Holdings dated as of the Closing Date, evidencing compliance with the conditions set forth in this Article VIII. (f) MANAGEMENT AGREEMENTS. That certain Management Agreement dated as of April 4, 1996 by and between Elgar and TC Group Management, L.L.C., a Delaware limited liability company and that certain Management Agreement dated as of April 4, 1996 by and between Elgar and GFI Energy Ventures LLC, a Delaware limited liability company, shall each have been terminated effective at the Effective Time and no additional payments shall be due thereunder. 8.3. CONDITIONS TO HOLDING'S OBLIGATIONS. The obligation of Holdings under this Agreement to consummate the Closing is subject to the conditions that: (a) COVENANTS, REPRESENTATIONS AND WARRANTIES. Parent and Merger Sub shall have performed in all material respects all agreements and complied in all material respects with all covenants contained in this Agreement to be performed and complied with by it prior to or on the Closing Date. The representations and warranties of Parent and Merger Sub set forth in this Agreement shall be accurate in all material respects, as of the Effective Time, with the same force and effect as though made as of the Effective Time except for any changes resulting from activities or transactions which may have taken place after the date hereof and which are permitted or contemplated by the Agreement or which have been entered into in the ordinary course of business and except to the extent that such representations and warranties are expressly made as of another specified date and, as to such representations, the same shall be true as of such specified date. (b) CONSENTS. All statutory requirements for the valid consummation by Parent and Merger Sub of the transactions contemplated by this Agreement shall have been fulfilled and all authorizations, consents and approvals, including those of all federal, state, local and foreign governmental agencies and regulatory authorities required to be obtained in order to permit the consummation by Parent and Merger Sub of the transactions contemplated hereby shall have been obtained in form and substance reasonably satisfactory to Holdings unless the failure to obtain such authorization, consent or approval shall not materially adversely affect Merger Sub's ability to consummate the transactions contemplated hereby. All approvals of Parent and of 31 Merger Sub's board of directors or shareholders necessary for the consummation of this Agreement and the transactions contemplated hereby shall have been obtained. (c) OPINION OF BUYER'S COUNSEL. Holdings shall have received an opinion of Gibson, Dunn & Crutcher LLP, counsel to Parent and Merger Sub, dated as of the Closing Date, in substantially the same form as the form of opinion that is EXHIBIT D hereto. (d) OFFICER'S CERTIFICATE. Holdings shall have received an officer's certificate executed by an officer of Merger Sub and of Parent, each dated as of the Closing Date, evidencing compliance with the conditions set forth in this Article VIII. (e) PAYMENT OF MERGER CONSIDERATION. Parent and Merger Sub shall have made provision for the payment of the Merger Consideration as set forth in Article I. ARTICLE IX. INDEMNIFICATION 9.1. SURVIVAL OF REPRESENTATIONS, ETC.. The representations, warranties, covenants and agreements of the parties hereto contained herein shall survive the Closing for a period ending on June 30, 1999, at which time such representations, warranties, covenants and agreements shall terminate; PROVIDED, HOWEVER, that the representations and warranties of Holdings set forth in Section 3.17 shall survive until the earlier to occur of (A) the date thirty (30) days after the expiration of any applicable statute of limitations and (B) the fifth anniversary of the Closing Date, at which time such representations and warranties shall terminate. The termination of representations, warranties, covenants and agreements shall not affect the rights of a party with respect to any claim thereunder which has been asserted in writing to the other party prior to the date of such termination, but claims based upon or arising under representations, warranties, covenants, or agreements contained herein that are asserted after June 30, 1999 (or in the case of the representations and warranties of Holdings in Section 3.17, the date specified in the proviso to the first sentence of this Section 9.1) shall be null and void. 9.2. INDEMNIFICATION. (a) Subject to the other provisions of this Article IX, from and after the Closing until the expiration of the applicable survival period set forth in Section 9.1 above, the Surviving Corporation shall be entitled to indemnification solely out of the Indemnification Escrow Amount from and against any and all demands, losses, damages, penalties, claims, liabilities, obligations, actions, causes of action, and reasonable expenses (including without limitation, costs of investigating, preparing or defending any such claim or action and reasonable legal fees and expenses) (collectively, "LOSSES") incurred by the Surviving Corporation arising by reason of, or resulting from, any breach of any warranty, representation, covenant or agreement of Holdings contained in this Agreement or in any certificate delivered pursuant thereto. (b) Subject to the provisions of this Article IX, from and after the Closing until the expiration of the applicable survival period set forth in Section 9.1 above, the Surviving Corporation shall indemnify and hold harmless the Holder Representative on behalf of the 32 Holders, to the fullest extent lawful, from and against any and all Losses incurred by the Holders or the Holder Representative arising by reason of or resulting from any breach of any warranty, representation, covenant or agreement of Parent or Merger Sub contained in this Agreement or in any certificate delivered pursuant thereto. 9.3. LIMITATION ON INDEMNITIES. No claim may be made for indemnification pursuant to Section 9.2(a) or Section 9.2(b) until the aggregate dollar amount of all Losses indemnifiable pursuant to such section exceeds Five Hundred Thousand Dollars ($500,000) and then only to the extent such Losses exceed the Five Hundred Thousand Dollar ($500,000) threshold. To the extent the Surviving Corporation is entitled to indemnification pursuant to Section 9.2(a), (i) the Surviving Corporation shall be entitled to obtain such indemnification only out of the then remaining balance of the Indemnification Escrow Amount, (ii) the aggregate amount of all Losses for which the Surviving Corporation shall be entitled to indemnification shall not exceed Seven Million Dollars ($7,000,000), and (iii) the Surviving Corporation shall not have any recourse against the Holder Representative or the Holders, for indemnification pursuant to this Article IX or otherwise. Notwithstanding anything contained in this Agreement, the indemnification provisions of this Article IX shall expire on June 30, 1999 (or, in the case of the representations and warranties of Holdings in Section 3.17, the date provided in Section 9.1) and any claims for indemnification which are not asserted prior to such date shall be forfeited; PROVIDED, HOWEVER, that such indemnification obligations with respect to any claim for indemnification asserted in writing to the indemnifying party prior to June 30, 1999 (or, in the case of the representations and warranties of Holdings in Section 3.17, the date provided in Section 9.1) shall survive until such claim is either resolved or satisfied. 9.4. LOSSES. The term for "LOSSES" as used in this Article IX is not limited to matters asserted by third parties, but includes Losses incurred or sustained by an indemnified party in the absence of third party claims. The difference between (a) any insurance proceeds received by an indemnified party in respect of Losses and (b) legal costs and expenses incurred by such indemnified party, if any, in seeking the payment of such insurance proceeds from the insurer or insurers who insured against such Losses, shall be deducted from any claim for indemnification made by such indemnified party. Payments by an indemnified party of amounts for which such indemnified party is indemnified hereunder shall not be a condition precedent to recovery. If after payment of any claim by an indemnifying party to an indemnified party, such indemnified party receives insurance proceeds on account of the Loss indemnified by such payment, such indemnified party shall pay to the indemnifying party the lesser of (a) the amount of the payment on the claim with respect to such Loss of the indemnifying party to the indemnified party and (b) the amount of such insurance proceeds minus the legal costs and expenses incurred by such indemnified party, if any, in seeking the payment of such insurance proceeds from the insurer or insurers who insured against such Losses. Additionally, the amount of any Losses shall be calculated (i) net of any reserves, liability accruals or other provisions for such Losses on the Closing Balance Sheet and (ii) after the effect of any tax benefits realizable in connection therewith. Any indemnification payments made under this Article shall be treated as an adjustment to the Merger Consideration except as otherwise required under applicable law. 9.5. DEFENSE OF CLAIMS. If a claim for Losses (a "CLAIM") is to be made by an indemnified party, such indemnified party shall give written notice (a "CLAIM NOTICE") to (i) the 33 Holder Representative in the case of indemnification pursuant to Section 9.2(a) and (ii) the Surviving Corporation in the case of indemnification pursuant to Section 9.2(b) (the recipient of such notice referred to below as the "INDEMNIFYING PARTY"), in either case as soon as practicable after such indemnified party becomes aware of any fact, condition or event which may give rise to Losses for which indemnification may be sought under this Article IX. If any lawsuit or other action is filed or instituted against any indemnified party with respect to a matter subject to indemnity hereunder, notice thereof (a "THIRD PARTY NOTICE") shall be given to the indemnifying party as promptly as practicable (and in any event within fifteen (15) calendar days after the service of the citation or summons). The failure of any indemnified party to give timely notice hereunder shall not affect rights to indemnification hereunder, except to the extent of actual damage caused by such failure. After receipt of a Third Party Notice, the indemnifying party shall be entitled, if it so elects, (i) to take control of the defense and investigation of such lawsuit or action, (ii) to employ and engage attorneys of its own choice to handle and defend the same, at the indemnifying party's cost, risk and expense, and (iii) to compromise or settle such claim, which compromise or settlement shall be made only with the written consent of the indemnified party, such consent not to be unreasonably withheld. The indemnified party shall cooperate in all reasonable respects with the indemnifying party and such attorneys in the investigation, trial and defense of such lawsuit or action and any appeal arising therefrom; and the indemnified party may, at its own cost, participate in the investigation, trial and defense of such lawsuit or action and any appeal arising therefrom. The parties shall also cooperate with each other in any notifications to insurers. If the indemnifying party fails to assume the defense of such claim within fifteen (15) calendar days after receipt of the Third Party Notice, the indemnified party against which such claim has been asserted will (upon delivering notice to such effect to the indemnifying party) have the right to undertake the defense, compromise or settlement of such claim and the indemnifying party shall have the right to participate therein at its own cost; PROVIDED, HOWEVER, that such claim shall not be compromised or settled without the written consent of the indemnifying party, which consent shall not be unreasonably withheld. In the event the indemnified party assumes the defense of the claim, the indemnified party will keep the indemnifying party reasonably informed of the progress of any such defense, compromise or settlement. Notwithstanding the foregoing, the indemnifying party shall not be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for any and all indemnified parties (which firm shall be designated in writing by such indemnified party or parties) in connection with any one such action or proceeding arising out of the same general allegations or circumstances. 9.6. RELEASE OF INDEMNIFICATION ESCROW AMOUNT. As promptly as practicable after June 30, 1999, the Escrow Agent shall release to the Holder Representative for distribution to the Holders all or any remaining portion of the Indemnification Escrow Amount (including any earnings thereon) LESS the sum of (i) an amount equal to the aggregate of all claims for indemnification of the Surviving Corporation which are properly asserted and pending on such date PLUS (ii) One Million Dollars ($1,000,000). Promptly upon the resolution of any such pending claim for indemnification, the Escrow Agent shall release to the Holder Representative for distribution to the Holders any Indemnification Escrow Amount (including any earnings thereon) retained in respect of such pending claim for indemnification remaining after the resolution of such pending claim; PROVIDED, HOWEVER, that until the date upon which the representations and warranties of Holdings set forth in Section 3.17 terminate as provided in 34 Section 9.1, the Escrow Agent shall retain and shall not distribute to the Holder Representative an Indemnification Escrow Amount equal to the lesser of (i) One Million Dollars ($1,000,000) and (ii) the amount of Indemnification Escrow Amount remaining after payment of all claims for indemnification of the Surviving Corporation pursuant to this Article IX. Notwithstanding anything herein to the contrary, as promptly as practicable after the expiration of the representations and warranties of Holdings set forth in Section 3.17 terminate as provided in Section 9.1, the Escrow Agent shall release to the Holder Representative for distribution to the Holders the remaining balance of the Indemnification Escrow Amount (including any earnings thereon), less the aggregate of all claims for indemnification of the Surviving Corporation which are properly asserted and pending on such date, as specified in the Indemnification Agreement. The Indemnification Escrow Agreement will provide that interest earned on the Indemnification Escrow Amount shall be payable quarterly to the Holder Representative to be distributed to the Holders. Any distribution to the Holders pursuant to this Section 9.6 shall be made in accordance with the Holders' Contingent Distribution Percentages and shall be net of any amounts to which the Holder Representative is entitled pursuant to Sections 1.10 and 1.11. 9.7. EXCLUSIVE REMEDY. From and after the Closing, and except for actions to enforce the provisions of Article I hereof, the parties' rights to indemnification pursuant to this Article X shall be the sole and exclusive remedy available to the parties with respect to any matter arising under or in connection with this Agreement or the transactions set forth herein except for any matter arising out of or related to fraud by any party. ARTICLE X. TERMINATION 10.1. TERMINATION. Prior to the Closing, this Agreement may be terminated: (a) by mutual written consent of the parties; (b) by Parent or Holdings if the Closing shall not have occurred on or before February 27, 1998, other than by reason of a material breach of a representation or warranty or of any covenant or agreement by the party seeking termination. (c) by Parent, if there is a material breach of any representation or warranty set forth in Article III hereof or of any covenant or agreement to be complied with or performed by Holdings pursuant to the terms of this Agreement which would reasonably be expected to cause a failure to meet a condition to Closing set forth in Section 8.1 or Section 8.2 (a "PARENT TERMINATING BREACH"), PROVIDED that if such Parent Terminating Breach is curable by Holdings through the exercise of its reasonable best efforts, then, for a period of up to thirty (30) days, but only so long as Holdings continues to use its reasonable best efforts to cure such Parent Terminating Breach (the "HOLDINGS CURE PERIOD"), such termination shall not be effective, and such termination shall become effective only if the Parent Terminating Breach is not cured within the Holdings Cure Period. (d) by Holdings, if there is a material breach of any representation or warranty set forth in Article IV hereof or of any covenant or agreement to be complied with or performed 35 by Parent pursuant to the terms of this Agreement (including the failure of Parent and Merger Sub to have made provision for the payment of the Merger Consideration as set forth in Article I (such failure, a "Payment Breach")) which would reasonably be expected to cause a failure to meet a condition to Closing set forth in Section 8.1 or Section 8.3 (a "HOLDINGS TERMINATING BREACH"), PROVIDED that if such Holdings Terminating Breach (other than a Payment Breach) is curable by Parent through the exercise of its reasonable best efforts, then, for a period of up to thirty (30) days, but only so long as Parent continues to use its reasonable best efforts to cure such Holdings Terminating Breach (the "PARENT CURE PERIOD"), such termination shall not be effective, and such termination shall become effective only if the Holdings Terminating Breach is not cured within the Parent Cure Period. There shall be no Parent Cure Period applicable to any Holdings Terminating Breach that is a Payment Breach. (e) In the event of termination of this Agreement: (i) if requested, each party will promptly redeliver all Confidential Information of any other party relating to the transactions contemplated hereby, whether so obtained before or after the execution hereof to the party furnishing the same. (ii) no party hereto shall have any liability or further obligation to any other party relating to the transactions contemplated hereby, provided that no such termination shall relieve any party from liability for a prior breach of this Agreement. ARTICLE XI. DEFINITIONS 11.1. DEFINITIONS. In this Agreement, the following terms have the meanings specified or referred to in this SECTION 11.1 which shall be equally applicable to both the singular and plural forms. Any agreement referred to below shall mean such agreement as amended, supplemented and modified from time to time to the extent permitted by the applicable provisions thereof and by this Agreement. "AFFILIATE" means, with respect to any Person, any other Person which directly or indirectly controls, is controlled by or is under common control with such Person. "BANK INDEBTEDNESS" means the indebtedness (including accrued interest) of Elgar pursuant to a credit agreement dated as of April 4, 1996 by and among Holdings, Carlyle-EEC Acquisitions, Inc., Banque Indosuez, New York Branch, as agent and the other financial institutions named therein. "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601 et seq.). "CLOSING NET WORKING CAPITAL" means the amount of Net Working Capital reflected on the Closing Balance Sheet. "CODE" means the Internal Revenue Code of 1986, as amended. 36 "CONFIDENTIAL INFORMATION" means, with respect to Holdings, Elgar, Parent or Merger Sub all confidential information and trade secrets of such Person including, without limitation, the identity, lists or descriptions of any customers, referral sources or organizations; financial statements, cost reports or other financial information; manufacturing and other processes, procedures and techniques; contract proposals and bidding information; business plans and training and operations methods and manuals; personnel records; fee structure; and management systems, policies or procedures, including related forms and manuals. Confidential Information shall not include any information (i) which is disclosed pursuant to subpoena or other legal process, (ii) which has been publicly disclosed, (iii) which subsequently becomes known to a third party not subject to a confidentiality agreement with Holdings, Carlyle-EEC or Parent, or (iv) which is subsequently disclosed by any third party not in breach of a confidentiality agreement. "CONTINGENT DISTRIBUTIONS" means any amounts (other than the Cash Available at Closing) which, pursuant to this Agreement, become distributable to the Holders subsequent to the Closing, including without limitation (i) any portion(s) of the Indemnification Escrow Amount or the Adjustment Escrow which become distributable to the Holders and (ii) any amounts distributable to the Holders out of payments made to the Holder Representative by the Escrow Agent pursuant to Section 1.9(d) or Article IX. "CONTINGENT DISTRIBUTION PERCENTAGES" shall mean the percentages set forth in the Liquidation Agreement as the percentage of Contingent Distributions to be received by each of the Holders, as the same may be amended from time to time. "COURT ORDER" means any judgment, order, award or decree of any foreign, federal, state, local or other court or tribunal and any award in any arbitration proceeding. "ELGAR" means Elgar Electronics Corporation, a California corporation and a wholly-owned Subsidiary of Holdings. "ENVIRONMENTAL LAWS" means, in each case as in effect on the applicable date prior to the Closing Date, 42 U.S.C. Section 9607 and 9613(f) of CERCLA, the Hazardous Material Transportation Act (49 U.S. C. Section 1801 et seq.), the Clean Water Act (33 U.S.C. Section 1251 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et. seq.), the Clean Air Act (42 U.S.C. Section 7401 et seq.), the Toxic Substances Control Act, as amended (15 U.S.C. Section 2601 et seq.), the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. Section 136 et seq.), the Occupational Safety and Health Act (29 U.S.C. Section 651 et seq.) and any other federal, state, local or foreign law relating to Environmental Matters, the rules and regulations promulgated under any thereof and any provisions of common law providing for any remedy or right of recovery with respect to Environmental Matters. "ENVIRONMENTAL MATTERS" means any matter arising out of or relating to the production, storage, handling, use, emission, disposal, discharge, transportation, or release of any contaminant, waste, or hazardous or toxic material, or other substance or material regulated by law, or otherwise arising out of or relating to safety, health, sanitation or the environment, and shall include, without limitation, the costs of investigating and remediating the same, any fines and 37 penalties arising in connection therewith, and any claim in respect thereof for damages or injunctive relief for alleged personal injury, property damage or damage to natural resources under common law or Environmental Law. "ENVIRONMENTAL PERMIT" means each permit, license, order, variance, registration or other authorization of any federal, state or local governmental agency issued, approved or required to be obtained under any Environmental Law. "FACILITY" means any Real Property and any real property or other facility presently or previously owned, operated or leased by Holdings or Elgar. "GAAP" means U.S. generally accepted accounting principles, consistently applied. "GOVERNMENT CONTRACT" means any prime contract, subcontract, basic ordering agreement, letter agreement, purchase order, delivery order, bid, change order or other commitment relating to the business of Holdings or Elgar between Holdings or Elgar and (i) the United States Government or a department or agency thereof or (ii) any prime contractor or subcontractor with respect to performance by Holdings or Elgar as a subcontractor of any portion of the obligations of a prime contract with the United States Government or a department or agency thereof. "GOVERNMENTAL BODY" means any foreign, federal, state, local or other governmental authority, instrumentality or regulatory body. "HAZARDOUS MATERIAL" means (i) any pollutant, contaminant, petroleum, crude oil or any fraction thereof or hazardous waste or hazardous substance, within the meaning of such terms under CERCLA or any other Environmental Law and (ii) any other hazardous or toxic substance or material, or any material requiring investigation or remediation, within the meaning of any Environmental Law applicable to Holdings or Elgar or to which their respective properties or other assets are subject. "HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. "IRS" means the United States Internal Revenue Service. "LIEN" means any encumbrance, claim, charge, security interest, mortgage, pledge, easement, conditional sale or other title retention agreement, defect in title, covenant or other restriction of any kind. "MATERIAL ADVERSE CHANGE" or "MATERIAL ADVERSE EFFECT" means, with respect to Holdings, Person or Merger Sub, as appropriate, a material adverse change or effect on the business, operations, or financial condition of such Person and its Subsidiaries, taken as a whole. "NET WORKING CAPITAL" as of any date means (i) the consolidated current assets of Holdings and its Subsidiaries as of such date, MINUS (ii) the consolidated current liabilities of 38 Holdings and its Subsidiaries (excluding the current portion of any Bank Indebtedness) as of such date. "NON-MANAGEMENT HOLDER" means a Holder designated as a "Non-Management Holder" on Exhibit A hereto. "PERMITTED LIENS" means (a) liens for Taxes and other governmental charges and assessments which are not yet due and payable or which are being contested in good faith by appropriate proceedings, (b) liens of landlords and liens of carriers, warehousemen, mechanics and materialmen and other like liens arising in the ordinary course of business for sums not yet due and payable or which are being contested in good faith by appropriate proceedings, (c) other liens or imperfections on property which do not materially detract from the value of or the existing use of the property affected by such lien or imperfection and (d) liens shown on any title insurance policies delivered to Buyer. "PERSON" means any individual, corporation, partnership, joint venture, association, joint-stock company, limited liability company, trust, unincorporated organization or Governmental Body. "REQUIREMENTS OF LAWS" means any foreign, federal, state and local laws, statutes, regulations, rules, codes or ordinances enacted, adopted, issued or promulgated by any Governmental Body (including, without limitation, those pertaining to environmental and occupational safety and health requirements) or common law. "SIDE LETTER" means that certain letter agreement of even date herewith between Holdings and J.F. Lehman Equity Investors I, L.P. "SUBSIDIARY" means, with respect to any Person, a corporation or other entity of which 50% or more of the voting power or value of the equity securities or equity interests is owned, directly or indirectly, by such Person. "TAX" or "TAXES" means any federal, state, local or foreign income, alternative or add-on minimum, gross income, gross receipts, windfall profits, severance, property, production, sales, use, transfer, gains, license, excise, employment, payroll, withholding or minimum tax, or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or any penalty, addition to tax or additional amount imposed by any Governmental Body. "TAX RETURN" means any return, report or similar statement required to be filed with respect to any Taxes (including any attached schedules), including, without limitation, any information return, claim for refund, amended return and declaration of estimated Tax. 11.2. TERMS DEFINED ELSEWHERE. The following is a list of additional terms used in this Agreement and a reference to the Section hereof in which such term is defined: 39
TERM SECTION - ---- ------- Adjustment Escrow Amount Section 1.7(c)(ii) Annual Financial Statements Section 3.6(a) Antitrust Authorities Section 5.3(a) Auditor Section 1.9(c) Base Working Capital Section 1.9(a) Benefit Arrangement Section 3.13(a)(i) Cancelled Shares Section 1.6(a) Carlyle-EEC Recital C Cash Available at Closing Section 1.7(c)(iv) Certificate of Merger Recital B Claim Section 9.5 Claim Notice Section 9.5 Closing Section 2.1 Closing Balance Sheet Section 1.9(b) Closing Date Section 1.2 Closing Net Working Capital Section 1.9(b) Constituent Corporation Recital A Continuing Shares Section 1.6(b) Contracts Section 3.7(a) Deficit Amount Section 1.9(d) Determination Date Section 1.9(c) DGCL Recital B Distribution Recital G Effective Time Section 1.2 Elgar Welfare Plan Section 3.13(c)(iii)(A) Employee Plans Section 3.13(a)(ii) ERISA Section 3.13(a)(iii) ERISA Affiliate Section 3.13(a)(iv) Estimated Closing Net Working Capital Section 1.9(a) Estimated Net Working Capital Adjustment Amount Section 1.9(a) Exchange Agent Section 1.8 Government Contract Section 3.8 Governmental Order Section 5.3(b) Governmental Permits Section 3.19 Holder Allocable Expenses Section 1.11 Holder Representative Section 1.10(a) Holders Recital J Holdings Common Stock Recital C Holdings Cure Period 10.1(c) Holdings Terminating Breach 10.1(d) Increase Amount Section 1.9(d) Indemnification Escrow Amount Section 1.7(c)(i) Intellectual Property Rights Section 3.10 Interim Financial Statements Section 3.6(a)
40
TERM SECTION - ---- ------- J.A.M.S. Section 12.12 Liquidation Agreement Recital G Losses Section 9.4 Machinery and Equipment Section 3.9 Majority Holders Section 1.10(a) Merger Recital A Merger Consideration Section 1.7(a) Merger Sub Common Stock Recital D Merger Sub Preferred Stock Recital E Multi-Employer Plan Section 3.13(a)(v) Net Working Capital Adjustment Amount Section 1.9(d) Paid-in Capital Section 1.6(c)(ii) Panel Section 12.12 Parent Cure Period 10.1(d) Parent Terminating Breach 10.1(c) PBGC Section 3.13(a)(vi) Pension Plan Section 3.13(a)(vii) Real Property Section 3.11 Reference Balance Sheet 1.9(a) Resignations Section 1.5 Retained Percentage Section 1.6(c)(ii) Retained Surviving Corporation Common Stock Section 1.6(b)(ii) Surviving Corporation Section 1.1 Surviving Corporation Common Stock Section 1.6(b) Surviving Corporation Holders 1.5(b) Third Party Notice Section 9.5 Welfare Plan Section 3.13(a)(viii)
ARTICLE XII. MISCELLANEOUS 12.1. PREPARATION AND FILING OF TAX RETURNS. Parent shall cause to be prepared, in a manner consistent with past practice, all Tax Returns that are in respect of the Taxes of Holdings, Elgar or any predecessor-in-interest for taxable years or periods beginning prior to the Closing Date but which are due to be filed (taking into account all applicable extensions of time for filing after the Closing Date) and shall cause such Tax Returns to be delivered to the Holder Representative for comment and approval, which approval shall not be unreasonably withheld, no later than thirty (30) days prior to the due date for filing any such Tax Return (taking into account any applicable extensions of time to file). 12.2. MODIFICATIONS, WAIVER OF RIGHTS. Any amendment, change or modification of this Agreement shall be void unless in writing and signed by all parties hereto. No failure or delay by any party hereto in exercising any right, power or privilege hereunder (and no course of 41 dealing between or among any of the parties) shall operate as a waiver of any such right, power or privilege. No waiver of any default on any one occasion shall constitute a waiver of any subsequent or other default. No single or partial exercise of any such right, power or privilege shall preclude the further or full exercise thereof. 12.3. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given (a) when personally delivered, or delivered by facsimile (receipt acknowledged), (b) on the next business day if timely delivered by overnight courier or (c) four (4) days after deposited in the United States mail, first-class, postage prepaid, addressed to the respective parties hereto as follows: PARENT OR MERGER SUB: --------------------- c/o J.F. Lehman & Company 450 Park Avenue, Sixth Floor New York, New York 10022 Attention: Donald Glickman Tel No.: (212) 634-0100 Fax No.: (212) 634-1155 WITH A COPY TO: --------------- Gibson, Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, California 90071 Attention: Kenneth M. Doran Tel No.: (213) 229-7000 Fax No.: (213) 229-7520 HOLDINGS OR HOLDERS REPRESENTATIVE: ----------------------------------- c/o The Carlyle Group 1001 Pennsylvania Avenue, N.W. Suite 2205 Washington, D.C. 20004 Attention: Daniel A. D'Aniello Tel No.: (202) 347-2626 Fax No.: (202) 347-1818 42 WITH A COPY TO: --------------- GFI Energy Ventures LLC 12121 Wilshire Boulevard, Suite 1375 Los Angeles, CA 90025 Attention: Ian Schapiro Tel No.: (310) 442-0542 Fax No.: (310) 442-0540 and Latham & Watkins 1001 Pennsylvania Avenue, N.W. Suite 1300 Washington, D.C. 20004 Attention: Bruce E. Rosenblum Tel No.: (202) 637-2200 Fax No.: (202) 637-2201 or to such other address as to any party hereto as such party shall designate by like notice to the other parties hereto. Any such communication shall bear the date on which it is delivered or deposited in the mail. The address and facsimile information provided for above may be changed by giving notice in the manner provided by this SECTION 12.3. 12.4. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed an original but all of which counterparts collectively shall constitute one instrument, and in making proof of this Agreement, it shall never be necessary to produce or account for more than one such counterpart. 12.5. EXPENSES. Each of the parties hereto, will bear all costs, charges and expenses incurred by such party in connection with this Agreement and the consummation of the transactions contemplated herein, including, without limitation, filing fees payable under the HSR Act and attorneys' fees incurred in connection with the negotiation and preparation of this Agreement. 12.6. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of Holdings, Parent, Merger Sub and the Holder Representative, their representatives, successors, and permitted assigns, in accordance with the terms hereof. This Agreement shall not be assignable by any party without the prior written consent of the other parties hereto. 12.7. ENTIRE AND SOLE AGREEMENT. This Agreement and the other schedules and agreements referred to herein (including the Side Letter), constitute the entire agreement between the parties hereto and supersede all prior agreements, representations, warranties, statements, promises, information, arrangements and understandings, whether oral or written, express or implied, with respect to the subject matter hereof. 43 12.8. GOVERNING LAW. This Agreement and its validity, construction, enforcement, and interpretation shall be governed by the substantive laws of the State of California. 12.9. INVALID PROVISIONS. If any provision of this Agreement is deemed or held to be illegal, invalid or unenforceable, this Agreement shall be considered divisible and inoperative as to such provision to the extent it is deemed to be illegal, invalid or unenforceable, and in all other respects this Agreement shall remain in full force and effect; PROVIDED, HOWEVER, that if any provision of this Agreement is deemed or held to be illegal, invalid or unenforceable there shall be added hereto automatically a provision as similar as possible to such illegal, invalid or unenforceable provision and be legal, valid and enforceable. Further, should any provision contained in this Agreement ever be reformed or rewritten by any judicial body of competent jurisdiction, such provision as so reformed or rewritten shall be binding upon all parties hereto. 12.10. REMEDIES CUMULATIVE. The remedies of the parties under this Agreement are cumulative and shall not exclude any other remedies to which any party may be lawfully entitled. 12.11. Obligation of the Parties. This Agreement represents an obligation only of the signatory parties. The representations, warranties, covenants and agreements included in this Agreement shall be obligations of such entities only, shall be satisfied only from the assets of such entity, and shall not be satisfied from the assets of the shareholders, partners or other Affiliates of the signatory parties. 12.12. DISPUTE RESOLUTION. The parties hereby agree that, in order to obtain prompt and expeditious resolution of disputes under this Agreement, each claim, dispute or controversy of whatever nature, arising out of, in connection with, or in relation to the interpretation, performance or breach of this Agreement (or any agreement contemplated by or related to this Agreement), including without limitation any claim based on contract, tort or statute, or the alleged breach hereof or thereof, shall be settled, at the request of any party of this Agreement, by final and binding arbitration conducted in Los Angeles, California, administered by a panel of three arbitrators, one chosen by Parent and one by the Holders Representative and the third to be selected by the two arbitrators so chosen (the "PANEL"), in accordance with the then existing Rules of Practice and Procedure of the Judicial Arbitration & Mediation Services, Inc. ("J.A.M.S."), and judgment upon any award rendered by the Panel may be entered by any state or federal court having jurisdiction thereof. The arbitration procedures shall follow the substantive law of the State of California, including the provisions of statutory law dealing with arbitration, as it may exist at the time of the demand for arbitration, insofar as said provisions are not in conflict with this Agreement and specifically excepting therefrom sections of any such statute dealing with discovery and sections requiring notice of the hearing date by registered or certified mail. The Panel shall determine the prevailing party and shall include in its award that party's reasonable attorney's fees and costs. 12.13. RELIANCE. The lender or lenders with respect to any financing transaction consummated in connection with this Agreement shall be entitled to rely in connection with the provision of such financing upon the legal opinions delivered pursuant to Section 8.2(d) and 8.3(c). 44 12.14. LIMITATION ON LIABILITY. No officer, director, member, shareholder or other Affiliate of Parent shall have any liability to any party under this Agreement other than as provided in the Side Letter. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed as of the date and year first above written. PARENT: JFL-EEC LLC By: /s/ Donald Glickman ---------------------------- Name: Donald Glickman Title: Manager MERGER SUB: JFL-EEC MERGER SUB CO. By: /s/ Donald Glickman ---------------------------- Name: Donald Glickman Title: President HOLDINGS: CARLYLE-EEC HOLDINGS, INC. By: /s/ Daniel A. D'Aniello ---------------------------- Name: Daniel A. D'Aniello Title: President HOLDERS REPRESENTATIVE: TC GROUP, L.L.C. BY: TCG Holdings, L.L.C., its Managing Member By: /s/ Daniel A. D'Aniello ---------------------------- Name: Daniel A. D'Aniello Title: Manager 45 EX-3.1 4 EXHIBIT 3.1 Exhibit 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF JFL-EEC MERGER SUB CO. The undersigned, Keith Oster, Secretary of JFL-EEC Merger Sub Co., a corporation existing under the laws of the State of Delaware (the "Corporation"), does hereby certify as follows: 1. The present name of the Corporation is JFL-EEC Merger Sub Co. The name under which the Corporation was originally incorporated is JFL-EEC Merger Sub Co. The original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on December 29, 1997. 2. In accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware, the Corporation duly adopted this Amended and Restated Certificate of Incorporation pursuant to resolutions of its Board of Directors and its stockholders. 3. The duly adopted Amended and Restated Certificate of Incorporation is as follows: ARTICLE I Name SECTION 1.01 The name of the Corporation incorporated pursuant to Delaware General Corporation Law is JFL-EEC Merger Sub Co. (the "Corporation"). ARTICLE II Registered Office; Registered Agent SECTION 2.01 The address of the Corporation's registered office in the State of Delaware is to be located at 9 East Loockerman Street, City of Dover, County of Kent. The name of its registered agent at such address is National Registered Agents, Inc. ARTICLE III Purpose of the Corporation SECTION 3.01 The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV Capital; Shareholders SECTION 4.01 The total number of shares of stock which the Corporation shall have authority to issue is five million fifty thousand (5,050,000) shares of capital stock, consisting of: (A) Five million shares (5,000,000) of common stock, par value $0.01 per share, ("Common Stock"), entitled to vote at any annual or special meeting of the stockholders of the Corporation. Each share of Common Stock shall have one (1) vote on any and all matters that may come before the stockholders of the Corporation at any annual or special meeting. (B) Fifty thousand (50,000) shares of preferred stock, par value $0.01 per share ("Preferred Stock"). The Board of Directors is authorized, subject to limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in one or more series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The number of shares of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the certificate or certificates establishing the series of Preferred Stock. The authority of the Board of Directors with respect to each such series shall include, but not be limited to, determination of the following: (1) The number of shares constituting that series and the distinctive designation of that series; (2) The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; (3) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (4) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provisions for adjustment of the conversion rate in such events as the Board of Directors shall determine; (5) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including, the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (6) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; (7) The rights of the shares of that series in the event of a voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; (8) Any other relative rights, preferences and limitations of that series. 2 ARTICLE V Board of Directors SECTION 5.01 The number of directors of the Corporation shall be fixed and may be altered from time to time as provided in the Bylaws of the Corporation. Election of directors need not be by written ballot. ARTICLE VI Bylaws SECTION 6.01 The Board of Directors may adopt, amend or repeal the Bylaws of this Corporation. ARTICLE VII Limitation on Liability SECTION 7.01 A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts of omissions not in good faith or which involve intentional misconduct or knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is hereafter amended to authorize the further elimination or limitation of the liability of directors, then the liability of the directors of the Corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended Delaware General Corporation Law. Any appeal or modification of this paragraph by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation at the time of such repeal or modification. ARTICLE VIII Indemnification SECTION 8.01 The Corporation shall indemnify all persons to the extent and in the manner permitted by the provisions of the laws of the State of Delaware, as amended from time to time, subject to any permissible expansion or limitation of such indemnification as may be set forth in Bylaws of the Corporation or any stockholder's or directors' resolution or by contract. The provisions of this Article shall also be applicable to the personal representative and estate of the persons who may be indemnified pursuant to the laws of the State of Delaware. 3 This Amended and Restated Certificate of Incorporation is executed this 26th day of January 1998 and shall be effective at 5:00 p.m. Eastern Standard Time on the date of filing with the Secretary of State of Delaware. /s/ Keith Oster --------------------------------------- Keith Oster, Secretary 4 EX-3.2 5 EXHIBIT 3.2 Exhibit 3.2 CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RELATIVE PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF SERIES A 10% CUMULATIVE REDEEMABLE PREFERRED STOCK OF JFL-EEC MERGER SUB CO. (Pursuant to Section 151(g) of the General Corporation Law of the State of Delaware) JFL-EEC Merger Sub Co., a corporation organized and existing under the laws of the State of Delaware (hereinafter the "Company"), DOES HEREBY CERTIFY THAT, pursuant to authority conferred upon the Board of Directors of the Company (the "Board") by the certificate of incorporation of the Company, as amended, the Board unanimously adopted the following resolutions on February 2, 1998 authorizing the issuance of the Series A 10% Cumulative Redeemable Preferred Stock of the Company, which resolutions are still in full force and effect and are not in conflict with any provisions of the certificate of incorporation or bylaws of the Company: RESOLVED, that pursuant to authority vested in the Board by the Certificate of Incorporation, the Board does hereby establish a series of preferred stock of the Company from the Company's authorized class of 50,000 shares of $.01 par value preferred shares (the "Preferred Stock"), such series to consist of 20,000 shares, and does hereby fix and state the voting rights, designation, powers, preferences and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereof, as follows: 1. DESIGNATION AND AMOUNT. The shares of such series of Preferred Stock shall be designated as "Series A 10% Cumulative Redeemable Preferred Stock" (the "Series A Preferred Stock"), and the number of shares constituting such series shall be 20,000. The initial liquidation preference of the Series A Preferred Stock shall be $1,000 per share (the "Stated Liquidation Value"). 2. RANK. The Series A Preferred Stock shall, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank (i) senior to the Company's common stock, $.01 par value per share (the "Common Stock"), and to all classes and series of stock of the Company now or hereafter authorized, issued or outstanding which by their terms expressly provide that they are junior to the Series A Preferred Stock or which do not specify their rank (collectively with the Common Stock, the "Junior Securities"), (ii) on a parity with each other class of capital stock or series of Preferred Stock issued by the Company after the date hereof the terms of which specifically provide that such class or series will rank on a parity with the Series A Preferred Stock as to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company (collectively referred to as "Parity Securities") and (iii) junior to each other class of capital stock or other series of Preferred Stock issued by the Company after the date hereof the terms of which have been approved by the requisite number of holders of Series A Preferred Stock as provided in Section 8(b) hereof and which specifically provide that such class or series will rank senior to the Series A Preferred Stock as to dividend distributions or distributions upon the liquidation, winding up and dissolution of the Company (collectively referred to as "Senior Securities"). 3. DIVIDENDS. (a) The holders of shares of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, dividends payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year (each such date, a "Dividend Payment Date"), except that if any Dividend Payment Date is not a Business Day, then such quarterly dividend shall be payable on the next succeeding Business Day and such next succeeding Business Day will be the Dividend Payment Date. Dividends shall be payable to holders of Series A Preferred Stock at the annual rate of 10% times the sum of (i) the Stated Liquidation Value and (ii) accrued but unpaid dividends as of the immediately preceding Dividend Payment Date. Dividends shall be payable (A) at the annual rate of .10 shares of Series A Preferred Stock per share of Series A Preferred Stock from the Issue Date through and including the January 31, 2001 Dividend Payment Date and (B) in cash on and after the April 30, 2001 Dividend Payment Date. Dividends shall be payable only to holders of record at the close of business on the date specified by the Board of Directors at the time such dividend is declared (the "Record Date"), in preference to dividends on the Junior Securities, commencing on the Dividend Payment Date next succeeding the Issue Date. Any such Record Date shall be not less than 10 days and not more than 60 days prior to the relevant Dividend Payment Date. All dividends paid with respect to shares of Series A Preferred Stock shall be paid PRO RATA to the holders entitled thereto. Dividends on the Series A Preferred Stock shall accrue and be cumulative on a quarterly basis (whether or not declared and whether or not funds are legally available for the payment thereof) from the Issue Date. (b) Dividends payable on the Series A Preferred Stock for any period less than a full quarterly dividend period shall be computed on the basis of a 360-day year of twelve 30-day months. (c) Fractional shares of Series A Preferred Stock shall be issued to the extent necessary to make dividend payments in shares of Series A Preferred Stock. Each fractional share of Series A Preferred Stock outstanding shall be entitled to a ratably proportionate amount of all dividends accruing with respect to each outstanding share of Series A Preferred Stock and all of such dividends with respect to such outstanding fractional shares shall be fully cumulative and shall accrue (whether or not declared) and shall be payable in the same manner and at such times as provided for in Section 3(a) above with respect to dividends on each outstanding share of Series A Preferred Stock. (d) Until the earlier of (i) the date upon which no shares of Series A Preferred Stock are outstanding and (ii) January 31, 2001, the Company shall reserve and keep available out 2 of its authorized or unissued Series A Preferred Stock solely for the purpose of paying dividends thereon as provided for herein, such number of shares of Series A Preferred Stock as shall from time to time be sufficient for such purpose. The Board of Directors of the Company shall, from time to time, if necessary, propose to the shareholders of the Company amendments to the Company's Certificate of Incorporation to increase its authorized capital stock and take such other actions as may be necessary to permit the issuance from time to time of shares of Series A Preferred Stock upon the declaration of any dividend payable in additional shares of Series A Preferred Stock. (e) So long as any shares of the Series A Preferred Stock are outstanding, the Company shall not, without the prior consent of the holders of at least eighty-five percent (85%) of the shares of outstanding Series A Preferred Stock, (i) make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or retirement of, any Junior Securities (other than dividends or distributions payable in additional shares of Junior Securities to holders of Junior Securities); (ii) permit any corporation or other entity directly or indirectly controlled by the Company to purchase or redeem any Junior Securities; (iii) declare, pay or set apart for payment, or permit any corporation or other entity directly or indirectly controlled by the Company to declare, pay or set apart for payment, any dividend or make any distribution or payment on any Junior Securities or Parity Securities, whether directly or indirectly and whether in cash, obligations or shares of the Company or other property (other than dividends or distributions payable in additional shares of Junior Securities to holders of Junior Securities); or (iv) make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or retirement of, any Parity Securities, whether directly or indirectly, and whether in cash, obligations, shares of the Company or other property (other than payments solely of Junior Securities), and shall not permit any corporation or other entity directly or indirectly controlled by the Company to purchase or redeem any Parity Securities, unless prior to or at the time of such payment or setting apart for payment, the Company shall have repurchased, redeemed or retired shares of Series A Preferred Stock on a PRO RATA basis, in proportion to the respective Liquidation Preferences (as defined in the applicable Certificate of Determination) of the Series A Preferred Stock and the Parity Securities as to which such sinking fund or similar fund payment, or such purchase, redemption or retirement, is being effected. (f) Whenever dividends on the Series A Preferred Stock are in arrears, the Company shall not declare dividends on or make any other distribution in respect of any Parity Securities, except dividends paid on a PRO RATA basis on the Series A Preferred Stock and all other capital stock ranking on a parity as to dividends and on which dividends are payable in arrears, in proportion to the respective amounts of dividends in arrears upon all such outstanding shares of Series A Preferred Stock and such other series of capital stock. (g) If at any time after the third anniversary of the Issue Date, any cash dividends payable on the Series A Preferred Stock shall have been in arrears and unpaid for four (4) or more successive Dividend Payment Dates, then until the date on which all such dividends in arrears are paid in full, dividends shall accrue and be payable to the holders of Series A Preferred 3 Stock at the annual rate of 12% times the sum of (i) the Stated Liquidation Value and (ii) accrued but unpaid dividends thereon. Upon payment in full of all such dividends in arrears, cash dividends will thereafter be payable as set forth in Section 3(a) above. 4. LIQUIDATION PREFERENCE. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the holders of shares of Series A Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its shareholders an amount in cash equal to 100% of the Stated Liquidation Value for each share outstanding, plus an amount in cash equal to all accrued but unpaid dividends thereon, without interest, to the date of liquidation, dissolution or winding up (such amount the "Liquidation Preference"), before any payment shall be made or any assets distributed to the holders of any of the Junior Securities. If the assets of the Company are not sufficient to pay in full the Liquidation Preference payable to the holders of outstanding shares of the Series A Preferred Stock and any Parity Securities, then the holders of all such shares shall share ratably in such distribution of assets in accordance with the amount which would be payable on such distribution if the amounts to which the holders of outstanding shares of Series A Preferred Stock and the holders of outstanding shares of such Parity Securities are entitled were paid in full. (b) For the purposes of this Section 4, neither the voluntary sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with any one or more other corporations shall be deemed to be a voluntary or involuntary liquidation, dissolution or winding up of the Company, unless such voluntary sale, conveyance, exchange or transfer shall be in connection with a plan of liquidation, dissolution or winding up of the Company. 5. REDEMPTION. (a) OPTIONAL REDEMPTION. The Company may, at its option, redeem at any time, out of funds legally available therefor, in the manner provided in Section 6 hereof, all or any portion of the shares of the Series A Preferred Stock, at a redemption price per share equal to 100% of the Liquidation Preference thereof on the date of redemption; PROVIDED, HOWEVER, that the Company may redeem fractional shares of Series A Preferred Stock pursuant to this Section 5(a) in the event that after such redemption a holder of Series A Preferred Stock would be left with less than one full share of Series A Preferred Stock. (b) MANDATORY REDEMPTION. On July 15, 2008, the Company shall redeem any and all outstanding shares of Series A Preferred Stock, out of funds legally available therefor, at a redemption price per share equal to 100% of the Liquidation Preference thereof on such date. (c) REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of Control, the Series A Preferred Stock shall be redeemable at the option of the holders thereof, in whole or in part, at a redemption price per share equal to 100% of the Liquidation Preference 4 on the date of redemption; PROVIDED, HOWEVER, that the Company will not be obligated to redeem, and will not redeem or call for redemption, any Series A Preferred Stock upon a Change of Control until the Company has repurchased or redeemed such of the $90,000,000 original principal amount of Senior Notes Due 2008 (the "Notes") then outstanding as the Company is required to repurchase or has called for redemption in connection with a change of control pursuant to the terms of the Indenture among the Company and United States Trust Company relating to the Notes, as supplemented and amended on or about the Issue Date; provided, further, that any such redemption (and the Company's obligations with respect thereto) shall be subject in all respects to the applicable restrictions contained in the Credit Agreement between the Company, the Company's subsidiary Elgar Electronics Corporation and Bankers Trust Company, as agent, dated on or about the Issue Date. Subject to the foregoing proviso, the Company shall redeem, out of funds legally available therefor, the number of shares specified in the holders' notices of election to redeem pursuant to Section 6(b) hereof on the date fixed for redemption. 6. PROCEDURE FOR REDEMPTION. (a) In the event that the Company shall redeem shares of Series A Preferred Stock pursuant to Sections 5(a) or 5(b) hereof, notice of such redemption shall be mailed by first-class mail, postage prepaid, and mailed not less than 30 days nor more than 60 days prior to the redemption date to the holders of record of the shares to be redeemed at their respective addresses as they shall appear in the records of the Company; PROVIDED, HOWEVER, that failure to give such notice or any defect therein or in the mailing thereof shall not affect the validity of the proceeding for the redemption of any shares so to be redeemed except as to the holder to whom the Company has failed to give such notice or except as to the holder to whom notice was defective. Each such notice shall state: (i) the redemption date; (ii) the number of shares of Series A Preferred Stock to be redeemed and, if less than all the shares held by such holders are to be redeemed, the number of such shares to be redeemed from such holders; (iii) the redemption price; (iv) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease to accrue on such redemption date. Any redemption or repurchase of less than all the shares of Series A Preferred Stock pursuant to Section 5(a) shall be made on a PRO RATA basis to all holders of Series A Preferred Stock. (b) If a Change of Control should occur, then, subject to Section 5(c) above, within 30 days of the occurrence of such Change of Control, the Company shall give written notice by first-class mail, postage prepaid, to each holder of Series A Preferred Stock at its address as it appears in the records of the Company, which notice shall set forth (in addition to the information required by the next succeeding paragraph): (i) each holder's right to require the Company to redeem shares of Series A Preferred Stock held by such holder as a result of such Change of Control; (ii) the redemption price; (iii) the redemption date (which date shall be no earlier than 30 days and no later than 60 days from the date the notice in respect of such Change of Control is mailed); (iv) the procedures to be followed by such holder in exercising its right of redemption, including the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will 5 cease to accrue on the redemption date. In the event a holder of shares of Series A Preferred Stock shall elect to require the Company to redeem any or all of such shares of Series A Preferred Stock, such holder shall deliver, within 20 days of the mailing to it of the Company's notice described in this Section 6(b), a written notice stating such holder's election and specifying the number of shares to be redeemed pursuant to Section 5(c) hereof. (c) Notice by the Company having been mailed as provided in Section 6(a) hereof, or notice of election having been mailed by the holders as provided in Section 6(b) hereof, and provided that on or before the applicable redemption date funds necessary for such redemption shall have been set aside by the Company, separate and apart from its other funds, in trust for the PRO RATA benefit of the holders of the shares of Series A Preferred Stock so called for or entitled to redemption, so as to be and to continue to be available therefor, then, from and after the redemption date, dividends on the shares of Series A Preferred Stock so called for or entitled to redemption shall cease to accrue, and said shares shall no longer be deemed to be outstanding and shall not have the status of shares of Series A Preferred Stock, and all rights of the holders thereof as shareholders of the Company (except the right to receive the applicable redemption price and any accrued and unpaid dividends from the Company to the date of redemption) shall cease, unless the Company defaults in the payment of the redemption price, in which case all rights of the holders of Series A Preferred Stock shall continue until the redemption price is paid. Upon surrender of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the Company shall so require and a notice by the Company shall so state), such shares shall be redeemed by the Company at the applicable redemption price as aforesaid. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the unredeemed shares without cost to the holder thereof. Any funds set aside in trust for the holders of Series A Preferred Stock pursuant to this Section 6(c) which remain unclaimed on the second anniversary of the applicable redemption date shall be released or repaid to the Company, after which the holders of shares called for redemption shall be entitled to receive payment of the redemption price only from the Company. 7. REACQUIRED SHARES. Shares of Series A Preferred Stock that have been issued and reacquired in any manner, including shares reacquired by purchase or redemption, shall (upon compliance with any applicable provisions of the laws of the State of Delaware) have the status of authorized and unissued shares of the class of Preferred Stock undesignated as to series and, subject to the approval of the holders of the Series A Preferred Stock as provided in Section 8(b) hereof, may be redesignated and reissued as part of any series of Preferred Stock other than the Series A Preferred Stock. 8. VOTING RIGHTS AND ELECTION OF DIRECTORS. In addition to any voting rights provided by law, the holders of Series A Preferred Stock shall have the following voting rights: (a) VOTING UPON AMENDMENT TO CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of the Company shall not be amended in any manner that would adversely alter 6 or change the powers, preferences, special rights or economics of the Series A Preferred Stock as set forth herein without the affirmative vote of the holders of at least eighty-five percent (85%) of the outstanding shares of Series A Preferred Stock. (b) OTHER VOTING RIGHTS. Without the affirmative vote or consent of the holders of at least eighty-five percent (85%) of the outstanding shares of Series A Preferred Stock, the Company shall not after the Issue Date (i) create, authorize or issue any Senior Securities or Parity Securities, (ii) create, authorize or issue any Junior Securities, unless such Junior Securities are expressly subordinate in right of payment (of liquidation preference and dividends) to the Series A Preferred Stock and such Junior Securities have no additional rights (directly or indirectly) upon the Company's failure to redeem such Junior Securities or to pay or declare a dividend or make a distribution with respect thereto or (iii) issue, other than pursuant to a registered public offering, any shares of its capital stock (or rights to acquire such shares) having the right to vote for the election of directors of the Company unless the holder thereof is party to that certain Shareholders Agreement ("Shareholders Agreement") dated as of February 3, 1998 among the Company and certain of its shareholders and is subject to Section 1 of the Shareholders Agreement (provided, however, that the issuance of options, warrants or rights to acquire up to 300,000 shares of common stock (appropriately adjusted for stock splits, dividends and/or combinations) to officers, directors, employees, consultants or agents of the Company pursuant to the terms of any stock option plan or arrangement approved by the Board of Directors, or the issuance of any such shares of common stock upon the exercise of any such stock options, warrants or rights, shall not be subject to this Section 8(b)(iii)). (c) CONSENT WITH RESPECT TO CERTAIN AGREEMENTS. Without the affirmative vote or consent of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, the Company shall not after the Issue Date enter into any agreement which will limit or otherwise adversely affect the Company's ability to comply with its redemption obligations under Section 5(b) hereof, including, without limitation, any such agreement or plan entered into with respect to (i) the sale of all or substantially all of the assets of the Company, (ii) the voluntary liquidation, dissolution or winding up of the Company or (iii) the consolidation or merger of the Company with any one or more other corporations, other than a consolidation or merger in which stockholders holding more than 50% of the equity securities of the Company immediately prior to such transaction will hold at least 50% of the equity securities of the surviving entity immediately after the consummation of such transaction. (d) VOTING RIGHTS UPON CERTAIN EVENTS: (i) CASH DIVIDENDS IN ARREARS. If at any time after the third anniversary of the Issue Date, the cash dividends payable on the Series A Preferred Stock shall have been in arrears and unpaid for four (4) or more successive Dividend Payment Dates, then the number of directors constituting the Board of Directors shall, without further action, be increased by the Dividend Arrears Number and, in addition to any other rights to elect directors which the holders of Series A Preferred Stock may have, the holders of all outstanding shares of Series A Preferred Stock (subject to Section 8(d)(viii)), voting separately as a class and to the exclusion of the holders of all other classes and series of 7 stock of the Company, shall be entitled to elect the directors of the Company to fill such newly created directorships. (ii) DEFAULT IN MANDATORY REDEMPTION. If the Company shall fail to redeem shares of Series A Preferred Stock in accordance with the mandatory redemption provisions of Section 5(b) hereof, then the number of directors constituting the Board of Directors shall, without further action, be increased by the Control Number and, in addition to any other rights to elect directors which the holders of Series A Preferred Stock may have, the holders of all outstanding shares of Series A Preferred Stock (subject to Section 8(d)(viii)), voting separately as a class and to the exclusion of the holders of all other classes and series of stock of the Company, shall be entitled to elect the directors of the Company to fill such newly created directorships. (iii) TERMINATION OF RIGHT TO ELECT DIRECTORS. Such voting right shall continue until, (A) in the case of a voting right arising pursuant to Section 8(d)(i), until the date on which all such dividends in arrears are paid in full, and (B) in the case of a voting right arising pursuant to Section 8(d)(ii), such time as the redemption price owing to holders of Series A Preferred Stock shall have been paid in full, at which time such special voting right of the holders of Series A Preferred Stock shall terminate, subject to revesting (with respect to the voting right set forth in Section 8(d)(i)) in the event of each and every recurrence of any event triggering such voting right. (iv) MECHANICS FOR ELECTION OF DIRECTORS. Whenever such voting right set forth in Section 8(d)(i) or 8(d)(ii) shall have vested as aforesaid, such right may be exercised initially either at a special meeting of the holders of Series A Preferred Stock, at any annual meeting of shareholders held for the purpose of electing directors or by the written consent of the holders of Series A Preferred Stock without a meeting, and thereafter at such annual meeting or by written consent. (v) QUORUM. At any meeting held for the purpose of electing directors at which the holders of Series A Preferred Stock shall have the right to elect directors as provided in this Section 8(d), the presence in person or by proxy of the holders of a majority of the then outstanding shares of Series A Preferred Stock entitled to vote thereon shall be required and be sufficient to constitute a quorum of such series for the election of directors by such series. At any such meeting or adjournment thereof, (A) the absence of a quorum of the holders of Series A Preferred Stock shall not prevent the election of directors other than the directors to be elected by the holders of Series A Preferred Stock, and the absence of a quorum or quorums of the holders of capital stock entitled to elect such other directors shall not prevent the election of the directors to be elected by the holders of Series A Preferred Stock, and (B) in the absence of a quorum of the holders of Series A Preferred Stock, a majority of the holders of Series A Preferred Stock present in person or by proxy shall have the power to adjourn the meeting for the election of directors which such holders are entitled to elect, from time to time, without notice (except as required by law) other than announcement at the meeting, until a quorum shall be present. 8 (vi) TERM; TERMINATION. The term of office of any director elected by the holders of Series A Preferred Stock pursuant to Section 8(d)(i) or 8(d)(ii) hereof in office at any time when the aforesaid voting rights are vested in the holders of Series A Preferred Stock shall terminate upon the election of his or her successor at any meeting of stockholders held for the purpose of electing directors. Upon any termination of the aforesaid voting rights in accordance with Section 8(d)(iii) hereof, the term of office of the directors elected by the holders of Series A Preferred Stock pursuant to Section 8(d)(i) or 8(d)(ii) hereof then in office thereupon shall terminate and upon such termination the number of directors constituting the Board of Directors, without further action, shall be reduced by the number of directors by which the number of directors was increased upon the occurrence of an event described in Section 8(d)(i) or 8(d)(ii), subject always to the increase of the number of directors pursuant to Section 8(d)(i) herein in case of the future right of the holders of Series A Preferred Stock to elect directors as provided herein. (vii) VACANCY. In case of a vacancy occurring in the office of any director so elected pursuant to Section 8(d)(i) or 8(d)(ii) hereof, the holders of a majority of the Series A Preferred Stock then outstanding and entitled to vote may, at a special meeting of the holders or by written consent as provided above, elect a successor to hold office for the unexpired term of such director. (viii) VOTING RIGHTS UPON TRANSFER OF SHARES. Notwithstanding the foregoing provisions of this Section 8(d), with respect to any share of Series A Preferred Stock, the right to elect directors pursuant to Section 8(d)(i) or 8(d)(ii) hereof shall cease to attach to such share at such time as such share is transferred to a Person other than the Initial Purchaser or an Eligible Transferee. Except as set forth herein, holders of shares of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote as set forth in the Certificate of Incorporation of the Company or herein or by law) for taking any corporate action. 9. REMEDIES. Any holder of Series A Preferred Stock may proceed to protect and enforce its rights and the rights of other holders by any available remedy by proceeding at law or in equity to protect and enforce any such rights, whether for the specific enforcement of any provision in this Certificate of Designations or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. 10. DEFINITIONS. For the purposes of this Certificate of Designations of the Series A Preferred Stock, the following terms shall have the meanings indicated: "Affiliate" shall mean, with respect to any specified person, (a) any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person or (b) any other person that owns, directly or indirectly, 10% or more of such specified person's capital stock or any executive officer or director of any such specified person or other person or, with respect to any natural person, any person having a relationship 9 with such person by blood, marriage or adoption not more remote than first cousin. For the purposes of this definition, "control," when used with respect to any specified person, means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Beneficial Owner" shall have the meaning ascribed to such term or the term "beneficial ownership" in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed 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. "Business Day" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in New York, New York are authorized or obligated by law or executive order to close. "Change of Control" shall mean such time after the Issue Date as either: (i) prior to the initial public offering by the Company of any class of its common stock, the consummation of any transaction the result of which is that the Principals and their Related Parties become the Beneficial Owners, in the aggregate, of less than 50% of the Common Stock of the Company; (ii) after the initial public offering by the Company of any class of its common stock, any "person" (as such term is used in Section 13(d)(3) of the Exchange Act), other than the Principals and their Related Parties, becomes, directly or indirectly, the Beneficial Owner, by way of merger, consolidation or otherwise, of 51% or more of the Common Stock of the Company and such person is or becomes, directly or indirectly, the Beneficial Owner of a greater percentage of the voting power of the Common Stock of the Company, calculated on a fully diluted basis, than the percentage Beneficially Owned by the Principals and their Related Parties; or (iii) the Company (A) effects the sale, lease or transfer of all or substantially all of the assets of the Company to any person or group, or (B) any wholly-owned subsidiary of the Company effects the sale, lease or transfer of all or substantially all of the assets of such subsidiary to any person or group, if such assets constitute substantially all of the assets of the Company and its subsidiaries, taken as a whole. "Control Number" shall mean such number of additional directors of the Company which, when added to the number of directors otherwise nominated by the holders of Series A Preferred Stock, shall result in the number of directors nominated by or at the direction of the holders of Series A Preferred Stock constituting a majority of the members of the Board of Directors of the Company. 10 "Dividend Arrears Number" shall mean such number of additional directors of the Company which, when added to the number of directors otherwise nominated by the holders of Series A Preferred Stock, shall result in the number of directors nominated by or at the discretion of the holders of Series A Preferred Stock constituting one-third of the members of the Board of Directors. "Eligible Transferees" shall mean any other Initial Purchaser, any partner of any Initial Purchaser, any Person who controls or is under common control with any Initial Purchaser, any successor to any Initial Purchaser or any such other Person and any "qualified institutional buyer" as defined in Rule 144A promulgated under the Securities Act of 1933, as amended. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended but shall not include any Person prohibited from holding securities having any of the rights, preferences and privileges of the Series A Preferred Stock. "Initial Purchasers" shall mean the initial purchasers of the Series A Preferred Stock on the Issue Date. "Issue Date" shall mean the first date on which shares of Series A Preferred Stock are issued. "Junior Securities" shall have the meaning set forth in Section 2 hereof. "Liquidation Preference" shall have the meaning set forth in Section 4 hereof. "Parity Securities" shall have the meaning set forth in Section 2 hereof. "Person" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. "Principals" shall mean (i) J.F. Lehman & Company, Inc., a Delaware corporation ("Lehman"), (ii) each Affiliate of Lehman as of the Issue Date, (iii) J.F. Lehman Equity Investors I, L.P., (iv) JFL-EEC LLC and (v) each officer or employee (including their respective immediate family members) of Lehman as of the Issue Date. "Related Party" shall mean with respect to any Principal (A) any controlling shareholder or 80% (or more) owned subsidiary of such Principal or (B) any trust, corporation, partnership or other entity, the beneficiaries, shareholders, 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 (A). 11 IN WITNESS WHEREOF, JFL-EEC Merger Sub Co. has caused this Certificate to be executed by its President this 2nd day of February, 1998. JFL-EEC MERGER SUB CO. /s/ Donald Glickman ------------------------------- Name: Donald Glickman, Title: President 12 EX-3.3 6 EXHIBIT 3.3 CERTIFICATE OF DESIGNATION OF PREFERENCES AND RELATIVE PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF SERIES B 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK OF ELGAR HOLDINGS, INC. (Pursuant to Section 151(g) of the General Corporation Law of the State of Delaware) Elgar Holdings, Inc., a corporation organized and existing under the laws of the State of Delaware (hereinafter the "Company"), DOES HEREBY CERTIFY THAT, pursuant to authority conferred upon the Board of Directors of the Company (the "Board of Directors") by the certificate of incorporation of the Company, as amended, the Board of Directors unanimously adopted the following resolutions on May 15, 1998 authorizing the issuance of the Series B 6% Cumulative Convertible Preferred Stock of the Company, which resolutions are still in full force and effect and are not in conflict with any provisions of the certificate of incorporation or bylaws of the Company: RESOLVED, that pursuant to the authority presently granted to and vested in the Board of Directors of the Company under the provisions of the Certificate of Incorporation of the Company and pursuant to the provisions of Section 151(g) of the General Corporation Law of the State of Delaware, this Board of Directors hereby creates a series of Preferred Stock to consist of 5,000 shares, and hereby fixes the powers, preferences, relative participating, voting, optional and other special rights, and the qualifications, limitations and restrictions thereof, as follows: 1. DESIGNATION AND AMOUNT. The shares of such series of Preferred Stock shall be designated as "Series B 6% Cumulative Convertible Preferred Stock" (the "Series B Preferred Stock"), and the number of shares constituting such series shall be 5,000. The initial liquidation preference of the Series B Preferred Stock shall be $1,000 per share (the "Stated Liquidation Value"). 2. RANK. The Series B Preferred Stock shall, with respect to rights on bankruptcy, liquidation, winding up, dissolution and dividends, rank (i) junior to the Series A 10% Cumulative Redeemable Preferred Stock of the Company (the "Series A Preferred Stock") and (ii) senior to the Company's Common Stock, par value $0.01 per share (the "Common Stock"), and to all other classes and series of stock of the Company now or hereafter authorized, issued or outstanding, other than any class or series of stock of the Company expressly designated as being on a parity with ("Parity Securities") or senior to the Series B Preferred Stock. Such other classes or series of stock of the Company not expressly designated as being on a parity with or senior to the Series B Preferred Stock are referred to hereafter as "Junior Securities." The rights of holders of shares of the Series B Preferred Stock are subordinate to the rights of the Company's general creditors, including the holders of the Company's 9-7/8% Senior Notes due 2008 (the "Senior Notes"). 1 3. DIVIDENDS. (a) The holders of shares of the Series B Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, dividends payable semi-annually in arrears on April 30 and October 31 of each year (each such date, a "Dividend Payment Date"), except that if any Dividend Payment Date is not a Business Day (as defined below), then such semi-annual dividend shall be payable on the next succeeding Business Day and such next succeeding Business Day will be the Dividend Payment Date. Dividends shall be payable to holders of the Series B Preferred Stock at the annual rate of 6% times the sum of (i) the Stated Liquidation Value and (ii) accrued but unpaid dividends as of the immediately preceding Dividend Payment Date, compounded semi-annually. Dividends shall be payable in cash only to holders of record at the close of business on the date specified by the Board of Directors at the time such dividend is declared (the "Record Date"). Any such Record Date shall be not less than 10 days and not more than 60 days prior to the relevant Dividend Payment Date. All dividends paid with respect to shares of the Series B Preferred Stock shall be paid PRO RATA to the holders entitled thereto. (b) Dividends on the Series B Preferred Stock shall accrue and be cumulative on a semi-annual basis (whether or not declared and whether or not funds are legally available for the payment thereof) from the Issue Date (as defined below). The semi-annual dividend period shall be computed on the basis of a 360-day year of twelve 30-day months. (c) So long as any shares of the Series B Preferred Stock are outstanding, the Company shall not, without the prior consent of the holders of at least fifty-one percent (51%) of the shares of outstanding Series B Preferred Stock, (i) make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or retirement of, any Junior Securities (other than dividends or distributions payable in additional shares of Junior Securities to holders of Junior Securities); (ii) permit any corporation or other entity directly or indirectly controlled by the Company to purchase or redeem any Junior Securities; (iii) declare, pay or set apart for payment, or permit any corporation or other entity directly or indirectly controlled by the Company to declare, pay or set apart for payment, any dividend or make any distribution or payment on any Junior Securities or Parity Securities, whether directly or indirectly and whether in cash, obligations or shares of the Company or other property (other than dividends or distributions payable in additional shares of Junior Securities to holders of Junior Securities); or (iv) make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or retirement of, any Parity Securities, whether directly or indirectly, and whether in cash, obligations, shares of the Company or other property (other than payments solely of Junior Securities), and shall not permit any corporation or other entity directly or indirectly controlled by the Company to purchase or redeem any Parity Securities, unless prior to or at the time of such payment or setting apart for payment, the Company shall have repurchased, redeemed or retired shares of the Series B Preferred Stock on a PRO RATA basis, in proportion to the respective Liquidation Preferences (as defined in the Certificate of Incorporation or applicable Certificate of Designation) of the Series B Preferred Stock and the Parity Securities as to which such sinking fund or similar fund payment, or such purchase, redemption or retirement, is being effected. 2 (d) Notwithstanding anything contained herein to the contrary, no dividends on shares of Series B Preferred Stock shall be authorized or declared by the Board of Directors of the Company or paid or set apart for payment by the Company at such time as the terms and provisions of any agreement of the Company, including any agreement relating to its indebtedness, prohibits such authorization, declaration, payment or setting apart for payment or provides that such authorization, declaration, payment or setting apart for payment would constitute a breach thereof or a default thereunder, or to the extent such declaration or payment shall be restricted or prohibited by law. 4. LIQUIDATION PREFERENCE. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the holders of shares of Series B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount in cash equal to 100% of the Stated Liquidation Value for each share outstanding, plus an amount in cash equal to all accrued but unpaid dividends thereon (whether or not declared) as provided in Section 3(b) above, without interest, to the date of liquidation, dissolution or winding up (such amount the "Liquidation Preference"), before any payment shall be made or any assets distributed to the holders of any of the Junior Securities. If the assets of the Company are not sufficient to pay in full the Liquidation Preference payable to the holders of outstanding shares of the Series B Preferred Stock and any Parity Securities, then the holders of all such shares shall share ratably in such distribution of assets in accordance with the amount which would be payable on such distribution if the amounts to which the holders of outstanding shares of Series B Preferred Stock and the holders of outstanding shares of such Parity Securities are entitled were paid in full. (b) For the purposes of this Section 4, neither the voluntary sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with any one or more other corporations shall be deemed to be a voluntary or involuntary liquidation, dissolution or winding up of the Company, unless such voluntary sale, conveyance, exchange or transfer shall be in connection with a plan of liquidation, dissolution or winding up of the Company. 5. REDEMPTION. (a) OPTIONAL REDEMPTION. The Company may, at its option, redeem at any time, out of funds legally available therefor, in the manner provided in Section 6 hereof, all or any portion of the shares of the Series B Preferred Stock, at a redemption price per share equal to 100% of the Liquidation Preference thereof on the date of redemption, including dividends accrued through the Dividend Payment Date immediately preceding the redemption date, though not including any dividends for any period after such Dividend Payment Date; PROVIDED, HOWEVER, that any such optional redemption by the Company shall be on a PRO RATA basis and for whole shares of the Series B Preferred Stock; PROVIDED, FURTHER, HOWEVER, that the Company may redeem fractional shares of Series B Preferred Stock pursuant to this Section 5(a) in the event 3 that after such redemption a holder of Series B Preferred Stock would be left with less than one full share of Series B Preferred Stock. (b) REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of Control (as defined below), the Series B Preferred Stock shall be redeemable at the option of the holders thereof, in whole or in part, at a redemption price per share equal to 100% of the Liquidation Preference on the date of redemption, including dividends accrued through the Dividend Payment Date immediately preceding the redemption date, though not including any dividends for any period after such Dividend Payment Date; PROVIDED, HOWEVER, that the Company will not be obligated to redeem, and will not redeem or call for redemption, any Series B Preferred Stock upon a Change of Control until it has repurchased or redeemed (x) such of the $90,000,000 original principal amount of Senior Notes then outstanding as the Company is required to repurchase in connection with a change of control pursuant to the terms of the Indenture, dated as of February 3, 1998, between the Company and United States Trust Company, relating to the Senior Notes and (y) such of the shares of Series A Preferred Stock then outstanding as the Company is required to repurchase pursuant to the Certificate of Designation relating thereto; PROVIDED, FURTHER, that any such redemption (and the Company's obligations with respect thereto) shall be subject in all respects to the applicable restrictions contained in the Credit Agreement, dated as of February 3, 1998, among the Company, Elgar Electronics Corporation, a wholly owned subsidiary of the Company, and Bankers Trust Company, as agent, as amended and restated by the parties thereto on the Issue Date, and as such agreement may be amended or supplemented thereafter. Subject to the foregoing provisos, the Company shall redeem, out of funds legally available therefor, the number of shares specified in the holders' notices of election to redeem pursuant to Section 6(b) hereof on the date fixed for redemption. 6. PROCEDURE FOR REDEMPTION. (a) In the event that the Company shall redeem shares of Series B Preferred Stock pursuant to Section 5(a) hereof, notice of such redemption shall be mailed by first-class mail, postage prepaid, and mailed not less than 30 days nor more than 60 days prior to the redemption date to the holders of record of the shares to be redeemed at their respective addresses as they shall appear in the records of the Company; PROVIDED, HOWEVER, that failure to give such notice or any defect therein or in the mailing thereof shall not affect the validity of the proceeding for the redemption of any shares so to be redeemed except as to the holder to whom the Company has failed to give such notice or except as to the holder to whom notice was defective. Each such notice shall state: (i) the redemption date; (ii) the number of shares of Series B Preferred Stock to be redeemed and, if less than all the shares held by such holders are to be redeemed, the number of such shares to be redeemed from such holders; (iii) the redemption price and form of consideration; (iv) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease to accrue on such redemption date. Any redemption of less than all the shares of Series B Preferred Stock pursuant to Section 5(a) shall be made on a PRO RATA basis to all holders of Series B Preferred Stock. 4 (b) If a Change of Control should occur, then, subject to Section 5(b) above, within 30 days of the occurrence of such Change of Control, the Company shall give written notice by first-class mail, postage prepaid, to each holder of Series B Preferred Stock at its address as it appears in the records of the Company, which notice shall set forth (in addition to the information required by the next succeeding paragraph): (i) each holder's right to require the Company to redeem shares of Series B Preferred Stock held by such holder as a result of such Change of Control; (ii) the redemption price; (iii) the redemption date (which date shall be no earlier than 30 days and no later than 60 days from the date the notice in respect of such Change of Control is mailed); (iv) the procedures to be followed by such holder in exercising its right of redemption, including the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease to accrue on the redemption date. In the event a holder of shares of Series B Preferred Stock shall elect to require the Company to redeem any or all of such shares of Series B Preferred Stock, such holder shall deliver, within 20 days of the mailing to it of the Company's notice described in this Section 6(b), a written notice stating such holder's election and specifying the number of shares to be redeemed pursuant to Section 5(b) hereof. (c) Notice by the Company having been mailed as provided in Section 6(a) hereof, or notice of election having been mailed by the holders as provided in Section 6(b) hereof, and provided that on or before the applicable redemption date funds necessary for such redemption shall have been set aside by the Company, separate and apart from its other funds, in trust for the PRO RATA benefit of the holders of the shares of Series B Preferred Stock so called for or entitled to redemption, so as to be and to continue to be available therefor, then, from and after the redemption date, dividends on the shares of Series B Preferred Stock so called for or entitled to redemption shall cease to accrue, and said shares shall no longer be deemed to be outstanding and shall not have the status of shares of Series B Preferred Stock, and all rights of the holders thereof as stockholders of the Company (except the right to receive the applicable redemption price and any accrued and unpaid dividends from the Company to the date of redemption) shall cease, unless the Company defaults in the payment of the redemption price, in which case all rights of the holders of Series B Preferred Stock shall continue until the redemption price is paid. Upon surrender of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the Company shall so require and a notice by the Company shall so state), such shares shall be redeemed by the Company at the applicable redemption price as aforesaid. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the unredeemed shares without cost to the holder thereof. Any funds set aside in trust for the holders of Series B Preferred Stock pursuant to this Section 6(c) which remain unclaimed on the second anniversary of the applicable redemption date shall be released or repaid to the Company, after which the holders of shares called for redemption shall be entitled to receive payment of the redemption price only from the Company. 7. REACQUIRED SHARES. Shares of Series B Preferred Stock that have been issued and reacquired in any manner, including shares reacquired by redemption or shares converted into Common Stock pursuant to Section 9 below, shall (upon compliance with any applicable provisions of the laws of the State of Delaware) have the status of authorized and unissued shares 5 of the class of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of Preferred Stock other than the Series B Preferred Stock. 8. VOTING RIGHTS. Except as specifically provided in this Section 8 and except for any additional voting rights provided by law, the holders of Series B Preferred Stock shall have no voting rights. The Certificate of Incorporation of the Company shall not be amended in any manner that would adversely alter or change the powers, preferences or special rights of the Series B Preferred Stock as set forth herein without the affirmative vote of the holders of at least fifty-one percent (51%) of the outstanding shares of Series B Preferred Stock. 9. CONVERSION RIGHTS. The rights of the holders of shares of Series B Preferred Stock to convert such shares into shares of Common Stock (the "Conversion Rights"), and the terms and conditions of such conversion, shall be as follows: (a) RIGHT TO CONVERT. (i) At any time following a Triggering Event (as defined below), each holder of shares of the Series B Preferred Stock shall have the right and option to convert all, but not less than all, of such shares into that number of fully paid and nonassessable shares of Common Stock determined in accordance with the provisions of this Section 9. In order to convert shares of the Series B Preferred Stock into shares of Common Stock, the holder thereof shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company or to the transfer agent for the Series B Preferred Stock or the Common Stock, together with written notice to the Company stating that he, she or it elects to convert the same and setting forth the name or names in which he, she or it wishes the certificate or certificates for Common Stock to be issued (the "Conversion Notice"). In the event of a redemption of the Series B Preferred Stock pursuant to Section 5 above, any holder that does not timely deliver such Conversion Notice and surrender such certificate or certificates prior to the date of redemption specified in any notice delivered pursuant to Section 6 above shall be deemed to have waived his, her or its right to conversion, and such shares shall be subject to the Company's right of redemption pursuant to Section 5 above. (ii) The Company shall, as soon as practicable after the surrender of the certificate or certificates evidencing shares of Series B Preferred Stock for conversion at the office of the Company or the transfer agent for the Series B Preferred Stock or the Common Stock, issue to each holder of such shares, or such holder's nominee or nominees, a certificate or certificates evidencing the number of shares of Common Stock to which such holder shall be entitled. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series B Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the recordholder or holders of such shares of Common Stock at such date and shall, with respect to such shares, have only those rights of a holder of Common Stock of the Company. (b) CONVERSION OF PREFERRED STOCK. Each share of Series B Preferred Stock shall be convertible into the number of shares of Common Stock which results from dividing the Stated 6 Liquidation Value (without any adjustment for the accrued but unpaid dividends thereon) by the Conversion Price per share in effect at the time of conversion; PROVIDED, HOWEVER, that any fractional number of shares of Common Stock shall be rounded up to the next whole share. Upon conversion of the Series B Preferred Stock, holders of shares of Series B Preferred Stock shall not be entitled to receive any accrued but unpaid dividends as of the conversion date. (c) CONVERSION PRICE. The conversion price of each share of Series B Preferred Stock shall initially be $10.00, which the Board of Directors of the Company has determined to be equal to or greater than the fair market value of the Common Stock on the Issue Date (the "Conversion Price") , and shall be subject to adjustment from time to time as provided herein. (d) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If outstanding shares of the Common Stock of the Company shall be subdivided into a greater number of shares, or a dividend in Common Stock or other securities of the Company convertible into or exchangeable for Common Stock (in which latter event the number of shares of Common Stock issuable upon the conversion or exchange of such securities shall be deemed to have been distributed), shall be paid in respect of the Common Stock of the Company, the Conversion Price for each share of Series B Preferred Stock in effect immediately prior to such subdivision or at the record date of such dividend shall, simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend, be proportionately reduced, and conversely, if outstanding shares of the Common Stock of the Company shall be combined into a smaller number of shares, the Conversion Price for each share of Series B Preferred Stock in effect immediately prior to such combination shall simultaneously with the effectiveness of such combination, be proportionately increased. Notwithstanding the foregoing, no adjustment of the Conversion Price for the Series B Preferred Stock shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; PROVIDED, HOWEVER, that any adjustments which by reason of this subparagraph (d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this subparagraph (9)(d) shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Any adjustment to the Conversion Price under this Section 9(d) shall become effective at the close of business on the date the subdivision, dividend or combination referred to herein becomes effective. (e) REORGANIZATIONS, MERGERS AND CONSOLIDATIONS. In the event of any capital reorganization, or the consolidation or merger of the Company with or into another entity (collectively referred to hereinafter as "Reorganizations"), unless the Company exercises its right to redeem the Series B Preferred Stock pursuant to Section 5(a) above, the holders of the Series B Preferred Stock shall thereafter be entitled to receive upon conversion of the Series B Preferred Stock the kind and number of shares of Common Stock or other securities or property (including cash) of the Company (or other corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold or otherwise transferred), that the holders would have been entitled to receive had such holders converted their Series B Preferred Stock into shares of Common Stock immediately prior to such Reorganization. In addition, upon the occurrence of such a Reorganization, appropriate adjustment shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter 7 of the holders of the Series B Preferred Stock, to the end that the provisions set forth herein (including the specified changes and other adjustments to the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares, other securities or property thereafter receivable upon conversion of the Series B Preferred Stock. The provisions of this Section 9(e) shall similarly apply to successive Reorganizations. Any agreement entered into by the Company relating to any Reorganization shall make appropriate provision for the conversions described herein. (f) CONVERSION PRICE ADJUSTMENT CERTIFICATE. Whenever the Conversion Price is adjusted as herein provided, the Company shall promptly file with the Secretary or transfer agent an officer's certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment, which certificate shall be conclusive evidence of the correctness of such adjustment absent manifest error. Promptly after delivery of such certificate, the Company shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the effective date of such adjustment and shall mail such notice of such adjustment of the Conversion Price to the holder of each share of Series B Preferred Stock at such holder's last address as shown on the stock records of the Company. (g) TRIGGERING EVENTS. A Triggering Event shall mean (i) a Change of Control, (ii) an initial public offering of any class of equity securities of the Company pursuant to the Securities Act of 1933, as amended, (iii) the delivery of a notice of redemption pursuant to Section 6(a) above and (iv) the fifth anniversary of the Issue Date. 10. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of Series B Preferred Stock, such numbers of its shares of Common Stock as shall from time to time be sufficient to effect a conversion of all outstanding shares of the Series B Preferred Stock, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all the outstanding shares of the Series B Preferred Stock, the Company shall promptly seek such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. In the event of the consolidation or merger of the Company with another corporation where the Company is not the surviving corporation, effective provisions shall be made in the articles or certificate of incorporation, merger or consolidation, or otherwise of the surviving corporation so that such corporation will at all times reserve and keep available a sufficient number of shares of Common Stock or other securities or property to provide for the conversion of the Series B Preferred Stock in accordance with the provisions of this Section 10. 11. NOTICES. All notices referred to herein, except as otherwise expressly provided, shall be made by registered or certified mail, return receipt requested, postage prepaid and shall be deemed to have been given when so mailed to the holder at the address for such holder maintained by the Company. 8 12. REMEDIES. Any holder of Series B Preferred Stock may proceed to protect and enforce his, her or its rights and the rights of other holders by any available remedy by proceeding at law or in equity to protect and enforce any such rights, whether for the specific enforcement of any provision in this Certificate of Designation or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. 13. DEFINITIONS. For the purposes of this Certificate of Designation, the following terms shall have the meanings indicated: "Affiliate" shall mean, with respect to any specified person, (a) any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person or (b) any other person that owns, directly or indirectly, 10% or more of such specified person's capital stock or any executive officer or director of any such specified person or other person or, with respect to any natural person, any person having a relationship with such person by blood, marriage or adoption not more remote than first cousin. For the purposes of this definition, "control," when used with respect to any specified person, means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Beneficial Owner" shall have the meaning ascribed to such term or the term "beneficial ownership" in Rule 13d-3 and Rule 13d-5 under the Securities Exchange Act of 1934, as amended, except that a person shall be deemed 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. "Business Day" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in New York, New York are authorized or obligated by law or executive order to close. "Change of Control" shall mean such time after the Issue Date as either: (i) prior to the initial public offering by the Company of any class of its Common Stock, the consummation of any transaction the result of which is that the Principals and their Related Parties become the Beneficial Owners, in the aggregate, of less than 50% of the Common Stock of the Company; (ii) after the initial public offering by the Company of any class of its Common Stock, any "person" (as such term is used in Section 13(d)(3) of the Exchange Act), other than the Principals and their Related Parties, becomes, directly or indirectly, the Beneficial Owner, by way of merger, consolidation or otherwise, of 51% or more of the Common Stock of the Company and such person is or becomes, directly or indirectly, the Beneficial Owner of a greater percentage of the voting power of the Common Stock of the Company, calculated on a fully diluted basis, than the percentage Beneficially Owned by the Principals and their Related Parties; or 9 (iii) the Company (A) effects the sale, lease or transfer of all or substantially all of the assets of the Company to any person or group, or (B) any wholly-owned subsidiary of the Company effects the sale, lease or transfer of all or substantially all of the assets of such subsidiary to any person or group, if such assets constitute substantially all of the assets of the Company and its subsidiaries, taken as a whole. "Junior Securities" shall have the meaning set forth in Section 2 hereof. "Issue Date" shall mean the first date on which shares of Series B Preferred Stock are issued. "Liquidation Preference" shall have the meaning set forth in Section 4 hereof. "Parity Securities" shall have the meaning set forth in Section 2 hereof. "Person" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. "Principals" shall mean (i) J.F. Lehman & Company ("Lehman"), (ii) each Affiliate of Lehman as of the Issue Date, (iii) J.F. Lehman Equity Investors I., L.P., (iv) JFL-EEC LLC and (v) each officer or employee (including their respective immediate family members) of Lehman as of the Issue Date. "Related Party" shall mean with respect to any Principal (A) any controlling stockholder or 80% (or more) owned subsidiary of such Principal or (B) 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 (A). IN WITNESS WHEREOF, Elgar Holdings, Inc. has caused this Certificate to be executed by its Secretary this 26th day of May, 1998. ELGAR HOLDINGS, INC. By: /s/ Keith Oster ------------------------ Keith Oster, Secretary 10 EX-3.4 7 EXHIBIT 3.4 Exhibit 3.4 AMENDED AND RESTATED BYLAWS OF JFL-EEC MERGER SUB CO. (A DELAWARE CORPORATION) ARTICLE I OFFICES SECTION 1.01 REGISTERED OFFICE. The registered office of JFL-EEC Merger Sub Co. (the "Corporation") in the State of Delaware shall be at 9 East Loockerman Street, City of Dover, County of Kent, and the name of the registered agent in charge thereof shall be National Registered Agents, Inc. SECTION 1.02 OTHER OFFICES. The Corporation may also have an office or offices at such other place or places, either within or without the State of Delaware, as the Board of Directors (hereinafter called the Board) may from time to time determine or as the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 2.01 ANNUAL MEETINGS. Annual meetings of the stockholders of the Corporation for the purpose of electing directors and for the transaction of such other proper business as may come before such meetings may be held at such time, date and place as the Board shall determine by resolution. SECTION 2.02 SPECIAL MEETINGS. A special meeting of the stockholders for the transaction of any proper business may be called at any time by the Board or by the President. SECTION 2.03 PLACE OF MEETINGS. All meetings of the stockholders shall be held at such places, within or without the State of Delaware, as may from time to time be designated by the person or persons calling the respective meeting and specified in the respective notices or waivers of notice thereof. SECTION 2.04 NOTICE OF MEETINGS. Except as otherwise required by law, notice of each meeting of the stockholders, whether annual or special, shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder of record entitled to vote at such meeting by delivering a typewritten or printed notice thereof to him personally, or by depositing such notice in the United States mail, in a postage prepaid envelope, directed to him at his post office address furnished by him to the Secretary of the Corporation for such purpose or, if he shall not have furnished to the Secretary his address for such purpose, then at his post office address last known to the Secretary, or by transmitting a notice thereof to him at such address by telegraph, cable, or wireless. Except as otherwise expressly required by law, no publication of any notice of a meeting of the stockholders shall be required. Every notice of a meeting of the stockholders shall state the place, date and hour of the meeting, and, in the case of a special meeting, shall also state the purpose or purposes for which the meeting is called. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall have waived such notice and such notice shall be deemed waived by any stockholder who shall attend such meeting in person or by proxy, except as a stockholder who shall attend such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Except as otherwise expressly required by law, notice of any adjourned meeting of the stockholders need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken. SECTION 2.05 QUORUM. Except in the case of any meeting for the election of directors summarily ordered as provided by law, the holders of record of a majority in voting interest of the shares of stock of the Corporation entitled to be voted thereat, present in person or by proxy, shall constitute a quorum for the transaction of business at any meeting of the stockholders of the Corporation or any adjournment thereof. In the absence of a quorum at any meeting or any adjournment thereof, a majority in voting interest of the stockholders present in person or by proxy and entitled to vote thereat or, in the absence therefrom of all the stockholders, any officer entitled to preside at, or to act as secretary of, such meeting may adjourn such meeting from time to time. At any such adjourned meeting at which a quorum is present any business may be transacted which might have been transacted at the meeting as originally called. SECTION 2.06 VOTING. (a) Each stockholder shall, at each meeting of the stockholders, be entitled to vote in person or by proxy each share or fractional share of the stock of the Corporation having voting rights on the matter in question and which shall have been held by him and registered in his name on the books of the Corporation: (i) on the date fixed pursuant to Section 6.05 of these Bylaws as the record date for the determination of stockholders entitled to notice of and to vote at such meeting, or (ii) if no such record date shall have been so fixed, then (a) at the close of business on the day next preceding the day on which notice of the meeting shall be given or (b) if notice of the meeting shall be waived, at the close of business on the day next preceding the day on which the meeting shall be held. 2 (b) Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors in such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes. Persons holding stock of the Corporation in a fiduciary capacity shall be entitled to vote such stock. Persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the Corporation he shall have expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his proxy, may represent such stock and vote thereon. Stock having voting power standing of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants in common, tenants by entirety or otherwise, or with respect to which two or more persons have the same fiduciary relationship, shall be voted in accordance with the provisions of the General Corporation Law of the State of Delaware. (c) Any such voting rights may be exercised by the stockholder entitled thereto in person or by his proxy appointed by an instrument in writing, subscribed by such stockholder or by his attorney thereunto authorized and delivered to the secretary of the meeting; provided, however, that no proxy shall be voted or acted upon after three years from its date unless said proxy shall provide for a longer period. The attendance at any meeting of a stockholder who may theretofore have given a proxy shall not have the effect of revoking the same unless he shall in writing so notify the secretary of the meeting prior to the voting of the proxy. At any meeting of the stockholders all matters, except as otherwise provided in the Certificate of Incorporation, in these Bylaws or by law, shall be decided by the vote of a majority in voting interest of the stockholders present in person or by proxy and entitled to vote thereat and thereon, a quorum being present. The vote at any meeting of the stockholders on any question need not be by ballot, unless so directed by the chairman of the meeting. On a vote by ballot each ballot shall be signed by the stockholder voting, or by his proxy, if there be such proxy, and it shall state the number of shares voted. SECTION 2.07 LIST OF STOCKHOLDERS. The Secretary of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 2.08 JUDGES. If at any meeting of the stockholders a vote by written ballot shall be taken on any question, the chairman of such meeting may appoint a judge or judges to act with respect to such vote. Each judge so appointed shall first subscribe an oath faithfully to execute the duties of a judge at such meeting with strict 3 impartiality and according to the best of his ability. Such judges shall decide upon the qualification of the voters and shall report the number of shares represented at the meeting and entitled to vote on such question, shall conduct and accept the votes, and, when the voting is completed, shall ascertain and report the number of shares voted respectively for and against the question. Reports of judges shall be in writing and subscribed and delivered by them to the Secretary of the Corporation. The judges need not be stockholders of the Corporation, and any officer of the Corporation may be a judge on any question other than a vote for or against a proposal in which he shall have a material interest. SECTION 2.09 ACTION WITHOUT MEETING. Any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action that may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III BOARD OF DIRECTORS SECTION 3.01 GENERAL POWERS. The property, business and affairs of the Corporation shall be managed by the Board. SECTION 3.02 NUMBER AND TERM OF OFFICE. The number of directors shall be nine (9). Directors need not be stockholders. Each of the directors of the Corporation shall hold office until his successor shall have been duly elected and shall qualify or until he shall resign or shall have been removed in the manner hereinafter provided. SECTION 3.03 ELECTION OF DIRECTORS. Subject to the provisions of the Certificate of Incorporation, the directors shall be elected annually by the stockholders of the Corporation and the persons receiving the greatest number of votes, up to the number of directors to be elected, shall be the directors. SECTION 3.04 RESIGNATIONS. Any director of the Corporation may resign at any time by giving written notice to the Board or to the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein, or, if the time be not specified, it shall take effect immediately upon its receipt; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 4 SECTION 3.05 VACANCIES. Except as otherwise provided in the Certificate of Incorporation, any vacancy in the Board, whether because of death, resignation, disqualification, an increase in the number of directors, or any other cause, may be filled by vote of the majority of the remaining directors, although less than a quorum. Each director so chosen to fill a vacancy shall hold office until his successor shall have been elected and shall qualify or until he shall resign or shall have been removed in the manner hereinafter provided. SECTION 3.06 PLACE OF MEETING, ETC. The Board may hold any of its meetings at such place or places within or without the State of Delaware as the Board may from time to time by resolution designate or as shall be designated by the person or persons calling the meeting or in the notice or a waiver of notice of any such meeting. Directors may participate in any regular or special meeting of the Board by means of conference telephone or similar communications equipment pursuant to which all persons participating in the meeting of the Board can hear each other, and such participation shall constitute presence in person at such meeting. SECTION 3.07 FIRST MEETING. The Board shall meet as soon as practicable after each annual election of directors and notice of such first meeting shall not be required. SECTION 3.08 REGULAR MEETINGS. Regular meetings of the Board may be held at such times as the Board shall from time to time by resolution determine. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting shall be held at the same hour and place on the next succeeding business day not a legal holiday. Except as provided by law, notice of regular meetings need not be given. SECTION 3.09 SPECIAL MEETINGS. Special meetings of the Board shall be held whenever called by the President or a majority of the authorized number of directors. Except as otherwise provided by law or by these Bylaws, notice of the time and place of each such special meeting shall be mailed to each director, addressed to him at his residence or usual place of business, at least five (5) days before the day on which the meeting is to be held, or shall be sent to him or her at such place by telegraph or cable or be delivered personally not less than forty-eight (48) hours before the time at which the meeting is to be held. Except where otherwise required by law or by these Bylaws, notice of the purpose of a special meeting need not be given. Notice of any meeting of the Board shall not be required to be given to any director who is present at such meeting, except a director who shall attend such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. SECTION 3.10 QUORUM AND MANNER OF ACTING. Except as otherwise provided in these Bylaws or by law, the presence of a majority of the authorized number of directors shall be required to constitute a quorum for the transaction of business at any meeting of the Board, and all matters shall be decided at any such meeting, 5 a quorum being present, by the affirmative votes of a majority of the directors present. In the absence of a quorum, a majority of directors present at any meeting may adjourn the same from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. The directors shall act only as a Board, and the individual directors shall have no power as such. SECTION 3.11 ACTION BY CONSENT. Any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee. SECTION 3.12 REMOVAL OF DIRECTORS. Subject to the provisions of the Certificate of Incorporation, any director may be removed at any time, either with or without cause, by the affirmative vote of the stockholders having a majority of the voting power of the Corporation given at a special meeting of the stockholders called for the purpose. SECTION 3.13 COMPENSATION. The directors shall receive only such compensation for their services as directors as may be allowed by resolution of the Board. The Board may also provide that the Corporation shall reimburse each such director for any expense incurred by him because of his attendance at any meetings of the Board or Committees of the Board. Neither the payment of such compensation nor the reimbursement of such expenses shall be construed to preclude any director from serving the Corporation or its subsidiaries in any other capacity and receiving compensation therefor. SECTION 3.14 COMMITTEES. The Board may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. Any such committee, to the extent provided in the resolution of the Board and except as otherwise limited by law, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers that may require it. Any such committee shall keep written minutes of its meetings and report the same to the Board at the next regular meeting of the Board. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. ARTICLE IV OFFICERS SECTION 4.01 NUMBER. The officers of the Corporation shall be a President, one or more Vice Presidents (the number thereof and their respective titles to 6 be determined by the Board), a Secretary, one or more Assistant Secretaries (the number thereof to be determined by the Board) and a Chief Financial Officer. SECTION 4.02 ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The officers of the Corporation, except such officers as may be appointed in accordance with Section 4.03, shall be elected annually by the Board at the first meeting thereof held after the election thereof. Each officer shall hold office until his successor shall have been duly chosen and shall qualify or until his resignation or removal in the manner hereinafter provided. SECTION 4.03 ASSISTANTS, AGENTS AND EMPLOYEES, ETC. In addition to the officers specified in Section 4.01, the Board may appoint other assistants, agents and employees as it may deem necessary or advisable, including one or more Assistant Secretaries, and one or more Assistant Treasurers, each of whom shall hold office for such period, have such authority, and perform such duties as the Board may from time to time determine. The Board may delegate to any officer of the Corporation or any committee of the Board the power to appoint, remove and prescribe the duties of any such assistants, agents or employees. SECTION 4.04 REMOVAL. Any officer, assistant, agent or employee of the Corporation may be removed, with or without cause, at any time: (i) in the case of an officer, assistant, agent or employee appointed by the Board, only by resolution of the Board; and (ii) in the case of an officer, assistant, agent or employee, by any officer of the Corporation or committee of the Board upon whom or which such power of removal may be conferred by the Board. SECTION 4.05 RESIGNATIONS. Any officer or assistant may resign at any time by giving written notice of his resignation to the Board or the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein, or, if the time be not specified, upon receipt thereof by the Board or the Secretary, as the case may be; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 4.06 VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification, or other cause, may be filled for the unexpired portion of the term thereof in the manner prescribed in these Bylaws for regular appointments or elections to such office. SECTION 4.07 THE PRESIDENT. The President of the Corporation shall be the chief executive officer of the Corporation and shall have, subject to the control of the Board, general and active supervision and management over the business of the Corporation and over its several officers, assistants, agents and employees. SECTION 4.08 THE VICE PRESIDENTS. Each Vice President shall have such powers and perform such duties as the Board may from time to time prescribe. At the request of the President, or in case of the President's absence or inability to act upon 7 the request of the Board, a Vice President shall perform the duties of the President and when so acting, shall have all the powers of, and be subject to all the restrictions upon, the President. SECTION 4.09 THE SECRETARY. The Secretary shall, if present, record the proceedings of all meetings of the Board, of the stockholders, and of all committees of which a secretary shall not have been appointed in one or more books provided for that purpose; he shall see that all notices are duly given in accordance with these Bylaws and as required by law; he shall be custodian of the seal of the Corporation and shall affix and attest the seal to all documents to be executed on behalf of the Corporation under its seal; and, in general, he shall perform all the duties incident to the office of Secretary and such other duties as may from time to time be assigned to him by the Board. SECTION 4.10 THE ASSISTANT SECRETARIES. Each Assistant Secretary shall have such powers and perform such duties as the Board may from time to time prescribe. SECTION 4.11 THE CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall have the general care and custody of the funds and securities of the Corporation, and shall deposit all such funds in the name of the Corporation in such banks, trust companies or other depositories as shall be selected by the Board. He shall receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever. He shall exercise general supervision over expenditures and disbursements made by officers, agents and employees of the Corporation and the preparation of such records and reports in connection therewith as may be necessary or desirable. He shall, in general, perform all other duties incident to the office of Chief Financial Officer and such other duties as from time to time may be assigned to him by the Board. SECTION 4.12 COMPENSATION. The compensation of the officers of the Corporation shall be fixed from time to time by the Board. None of such officers shall be prevented from receiving such compensation by reason of the fact that he is also a director of the Corporation. Nothing contained herein shall preclude any officer from serving the Corporation, or any subsidiary corporation, in any other capacity and receiving such compensation by reason of the fact that he is also a director of the Corporation. Nothing contained herein shall preclude any officer from serving the Corporation, or any subsidiary corporation, in any other capacity and receiving proper compensation therefor. ARTICLE V CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. SECTION 5.01 EXECUTION OF CONTRACTS. The Board, except as in these Bylaws otherwise provided, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances; and 8 unless so authorized by the Board or by these Bylaws, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or in any amount. SECTION 5.02 CHECKS, DRAFTS, ETC. All checks, drafts or other orders for payment of money, notes or other evidence of indebtedness, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board. Each such officer, assistant, agent or attorney shall give such bond, if any, as the Board may require. SECTION 5.03 DEPOSITS. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board may select, or as may be selected by any officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation to whom such power shall have been delegated by the Board. For the purpose of deposit and for the purpose of collection for the account of the Corporation, the President, any Vice President or the Chief Financial Officer (or any other officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation who shall from time to time be determined by the Board) may endorse, assign and deliver checks, drafts and other orders for the payment of money which are payable to the order of the Corporation. SECTION 5.04 GENERAL AND SPECIAL BANK ACCOUNTS. The Board may from time to time authorize the opening and keeping of general and special bank accounts with such banks, trust companies or other depositories as the Board may select or as may be selected by any officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation to whom such power shall have been delegated by the Board. The Board may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these Bylaws, as it may deem expedient. ARTICLE VI SHARES AND THEIR TRANSFER SECTION 6.01 CERTIFICATES FOR STOCK. Every owner of stock of the Corporation shall be entitled to have a certificate or certificates, to be in such form as the Board shall prescribe, certifying the number and class of shares of the stock of the Corporation owned by him. The certificates representing shares of such stock shall be numbered in the order in which they shall be issued and shall be signed in the name of the Corporation by the President or a Vice President, and by the Secretary or an Assistant Secretary or by the Chief Financial Officer or an Assistant Treasurer. Any of or all of the signatures on the certificates may be a facsimile. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon, any such certificate, shall have ceased to be such officer, transfer agent or registrar before such 9 certificate is issued, such certificate may nevertheless be issued by the Corporation with the same effect as though the person who signed such certificate, or whose facsimile signature shall have been placed thereupon, were such officer, transfer agent or registrar at the date of issue. A record shall be kept of the respective names of the persons, firms or corporations owning the stock represented by such certificates, the number and class of shares represented by such certificates, respectively, and the respective dates thereof, and in case of cancellation, the respective dates of cancellation. Every certificate surrendered to the Corporation for exchange or transfer shall be cancelled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so cancelled, except in cases provided for in Section 6.04. SECTION 6.02 TRANSFERS OF STOCK. Transfers of shares of stock of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary, or with a transfer clerk or a transfer agent appointed as provided in Section 6.03, and upon surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. Whenever any transfer of shares shall be made for collateral security, and not absolutely, such fact shall be so expressed in the entry of transfer if, when the certificate or certificates shall be presented to the Corporation for transfer, both the transferor and the transferee request the Corporation to do so. SECTION 6.03 REGULATIONS. The Board may make such rules and regulations as it may deem expedient, not inconsistent with these Bylaws, concerning the issue, transfer and registration of certificates for shares of the stock of the Corporation. It may appoint, or authorize any officer or officers to appoint, one or more transfer clerks or one or more transfer agents and one or more registrars, and may require all certificates for stock to bear the signature or signatures of any of them. SECTION 6.04 LOST, STOLEN, DESTROYED, AND MUTILATED CERTIFICATES. In any case of loss, theft, destruction, or mutilation of any certificate of stock, another may be issued in its place upon proof of such loss, theft, destruction, or mutilation and upon the giving of a bond of indemnity to the Corporation in such form and in such sum as the Board may direct; provided, however, that a new certificate may be issued without requiring any bond when, in the judgment of the Board, it is proper so to do. SECTION 6.05 FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any other change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. If in any case involving the determination of stockholders for 10 any purpose other than notice of or voting at a meeting of stockholders or expressing consent to corporate action without a meeting the Board shall not fix such a record date, the record date for determining stockholders for such purpose shall be the close of business on the day on which the Board shall adopt the resolution relating thereto. A determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of such meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. ARTICLE VII INDEMNIFICATION SECTION 7.01 ACTION, ETC. OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or 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 Corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person 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 Corporation, and, with respect to any criminal action or proceeding, that he had reasonable cause to believe that his conduct was unlawful. SECTION 7.02 ACTIONS, ETC., BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit 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 Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is 11 fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. SECTION 7.03 DETERMINATION OF RIGHT OF INDEMNIFICATION. Any indemnification under Section 7.01 or 7.02 (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 7.01 and 7.02. Such determination shall be made (i) by the Board by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. SECTION 7.04 INDEMNIFICATION AGAINST EXPENSES OF SUCCESSFUL PARTY. Notwithstanding the other provisions of this Article, to the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 7.01 or 7.02, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. SECTION 7.05 PREPAID EXPENSES. Expenses incurred by an officer or director in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board in the specific case upon receipt of an undertaking by or on behalf of the director or officer to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Article. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board deems appropriate. SECTION 7.06 OTHER RIGHTS AND REMEDIES. The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 7.07 INSURANCE. Upon resolution passed by the Board, the Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article. 12 SECTION 7.08 CONSTITUENT CORPORATIONS. For the purposes of this Article, references to "the Corporation" include all constituent corporations absorbed in a consolidation or merger as well as the resulting or surviving corporation, so that any person who is or was a director, officer, employee or agent of such a constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as he would if he had served the resulting or surviving corporation in the same capacity. SECTION 7.09 OTHER ENTERPRISES, FINES, AND SERVING AT CORPORATION'S REQUEST. For purposes of this Article, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article. ARTICLE VIII MISCELLANEOUS SECTION 8.01 SEAL. The Board shall provide a corporate seal, which shall be in the form of a circle and shall bear the name of the Corporation and words and figures showing that the Corporation was incorporated in the State of Delaware and the year of incorporation. SECTION 8.02 WAIVER OF NOTICES. Whenever notice is required to be given by these Bylaws or the Certificate of Incorporation or by law, the person entitled to said notice may waive such notice in writing, either before or after the time stated therein, and such waiver shall be deemed equivalent to notice. SECTION 8.03 AMENDMENTS. These Bylaws, or any of them, may be altered, amended or repealed, and new Bylaws may be made, (i) by the Board, by vote of a majority of the number of directors then in office as directors, acting at any meeting of the Board, or (ii) by the stockholders, at any annual meeting of stockholders, without previous notice, or at any special meeting of stockholders, provided that notice of such proposed amendment, modification, repeal or adoption is given in the notice of special meeting. Any Bylaws made or altered by the stockholders may be altered or repealed by either the Board or the stockholders. 13 EX-3.5 8 EXHIBIT 3.5 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF ELGAR ELECTRONICS CORPORATION I The name of this Corporation is: Elgar Electronics Corporation. II The purpose of this Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III This Corporation is authorized to issue only one class of shares of stock; and the total number of shares that the Corporation is authorized to issue is 1,000 shares all of which will be Common Stock, par value $.01 per share. IV The liability of the directors of this Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. V This Corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code subject only to the applicable limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to this Corporation and its shareholders. EX-3.6 9 EXHIBIT 3.6 Exhibit 3.6 BYLAWS FOR THE REGULATION OF ELGAR ELECTRONICS CORPORATION A CALIFORNIA CORPORATION ARTICLE I PRINCIPAL EXECUTIVE OFFICE The principal executive office of the corporation shall be 9250 Brown Deer Road, San Diego, California 92121. ARTICLE II MEETING OF SHAREHOLDERS Section 2.01 ANNUAL MEETINGS. The annual meeting of shareholders shall be held on the 15th day of June in each year (or, should such day fall upon a legal holiday, then on the first day thereafter which is not a legal holiday) at 10:00 o'clock A.M., or at such other time and on such other date as the board of directors shall determine. At each annual meeting, directors shall be elected and any other proper business may be transacted. Section 2.02 SPECIAL MEETINGS. Special meetings of shareholders may be called by the board of directors, the chairman of the board (if there be such an officer), the president, or the holders of shares entitled to cast not less than ten percent (10%) of the votes at such meeting. Each special meeting shall be held at such date and time as is requested by the person or persons calling the meeting within the limits fixed by law. Section 2.03 PLACE OF MEETINGS. Each annual or special meeting of shareholders shall be held at such location as may be determined by the board of directors, or if no such determination is made, at such place as may be determined by the chief executive officer, or by any other officer authorized by the board of directors or the chief executive officer to make such determination. If no location is so determined, any annual or special meeting shall be held at the principal executive office of the corporation. Section 2.04 NOTICE OF MEETINGS. Notice of each annual or special meeting of shareholders shall contain such information, and shall be given to such persons at such time, and in such manner, as the board of directors shall determine, or if no such determination is made, as the chief executive officer, or any other officer so authorized by the board of directors or the chief executive officer, shall determine, subject to the requirements of applicable law. Section 2.05 CONDUCT OF MEETINGS. Subject to the requirements of applicable law, all annual and special meetings of shareholders shall be conducted in accordance with such rules and procedures as the board of directors may determine and, as to matters not governed by such rules and procedures, as the chairman of such meeting shall determine. The chairman of any annual or special meeting of shareholders shall be designated by the board of directors and, in the absence of any such designation, shall be the chief executive officer of the corporation. Section 2.06 INFORMAL ACTION BY SHAREHOLDERS. An action required or permitted to be taken at a meeting of Shareholders may be taken without a meeting if a consent, in writing, setting forth such action, is signed by all the Shareholders entitled to vote on the subject matter thereof and any other Shareholders entitled to notice of a meeting of Shareholders (but not to vote thereat) have waived in writing any rights which they may have to dissent from such action, and such consents and waivers are filed with the minutes of proceedings of the Shareholders. Such consents and waivers may be signed by different Shareholders on separate counterparts. ARTICLE III DIRECTORS Section 3.01 NUMBER. The number of directors of the corporation shall be nine (9) until changed in accordance with applicable law. Section 3.02 MEETINGS OF THE BOARD. Each regular and special meeting of the board shall be held at a location determined as follows: The board of directors may designate any place, within or without the State of California, for the holding of any meeting. If no such designation is made, (i) any meeting called by a majority of the directors shall be held at such location, within the county of the corporation's principal executive office, as the directors calling the meeting shall designate; and (ii) any other meeting shall be held at such location, within the county of the corporation's principal executive office, as the chief executive officer may designate, or in the absence of such designation, at the corporation's principal executive office. Subject to the requirements of applicable law, all regular and special meetings of the board of directors shall be conducted in accordance with such rules and procedures as the board of directors may approve and, as to matters not governed by such rules and procedures, as the chairman of such meeting shall determine. The chairman of any regular or special meeting shall be designated by the directors and, in the absence of any such designation, shall be the chief executive officer of the corporation. Members of the board of directors (or any committee appointed by the board) may participate in a meeting by means of conference telephone or similar communications equipment whereby all persons participating in the meeting can hear each other, and participation in such meeting in such manner shall constitute presence in person at such meeting. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by all of the Directors and such written consents may be signed by different Directors on separate counterparts. Section 3.03 INFORMAL ACTION BY DIRECTORS. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by all of the Directors and such written consents may be signed by different Directors on separate counterparts. 2 ARTICLE IV INDEMNIFICATION OF DIRECTORS, OFFICERS, AND OTHER CORPORATE AGENTS Section 4.01 INDEMNIFICATION. This corporation shall indemnify and hold harmless any person who is or was a director or officer of this corporation, or is or was serving at the request of the Board of Directors of this Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise (an "Agent"), from and against any expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any "proceeding" (as defined in Section 317(a)) to the fullest extent permitted by applicable law. The corporation shall advance to its agents expenses incurred in defending any proceeding prior to the final disposition thereof to the fullest extent and in the manner permitted by applicable law. Section 4.02 RIGHT TO INDEMNIFICATION. This section shall create a right of indemnification for each person referred to in Section 4.01, whether or not the proceeding to which the indemnification relates arose in whole or in part prior to adoption of such section and in the event of death such right shall extend to such person's legal representatives. The right of indemnification hereby given shall not be exclusive of any other rights such person may have whether by law or under any agreement, insurance policy, vote of directors or shareholders, or otherwise. Section 4.03 INSURANCE. The corporation shall have power to purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such whether or not the corporation would have the power to indemnify the agent against such liability. ARTICLE V OFFICERS Section 5.01 OFFICERS. The corporation shall have a president, a chief financial officer, a secretary, and such other officers, including a chairman of the board, as may be designated by the board. Unless the board of directors shall otherwise determine, the president shall be the chief executive officer of the corporation. Officers shall have such powers and duties as may be specified by, or in accordance with, resolutions of the board of directors. In the absence of any contrary determination by the board of directors, the chief executive officer shall, subject to the power and authority of the board of directors, have general supervision, direction, and control of the officers, employees, business, and affairs of the corporation. Section 5.02 LIMITED AUTHORITY OF OFFICERS. No officer of the corporation shall have any power or authority outside the normal day-to-day business of the corporation to bind the corporation by any contract or engagement or to pledge its credit or to render it liable in connection with any transaction unless so authorized by the board of directors. 3 ARTICLE VI WAIVER OF ANNUAL REPORTS So long as the corporation has less than 100 holders of record of its shares (determined as provided in Section 605 of the California General Corporation Law), no annual report to shareholders shall be required, and the requirement to the contrary of Section 1501 of the California General Corporation Law is hereby expressly waived. ARTICLE VII AMENDMENTS New bylaws may be adopted or these bylaws may be amended or repealed by the shareholders or by the directors. 4 EX-4.1 10 EXHIBIT 4.1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- JFL-EEC MERGER SUB CO., as Issuer, and UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee ---------------------------------- INDENTURE Dated as February 3, 1998 ---------------------------------- up to $150,000,000 9 7/8% Senior Notes due 2008, Series A 9 7/8% Senior Notes due 2008, Series B - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CROSS-REFERENCE TABLE
TIA Indenture Section Section - ------- ------------ 310(a)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (a)(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (a)(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.08; 7.10; 11.02 (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). . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06; 11.02 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.06; 4.08; 11.02 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (c)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.04(1) (c)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.04(2) (c)(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.05 (f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01(b) (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.05; 11.02 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01(a) (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01(c) (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.11 316(a)(last sentence). . . . . . . . . . . . . . . . . . . . . . 2.09 (a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.05 (a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.04 (a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.04 317(a)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.08 (a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.09 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.04 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.01 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.01
N.A. means Not Applicable. _________________ Note: This Cross-Reference Table shall not, for any purpose, be deemed to be part of the Indenture. TABLE OF CONTENTS
Page ---- ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. Definitions.. . . . . . . . . . . . . . . . . . . . . . . . . . . .2 SECTION 1.02. Incorporation by Reference of TIA.. . . . . . . . . . . . . . . . 33 SECTION 1.03. Rules of Construction.. . . . . . . . . . . . . . . . . . . . . . 33 ARTICLE TWO THE NOTES SECTION 2.01. Form and Dating.. . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 2.02. Execution and Authentication; Aggregate Principal Amount. . . . . 37 SECTION 2.03. Registrar and Paying Agent. . . . . . . . . . . . . . . . . . . . 39 SECTION 2.04. Paying Agent To Hold Assets in Trust. . . . . . . . . . . . . . . 40 SECTION 2.05. Holder Lists. . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 2.06. Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 2.07. Replacement Notes . . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 2.08. Outstanding Notes . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 2.09. Treasury Notes. . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 2.10. Temporary Notes . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 2.11. Cancellation. . . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 2.12. Defaulted Interest. . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 2.13. CUSIP Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . 44 SECTION 2.14. Deposit of Monies . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 2.15. Restrictive Legends . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 2.16. Book-Entry Provisions for Global Security . . . . . . . . . . . . 48 SECTION 2.17. Special Transfer Provisions . . . . . . . . . . . . . . . . . . . 50 ARTICLE THREE REDEMPTION SECTION 3.01. Notices to Trustee. . . . . . . . . . . . . . . . . . . . . . . . 53 SECTION 3.02. Selection of Notes To Be Redeemed . . . . . . . . . . . . . . . . 53 SECTION 3.03. Redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 SECTION 3.04. Notice of Redemption. . . . . . . . . . . . . . . . . . . . . . . 55 SECTION 3.05. Effect of Notice of Redemption. . . . . . . . . . . . . . . . . . 56 SECTION 3.06. Deposit of Redemption Price . . . . . . . . . . . . . . . . . . . 57 SECTION 3.07. Notes Redeemed in Part. . . . . . . . . . . . . . . . . . . . . . 57 SECTION 3.08. Sinking Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . 57 - i - Page ---- ARTICLE FOUR COVENANTS SECTION 4.01. Payment of Notes. . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 4.02. Maintenance of Office or Agency . . . . . . . . . . . . . . . . . 58 SECTION 4.03. Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 4.04. Payment of Taxes and Other Claims . . . . . . . . . . . . . . . . 59 SECTION 4.05. [Intentionally Omitted] . . . . . . . . . . . . . . . . . . . . . 59 SECTION 4.06. Compliance Certificate; Notice of Default . . . . . . . . . . . . 59 SECTION 4.07. Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 4.08. Reports to Holders. . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 4.09. Waiver of Stay, Extension or Usury Laws . . . . . . . . . . . . . 61 SECTION 4.10. Limitation on Restricted Payments . . . . . . . . . . . . . . . . 61 SECTION 4.11. Limitations on Transactions with Affiliates . . . . . . . . . . . 64 SECTION 4.12. Limitation on Incurrence of Additional Indebtedness . . . . . . . 66 SECTION 4.13. Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries . . . . . . . . . . . . . . . . . . . . 67 SECTION 4.14. Change of Control . . . . . . . . . . . . . . . . . . . . . . . . 68 SECTION 4.15. Limitation on Asset Sales . . . . . . . . . . . . . . . . . . . . 70 SECTION 4.16. Limitation on Preferred Stock of Restricted Subsidiaries. . . . . 74 SECTION 4.17. Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . 74 SECTION 4.18. Limitation of Guarantees by Restricted Subsidiaries . . . . . . . 75 SECTION 4.19 Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . 75 ARTICLE FIVE SUCCESSOR CORPORATION SECTION 5.01. Merger, Consolidation and Sale of Assets. . . . . . . . . . . . . 76 SECTION 5.02. Successor Corporation Substituted . . . . . . . . . . . . . . . . 77 ARTICLE SIX REMEDIES SECTION 6.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . 78 SECTION 6.02. Acceleration. . . . . . . . . . . . . . . . . . . . . . . . . . . 79 SECTION 6.03. Other Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . 80 SECTION 6.04. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . 81 SECTION 6.05. Control by Majority . . . . . . . . . . . . . . . . . . . . . . . 81 SECTION 6.06. Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . 81 - ii - Page ---- SECTION 6.07. Right of Holders To Receive Payment . . . . . . . . . . . . . . . 82 SECTION 6.08. Collection Suit by Trustee. . . . . . . . . . . . . . . . . . . . 82 SECTION 6.09. Trustee May File Proofs of Claim. . . . . . . . . . . . . . . . . 83 SECTION 6.10. Priorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 SECTION 6.11. Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . 84 ARTICLE SEVEN TRUSTEE SECTION 7.01. Duties of Trustee . . . . . . . . . . . . . . . . . . . . . . . . 84 SECTION 7.02. Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . 85 SECTION 7.03. Individual Rights of Trustee. . . . . . . . . . . . . . . . . . . 87 SECTION 7.04. Trustee's Disclaimer. . . . . . . . . . . . . . . . . . . . . . . 87 SECTION 7.05. Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . 88 SECTION 7.06. Reports by Trustee to Holders . . . . . . . . . . . . . . . . . . 88 SECTION 7.07. Compensation and Indemnity. . . . . . . . . . . . . . . . . . . . 88 SECTION 7.08. Replacement of Trustee. . . . . . . . . . . . . . . . . . . . . . 90 SECTION 7.09. Successor Trustee by Merger, Etc. . . . . . . . . . . . . . . . . 91 SECTION 7.10. Eligibility; Disqualification . . . . . . . . . . . . . . . . . . 91 SECTION 7.11. Preferential Collection of Claims Against Company . . . . . . . . 92 ARTICLE EIGHT DISCHARGE OF INDENTURE; DEFEASANCE SECTION 8.01. Termination of Company's Obligations. . . . . . . . . . . . . . . 92 SECTION 8.02. Application of Trust Money. . . . . . . . . . . . . . . . . . . . 95 SECTION 8.03. Repayment to the Company. . . . . . . . . . . . . . . . . . . . . 95 SECTION 8.04. Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . 96 SECTION 8.05. Acknowledgment of Discharge by Trustee. . . . . . . . . . . . . . 96 ARTICLE NINE MODIFICATION OF THE INDENTURE SECTION 9.01. Without Consent of Holders. . . . . . . . . . . . . . . . . . . . 97 SECTION 9.02. With Consent of Holders . . . . . . . . . . . . . . . . . . . . . 98 SECTION 9.03. Compliance with TIA . . . . . . . . . . . . . . . . . . . . . . . 99 SECTION 9.04. Revocation and Effect of Consents . . . . . . . . . . . . . . . .100 SECTION 9.05. Notation on or Exchange of Notes. . . . . . . . . . . . . . . . .100 SECTION 9.06. Trustee To Sign Amendments, Etc.. . . . . . . . . . . . . . . . .101 ARTICLE TEN GUARANTEE OF NOTES SECTION 10.01. Unconditional Guarantee.. . . . . . . . . . . . . . . . . . . . .101 - iii - Page ---- SECTION 10.02. Limitations on Guarantees.. . . . . . . . . . . . . . . . . . . .103 SECTION 10.03. Execution and Delivery of Note Guarantee. . . . . . . . . . . . .103 SECTION 10.04. Release of Subsidiary Guarantors. . . . . . . . . . . . . . . . .104 SECTION 10.05. Waiver of Subrogation.. . . . . . . . . . . . . . . . . . . . . .105 SECTION 10.06. Immediate Payment.. . . . . . . . . . . . . . . . . . . . . . . .106 SECTION 10.07. Obligations Continuing. . . . . . . . . . . . . . . . . . . . . .106 SECTION 10.08. Obligations Reinstated. . . . . . . . . . . . . . . . . . . . . .106 SECTION 10.09. Obligations Not Affected. . . . . . . . . . . . . . . . . . . . .106 SECTION 10.10. Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107 SECTION 10.11. No Obligation To Take Action Against the Company. . . . . . . . .107 SECTION 10.12. Dealing with the Company and Others.. . . . . . . . . . . . . . .107 SECTION 10.13. Default and Enforcement.. . . . . . . . . . . . . . . . . . . . .108 SECTION 10.14. Amendment, Etc. . . . . . . . . . . . . . . . . . . . . . . . . .108 SECTION 10.15. Acknowledgment. . . . . . . . . . . . . . . . . . . . . . . . . .108 SECTION 10.16. Costs and Expenses. . . . . . . . . . . . . . . . . . . . . . . .109 SECTION 10.17. No Waiver; Cumulative Remedies. . . . . . . . . . . . . . . . . .109 SECTION 10.18. Survival of Obligations.. . . . . . . . . . . . . . . . . . . . .109 SECTION 10.19. Note Guarantee in Addition to Other Obligations.. . . . . . . . .109 SECTION 10.20. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . .110 SECTION 10.21. Successors and Assigns. . . . . . . . . . . . . . . . . . . . . .110 ARTICLE ELEVEN MISCELLANEOUS SECTION 11.01. TIA Controls. . . . . . . . . . . . . . . . . . . . . . . . . . .110 SECTION 11.02. Notices.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .110 SECTION 11.03. Communications by Holders with Other Holders. . . . . . . . . . .112 SECTION 11.04. Certificate and Opinion as to Conditions Precedent. . . . . . . .112 SECTION 11.05. Statements Required in Certificate or Opinion.. . . . . . . . . .112 SECTION 11.06. Rules by Trustee, Paying Agent, Registrar.. . . . . . . . . . . .113 SECTION 11.07. Business Days.. . . . . . . . . . . . . . . . . . . . . . . . . .113 SECTION 11.08. Governing Law.. . . . . . . . . . . . . . . . . . . . . . . . . .113 SECTION 11.09. No Adverse Interpretation of Other Agreements.. . . . . . . . . .113 SECTION 11.10. No Personal Liability.. . . . . . . . . . . . . . . . . . . . . .113 SECTION 11.11. Successors. . . . . . . . . . . . . . . . . . . . . . . . . . . .114 SECTION 11.12. Duplicate Originals.. . . . . . . . . . . . . . . . . . . . . . .114 SECTION 11.13. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . .114 SECTION 11.14. Independence of Covenants.. . . . . . . . . . . . . . . . . . . .114 - iv - Page ---- Exhibit A - Form of Initial Note . . . . . . . . . . . . . . . . . . . . . A-1 Exhibit B - Form of Exchange Note. . . . . . . . . . . . . . . . . . . . . B-1 Exhibit C - Form of Certificate To Be Delivered in Connection with Transfers to Non-QIB Accredited Investors. . . . . . C-1 Exhibit D - Form of Certificate To Be Delivered in Connection with Transfers Pursuant to Regulation S . . . . . . . . . D-1 Exhibit E - Form of Note Guarantee . . . . . . . . . . . . . . . . . . . . E-1 Exhibit F - Form of Certification To Be Given by Holders of Beneficial Interest in a Temporary Regulation S Global Security to Euroclear or CEDEL. . . . . . . . . . . . . . . . F-1 Exhibit G - Form of Certification To Be Given by the Euroclear Operator or CEDEL Bank, Societe Anonyme . . . . . . . . . . . G-1
Note: This Table of Contents shall not, for any purpose, be deemed to be part of the Indenture - v - INDENTURE, dated as of February 3, 1998, between JFL-EEC MERGER SUB CO., a Delaware corporation ("MergerCo"), and UNITED STATES TRUST COMPANY OF NEW YORK, a New York banking corporation, as Trustee (the "Trustee"). MergerCo has duly authorized the creation of an issue of 9 7/8% Senior Notes due 2008, Series A, to be issued initially in the principal amount of $90,000,000 and thereafter in an additional principal amount, if any, up to $60,000,000 subject to the terms and conditions contained herein, and 9 7/8% Senior Notes due 2008, Series B, to be issued in exchange for the 9 7/8% Senior Notes due 2008, Series A, pursuant to the Registration Rights Agreement and, to provide therefor, MergerCo has duly authorized the execution and delivery of this Indenture. All things necessary to make the Notes, when duly issued and executed by MergerCo and authenticated and delivered hereunder, the valid and binding obligations of MergerCo and to make this Indenture a valid and binding agreement of MergerCo, have been done. The Notes are being sold in connection with the recapitalization (the "Recapitalization") of Carlyle-EEC Holdings, Inc., a Delaware corporation to be renamed Elgar Holdings, Inc. ("EHI") pursuant to the Agreement and Plan of Merger dated as of January 2, 1998 by and among JFL-EEC LLC, a Delaware limited liability company, Carlyle-EEC Holdings, Inc., a Delaware corporation, TC Group, L.L.C., a Delaware limited liability company, and MergerCo (as it may be amended through the date hereof and together with all ancillary agreements entered into in connection therewith, the "Recapitalization Agreement"). The Recapitalization Agreement provides for the merger (the "Merger") of MergerCo with and into Carlyle-EEC Holdings, Inc., which shall survive the merger and change its name to EHI. The time of the consummation of the Recapitalization and the Merger is referred to herein as the "Effective Time." Immediately after the Effective Time, (A) EHI and Elgar Electronics Corporation, a California corporation and a wholly owned subsidiary of EHI ("Elgar"), will execute an assumption agreement (the "Assumption Agreement") pursuant to which EHI, as survivor of the Merger, will assume all of the obligations of MergerCo under the Purchase Agreement and the Registration Rights Agreement, and Elgar will become a party to the Purchase Agreement and the Registration Rights Agreement as a subsidiary guarantor and unconditionally guarantee the Notes on a senior unsecured basis; and (B) EHI, Elgar (as a subsidiary guarantor), and the Trustee will enter into a first supplemental indenture to this Indenture (the "Supplemental Inden- -2- ture") providing for the express assumption by EHI, as survivor of the Merger, of the covenants, agreements and undertakings of MergerCo in this Indenture and under the Notes, and the guarantee of the Notes by Elgar, as subsidiary guarantor. As used herein, the "Company" shall mean MergerCo prior to the Effective Time and EHI as of and after the execution and delivery of the Supplemental Indenture. References to this Indenture as of and after the execution and delivery of the Supplemental Indenture will refer to this Indenture and the Supplemental Indenture and references to each of the Purchase Agreement and the Registration Rights Agreement as of and after the Effective Time will refer to that agreement together with the Assumption Agreement. Each party hereto agrees as follows for the benefit of the other and for the equal and ratable benefit of the Holders of the Notes: ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. DEFINITIONS. "ACCELERATION NOTICE" has the meaning provided in Section 6.02. "ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of the Company or at the time it merges or consolidates with the Company or any of its Subsidiaries or assumed in connection with the acquisition of assets from such Person and in each case not incurred by such Person in connection with, or in anticipation or contemplation of, such Person becoming a Restricted Subsidiary of the Company or such acquisition, merger or consolidation. "ADDITIONAL INTEREST" has the meaning provided in the Registration Rights Agreement. "AFFILIATE" means, with respect to any specified Person, any other Person who directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such specified Person. The term "control" means the possession, directly or indirectly, of the power to -3- direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative of the foregoing. "AFFILIATE TRANSACTION" has the meaning provided in Section 4.11. "AGENT" means any Registrar, Paying Agent or co-Registrar. "AGENT MEMBER" means any member of, or participant in, the Depository. "APPLICABLE PREMIUM" means, with respect to a Note, the greater of (i) 1% of the then outstanding principal amount of such Note and (ii) the excess of (A) the present value of the remaining required interest and principal payments due on such Note (exclusive of accrued and unpaid interest), computed using a discount rate equal to the Treasury Rate plus 50 basis points, over (B) the then outstanding principal amount of such Note. "APPLICABLE PROCEDURES" means the rules and procedures of the Depository, Euroclear and CEDEL, in each case to the extent applicable and as in effect from time to time. "ASSET ACQUISITION" means (a) an Investment by the Company or any Restricted Subsidiary of the Company in any other Person pursuant to which such Person shall become a Restricted Subsidiary of the Company or any Restricted Subsidiary of the Company, or shall be merged with or into the Company or any Restricted Subsidiary of the Company, or (b) the acquisition by the Company or any Restricted Subsidiary of the Company of the assets of any Person (other than a Restricted Subsidiary of the Company) which constitute all or substantially all of the assets of such Person or comprise any division or line of business of such Person or any other properties or assets of such Person other than in the ordinary course of business. "ASSET SALE" means any direct or indirect sale, issuance, conveyance, transfer, lease (other than operating leases entered into in the ordinary course of business), assignment or other transfer for value by the Company or any of its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to any Person other than the Company or a Restricted Subsidiary of the Company of (a) any Capital Stock of any Restricted Subsidiary of the Company; or (b) any other property -4- or assets of the Company or any Restricted Subsidiary of the Company other than in the ordinary course of business; PROVIDED, HOWEVER, that Asset Sale shall not include (i) a transaction or series of related transactions for which the Company or its Restricted Subsidiaries receive aggregate consideration of less than $500,000, (ii) the sale, lease, conveyance, disposition or other transfer of all or substantially all of the assets of the Company and the Restricted Subsidiaries of the Company (determined on a consolidated basis), or the consolidation or merger of the Company with any other Person, in each case as permitted under Section 5.01, (iii) any disposition of property of the Company or any of its Restricted Subsidiaries that, in the reasonable judgment of the Company, has become uneconomic, obsolete or worn out, (iv) a Restricted Payment or Permitted Investment that is permitted by Section 4.10 (including, without limitation, any formation of or contribution of assets to a joint venture), (v) leases or subleases, in the ordinary course of business, to third parties of real property owned in fee or leased by the Company or its Subsidiaries, (vi) the sale of inventory in the ordinary course of business, (vii) the sale of Cash Equivalents or (viii) the sale or discount, in each case without recourse (other than recourse for a breach of a representation or warranty), of accounts receivable arising in the ordinary course of business, but only in connection with the compromise or collection thereof. "AUTHENTICATING AGENT" has the meaning provided in Section 2.02. "BANKRUPTCY LAW" means Title 11, U.S. Code or any similar Federal, state or foreign law for the relief of debtors. "BOARD OF DIRECTORS" means, as to any Person, the board of directors of such Person or any duly authorized committee thereof. "BOARD RESOLUTION" means, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification, and delivered to the Trustee. "BORROWING BASE" means, as of any date, an amount equal to the sum of (a) 85% of the face amount of all accounts receivable owned by the Company and its Restricted Subsidiaries as of such date that are not more than 90 days past due, and -5- (b) 60% of the book value of all inventory owned by the Company and its Restricted Subsidiaries as of such date, all calculated on a consolidated basis and in accordance with GAAP. To the extent that information is not available as to the amount of accounts receivable or inventory as of a specific date, the Company may utilize the most recent available information for the purpose of calculating the Borrowing Base. "BUSINESS DAY" means any day other than a Saturday, Sunday or any other day on which banking institutions in the City of New York or the city in which the Trustee is located are required or authorized by law or other governmental action to be closed. "CAPITALIZED LEASE OBLIGATION" means, as to any Person, the obligations of such Person under a lease that are required to be classified and accounted for as capital lease obligations under GAAP and, for purposes of this definition, the amount of such obligations at any date shall be the capitalized amount of such obligations at such date, determined in accordance with GAAP. "CAPITAL STOCK" means (i) with respect to any Person that is a corporation, any and all shares, interests, participations or other equivalents (however designated and whether or not voting) of corporate stock, including each class of Common Stock and Preferred Stock of such Person and (ii) with respect to any Person that is not a corporation, any and all partnership or other equity interests of such Person. "CASH EQUIVALENTS" means (i) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor's ("S&P") or Moody's Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more than one year from the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit, Euro-dollar deposits or bankers' acceptances maturing within one year from the date of acquisition thereof issued by any bank organized under the laws of the United States of Amer- -6- ica or any state thereof or the District of Columbia or any U.S. branch of a foreign bank or any foreign branch of a U.S. bank, in each case, having at the date of acquisition thereof combined capital and surplus of not less than $250,000,000; (v) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (i) above entered into with any bank meeting the qualifications specified in clause (iv) above; and (vi) investments in money market funds with assets at least equal to $500.0 million. "CEDEL" means Cedel Bank, Societe Anonyme (or any successor securities clearing agency). "CERTIFICATED SECURITIES" means Notes in definitive registered form that are registered in the name of a Person other than the Depository or its nominee. "CHANGE OF CONTROL" means the occurrence of one or more of the following events: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company to any Person or group of related Persons for purposes of Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates thereof (whether or not otherwise in compliance with the provisions of this Indenture) other than to a Subsidiary of the Company, the Principals and their Related Parties; (ii) the liquidation or dissolution of the Company, other than in a transaction that complies with Section 5.01; (iii) any Person or Group (other than the Principals and their Related Parties) shall become the owner, directly or indirectly, beneficially or of record, of shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding Capital Stock of the Company; or (iv) the replacement of a majority of the Board of Directors of the Company over a two-year period from the directors who constituted the Board of Directors of the Company at the beginning of such period, and such replacement shall not have been approved by a vote of at least a majority of the Board of Directors of the Company then still in office who either were members of such Board of Directors at the beginning of such period or whose election as a member of such Board of Directors was previously so approved. "CHANGE OF CONTROL OFFER" has the meaning provided in Section 4.14. "CHANGE OF CONTROL PAYMENT DATE" has the meaning provided in Section 4.14. -7- "COMMISSION" means the U.S. Securities and Exchange Commission. "COMMON STOCK" of any Person means any and all shares, interests or other participations in, and other equivalents (however designated and whether voting or non-voting) of such Person's common stock, whether outstanding on the Issue Date or issued after the Issue Date, and includes, without limitation, all series and classes of such common stock. "COMPANY" has the meaning provided in the fifth introductory paragraph hereto. "CONSOLIDATED EBITDA" means, with respect to any Person, for any period, the sum (without duplication) of (i) Consolidated Net Income and (ii) to the extent Consolidated Net Income has been reduced thereby, (A) all income taxes of such Person and its Restricted Subsidiaries accrued in accordance with GAAP for such period, (B) Consolidated Fixed Charges and (C) Consolidated Non-cash Charges LESS any non-cash items increasing Consolidated Net Income for such period, all as determined on a consolidated basis for such Person and its Restricted Subsidiaries in accordance with GAAP. "CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to any Person, the ratio of Consolidated EBITDA of such Person during the four full fiscal quarters (the "Four Quarter Period") ending on or prior to the date of the transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of such Person for the Four Quarter Period. In addition to and without limitation of the foregoing, for purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated after giving effect on a PRO FORMA basis for the period of such calculation to (i) the incurrence or repayment of any Indebtedness of such Person or any of its Restricted Subsidiaries (and the application of the proceeds thereof) giving rise to the need to make such calculation and any incurrence or repayment of other Indebtedness (and the application of the proceeds thereof), other than the incurrence or repayment of Indebtedness in the ordinary course of business for working capital purposes pursuant to working capital facilities, occurring during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transaction Date, as if such incurrence or repayment, as the case may be (and the application of the proceeds thereof), occurred on the first day of the Four Quarter Period and (ii) any Asset Sales, discon- -8- tinuance of operations (as determined in accordance with GAAP) or Asset Acquisitions (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of such Person or one of its Restricted Subsidiaries (including any Person who becomes a Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming or otherwise being liable for Acquired Indebtedness and also including any Consolidated EBITDA (including any PRO FORMA expense and cost reductions as determined in accordance with Regulation S-X under the Exchange Act) attributable to the assets which are the subject of the Asset Acquisition or Asset Sale during the Four Quarter Period) occurring during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transaction Date, as if such Asset Sale, discontinuance or Asset Acquisition (including the incurrence, assumption or liability for any such Acquired Indebtedness) occurred on the first day of the Four Quarter Period. If such Person or any of its Restricted Subsidiaries directly or indirectly guarantees Indebtedness of a third Person, the preceding sentence shall give effect to the incurrence of such guaranteed Indebtedness as if such Person or any Restricted Subsidiary of such Person had directly incurred or otherwise assumed such guaranteed Indebtedness. If since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Acquisition or Asset Sale that would have required adjustment pursuant to this definition, then the Consolidated Fixed Charge Coverage Ratio shall be calculated giving PRO FORMA effect thereto as if such Asset Acquisition or Asset Sale had occurred at the beginning of the applicable Four Quarter Period. Furthermore, in calculating "Consolidated Fixed Charges" for purposes of determining the denominator (but not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1) interest on outstanding Indebtedness determined on a fluctuating basis as of the Transaction Date and which will continue to be so determined thereafter shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest on such Indebtedness in effect on the Transaction Date; and (2) notwithstanding clause (1) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Interest Swap Obligations, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of such agreements and (3) if it bears, at the option of the Company or the relevant Restricted Subsidiary of the Company, a fixed or floating rate of interest, interest thereon will be computed by applying, at the option of the Company, either the fixed or floating rate. For -9- purposes of this definition, whenever PRO FORMA effect is to be given to a transaction, the PRO FORMA calculation shall be made in good faith by the Chief Financial Officer of the Company and ratified by the Board of Directors of the Company. "CONSOLIDATED FIXED CHARGES" means, with respect to any Person for any period, the sum, without duplication, of (i) Consolidated Interest Expense, plus (ii) the product of (x) the amount of all dividend payments on any series of Preferred Stock of such Person (other than dividends paid in Qualified Capital Stock) paid, accrued or scheduled to be paid or accrued during such period times (y) a fraction, the numerator of which is one and the denominator of which is one minus the then current effective consolidated federal, state and local income tax rate of such Person, expressed as a decimal, PROVIDED that Consolidated Fixed Charges shall not include (x) gain or loss from extinguishment of debt, including write off of debt issuance costs, commissions, fees and expenses, (y) amortization of debt issuance costs, commissions, fees and expenses, or (z) customary commitment, administrative and transaction fees or charges. "CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any period, the sum of, without duplication: (i) the aggregate of the interest expense of such Person and its Restricted Subsidiaries for such period determined on a consolidated basis in accordance with GAAP, including without limitation, (a) any amortization of debt discount and amortization or write-off deferred financing costs, (b) the net costs under Interest Swap Obligations, (c) all capitalized interest and (d) the interest portion of any deferred payment obligation; and (ii) the interest component of Capitalized Lease Obligations accrued by such Person and its Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED NET INCOME" means, with respect to any Person, for any period, the aggregate net income (or loss) of such Person and its Restricted Subsidiaries for such period on a consolidated basis, determined in accordance with GAAP; PROVIDED that there shall be excluded therefrom (a) after-tax gains or losses from Asset Sales or other sales of assets outside the ordinary course of business or abandonments or reserves relating thereto, (b) after-tax items classified as extraordinary or nonrecurring gains or losses, (c) solely for purposes of Section 4.10, the net income or loss of any Person acquired in a "pooling of interests" transaction accrued prior to the date it becomes a Restricted Subsidiary of the referent Person or is merged or consolidated with the referent Person or -10- any Restricted Subsidiary of the referent Person, (d) the net income or loss of any Restricted Subsidiary of the referent Person to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is restricted by a contract, operation of law or otherwise, except to the extent that such net income is actually paid to the Company or a Restricted Subsidiary thereof by loans, advances, intercompany transfers, principal payments or otherwise, (e) the net income of any Person, other than a Restricted Subsidiary of the referent Person, except to the extent of cash dividends or distributions paid to the referent Person or subject to clause (d), to a Restricted Subsidiary of the referent Person by such Person, and (f) the fees, expenses and other costs incurred in connection with the Recapitalization, including payments to management contemplated by the Recapitalization Agreement; PROVIDED, HOWEVER, that Net Income shall be deemed to include any increases during such period to consolidated shareholder's equity of such Person attributable to tax benefits from net operating losses and the exercise of stock options that are not otherwise included in Net Income for such period. "CONSOLIDATED NON-CASH CHARGES" means, with respect to any Person, for any period, the (a) sum of (i) aggregate depreciation, amortization and other non-cash expenses or charges of such Person and its Restricted Subsidiaries reducing Consolidated Net Income of such Person and its Restricted Subsidiaries for such period (including amortization of goodwill, the non-cash costs of agreements evidencing Interest Swap Obligations, Currency Agreements, license agreements, non-competition agreements, non-cash amortization of Capitalized Lease Obligations or management fees, and organization costs), (ii) expenses and charges related to any equity offering or incurrence of Indebtedness permitted to be incurred by this Indenture (including any such expenses or charges relating to the Recapitalization), (iii) the amount of any restructuring charge or reserve, (iv) unrealized gains and losses from hedging, foreign currency or commodities translations and transactions, and (v) the amount of any reduction representing a minority interest in Subsidiary Guarantors, MINUS (b) any cash payment with respect to which a charge or reserve referred to in clause (a) was taken in a prior period, in each case, determined on a consolidated basis in accordance with GAAP. "CORPORATE TRUST OFFICE" means the office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office at the -11- date of execution of this Indenture is located at 114 West 47th Street, New York, New York 10036. "COVENANT DEFEASANCE" has the meaning provided in Section 8.01. "CURRENCY AGREEMENT" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company or any Restricted Subsidiary of the Company against fluctuations in currency values. "CUSTODIAN" means any receiver, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law. "DEFAULT" means an event or condition the occurrence of which is, or with the lapse of time or the giving of notice or both would be, an Event of Default. "DEFAULT INTEREST PAYMENT DATE" has the meaning provided in Section 2.12. "DEPOSITORY" means The Depository Trust Company, its nominees and successors and any institution that succeeds The Depository Trust Company as depository and Holder of Global Notes hereunder. "DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock which, 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 is redeemable at the sole option of the holder thereof on or prior to the final maturity date of the Notes; PROVIDED that (i) any Capital Stock that would not constitute Disqualified Capital Stock but for provisions therein giving holders thereof the right to cause the issuer thereof to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the Stated Maturity of the Notes will constitute Disqualified Capital Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions described under Section 4.14 and (ii) the Redeemable Preferred Stock shall not constitute Disqualified Capital Stock. -12- "EFFECTIVE TIME" means the time of the consummation of the Recapitalization and the Merger. "EHI" means Elgar Holdings, Inc., a Delaware corporation. "ELGAR" means Elgar Electronics Corporation, a California corporation. "EUROCLEAR" means the Euroclear Clearance System (or any successor securities clearing agency). "EVENT OF DEFAULT" has the meaning provided in Section 6.01. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any successor statute or statutes thereto. "EXCHANGE NOTES" means the 9 7/8% Senior Notes due 2008, Series B to be issued pursuant to the Registration Rights Agreement in exchange for the Initial Notes issued under this Indenture on the Issue Date or Initial Notes issued under this Indenture subsequent to the Issue Date pursuant to Section 2.02. "EXCHANGE OFFER" has the meaning provided in the Registration Rights Agreement. "EXCHANGE OFFER REGISTRATION STATEMENT" means the registration statement filed by the Company pursuant to the Registration Rights Agreement. "FAIR MARKET VALUE" means, with respect to any asset or property, the price which could be negotiated in an arm's-length, free market transaction, for cash, between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction. For purposes of Section 4.15, fair market value shall be determined by the Board of Directors of the Company acting in good faith and shall be evidenced by a Board Resolution of the Board of Directors of the Company delivered to the Trustee. "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 approved by a significant segment of the ac- -13- counting profession of the United States, which are in effect as of the Issue Date. "GLOBAL NOTE" has the meaning provided in Section 2.01. "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. "HOLDER" means a registered holder of Notes. "INCUR" has the meaning provided in Section 4.12. "INDEBTEDNESS" means with respect to any Person, without duplication, (i) all indebtedness of such Person for borrowed money, (ii) all indebtedness of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all Capitalized Lease Obligations of such Person, (iv) all obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations and all obligations under any title retention agreement (but excluding trade accounts payable and other accrued liabilities arising in the ordinary course of business), (v) all obligations for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction, (vi) guarantees and other contingent obligations in respect of Indebtedness referred to in clauses (i) through (v) above and clause (viii) below, (vii) all obligations of any other Person of the type referred to in clauses (i) through (vi) above which are secured by any lien on any property or asset of such Person, the amount of such obligation being deemed to be the lesser of the fair market value of such property or asset or the amount of the obligation so secured, (viii) all obligations under currency agreements and interest swap agreements of such Person and (ix) all Disqualified Capital Stock issued by such Person with the amount of Indebtedness represented by such Disqualified Capital Stock being equal to the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price, but excluding accrued dividends, if any. For purposes hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebt- -14- edness shall be required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock, such fair market value shall be determined in good faith by the Board of Directors of the issuer of such Disqualified Capital Stock. Subject to the directly preceding sentence, 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 interests, and (ii) the principal amount thereof in the case of any other Indebtedness. Notwithstanding the foregoing, (i)(a) Obligations of such Persons other than principal, (b) any liability for federal, state or local taxes or other taxes owed by such Person and (c) obligations with respect to performance and surety bonds and completion guarantees in the ordinary course of business will not be considered Indebtedness for purposes of this definition and (ii) the accretion of original issue discount will not be considered the incurrence of Indebtedness. "INDENTURE" means this Indenture, as amended or supplemented from time to time in accordance with the terms hereof. "INDEPENDENT FINANCIAL ADVISOR" means a firm (i) which does not, and whose directors, officers and employees or Affiliates do not, own more than 5% of the Capital Stock of the Company and (ii) which, in the judgment of the Board of Directors of the Company, is otherwise independent and qualified to perform the task for which it is to be engaged. "INITIAL NOTES" means, collectively, (i) the 9 7/8% Senior Notes due 2008, Series A, of the Company issued on the Issue Date and (ii) one or more series of 9 7/8% Senior Notes due 2008 that are issued under this Indenture subsequent to the Issue Date pursuant to Section 2.02, in an aggregate principal amount up to $60,000,000, in each case for so long as such securities constitute Restricted Securities. "INITIAL PURCHASERS" means BT Alex. Brown Incorporated or any other original purchasers of any Initial Notes issued after the Issue Date. "INSTITUTIONAL ACCREDITED INVESTOR" means an institution that is an "accredited investor" as that term is defined in Rule 501(a)(1)(2),(3) or (7) under the Securities Act. "INTEREST" when used with respect to any Note means the amount of all interest accruing on such Note, including any -15- applicable defaulted interest pursuant to Section 2.12 and any Additional Interest pursuant to the Registration Rights Agreement. "INTEREST PAYMENT DATE" means the Stated Maturity of an installment of interest on the Notes. "INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant to any arrangement with any other Person, whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such other Person calculated by applying a fixed or a floating rate of interest on the same notional amount and shall include, without limitation, interest rate swaps, caps, floors, collars and similar agreements. "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended to the date hereof and from time to time hereafter. "INVESTMENT" means, with respect to any Person, any direct or indirect loan or other extension of credit (including, without limitation, a guarantee) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition by such Person of any Capital Stock, bonds, debentures or other securities or evidences of Indebtedness issued by, any other Person. "Investment" shall exclude extensions of trade credit by the Company and its Restricted Subsidiaries on commercially reasonable terms in accordance with normal trade practices of the Company or such Restricted Subsidiary, as the case may be. For the purposes of Section 4.10, (i) "Investment" shall include and be valued at the fair market value of the net assets of any Restricted Subsidiary at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary and shall exclude the fair market value of the net assets of and the fair market value of Investments (other than common stock) in any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary and (ii) the amount of any Investment shall be the original cost of such Investment plus the cost of all additional Investments by the Company or any of its Restricted Subsidiaries, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment, reduced by the payment of interest, dividends or distributions in connection with -16- such Investment or any other amounts or assets received in respect of such Investment; PROVIDED that no such payment of dividends or distributions or receipt of any such other amounts shall reduce the amount of any Investment if such payment of dividends or distributions or receipt of any such amounts would be included in Consolidated Net Income. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Common Stock of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, the Company no longer owns, directly or indirectly, 100% of the outstanding Common Stock of such Restricted Subsidiary, 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 Common Stock of such Restricted Subsidiary not sold or disposed of. "ISSUE DATE" means February 3, 1998. "LEGAL DEFEASANCE" has the meaning provided in Section 8.01. "LEHMAN" means J.F. Lehman & Company. "LIEN" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement and any lease in the nature thereof). "MANAGEMENT AGREEMENT" means the management agreement to be entered into among EHI, Elgar and Lehman at the Effective Time. "MATURITY DATE" means February 1, 2008. "MERGER" has the meaning provided in the third introductory paragraph hereto. "MERGERCO" has the meaning provided in the introductory paragraph hereto. "NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds in the form of cash or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (other than the portion of any such deferred payment constituting interest or dividends) received by the Company or any of its Restricted Subsidiaries from such Asset Sale net of (a) reasonable out-of-pocket expenses and fees relating to such Asset -17- Sale (including, without limitation, legal, accounting and investment banking fees and sales commissions), (b) taxes paid or payable, (c) repayment of Indebtedness that is secured by the subject assets or required to be repaid in connection with such Asset Sale, (d) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against any liabilities associated with such Asset Sale and retained by the Company or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale and (e) amounts required to be paid to any Person (other than the Company or any Restricted Subsidiary) owning a beneficial interest (by way of Capital Stock of the Person owning such assets or otherwise) in the assets that are subject to the Asset Sale. "NET PROCEEDS OFFER" has the meaning provided in Section 4.15. "NET PROCEEDS OFFER AMOUNT" has the meaning provided in Section 4.15. "NET PROCEEDS OFFER PAYMENT DATE" has the meaning provided in Section 4.15. "NET PROCEEDS OFFER TRIGGER DATE" has the meaning provided in Section 4.15. "NEW CREDIT FACILITY" means the Credit Agreement dated as of February 3, 1998, among EHI, Elgar, the lenders party thereto in their capacities as lenders thereunder and Bankers Trust Company, as agent, together with the related documents thereto (including, without limitation, any guarantee agreements and security documents), in each case as such agreements may be amended (including any amendment and restatement thereof), supplemented or otherwise modified from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring (including increasing the amount of available borrowings thereunder or adding Restricted Subsidiaries of the Company as additional borrowers or guarantors thereunder) all or any portion of the Indebtedness under such agreement or any successor or replacement agreement and whether by the same or any other agent, lender or group of lenders. -18- "NOTE GUARANTEE" means the guarantee of the Obligations of the Company with respect to the Notes by each Subsidiary Guarantor pursuant to the terms of this Indenture. "NOTES" means, collectively, the Initial Notes, the Private Exchange Notes, if any, and the Exchange Notes, treated as a single class of securities, as amended or supplemented from time to time in accordance with the terms of this Indenture, that are issued pursuant to this Indenture. "OBLIGATIONS" means all obligations for principal, premium, interest, penalties, fees, indemnifications, reimbursements and other liabilities payable under the documentation governing any Indebtedness. "OFFERING MEMORANDUM" means the confidential Offering Memorandum dated January 30, 1998 of EHI relating to the offering of the Notes. "OFFICER" means, with respect to any Person, the Chairman of the Board of Directors, the Chief Executive Officer, the President, any Vice President, the Chief Financial Officer, the Treasurer, the Controller, or the Secretary of such Person, or any other officer designated by the Board of Directors in a Board Resolution serving in a similar capacity. "OFFICERS' CERTIFICATE" means, with respect to any Person, a certificate signed by the Chief Executive Officer, the President or any Vice President and the Chief Financial Officer or any Treasurer of such Person that shall comply with applicable provisions of this Indenture. "OPINION OF COUNSEL" means a written opinion from legal counsel who is reasonably acceptable to the Trustee complying with the requirements of Sections 11.04 and 11.05, as they relate to the giving of an Opinion of Counsel. "PAYING AGENT" has the meaning provided in Section 2.03. "PERMANENT REGULATION S GLOBAL NOTE" has the meaning provided in Section 2.01. "PERMITTED INDEBTEDNESS" means, without duplication, each of the following: (i) Indebtedness under the Notes issued in the Offering and any Note Guarantees; -19- (ii) Indebtedness incurred pursuant to the New Credit Facility and/or one or more other credit facilities (including any guarantees of such Indebtedness) in an aggregate principal amount at any time outstanding not to exceed the greater of (x) $15 million, and (y) the amount of the Borrowing Base; less, in the case of preceding clause (x), any amount applied to the permanent reduction of such credit facilities pursuant to Section 4.15; (iii) other Indebtedness of the Company and its Restricted Subsidiaries outstanding on the Issue Date; (iv) Indebtedness in respect of Interest Swap Obligations of the Company or any of its Restricted Subsidiaries; PROVIDED, HOWEVER, that such Interest Swap Obligations are entered into to protect the Company and its Restricted Subsidiaries from fluctuations in interest rates on Indebtedness incurred in accordance with this Indenture to the extent the notional principal amount of such Interest Swap Obligation does not exceed the principal amount of the Indebtedness to which such Interest Swap Obligation relates; (v) Indebtedness under Currency Agreements; PROVIDED that in the case of Currency Agreements which relate to Indebtedness, such Currency Agreements do not increase the Indebtedness of the Company and its Restricted Subsidiaries outstanding other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder; (vi) Indebtedness of a Restricted Subsidiary of the Company to the Company or to a Wholly Owned Restricted Subsidiary of the Company for so long as such Indebtedness is held by the Company or a Wholly Owned Restricted Subsidiary of the Company or the lenders or collateral agent under the New Credit Facility; PROVIDED that if as of any date any Person other than the Company, a Wholly Owned Restricted Subsidiary of the Company or the lenders or collateral agent under the New Credit Facility owns or holds any such Indebtedness, such date shall be deemed the incurrence of Indebtedness; (vii) Indebtedness of the Company to a Wholly Owned Restricted Subsidiary of the Company for so long as such Indebtedness is held by a Wholly Owned Restricted Subsidiary of the Company or the lenders or collateral agent under the New Credit Facility; PROVIDED that (a) any Indebt- -20- edness of the Company to any Wholly Owned Restricted Subsidiary of the Company which is not a Subsidiary Guarantor is unsecured and subordinated, pursuant to a written agreement, to the Company's obligations under this Indenture and the Notes and (b) if as of any date any Person other than a Wholly Owned Restricted Subsidiary of the Company owns or holds any such Indebtedness, such date shall be deemed the incurrence of Indebtedness; (viii) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; PROVIDED, HOWEVER, that such Indebtedness is extinguished within three Business Days of incurrence; (ix) Indebtedness of the Company or any of its Restricted Subsidiaries represented by letters of credit for the account of the Company or such Restricted Subsidiary, as the case may be, issued in the ordinary course of business, including without limitation letters of credit in respect of workers' compensation claims or self-insurance, or other Indebtedness with respect to reimbursement type obligations regarding worker's compensation claims; PROVIDED, HOWEVER, that upon the drawing of such letters of credit or other obligations, such obligations are reimbursed within 30 days following such drawing; (x) Indebtedness (A) represented by Capitalized Lease Obligations and Purchase Money Indebtedness of the Company and its Restricted Subsidiaries or (B) Indebtedness under purchase money mortgages or secured by purchase money security interests, in the case of (A) or (B) incurred for the purpose of leasing or financing or refinancing all or any part of the purchase price or cost of construction or improvement of any property (real or personal) or other assets that are used or useful 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 and whether such Indebtedness is owed to the seller or Person carrying out such construction or improvement or to any third party), so long as (x) such Indebtedness is not secured by any property or assets of the Company or any Restricted Subsidiary other than the property or assets so leased, acquired (directly or indirectly), constructed or improved and (y) such Indebtedness is created within 90 days of the -21- acquisition or completion of construction or improvement of the related property or asset, provided that the aggregate principal amount of Indebtedness under clause (A) and (B) does not exceed the greater of (a) $8.0 million or (b) 7.5% of Total Assets and, any Refinancing of Indebtedness permitted under clause (A) or (B) the aggregate amount of which does not exceed the greater of (a) $8.0 million or (b) 7.5% of Total Assets; (xi) Refinancing Indebtedness; (xii) Indebtedness of the Company or any Restricted Subsidiary consisting of guarantees, indemnities or obligations in respect of purchase price adjustments in connection with the acquisition or disposition of assets, including, without limitation, shares of Capital Stock; (xiii) guarantees of Indebtedness otherwise permitted under this Indenture; and (xiv) additional Indebtedness of the Company and its Restricted Subsidiaries in an aggregate principal amount not to exceed $10.0 million at any one time outstanding (which amount may, but need not, be incurred in whole or in part under the New Credit Facility). "PERMITTED INVESTMENTS" means (i) Investments by the Company or any Restricted Subsidiary of the Company in any Person that is or will become immediately after such Investment a Restricted Subsidiary of the Company or that will merge or consolidate into the Company or a Restricted Subsidiary of the Company, (ii) Investments in the Company by any Restricted Subsidiary of the Company; PROVIDED that any Indebtedness evidencing such Investment made by a Restricted Subsidiary that is not a Subsidiary Guarantor is unsecured and subordinated, pursuant to a written agreement, to the Company's obligations under the Notes and this Indenture; (iii) investments in cash and Cash Equivalents; (iv) loans and advances to employees and officers of the Company and its Restricted Subsidiaries in the ordinary course of business for bona fide business purposes not in excess of $250,000 at any one time outstanding; (v) Currency Agreements and Interest Swap Obligations entered into in the ordinary course of the Company's or its Restricted Subsidiaries' businesses and otherwise in compliance with this Indenture; (vi) Investments in securities of trade creditors or customers received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers or otherwise in settlement of debts; -22- (vii) Investments made by the Company or its Restricted Subsidiaries as a result of consideration received in connection with an Asset Sale or other disposition of assets made in compliance with Section 4.15; (viii) Investments in existence on the Issue Date; (ix) any acquisition of assets solely in exchange for the issuance of Qualified Equity Interests of the Company; (x) commission, travel, payroll, entertainment, relocation and similar advances to officers and employees made in the ordinary course of business; (xi) guarantees of Indebtedness otherwise permitted under this Indenture; and (xii) other Investments that do not exceed the greater of $5.0 million or 10% of Total Assets in the aggregate at any time outstanding. "PERMITTED LIENS" means the following types of Liens: (i) Liens for taxes, assessments or governmental charges or claims either (a) not delinquent or (b) contested in good faith by appropriate proceedings and as to which the Company or its Restricted Subsidiaries shall have set aside on its books such reserves as may be required pursuant to GAAP; (ii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, including any Lien securing letters of credit issued in the ordinary course of business in connection therewith, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (iv) judgment Liens not giving rise to an Event of Default; (v) easements, rights-of-way, zoning restrictions, eminent domain proceedings and other similar charges or encumbrances in respect of real property not interfering in any material respect with the ordinary conduct of the -23- business of the Company or any of its Restricted Subsidiaries; (vi) any interest or title of a lessor under any Capitalized Lease Obligation; PROVIDED that such Liens do not extend to any property or assets which is not leased property subject to such Capitalized Lease Obligation; (vii) purchase money Liens to finance the acquisition, construction or improvement of property or assets of the Company or any Restricted Subsidiary of the Company; PROVIDED, HOWEVER, that the related Indebtedness shall not exceed the cost of the acquisition, construction or improvement of such property or assets and shall not be secured by any property or assets of the Company or any Restricted Subsidiary of the Company other than the property and assets so acquired whether through the direct acquisition of such property or assets or indirectly through the acquisition of the Capital Stock of any Person owning such property or assets constructed or improved, and (B) the Lien securing such Indebtedness shall be created within 90 days of such acquisition or completion of construction or improvement; (viii) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods; (ix) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (x) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual, or warranty requirements of the Company or any of its Restricted Subsidiaries, including rights of offset and set-off; (xi) Liens securing Interest Swap Obligations which Interest Swap Obligations relate to Indebtedness that is otherwise permitted under this Indenture; (xii) Liens securing Indebtedness under Currency Agreements; -24- (xiii) Liens securing Acquired Indebtedness incurred in accordance with Section 4.12; PROVIDED that (A) such Liens secured such Acquired Indebtedness at the time of and prior to the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary of the Company and were not granted in connection with, or in anticipation of, the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary of the Company and (B) such Liens do not extend to or cover any property or assets of the Company or of any of its Restricted Subsidiaries other than the property or assets that secured the Acquired Indebtedness prior to the time such Indebtedness became Acquired Indebtedness of the Company or a Restricted Subsidiary of the Company; (xiv) Liens on property or assets of the Company or any Restricted Subsidiary securing Indebtedness under the New Credit Facility or one or more other credit facilities in a principal amount not to exceed the sum of (1) the principal amount of Indebtedness permitted by clause (ii) of the definition of "Permitted Indebtedness" and (2) the principal amount of Indebtedness permitted by clause (xiv) of the definition of "Permitted Indebtedness" to the extent such Indebtedness is incurred under the New Credit Facility; (xv) Liens on property or assets of the Company or any Restricted Subsidiary securing Indebtedness incurred under clause (xiv) of the definition of "Permitted Indebtedness"; (xvi) Liens in favor of customs and revenues authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xvii) 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 the business of the Company or such Restricted Subsidiary; (xviii) leases or subleases to third parties; -25- (xix) Liens in connection with workmen's compensation obligations and general liability exposure of the Company and its Restricted Subsidiaries; and (xx) any extension, renewal or replacement, in whole or in part, of any Lien described in the foregoing clauses (i) through (xix); provided that the Lien so extended, renewed or replaced does not extend to any additional property or assets. "PERSON" means an individual, partnership, corporation, unincorporated organization, limited liability company, trust or joint venture, or a governmental agency or political subdivision thereof. "PREFERRED STOCK" of any Person means any Capital Stock of such Person that has preferential rights to any other Capital Stock of such Person with respect to dividends or redemptions or upon liquidation. "PRINCIPAL" of any Indebtedness (including the Notes) means the principal amount of such Indebtedness plus the premium, if any, on such Indebtedness. "PRINCIPALS" means (i) Lehman and each Affiliate of Lehman as of the Issue Date, (ii) JFL-EEC LLC, J.F. Lehman Equity Investors I, L.P. and the other members of JFL-EEC LLC on the Issue Date and their Affiliates, (iii) each officer or employee of Lehman or any such member referred to in clause (ii) as of the Issue Date and (iv) each of the foregoing's family members, legal representatives or guardians, heirs and legatees and trusts, partnerships and corporations the sole beneficiaries, partners or shareholders, as the case may be, of which are family members. "PRIVATE EXCHANGE NOTES" has the meaning provided in the Registration Rights Agreement. "PRIVATE PLACEMENT LEGEND" has the meaning provided in Section 2.15. "PRO FORMA" means, with respect to any calculation made or required to be made pursuant to the terms of this Indenture, a calculation in accordance with Article 11 of Regulation S-X under the Securities Act, as determined by the Board of Directors of the Company in consultation with its independent public accountants. -26- "PUBLIC EQUITY OFFERING" means an underwritten public offering of Qualified Capital Stock of the Company pursuant to a registration statement filed with the Commission in accordance with the Securities Act. "PURCHASE AGREEMENT" means the Purchase Agreement dated as of January 30, 1998 between MergerCo and the Initial Purchaser. "PURCHASE MONEY INDEBTEDNESS" means Indebtedness of the Company and its Restricted Subsidiaries incurred in the normal course of business for the purpose of financing all or any part of the purchase price, or the cost of installation, construction or improvement, of property or equipment. "QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified Capital Stock. "QUALIFIED EQUITY INTEREST" means any Qualified Capital Stock and all warrants, options or other rights to acquire Qualified Capital Stock (but excluding any debt security or Disqualified Capital Stock that is convertible into or exchangeable for Qualified Capital Stock). "QUALIFIED INSTITUTIONAL BUYER" or "QIB" has the meaning specified in Rule 144A under the Securities Act. "RECAPITALIZATION" means the recapitalization of EHI pursuant to the Recapitalization Agreement providing for the merger of MergerCo, a company formed by Lehman, with and into EHI and related transactions contemplated thereby. "RECAPITALIZATION AGREEMENT" means the Agreement and Plan of Merger dated as of January 2, 1998 by and among JFL-EEC LLC, MergerCo, Carlyle-EEC Holdings, Inc. (which will change its name to EHI Holdings, Inc. upon consummation of the Recapitalization) and TC Group, L.L.C. "RECORD DATE" means the Record Date specified in the Notes. "REDEEMABLE PREFERRED STOCK" means the Series A 10% Cumulative Redeemable Preferred Stock of the Company, par value $.01 per share. "REDEMPTION DATE," when used with respect to any Note to be redeemed, means the date fixed for such redemption pursuant to this Indenture and the Notes. -27- "REDEMPTION PRICE," when used with respect to any Note to be redeemed, means the price fixed for such redemption, including principal and premium, if any, pursuant to this Indenture and the Notes. "REFERENCE DATE" has the meaning provided in Section 4.10. "REFINANCE" means, in respect of any security or Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a security or Indebtedness in exchange or replacement for, such security or Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have correlative meanings. "REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any Restricted Subsidiary of the Company of Indebtedness incurred in accordance with Section 4.12 (other than pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (ix), (x) or (xiv) of the definition of Permitted Indebtedness), in each case that does not (1) result in an increase in the aggregate principal amount of Indebtedness of such Person as of the date of such proposed Refinancing (plus the amount of any premium required to be paid under the terms of the instrument governing such Indebtedness and plus the amount of reasonable expenses incurred by the Company in connection with such Refinancing) or (2) create Indebtedness with (A) a Weighted Average Life to Maturity that is less than the Weighted Average Life to Maturity of the Indebtedness being Refinanced or (B) a final maturity earlier than the final maturity of the Indebtedness being Refinanced; PROVIDED that (x) if such Indebtedness being Refinanced is Indebtedness of the Company, then such Refinancing Indebtedness shall be Indebtedness solely of the Company and (y) if such Indebtedness being Refinanced is subordinate or junior to the Notes, then such Refinancing Indebtedness shall be subordinate to the Notes at least to the same extent and in the same manner as the Indebtedness being Refinanced. "REGISTRAR" has the meaning provided in Section 2.03. "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement dated as of the Issue Date between MergerCo and the Initial Purchaser and any other registration rights agreement covering similar matters that may be executed and delivered by the Company and the Subsidiary Guarantor in connection with the issuance of any Initial Notes after the Issue Date. -28- "REGULATION S" means Regulation S under the Securities Act. "RELATED PARTY" with respect to any Principal means (A) any controlling stockholder or 80% (or more) owned Subsidiary of such Principal or (B) 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 (A). "REPLACEMENT ASSETS" has the meaning provided in Section 4.15. "RESTRICTED PAYMENT" has the meaning provided in Section 4.10. "RESTRICTED PERIOD" means the period of 40 days commencing on the day after the later of (a) the day on which the Notes are first offered to Persons other than distributors (as defined in Regulation S) in reliance on Regulation S and (b) the date of this Indenture; provided that promptly after the occurrence of the date described in clause (a), the Company shall give written notice thereof to the Trustee, identifying therein the day on which the Restricted Period expires. "RESTRICTED SECURITY" has the meaning assigned to such term in Rule 144(a)(3) under the Securities Act; PROVIDED, HOWEVER, that the Trustee shall be entitled to request and conclusively rely on an Opinion of Counsel with respect to whether any Note constitutes a Restricted Security. "RESTRICTED SUBSIDIARY" of any Person means any Subsidiary of such Person which at the time of determination is not an Unrestricted Subsidiary. "RULE 144A" means Rule 144A under the Securities Act. "SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement with any Person or to which any such Person is a party, providing for the leasing to the Company or a Restricted Subsidiary of any property, whether owned by the Company or any Restricted Subsidiary at the Issue Date or later acquired, which has been or is to be sold or transferred by the Company or such Restricted Subsidiary to such Person or to any other Person from whom funds have been or are to be advanced by such Person on the security of such Property. -29- "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "SENIOR OFFICER" means the Chief Executive Officer or the Chief Financial Officer of the Company. "SHELF REGISTRATION STATEMENT" has the meaning provided in the Registration Rights Agreement. "SIGNIFICANT SUBSIDIARY," with respect to any Person, means any Restricted Subsidiary of such Person that satisfies the criteria for a "significant subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Exchange Act. "SPECIFIED AFFILIATE PAYMENTS" means: (i) the repurchase, redemption or other acquisition or retirement for value of any Capital Stock of the Company held by any future, present or former employee, director, officer or consultant of the Company (or any of its Restricted Subsidiaries) pursuant to any management equity subscription agreement, stock option agreement, put agreement, stockholder agreement or similar agreement that may be in effect from time to time; PROVIDED that the aggregate price paid for all such repurchased, redeemed, acquired or retired Capital Stock in any fiscal year shall not exceed the sum of (a) $250,000, (b) the cash proceeds received by the Company after the Issue Date from the sale of Qualified Capital Stock to employees, directors or officers of the Company and its Subsidiaries that occurs in such fiscal year (to the extent such proceeds do not provide the basis for any other Restricted Payment) and (c) amounts referred to in clauses (a) through (b) that remain unused from the immediately preceding fiscal year; (ii) repurchases of Capital Stock deemed to occur upon exercise of stock options or warrants as a result of the payment of all or a portion of the exercise price of such options or warrants with Capital Stock; (iii) payments by the Company to members of management of the Company and its Subsidiaries in connection with the Recapitalization to the extent disclosed in the Offering Memorandum; and (iv) any transaction contemplated by any tax sharing agreement or any other agreement as in effect on the Issue Date (including, without limitation, the Recapitalization Agreement and the Management Agreement) or any amendment thereto (so long as any such amendment is not disadvantageous to the Holders in any material respect), including distributions to effect the Recapitalization. Amounts referred to in clause (i), but not other Specified Affiliate Payments, shall constitute Restricted Payments for purposes of clause (iii) of the first paragraph of Section 4.10. -30- "STATED MATURITY" means, when used with respect to any Note or any installment of interest thereon, the date specified in such Note as the fixed date on which the principal of such Note or such installment of interest is due and payable and, when used with respect to any other Indebtedness, means the date specified in the instrument governing such Indebtedness as the fixed date on which the principal of such Indebtedness or any installment of interest thereon is due and payable. "SUBSIDIARY," with respect to any Person, means (i) any corporation of which the outstanding Capital Stock having at least a majority of the votes entitled to be cast in the election of directors under ordinary circumstances shall at the time be owned, directly or indirectly, by such Person or (ii) any other Person of which at least a majority of the voting interest under ordinary circumstances is at the time, directly or indirectly, owned by such Person. "SUBSIDIARY GUARANTOR" means any Restricted Subsidiary that is a party to a Note Guarantee pursuant to the terms of this Indenture. "SUPPLEMENTAL INDENTURE" has the meaning provided in the fourth introductory paragraph hereto. "SURVIVING ENTITY" has the meaning provided in Section 5.01. "TEMPORARY REGULATION S GLOBAL NOTE" has the meaning provided in Section 2.01. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb), as amended, as in effect on the date of this Indenture, except as otherwise provided in Section 9.03; PROVIDED, HOWEVER, that, in the event the Trust Indenture Act of 1939 is amended after such date, "TIA" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "TOTAL ASSETS" means, at any time, the total consolidated assets of the Company and its Restricted Subsidiaries at such time. For the purposes of paragraph (x) of the definition of "Permitted Indebtedness" and paragraph (xii) of the definition of "Permitted Investments," Total Assets shall be determined giving PRO FORMA effect to the lease, acquisition, construction or improvement of the assets being leased, acquired, constructed or improved with the proceeds of the relevant In- -31- debtedness or the making of such Permitted Investment, as the case may be. "TREASURY RATE" means the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15(519) which has become publicly available at least two Business Days prior to the date fixed for prepayment (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the then remaining Weighted Average Life to Maturity of the Notes; PROVIDED, HOWEVER, that if the Weighted Average Life to Maturity of the Notes is not equal to the constant maturity of a United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given, except that if the Weighted Average Life to Maturity of the Notes is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used. "TRUST OFFICER" means any officer or assistant officer of the Trustee assigned by the Trustee to administer this Indenture, or in the case of a successor trustee, an officer assigned to the department, division or group performing the corporation trust work of such successor and assigned to administer this Indenture. "TRUSTEE" means the party named as such in this Indenture until a successor replaces it in accordance with the provisions of this Indenture and thereafter means such successor. "UNRESTRICTED SUBSIDIARY" of any Person means (i) any Subsidiary of such Person that at the time of determination shall be or continue to be designated an Unrestricted Subsidiary by the Board of Directors of such Person in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; PROVIDED that (x) the Company certifies to the Trustee that such designation complies with Section 4.10 and (y) each Subsidiary to be -32- so designated and each of its Subsidiaries has not at the time of designation, and does not thereafter, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to any Indebtedness pursuant to which the lender has recourse to any of the assets of the Company or any of its Restricted Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary only if (x) immediately after giving effect to such designation, the Company is able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with Section 4.12 and (y) immediately before and immediately after giving effect to such designation, no Default or Event of Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "U.S. GOVERNMENT OBLIGATIONS" mean direct obligations of, and obligations guaranteed by, the United States of America for the payment of which the full faith and credit of the United States of America is pledged. "U.S. LEGAL TENDER" means such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. "WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the then outstanding aggregate principal amount of such Indebtedness into (b) the sum of the total of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the making of such payment. "WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means any Restricted Subsidiary of such Person of which all the outstanding voting securities (other than in the case of a foreign Restricted Subsidiary, directors' qualifying shares or an immaterial amount of shares required to be owned by other Persons pursuant to applicable law) are owned by such Person or any Wholly Owned Restricted Subsidiary of such Person. -33- SECTION 1.02. INCORPORATION BY REFERENCE OF TIA. Whenever this Indenture refers to a provision of the TIA, such 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. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the Indenture securities means the Company or any other obligor on the Notes. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by Commission rule and not otherwise defined herein have the meanings assigned to them therein. SECTION 1.03. RULES OF CONSTRUCTION. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP of any date of determination; (3) "or" is not exclusive; (4) words in the singular include the plural, and words in the plural include the singular; (5) "herein," "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; and (6) any reference to a statute, law or regulation means that statute, law or regulation as amended and in effect from time to time and includes any successor statute, law or regulation; PROVIDED, HOWEVER, that any refer- -34- ence to the Bankruptcy Law shall mean the Bankruptcy Law as applicable to the relevant case. ARTICLE TWO THE NOTES SECTION 2.01. FORM AND DATING. The Initial Notes and the Trustee's certificate of authentication relating thereto shall be substantially in the form of EXHIBIT A. The Exchange Notes and the Trustee's certificate of authentication relating thereto shall be substantially in the form of EXHIBIT B. The Notes may have notations, legends or endorsements required by law, stock exchange rule or depository rule or usage. The Company and the Trustee shall approve the form of the Notes and any notation, legend or endorsement on them. If required, the Notes may bear the appropriate legend regarding any original issue discount for federal income tax purposes. Each Note shall be dated the date of its issuance and shall show the date of its authentication. Immediately after the Effective Time, the Company shall cause each Note to have an executed Note Guarantee from each Subsidiary Guarantor endorsed thereon or attached thereto substantially in the form of EXHIBIT E hereto. The terms and provisions contained in the Notes, annexed hereto as EXHIBITS A and B, shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, 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. Notes offered and sold in their initial distribution to Qualified Institutional Buyers in reliance on Rule 144A shall be issued in the form of one or more global notes, substantially in the form set forth in EXHIBIT A (the "Global Note"), which shall be registered in the name of the Depository or its nominee and deposited with the Trustee, as custodian for the Depository, duly executed by the Company and authenticated by the Trustee as hereinafter provided, for credit by the Depository to the respective accounts of beneficial owners of the Notes represented thereby (or such other accounts as they may direct), and shall bear such applicable legends as are provided for in Section 2.15. The aggregate principal amount of the -35- Global Note may be increased or decreased from time to time by adjustments made on the records of the Trustee, as custodian for the Depository, in connection with a corresponding decrease or increase in the aggregate principal amount of the Temporary Regulation S Global Notes or the Permanent Regulation S Global Note. Notes offered and sold in reliance on Regulation S shall initially be in the form of temporary Global Notes which shall be registered in the name of the Depository or its nominee and deposited with the Trustee, as custodian for the Depository, duly executed by the Company and authenticated by the Trustee as hereinafter provided, for credit by the Depository to the respective accounts of the beneficial owners of the Notes represented thereby (or such other accounts as they may direct), provided that upon such deposit all such Notes shall be credited to or through accounts maintained at the Depository by or on behalf of Euroclear or CEDEL. Until such time as the Restricted Period shall have expired, such temporary Global Notes shall be referred to herein as a "Temporary Regulation S Global Note." After such time as the Restricted Period shall have expired and the certifications referred to below in the next succeeding paragraph shall have been provided, interests in such Temporary Regulation S Global Notes shall be exchanged (as initiated by the beneficial owners of interests therein) for interests in like Global Notes, referred to herein collectively as the "Permanent Regulation S Global Note," in substantially the form set forth in EXHIBIT A, with such applicable legends as are provided for in Section 2.15. Such Permanent Regulation S Global Notes shall be registered in the name of the Depository or its nominee and deposited with the Trustee, as custodian for the Depository, duly executed by the Company and authenticated by the Trustee as hereinafter provided, for credit to the respective accounts of the beneficial owners of the Notes represented thereby (or such other accounts as they may direct). The aggregate principal amount of the Temporary Regulation S Global Note or the Permanent Regulation S Global Note may be increased or decreased from time to time by adjustments made on the records of the Trustee, as custodian for the Depository, as hereinafter provided. Interests in a Temporary Regulation S Global Note may be exchanged for interests in a Permanent Regulation S Global Note only after (a) the expiration of the Restricted Period, (b) delivery by a beneficial owner of an interest therein to Euroclear or CEDEL of a written certification (an "Owner Securities Certification") substantially in the form of EXHIBIT F hereto, and (c) upon delivery by Euroclear or CEDEL to the -36- Trustee of a written certification (a "Depository Securities Certification") substantially in the form attached hereto as EXHIBIT G. Upon receipt by the Trustee of the Depository Securities Certification and the notification from the Depository described in clause (iv) of the next succeeding paragraph, the Trustee will exchange the portion of the Temporary Regulation S Global Note covered by such certification for interests in a Permanent Regulation S Global Note. The delivery by such holder of a beneficial interest in such Temporary Regulation S Global Note of such certification shall constitute an irrevocable instruction by such holder to Euroclear or CEDEL, as the case may be, to exchange such holder's beneficial interest in the Temporary Regulation S Global Note for a beneficial interest in the Permanent Regulation S Global Note upon the expiration of the Restricted Period in accordance with the next succeeding paragraph. Upon: (i) the expiration of the Restricted Period; (ii) receipt by Euroclear or CEDEL, as the case may be, of Owner Securities Certifications described in the preceding paragraph; (iii) receipt by the Depository of: (1) written instructions given in accordance with the Applicable Procedures from an Agent Member directing the Depository to credit or cause to be credited to a specified Agent Member's account a beneficial interest in a Permanent Regulation S Global Note in a principal amount equal to that of the beneficial interest in a corresponding Temporary Regulation S Global Note for which the necessary certifications have been delivered; and (2) a written order given in accordance with the Applicable Procedures containing information regarding the account of the Agent Member, and the Euroclear or CEDEL account for which such Agent Member's account is held, to be credited with, and the account of the Agent Member to be debited for, such beneficial interest; and (iv) receipt by the Trustee of notification from the Depository in accordance with the Applicable Procedures requesting the exchange of a principal amount of the Tem- -37- porary Regulation S Global Note identified therein for the same amount of the Permanent Regulation S Global Note and from Euroclear or CEDEL, as the case may be, of Depository Securities Certifications, the Trustee, as Registrar, shall, or shall instruct the Depository to, reduce the principal amount of such Temporary Regulation S Global Note, and increase the principal amount of such Permanent Regulation S Global Note, by the principal amount of the beneficial interest in such Temporary Regulation S Global Note to be so transferred, and the Depository shall credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in such Permanent Regulation S Global Note having a principal amount equal to the amount by which the principal amount of such Temporary Regulation S Global Note was reduced upon such transfer. Notes issued in exchange for interests in a Global Note pursuant to Section 2.16 may be issued in the form of permanent certificated Notes in registered form in substantially the form set forth in EXHIBIT A (the "Certificated Securities") and, if required, shall bear the Private Placement Legend set forth in Section 2.15. All Notes offered and sold in reliance on Regulation S shall remain in the form of a Global Note until the consummation of the Exchange Offer pursuant to the Registration Rights Agreement; PROVIDED, HOWEVER, that all of the time periods specified in the Registration Rights Agreement to be complied with by the Company have been so complied with. SECTION 2.02. EXECUTION AND AUTHENTICATION; AGGREGATE PRINCIPAL AMOUNT. Two Officers, or an Officer and an Assistant Secretary (each of whom shall, in each case, have been duly authorized by all requisite corporate actions) shall sign the Notes for the Company, and the Note Guarantees for the Subsidiary Guarantors, by manual or facsimile signature. If an Officer or Assistant Secretary whose signature is on a Note or a Note Guarantee, as the case may be, was an Officer or Assistant Secretary at the time of such execution but no longer holds that office or position at the time the Trustee authenticates the Note, the Note shall nevertheless be valid. A Note shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authenti- -38- cation on the Note. The signature shall be conclusive evidence that the Note has been authenticated under this Indenture. The Trustee shall authenticate (i) Initial Notes for original issue in the aggregate principal amount not to exceed $150,000,000 in one or more series, provided that the aggregate principal amount of Initial Notes on the Issue Date is $90,000,000, (ii) Private Exchange Notes from time to time only in exchange for a like principal amount of Initial Notes and (iii) Exchange Notes from time to time only in exchange for (A) a like principal amount of Initial Notes or (B) a like principal amount of Private Exchange Notes, in each case upon a written order of the Company in the form of an Officers' Certificate of the Company. Each such written order shall specify the amount of Notes to be authenticated and the date on which the Notes are to be authenticated, whether the Notes are to be Initial Notes, Private Exchange Notes or Exchange Notes and whether (subject to Section 2.01) the Notes are to be issued as Certificated Securities or Global Notes or such other information as the Trustee may reasonably request. The aggregate principal amount of Notes outstanding at any time may not exceed $150,000,000, except as provided in Sections 2.07 and 2.08. In the event that the Company shall issue and the Trustee shall authenticate any Notes issued under this Indenture subsequent to the Issue Date pursuant to clauses (i) and (iii) of the first sentence of the immediately preceding paragraph, the Company shall use its reasonable efforts to obtain the same "CUSIP" number for such Notes as is printed on the Notes outstanding at such time; PROVIDED, HOWEVER, that if any series of Notes issued under this Indenture subsequent to the Issue Date is determined by the Company to be a different class of security than the Notes outstanding at such time for federal income tax purposes, the Company may obtain a "CUSIP" number for such Notes that is different than the "CUSIP" number printed on the Notes then outstanding. Notwithstanding the foregoing, all Notes issued under this Indenture shall vote and consent together on all matters (as to which any of such Notes may vote or consent) as one class and no series of Notes will have the right to vote or consent as a separate class on any matter. The Trustee may appoint an authenticating agent (the "Authenticating Agent") reasonably acceptable to the Company to authenticate Notes. Unless otherwise provided in the appointment, an Authenticating Agent may authenticate Notes whenever -39- the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such Authenticating Agent. An Authenticating Agent has the same rights as an Agent to deal with the Company or with any Affiliate of the Company. The Notes shall be issuable in fully registered form only, without coupons, in denominations of $1,000 and any integral multiple thereof. SECTION 2.03. REGISTRAR AND PAYING AGENT. The Company shall maintain an office or agency (which shall be located in the Borough of Manhattan in the City of New York, State of New York) where (a) Notes may be presented or surrendered for registration of transfer or for exchange ("Registrar"), (b) Notes may be presented or surrendered for payment ("Paying Agent") and (c) notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Registrar shall keep a register of the Notes and of their transfer and exchange. The Company, upon prior written notice to the Trustee, may have one or more co-Registrars and one or more additional paying agents reasonably acceptable to the Trustee. The term "Paying Agent" includes any additional Paying Agent. The Company may act as its own Paying Agent, except that for the purposes of payments on the Notes pursuant to Sections 4.14 and 4.15, neither the Company nor any Affiliate of the Company may act as Paying Agent. The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, which agreement shall incorporate the provisions of the TIA and implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee, in advance, of the name and address of any such Agent. If the Company fails to maintain a Registrar or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as such and shall be entitled to appropriate compensation in accordance with Section 7.07. The Company initially appoints the Trustee as Registrar, Paying Agent and agent for service of demands and notices in connection with the Notes, until such time as the Trustee has resigned or a successor has been appointed. Any of the Registrar, the Paying Agent or any other agent may resign upon 30 days' written notice to the Company. -40- SECTION 2.04. PAYING AGENT TO HOLD ASSETS IN TRUST. The Company shall require each Paying Agent other than the Trustee to agree in writing that such Paying Agent shall hold in trust for the benefit of the Holders or the Trustee all assets held by the Paying Agent for the payment of principal of, premium, if any, or interest on, the Notes (whether such assets have been distributed to it by the Company or any other obligor on the Notes), and the Company and the Paying Agent shall notify the Trustee of any Default by the Company (or any other obligor on the Notes) in making any such payment. The Company at any time may require a Paying Agent to distribute all assets held by it to the Trustee and account for any assets disbursed and the Trustee may at any time during the continuance of any payment Default, upon written request to a Paying Agent, require such Paying Agent to distribute all assets held by it to the Trustee and to account for any assets distributed. Upon distribution to the Trustee of all assets that shall have been delivered by the Company to the Paying Agent, the Paying Agent shall have no further liability for such assets. SECTION 2.05. 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 the Holders. If the Trustee is not the Registrar, the Company shall furnish or cause the Registrar to furnish to the Trustee five (5) Business Days before each Interest Payment Date and at such other times as the Trustee may request in writing a list as of such date and in such form as the Trustee may reasonably require of the names and addresses of the Holders, which list may be conclusively relied upon by the Trustee. SECTION 2.06. TRANSFER AND EXCHANGE. When Notes are presented to the Registrar or a co-Registrar with a request to register the transfer of such Notes or to exchange such Notes for an equal principal amount of Notes or other authorized denominations, the Registrar or co-Registrar shall, subject to Section 2.17, register the transfer or make the exchange as requested if its requirements for such transaction are met; PROVIDED, HOWEVER, that the Notes presented or surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer in form satisfactory to the Company, the Trustee and the Registrar or co-Registrar, duly executed by the Holder -41- thereof or his attorney duly authorized in writing. To permit registration of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Notes (and each Subsidiary Guarantor shall execute a Note Guarantee thereon). No service charge shall be made for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax, fee or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchanges or transfers pursuant to Sections 2.10, 3.04, 4.14, 4.15 or 9.05, in which event the Company shall be responsible for the payment of such taxes). The Registrar or co-Registrar shall not be required to register the transfer of or exchange of any Note (i) during a period beginning at the opening of business 15 days before the mailing of a notice of redemption of Notes (whether pursuant to a Change of Control Offer, a Net Proceeds Offer or otherwise) and ending at the close of business on the day of such mailing, (ii) selected for redemption in whole or in part pursuant to Article Three, except the unredeemed portion of any Note being redeemed in part or (iii) between a Record Date and the next succeeding Interest Payment Date. Any holder of a beneficial interest in a Global Note, by acceptance of such Global Note, agrees that transfers of beneficial interests in such Global Notes may be effected only through a book entry system maintained by the Holder of such Global Note (or its agent), and that ownership of a beneficial interest in the Note shall be required to be reflected in a book entry system. Neither the Company nor the Trustee shall be liable for any delay by the Holder of a Global Note or the Depository in identifying the beneficial owners of any Note and the Company and the Trustee may conclusively rely on instructions from the Holder of a Global Note or the Depository for all purposes. SECTION 2.07. REPLACEMENT NOTES. If a mutilated Note is surrendered to the Trustee or if the Holder of a Note claims that the Note has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Note and each Subsidiary Guarantor shall execute a Note Guarantee thereon if the Trustee's requirements are met. If required by the Trustee or the Company, such Holder must provide satisfactory evidence of such loss, destruction or taking, and an indemnity bond or -42- other indemnity of reasonable tenor, sufficient in the reasonable judgment of the Company, the Subsidiary Guarantors and the Trustee, to protect the Company, the Subsidiary Guarantors, the Trustee or any Agent from any loss which any of them may suffer if a Note is replaced. Every replacement Note shall constitute an obligation of the Company and the Subsidiary Guarantors. The Company and the Trustee each may charge such Holder for its expenses in replacing such Note. SECTION 2.08. OUTSTANDING NOTES. Notes outstanding at any time are all the Notes that have been authenticated by the Trustee except those canceled by it, those delivered to it for cancellation and those described in this Section as not outstanding. Subject to the provisions of Section 2.09, a Note does not cease to be outstanding because an Company or any of its Affiliates holds the Note. If a Note is replaced pursuant to Section 2.07 (other than a mutilated Note surrendered for replacement), it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Note is held by a BONA FIDE purchaser. A mutilated Note ceases to be outstanding upon surrender of such Note and replacement thereof pursuant to Section 2.07. If on a Redemption Date, the Maturity Date, the Change of Control Payment Date or the Net Proceeds Offer Payment Date, the Paying Agent holds U.S. Legal Tender sufficient to pay all of the principal, premium, if any, and interest due on the Notes payable on that date and is not prohibited from paying such money to the Holders thereof pursuant to the terms of this Indenture, then on and after that date such Notes shall be deemed not to be outstanding and interest on them shall cease to accrue. SECTION 2.09. TREASURY NOTES. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver, consent or notice, Notes owned by the Company or an Affiliate of the Company shall be considered as though they are 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 which a Trust Officer of the Trustee actually knows are so owned shall be so considered. The Company shall notify the Trustee, in writing, when it or, to its knowledge, any of its Affiliates repurchases or -43- otherwise acquires Notes, of the aggregate principal amount of such Notes so repurchased or otherwise acquired and such other information as the Trustee may reasonably request and the Trustee shall be entitled to rely thereon. SECTION 2.10. TEMPORARY NOTES. Until definitive Notes are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Notes and the Subsidiary Guarantors shall prepare temporary Note Guarantees thereon upon receipt of a written order of the Company in the form of an Officers' Certificate. The Officers' Certificate shall specify the amount of temporary Notes to be authenticated and the date on which the temporary Notes are to be authenticated. Temporary Notes shall be substantially in the form of definitive Notes but may have variations that the Company considers appropriate for temporary Notes and so indicate in the Officers' Certificate. Without unreasonable delay, the Company shall prepare and execute, the Trustee shall authenticate, and the Subsidiary Guarantors shall execute Note Guarantees on, upon receipt of a written order of the Company pursuant to Section 2.02, definitive Notes in exchange for temporary Notes. SECTION 2.11. CANCELLATION. The Company at any time may deliver Notes to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer, exchange or payment. The Trustee, or at the direction of the Trustee, the Registrar or the Paying Agent, and no one else, shall cancel and, at the written direction of the Company, shall dispose, in its customary manner, of all Notes surrendered for registration of transfer, exchange, payment or cancellation. Subject to Section 2.07, the Company may not issue new Notes to replace Notes that it has paid or delivered to the Trustee for cancellation. If the Company shall acquire any of the Notes, such acquisition shall not operate as a redemption or satisfaction of the Indebtedness represented by such Notes unless and until the same are surrendered to the Trustee for cancellation pursuant to this Section 2.11. SECTION 2.12. DEFAULTED INTEREST. The Company will pay interest on overdue principal from time to time on demand at the rate of interest then borne by the Notes. The Company shall, to the extent lawful, pay in- -44- terest on overdue installments of interest (without regard to any applicable grace periods) from time to time on demand at the rate of interest then borne by the Notes. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. If the Company defaults in a payment of interest on the Notes, it shall pay the defaulted interest, plus (to the extent lawful) any interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date, which special record date shall be the fifteenth day next preceding the date fixed by the Company for the payment of defaulted interest or the next succeeding Business Day if such date is not a Business Day. The Company shall notify the Trustee in writing of the amount of defaulted interest proposed to be paid on each Note and the date of the proposed payment (a "Default Interest Payment Date"), and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such defaulted interest or shall make arrangements satisfactory to the Trustee for such deposit on or prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such defaulted interest as provided in this Section; PROVIDED, HOWEVER, that in no event shall the Company deposit monies proposed to be paid in respect of defaulted interest later than 11:00 a.m. New York City time on the proposed Default Interest Payment Date. At least 15 days before the subsequent special record date, the Company shall mail (or cause to be mailed) to each Holder, as of a recent date selected by the Company, with a copy to the Trustee, a notice that states the subsequent special record date, the payment date and the amount of defaulted interest, and interest payable on such defaulted interest, if any, to be paid. Notwithstanding the foregoing, any interest which is paid prior to the expiration of the 30-day period set forth in Section 6.01(a) shall be paid to Holders as of the regular record date for the Interest Payment Date for which interest has not been paid. Notwithstanding the foregoing, the Company may make payment of any defaulted interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange. SECTION 2.13. CUSIP NUMBERS. The Company in issuing the Notes may use one or more "CUSIP" numbers, and, if so, the Trustee shall use the CUSIP numbers in notices of redemption or exchange as a convenience -45- to Holders; PROVIDED, HOWEVER, that no representation is hereby deemed to be made by the Trustee 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 numbers. SECTION 2.14. DEPOSIT OF MONIES. Prior to 11:00 a.m. New York City time on each Interest Payment Date, Maturity Date, Redemption Date, Change of Control Payment Date and Net Proceeds Offer Payment Date, the Company shall have (i) deposited with the Paying Agent in immediately available funds money sufficient to make cash payments, if any, due on such Interest Payment Date, Maturity Date, Redemption Date, Change of Control Payment Date or Net Proceeds Offer Payment Date, as the case may be, in a timely manner which permits the Paying Agent to remit payment to the Holders on such Interest Payment Date, Maturity Date, Redemption Date, Change of Control Payment Date or Net Proceeds Offer Payment Date, as the case may be or (ii) at the option of the Company, mailed to the registered address of each Holder of Notes a check in the amount of the cash payment due in a timely manner which permits the Holders to receive payment on the Interest Payment Date, Maturity Date, Redemption Date, Change of Control Payment Date or Net Proceeds Offer Payment Date, as the case may be. SECTION 2.15. RESTRICTIVE LEGENDS. Each Global Note and Certificated Security that constitutes a Restricted Security or is sold in compliance with Regulation S shall bear the following legend (the "Private Placement Legend") on the face thereof until after the second anniversary of the later of the Issue Date and the last date on which the Company or any Affiliate of the Company was the owner of such Note (or any predecessor security) (or such shorter period of time as permitted by Rule 144(k) under the Securities Act or any successor provision thereunder) (or such longer period of time as may be required under the Securities Act or applicable state securities laws in the Opinion of Counsel for the Company, unless otherwise agreed by the Company and the Holder thereof): THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR -46- FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT WITHIN THE TIME PERIOD REFERRED TO UNDER 144(k) (TAKING INTO ACCOUNT THE PROVISIONS OF RULE 144(d) UNDER THE SECURITIES ACT, IF APPLICABLE), UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF THE TRANSFER OF THIS SECURITY, RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE ISSUER OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN ACCREDITED INVESTOR (AS DEFINED IN RULE 501(a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ach Global Note shall also bear the following legend on the face thereof: UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR SECURITIES IN DEFINITIVE FORM, THIS SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY, OR BY ANY SUCH NOMINEE OF THE DEPOSITORY, OR BY THE DEPOSITORY OR NOMINEE OF SUCH SUCCESSOR DEPOSITORY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITORY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITORY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY 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 IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS 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. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.17 OF THE INDENTURE GOVERNING THIS NOTE. Each Temporary Regulation S Global Note shall bear the following legend on the face thereof: THIS SECURITY IS A TEMPORARY REGULATION S GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE REFERRED TO HEREINAFTER. INTERESTS IN THIS TEMPORARY REGULATION S GLOBAL NOTE MAY NOT BE OFFERED OR SOLD TO A U.S. PERSON OR FOR THE ACCOUNT OR BENEFIT OF A U.S. PERSON PRIOR TO THE EXPIRATION OF THE RESTRICTED PERIOD (AS DEFINED IN THE INDENTURE), AND NO TRANSFER OR EXCHANGE OF AN INTEREST IN THIS TEM- -48- PORARY REGULATION S GLOBAL NOTE MAY BE MADE FOR AN INTEREST IN A RESTRICTED GLOBAL NOTE OR IN A PERMANENT REGULATION S GLOBAL NOTE UNTIL AFTER THE LATER OF THE DATE OF EXPIRATION OF THE RESTRICTED PERIOD AND THE DATE ON WHICH THE OWNER SECURITIES CERTIFICATION AND THE DEPOSITORY SECURITIES CERTIFICATION RELATING TO SUCH INTEREST HAVE BEEN PROVIDED IN ACCORDANCE WITH THE TERMS OF THE INDENTURE, TO THE EFFECT THAT THE BENEFICIAL OWNER OR OWNERS OF SUCH INTEREST ARE NOT U.S. PERSONS. Each Permanent Regulation S Global Note or certificated Regulation S security shall bear the following legend on the face thereof: THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD, OR DELIVERED IN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY U.S. PERSON, UNLESS THE SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREOF IS AVAILABLE. SECTION 2.16. BOOK-ENTRY PROVISIONS FOR GLOBAL SECURITY. (a) The Global Notes initially shall (i) be registered in the name of the Depository or the nominee of such Depository, (ii) be delivered to the Depository or its custodian and (iii) bear legends as set forth in Section 2.15. Agent Members shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depository, or the Trustee as its custodian, or under the Global Notes, and the Depository 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 Depository or impair, as between the Depository and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of any Note. (b) Transfers of a Global Note shall be limited to transfers in whole, but not in part, to the Depository, its -49- successors or their respective nominees. Interests of beneficial owners in a Global Note may be transferred or exchanged for Certificated Securities in accordance with the rules and procedures of the Depository and the provisions of Section 2.17. In addition, Certificated Securities shall be transferred to all beneficial owners in exchange for their beneficial interests in a Global Note if (i) the Depository notifies the Company that it is unwilling or unable to continue as Depository for the Global Notes and a successor Depository is not appointed by the Company within 90 days of such notice or (ii) an Event of Default has occurred and is continuing and the Registrar has received a written request from the Depository or the Trustee to issue Certificated Securities. (c) In connection with any transfer or exchange of a portion of the beneficial interest in a Global Note to beneficial owners pursuant to paragraph (b), the Registrar shall (if one or more Certificated Securities are to be issued) reflect on its books and records the date and a decrease in the principal amount of such Global Note in an amount equal to the principal amount of the beneficial interest in the Global Note to be transferred, and the Company shall execute and the Trustee shall authenticate and deliver, one or more Certificated Securities of like tenor and amount. (d) In connection with the transfer of an entire Global Note to beneficial owners pursuant to paragraph (b), such Global Note shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, the Subsidiary Guarantors shall execute Note Guarantees on and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depository in exchange for its beneficial interest in the Global Note, an equal aggregate principal amount of Certificated Securities of authorized denominations registered in the names of such beneficial owners. (e) Any Certificated Security constituting a Restricted Security delivered in exchange for an interest in a Global Note pursuant to paragraph (b) or (c) shall, except as otherwise provided by paragraphs (a)(i)(x) and (c) of Section 2.17, bear the Private Placement Legend applicable to the Certificated Securities set forth in Section 2.15. (f) The Holder of a Global Note may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Notes. -50- SECTION 2.17. SPECIAL TRANSFER PROVISIONS. (a) TRANSFERS TO NON-QIB INSTITUTIONAL ACCREDITED INVESTORS AND NON-U.S. PERSONS. The following provisions shall apply with respect to the registration of any proposed transfer of a Note constituting a Restricted Security to any Institutional Accredited Investor which is not a QIB or to any Non-U.S. Person: (i) the Registrar shall register the transfer of any Note constituting a Restricted Security, whether or not such Note bears the Private Placement Legend, if (x) the requested transfer is after the second anniversary of the Issue Date (PROVIDED, HOWEVER, that neither the Company nor any Affiliate of the Company has held any beneficial interest in such Note, or portion thereof, at any time on or prior to the second anniversary of the Issue Date) or (y) (1) in the case of a transfer to an Institutional Accredited Investor which is not a QIB (excluding Non-U.S. Persons), the proposed transferee has delivered to the Registrar a certificate substantially in the form of EXHIBIT C and any legal opinions and certifications required thereby or (2) in the case of a transfer to a Non-U.S. Person, the proposed transferor has delivered to the Registrar a certificate substantially in the form of EXHIBIT D; and (ii) if the proposed transferor is an Agent Member holding a beneficial interest in the Global Note, upon receipt by the Registrar of (x) the certificate, if any, required by paragraph (i) above and (y) written instructions given in accordance with the Depository's and the Registrar's procedures, whereupon (a) the Registrar shall reflect on its books and records the date and (if the transfer does not involve a transfer of outstanding Certificated Securities) a decrease in the principal amount of such Global Note in an amount equal to the principal amount of the beneficial interest in the Global Note to be transferred, and (b) the Company shall execute and the Trustee shall authenticate and deliver one or more Certificated Securities of like tenor and amount. (b) TRANSFERS TO QIBs. The following provisions shall apply with respect to the registration of any proposed transfer of a Note constituting a Restricted Security to a QIB (excluding transfers to Non-U.S. Persons): -51- (i) the Registrar shall register the transfer of any Restricted Security, whether or not such Note bears the Private Placement Legend, if (x) the requested transfer is after the second anniversary of the Issue Date; PROVIDED, HOWEVER, that neither the Company nor any Affiliate of the Company has held any beneficial interest in such Note, or portion thereof, at any time on or prior to the second anniversary of the Issue Date or (y) if such transfer is being made by a proposed transferor who has checked the box provided for on the form of Note stating, or has otherwise advised the Company and the Registrar in writing, that the sale has been made in compliance with the provisions of Rule 144A to a transferee who has signed the certification provided for on the form of Note stating, or has otherwise advised the Company and the Registrar in writing, that it is purchasing the Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A; and (ii) if the proposed transferee is an Agent Member, and the Notes to be transferred consist of Certificated Securities which after transfer are to be evidenced by an interest in a Global Note, upon receipt by the Registrar of written instructions given in accordance with the Depository's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and an increase in the principal amount of such Global Note in an amount equal to the principal amount of the Certificated Securities to be transferred, and the Trustee shall cancel the Certificated Securities so transferred. (c) PRIVATE PLACEMENT LEGEND. Upon the registration of transfer, exchange or replacement of Notes not bearing the Private Placement Legend, the Registrar shall deliver Notes that do not bear the Private Placement Legend. Upon the registration of transfer, exchange or replacement of Notes bearing the Private Placement Legend, the Registrar shall deliver only Notes that bear the Private Placement Legend unless (i) the requested transfer is after the second anniversary of the Issue Date (PROVIDED, HOWEVER, that neither the Company nor any Af- -52- filiate of the Company has held any beneficial interest in such Note, or portion thereof, prior to or on the second anniversary of the Issue Date), or (ii) there is delivered to the Registrar an Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. (d) GENERAL. By its acceptance of any Note bearing the Private Placement Legend, each Holder of such a Note acknowledges the restrictions on transfer of such Note set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Note only as provided in this Indenture. The Registrar shall retain in accordance with its customary procedure copies of all letters, notices and other written communications received pursuant to Section 2.16 or this Section 2.17. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time during the Registrar's normal business hours upon the giving of reasonable written notice to the Registrar. (e) TRANSFERS OF NOTES HELD BY AFFILIATES. Any certificate (i) evidencing a Note that has been transferred to an Affiliate of the Company within two years after the Issue Date, as evidenced by a notation on the Assignment Form for such transfer or in the representation letter delivered in respect thereof or (ii) evidencing a Note that has been acquired from an Affiliate of the Company (other than by an Affiliate of the Company) in a transaction or a chain of transactions not involving any public offering, shall, until two years after the last date on which either the Company or any Affiliate of the Company was an owner of such Note, in each case, bear a legend in substantially the form set forth in Section 2.15, unless otherwise agreed by the Company (with written notice thereof to the Trustee). -53- ARTICLE THREE REDEMPTION SECTION 3.01. NOTICES TO TRUSTEE. If the Company elects to redeem Notes pursuant to Paragraph 5 of the Notes and Section 3.03, it shall notify the Trustee and the Paying Agent in writing of the Redemption Date and the principal amount of the Notes to be redeemed. The Company shall give each notice provided for in this Section 3.01 at least 45 but not more than 60 days before the Redemption Date (unless a shorter notice period shall be satisfactory to the Trustee, as evidenced in a writing signed on behalf of the Trustee), together with an Officers' Certificate stating that such redemption shall comply with the conditions contained herein and in the Notes, the Redemption Date, the redemption price and the principal amount of the Notes to be redeemed. If the Company is required to make an offer to purchase Notes pursuant to the provisions of Section 4.14 or 4.15 hereof, it shall furnish to the Trustee at least 45 days but not more than 60 days before a Change of Control Payment Date or the Net Proceeds Payment Date, as the case may be (or such shorter period as may be agreed to by the Trustee in writing), an Officers' Certificate setting forth (i) the Section of this Indenture pursuant to which the purchase shall occur, (ii) the Change of Control Payment Date or the Net Proceeds Payment Date, as the case may be, (iii) the principal amount of Notes to be purchased, (iv) the purchase price and (v) a statement to the effect that (a) the Company or one of its Subsidiaries has effected an Asset Sale and the conditions set forth in Section 4.15 have been satisfied or (b) a Change of Control has occurred and the conditions set forth in Section 4.14 have been satisfied, as applicable. SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED. In the event that less than all of the Notes are to be redeemed at any time, selection of such Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which such Notes are listed or, if such Notes are not then listed on a national securities exchange, on a PRO RATA basis, by lot or by such method as the Trustee shall deem fair and appropriate; -54- PROVIDED, HOWEVER, that no Notes of a principal amount of U.S. $1,000 or less shall be redeemed in part; PROVIDED, FURTHER, that if a partial redemption is made with the proceeds of a Public Equity Offering, selection of the Notes or portions thereof for redemption shall be made by the Trustee only on a PRO RATA basis or on as nearly a PRO RATA basis as is practicable (subject to DTC procedures), unless such method is otherwise prohibited. Notice 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. 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 a principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. On and after the redemption date, interest will cease to accrue on Notes or portions thereof called for redemption as long as the Company has deposited with the Paying Agent funds in satisfaction of the applicable redemption price pursuant to this Indenture. SECTION 3.03. REDEMPTION. (a) OPTIONAL REDEMPTION. The Notes will be redeemable, at the Company's option, in whole at any time or in part from time to time, on and after February 1, 2003, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on February 1 of the year set forth below, plus, in each case, accrued and unpaid interest thereon, if any, to the date of redemption:
Year Percentage ---- ---------- 2003 . . . . . . . . . . . . . . . . . . . . . . . 104.938% 2004 . . . . . . . . . . . . . . . . . . . . . . . 103.292% 2005 . . . . . . . . . . . . . . . . . . . . . . . 101.646% 2006 and thereafter. . . . . . . . . . . . . . . . 100.000%
(b) OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from time to time, on or prior to February 1, 2001, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings to redeem up to 35% of the sum of (i) the initial aggregate principal amount of Notes issued in the Offering and (ii) the respective initial aggregate principal amounts of Notes issued under this Indenture after the Issue Date, at a redemption price equal to -55- 109.875% of the principal amount thereof plus accrued and unpaid interest thereon and Additional Interest, if any, to the date of redemption; PROVIDED that at least 65% of the sum of (i) the initial aggregate principal amount of Notes issued in the Offering and (ii) the respective initial aggregate principal amounts of Notes issued under this Indenture after the Issue Date remains outstanding immediately after any such redemption. In order to effect the foregoing redemption with the proceeds of any Public Equity Offering, the Company shall make such redemption not more than 120 days after the consummation of any such Public Equity Offering. (c) OPTIONAL REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of Control prior to February 1, 2003, the Notes will be redeemable, in whole or in part, at the option of the Company, upon not less than 30 nor more than 60 days prior notice to each Holder of Notes to be redeemed, at a redemption price equal to the sum of (i) the then outstanding principal amount thereof plus (ii) accrued and unpaid interest thereon and Additional Interest, if any, to the redemption date plus (iii) the Applicable Premium. SECTION 3.04. NOTICE OF REDEMPTION. At least 30 days but not more than 60 days before the Redemption Date, the Company shall mail or cause to be mailed a notice of redemption by first class mail to each Holder of Notes to be redeemed at its registered address, with a copy to the Trustee and any Paying Agent. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense. The Company shall provide such notices of redemption to the Trustee at least three Business Days (or such shorter period as shall be agreed to by the Trustee) before the intended mailing date. In any case, failure to give such notice 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. Each notice of redemption shall identify (including the CUSIP number) the Notes to be redeemed and shall state: (1) the Redemption Date; (2) the redemption price and the amount of accrued interest, if any, to be paid; (3) the name and address of the Paying Agent; -56- (4) the subparagraph of the Notes pursuant to which such redemption is being made; (5) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price plus accrued interest, if any; (6) that, unless the Company defaults in making the redemption payment, interest on Notes or applicable portions thereof called for redemption ceases to accrue on and after the Redemption Date, and the only remaining right of the Holders of such Notes is to receive payment of the redemption price plus accrued interest as of the Redemption Date, if any, upon surrender to the Paying Agent of the Notes redeemed; (7) if any Note is being redeemed in part, the portion of the principal amount of such Note to be redeemed and that, after the Redemption Date, and upon surrender of such Note, a new Note or Notes in the aggregate principal amount equal to the unredeemed portion thereof will be issued; and (8) if fewer than all the Notes are to be redeemed, the identification of the particular Notes (or portion thereof) to be redeemed, as well as the aggregate principal amount of Notes to be redeemed and the aggregate principal amount of Notes to be outstanding after such partial redemption. No representation is made as to the accuracy of the CUSIP numbers listed in such notice or printed on the Notes. The Company will 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 purchase of Notes. SECTION 3.05. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed in accordance with Section 3.04, such notice of redemption shall be irrevocable and Notes called for redemption become due and payable on the Redemption Date and at the redemption price plus accrued interest as of such date, if any. Upon surrender to the Trustee or Paying Agent, such Notes called for redemption shall be paid at the redemption price plus accrued interest thereon to the Redemption Date, but installments of interest, the maturity -57- of which is on or prior to the Redemption Date, shall be payable to Holders of record at the close of business on the relevant record dates referred to in the Notes. Interest shall accrue on or after the Redemption Date and shall be payable only if the Company defaults in payment of the redemption price. If mailed in the manner herein, the notice shall be conclusively presumed to have been given whether or not the Holder receives such notice. Failure to give notice or any defect in the notice to any Holder shall not affect the validity of notice to any other Holder. SECTION 3.06. DEPOSIT OF REDEMPTION PRICE. On or before 11:00 a.m. New York City time on the Redemption Date and in accordance with Section 2.14, the Company shall deposit with the Paying Agent U.S. Legal Tender sufficient to pay the redemption price plus accrued interest, if any, of all Notes to be redeemed on that date. The Paying Agent shall promptly return to the Company any U.S. Legal Tender so deposited which is not required for that purpose, except with respect to monies owed as obligations to the Trustee pursuant to Article Seven. Unless the Company fails to comply with the preceding paragraph and defaults in the payment of such redemption price plus accrued interest, if any, interest on the Notes to be redeemed will cease to accrue on and after the applicable Redemption Date, whether or not such Notes are presented for payment. SECTION 3.07. NOTES REDEEMED IN PART. Upon surrender of a Note that is to be redeemed in part, the Trustee shall authenticate for the Holder a new Note or Notes equal in principal amount to the unredeemed portion of the Note surrendered. SECTION 3.08. SINKING FUND. There shall be no sinking fund for the payment of principal on the Notes to the Holders. -58- ARTICLE FOUR COVENANTS SECTION 4.01. PAYMENT OF NOTES. (a) The Company shall pay the principal of, premium, if any, and interest on the Notes on the dates and in the manner provided in the Notes and in this Indenture. (b) An installment of principal of or interest on the Notes shall be considered paid on the date it is due if the Trustee or Paying Agent (other than the Company or any of its Affiliates) holds, prior to 11:00 a.m. New York City time on that date, U.S. Legal Tender designated for and sufficient to pay in a timely manner the installment in full and is not prohibited from paying such money to the Holders pursuant to the terms of this Indenture or the Notes. (c) Notwithstanding anything to the contrary contained in this Indenture, the Company may, to the extent it is required to do so by law, deduct or withhold income or other similar taxes imposed by the United States of America from principal or interest payments hereunder. SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY. The Company shall maintain the office or agency required under Section 2.03. The Company shall give prior written notice to the Trustee of the location, and any change in the location, of such office or agency. If at 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 address of the Trustee set forth in Section 11.02. SECTION 4.03. CORPORATE EXISTENCE. Except as provided in Article Five, the Company shall do or shall 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 Restricted Subsidiaries in accordance with the respective organizational documents of the Company and each such Restricted Subsidiary and the rights (charter and statutory) and material franchises of the Company and each such Restricted Subsidiary; -59- PROVIDED, HOWEVER, that the Company shall not be required to preserve, with respect to itself, any material right or franchise and, with respect to any of its Restricted Subsidiaries, any such existence, material right or franchise, if the Board of Directors of the Company shall determine in good faith that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries, taken as a whole. SECTION 4.04. PAYMENT OF TAXES AND OTHER CLAIMS. The Company shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (i) all material taxes, assessments and governmental charges (including withholding taxes and any penalties, interest and additions to taxes) levied or imposed upon the Company or any of the Restricted Subsidiaries or properties of the Company or any of the Restricted Subsidiaries of the Company and (ii) all material lawful claims for labor, materials and supplies that, if unpaid, might by law become a Lien upon the property of the Company or any of the Restricted Subsidiaries of the Company; PROVIDED, HOWEVER, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate negotiations or proceedings properly instituted and diligently conducted for which adequate reserves, to the extent required under GAAP, have been taken. SECTION 4.05. [Intentionally Omitted] SECTION 4.06. COMPLIANCE CERTIFICATE; NOTICE OF DEFAULT. (a) The Company shall deliver to the Trustee, within 120 days after the end of each of the Company's fiscal years, an Officers' Certificate (signed by the principal executive officer, principal financial officer or principal accounting officer) stating that a review of its activities and the activities of its Restricted Subsidiaries during the preceding fiscal year has been made under the supervision of the signing officers with a view to determining whether it has kept, observed, performed and fulfilled its obligations under this Indenture and further stating, as to each such officer signing such certificate, that to the best of such officers' knowledge the Company during such preceding fiscal year has kept, observed, performed and fulfilled each and every such obligation and no Default or Event of Default occurred during such year and at the -60- date of such certificate there is no Default or Event of Default that has occurred and is continuing or, if such signers do know of such Default or Event of Default, the certificate shall describe the Default or Event of Default and its status with particularity. (b) So long as any of the Notes are outstanding, if any Default or Event of Default has occurred and is continuing, the Company shall promptly deliver to the Trustee by registered or certified mail or by telegram, telex or facsimile transmission followed by hard copy by registered or certified mail an Officers' Certificate specifying such event, notice or other action within five Business Days of its actually becoming aware of such occurrence. SECTION 4.07. COMPLIANCE WITH LAWS. The Company shall comply, and shall cause each of its Subsidiaries to comply, with all applicable statutes, rules, regulations, orders and restrictions of the United States of America, all states and municipalities thereof and of any governmental department, commission, board, regulatory authority, bureau, agency and instrumentality of the foregoing, in respect of the conduct of their respective businesses and the ownership of their respective properties, except for such noncompliances as could not singly or in the aggregate reasonably be expected to have a material adverse effect on the financial condition or results of operations of the Company and its Restricted Subsidiaries taken as a whole. SECTION 4.08. REPORTS TO HOLDERS. The Company shall deliver to the Trustee within 15 days after the filing of the same with the Commission, copies of the quarterly and annual reports and of the information, documents and other reports, if any, which the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. Notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file with the Commission from and after the commencement of an Exchange Offer or the effectiveness of the Shelf Registration Statement, to the extent permitted, and provide the Trustee and Holders with such annual reports and such information, documents and other reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will also comply with the other provisions of TIA Section 314(a). -61- SECTION 4.09. WAIVER OF STAY, EXTENSION OR USURY LAWS. The Company 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 or extension law or any usury law or other law that would prohibit or forgive the Company from paying all or any portion of the principal of or interest on the Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) the Company hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not 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 had been enacted. SECTION 4.10. LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, (a) declare or pay any dividend or make any distribution (other than dividends or distributions payable in Qualified Equity Interests of the Company) on or in respect of shares of the Company's Capital Stock to holders of such Capital Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital Stock of the Company or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock, (c) make any principal payment on, purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for value, prior to any scheduled final maturity, scheduled repayment or scheduled sinking fund payment, any Indebtedness of the Company that is subordinate or junior in right of payment to the Notes (except the prepayment, purchase, repurchase or other acquisition or retirement of Indebtedness in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of prepayment, purchase, repurchase or other acquisition or retirement) or (d) make any Investment (other than Permitted Investments) (each of the foregoing actions set forth in clauses (a), (b), (c) and (d) being referred to as a "Restricted Payment"), if at the time of such Restricted Payment or immediately after giving effect thereto, (i) a Default or an Event of Default shall have occurred and be continuing or (ii) the Company is not able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with -62- Section 4.12 or (iii) the aggregate amount of Restricted Payments (including such proposed Restricted Payment) made subsequent to the Issue Date (the amount expended for such purposes, if other than in cash, being the fair market value of such property as determined in good faith by the Board of Directors of the Company) shall exceed the sum of: (w) 50% of the cumulative Consolidated Net Income (or if cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of the Company from the first day of the Company's first fiscal quarter commencing after the Issue Date to the last day of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such proposed Restricted Payment (the "Reference Date") (treating such period as a single accounting period); plus (x) 100% of the aggregate net cash proceeds received by the Company from any Person (other than a Restricted Subsidiary of the Company) from (i) the issuance and sale subsequent to the Issue Date and on or prior to the Reference Date of Qualified Equity Interests of the Company and (ii) Indebtedness or Disqualified Capital Stock that has been converted into or exchanged for Qualified Equity Interests together with the aggregate net cash proceeds received by the Company at the time of such conversion or exchange; plus (y) without duplication of any amounts included in clause (iii)(x) above, 100% of the aggregate net cash proceeds of any equity contribution received by the Company from a holder of the Company's Capital Stock; plus (z) an amount equal to the net reduction in Investment made pursuant to this first paragraph of Section 4.10 in any Person resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances, or other transfers of assets, in each case to the Company or any Restricted Subsidiary (except to the extent any such payment is included in the calculation of Consolidated Net Income), or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (determined and valued in each case as provided in the definition of "Investments"), not to exceed the amount of Investments previously made by the Company or any Restricted Subsidiary in such Person. Notwithstanding the foregoing, the provisions set forth in the immediately preceding paragraph do not prohibit: (1) the payment of any dividend or the consummation of any purchase or redemption within 60 days after the date of declaration of such dividend or the giving of any irrevocable notice in respect of any such purchase or redemption if the dividend or purchase or redemption would have been permitted on the date of declaration or the giving of such irrevocable notice; (2) if no Default or Event of Default shall have occurred and be continuing, the acquisition of any shares of Capital Stock of the -63- Company, either (i) solely in exchange for Qualified Equity Interests of the Company or (ii) through the application of net proceeds of a substantially concurrent sale for cash (other than to a Restricted Subsidiary of the Company) of Qualified Equity Interests of the Company; (3) if no Default or Event of Default shall have occurred and be continuing, the purchase, redemption, defeasance or other acquisition or retirement for value of any Indebtedness of the Company that is subordinate or junior in right of payment to the Notes either (i) solely in exchange for Qualified Equity Interests of the Company, or (ii) through the application of net proceeds of a substantially concurrent sale for cash (other than to a Restricted Subsidiary of the Company) of (A) Qualified Equity Interests of the Company or (B) Refinancing Indebtedness; (4) to the extent constituting Restricted Payments, the Specified Affiliate Payments; (5) (i) without limitation of the parenthetical in clause (a) of the preceding paragraph, the payment of any regular quarterly dividends in respect of the Redeemable Preferred Stock in the form of additional shares of Redeemable Preferred Stock having the terms and conditions set forth in the Certificate of Designations for the Redeemable Preferred Stock as in effect on the Issue Date; and (ii) commencing January 31, 2001, the payment of regular quarterly cash dividends (in the amount no greater than that provided for in the Certificate of Designations for the Redeemable Preferred Stock as in effect on the Issue Date), out of funds legally available therefor, on any of the shares of Redeemable Preferred Stock issued and outstanding on the Issue Date and on any shares of Redeemable Preferred Stock issued in payment of dividends made or subsequently issued in payment of dividends thereon in respect of such shares of Redeemable Preferred Stock outstanding on the Issue Date; PROVIDED that, at the time of and immediately after giving effect to the payment of such cash dividend, the Consolidated Fixed Charge Coverage Ratio, giving PRO FORMA effect to the payment of such dividend as if it had occurred at the beginning of the four full fiscal quarters immediately preceding the date on which the dividend is to be paid, would have been equal to at least 2.0 to 1.0 and (6) Restricted Payments in an aggregate amount not to exceed $2.5 million. In determining the aggregate amount of Restricted Payments made subsequent to the Issue Date in accordance with clause (iii) of the immediately preceding paragraph, amounts expended pursuant to clauses (1) without duplication, (2)(ii), 3(ii)(A), (4) (to the extent provided in the definition of "Specified Affiliate Payments"), (5)(ii) and (6) shall be included in such calculation and all other Restricted Payments permitted pursuant to this paragraph shall be excluded from such aggregate amount of Restricted Payments. -64- 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 complies with this Indenture and setting forth in reasonable detail the basis upon which the required calculations were computed. In making the computations required by this Section 4.10, (i) the Company may use audited financial statements for the portions of the relevant period for which audited financial statements are available on the date of determination and unaudited financial statements and other current financial data based on the books and records of the Company for the remaining portion of such period and (ii) the Company will be permitted to rely in good faith on the financial statements and other financial data derived from its books and records that are available on the date of determination. If the Company makes a Restricted Payment that, at the time of the making of such Restricted Payment, would in the good faith determination of the Company be permitted under the requirements of this Indenture, such Restricted Payment will be deemed to have been made in compliance with this Indenture notwithstanding any subsequent adjustments made in good faith to the Company's financial statements affecting Consolidated Net Income of the Company for any period. For the avoidance of doubt, it is expressly agreed that no payment or other transactions permitted by clause (i), (iv), (v), (vi) or (viii) of paragraph (b), or clause (i) of paragraph (c), of Section 4.11 shall be considered a Restricted Payment for purposes of, or otherwise restricted by, this Indenture. SECTION 4.11. LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction or series of related transactions (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with, or for the benefit of, any of its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate Transactions permitted under paragraph (b) below and (y) Affiliate Transactions on terms that are no less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arm's-length basis from a Person that is not an Affiliate of the Company or such Restricted Subsidiary. All Affiliate Transactions (and each series of related Affiliate Transactions which are part of a common plan) involving aggregate payments or other property with a fair mar- -65- ket value in excess of $2.5 million shall be approved by the Board of Directors of the Company or such Restricted Subsidiary, as the case may be, such approval to be evidenced by a Board Resolution stating that such Board of Directors has determined that such transaction complies with the foregoing provisions. If the Company or any Restricted Subsidiary of the Company enters into an Affiliate Transaction (or a series of related Affiliate Transactions related to a common plan) that involves an aggregate fair market value of more than $7.5 million, the Company or such Restricted Subsidiary, as the case may be, shall, prior to the consummation thereof, obtain a favorable opinion as to the fairness of such transaction or series of related transactions to the Company or the relevant Restricted Subsidiary, as the case may be, from a financial point of view, from an Independent Financial Advisor and file the same with the Trustee. (b) The restrictions set forth in paragraph (a) above shall not apply to (i) reasonable fees and compensation paid to and indemnity provided for the benefit of officers, directors, employees or consultants of the Company or any Restricted Subsidiary of the Company as determined in good faith by the Company's Board of Directors or senior management; (ii) transactions exclusively between or among the Company and any of its Restricted Subsidiaries or exclusively between or among such Restricted Subsidiaries, provided such transactions are not otherwise prohibited by this Indenture; (iii) the transactions and payments contemplated by any agreement as in effect as of the Issue Date (including, without limitation, the Recapitalization Agreement and the Management Agreement) or any amendment thereto or any replacement agreement thereto so long as any such amendment or replacement agreement is not more disadvantageous to the Holders in any material respect than the original agreement as in effect on the Issue Date; (iv) the payment to the Principals or their Related Parties and Affiliates of annual management and advisory fees and related expenses; PROVIDED that the amount of such fees shall not exceed $500,000 per fiscal year; (v) loans and advances (or guarantees of third party loans) to officers or employees of the Company or any of its Restricted Subsidiaries in the ordinary course of business not to exceed $250,000 at any time outstanding; (vi) the payment of fees and expenses related to the Recapitalization; (vii) Permitted Investments and Restricted Payments permitted by this Indenture and (viii) any employment agreement, collective bargaining agreement, employee benefit plan, related trust agreement, indemnification agreement, benefit plan or similar arrangement for the benefit of directors or officers entered into in the ordinary course of business. -66- (c) In addition, the last sentence of paragraph (a) shall not apply to (i) payments by the Company or any of its Restricted Subsidiaries to the Principals or their Related Parties and Affiliates for any financial advisory, financing, underwriting or placement services or in respect of other investment banking activities, including in connection with acquisition or divestitures, which payments are approved by the Board of Directors of the Company in good faith, and (ii) Indebtedness permitted by paragraph (xiv) of the definition of "Permitted Indebtedness." SECTION 4.12. LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume, guarantee, acquire, or become liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (other than Permitted Indebtedness); PROVIDED, HOWEVER, that if no Default or Event of Default shall have occurred and be continuing at the time of or as a consequence of the incurrence of any such Indebtedness, the Company and the Subsidiary Guarantors may incur Indebtedness (including, without limitation, Acquired Indebtedness) if on the date of the incurrence of such Indebtedness, after giving effect to the incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.0 to 1.0. For the purposes of determining compliance with this Section 4.12, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Indebtedness or is otherwise entitled to be incurred pursuant to this Section 4.12, the Company shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this Section 4.12 and such items 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 4.12. The Company will not incur any Indebtedness which by its terms (or by the terms of any agreement governing such Indebtedness) is subordinated in right of payment to any other Indebtedness of the Company unless such Indebtedness is also by its terms (or by the terms of any agreement governing such Indebtedness) made expressly subordinate in right of payment to the Notes pursuant to subordination provisions that are sub- -67- stantively identical to the subordination provisions of such Indebtedness (or such agreement) that are most favorable to the holders of any other Indebtedness of the Company. SECTION 4.13. LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary of the Company to (a) pay dividends or make any other distributions on or in respect of its Capital Stock; (b) make loans or advances or to pay any Indebtedness or other obligation owed to the Company or any other Restricted Subsidiary of the Company; or (c) transfer any of its property or assets to the Company or any other Restricted Subsidiary of the Company, except for such encumbrances or restrictions existing under or by reason of: (1) this Indenture; (2) any security or pledge agreements, leases or options (or similar agreements) containing customary restrictions on transfers of the assets encumbered thereby or leased or subject to option or on the transfer or subletting of the leasehold interest represented thereby; (3) any instrument governing Acquired Indebtedness, which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person or the properties or assets of the Person so acquired; (4) agreements existing on the Issue Date to the extent and in the manner such agreements are in effect on the Issue Date; (5) any contracts for the sale of assets, including, without limitation, any restriction with respect to a Restricted Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary, pending the closing of such sale or disposition, PROVIDED that any such restriction relates solely to the assets that are the subject of such agreement; (6) restrictions on cash or other deposits or net worth imposed by leases entered into in the ordinary course of business; (7) customary provisions in joint venture agreements and other similar agreements; (8) the New Credit Facility; (9) any agreement or instrument governing Capital Stock of any Person that is acquired; and (10) any encumbrances or restrictions imposed by any amendments, modifications, restatements, renewals, -68- increases, supplements, refundings, replacements or refinancings of contracts, instruments or obligations referred to in clauses (1) through (9); PROVIDED that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings are, in the good faith judgment of the Company, no more restrictive with respect to such dividend and other transfer restrictions than those contained in the dividend or other transfer restrictions prior to such amendment, modification, restatement, renewal, increase, supplement, refunding, replacement or refinancing. SECTION 4.14. CHANGE OF CONTROL. (a) Upon the occurrence of a Change of Control, unless irrevocable notice of redemption for all of the Notes is given within 30 days after such Change in Control in accordance with Section 3.03(c), each Holder shall have the right to require that the Company purchase all or a portion of such Holder's Notes pursuant to the offer described below (the "Change of Control Offer"), at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, thereon to the date of purchase. (b) Within 30 days following the date upon which the Change of Control occurred, unless irrevocable notice of redemption for all of the Notes is given within 30 days after such Change in Control in accordance with Section 3.03(c), the Company shall send, by first class mail, a notice to each Holder at such Holder's last registered address, with a copy to the Trustee, which notice shall govern the terms of the Change of Control Offer. The notice to the Holders shall contain all instructions and materials necessary to enable such Holders to tender Notes pursuant to the Change of Control Offer. Such notice shall state: (i) that the Change of Control Offer is being made pursuant to this Section 4.14 and that all Notes tendered and not withdrawn shall be accepted for payment; (ii) the purchase price (including the amount of accrued interest) and the purchase date (which shall be no earlier than 30 days nor later than 45 days from the date such notice is mailed, other than as may be required by law) (the "Change of Control Payment Date"); (iii) that any Note not tendered shall continue to accrue interest; (iv) that, unless the Company defaults in making payment therefor, any Note accepted for payment pursuant to -69- the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; (v) that Holders electing to have a Note purchased pursuant to a Change of Control Offer shall be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third Business Day prior to the Change of Control Payment Date; (vi) that Holders shall be entitled to withdraw their election if the Paying Agent receives, not later than the second Business Day prior to the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Notes the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Notes purchased; (vii) that Holders whose Notes are purchased only in part shall be issued new Notes in a principal amount equal to the unpurchased portion of the Notes surrendered; PROVIDED, HOWEVER, that each Note purchased and each new Note issued shall be in an original principal amount of $1,000 or integral multiples thereof; and (viii) the circumstances and relevant facts regarding such Change of Control. On the Change of Control Payment Date, the Company shall, to the extent permitted by law, (i) accept for payment all Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an amount equal to the aggregate Change of Control Payment in respect of all Notes or portions thereof so tendered and (iii) deliver, or cause to be delivered, to the Trustee for cancellation the Notes so accepted together with an Officers' Certificate stating that such Notes or portions thereof have been tendered to and purchased by the Company. The Paying Agent will promptly either (x) pay to the Holder against presentation and surrender (or, in the case of partial payment, endorsement) of the Global Notes or (y) in the case of Certificated Securities, mail to each Holder of Notes the Change of Control Payment for such Notes, and the Trustee will promptly authenticate and deliver to the Holder of the Global Notes a new Global Note or Notes or, in the case of Certificated Securities, mail to each Holder new Certificated Securities, as ap- -70- plicable, equal in principal amount to any unpurchased portion of the Notes surrendered, if any, provided that each new Certificated Security will be in a principal amount of $1,000 or an integral multiple thereof. The Company will notify the Trustee and the Holders of the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. Neither the Board of Directors of the Company nor the Trustee may waive the provisions of this Section 4.14 relating to the Company's obligation to make a Change of Control Offer or a Holder's right to redemption upon a Change of Control. 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 Notes pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this Section 4.14, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the provisions of this Section 4.14 by virtue thereof. SECTION 4.15. LIMITATION ON ASSET SALES. The Company will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company or the applicable Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold or otherwise disposed of (as determined in good faith by the Company's Board of Directors), (ii) at least 75% of the consideration received by the Company or the Restricted Subsidiary, as the case may be, from such Asset Sale shall be in the form of cash or Cash Equivalents and is received at the time of such disposition; PROVIDED that the amount of (x) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet), of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Notes or, in the case of liabilities of a Restricted Subsidiary, any Note Guarantee of such Subsidiary) that are assumed by the transferee of any such assets and (y) any securities, 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 (to the extent of the cash received) within 180 days after receipt, shall be deemed to be cash for purposes of this -71- clause (ii); PROVIDED, FURTHER, HOWEVER, that this clause (ii) shall not apply to any sale of Capital Stock of or other Investments in Unrestricted Subsidiaries and (iii) upon the consummation of an Asset Sale, the Company shall apply, or cause such Restricted Subsidiary to apply, the Net Cash Proceeds relating to such Asset Sale within 360 days of receipt thereof either (A) to prepay (and, in the case of any Indebtedness under any revolving credit facility, including the New Credit Facility, effect a permanent reduction in the availability under such revolving credit facility) any Indebtedness, (B) to make an investment in properties and assets that replace the properties and assets that were the subject of such Asset Sale or in properties and assets that will be used in the business of the Company and its Restricted Subsidiaries as existing on the Issue Date or in businesses reasonably related thereto ("Replacement Assets"), or (C) a combination of prepayment and investment permitted by the foregoing clauses (iii)(A) and (iii)(B). On the 361st day after an Asset Sale or such earlier date, if any, as the Board of Directors of the Company or of such Restricted Subsidiary determines not to apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such aggregate amount of such Net Cash Proceeds which have not been applied on or before such Net Proceeds Offer Trigger Date as permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each a "Net Proceeds Offer Amount") shall be applied by the Company or such Restricted Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45 days following the applicable Net Proceeds Offer Trigger Date, from all Holders on a PRO RATA basis, that amount of Notes issued under this Indenture equal to the Net Proceeds Offer Amount at a price equal to 100% of the principal amount of the Notes to be purchased, plus accrued and unpaid interest thereon, if any, to the date of purchase; PROVIDED, HOWEVER, that if at any time any non-cash consideration received by the Company or any Restricted Subsidiary of the Company, as the case may be, in connection with any Asset Sale is converted into or sold or otherwise disposed of for cash (other than interest or dividends received with respect to any such non-cash consideration), then such conversion or disposition shall be deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be applied in accordance with this Section 4.15. The Company may defer the Net Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to or in excess of $10.0 million resulting from one or more Asset Sales (at which time, the entire unutilized Net Pro- -72- ceeds Offer Amount, and not just the amount in excess of $10.0 million, shall be applied as required pursuant to this paragraph). In the event of the transfer of substantially all (but not all) of the property and assets of the Company and its Restricted Subsidiaries as an entirety to a Person in a transaction permitted under Section 5.01, the successor Person shall be deemed to have sold the properties and assets of the Company and its Restricted Subsidiaries not so transferred for purposes of this Section 4.15, and shall comply with the provisions of this Section 4.15 with respect to such deemed sale as if it were an Asset Sale. In addition, the fair market value of such properties and assets of the Company or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash Proceeds for purposes of this Section 4.15. Notwithstanding the two immediately preceding paragraphs, the Company and its Restricted Subsidiaries will be permitted to consummate an Asset Sale without complying with such paragraphs to the extent (i) at least 75% of the consideration for such Asset Sale constitutes Replacement Assets and (ii) such Asset Sale is for fair market value; PROVIDED that any consideration not constituting Replacement Assets received by the Company or any of its Restricted Subsidiaries in connection with any Asset Sale permitted to be consummated under this paragraph shall constitute Net Cash Proceeds subject to the provisions of the two preceding paragraphs. Each Net Proceeds Offer will be mailed to the record Holders as shown on the register of Holders within 25 days following the Net Proceeds Offer Trigger Date, with a copy to the Trustee, and shall comply with the procedures set forth in this Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may elect to tender their Notes in whole or in part in integral multiples of $1,000 in exchange for cash. To the extent Holders properly tender Notes in an amount exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be purchased on a PRO RATA basis (based on amounts tendered). A Net Proceeds Offer shall remain open for a period of 20 Business Days or such longer period as may be required by law. The notice, which shall govern the terms of the Net Proceeds Offer, shall include such disclosures as are required by applicable law and shall state: (i) that the Net Proceeds Offer is being made pursuant to this Section 4.15; -73- (ii) the purchase price (including the amount of accrued interest, if any) to be paid for Notes purchased pursuant to the Net Proceeds Offer and the Net Proceeds Payment Date; (iii) that any Note not tendered for payment will continue to accrue interest in accordance with the terms thereof; (iv) that, unless the Company defaults on making the payment, any Note accepted for payment pursuant to the Net Proceeds Offer shall cease to accrue interest after the Net Proceeds Payment Date; (v) that Holders accepting the Net Proceeds Offer to have their Notes purchased pursuant to the Net Proceeds Offer will be required to surrender their Notes to the Paying Agent at the address specified in the notice prior to the close of business on the Net Proceeds Payment Date; (vi) that Holders will be entitled to withdraw their acceptance if the Paying Agent receives, not later than the close of business on the second Business Day prior to the Net Proceeds Payment Date, a facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Notes the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Notes purchased; (vii) that Holders whose Notes are purchased only in part will be issued new Notes in a principal amount equal to the unpurchased portion of the Notes surrendered; PROVIDED that each Note purchased and each such new Note issued shall be in an original principal amount in denominations of $1,000 and integral multiples thereof; (viii) any other procedures that a Holder must follow to accept a Net Proceeds Offer or effect withdrawal of such acceptance; and (ix) the name and address of the Paying Agent. On the Net Proceeds Payment Date, the Company shall (i) accept for payment Notes or portions thereof tendered pursuant to the Net Proceeds Offer in accordance with this Section 4.15, (ii) deposit timely with the Paying Agent U.S. Legal Tender sufficient to pay the purchase price, plus accrued interest, if any, of all Notes to be purchased in accordance with -74- this Section 4.15 and (iii) deliver to the Trustee Notes so accepted together with an Officers' Certificate stating the Notes or portions thereof tendered to and accepted for payment by the Company. For purposes of this Section 4.15, the Trustee shall act as the Paying Agent. The Paying Agent shall promptly mail or deliver to the Holders of Notes so accepted payment in an amount equal to the purchase price for such Notes, and the Company shall execute and issue, and the Trustee shall promptly authenticate and mail to such Holders, a new Note equal in principal amount to any unpurchased portion of the Note surrendered; PROVIDED that each such new Note shall be issued in an original principal amount in denominations of $1,000 and integral multiples thereof. The Company will send to the Trustee and the Holders of Notes on or as soon as practicable after the Net Proceeds Payment Date a notice setting forth the results of the Net Proceeds Offer. Any Notes not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof. The Company will 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 Notes pursuant to a Net Proceeds Offer. To the extent that the provisions of any securities laws or regulations conflict with the "Asset Sale" provisions of this Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section 4.15 by virtue thereof. SECTION 4.16. LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will not permit any of its Restricted Subsidiaries to issue any Preferred Stock (other than to the Company or to a Wholly Owned Restricted Subsidiary of the Company) or permit any Person (other than the Company or a Wholly Owned Restricted Subsidiary of the Company) to own any Preferred Stock of any Restricted Subsidiary of the Company. SECTION 4.17. LIMITATION ON LIENS. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or permit or suffer to exist any Liens of any kind against or upon any property or assets of the Company -75- or any of its Restricted Subsidiaries whether owned on the Issue Date or acquired after the Issue Date, or any proceeds therefrom, unless (i) in the case of Liens securing Indebtedness that is expressly subordinate or junior in right of payment to the Notes, the Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to such Liens and (ii) in all other cases, the Notes are equally and ratably secured, except in each case for (A) Liens existing as of the Issue Date to the extent and in the manner such Liens are in effect on the Issue Date; (B) Liens of the Company or a Restricted Subsidiary of the Company on assets of any Restricted Subsidiary of the Company; (C) Liens securing Refinancing Indebtedness which is incurred to Refinance any Indebtedness which has been secured by a Lien permitted under this Indenture and which has been incurred in accordance with the provisions of this Indenture; PROVIDED, HOWEVER, that such Liens do not extend to or cover any property or assets of the Company or any of its Restricted Subsidiaries not securing the Indebtedness so Refinanced; and (D) Permitted Liens. SECTION 4.18. LIMITATION OF GUARANTEES BY RESTRICTED SUBSIDIARIES. The Company will not permit any of its domestic Restricted Subsidiaries, directly or indirectly, by way of the pledge of any intercompany note or otherwise, to guarantee any Indebtedness of the Company unless, in any such case, (a) such Restricted Subsidiary executes and delivers a supplemental indenture to this Indenture providing a Note Guarantee by such Restricted Subsidiary and (b) if any such guarantee of such Restricted Subsidiary is provided in respect of Indebtedness that is expressly subordinated to the Notes, the guarantee or other instrument provided by such Restricted Subsidiary in respect of such subordinated Indebtedness shall be subordinated to the Note Guarantee pursuant to subordination provisions no less favorable to the Holders of the Notes than those contained in this Indenture. SECTION 4.19. CONDUCT OF BUSINESS. The Company and its Restricted Subsidiaries will not engage in any businesses which are not the same, similar or reasonably related or complementary to the businesses in which the Company and its Restricted Subsidiaries are engaged on the Issue Date (as determined in good faith by the Board of Directors of the Company). -76- ARTICLE FIVE SUCCESSOR CORPORATION SECTION 5.01. MERGER, CONSOLIDATION AND SALE OF ASSETS. (a) The Company will not, in a single transaction or series of related transactions, consolidate or merge with or into any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or cause or permit any Restricted Subsidiary of the Company to sell, assign, transfer, lease, convey or otherwise dispose of) all or substantially all of the Company's assets (determined on a consolidated basis for the Company and the Company's Restricted Subsidiaries) to any Person unless: (i) either (1) the Company shall be the surviving or continuing corporation or (2) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquires by sale, assignment, transfer, lease, conveyance or other disposition the properties and assets of the Company and of the Company's Restricted Subsidiaries substantially as an entirety (the "Surviving Entity") (x) shall be a corporation organized and validly existing under the laws of the United States or any State thereof or the District of Columbia and (y) shall expressly assume, by supplemental indenture (in form and substance satisfactory to the Trustee), executed and delivered to the Trustee, the due and punctual payment of the principal of, and premium, if any, and interest on all of the Notes and the performance of every covenant of the Notes, this Indenture and the Registration Rights Agreement on the part of the Company to be performed or observed; (ii) immediately after giving effect to such transaction and the assumption contemplated by clause (i)(2)(y) above (including giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction), the Company or such Surviving Entity, as the case may be, shall be able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to Section 4.12; (iii) immediately before and immediately after giving effect to such transaction and the assumption contemplated by clause (i)(2)(y) above (including, without limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred and any Lien granted in connection with or in respect of the transaction), no Default or Event of Default shall have occurred or be continuing; and (iv) the Company or the Surviving Entity shall have delivered to the Trustee an Officers' -77- Certificate and an Opinion of Counsel, each stating that such consolidation, merger, sale, assignment, transfer, lease, conveyance or other disposition and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with the applicable provisions of this Indenture and that all conditions precedent in this Indenture relating to such transaction have been satisfied. (b) For purposes of this Section 5.01, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties or assets of one or more Restricted Subsidiaries of the Company the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. (c) Notwithstanding clauses (ii), (iii) and (iv) of paragraph (a) of this Section 5.01, (i) any Restricted Subsidiary may consolidate with, merge into or transfer all or part of its properties and assets to the Company, and (ii) EHI may merge with (A) Elgar at any time following the Issue Date, or (B) an Affiliate incorporated solely for the purpose of reincorporating the Company in another jurisdiction. (d) Notwithstanding the foregoing, the merger of MergerCo with and into EHI as contemplated by the Recapitalization Agreement on the Issue Date shall be permitted. SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED. Upon any consolidation, combination or merger or any transfer of all or substantially all of the assets of the Company in accordance with Section 5.01 in which the Company is not the Surviving Entity, the Surviving Entity shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture and the Notes with the same effect as if such Surviving Entity had been named as such and thereafter the Company will be discharged from all of its obligations and covenants under the Indenture and Notes. -78- ARTICLE SIX REMEDIES SECTION 6.01. EVENTS OF DEFAULT. An "Event of Default" means any of the following events: (a) the failure to pay interest on any Notes when the same becomes due and payable and the default continues for a period of 30 days; (b) the failure to pay the principal on any Notes when such principal becomes due and payable, at maturity, upon redemption or otherwise (including the failure to make a payment to purchase Notes tendered pursuant to a Change of Control Offer or a Net Proceeds Offer); (c) a default in the observance or performance of any other covenant or agreement contained in this Indenture which default continues for a period of 60 days after written notice specifying the default (and demanding that such default be remedied) is given to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% of the outstanding principal amount of the Notes (except in the case of a default with respect to Section 5.01, which will constitute an Event of Default with such notice requirement but without such passage of time requirement); (d) the failure to pay at final maturity (giving effect to any applicable grace periods and any extensions thereof) the principal amount of any Indebtedness of the Company or any Restricted Subsidiary of the Company and such failure continues for a period of 20 days or more, or the acceleration of the final stated maturity of any such Indebtedness (which acceleration is not rescinded, annulled or otherwise cured within 20 days of receipt by the Company or such Restricted Subsidiary of notice of any such acceleration) if the aggregate principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal at final maturity or which has been accelerated, aggregates $5.0 million or more at any time; -79- (e) one or more judgments in an aggregate amount in excess of $5.0 million shall have been rendered against the Company or any of its Significant Subsidiaries and such judgments remain undischarged, unpaid or unstayed for a period of 60 days after such judgment or judgments become final and non-appealable; or (f) the Company or any of its Significant Subsidiaries pursuant to or under or within the meaning of any Bankruptcy Law: (i) commences a voluntary case or proceeding; (ii) consents to the entry of an order for relief against it in an involuntary case or proceeding; (iii) consents to the appointment of a Custodian of it or for all or substantially all of its property; or (iv) makes a general assignment for the benefit of its creditors; or (g) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company or any of its Significant Subsidiaries in an involuntary case or proceeding; (ii) appoints a Custodian of the Company or any of its Significant Subsidiaries for all or substantially all of their properties taken as a whole, or (iii) orders the liquidation of the Company or any of its Significant Subsidiaries, and in each case the order or decree remains unstayed and in effect for 60 days. SECTION 6.02. ACCELERATION. If an Event of Default (other than an Event of Default specified in paragraph (f) or (g) of Section 6.01 relating to the Company) shall occur and be continuing, the Trustee or the Holders of at least 25% in principal amount of outstanding Notes may declare the principal of and accrued interest on all the Notes to be due and payable by notice in writing to the -80- Company and the Trustee specifying the respective Event of Default and that it is a "notice of acceleration" (the "Acceleration Notice"), and the same shall become immediately due and payable. If an Event of Default specified in paragraph (f) or (g) of Section 6.01 relating to the Company occurs and is continuing, then all unpaid principal of, and premium, if any, and accrued and unpaid interest and Additional Interest, if any, on all of the outstanding Notes shall IPSO FACTO become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. At any time after a declaration of acceleration with respect to the Notes as described in the preceding paragraph, the Holders of a majority in principal amount of the Notes may rescind and cancel such declaration and its consequences (i) if the rescission would not conflict with any judgment or decree, (ii) if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration, (iii) to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal, which has become due otherwise than by such declaration of acceleration, has been paid and (iv) if the Company has paid the Trustee its reasonable compensation and reimbursed the Trustee for its expenses, disbursements and advances and any other amounts due to the Trustee pursuant to the provisions of Section 7.07. No such rescission shall affect any subsequent Default or impair any right consequent thereto. SECTION 6.03. OTHER REMEDIES. (a) If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of the principal of, premium, if any, or interest or Additional Interest, if any, on the Notes or to enforce the performance of any provision of the Notes or this Indenture. (b) All rights of action and claims under this Indenture or the Notes may be enforced by the Trustee 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 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. No remedy is exclusive of any other remedy. All available remedies are cumulative to the extent permitted by law. -81- SECTION 6.04. WAIVER OF PAST DEFAULTS. Prior to the acceleration of the Notes, 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 the Notes, waive any existing Default or Event of Default and its consequences under this Indenture, except a Default or Event of Default specified in paragraph (a) or (b) of Section 6.01 or in respect of any provision hereof which cannot be modified or amended without the consent of the Holder so affected pursuant to Section 9.02. When a Default or Event of Default is so waived, it shall be deemed cured and shall cease to exist and any Event of Default arising therefrom shall be deemed to have been cured and waived for every purpose under this Indenture, but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any consequent right. This Section 6.04 shall be in lieu of Section 316(a)(1)(B) of the TIA and such Section 316(a)(1)(B) of the TIA is hereby expressly excluded from this Indenture and the Notes, as permitted by the TIA. SECTION 6.05. CONTROL BY MAJORITY. Holders of the Notes may not enforce this Indenture or the Notes except as provided in this Article Six and under the TIA. The Holders of a majority in aggregate principal amount of the then outstanding Notes have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee, PROVIDED, HOWEVER, that the Trustee may refuse to follow any direction (a) that conflicts with any rule of law or this Indenture, (b) that the Trustee, in its sole discretion, determines may be unduly prejudicial to the rights of another Holder, or (c) that may expose the Trustee to personal liability for which adequate indemnity provided to the Trustee against such liability is not reasonably assured to it; PROVIDED, FURTHER, HOWEVER, that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction or this Indenture. This Section 6.05 shall be in lieu of Section 316(a)(1)(A) of the TIA, and such Section 316(a)(1)(A) of the TIA is hereby expressly excluded from this Indenture and the Notes, as permitted by the TIA. SECTION 6.06. LIMITATION ON SUITS. No Holder of any Notes shall have any right to institute any proceeding with respect to this Indenture or the Notes or any remedy hereunder, unless the Holders of at least 25% in -82- aggregate principal amount of the outstanding Notes have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding as Trustee under the Notes and this Indenture, the Trustee has failed to institute such proceeding within 60 days after receipt of such notice, request and offer of indemnity and the Trustee, within such 60-day period, has not received directions inconsistent with such written request by Holders of a majority in aggregate principal amount of the outstanding Notes. The foregoing limitations shall not apply to a suit instituted by a Holder of a Note for the enforcement of the payment of the principal of, premium, if any, or interest or Additional Interest, if any, on, such Note on or after the respective due dates expressed or provided for in such Note. A Holder may not use this Indenture to prejudice the rights of any other Holders or to obtain priority or preference over such other Holders. SECTION 6.07. RIGHT OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any other provision in this Indenture, the right of any Holder of a Note to receive payment of the principal of, premium, if any, and interest or Additional Interest, if any, on such Note, on or after the respective due dates expressed or provided for in such Note, or to bring suit for the enforcement of any such payment on or after the respective due dates, is absolute and unconditional and shall not be impaired or affected without the consent of the Holder. SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default specified in paragraph (a) or (b) of Section 6.01 occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company, or any other obligor on the Notes for the whole amount of the principal of, premium, if any, and accrued interest remaining unpaid, together with interest on overdue principal and, to the extent that payment of such interest is lawful, interest on overdue installments of interest, in each case at the rate per annum provided for by the Notes 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 and any other amounts due the Trustee pursuant to the provisions of Section 7.07. -83- SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee may 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, counsel, accountants and experts) and the Holders 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 and receive any monies or other property payable or deliverable on any such claims and to distribute the same, and any Custodian in any such judicial proceedings 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 agent and counsel, and any other amounts due the Trustee under Section 7.07. 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 thereof, 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 Six it shall pay out such money in the following order: First: to the Trustee, its agents and attorneys for amounts due under Section 7.07, including payment of all compensation, expense and liabilities incurred, and all advances made, by the Trustee and the cost and expenses of collection; Second: to Holders for interest accrued on the Notes, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for interest (including any Additional Interest); Third: to Holders for the principal amounts (including any premium) owing under the Notes, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for the principal (including any premium); and -84- Fourth: the balance, if any, to the Company. The Trustee, upon prior written notice to the Company, may fix a record date and payment date for any payment to Holders 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 Trustee, a court may in its discretion 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 any suit by the Trustee, any suit by a Holder pursuant to Section 6.07, or a suit by a Holder or Holders of more than 10% in aggregate principal amount of the outstanding Notes. ARTICLE SEVEN TRUSTEE SECTION 7.01. DUTIES OF TRUSTEE. (a) If an Event of Default has occurred and is continuing, 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 thereof as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (1) The Trustee need undertake to perform only those duties as are specifically set forth in this Indenture and no covenants or obligations shall be implied in this Indenture that are adverse to the Trustee. (2) 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 -85- therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) Notwithstanding anything to the contrary herein contained, the Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (1) This paragraph does not limit the effect of paragraph (b) of this Section 7.01. (2) The Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (3) 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 6.02, 6.04 or 6.05. (d) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (e) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), (c) and (d) of this Section 7.01 and Section 7.02. (f) The Trustee shall not be liable for interest on any money or assets received by it except as the Trustee may agree in writing with the Company. Assets held in trust by the Trustee need not be segregated from other assets except to the extent required by law. SECTION 7.02. RIGHTS OF TRUSTEE. Subject to Section 7.01: -86- (a) The Trustee may rely and shall be fully protected in 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 consult with counsel of its selection and may require an Officers' Certificate or an Opinion of Counsel, which shall conform to Sections 11.04 and 11.05. 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. The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect to 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 that it takes or omits to take in good faith which it reasonably believes to be authorized or within its rights or powers. (e) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, notice, request, direction, consent, order, bond, debenture, or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled, upon reasonable notice to the Company, to examine the books, records, and premises of the Company, personally or by agent or attorney and to consult with the officers and representatives of the Company, including the Company's accountants and attorneys during reasonable business hours and subject to executing a confidentiality undertaking in customary form with respect to confidential and/or proprietary information of the Company and its Subsidiaries. (f) The Trustee shall be under no obligation to exercise any of its rights or powers vested in it by this -87- Indenture at the request, order or direction of any of the Holders pursuant to the provisions of this Indenture, unless such Holders have offered to the Trustee reasonable indemnity satisfactory to the Trustee against the costs, expenses and liabilities which may be incurred by it in compliance with such request, order or direction. (g) The Trustee shall not be required to give any bond or surety in respect of the performance of its powers and duties hereunder. (h) Delivery of reports, information and documents to the Trustee under Section 4.08 is for informational purposes only and the Trustee's receipt of the foregoing shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of their covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). (i) The Trustee shall not be charged with knowledge of any Default or Event of Default, of the identity of any Restricted Subsidiary or of the existence of any Change of Control or Asset Sale unless either (i) a Trust Officer shall have actual knowledge thereof, or (ii) the Trustee shall have received written notice thereof from the Company or any Holder of the Notes. SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Company or any of its Subsidiaries, or their respective Affiliates with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11. SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Notes, and it shall not be accountable for the Company's use of the proceeds from the Notes, 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 of the Company in this Indenture or the Notes other than the Trustee's certificate of authentication. -88- SECTION 7.05. NOTICE OF DEFAULT. If a Default or an Event of Default occurs and is continuing and if it is known to a Trust Officer, the Trustee shall mail to each Holder notice of the uncured Default or Event of Default within 90 days after obtaining knowledge thereof. Except in the case of a Default or an Event of Default in payment of principal of, or interest on, any Note, including an accelerated payment, a Default in payment on the Change of Control Payment Date pursuant to a Change of Control Offer or on the Net Proceeds Offer Payment Date pursuant to a Net Proceeds Offer and a Default in compliance with Article Five hereof, the Trustee may withhold the notice if and so long as its Board of Directors, the executive committee of its Board of Directors or a committee of its directors and/or Trust Officers in good faith determines that withholding the notice is in the interest of the Holders. The foregoing sentence of this Section 7.05 shall be in lieu of the proviso to Section 315(b) of the TIA and such proviso to Section 315(b) of the TIA is hereby expressly excluded from this Indenture and the Notes, as permitted by the TIA. SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS. Within 60 days after May 15 of each year beginning with 1998, the Trustee shall, to the extent that any of the events described in TIA Section 313(a) occurred within the previous twelve months, but not otherwise, mail to each Holder a brief report dated as of such date that complies with TIA Section 313(a). The Trustee also shall comply with TIA Sections 313(b), (c) and (d). A copy of each report at the time of its mailing to Holders shall be mailed to the Company and filed with the Commission and each stock exchange, if any, on which the Notes are listed. The Company shall promptly notify the Trustee if the Notes become listed on any stock exchange and the Trustee shall comply with TIA Section 313(d). SECTION 7.07. COMPENSATION AND INDEMNITY. The Company shall pay to the Trustee from time to time such compensation for its services as has been agreed to in writing signed by the Company and the Trustee. 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 upon request for all reasonable out-of-pocket -89- expenses incurred or made by it in connection with the performance of its duties under this Indenture. Such expenses shall include the reasonable fees and expenses of the Trustee's agents, counsel, accountants and experts. The Company shall indemnify each of the Trustee (or any predecessor Trustee) and its agents, employees, stockholders, Affiliates and directors and officers for, and hold them each harmless against, any and all loss, liability, damage, claim or expense (including reasonable fees and expenses of counsel), incurred by them except for such actions to the extent caused by any negligence, bad faith or willful misconduct on their part, arising out of or in connection with the acceptance or administration of this trust including the reasonable costs and expenses of enforcing this Indenture against the Company (including those costs and expenses pursuant to this Section 7.07) and defending themselves against any claim or liability in connection with the exercise or performance of any of their rights, powers or duties hereunder. The Trustee shall notify the Company promptly in writing of any claim asserted against the Trustee for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its Obligations hereunder except to the extent such failure shall have prejudiced the Company. At the Company's sole discretion, the Company shall defend the claim and the Trustee shall cooperate and may participate in the defense; PROVIDED, HOWEVER, that any settlement of a claim shall be approved in writing by the Trustee if such settlement would result in an admission of liability by the Trustee or if such settlement would not be accompanied by a full release of the Trustee for all liability arising out of the events giving rise to such claim. Alternatively, the Trustee may at its option have separate counsel of its own choosing and the Company shall pay the reasonable fees and expenses of such counsel, PROVIDED that the Company shall not be required to pay such fees and expenses if it assumes such indemnified parties' defense and, in such indemnified parties' reasonable judgment, there is no conflict of interest between the Company and such parties in connection with such defense. The Company need not reimburse any expense or indemnify against any loss, liability, damage, claim or expense incurred by an indemnified party through such party's own willful misconduct, negligence or bad faith. The Company need not pay any settlement made without its consent (which consent shall not unreasonably be withheld). To secure the Company's payment obligations in this Section 7.07, the Trustee shall have a lien prior to the Notes on all assets or money held or collected by the Trustee, in its -90- capacity as Trustee, except assets or money held in trust to pay principal of or premium, if any, or interest or Additional Interest on particular Notes. When the Trustee incurs expenses or renders services after an Event of Default specified in paragraph (f) or (g) of Section 6.01 occurs, such expenses and the compensation for such services are intended to constitute expenses of administration under any Bankruptcy Law. The provisions of this Section 7.07 shall survive the resignation or removal of the Trustee and the termination of this Indenture. SECTION 7.08. REPLACEMENT OF TRUSTEE. The Trustee may resign at any time upon not less than 10 Business Days' notice by so notifying the Company in writing. The Holders of a majority in principal amount of the outstanding Notes may remove the Trustee and appoint a successor Trustee with the Company's consent, by so notifying the Company and the Trustee. The Company may remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged bankrupt or insolvent; (3) a receiver or other public officer takes charge of the Trustee or its property; or (4) 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 notify each Holder of such event and shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in aggregate principal amount of the outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Immediately after that, the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided in Section 7.07, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, pow- -91- ers and duties of the Trustee under this Indenture. The Company shall mail notice of such successor Trustee's appointment to each Holder. 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 aggregate principal amount of the outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Notwithstanding any resignation or replacement of the Trustee pursuant to this Section 7.08, the Company's obligations under Section 7.07 shall continue for the benefit of the retiring Trustee. SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the resulting, surviving or transferee corporation without any further act shall, if such resulting, surviving or transferee corporation is otherwise eligible hereunder, be the successor Trustee; PROVIDED, HOWEVER, that such corporation shall be otherwise qualified and eligible under this Article Seven. SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. This Indenture shall always have a Trustee who satisfies the requirement of TIA Sections 310(a)(1), (2) and (5). The Trustee (or, in the case of a Trustee that is a subsidiary of another bank or a corporation included in a bank holding company system, the related bank or bank holding company) shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition, and have a Corporate Trust Office in the City of New York. In addition, if the Trustee is a subsidiary of another bank or a corporation included in a bank holding company system, the Trustee, independently of such bank or bank holding company, shall meet the capital requirements of TIA Section 310(a)(2). The Trustee shall comply with TIA Section 310(b); PROVIDED, HOWEVER, that there shall be excluded from the operation -92- of TIA Section 310(b)(1) any indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the Company are outstanding, if the requirements for such exclusion set forth in TIA Section 310(b)(1) are met. SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The Trustee shall comply with 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 EIGHT DISCHARGE OF INDENTURE; DEFEASANCE SECTION 8.01. TERMINATION OF COMPANY'S OBLIGATIONS. This Indenture will be discharged and will cease to be of further effect (except as to surviving rights of registration of transfer or exchange of the Notes, as expressly provided for in this Indenture) as to all outstanding Notes when (a) either (i) all Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust) have been delivered to the Trustee for cancellation or (ii) all Notes not theretofore delivered to the Trustee for cancellation have become due and payable and the Company has irrevocably deposited or caused to be deposited with the Trustee funds in an amount sufficient to pay and discharge the entire Indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for principal of, premium, if any, and interest and Additional Interest, if any, on the Notes to the date of deposit together with irrevocable instructions from the Company directing the Trustee to apply such funds to the payment thereof at maturity or redemption, as the case may be; (b) the Company has paid all other sums payable under this Indenture by the Company; and (c) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel stating that all conditions precedent under this Indenture relating to the satisfaction and discharge of this Indenture have been complied with. -93- The Company may, at its option and at any time, elect to have its obligations and the obligations of the Subsidiary Guarantors discharged with respect to the outstanding Notes ("Legal Defeasance"), this Indenture and the Note Guarantees. Such Legal Defeasance means that the Company and the Subsidiary Guarantors shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding Notes and the Note Guarantees and cured all then existing Defaults and Events of Default, except for (a) the rights of Holders to receive payments in respect of the principal of, premium, if any, and interest and Additional Interest, if any, on the Notes when such payments are due and of the defeasance trust referred to below, (b) the Company's obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payments, (c) the rights, powers, trust, duties and immunities of the Trustee and the Company's obligations in connection therewith and (d) the Legal Defeasance provisions of this Section 8.01. In addition, the Company may, at its option and at any time, elect to have the obligations of the Company and the Subsidiary Guarantors released with respect to covenants contained in Sections 4.04, 4.08 and 4.10 through 4.19 and Article Five ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the Notes. In the event Covenant Defeasance occurs, those events described under Section 6.01 (except those events described in paragraph (a), (b), (f) and (g) of Section 6.01) will no longer constitute an Event of Default with respect to the Notes. 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 cash in U.S. Legal Tender, non-callable U.S. Government Obligations, 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, if any, and interest on the Notes on the stated date for payment thereof or on the applicable Redemption Date, as the case may be; (b) 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 (i) the Company has received from, or -94- there has been published by, the Internal Revenue Service a ruling or (ii) since the date of this 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 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; (c) 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 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; (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 and the grant of any Lien securing such borrowing) or insofar as Events of Default under paragraph (f) or (g) of Section 6.01 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 other material agreement or instrument 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 Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders over any other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company or others; (g) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for or re- -95- lating to the Legal Defeasance or the Covenant Defeasance, as the case may be, have been complied with; and (h) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that, subject to customary assumptions and conclusions, after the 91st day following the deposit, the trust funds will not be part of any "estate" formed by the bankruptcy or reorganization of the Company or subject to the "automatic stay" under the Bankruptcy Code or, in the case of Covenant Defeasance, will be subject to a first priority Lien in favor of the Trustee for the benefit of the Holders. Notwithstanding the foregoing, the Opinion of Counsel required by clause (b) above need not be delivered if all Notes not theretofore delivered to the Trustee for cancellation (i) have become due and payable, (ii) will become due and payable on the maturity date within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by such Trustee in the name, and at the expense, of the Company. SECTION 8.02. APPLICATION OF TRUST MONEY. The Trustee or Paying Agent shall hold in trust U.S. Legal Tender or U.S. Government Obligations deposited with it pursuant to Section 8.01, and shall apply the deposited U.S. Legal Tender and the money from U.S. Government Obligations in accordance with this Indenture to the payment of the principal of and interest on the Notes. The Trustee shall be under no obligation to invest said U.S. Legal Tender or U.S. Government Obligations. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Legal Tender or U.S. Government Obligations deposited pursuant to Section 8.01 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 outstanding Notes. SECTION 8.03. REPAYMENT TO THE COMPANY. Subject to Sections 7.07 and 8.01, the Trustee and the Paying Agent shall promptly pay to the Company upon request any U.S. Legal Tender or U.S. Government Obligations held by them at any time that, in the opinion of a nationally recognized firm of independent public accountants as certified to -96- the Trustee, is excess funds and thereupon shall be relieved from all liability with respect to such money. The Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of principal or interest that remains unclaimed for one year; PROVIDED, HOWEVER, that the Company shall, if requested by the Trustee or Paying Agent, give to the Trustee or Paying Agent, indemnification reasonably satisfactory to it against any and all liability which may be incurred by it by reason of such paying; PROVIDED, FURTHER, that the Trustee or such Paying Agent, before being required to make any payment, may at the expense of the Company cause to be published once in a newspaper of general circulation in the City of New York or mail to each Holder entitled to such money notice that such money remains unclaimed and that after a date specified therein which shall be at least 30 days from the date of such publication or mailing any unclaimed balance of such money then remaining will be repaid to the Company. After payment to the Company, Holders entitled to such money must look to the Company for payment as general creditors unless an applicable law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. SECTION 8.04. REINSTATEMENT. If the Trustee or Paying Agent is unable to apply any U.S. Legal Tender or U.S. Government Obligations in accordance with Section 8.01 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations and those of 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 8.01 until such time as the Trustee or Paying Agent is permitted to apply all such U.S. Legal Tender or U.S. Government Obligations in accordance with Section 8.01; PROVIDED, HOWEVER, that if the Company has made any payment of interest on or principal of any Notes because of 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 U.S. Legal Tender or U.S. Government Obligations held by the Trustee or Paying Agent. SECTION 8.05. ACKNOWLEDGMENT OF DISCHARGE BY TRUSTEE. After (i) the conditions of Section 8.01 have been satisfied, (ii) the Company has paid or caused to be paid all -97- other sums payable hereunder by the Company and (iii) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent referred to in clause (i) above relating to the satisfaction and discharge of this Indenture have been complied with, the Trustee upon request shall acknowledge in writing the discharge of the Company's obligations under this Indenture except for those surviving obligations specified in Section 8.01, PROVIDED the legal counsel delivering such Opinion of Counsel may rely as to matters of fact on one or more Officers' Certificates of the Company. ARTICLE NINE MODIFICATION OF THE INDENTURE SECTION 9.01. WITHOUT CONSENT OF HOLDERS. Subject to the provisions of Section 9.02, the Company, the Subsidiary Guarantors and the Trustee may amend, waive or supplement this Indenture without notice to or consent of any Holder: (a) to evidence the succession of another Person to the Company or any Subsidiary Guarantor and the assumption by any such successor of the covenants of the Company or any Subsidiary Guarantor in this Indenture and in the Notes; or (b) to add to the covenants of the Company or any Subsidiary Guarantor for the benefit of the Holders, or to surrender any right or power herein conferred upon the Company or any Subsidiary Guarantor; or (c) to add additional Events of Defaults; or (d) to provide for uncertificated Notes in addition to or in place of the certificated Notes; or (e) to evidence and provide for the acceptance of appointment under this Indenture by a successor Trustee; or (f) to secure the Notes or any Note Guarantee; or (g) to cure any ambiguity, to correct or supplement any provision in this Indenture that may be defective or inconsistent with any other provisions in this Indenture, or to make any other provisions with respect to matters or questions arising under this Indenture, provided that such actions pursuant to this clause (g) do not adversely affect the interests of the Holders in any material respect; or (h) to comply with any requirements of the Commission in order to effect and maintain the qualification of this Indenture under the TIA; or (i) to release any Subsidiary Guarantor from its Note Guarantee in accordance with the provisions of this Indenture (including in connection with a sale of all of the Capital Stock of such Subsidiary Guarantor) or (j) to enter into the Supplemental Inden- -98- ture as provided herein or (k) to provide for the issuance of Initial Notes subsequent to the Issue Date pursuant to Section 2.02. In formulating its opinion on the matters in clause (g), the Trustee will be entitled to rely on such evidence as it deems appropriate, including, without limitation, solely on an Opinion of Counsel. Notwithstanding the foregoing, the Trustee, the Subsidiary Guarantors and the Company may not make any change pursuant to this Section 9.01 that adversely affects the rights of any Holder under this Indenture without the consent of such Holder. Upon the request of the Company and the Subsidiary Guarantors accompanied by a Board Resolution authorizing the execution of any such amended or supplemental indenture, and upon receipt by the Trustee of the documents described in Section 9.06, 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 which may be therein contained, but the Trustee may but shall not be obligated to enter into such amended or supplemental indenture which affects its own rights, duties or immunities under this Indenture or otherwise. SECTION 9.02. WITH CONSENT OF HOLDERS. The Company, the Subsidiary Guarantors and the Trustee may amend or supplement this Indenture or the Notes or any amended or supplemental indenture with the written consent of the Holders of not less than a majority in aggregate 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, the Notes). Upon the request of the Company and the Subsidiary Guarantors accompanied by a Board Resolution 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 9.06, 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 in its sole discretion, but shall not be obligated to, enter into such amended or supplemental indenture. -99- It shall not be necessary for the consent of the Holders of Notes under this Section 9.02 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 9.02 becomes effective, the Company shall mail to the Holders of Notes affected thereby a notice 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 6.04 and 6.07, the Holders of a majority in aggregate principal amount of the Notes then outstanding may waive compliance in a particular instance by the Company with any provision of this Indenture or the Notes. However, without the consent of each Holder of the Notes affected thereby, an amendment or waiver may not, directly or indirectly: (i) reduce the amount of Notes whose Holders must consent to an amendment; (ii) reduce the rate of or change the time for payment of and interest, including defaulted interest, on any Notes; (iii) reduce the principal of or change the fixed maturity of any Notes, or change the date on which any Notes may be subject to redemption or repurchase, or reduce the redemption or repurchase price therefor; (iv) make any Notes payable in money other than that stated in the Notes; (v) make any change in provisions of this Indenture protecting the right of each Holder to receive payment of principal of and interest on such Note on or after the due date thereof or to bring suit to enforce such payment, or permitting Holders of a majority in principal amount of the Notes to waive Defaults or Events of Default; (vi) modify or change any provision of this Indenture or the related definitions affecting the ranking of the Notes or any Note Guarantee in a manner which adversely affects the Holders; or (vii) release any Subsidiary Guarantor from any of its obligations under its Note Guarantee other than in accordance with the terms of this Indenture. SECTION 9.03. COMPLIANCE WITH TIA. Every amendment, waiver or supplement of this Indenture or the Notes shall comply with the TIA as then in effect; PROVIDED, HOWEVER, that this Section 9.03 shall not of itself require that this Indenture or the Trustee be qualified under the TIA or constitute any admission or acknowledgment by any party hereto that any such qualification is required prior to the time this Indenture and the Trustee are required by the TIA to be so qualified. -100- SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS. Until an amendment, waiver or supplement becomes effective, a consent to it by a Holder 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. Subject to the following paragraph, any such Holder or subsequent Holder may revoke the consent as to such Holder's Note or portion of such Note by notice to the Trustee or the Company received before the date on which the Trustee receives an Officers' Certificate certifying that the Holders of the requisite principal amount of Notes have consented (and not theretofore revoked such consent) to the amendment, supplement or waiver. An amendment, supplement or waiver becomes effective upon receipt by the Trustee of such Officers' Certificate and evidence of consent by the Holders of the requisite percentage in principal amount of outstanding Notes. The Company may, but shall not be obligated to, fix a Record Date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver. If a Record Date is fixed, then notwithstanding the second sentence of the immediately preceding paragraph, those Persons who were Holders at such Record Date (or their duly designated proxies), and only those Persons, shall be entitled to revoke any consent previously given, whether or not such Persons continue to be Holders after such Record Date. No such consent shall be valid or effective for more than 90 days after such Record Date unless consents from Holders of the requisite percentage in principal amount of outstanding Notes required hereunder for the effectiveness of such consents shall have also been given and not revoked within such 90-day period. SECTION 9.05. NOTATION ON OR EXCHANGE OF NOTES. If an amendment, supplement or waiver changes the terms of a Note, the Trustee may require the Holder of such Note to deliver it to the Trustee. The Trustee may place an appropriate notation on the Note about the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determine, the Company in exchange for the Note shall issue and the Trustee shall authenticate a new Note that reflects the changed terms. -101- SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall execute any amendment, supplement or waiver authorized pursuant to this Article Nine; PROVIDED, HOWEVER, that the Trustee may, but shall not be obligated to, execute any such amendment, supplement or waiver which affects the Trustee's own rights, duties or immunities under this Indenture. In executing such amendment, supplement or waiver the Trustee shall be entitled to receive indemnity reasonably satisfactory to it, and shall be fully protected in relying upon an Opinion of Counsel and an Officers' Certificate of the Company, meeting the requirements of Sections 11.04 and 11.05 and stating that no Event of Default shall occur as a result of such amendment, supplement or waiver and that the execution of such amendment, supplement or waiver is authorized or permitted by this Indenture, PROVIDED, HOWEVER, that the legal counsel delivering such Opinion of Counsel may rely as to matters of fact on one or more Officers' Certificates of the Company. Such Opinion of Counsel shall not be an expense of the Trustee. ARTICLE TEN GUARANTEE OF NOTES SECTION 10.01. UNCONDITIONAL GUARANTEE. Subject to the provisions of this Article Ten, each Subsidiary Guarantor hereby, jointly and severally, unconditionally and irrevocably guarantees, on a senior unsecured basis (such guarantee to be referred to herein as a "Note Guarantee") 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 or the obligations of the Company or any other Subsidiary Guarantor to the Holders or the Trustee hereunder or thereunder, that: (a) the principal of, premium, if any, and interest and any Additional Interest on the Notes shall be duly and punctually paid in full when due, whether at maturity, upon redemption at the option of Holders pursuant to the provisions of the Notes relating thereto, by acceleration or otherwise, and interest on the overdue principal and (to the extent permitted by law) interest, if any, on the Notes and all other obligations of the Company or the Subsidiary Guarantors to the Holders or the Trustee hereunder or thereunder (including amounts due the Trustee under Section 7.07) and all other obligations shall be promptly paid in full or performed, all in ac- -102- cordance with the terms hereof and thereof (including any applicable grace periods); and (b) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, the same shall be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed, or failing performance of any other obligation of the Company to the Holders under this Indenture or under the Notes, for whatever reason, each Subsidiary Guarantor shall be obligated to pay, or to perform or cause the performance of, the same immediately. An Event of Default under this Indenture or the Notes shall constitute an event of default under this Note Guarantee, and shall entitle the Holders of Notes or the Trustee to accelerate the obligations of the Subsidiary Guarantors hereunder in the same manner and to the same extent as the obligations of the Company. Each of the Subsidiary Guarantors hereby agrees that its 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 of the Notes with respect to any provisions hereof or thereof, any release of any other Subsidiary Guarantor, the recovery of any judgment against the Company, any action to enforce the same, whether or not a Note Guarantee is affixed to any particular Note, or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a Subsidiary Guarantor. Each of the Subsidiary Guarantors hereby waives the benefit of 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 its Note Guarantee shall not be discharged except by complete performance of the obligations contained in the Notes, this Indenture and this Note Guarantee. This Note Guarantee is a guarantee of payment and not of collection. If any Holder or the Trustee is required by any court or otherwise to return to the Company or to any Subsidiary Guarantor, or any custodian, trustee, liquidator or other similar official acting in relation to the Company or such Subsidiary Guarantor, any amount paid by the Company or such Subsidiary Guarantor 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 further agrees that, as between it, on the one hand, and the Holders of Notes and the Trustee, on the other hand, (a) subject to this Article Ten, the maturity of -103- the obligations guaranteed hereby may be accelerated as provided in Article Six 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 (b) in the event of any acceleration of such obligations as provided in Article Six, 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. No stockholder, officer, director, employee or incorporator, past, present or future, or any Subsidiary Guarantor, as such, shall have any personal liability under this Note Guarantee by reason of his, her or its status as such stockholder, officer, director, employee or incorporator. SECTION 10.02. LIMITATIONS ON GUARANTEES. The obligations of any Subsidiary Guarantor under its Note Guarantee are limited to the maximum amount which, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under its Note Guarantee or pursuant to its contribution obligations under this Indenture, will result in the obligations of such Subsidiary Guarantor under the Note Guarantee not constituting a fraudulent conveyance or fraudulent transfer under any laws of the United States, any state of the United States or the District of Columbia. SECTION 10.03. EXECUTION AND DELIVERY OF NOTE GUARANTEE. To further evidence the Note Guarantee set forth in Section 10.01, each Subsidiary Guarantor hereby agrees that a notation of such Note Guarantee, substantially in the form of EXHIBIT E, shall be endorsed on each Note authenticated and delivered by the Trustee. Such Note Guarantee shall be executed on behalf of each Subsidiary Guarantor by either manual or facsimile signature of two Officers of the Subsidiary Guarantor, each of whom shall have been duly authorized to so execute by all requisite corporate action. The validity and enforceability of any Note Guarantee shall not be affected by the fact that it is not affixed to any particular Note. Each of the Subsidiary Guarantors hereby agrees that its Note Guarantee set forth in Section 10.01 shall remain in full force and effect -104- notwithstanding any failure to endorse on each Note a notation of such Note Guarantee. If an Officer of a Subsidiary Guarantor whose signature is on this Indenture or a Note Guarantee no longer holds that office at the time the Trustee authenticates the Note on which such Note Guarantee is endorsed or at any time thereafter, such Subsidiary Guarantor's Note Guarantee of such Note shall be valid nevertheless. The delivery of any Note by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of any Note Guarantee set forth in this Indenture on behalf of each Subsidiary Guarantor. SECTION 10.04. RELEASE OF SUBSIDIARY GUARANTORS. (a) The Note Guarantee by a Restricted Subsidiary shall provide by its terms that it shall be automatically and unconditionally released and discharged, without any further action required on the part of the Trustee or any Holder, upon: (i) the unconditional release of such Restricted Subsidiary from its liability in respect of the Indebtedness in connection with which such Note Guarantee was executed and delivered; (ii) any sale or other disposition (by merger or otherwise) to any Person which is not a Restricted Subsidiary of the Company of all of the Company's Capital Stock in, or all or substantially all of the assets of, such Restricted Subsidiary; PROVIDED that such sale or disposition of such Capital Stock or assets is otherwise in compliance with the terms of this Indenture, (iii) the designation of such Subsidiary as an Unrestricted Subsidiary in accordance with the provisions of this Indenture or (iv) the sale or other disposition of shares of Capital Stock of such Subsidiary to a Person other than the Company or a Restricted Subsidiary such that such Subsidiary ceases to constitute a Subsidiary of the Company, provided such disposition is otherwise in accordance with the provisions of this Indenture. If such Subsidiary Guarantor is not so released, such Subsidiary Guarantor or the entity surviving such Subsidiary Guarantor, as applicable, shall remain or be liable under its Note Guarantee as provided in this Article Ten. (b) The Trustee shall deliver an appropriate instrument evidencing the release of any Subsidiary Guarantor upon receipt of a request by the Company or such Subsidiary Guarantor accompanied by an Officers' Certificate and an Opinion of Counsel certifying as to the compliance with this Section 10.04, PROVIDED the legal counsel delivering such Opinion of -105- Counsel may rely as to matters of fact on one or more Officers Certificates of the Company. The Trustee shall execute any documents reasonably requested by the Company or any Subsidiary Guarantor in order to evidence the release of such Subsidiary Guarantor from its obligations under its Note Guarantee endorsed on the Notes and under this Article Ten. Except as set forth in Articles Four and Five and this Section 10.04, nothing contained in this Indenture or in any of the Notes shall prevent any consolidation or merger of any Subsidiary Guarantor with or into, or shall prevent any sale or conveyance of the property of such Subsidiary Guarantor as an entirety or substantially as an entirety to, the Company or another Subsidiary Guarantor that is a Restricted Subsidiary of the Company. SECTION 10.05. WAIVER OF SUBROGATION. Until this Indenture is discharged and all of the Notes are discharged and paid in full, each Subsidiary Guarantor hereby irrevocably waives and agrees not to exercise any claim or other rights which it may now or hereafter acquire against the Company that arise from the existence, payment, performance or enforcement of the Company's obligations under the Notes or this Indenture and such Subsidiary Guarantor's obligations under this Note Guarantee and this Indenture, in any such instance including, without limitation, any right of subrogation, reimbursement, exoneration, contribution, indemnification, and any right to participate in any claim or remedy of the Holders against the Company, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law, including, without limitation, the right to take or receive from the Company, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim or other rights. If any amount shall be paid to any Subsidiary Guarantor in violation of the preceding sentence and any amounts owing to the Trustee or the Holders under the Notes, this Indenture, or any other document or instrument delivered under or in connection with such agreements or instruments, shall not have been paid in full, such amount shall have been deemed to have been paid to such Subsidiary Guarantor for the benefit of, and held in trust for the benefit of, the Trustee or the Holders and shall forthwith be paid to the Trustee for the benefit of itself or such Holders to be credited and applied to the obligations in favor of the Trustee or the Holders, as the case may be, whether ma- -106- tured or unmatured, in accordance with the terms of this Indenture. Each Subsidiary Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by this Indenture and that the waiver set forth in this Section 10.05 is knowingly made in contemplation of such benefits. SECTION 10.06. IMMEDIATE PAYMENT. Each Subsidiary Guarantor agrees to make immediate payment to the Trustee on behalf of the Holders of all Obligations owing or payable to the respective Holders upon receipt of a demand for payment therefor by the Trustee to such Subsidiary Guarantor in writing. SECTION 10.07. OBLIGATIONS CONTINUING. The obligations of each Subsidiary Guarantor hereunder shall be continuing and shall remain in full force and effect until all the obligations have been paid and satisfied in full or released pursuant to Section 10.04. Each Subsidiary Guarantor agrees with the Trustee that it will from time to time deliver to the Trustee suitable acknowledgments of this continued liability hereunder. SECTION 10.08. OBLIGATIONS REINSTATED. The obligations of each Subsidiary Guarantor hereunder shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment which would otherwise have reduced the obligations of any Subsidiary Guarantor hereunder (whether such payment shall have been made by or on behalf of the Company or by or on behalf of a Subsidiary Guarantor) is rescinded or reclaimed from any of the Holders upon the insolvency, bankruptcy, liquidation or reorganization of the Company or any Subsidiary Guarantor or otherwise, all as though such payment had not been made. If demand for, or acceleration of the time for, payment by the Company is stayed upon the insolvency, bankruptcy, liquidation or reorganization of the Company, all such Indebtedness otherwise subject to demand for payment or acceleration shall nonetheless be payable by each Subsidiary Guarantor as provided herein. SECTION 10.09. OBLIGATIONS NOT AFFECTED. The obligations of each Subsidiary Guarantor hereunder shall not be affected, impaired or diminished in any way by any act, omission, matter or thing whatsoever, occurring be- -107- fore, upon or after any demand for payment hereunder (and whether or not known or consented to by any Subsidiary Guarantor or any of the Holders) which, but for this provision, might constitute a whole or partial defense to a claim against any Subsidiary Guarantor hereunder or might operate to release or otherwise exonerate any Subsidiary Guarantor from any of its obligations hereunder or otherwise affect such obligations, whether occasioned by default of any of the Holders or otherwise. SECTION 10.10. WAIVER. Without in any way limiting the provisions of Section 10.01 hereof, each Subsidiary Guarantor hereby waives notice or proof of reliance by the Holders upon the obligations of any Subsidiary Guarantor hereunder, and diligence, presentment, demand for payment on the Company, protest or notice of dishonor of any of the Obligations, or other notice or formalities to the Company of any kind whatsoever. SECTION 10.11. NO OBLIGATION TO TAKE ACTION AGAINST THE COMPANY. Neither the Trustee nor any other Person shall have any obligation to enforce or exhaust any rights or remedies or to take any other steps under any security for the Obligations or against the Company or any other Person or any property of the Company or any other Person before the Trustee is entitled to demand payment and performance by any or all Subsidiary Guarantors of their liabilities and obligations under their Note Guarantees or under this Indenture. SECTION 10.12. DEALING WITH THE COMPANY AND OTHERS. The Holders, without releasing, discharging, limiting or otherwise affecting in whole or in part the obligations and liabilities of any Subsidiary Guarantor hereunder and without the consent of or notice to any Subsidiary Guarantor, may (a) grant time, renewals, extensions, compromises, concessions, waivers, releases, discharges and other indulgences to the Company or any other Person; (b) take or abstain from taking security or collateral from the Company or from perfecting security or collateral of the Company; -108- (c) release, discharge, compromise, realize, enforce or otherwise deal with or do any act or thing in respect of (with or without consideration) any and all collateral, mortgages or other security given by the Company or any third party with respect to the obligations or matters contemplated by this Indenture or the Notes; (d) accept compromises or arrangements from the Company; (e) apply all monies at any time received from the Company or from any security upon such part of the Obligations as the Holders may see fit or change any such application in whole or in part from time to time as the Holders may see fit; and (f) otherwise deal with, or waive or modify their right to deal with, the Company and all other Persons and any security as the Holders or the Trustee may see fit. SECTION 10.13. DEFAULT AND ENFORCEMENT. If any Subsidiary Guarantor fails to pay in accordance with Section 10.06, the Trustee may proceed in its name as trustee hereunder in the enforcement of the Note Guarantee of any such Subsidiary Guarantor and such Subsidiary Guarantor's obligations thereunder and hereunder by any remedy provided by law, whether by legal proceedings or otherwise, and to recover from such Subsidiary Guarantor the obligations. SECTION 10.14. AMENDMENT, ETC. No amendment, modification or waiver of any provision of this Indenture relating to any Subsidiary Guarantor or consent to any departure by any Subsidiary Guarantor or any other Person from any such provision will in any event be effective unless it is signed by such Subsidiary Guarantor and the Trustee. SECTION 10.15. ACKNOWLEDGMENT. Each Subsidiary Guarantor hereby acknowledges communication of the terms of this Indenture and the Notes and consents to and approves of the same. -109- SECTION 10.16. COSTS AND EXPENSES. Each Subsidiary Guarantor shall pay on demand by the Trustee any and all reasonable costs, fees and expenses (including, without limitation, legal fees) incurred by the Trustee, its agents, advisors and counsel or any of the Holders in enforcing any of their rights under any Note Guarantee. SECTION 10.17. NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no delay in exercising, on the part of the Trustee or the Holders, any right, remedy, power or privilege hereunder or under this Indenture or the Notes, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder or under this Indenture or the Notes preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges in the Note Guarantee and under this Indenture, the Notes and any other document or instrument between a Subsidiary Guarantor and/or the Company and the Trustee are cumulative and not exclusive of any rights, remedies, powers and privilege provided by law. SECTION 10.18. SURVIVAL OF OBLIGATIONS. Without prejudice to the survival of any of the other obligations of each Subsidiary Guarantor hereunder, the obligations of each Subsidiary Guarantor under Section 10.01 shall be enforceable against such Subsidiary Guarantor without regard to and without giving effect to any right of offset or counterclaim available to or which may be asserted by the Company or any Subsidiary Guarantor. SECTION 10.19. NOTE GUARANTEE IN ADDITION TO OTHER OBLIGATIONS. The obligations of each Subsidiary Guarantor under its Note Guarantee and this Indenture are in addition to and not in substitution for any other obligations to the Trustee or to any of the Holders in relation to this Indenture or the Notes (including the Purchase Agreement and the Registration Rights Agreement). -110- SECTION 10.20. SEVERABILITY. Any provision of this Article Ten which is prohibited or unenforceable in any jurisdiction shall not invalidate the remaining provisions and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction unless its removal would substantially defeat the basic intent, spirit and purpose of this Indenture and this Article Ten. SECTION 10.21. SUCCESSORS AND ASSIGNS. Each Note Guarantee shall be binding upon and inure to the benefit of each Subsidiary Guarantor and the Trustee and the other Holders and their respective successors and permitted assigns, except that no Subsidiary Guarantor may assign any of its obligations hereunder or thereunder. ARTICLE ELEVEN MISCELLANEOUS SECTION 11.01. TIA CONTROLS. If any provision of this Indenture limits, qualifies, or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control; PROVIDED, HOWEVER, that this Section 11.01 shall not of itself require that this Indenture or the Trustee be qualified under the TIA or constitute any admission or acknowledgment by any party hereto that any such qualification is required prior to the time this Indenture and the Trustee are required by the TIA to be so qualified. SECTION 11.02. NOTICES. Any notices or other communications required or permitted hereunder shall be in writing, and shall be sufficiently given if made by hand delivery, by telex, by telecopier or registered or certified mail, postage prepaid, return receipt requested, addressed as follows: -111- if to the Company or the Subsidiary Guarantors: Elgar Holdings, Inc. 9250 Brown Deer Road San Diego, CA 92121 Facsimile No.: (619) 458-0257 Attention: Chief Financial Officer with a copy to: Gibson Dunn & Crutcher, LLP 333 South Grand Avenue Los Angeles, CA 90071 Facsimile No.: (213) 229-7520 Attention: Kenneth M. Doran if to the Trustee: United States Trust Company of New York 114 West 47th Street 25th Floor New York, NY 10036 Facsimile No.: (212) 852-1625 Attention: Corporate Trust Department The Company, the Subsidiary Guarantors and the Trustee by written notice to the other may designate additional or different addresses for notices to such Person. Any notice or communication to the Company, the Subsidiary Guarantors or the Trustee shall be deemed to have been given or made as of the date so delivered if hand delivered; when answered back, if telexed; when receipt is acknowledged, if faxed; one (1) Business Day after mailing by reputable overnight courier and five (5) calendar days after mailing if sent by registered or certified mail, postage prepaid (except that a notice of change of address shall not be deemed to have been given until actually received by the addressee). Any notice or communication mailed to a Holder shall be mailed to him by first class mail or other equivalent means at his address as it appears on the registration books of the Registrar ten (10) days prior to such mailing and shall be sufficiently given to him if so mailed within the time prescribed. 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 -112- in the manner provided above, it is duly given, whether or not the addressee receives it. SECTION 11.03. COMMUNICATIONS BY HOLDERS WITH OTHER HOLDERS. 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 any other Person shall have the protection of TIA Section 312(c). SECTION 11.04. 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, the Company shall furnish to the Trustee: (1) an Officers' Certificate, in form and substance reasonably satisfactory to the Trustee, stating that, in the opinion of the signers, all conditions precedent to be performed by the Company, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent to be performed by the Company, if any, provided for in this Indenture relating to the proposed action have been complied with (which counsel, as to factual matters, may rely on an Officers' Certificate). SECTION 11.05. 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 the Officers' Certificate required by Section 4.06, shall include: (1) a statement that the Person making such certificate or opinion has read such covenant or condition; (2) 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; -113- (3) a statement that, in the opinion of such Person, he has made such examination or investigation as is reasonably necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of each such Person, such condition or covenant has been complied with. SECTION 11.06. RULES BY TRUSTEE, PAYING AGENT, REGISTRAR. The Trustee may make reasonable rules in accordance with the Trustee's customary practices for action by or at a meeting of Holders. The Paying Agent or Registrar may make reasonable rules for its functions. SECTION 11.07. BUSINESS DAYS. If a payment date is not a Business Day at a particular place of payment, payment may be made at such place on the next succeeding day that is a Business Day, and no interest shall accrue for the intervening period. SECTION 11.08. GOVERNING LAW. This Indenture, the Notes and the Note Guarantees shall be governed by and construed in accordance with the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby. SECTION 11.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or any of its Subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 11.10. NO PERSONAL LIABILITY. No director, officer, employee, stockholder or incorporator, as such, 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 Notes, the Note -114- Guarantees, this Indenture or the Registration Rights Agreement 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 the issuance of the Notes. SECTION 11.11. SUCCESSORS. All agreements of the Company in this Indenture and the Notes shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 11.12. DUPLICATE ORIGINALS. All parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together shall represent the same agreement. SECTION 11.13. SEVERABILITY. In case any one or more of the provisions in this Indenture or in the Notes shall be held invalid, illegal or unenforceable, in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions shall not in any way be affected or impaired thereby, it being intended that all of the provisions hereof shall be enforceable to the full extent permitted by law. SECTION 11.14. INDEPENDENCE OF COVENANTS. All covenants and agreements in this Indenture and the Notes shall be given independent effect so that if any particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or otherwise be within the limitations of, another covenant shall not avoid the occurrence of a Default or an Event of Default if such action is taken or condition exists. [Signature Page Follows] SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the date first written above. JFL-EEC MERGER SUB CO., as Issuer By: /s/ Donald Glickman ---------------------------------- Name: Donald Glickman Title: President UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee By: /s/ Cynthia Chaney ---------------------------------- Name: Cynthia Chaney Title: Assistant Vice President EXHIBIT A CUSIP No.: [ ] JFL-EEC MERGER SUB CO. % SENIOR NOTE DUE 2008, SERIES A No. [ ] $ JFL-EEC MERGER SUB CO., a Delaware corporation (the "Company"), for value received promises to pay to or registered assigns the principal sum of Dollars [(as such amount may be increased or decreased from time to time by adjustments made on the records of the Trustee, as custodian for the Depository)]* on February 1, 2008. Interest Payment Dates: February 1 and August 1, commencing August 1, 1998 Record Dates: January 15 and July 15 Reference is made to the further provisions of this Note contained herein, which will for all purposes have the same effect as if set forth at this place. - ------------------- * Language to be included in Global Notes only. A-1 IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by its duly authorized officers. JFL-EEC MERGER SUB CO. By: ---------------------------------- Name: Title: By: ---------------------------------- Name: Title: Dated: A-2 Certificate of Authentication This is one of the 9 7/8% Senior Notes, Series A due 2008 referred to in the within-mentioned Indenture. UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee By: ---------------------------------- Authorized Signatory A-3 (REVERSE OF SECURITY) 9 7/8% Senior Note due 2008, Series A 1. INTEREST. JFL-EEC MERGER SUB CO., a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Note at the rate per annum shown above. Interest on the Notes will accrue from the most recent date on which interest has been paid or, if no interest has been paid, from February 3, 1998. The Company will pay interest semi-annually in arrears on each Interest Payment Date, commencing August 1, 1998. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal and on overdue installments of interest from time to time on demand at the rate borne by the Notes and on overdue installments of interest (without regard to any applicable grace periods) to the extent lawful. 2. METHOD OF PAYMENT. The Company shall pay interest on the Notes (except defaulted interest) to the Persons who are the registered Holders at the close of business on the Record Date immediately preceding the Interest Payment Date even if the Notes are cancelled on registration of transfer or registration of exchange (including pursuant to an Exchange Offer (as defined in the Registration Rights Agreement)) after such Record Date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Company shall pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts ("U.S. Legal Tender"). However, the Company may pay principal and interest by its check payable in such U.S. Legal Tender or by wire transfer of immediately available funds. The Company may deliver any such interest payment to the Paying Agent or to a Holder at the Holder's registered address. 3. PAYING AGENT AND REGISTRAR. Initially, United States Trust Company of New York (the "Trustee") will act as Paying Agent and Registrar. The Company may change any Paying Agent, Registrar or co-Registrar without notice to the Holders. 4. INDENTURE. The Company issued the Notes under an Indenture, dated as of February 3, 1998 (the "Indenture"), between the Company and the Trustee. This Note is one of a duly authorized issue of Initial Notes of the Company designated as its 9 7/8% Senior Notes due 2008, Series A (the "Initial Notes"). The Notes are limited (except as otherwise provided in the Indenture) in aggregate principal amount to A-4 $150,000,000, which may be issued under the Indenture; PROVIDED the principal amount of Initial Notes issued on the Issue Date is $90,000,000. The Notes include the Initial Notes, the Private Exchange Notes and the Exchange Notes issued in exchange for the Initial Notes pursuant to the Registration Rights Agreement. The Initial Notes and the Exchange Notes are treated as a single class of securities under the Indenture. Capitalized terms herein are used as defined in the Indenture unless otherwise defined herein. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture. Notwithstanding anything to the contrary herein, the Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and said Act for a statement of them. The Notes are general unsecured obligations of the Company. Each Holder, by accepting a Note, agrees to be bound by all of the terms and provisions of the Indenture, as the same may be amended from time to time in accordance with its terms. 5. OPTIONAL REDEMPTION. The Notes will be redeemable, at the Company's option, in whole at any time or in part from time to time, on and after February 1, 2003, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on February 1 of the years set forth below, plus, in each case, accrued and unpaid interest thereon and Additional Interest, if any, to the date of redemption:
Year Percentage ---- ---------- 2003 ...................................... 104.938% 2004 ...................................... 103.292% 2005 ...................................... 101.646% 2006 and thereafter ........................ 100.000%
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from time to time, on or prior to February 1, 2001, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings to redeem up to 35% of the sum of (i) the initial aggregate principal amount of Notes issued in the Offering and (ii) the respective initial aggregate principal amounts of Notes issued under the Indenture after the Issue Date, at a redemption price equal to 109.875% of the principal amount thereof plus accrued and unpaid interest thereon and Additional Interest, if any, to the date of redemption; PROVIDED that at least 65% of the sum of (i) the initial A-5 aggregate principal amount of Notes issued in the Offering and (ii) the respective initial aggregate principal amounts of Notes issued under the Indenture after the Issue Date remains outstanding immediately after any such redemption. In order to effect the foregoing redemption with the proceeds of any Public Equity Offering, the Company shall make such redemption not more than 120 days after the consummation of any such Public Equity Offering. OPTIONAL REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of Control prior to February 1, 2003, the Notes will be redeemable, in whole or in part, at the option of the Company, upon not less than 30 nor more than 60 days prior notice to each holder of Notes to be redeemed, at a redemption price equal to the sum of (i) the then outstanding principal amount thereof plus (ii) accrued and unpaid interest thereon and Additional Interest, if any, to the redemption date plus (iii) the Applicable Premium. 6. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at such Holder's registered address. Notes in denominations larger than $1,000 may be redeemed in part. Except as set forth in the Indenture, if monies for the redemption of the Notes called for redemption shall have been deposited with the Paying Agent for redemption on such Redemption Date, then, unless the Company defaults in the payment of such redemption price plus accrued interest, if any, the Notes called for redemption will cease to bear interest from and after such Redemption Date and the only right of the Holders of such Notes will be to receive payment of the redemption price plus accrued interest, if any. 7. OFFERS TO PURCHASE. Sections 4.14 and 4.15 of the Indenture provide that, after certain Asset Sales and upon the occurrence of a Change of Control, and subject to further limitations contained therein, the Company will make an offer to purchase certain amounts of the Notes in accordance with the procedures set forth in the Indenture. 8. REGISTRATION RIGHTS. Pursuant to a Registration Rights Agreement between the Company and the Initial Purchaser, the Company will be obligated to consummate an exchange offer pursuant to which the Holder of this Note shall have the right to exchange this Note for Exchange Notes, which have been registered under the Securities Act, in like principal amount and having terms identical in all material respects as the Initial Notes. The Holders of the Initial Notes shall be entitled to receive certain additional interest payments in the event such A-6 exchange offer is not consummated and upon certain other conditions, all pursuant to and in accordance with the terms of the Registration Rights Agreement. 9. DENOMINATIONS; TRANSFER; EXCHANGE. The Notes are in registered form, without coupons, and in denominations of $1,000 and integral multiples of $1,000. A Holder shall register the transfer of or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay certain transfer taxes or similar governmental charges payable in connection therewith as permitted by the Indenture. The Registrar need not register the transfer of or exchange of any Notes or portions thereof selected for redemption. 10. PERSONS DEEMED OWNERS. The registered Holder of a Note shall be treated as the owner of it for all purposes. 11. UNCLAIMED MONEY. If money for the payment of principal or interest remains unclaimed for one year, the Trustee and the Paying Agent will pay the money back to the Company. After that, all liability of the Trustee and such Paying Agent with respect to such money shall cease. 12. DISCHARGE PRIOR TO REDEMPTION OR MATURITY. If the Company at any time deposits with the Trustee U.S. Legal Tender sufficient to pay the principal of and interest on the Notes to redemption or maturity and complies with the other provisions of the Indenture relating thereto, the Company will be discharged from certain provisions of the Indenture and the Notes (including certain covenants, and including, under certain circumstances, the Company's obligation to pay the principal of and interest on the Notes but without affecting the rights of the Holders to receive such amounts from such deposits). 13. AMENDMENT; SUPPLEMENT; WAIVER. Subject to certain exceptions set forth in the Indenture, the Indenture or the Notes may be amended or supplemented with the written consent of the Holders of a majority in aggregate principal amount of the Notes then outstanding, and any past Default or Event of Default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in aggregate principal amount of the Notes then outstanding. Without notice to or consent of any Holder, the parties thereto may amend or supplement the Indenture or the Notes to, among other things, cure any ambiguity, defect or inconsistency, provide for uncertificated Notes in addition to or in place of certificated Notes, comply with any requirements of the Commission in order to effect or maintain the qualification of the Indenture under A-7 the TIA or comply with Article Five of the Indenture or make any other change that does not adversely affect the rights of any Holder of a Note. 14. RESTRICTIVE COVENANTS. The Indenture imposes certain limitations on the ability of the Company and its Restricted Subsidiaries to, among other things, incur additional Indebtedness, pay dividends or make certain other Restricted Payments, consummate certain Asset Sales, enter into certain transactions with Affiliates, incur liens, impose restrictions on the ability of a Subsidiary to pay dividends or make certain payments to the Company and its Subsidiaries, merge or consolidate with any other Person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Such limitations are subject to a number of important qualifications and exceptions. Pursuant to Section 4.06 of the Indenture, the Company must annually report to the Trustee on compliance with such limitations. 15. SUCCESSORS. When a successor assumes, in accordance with the Indenture, all the obligations of its predecessor under the Notes and the Indenture, the predecessor, subject to certain exceptions, will be released from those obligations. 16. DEFAULTS AND REMEDIES. If an Event of Default occurs and is continuing, the Trustee or the Holders of not less than 25% in aggregate principal amount of Notes then outstanding may declare all the Notes to be due and payable in the manner, at the time and with the effect provided in the Indenture. Holders of Notes may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee is not obligated to enforce the Indenture or the Notes unless it has received indemnity reasonably satisfactory to it. The Indenture permits, subject to certain limitations therein provided, Holders of a majority in aggregate principal amount of the Notes then outstanding to direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of Notes notice of any continuing Default or Event of Default (except a Default in payment of principal or interest when due, for any reason or a Default in compliance with Article Five of the Indenture) if it determines that withholding notice is in their interest. 17. TRUSTEE DEALINGS WITH THE COMPANY AND ITS SUBSIDIARIES. The Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with the Company, its Subsidiaries or their respective Affiliates as if it were not the Trustee. 18. NO RECOURSE AGAINST OTHERS. No director, officer, employee, shareholder or incorporator, as such, of the A-8 Company or any Subsidiary Guarantor, as such, shall have any liability for any obligation of the Company under the Notes, the Indenture or the Registration Rights Agreement 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 the issuance of the Notes. 19. AUTHENTICATION. This Note shall not be valid until the Trustee or Authenticating Agent manually signs the certificate of authentication on this Note. 20. GOVERNING LAW. This Note and the Indenture shall be governed by and construed in accordance with the laws of the State of New York, as applied to contracts made and performed within the State of New York, without regard to principles of conflict of laws. Each of the parties hereto agrees to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to this Note. 21. ABBREVIATIONS AND DEFINED TERMS. Customary abbreviations may be used in the name of a Holder of a Note 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). 22. 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 Notes as a convenience to the Holders of the Notes. No representation is made as to the accuracy of such numbers as printed on the Notes and reliance may be placed only on the other identification numbers printed hereon. The Company will furnish to any Holder of a Note upon written request and without charge a copy of the Indenture, which has the text of this Note. Requests may be made to: Elgar Holdings, Inc., 9250 Brown Deer Road, San Diego, CA 92121, Facsimile No.: (619) 458-0257, Attention: Chief Financial Officer. A-9 ASSIGNMENT FORM If you the Holder want to assign this Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Note to: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint ______________________________________________________, agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Dated: Signed: ------------------------- ---------------------------------- (Sign exactly as your name appears on the other side of this Note) Signature Guarantee: ----------------------------------------------------------- In connection with any transfer of this Note occurring prior to the date which is the earlier of (i) the date of the declaration by the Commission of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act") covering resales of this Note (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) February 3, 2000, the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer: [CHECK ONE] (1) __ to the Company or a subsidiary thereof; or (2) __ pursuant to and in compliance with Rule 144A under the Securities Act of 1933, as amended; or A-10 (3) __ to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933, as amended) that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter can be obtained from the Trustee); or (4) __ outside the United states to a "foreign person" in compliance with Rule 904 of Regulation S under the Securities Act of 1933, as amended; or (5) __ pursuant to the exemption from registration provided by Rule 144 under the Securities Act of 1933, as amended; or (6) __ pursuant to an effective registration statement under the Securities Act of 1933, as amended; or (7) __ pursuant to another available exemption from the registration requirements of the Securities Act of 1933, as amended. and unless the box below is checked, the undersigned confirms that such Note is not being transferred to an "affiliate" of the Company as defined in Rule 144 under the Securities Act of 1933, as amended (an "Affiliate"): / / The transferee is an Affiliate of the Company. Unless one of the items is checked, the Trustee will refuse to register any of the Notes evidenced by this certificate in the name of any person other than the registered Holder thereof; PROVIDED, HOWEVER, that if item (3), (4), (5) or (7) is checked, the Company or the Trustee may require, prior to registering any such transfer of the Notes, in their sole discretion, such written legal opinions, certifications (including an investment letter in the case of box (3) or (4)) and other information as the Trustee or the Company has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, as amended. A-11 If none of the foregoing items are checked, the Trustee or Registrar shall not be obligated to register this Note in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 2.17 of the Indenture shall have been satisfied. Dated: Signed: ------------------------- --------------------------------- (Sign exactly as your name appears on the other side of this Note) Signature Guarantee: ---------------------------------------------------------- A-12 TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, as amended and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: --------------------- ---------------------------------------- NOTICE: To be executed by an executive officer A-13 [OPTION OF HOLDER TO ELECT PURCHASE] If you want to elect to have this Note purchased by the Company pursuant to Section 4.14 or Section 4.15 of the Indenture, check the appropriate box: Section 4.14 [ ] Section 4.15 [ ] If you want to elect to have only part of this Note purchased by the Company pursuant to Section 4.14 or Section 4.15 of the Indenture, state the amount you elect to have purchased: $ ------------------- Dated: ---------------------- --------------------------------------------- NOTICE: The signature on this assignment must correspond with the name as it appears upon the face of the within Note in every particular without alteration or enlargement or any change whatsoever and be guaranteed. Signature Guarantee: ------------------------------------------------------ A-14 EXHIBIT B CUSIP No.: [ ] JFL-EEC MERGER SUB CO. 9 7/8% SENIOR NOTE DUE 2008, SERIES B No. [ ] $ JFL-EEC MERGER SUB CO., a Delaware corporation (the "Company"), for value received, promises to pay to or registered assigns the principal sum of Dollars [(as such amount may be increased or decreased from time to time by adjustments made on the records of the Trustee, as custodian for the Depository)]* on February 1, 2008. Interest Payment Dates: February 1 and August 1, commencing August 1, 1998 Record Dates: January 15 and July 15 Reference is made to the further provisions of this Note contained herein, which will for all purposes have the same effect as if set forth at this place. - ------------------------ * Language to be included in Global Notes only. B-1 IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by its duly authorized officers. JFL-EEC MERGER SUB CO. By: ------------------------------ Name: Title: By: ------------------------------ Name: Title: Dated: B-2 Certificate of Authentication This is one of the 9 7/8% Senior Notes, Series B due 2008, Series B referred to in the within-mentioned Indenture. UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee By: ------------------------------ Authorized Signatory B-3 (REVERSE OF SECURITY) 9 7/8% Senior Note due 2008, Series B 1. INTEREST. JFL-EEC MERGER SUB CO., a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Note at the rate per annum shown above. Interest on the Notes will accrue from the most recent date on which interest has been paid or, if no interest has been paid, from February 3, 1998. The Company will pay interest semi-annually in arrears on each Interest Payment Date, commencing August 1, 1998. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal and on overdue installments of interest from time to time on demand at the rate borne by the Notes and on overdue installments of interest (without regard to any applicable grace periods) to the extent lawful. 2. METHOD OF PAYMENT. The Company shall pay interest on the Notes (except defaulted interest) to the Persons who are the registered Holders at the close of business on the Record Date immediately preceding the Interest Payment Date even if the Notes are canceled on registration of transfer or registration of exchange after such Record Date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Company shall pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts ("U.S. Legal Tender"). However, the Company may pay principal and interest by its check payable in such U.S. Legal Tender or by wire transfer of immediately available funds. The Company may deliver any such interest payment to the Paying Agent or to a Holder at the Holder's registered address. 3. PAYING AGENT AND REGISTRAR. Initially, United States Trust Company of New York (the "Trustee") will act as Paying Agent and Registrar. The Company may change any Paying Agent, Registrar or co-Registrar without notice to the Holders. 4. INDENTURE. The Company issued the Notes under an Indenture, dated as of February 3, 1998 (the "Indenture"), between the Company and the Trustee. This Note is one of a duly authorized issue of Exchange Notes of the Company designated as its 9 7/8% Senior Notes due 2008, Series B (the "Exchange Notes"). The Notes include the 9 7/8% Notes due 2008, Series A (the "Initial Notes") and the Exchange Notes, issued in exchange for the Initial Notes pursuant to a Registration Rights Agreement. The Notes are limited (except as otherwise provided in the Indenture) in aggregate principal B-4 amount to $150,000,000, which may be issued under the Indenture; PROVIDED the principal amount of Initial Notes issued on the Issue Date was $90,000,000. The Initial Notes and the Exchange Notes are treated as a single class of securities under the Indenture. Capitalized terms herein are used as defined in the Indenture unless otherwise defined herein. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture. Notwithstanding anything to the contrary herein, the Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and said Act for a statement of them. The Notes are general unsecured obligations of the Company. Each Holder, by accepting a Note, agrees to be bound by all of the terms and provisions of the Indenture, as the same may be amended from time to time in accordance with its terms. 5. OPTIONAL REDEMPTION. The Notes will be redeemable, at the Company's option, in whole at any time or in part from time to time, on and after February 1, 2003, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on February 1 of the years set forth below, plus, in each case, accrued and unpaid interest thereon and Additional Interest, if any, to the date of redemption:
Year Percentage ---- ---------- 2003. . . . . . . . . . . . . . . . . . . . . 104.938% 2004. . . . . . . . . . . . . . . . . . . . . 103.292% 2005. . . . . . . . . . . . . . . . . . . . . 101.646% 2006 and thereafter . . . . . . . . . . . . . 100.000%
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from time to time, on or prior to February 1, 2001, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings to redeem up to 35% of the sum of (i) the initial aggregate principal amount of Notes issued in the Offering and (ii) the respective initial aggregate principal amounts of Notes issued under the Indenture after the Issue Date, at a redemption price equal to 109.875% of the principal amount thereof plus accrued and unpaid interest thereon and Additional Interest, if any, to the date of redemption; PROVIDED that at least 65% of the sum of (i) the initial aggregate principal amount of Notes issued in the Offering and (ii) the respective initial aggregate principal amounts of Notes issued under the Indenture after the Issue Date remains B-5 outstanding immediately after any such redemption. In order to effect the foregoing redemption with the proceeds of any Public Equity Offering, the Company shall make such redemption not more than 120 days after the consummation of any such Public Equity Offering. OPTIONAL REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of Control prior to February 1, 2003, the Notes will be redeemable, in whole or in part, at the option of the Company, upon not less than 30 nor more than 60 days prior notice to each holder of Notes to be redeemed, at a redemption price equal to the sum of (i) the then outstanding principal amount thereof plus (ii) accrued and unpaid interest thereon and Additional Interest, if any, to the redemption date plus (iii) the Applicable Premium. 6. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at such Holder's registered address. Notes in denominations larger than $1,000 may be redeemed in part. Except as set forth in the Indenture, if monies for the redemption of the Notes called for redemption shall have been deposited with the Paying Agent for redemption on such Redemption Date, then, unless the Company defaults in the payment of such redemption price plus accrued interest, if any, the Notes called for redemption will cease to bear interest from and after such Redemption Date and the only right of the Holders of such Notes will be to receive payment of the redemption price plus accrued interest, if any. 7. OFFERS TO PURCHASE. Sections 4.14 and 4.15 of the Indenture provide that, after certain Asset Sales and upon the occurrence of a Change of Control, and subject to further limitations contained therein, the Company will make an offer to purchase certain amounts of the Notes in accordance with the procedures set forth in the Indenture. 8. DENOMINATIONS; TRANSFER; EXCHANGE. The Notes are in registered form, without coupons, and in denominations of $1,000 and integral multiples of $1,000. A Holder shall register the transfer of or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay certain transfer taxes or similar governmental charges payable in connection therewith as permitted by the Indenture. The Registrar need not register the transfer of or exchange of any Notes or portions thereof selected for redemption. B-6 9. PERSONS DEEMED OWNERS. The registered Holder of a Note shall be treated as the owner of it for all purposes. 10. UNCLAIMED MONEY. If money for the payment of principal or interest remains unclaimed for one year, the Trustee and the Paying Agent will pay the money back to the Company. After that, all liability of the Trustee and such Paying Agent with respect to such money shall cease. 11. DISCHARGE PRIOR TO REDEMPTION OR MATURITY. If the Company at any time deposits with the Trustee U.S. Legal Tender sufficient to pay the principal of and interest on the Notes to redemption and complies with the other provisions of the Indenture relating thereto, the Company will be discharged from certain provisions of the Indenture and the Notes (including certain covenants, and including, under certain circumstances, the Company's obligation to pay the principal of and interest on the Notes but without affecting the rights of the Holders to receive such amounts from such deposit). 12. AMENDMENT; SUPPLEMENT; WAIVER. Subject to certain exceptions set forth in the Indenture, the Indenture or the Notes may be amended or supplemented with the written consent of the Holders of a majority in aggregate principal amount of the Notes then outstanding, and any past Default or Event of Default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in aggregate principal amount of the Notes then outstanding. Without notice to or consent of any Holder, the parties thereto may amend or supplement the Indenture or the Notes to, among other things, cure any ambiguity, defect or inconsistency, provide for uncertificated Notes in addition to or in place of certificated Notes, comply with any requirements of the Commission in order to effect or maintain the qualification of the Indenture under the TIA or comply with Article Five of the Indenture or make any other change that does not adversely affect the rights of any Holder of a Note. 13. RESTRICTIVE COVENANTS. The Indenture imposes certain limitations on the ability of the Company and its Restricted Subsidiaries to, among other things, incur additional Indebtedness, pay dividends or make certain other Restricted Payments, consummate certain Asset Sales, enter into certain transactions with Affiliates, incur liens, impose restrictions on the ability of a Subsidiary to pay dividends or make certain payments to the Company and its Subsidiaries, merge or consolidate with any other Person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Such limitations are subject to a number of important qualifications and exceptions. Pursuant to B-7 Section 4.06 of the Indenture, the Company must annually report to the Trustee on compliance with such limitations. 14. SUCCESSORS. When a successor assumes, in accordance with the Indenture, all the obligations of its predecessor under the Notes and the Indenture, the predecessor, subject to certain exceptions, will be released from those obligations. 15. DEFAULTS AND REMEDIES. If an Event of Default occurs and is continuing, the Trustee or the Holders of not less than 25% in aggregate principal amount of Notes then outstanding may declare all the Notes to be due and payable in the manner, at the time and with the effect provided in the Indenture. Holders of Notes may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee is not obligated to enforce the Indenture or the Notes unless it has received indemnity reasonably satisfactory to it. The Indenture permits, subject to certain limitations therein provided, Holders of a majority in aggregate principal amount of the Notes then outstanding to direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of Notes notice of any continuing Default or Event of Default (except a Default in payment of principal or interest when due, for any reason or a Default in compliance with Article Five of the Indenture) if it determines that withholding notice is in their interest. 16. TRUSTEE DEALINGS WITH THE COMPANY AND ITS SUBSIDIARIES. The Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with the Company, its Subsidiaries or their respective Affiliates as if it were not the Trustee. 17. NO RECOURSE AGAINST OTHERS. No director, officer, employee, shareholder or incorporator, as such, of the Company or any Subsidiary Guarantor, as such, shall have any liability for any obligation of the Company under the Notes, the Indenture or the Registration Rights Agreement 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 the issuance of the Notes. 18. AUTHENTICATION. This Note shall not be valid until the Trustee or Authenticating Agent manually signs the certificate of authentication on this Note. 19. GOVERNING LAW. This Note and the Indenture shall be governed by and construed in accordance with the laws of the State of New York, as applied to contracts made and per- B-8 formed within the State of New York, without regard to principles of conflict of laws. Each of the parties hereto agrees to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to this Note. 20. ABBREVIATIONS AND DEFINED TERMS. Customary abbreviations may be used in the name of a Holder of a Note 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). 21. 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 Notes as a convenience to the Holders of the Notes. No representation is made as to the accuracy of such numbers as printed on the Notes and reliance may be placed only on the other identification numbers printed hereon. The Company will furnish to any Holder of a Note upon written request and without charge a copy of the Indenture, which has the text of this Note. Requests may be made to: Elgar Holdings, Inc., 9250 Brown Deer Road, San Diego, CA 92121, Facsimile No.: (619) 458-0257, Attention: Chief Financial Officer. B-9 ASSIGNMENT FORM If you the Holder want to assign this Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Note to: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint _______________________________________________________, agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Dated: Signed: ----------------------- -------------------------------- (Sign exactly as name appears on the other side of this Note) Signature Guarantee: ----------------------------------- B-10 [OPTION OF HOLDER TO ELECT PURCHASE] If you want to elect to have this Note purchased by the Company pursuant to Section 4.14 or Section 4.15 of the Indenture, check the appropriate box: Section 4.14 [ ] Section 4.15 [ ] If you want to elect to have only part of this Note purchased by the Company pursuant to Section 4.14 or Section 4.15 of the Indenture, state the amount you elect to have purchased: $ ------------------- Dated: --------------- ------------------------------------------ NOTICE: The signature on this assignment must correspond with the name as it appears upon the face of the within Note in every particular without alteration or enlargement or any change whatsoever and be guaranteed. Signature Guarantee: -------------------------------- B-11 EXHIBIT C Form of Certificate To Be Delivered in Connection with Transfers to Non-QIB Accredited Investors ----------------------------------------- [ ], [ ] United States Trust Company of New York 114 West 47th Street 25th Floor New York, NY 10036 Ladies and Gentlemen: In connection with our proposed purchase of 9 7/8% Senior Notes due 2008 (the "Notes") of JFL-EEC Merger Sub Co., a Delaware corporation (the "Company"), we confirm that: 1. We have received a copy of the Offering Memorandum (the "Offering Memorandum"), dated January 30, 1998, relating to the Notes and such other information as we deem necessary in order to make our investment decision. We acknowledge that we have read and agreed to the matters stated in the section entitled "Transfer Restrictions" of such Offering Memorandum. 2. We understand that any subsequent transfer of the Notes is subject to certain restrictions and conditions set forth in the Indenture relating to the Notes (the "Indenture") as described in the Offering Memorandum and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Notes except in compliance with, such restrictions and conditions and the Securities Act of 1933, as amended (the "Securities Act"), and all applicable State securities laws. 3. We understand that the offer and sale of the Notes have not been registered under the Securities Act, and that the Notes may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell any Notes, we will do so only (i) to the Company or any subsidiary thereof, (ii) inside the United States in accordance with Rule 144A under the Securities Act to a "qualified institutional buyer" (as de- C-1 fined in Rule 144A promulgated under the Securities Act), (iii) inside the United States to an institutional "accredited investor" (as defined below) that, prior to such transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the Trustee (as defined in the Indenture) a signed letter containing certain representations and agreements relating to the restrictions on transfer of the Notes (the form of which letter can be obtained from the Trustee), (iv) outside the United States in accordance with Rule 904 of Regulation S promulgated under the Securities Act to non-U.S. persons, (v) pursuant to the exemption from registration provided by Rule 144 under the Securities Act (if available), or (vi) pursuant to an effective registration statement under the Securities Act, and we further agree to provide to any person purchasing any of the Notes from us a notice advising such purchaser that resales of the Notes are restricted as stated herein. 4. We understand that, on any proposed resale of any Notes, we will be required to furnish to the Trustee and the Company such certification, legal opinions and other information as the Trustee 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. 5. 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 their investment, as the case may be. 6. We are acquiring the Notes purchased by us for our 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. C-2 You, the Company, the Trustee and others 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 proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, [Name of Transferee] By: ----------------------------------- Name: Title: C-3 EXHIBIT D FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION WITH TRANSFERS PURSUANT TO REGULATION S [ ], [ ] United States Trust Company of New York 114 West 47th Street 25th Floor New York, New York 10036 Re: JFL-ECC Merger SubCo. (the "Company") 9 7/8% Senior Notes due 2008 (the "Notes") ------------------------------------ Ladies and Gentlemen: In connection with our proposed sale of aggregate principal amount of the Notes, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: (1) the offer of the Notes was not made to a person in the United States; (2) either (a) at the time the buy offer was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States, or (b) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre-arranged with a buyer in the United States; (3) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; and (5) we have advised the transferee of the transfer restrictions applicable to the Notes. D-1 You, the Company and counsel for 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. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By: ---------------------------- Authorized Signature D-2 EXHIBIT E FORM OF NOTE GUARANTEE For value received, the undersigned hereby unconditionally guarantees, as principal obligor and not only as a surety, to the Holder of this Note the cash payments in United States dollars of principal of, premium, if any, and interest and Additional Interest, if any, on this Note in the amounts and at the times when due and interest on the overdue principal, premium, if any, and interest and Additional Interest, if any, of this Note, if lawful, and the payment or performance of all other obligations of the Company under the Indenture (as defined below) or the Notes, to the Holder of this Note and the Trustee, all in accordance with and subject to the terms and limitations of this Note, Article Ten of the Indenture and this Note Guarantee. This Note Guarantee will become effective in accordance with Article Ten of the Indenture and its terms shall be evidenced therein. The validity and enforceability of any Note Guarantee shall not be affected by the fact that it is not affixed to any particular Note. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Indenture dated as of February 3, 1998, between JFL-EEC Merger Sub Co., a Delaware corporation, as Company (the "Company") and United States Trust Company of New York, as Trustee (the "Trustee"), as amended or supplemented (the "Indenture"). The obligations of the undersigned to the Holders of Notes and to the Trustee pursuant to this Note Guarantee and the Indenture are expressly set forth in Article Ten of the Indenture and reference is hereby made to the Indenture for the precise terms of this Note Guarantee and all of the other provisions of the Indenture to which this Note Guarantee relates. THIS NOTE GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. Each Subsidiary Guarantor hereby agrees to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to this Note Guarantee. This Note Guarantee is subject to release upon the terms set forth in the Indenture. E-1 IN WITNESS WHEREOF, the Subsidiary Guarantor has caused its Note Guarantee to be duly executed. Date:______________ [Subsidiary Guarantor], as Subsidiary Guarantor By: ------------------------------------- Name: Title: By: ------------------------------------- Name: Title: E-2 EXHIBIT F FORM OF CERTIFICATION TO BE GIVEN BY HOLDERS OF BENEFICIAL INTEREST IN A TEMPORARY REGULATION S GLOBAL SECURITY TO EUROCLEAR OR CEDEL OWNER SECURITIES CERTIFICATION JFL-EEC Merger Sub Co. 9 7/8% Senior Notes due 2008 Reference is hereby made to the Indenture, dated as of February 3, 1998 (the "INDENTURE"), by and between JFL-EEC Merger Sub Co., as Issuer and United States Trust Company of New York, as Trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This is to certify that, as of the date hereof, $ of the above-captioned Notes (the "NOTES") are beneficially owned by non-U.S. person(s). As used in this paragraph, the term "U.S. person" has the meaning given to it by Regulation S under the Securities Act of 1933, as amended. We undertake to advise you promptly by tested telex on or prior to the date on which you intend to submit your certification relating to the Notes held by you for our account in accordance with your operating procedures if any applicable statement herein is not correct on such date, and in the absence of any such notification it may be assumed that this certification applies as of such date. F-1 We understand that this certificate is required in connection with certain securities laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with which this certificate is or would be relevant, we irrevocably authorize you to produce this certificate to any interested party in such proceedings. This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer and the Initial Purchaser. Dated: __________, ____ By: ----------------------------------- As, or as agent for, the beneficial owner(s) of the Notes to which this certificate relates. F-2 EXHIBIT G FORM OF CERTIFICATION TO BE GIVEN BY THE EUROCLEAR OPERATOR OR CEDEL BANK, SOCIETE ANONYME DEPOSITORY SECURITIES CERTIFICATION JFL-EEC Merger Sub co. 9 7/8% Senior Notes due 2008 Reference is hereby made to the Indenture, dated as of February 3, 1998 (the "Indenture"), by and between JFL-EEC Merger Sub Co., as Issuer and United States Trust Company of New York, as Trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This is to certify that, with respect to U.S.$ principal amount of the above-captioned Notes (the "Notes"), except as set forth below, we have received in writing, by tested telex or by electronic transmission, from member organizations appearing in our records as persons being entitled to a portion of the principal amount of the Note (our "Member Organizations"), certifications with respect to such portion, substantially to the effect set forth in the Indenture.* We further certify (i) that we are not making available herewith for exchange (or, if relevant, exercise of any rights or collection of any interest) any portion of the Temporary Regulation S Global Note excepted in such certifications and (ii) that as of the date hereof we have not received any notification from any of our Member Organizations to the effect that the statements made by such Member Organizations with respect to any portion of the part submitted herewith for exchange (or, if relevant, exercise of any rights or collection of any interest) are no longer true and cannot be relied upon as of the date hereof. - ---------------- * Unless Morgan Guaranty Trust Company of New York, London Branch is otherwise informed by the Agent, the long form certificate set out in the Operating Procedures will be Footnote continued on next page. G-1 We understand that this certification is required in connection with certain securities laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with which this certification is or would be relevant, we irrevocably authorize you to produce this certification to any interested party in such proceedings. This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer and the Initial Purchasers. Dated: ___________, ____ Yours faithfully, [MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as operator of the Euroclear System] or [CEDEL BANK, SOCIETE ANONYME] By: --------------------------------- - -------------------- Footnote continued from previous page. deemed to meet the requirements of this sentence. G-2 EX-4.2 11 EXHIBIT 4.2 ELGAR HOLDINGS, INC. as Issuer ELGAR ELECTRONICS CORPORATION, as Subsidiary Guarantor and UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee ---------------------- FIRST SUPPLEMENTAL INDENTURE Dated as of February 3, 1998 to INDENTURE Dated as of February 3, 1998 between JFL-EEC MERGER SUB CO., as Issuer and UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee ---------------------- up to $150,000,000 9 7/8% Senior Notes due 2008, Series A 9 7/8% Senior Notes due 2008, Series B FIRST SUPPLEMENTAL INDENTURE, dated as of February 3, 1998, between ELGAR HOLDINGS, INC., a Delaware corporation ("EHI"), ELGAR ELECTRONICS CORPORATION, a California corporation and a wholly owned subsidiary of EHI ("Elgar"), and UNITED STATES TRUST COMPANY OF NEW YORK, as trustee (the "Trustee"). WHEREAS, JFL-EEC Merger Sub Co., a Delaware corporation ("MergerCo"), has heretofore executed and delivered to the Trustee an Indenture dated as of February 3, 1998 (the "Indenture"), providing for the issuance of its 9 7/8% Senior Notes due 2008, Series A initially in the principal amount of $90,000,000 and thereafter in an additional principal amount, if any, up to $60,000,000 (the "Initial Notes") and its 9 7/8% Senior Notes due 2008, Series B (the "Exchange Notes" and, together with the Initial Notes, the "Notes"); and WHEREAS, MergerCo has merged with and into EHI and, in connection herewith, EHI has assumed by operation of law all of MergerCo's debts, liabilities, duties and obligations, including MergerCo's obligations in respect of the Notes and under the Indenture; and WHEREAS, Elgar is required pursuant to the Indenture to become a party thereto and to guarantee (the "Note Guarantee") the obligations of MergerCo in respect of the Notes and under the Indenture as the Subsidiary Guarantor; and WHEREAS, EHI and Elgar desire by this First Supplemental Indenture, pursuant to and as contemplated by Sections 5.01 and 9.01 of the Indenture, to expressly assume the covenants, agreements and undertakings of MergerCo and the Subsidiary Guarantor, respectively, in the Indenture and under the Notes; and WHEREAS, the execution and delivery of this First Supplemental Indenture and the notes evidencing the Initial Notes and the Exchange Notes substantially in the form attached hereto as Exhibits A and B, respectively, have been authorized by a resolution of the Board of Directors of EHI; and WHEREAS, the execution and delivery of this First Supplemental Indenture and the guarantee evidencing the Note Guarantee substantially in the form attached hereto as Exhibit E have been authorized by a resolution of the Board of Directors of Elgar; and WHEREAS, EHI and Elgar authorize the Trustee to cancel the 9 7/8% Senior Notes due 2008, Series A and the 9 7/8% -2- Senior Notes due 2008, Series B of MergerCo and to authenticate 9 7/8% Senior Notes due 2008, Series A and 9 7/8% Senior Notes due 2008, Series B of EHI, each series as guaranteed by Elgar; and WHEREAS, all conditions and requirements necessary to make each of this First Supplemental Indenture and the Notes a valid, binding and legal instrument in accordance with its terms upon EHI and the Trustee, and each of this First Supplemental Indenture and the Note Guarantee a valid, binding and legal instrument in accordance with its terms upon Elgar and the Trustee, have been performed and fulfilled by the applicable parties hereto and the execution and delivery thereof have been in all respects duly authorized by the applicable parties hereto. NOW, THEREFORE, in consideration of the above premises, each party agrees, for the benefit of the others and for the equal and ratable benefit of the Holders of the Notes, as follows: ARTICLE ONE ASSUMPTION OF OBLIGATIONS SECTION 1.01. ASSUMPTION OF OBLIGATIONS OF MERGERCO. (a) EHI hereby expressly and unconditionally assumes each and every covenant, agreement and undertaking of MergerCo in the Indenture as if EHI had been the original issuer of the Notes, and also hereby expressly and unconditionally assumes each and every covenant, agreement and undertaking in each Note outstanding on the date of this First Supplemental Indenture. (b) Promptly following the execution and delivery of this First Supplemental Indenture, the Trustee shall, upon the written order of the Company in the form of an Officers' Certificate of the Company, authenticate and deliver Initial Notes substantially in the form of Exhibit A hereto in exchange for the outstanding Initial Notes. SECTION 1.02. ASSUMPTION OF OBLIGATIONS OF THE SUBSIDIARY GUARANTOR. Elgar hereby expressly and unconditionally assumes each and every covenant, agreement and undertaking of the Sub- -3- sidiary Guarantor in the Indenture and also hereby expressly and unconditionally assumes each and every covenant, agreement and undertaking relating to the Subsidiary Guarantor in each Note outstanding on the date of this First Supplemental Indenture. SECTION 1.03. EXCHANGE OF OUTSTANDING NOTES; EXHIBITS. Exhibits A, B, C, D, E, F and G of the Indenture are hereby deleted and replaced in their entirety by Exhibits A, B, C, D, E, F and G, respectively, hereto. ARTICLE TWO MISCELLANEOUS PROVISIONS SECTION 2.01. TERMS DEFINED. For all purposes of this First Supplemental Indenture, except as otherwise defined or unless the context otherwise requires, terms used in capitalized form in this First Supplemental Indenture and defined in the Indenture have the meanings specified in the Indenture. SECTION 2.02. INDENTURE. Except as amended hereby, the Indenture, the Notes and the Note Guarantees are in all respects ratified and confirmed and all the terms shall remain in full force and effect. SECTION 2.03. GOVERNING LAW. THIS FIRST SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. SECTION 2.04. SUCCESSORS. All agreements of EHI and Elgar in this First Supplemental Indenture, the Notes and the Note Guarantee shall bind their respective successors. All agreements of the Trustee in this First Supplemental Indenture shall bind its successors. -4- SECTION 2.05. DUPLICATE ORIGINALS. The parties may sign any number of copies of this First Supplemental Indenture. Each signed copy shall be an original, but all of them together shall represent the same agreement. SECTION 2.06. TRUSTEE DISCLAIMER. The Trustee accepts the amendment of the Indenture effected by this First Supplemental Indenture and agrees to execute the trust created by the Indenture as hereby amended, but only upon the terms and conditions set forth in the Indenture, including the terms and provisions defining and limiting the liabilities and responsibilities of the Trustee, which terms and provisions shall in like manner define and limit its liabilities and responsibilities in the performance of the trust created by the Indenture as hereby amended and, without limiting the generality of the foregoing, the Trustee shall not be responsible in any manner whatsoever for or with respect to any of the recitals or statements contained herein, all of which recitals or statements are made solely by EHI and Elgar, or for or with respect to (i) the validity of the terms of this First Supplemental Indenture or any of the terms or provisions hereof, (ii) the proper authorization hereof by EHI and Elgar by corporate action or otherwise, (iii) the due execution hereof by EHI and Elgar or (iv) the consequences (direct or indirect and whether deliberate or inadvertent) of any amendment herein provided for, and the Trustee makes no representation with respect to any such matters. [Signature Page Follows] SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed, all as of the date first written above. ELGAR HOLDINGS, Inc., as Issuer By: /s/ Donald Glickman ------------------------------------ Name: Donald Glickman Title: President ELGAR ELECTRONICS CORPORATION, as Subsidiary Guarantor By: /s/ Christopher W. Kelford ------------------------------------ Name: Christopher W. Kelford Title: Vice President--Finance, Chief Financial Officer and Treasurer UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee By: /s/ Cynthia Chaney ------------------------------------ Name: Cynthia Chaney Title: Assistant Vice President EXHIBIT A CUSIP No.: [ ] ELGAR HOLDINGS, INC. 9 7/8% SENIOR NOTE DUE 2008, SERIES A No. [ ] $ ELGAR HOLDINGS, INC., a Delaware corporation (the "Company"), for value received promises to pay to or registered assigns the principal sum of Dollars [(as such amount may be increased or decreased from time to time by adjustments made on the records of the Trustee, as custodian for the Depository)]* on February 1, 2008. Interest Payment Dates: February 1 and August 1, commencing August 1, 1998 Record Dates: January 15 and July 15 Reference is made to the further provisions of this Note contained herein, which will for all purposes have the same effect as if set forth at this place. - -------------------- * Language to be included in Global Notes only. A-1 IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by its duly authorized officers. ELGAR HOLDINGS, INC. By: ------------------------------------ Name: Title: By: ------------------------------------ Name: Title: Dated: A-2 Certificate of Authentication This is one of the 9 7/8% Senior Notes, Series A due 2008 referred to in the within-mentioned Indenture. UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee By: ---------------------------------- Authorized Signatory A-3 (REVERSE OF SECURITY) 9 7/8% Senior Note due 2008, Series A 1. INTEREST. ELGAR HOLDINGS, INC., a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Note at the rate per annum shown above. Interest on the Notes will accrue from the most recent date on which interest has been paid or, if no interest has been paid, from February 3, 1998. The Company will pay interest semi-annually in arrears on each Interest Payment Date, commencing August 1, 1998. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal and on overdue installments of interest from time to time on demand at the rate borne by the Notes and on overdue installments of interest (without regard to any applicable grace periods) to the extent lawful. 2. METHOD OF PAYMENT. The Company shall pay interest on the Notes (except defaulted interest) to the Persons who are the registered Holders at the close of business on the Record Date immediately preceding the Interest Payment Date even if the Notes are cancelled on registration of transfer or registration of exchange (including pursuant to an Exchange Offer (as defined in the Registration Rights Agreement)) after such Record Date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Company shall pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts ("U.S. Legal Tender"). However, the Company may pay principal and interest by its check payable in such U.S. Legal Tender or by wire transfer of immediately available funds. The Company may deliver any such interest payment to the Paying Agent or to a Holder at the Holder's registered address. 3. PAYING AGENT AND REGISTRAR. Initially, United States Trust Company of New York (the "Trustee") will act as Paying Agent and Registrar. The Company may change any Paying Agent, Registrar or co-Registrar without notice to the Holders. 4. INDENTURE. The Company issued the Notes under an Indenture, dated as of February 3, 1998 (as supplemented by the First Supplemental Indenture thereto, dated as of February 3, 1998, the "Indenture"), among the Company, the Subsidiary Guarantor and the Trustee. This Note is one of a duly authorized issue of Initial Notes of the Company designated as its 9 7/8% A-4 Senior Notes due 2008, Series A (the "Initial Notes"). The Notes are limited (except as otherwise provided in the Indenture) in aggregate principal amount to $150,000,000, which may be issued under the Indenture; PROVIDED the principal amount of Initial Notes issued on the Issue Date is $90,000,000. The Notes include the Initial Notes, the Private Exchange Notes and the Exchange Notes issued in exchange for the Initial Notes pursuant to the Registration Rights Agreement. The Initial Notes and the Exchange Notes are treated as a single class of securities under the Indenture. Capitalized terms herein are used as defined in the Indenture unless otherwise defined herein. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture. Notwithstanding anything to the contrary herein, the Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and said Act for a statement of them. The Notes are general unsecured obligations of the Company. Each Holder, by accepting a Note, agrees to be bound by all of the terms and provisions of the Indenture, as the same may be amended from time to time in accordance with its terms. 5. OPTIONAL REDEMPTION. The Notes will be redeemable, at the Company's option, in whole at any time or in part from time to time, on and after February 1, 2003, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on February 1 of the years set forth below, plus, in each case, accrued and unpaid interest thereon and Additional Interest, if any, to the date of redemption:
Year Percentage ---- ---------- 2003................... 104.938% 2004................... 103.292% 2005................... 101.646% 2006 and thereafter.... 100.000%
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from time to time, on or prior to February 1, 2001, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings to redeem up to 35% of the sum of (i) the initial aggregate principal amount of Notes issued in the Offering and (ii) the respective initial aggre- A-5 gate principal amounts of Notes issued under the Indenture after the Issue Date at a redemption price equal to 109.875% of the principal amount thereof plus accrued and unpaid interest thereon and Additional Interest, if any, to the date of redemption; PROVIDED that at least 65% of the sum of (i) the initial aggregate principal amount of Notes issued in the Offering and (ii) the respective initial aggregate principal amounts of Notes issued under the Indenture after the Issue Date, remains outstanding immediately after any such redemption. In order to effect the foregoing redemption with the proceeds of any Public Equity Offering, the Company shall make such redemption not more than 120 days after the consummation of any such Public Equity Offering. OPTIONAL REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of Control prior to February 1, 2003, the Notes will be redeemable, in whole or in part, at the option of the Company, upon not less than 30 nor more than 60 days prior notice to each holder of Notes to be redeemed, at a redemption price equal to the sum of (i) the then outstanding principal amount thereof plus (ii) accrued and unpaid interest thereon and Additional Interest, if any, to the redemption date plus (iii) the Applicable Premium. 6. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at such Holder's registered address. Notes in denominations larger than $1,000 may be redeemed in part. Except as set forth in the Indenture, if monies for the redemption of the Notes called for redemption shall have been deposited with the Paying Agent for redemption on such Redemption Date, then, unless the Company defaults in the payment of such redemption price plus accrued interest, if any, the Notes called for redemption will cease to bear interest from and after such Redemption Date and the only right of the Holders of such Notes will be to receive payment of the redemption price plus accrued interest, if any. 7. OFFERS TO PURCHASE. Sections 4.14 and 4.15 of the Indenture provide that, after certain Asset Sales and upon the occurrence of a Change of Control, and subject to further limitations contained therein, the Company will make an offer to purchase certain amounts of the Notes in accordance with the procedures set forth in the Indenture. A-6 8. REGISTRATION RIGHTS. Pursuant to a Registration Rights Agreement between the Company and the Initial Purchaser, the Company will be obligated to consummate an exchange offer pursuant to which the Holder of this Note shall have the right to exchange this Note for Exchange Notes, which have been registered under the Securities Act, in like principal amount and having terms identical in all material respects as the Initial Notes. The Holders of the Initial Notes shall be entitled to receive certain additional interest payments in the event such exchange offer is not consummated and upon certain other conditions, all pursuant to and in accordance with the terms of the Registration Rights Agreement. 9. DENOMINATIONS; TRANSFER; EXCHANGE. The Notes are in registered form, without coupons, and in denominations of $1,000 and integral multiples of $1,000. A Holder shall register the transfer of or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay certain transfer taxes or similar governmental charges payable in connection therewith as permitted by the Indenture. The Registrar need not register the transfer of or exchange of any Notes or portions thereof selected for redemption. 10. PERSONS DEEMED OWNERS. The registered Holder of a Note shall be treated as the owner of it for all purposes. 11. UNCLAIMED MONEY. If money for the payment of principal or interest remains unclaimed for one year, the Trustee and the Paying Agent will pay the money back to the Company. After that, all liability of the Trustee and such Paying Agent with respect to such money shall cease. 12. DISCHARGE PRIOR TO REDEMPTION OR MATURITY. If the Company at any time deposits with the Trustee U.S. Legal Tender sufficient to pay the principal of and interest on the Notes to redemption or maturity and complies with the other provisions of the Indenture relating thereto, the Company and each Subsidiary Guarantor will be discharged from certain provisions of the Indenture and the Notes (including certain covenants, and including, under certain circumstances, their obligation to pay the principal of and interest on the Notes but without affecting the rights of the Holders to receive such amounts from such deposits). 13. AMENDMENT; SUPPLEMENT; WAIVER. Subject to certain exceptions set forth in the Indenture, the Indenture or A-7 the Notes may be amended or supplemented with the written consent of the Holders of a majority in aggregate principal amount of the Notes then outstanding, and any past Default or Event of Default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in aggregate principal amount of the Notes then outstanding. Without notice to or consent of any Holder, the parties thereto may amend or supplement the Indenture or the Notes to, among other things, cure any ambiguity, defect or inconsistency, provide for uncertificated Notes in addition to or in place of certificated Notes, comply with any requirements of the Commission in order to effect or maintain the qualification of the Indenture under the TIA or comply with Article Five of the Indenture or make any other change that does not adversely affect the rights of any Holder of a Note. 14. RESTRICTIVE COVENANTS. The Indenture imposes certain limitations on the ability of the Company and its Restricted Subsidiaries to, among other things, incur additional Indebtedness, pay dividends or make certain other Restricted Payments, consummate certain Asset Sales, enter into certain transactions with Affiliates, incur liens, impose restrictions on the ability of a Subsidiary to pay dividends or make certain payments to the Company and its Subsidiaries, merge or consolidate with any other Person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Such limitations are subject to a number of important qualifications and exceptions. Pursuant to Section 4.06 of the Indenture, the Company must annually report to the Trustee on compliance with such limitations. 15. SUCCESSORS. When a successor assumes, in accordance with the Indenture, all the obligations of its predecessor under the Notes and the Indenture, the predecessor, subject to certain exceptions, will be released from those obligations. 16. DEFAULTS AND REMEDIES. If an Event of Default occurs and is continuing, the Trustee or the Holders of not less than 25% in aggregate principal amount of Notes then outstanding may declare all the Notes to be due and payable in the manner, at the time and with the effect provided in the Indenture. Holders of Notes may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee is not obligated to enforce the Indenture or the Notes unless it has received indemnity reasonably satisfactory to it. The Indenture permits, subject to certain limitations therein provided, Holders of a majority in aggregate principal amount of the Notes then outstanding to direct the Trustee in its exercise of A-8 any trust or power. The Trustee may withhold from Holders of Notes notice of any continuing Default or Event of Default (except a Default in payment of principal or interest when due, for any reason or a Default in compliance with Article Five of the Indenture) if it determines that withholding notice is in their interest. 17. TRUSTEE DEALINGS WITH THE COMPANY AND ITS SUBSIDIARIES. The Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with the Company, its Subsidiaries or their respective Affiliates as if it were not the Trustee. 18. NO RECOURSE AGAINST OTHERS. No director, officer, employee, shareholder or incorporator as such, of the Company or any Subsidiary Guarantor, as such, shall have any liability for any obligation of the Company under the Notes, the Indenture or the Registration Rights Agreement 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 the issuance of the Notes. 19. AUTHENTICATION. This Note shall not be valid until the Trustee or Authenticating Agent manually signs the certificate of authentication on this Note. 20. GOVERNING LAW. This Note and the Indenture shall be governed by and construed in accordance with the laws of the State of New York, as applied to contracts made and performed within the State of New York, without regard to principles of conflict of laws. Each of the parties hereto agrees to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to this Note. 21. ABBREVIATIONS AND DEFINED TERMS. Customary abbreviations may be used in the name of a Holder of a Note 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). 22. 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 Notes as a convenience to the Holders of the Notes. No representation is made as to the accuracy of such numbers as A-9 printed on the Notes and reliance may be placed only on the other identification numbers printed hereon. The Company will furnish to any Holder of a Note upon written request and without charge a copy of the Indenture, which has the text of this Note. Requests may be made to: Elgar Holdings, Inc., 9250 Brown Deer Road, San Diego, CA 92121, Facsimile No.: (619) 458-0257, Attention: Chief Financial Officer. A-10 ASSIGNMENT FORM If you the Holder want to assign this Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Note to: - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Print or type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint ______________________________________________________ , agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Dated: Signed: --------------- -------------------------------------------------- (Sign exactly as your name appears on the other side of this Note) Signature Guarantee: ------------------------------------------------------------ In connection with any transfer of this Note occurring prior to the date which is the earlier of (i) the date of the declaration by the Commission of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act") covering resales of this Note (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) February 3, 2000, the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer: [CHECK ONE] (1) __ to the Company or a subsidiary thereof; or (2) __ pursuant to and in compliance with Rule 144A under the Securities Act of 1933, as amended; or A-11 (3) __ to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933, as amended) that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter can be obtained from the Trustee); or (4) __ outside the United states to a "foreign person" in compliance with Rule 904 of Regulation S under the Securities Act of 1933, as amended; or (5) __ pursuant to the exemption from registration provided by Rule 144 under the Securities Act of 1933, as amended; or (6) __ pursuant to an effective registration statement under the Securities Act of 1933, as amended; or (7) __ pursuant to another available exemption from the registration requirements of the Securities Act of 1933, as amended. and unless the box below is checked, the undersigned confirms that such Note is not being transferred to an "affiliate" of the Company as defined in Rule 144 under the Securities Act of 1933, as amended (an "Affiliate"): / / The transferee is an Affiliate of the Company. Unless one of the items is checked, the Trustee will refuse to register any of the Notes evidenced by this certificate in the name of any person other than the registered Holder thereof; PROVIDED, HOWEVER, that if item (3), (4), (5) or (7) is checked, the Company or the Trustee may require, prior to registering any such transfer of the Notes, in their sole discretion, such written legal opinions, certifications (including an investment letter in the case of box (3) or (4)) and other information as the Trustee or the Company has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, as amended. A-12 If none of the foregoing items are checked, the Trustee or Registrar shall not be obligated to register this Note in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 2.17 of the Indenture shall have been satisfied. Dated: Signed: --------------- -------------------------------------------------- (Sign exactly as your name appears on the other side of this Note) Signature Guarantee: ------------------------------------------------------------ A-13 TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, as amended and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: ---------- -------------------------------------------------------- NOTICE: To be executed by an executive officer A-14 [OPTION OF HOLDER TO ELECT PURCHASE] If you want to elect to have this Note purchased by the Company pursuant to Section 4.14 or Section 4.15 of the Indenture, check the appropriate box: Section 4.14 [ ] Section 4.15 [ ] If you want to elect to have only part of this Note purchased by the Company pursuant to Section 4.14 or Section 4.15 of the Indenture, state the amount you elect to have purchased: $ -------------------- Dated: ------------- ---------------------------------------------------- NOTICE: The signature on this assignment must correspond with the name as it appears upon the face of the within Note in every particular without alteration or enlargement or any change whatsoever and be guaranteed. Signature Guarantee: --------------------------------------------------------- A-15 EXHIBIT B CUSIP No.: [ ] ELGAR HOLDINGS, INC. 9 7/8% SENIOR NOTE DUE 2008, SERIES B No. [ ] $ ELGAR HOLDINGS, INC., a Delaware corporation (the "Company"), for value received, promises to pay to or registered assigns the principal sum of Dollars [(as such amount may be increased or decreased from time to time by adjustments made on the records of the Trustee, as custodian for the Depository)]* on February 1, 2008. Interest Payment Dates: February 1 and August 1, commencing August 1, 1998 Record Dates: January 15 and July 15 Reference is made to the further provisions of this Note contained herein, which will for all purposes have the same effect as if set forth at this place. - ---------------------- * Language to be included in Global Notes only. B-1 IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by its duly authorized officers. ELGAR HOLDINGS, INC. By: ------------------------------------ Name: Title: By: ------------------------------------ Name: Title: Dated: B-2 Certificate of Authentication This is one of the 9 7/8% Senior Notes, Series B due 2008, Series B referred to in the within-mentioned Indenture. UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee By: ------------------------------------------ Authorized Signatory B-3 (REVERSE OF SECURITY) 9 7/8% Senior Note due 2008, Series B 1. INTEREST. ELGAR HOLDINGS, INC., a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Note at the rate per annum shown above. Interest on the Notes will accrue from the most recent date on which interest has been paid or, if no interest has been paid, from February 3, 1998. The Company will pay interest semi-annually in arrears on each Interest Payment Date, commencing August 1, 1998. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal and on overdue installments of interest from time to time on demand at the rate borne by the Notes and on overdue installments of interest (without regard to any applicable grace periods) to the extent lawful. 2. METHOD OF PAYMENT. The Company shall pay interest on the Notes (except defaulted interest) to the Persons who are the registered Holders at the close of business on the Record Date immediately preceding the Interest Payment Date even if the Notes are canceled on registration of transfer or registration of exchange after such Record Date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Company shall pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts ("U.S. Legal Tender"). However, the Company may pay principal and interest by its check payable in such U.S. Legal Tender or by wire transfer of immediately available funds. The Company may deliver any such interest payment to the Paying Agent or to a Holder at the Holder's registered address. 3. PAYING AGENT AND REGISTRAR. Initially, United States Trust Company of New York (the "Trustee") will act as Paying Agent and Registrar. The Company may change any Paying Agent, Registrar or co-Registrar without notice to the Holders. 4. INDENTURE. The Company issued the Notes under an Indenture, dated as of February 3, 1998 (as supplemented by the First Supplemental Indenture dated as of February 3, 1998, the "Indenture"), among the Company, the Subsidiary Guarantor and the Trustee. This Note is one of a duly authorized issue of Exchange Notes of the Company designated as its 9 7/8% Senior Notes due 2008, Series B (the "Exchange Notes"). The Notes B-4 include the 9 7/8% Notes due 2008, Series A (the "Initial Notes") and the Exchange Notes, issued in exchange for the Initial Notes pursuant to a Registration Rights Agreement. The Notes are limited (except as otherwise provided in the Indenture) in aggregate principal amount to $150,000,000, which may be issued under the Indenture; PROVIDED the principal amount of Initial Notes issued on the Issue Date was $90,000,000. The Initial Notes and the Exchange Notes are treated as a single class of securities under the Indenture. Capitalized terms herein are used as defined in the Indenture unless otherwise defined herein. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture. Notwithstanding anything to the contrary herein, the Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and said Act for a statement of them. The Notes are general unsecured obligations of the Company. Each Holder, by accepting a Note, agrees to be bound by all of the terms and provisions of the Indenture, as the same may be amended from time to time in accordance with its terms. 5. OPTIONAL REDEMPTION. The Notes will be redeemable, at the Company's option, in whole at any time or in part from time to time, on and after February 1, 2003, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on February 1 of the years set forth below, plus, in each case, accrued and unpaid interest thereon and Additional Interest, if any, to the date of redemption:
Year Percentage ----- ---------- 2003................. 104.938% 2004................. 103.292% 2005................. 101.646% 2006 and thereafter.. 100.000%
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from time to time, on or prior to February 1, 2001, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings to redeem up to 35% of the sum of (i) the initial aggregate principal amount of Notes issued in the Offering and (ii) the respective initial aggregate principal amounts of Notes issued under the Indenture af- B-5 ter the Issue Date at a redemption price equal to 109.875% of the principal amount thereof plus accrued and unpaid interest thereon and Additional Interest, if any, to the date of redemption; PROVIDED that at least 65% of the sum of (i) the initial aggregate principal amount of Notes issued in the Offering and (ii) the respective initial aggregate principal amounts of Notes issued under the Indenture after the Issue Date, remains outstanding immediately after any such redemption. In order to effect the foregoing redemption with the proceeds of any Public Equity Offering, the Company shall make such redemption not more than 120 days after the consummation of any such Public Equity Offering. OPTIONAL REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of Control prior to February 1, 2003, the Notes will be redeemable, in whole or in part, at the option of the Company, upon not less than 30 nor more than 60 days prior notice to each holder of Notes to be redeemed, at a redemption price equal to the sum of (i) the then outstanding principal amount thereof plus (ii) accrued and unpaid interest thereon and Additional Interest, if any, to the redemption date plus (iii) the Applicable Premium. 6. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at such Holder's registered address. Notes in denominations larger than $1,000 may be redeemed in part. Except as set forth in the Indenture, if monies for the redemption of the Notes called for redemption shall have been deposited with the Paying Agent for redemption on such Redemption Date, then, unless the Company defaults in the payment of such redemption price plus accrued interest, if any, the Notes called for redemption will cease to bear interest from and after such Redemption Date and the only right of the Holders of such Notes will be to receive payment of the redemption price plus accrued interest, if any. 7. OFFERS TO PURCHASE. Sections 4.14 and 4.15 of the Indenture provide that, after certain Asset Sales and upon the occurrence of a Change of Control, and subject to further limitations contained therein, the Company will make an offer to purchase certain amounts of the Notes in accordance with the procedures set forth in the Indenture. 8. DENOMINATIONS; TRANSFER; EXCHANGE. The Notes are in registered form, without coupons, and in denominations B-6 of $1,000 and integral multiples of $1,000. A Holder shall register the transfer of or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay certain transfer taxes or similar governmental charges payable in connection therewith as permitted by the Indenture. The Registrar need not register the transfer of or exchange of any Notes or portions thereof selected for redemption. 9. PERSONS DEEMED OWNERS. The registered Holder of a Note shall be treated as the owner of it for all purposes. 10. UNCLAIMED MONEY. If money for the payment of principal or interest remains unclaimed for one year, the Trustee and the Paying Agent will pay the money back to the Company. After that, all liability of the Trustee and such Paying Agent with respect to such money shall cease. 11. DISCHARGE PRIOR TO REDEMPTION OR MATURITY. If the Company at any time deposits with the Trustee U.S. Legal Tender sufficient to pay the principal of and interest on the Notes to redemption and complies with the other provisions of the Indenture relating thereto, the Company and each Subsidiary Guarantor will be discharged from certain provisions of the Indenture and the Notes (including certain covenants, and including, under certain circumstances, their obligation to pay the principal of and interest on the Notes but without affecting the rights of the Holders to receive such amounts from such deposit). 12. AMENDMENT; SUPPLEMENT; WAIVER. Subject to certain exceptions set forth in the Indenture, the Indenture or the Notes may be amended or supplemented with the written consent of the Holders of a majority in aggregate principal amount of the Notes then outstanding, and any past Default or Event of Default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in aggregate principal amount of the Notes then outstanding. Without notice to or consent of any Holder, the parties thereto may amend or supplement the Indenture or the Notes to, among other things, cure any ambiguity, defect or inconsistency, provide for uncertificated Notes in addition to or in place of certificated Notes, comply with any requirements of the Commission in order to effect or maintain the qualification of the Indenture under the TIA or comply with Article Five of the Indenture or make any other change that does not adversely affect the rights of any Holder of a Note. B-7 13. RESTRICTIVE COVENANTS. The Indenture imposes certain limitations on the ability of the Company and its Restricted Subsidiaries to, among other things, incur additional Indebtedness, pay dividends or make certain other Restricted Payments, consummate certain Asset Sales, enter into certain transactions with Affiliates, incur liens, impose restrictions on the ability of a Subsidiary to pay dividends or make certain payments to the Company and its Subsidiaries, merge or consolidate with any other Person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Such limitations are subject to a number of important qualifications and exceptions. Pursuant to Section 4.06 of the Indenture, the Company must annually report to the Trustee on compliance with such limitations. 14. SUCCESSORS. When a successor assumes, in accordance with the Indenture, all the obligations of its predecessor under the Notes and the Indenture, the predecessor, subject to certain exceptions, will be released from those obligations. 15. DEFAULTS AND REMEDIES. If an Event of Default occurs and is continuing, the Trustee or the Holders of not less than 25% in aggregate principal amount of Notes then outstanding may declare all the Notes to be due and payable in the manner, at the time and with the effect provided in the Indenture. Holders of Notes may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee is not obligated to enforce the Indenture or the Notes unless it has received indemnity reasonably satisfactory to it. The Indenture permits, subject to certain limitations therein provided, Holders of a majority in aggregate principal amount of the Notes then outstanding to direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of Notes notice of any continuing Default or Event of Default (except a Default in payment of principal or interest when due, for any reason or a Default in compliance with Article Five of the Indenture) if it determines that withholding notice is in their interest. 16. TRUSTEE DEALINGS WITH THE COMPANY AND ITS SUBSIDIARIES. The Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with the Company, its Subsidiaries or their respective Affiliates as if it were not the Trustee. 17. NO RECOURSE AGAINST OTHERS. No director, officer, employee, shareholder or incorporator as such, of the Company or any Subsidiary Guarantor, as such, shall have any li- B-8 ability for any obligation of the Company under the Notes, the Indenture or the Registration Rights Agreement 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 the issuance of the Notes. 18. AUTHENTICATION. This Note shall not be valid until the Trustee or Authenticating Agent manually signs the certificate of authentication on this Note. 19. GOVERNING LAW. This Note and the Indenture shall be governed by and construed in accordance with the laws of the State of New York, as applied to contracts made and performed within the State of New York, without regard to principles of conflict of laws. Each of the parties hereto agrees to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to this Note. 20. ABBREVIATIONS AND DEFINED TERMS. Customary abbreviations may be used in the name of a Holder of a Note 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). 21. 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 Notes as a convenience to the Holders of the Notes. No representation is made as to the accuracy of such numbers as printed on the Notes and reliance may be placed only on the other identification numbers printed hereon. The Company will furnish to any Holder of a Note upon written request and without charge a copy of the Indenture, which has the text of this Note. Requests may be made to: Elgar Holdings, Inc., 9250 Brown Deer Road, San Diego, CA 92121, Facsimile No.: (619) 458-0257, Attention: Chief Financial Officer. B-9 ASSIGNMENT FORM If you the Holder want to assign this Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Note to: - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Print or type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint -------------------------------------------------------, agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Dated: Signed: --------------- -------------------------------------------------- (Sign exactly as your name appears on the other side of this Note) Signature Guarantee: ------------------------------------------------------------ B-10 [OPTION OF HOLDER TO ELECT PURCHASE] If you want to elect to have this Note purchased by the Company pursuant to Section 4.14 or Section 4.15 of the Indenture, check the appropriate box: Section 4.14 [ ] Section 4.15 [ ] If you want to elect to have only part of this Note purchased by the Company pursuant to Section 4.14 or Section 4.15 of the Indenture, state the amount you elect to have purchased: $ --------------------- Dated: ---------------- ---------------------------------------------- NOTICE: The signature on this assignment must correspond with the name as it appears upon the face of the within Note in every particular without alteration or enlargement or any change whatsoever and be guaranteed. Signature Guarantee: ----------------------------------------------- B-11 EXHIBIT C Form of Certificate To Be Delivered in Connection with Transfers to Non-QIB Accredited Investors ----------------------------------------- [ ], [ ] United States Trust Company of New York 114 West 47th Street 25th Floor New York, NY 10036 Ladies and Gentlemen: In connection with our proposed purchase of 9 7/8% Senior Notes due 2008 (the "Notes") of EHI Holdings, Inc., a Delaware corporation (the "Company"), we confirm that: 1. We have received a copy of the Offering Memorandum (the "Offering Memorandum"), dated January 30, 1998, relating to the Notes and such other information as we deem necessary in order to make our investment decision. We acknowledge that we have read and agreed to the matters stated in the section entitled "Transfer Restrictions" of such Offering Memorandum. 2. We understand that any subsequent transfer of the Notes is subject to certain restrictions and conditions set forth in the Indenture relating to the Notes (the "Indenture") as described in the Offering Memorandum and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Notes except in compliance with, such restrictions and conditions and the Securities Act of 1933, as amended (the "Securities Act"), and all applicable State securities laws. 3. We understand that the offer and sale of the Notes have not been registered under the Securities Act, and that the Notes may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell any Notes, we will do so only (i) to the Company or any subsidiary thereof, (ii) inside the United States in accordance with Rule 144A under the Securities Act to a "qualified institutional buyer" (as defined C-1 in Rule 144A promulgated under the Securities Act), (iii) inside the United States to an institutional "accredited investor" (as defined below) that, prior to such transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the Trustee (as defined in the Indenture) a signed letter containing certain representations and agreements relating to the restrictions on transfer of the Notes (the form of which letter can be obtained from the Trustee), (iv) outside the United States in accordance with Rule 904 of Regulation S promulgated under the Securities Act to non-U.S. persons, (v) pursuant to the exemption from registration provided by Rule 144 under the Securities Act (if available), or (vi) pursuant to an effective registration statement under the Securities Act, and we further agree to provide to any person purchasing any of the Notes from us a notice advising such purchaser that resales of the Notes are restricted as stated herein. 4. We understand that, on any proposed resale of any Notes, we will be required to furnish to the Trustee and the Company such certification, legal opinions and other information as the Trustee 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. 5. 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 their investment, as the case may be. 6. We are acquiring the Notes purchased by us for our 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. C-2 You, the Company, the Trustee and others 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 proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, [Name of Transferee] By: -------------------------------- Name: Title: C-3 EXHIBIT D Form of Certificate To Be Delivered in Connection with Transfers Pursuant to Regulation S ------------------------ [ ], [ ] United States Trust Company of New York 114 West 47th Street 25th Floor New York, NY 10036 Re: EHI Holdings, Inc.(the "Company") 9 7/8% Senior Notes due 2008 (the "Notes") ------------------------------------------ Ladies and Gentlemen: In connection with our proposed sale of aggregate principal amount of the Notes, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: (1) the offer of the Notes was not made to a person in the United States; (2) either (a) at the time the buy offer was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States, or (b) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre-arranged with a buyer in the United States; (3) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; and D-1 (5) we have advised the transferee of the transfer restrictions applicable to the Notes. You, the Company and counsel for 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. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By: ---------------------------------- Authorized Signature D-2 EXHIBIT E FORM OF NOTE GUARANTEE For value received, the undersigned hereby unconditionally guarantees, as principal obligor and not only as a surety, to the Holder of this Note the cash payments in United States dollars of principal of, premium, if any, and interest and Additional Interest, if any, on this Note in the amounts and at the times when due and interest on the overdue principal, premium, if any, and interest and Additional Interest, if any, of this Note, if lawful, and the payment or performance of all other obligations of the Company under the Indenture (as defined below) or the Notes, to the Holder of this Note and the Trustee, all in accordance with and subject to the terms and limitations of this Note, Article Ten of the Indenture and this Note Guarantee. This Note Guarantee will become effective in accordance with Article Ten of the Indenture and its terms shall be evidenced therein. The validity and enforceability of any Note Guarantee shall not be affected by the fact that it is not affixed to any particular Note. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Indenture dated as of February 3, 1998, as supplemented by the First Supplemental Indenture dated as of February 3, 1998 among EHI Holdings, Inc., a Delaware corporation (the "Company"), Elgar Electronics Corporation, a California corporation (the "Subsidiary Guarantor") and United States Trust Company of New York, as Trustee (the "Trustee"), (the "Indenture"). The obligations of the undersigned to the Holders of Notes and to the Trustee pursuant to this Note Guarantee and the Indenture are expressly set forth in Article Ten of the Indenture and reference is hereby made to the Indenture for the precise terms of this Note Guarantee and all of the other provisions of the Indenture to which this Note Guarantee relates. THIS NOTE GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. Each Subsidiary Guarantor hereby agrees to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to this Note Guarantee. This Note Guarantee is subject to release upon the terms set forth in the Indenture. E-1 IN WITNESS WHEREOF, the Subsidiary Guarantor has caused its Note Guarantee to be duly executed. Date: --------------- ELGAR ELECTRONICS CORPORATION, as Subsidiary Guarantor By: -------------------------------- Name: Title: By: -------------------------------- Name: Title: E-2 EXHIBIT F FORM OF CERTIFICATION TO BE GIVEN BY HOLDERS OF BENEFICIAL INTEREST IN A TEMPORARY REGULATION S GLOBAL SECURITY TO EUROCLEAR OR CEDEL OWNER SECURITIES CERTIFICATION EHI Holdings, Inc. 9 7/8% Senior Notes due 2008 Reference is hereby made to the Indenture, dated as of February 3, 1998 (as supplemented by the First Supplemental Indenture dated as of February 3, 1998, the "INDENTURE"), by and among EHI Holdings, Inc. and Elgar Electronics Corporation, as Issuers and United States Trust Company of New York, as Trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This is to certify that, as of the date hereof, $___________ of the above-captioned Notes (the "NOTES") are beneficially owned by non-U.S. person(s). As used in this paragraph, the term "U.S. person" has the meaning given to it by Regulation S under the Securities Act of 1933, as amended. We undertake to advise you promptly by tested telex on or prior to the date on which you intend to submit your certification relating to the Notes held by you for our account in accordance with your operating procedures if any applicable statement herein is not correct on such date, and in the absence of any such notification it may be assumed that this certification applies as of such date. F-1 We understand that this certificate is required in connection with certain securities laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with which this certificate is or would be relevant, we irrevocably authorize you to produce this certificate to any interested party in such proceedings. This certificate and the statements contained herein are made for your benefit and the benefit of the Issuers and the Initial Purchaser. Dated: , ----------- ---- By: ----------------------------------------- As, or as agent for, the beneficial owner(s) of the Notes to which this certificate relates. F-2 EXHIBIT G FORM OF CERTIFICATION TO BE GIVEN BY THE EUROCLEAR OPERATOR OR CEDEL BANK, SOCIETE ANONYME DEPOSITORY SECURITIES CERTIFICATION EHI Holdings, Inc. 9 7/8% Senior Notes due 2008 Reference is hereby made to the Indenture, dated as of February 3, 1998 (as supplemented by the First Supplemental Indenture dated as of February 3, 1998, the "INDENTURE"), by and among EHI Holdings, Inc. and Elgar Electronics Corporation, as Issuers and United States Trust Company of New York, as Trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This is to certify that, with respect to U.S.$______________ principal amount of the above-captioned Notes (the "Notes"), except as set forth below, we have received in writing, by tested telex or by electronic transmission, from member organizations appearing in our records as persons being entitled to a portion of the principal amount of the Note (our "Member Organizations"), certifications with respect to such portion, substantially to the effect set forth in the Indenture.* We further certify (i) that we are not making available herewith for exchange (or, if relevant, exercise of any rights or collection of any interest) any portion of the Temporary Regulation S Global Note excepted in such certifications and (ii) that as of the date hereof we have not received any notification from any of our Member Organizations to the effect that the statements made by such Member Organizations with respect to any portion of the part submitted herewith for ex- - ------------------------ * Unless Morgan Guaranty Trust Company of New York, London Branch is otherwise informed by the Agent, the long form certificate set out in the Operating Procedures will be deemed to meet the requirements of this sentence. G-1 change (or, if relevant, exercise of any rights or collection of any interest) are no longer true and cannot be relied upon as of the date hereof. We understand that this certification is required in connection with certain securities laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with which this certification is or would be relevant, we irrevocably authorize you to produce this certification to any interested party in such proceedings. This certificate and the statements contained herein are made for your benefit and the benefit of the Issuers and the Initial Purchasers. Dated: , ---------- ---- Yours faithfully, [MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as operator of the Euroclear System] or [CEDEL BANK, SOCIETE ANONYME] By: ----------------------------- G-2 EX-4.5 12 EXHIBIT 4.5 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT Dated as of February 3, 1998 By and Between JFL-EEC MERGER SUB CO. and BT ALEX. BROWN INCORPORATED, as Initial Purchaser - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $90,000,000 9 7/8% SENIOR NOTES DUE 2008 TABLE OF CONTENTS
Page 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 2. Exchange Offer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 3. Shelf Registration. . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4. Additional Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5. Registration Procedures . . . . . . . . . . . . . . . . . . . . . . . . 14 6. Registration Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 23 7. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 8. Rule 144 and 144A . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 9. Underwritten Registrations. . . . . . . . . . . . . . . . . . . . . . . 29 10. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (a) No Inconsistent Agreements. . . . . . . . . . . . . . . . . . . . 29 (b) Adjustments Affecting Registrable Notes . . . . . . . . . . . . . 30 (c) Amendments and Waivers. . . . . . . . . . . . . . . . . . . . . . 30 (d) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 (e) Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . 32 (f) Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . 32 (g) Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 (h) Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . 32 (i) Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . 32 (j) Securities Held by the Issuers or Their Respective Affiliates . . 33 (k) Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . 33 (l) Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . 33
-i- REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "AGREEMENT") is dated as of February 3, 1998 by and between JFL-EEC Merger Sub Co., a Delaware corporation, as issuer ("MERGERCO"), and BT Alex. Brown Incorporated, as initial purchaser (the "INITIAL PURCHASER"). This Agreement is entered into in connection with the Purchase Agreement, dated as of January 30, 1998, by and between MergerCo and the Initial Purchaser (the "PURCHASE AGREEMENT"), which provides for the sale by MergerCo to the Initial Purchaser of $90,000,000 aggregate principal amount of MergerCo's 9 7/8% Senior Notes due 2008 (the "NOTES"). In order to induce the Initial Purchaser to enter into the Purchase Agreement, MergerCo has agreed to provide the registration rights set forth in this Agreement for the benefit of the Initial Purchaser and its direct and indirect transferees and assigns as provided herein. The execution and delivery of this Agreement is a condition to the Initial Purchaser's obligation to purchase the Notes under the Purchase Agreement. The Notes are being sold in connection with the recapitalization (the "RECAPITALIZATION") of Elgar Holdings, Inc. ("EHI") pursuant to the Agreement and Plan of Merger dated as of January 2, 1998 by and among JFL-EEC LLC, a Delaware limited liability company, Carlyle-EEC Holdings, Inc., a Delaware corporation, TC Group, L.L.C., a Delaware limited liability company, and MergerCo (as it may be amended through the date hereof and together with all ancillary agreements entered into in connection therewith, the "RECAPITALIZATION AGREEMENT"). The Recapitalization Agreement provides for the merger (the "MERGER") of MergerCo with and into Carlyle-EEC Holdings, Inc., which shall survive the Merger and change its name to EHI. The time of the consummation of the Recapitalization and the Merger is referred to herein as the "EFFECTIVE TIME." Immediately after the Effective Time, EHI and Elgar Electronics Corporation, a California corporation and a wholly owned subsidiary of EHI ("ELGAR"), will execute an assumption agreement (the "ASSUMPTION AGREEMENT") pursuant to which EHI, as survivor of the Merger, will assume all of the obligations of MergerCo under this Registration Rights Agreement, and Elgar will become a party to this Registration Rights Agreement as a subsidiary guarantor (the "SUBSIDIARY GUARANTOR") and unconditionally guarantee the Notes (the "GUARANTEE") on a senior unsecured basis. As used herein, the "ISSUERS" shall mean -2- MergerCo prior to the Effective Time and, at and as of the Effective Time, EHI and the Subsidiary Guarantor. The Notes and the Guarantee are to be issued under an indenture (the "INDENTURE") to be dated as of February 3, 1998 by and between MergerCo and United States Trust Company of New York, as Trustee (the "TRUSTEE"). Immediately after the Effective Time, EHI, the Subsidiary Guarantor and the Trustee will enter into a first supplemental indenture to the Indenture (the "SUPPLEMENTAL INDENTURE") providing for the express assumption by EHI, as survivor of the Merger, of the covenants, agreements and undertakings of MergerCo in the Indenture and under the Notes, and the guarantee of the Notes by the Subsidiary Guarantor. References to this Agreement as of and after the Effective Time will refer to this Registration Rights Agreement together with the Assumption Agreement and references to the Indenture as of and after the Effective Time will refer to the Indenture and the Supplemental Indenture. The parties hereby agree as follows: 1. DEFINITIONS As used in this Agreement, the following terms shall have the following meanings: ADDITIONAL INTEREST: See Section 4(a) hereof. ADVICE: See the last paragraph of Section 5 hereof. AGREEMENT: See the first introductory paragraph hereto. APPLICABLE PERIOD: See Section 2(b) hereof. ASSUMPTION AGREEMENT: See the fourth introductory paragraph hereto. CLOSING DATE: The Closing Date as defined in the Purchase Agreement. EFFECTIVE TIME: See the third introductory paragraph hereto. EFFECTIVENESS DATE: The date that is within 180 days after the Issue Date; PROVIDED, HOWEVER, that with respect to any Shelf Registration, the Effectiveness Date shall be the 45th day after the Filing Date with respect thereto. -3- EFFECTIVENESS PERIOD: See Section 3(a) hereof. EHI: See the third introductory paragraph hereto. ELGAR: See the fourth introductory paragraph hereto. EVENT DATE: See Section 4(b) hereof. EXCHANGE ACT: The Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder. EXCHANGE NOTES: See Section 2(a) hereof. EXCHANGE OFFER: See Section 2(a) hereof. EXCHANGE OFFER REGISTRATION STATEMENT: See Section 2(a) hereof. FILING DATE: (A) If no Exchange Offer Registration Statement has been filed by the Issuers pursuant to this Agreement, the 120th day after the Issue Date; and (B) in each case (which may be applicable notwithstanding the consummation of the Exchange Offer), the 90th day after the delivery of a Shelf Notice. GUARANTEE: See the fourth introductory paragraph hereto. HOLDER: Any holder of a Registrable Note or Registrable Notes. INDEMNIFIED PERSON: See Section 7(c) hereof. INDEMNIFYING PERSON: See Section 7(c) hereof. INDENTURE: See the fifth introductory paragraph hereto. INITIAL PURCHASER: See the first introductory paragraph hereto. INSPECTORS: See Section 5(o) hereof. ISSUE DATE: The date on which the original Notes were sold to the Initial Purchaser pursuant to the Purchase Agreement. -4- ISSUERS: See the fourth introductory paragraph hereto. MERGER: See the third introductory paragraph hereto. MERGERCO: See the first introductory paragraph hereto. NASD: See Section 5(t) hereof. NOTES: See the second introductory paragraph hereto. PARTICIPANT: See Section 7(a) hereof. PARTICIPATING BROKER-DEALER: See Section 2(b) hereof. PERSON: An individual, trustee, corporation, partnership, limited liability company, joint stock company, trust, unincorporated association, union, business association, firm or other legal entity. PRIVATE EXCHANGE: See Section 2(b) hereof. PRIVATE EXCHANGE NOTES: See Section 2(b) hereof. PROSPECTUS: The prospectus included in any Registration Statement (including, without limitation, any prospectus subject to completion and a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, and all other amendments and supplements to the Prospectus, with respect to the terms of the offering of any portion of the Registrable Notes covered by such Registration Statement including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. PURCHASE AGREEMENT: See the second introductory paragraph hereto. RECAPITALIZATION: See the third introductory paragraph hereto. RECAPITALIZATION AGREEMENT: See the third introductory paragraph hereto. -5- RECORDS: See Section 5(o) hereof. REGISTRABLE NOTES: Each Note upon its original issuance and at all times subsequent thereto, each Exchange Note as to which Section 2(c)(iv) hereof is applicable upon original issuance and at all times subsequent thereto and each Private Exchange Note upon original issuance thereof and at all times subsequent thereto, until in the case of any such Note, Exchange Note or Private Exchange Note, as the case may be, the earliest to occur of (i) a Registration Statement (other than, with respect to any Exchange Note as to which Section 2(c)(iv) hereof is applicable, the Exchange Offer Registration Statement) covering such Note, Exchange Note or Private Exchange Note, as the case may be, has been declared effective by the SEC and such Note, Exchange Note or Private Exchange Note, as the case may be, has been disposed of in accordance with such effective Registration Statement, (ii) such Note, Exchange Note or Private Exchange Note, as the case may be, may be sold in compliance with Rule 144, (iii) such Note has been exchanged for an Exchange Note or Exchange Notes pursuant to an Exchange Offer and is entitled to be resold without complying with the prospectus delivery requirements of the Securities Act or (iv) such Note, Exchange Note or Private Exchange Note, as the case may be, ceases to be outstanding for purposes of the Indenture or any other indenture. REGISTRATION STATEMENT: Any registration statement of the Issuers, including, but not limited to, the Exchange Offer Registration Statement and any registration statement filed in connection with a Shelf Registration, filed with the SEC pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such registration statement, including post-effective amendments, all exhibits and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. RULE 144: Rule 144 promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule (other than Rule 144A) or regulation hereafter adopted by the SEC providing for offers and sales of securities made in compliance therewith resulting in offers and sales by subsequent holders that are not affiliates of an issuer of such securities being free of the registration and prospectus delivery requirements of the Securities Act. RULE 144A: Rule 144A promulgated under the Securities Act, as such Rule may be amended from time to time, or any -6- similar rule (other than Rule 144) or regulation hereafter adopted by the SEC. RULE 415: Rule 415 promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC. SEC: The Securities and Exchange Commission. SECURITIES ACT: The Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder. SHELF NOTICE: See Section 2(c) hereof. SHELF REGISTRATION: See Section 3(a) hereof. SPECIAL COUNSEL: Such special counsel to the holders of Registrable Notes as shall be agreed upon by the Issuers and holders of a majority in aggregate principal amount of Registrable Notes, the reasonable expenses of which holders of Registrable Notes will be reimbursed by the Issuers pursuant to Section 6 hereof. SUBSIDIARY GUARANTOR: See the fourth introductory paragraph hereto. SUPPLEMENTAL INDENTURE: See the fifth introductory paragraph hereto. TIA: The Trust Indenture Act of 1939, as amended. TRUSTEE: The trustee under the Indenture and, if existent, the trustee under any indenture governing the Exchange Notes and Private Exchange Notes (if any). UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING: A registration in which securities of the Issuers are sold to an underwriter for reoffering to the public. 2. EXCHANGE OFFER (a) To the extent not prohibited by any applicable law or applicable interpretation of the Staff of the SEC, the Issuers shall file with the SEC no later than the Filing Date an offer to exchange (the "EXCHANGE OFFER") any and all of the Registrable Notes (other than the Private Exchange Notes, if any) for a like aggregate principal amount of debt securities -7- of the Issuers, guaranteed by the Subsidiary Guarantor, that are identical in all material respects to the Notes (the "EXCHANGE NOTES") (and that are entitled to the benefits of the Indenture or a trust indenture that is identical in all material respects to the Indenture (other than such changes to the Indenture or any such identical trust indenture as are necessary to comply with any requirements of the SEC to effect or maintain the qualification thereof under the TIA) and that, in either case, has been qualified under the TIA), except that the Exchange Notes (other than Private Exchange Notes, if any) shall have been registered pursuant to an effective Registration Statement under the Securities Act and shall contain no restrictive legend thereon or any provisions regarding registration rights. The Exchange Offer shall be registered under the Securities Act on the appropriate form (the "EXCHANGE OFFER REGISTRATION STATEMENT") and shall comply with all applicable tender offer rules and regulations under the Exchange Act. The Issuers agree to use their best efforts to (x) cause the Exchange Offer Registration Statement to be declared effective under the Securities Act on or before the Effectiveness Date; (y) keep the Exchange Offer open for not less than 20 business days (or longer if required by applicable law) after the date that notice of the Exchange Offer is mailed to Holders; and (z) consummate the Exchange Offer within 210 days of the Issue Date. Each Holder who participates in the Exchange Offer will be required to represent to the Issuers that (i) any Exchange Notes received by it will be acquired in the ordinary course of its business, (ii) at the time of the consummation of the Exchange Offer such Holder will have no arrangement or understanding with any Person to participate in the distribution of the Exchange Notes in violation of the provisions of the Securities Act and (iii) such Holder is not an affiliate of the Issuers within the meaning of the Securities Act and is not acting on behalf of any persons or entities who could not truthfully make the foregoing representations. Upon consummation of the Exchange Offer in accordance with this Section 2, the provisions of this Agreement shall continue to apply, MUTATIS MUTANDIS, solely with respect to Registrable Notes that are Private Exchange Notes and Exchange Notes held by Participating Broker-Dealers, and the Issuers shall have no further obligation to register Registrable Notes (other than Private Exchange Notes and other than in respect of any Exchange Notes as to which clause 2(c)(iv) hereof applies) pursuant to Section 3 hereof. No securities other than the Ex- -8- change Notes shall be included in the Exchange Offer Registration Statement. (b) The Issuers shall include within the Prospectus contained in the Exchange Offer Registration Statement a section entitled "Plan of Distribution," reasonably acceptable to the Initial Purchaser, that shall contain a summary statement of the positions taken or policies made by the staff of the SEC with respect to the potential "underwriter" status of any broker-dealer that is the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange Notes received by such broker-dealer in the Exchange Offer (a "PARTICIPATING BROKER-DEALER"), whether such positions or policies have been publicly disseminated by the staff of the SEC or such positions or policies represent the prevailing views of the Staff of the SEC. Such "Plan of Distribution" section shall also expressly permit, to the extent permitted by applicable policies and regulations of the SEC, the use of the Prospectus by all Persons subject to the prospectus delivery requirements of the Securities Act, including all Participating Broker-Dealers, and include a statement describing the means by which Participating Broker-Dealers may resell the Exchange Notes. The Issuers shall use their best efforts to keep the Exchange Offer Registration Statement effective and to amend and supplement the Prospectus contained therein in order to permit such Prospectus to be lawfully delivered by all Persons subject to the prospectus delivery requirements of the Securities Act for such period of time as is necessary to comply with applicable law in connection with any resale of the Exchange Notes; PROVIDED, HOWEVER, that the Issuers shall only be required to keep the Exchange Offer Registration Statement continuously effective for a period of 180 days following consummation of the Exchange Offer or (i) upon the resale by each Participating Broker-Dealer of any Exchange Notes acquired in the Exchange Offer and the notice to the Issuers thereof, such earlier date or (ii) such longer period if extended pursuant to the last paragraph of Section 5 hereof (the "APPLICABLE PERIOD"). If, prior to consummation of the Exchange Offer, the Initial Purchaser holds any Notes acquired by it and having, or that are reasonably likely to be determined to have, the status of an unsold allotment in the initial distribution, the Issuers, upon the request of the Initial Purchaser simultaneously with the delivery of the Exchange Notes in the Exchange Offer, shall issue and deliver to the Initial Purchaser in exchange (the "PRIVATE EXCHANGE") for such Notes held by the Initial -9- Purchaser a like principal amount of debt securities of the Issuers, guaranteed by the Subsidiary Guarantor, that are identical in all material respects to the Exchange Notes (the "PRIVATE EXCHANGE NOTES") (and that are issued pursuant to the same indenture as the Exchange Notes), except for the placement of a restrictive legend on such Private Exchange Notes. The Private Exchange Notes shall bear the same CUSIP number as the Exchange Notes. Interest on the Exchange Notes and the Private Exchange Notes will accrue from the last interest payment date on which interest was paid on the Notes surrendered in exchange therefor or, if no interest has been paid on the Notes, from the Issue Date. In connection with the Exchange Offer, the Issuers shall: (1) mail to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (2) utilize the services of a depositary for the Exchange Offer with an address in the Borough of Manhattan, The City of New York; (3) permit Holders to withdraw tendered Notes at any time prior to the close of business, New York time, on the last business day on which the Exchange Offer shall remain open; and (4) otherwise comply in all material respects with all applicable laws, rules and regulations. As soon as practicable after the close of the Exchange Offer or the Private Exchange, as the case may be, the Issuers shall: (1) accept for exchange all Notes properly tendered and not validly withdrawn pursuant to the Exchange Offer or the Private Exchange; (2) deliver to the Trustee for cancellation all Notes so accepted for exchange; and (3) cause the Trustee to authenticate and deliver promptly to each Holder of Notes, Exchange Notes or Pri- -10- vate Exchange Notes, as the case may be, equal in principal amount to the Notes of such Holder so accepted for exchange. The Exchange Offer and the Private Exchange shall not be subject to any conditions, other than that (i) the Exchange Offer or Private Exchange, as the case may be, does not violate applicable law or any applicable interpretation of the staff of the SEC, (ii) no action or proceeding shall have been instituted or threatened in any court or by any governmental agency which would be reasonably likely to materially impair the ability of the Issuers to proceed with the Exchange Offer or the Private Exchange, and no material adverse development shall have occurred in any existing action or proceeding with respect to the Issuers which could produce similar consequences and (iii) all governmental approvals shall have been obtained, which approvals the Issuers deem necessary for the consummation of the Exchange Offer or Private Exchange. The Exchange Notes and the Private Exchange Notes shall be issued under (i) the Indenture or (ii) an indenture identical in all material respects to the Indenture, which in either event shall provide that (1) the Exchange Notes shall not be subject to the transfer restrictions set forth in the Indenture and (2) the Private Exchange Notes shall be subject to the transfer restrictions set forth in the Indenture. The Indenture or such indenture shall provide that the Exchange Notes, the Private Exchange Notes and the Notes shall vote and consent together on all matters as one class and that neither the Exchange Notes, the Private Exchange Notes nor the Notes will have the right to vote or consent as a separate class on any matter. (c) If, (i) because of any change in law or in currently prevailing interpretations of the Staff of the SEC, the Issuers are not permitted to effect an Exchange Offer, (ii) the Exchange Offer is not consummated within 210 days of the Issue Date, (iii) the holder of Private Exchange Notes so requests in writing at any time after the consummation of the Private Exchange, or (iv) in the case of any Holder that participates in the Exchange Offer, such Holder does not receive Exchange Notes on the date of the exchange that may be sold without restriction under state and federal securities laws (other than due solely to the status of such Holder as an affiliate of the Issuers within the meaning of the Securities Act) and such Holder notifies the Issuers prior to the 20th day following consummation of the Exchange Offer, then the Issuers shall promptly as practicable deliver written notice thereof (the "SHELF NOTICE") -11- to the Trustee and in the case of clauses (i) and (ii), all Holders, in the case of clause (iii), the holder of the Private Exchange Notes and in the case of clause (iv), the affected Holders, and shall file a Shelf Registration pursuant to Section 3 hereof. 3. SHELF REGISTRATION If at any time a Shelf Notice is delivered as contemplated by Section 2(c) hereof, then: (a) SHELF REGISTRATION. The Issuers shall file with the SEC a Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415 covering all of the Registrable Notes not exchanged in the Exchange Offer, Private Exchange Notes and Exchange Notes as to which Section 2(c)(iv) is applicable (the "SHELF REGISTRATION"). The Issuers shall use their best efforts to file with the SEC the Shelf Registration on or before the Filing Date. The Shelf Registration shall be on Form S-1 or another appropriate form permitting registration of such Registrable Notes for resale by Holders in the manner or manners designated by them (including, without limitation, one or more underwritten offerings). The Issuers shall not permit any securities other than the Registrable Notes to be included in the Shelf Registration. The Issuers shall use their best efforts to cause the Shelf Registration to be declared effective under the Securities Act on or prior to the Effectiveness Date and to keep the Shelf Registration continuously effective under the Securities Act until the date that is two years from the Issue Date (the "EFFECTIVENESS PERIOD"), or such shorter period ending when all Registrable Notes covered by the Shelf Registration have been sold in the manner set forth and as contemplated in the Shelf Registration or are distributed to the public pursuant to Rule 144 or are saleable pursuant to Rule 144(k); PROVIDED, HOWEVER, that the Effectiveness Period in respect of the Shelf Registration shall be extended to the extent required to permit dealers to comply with the applicable prospectus delivery requirements of Rule 174 under the Securities Act and as otherwise provided herein. (b) WITHDRAWAL OF STOP ORDERS. If the Shelf Registration ceases to be effective for any reason at any time during the Effectiveness Period (other than because of the sale of all of the securities registered thereunder), the Issuers shall use their best efforts to obtain the prompt withdrawal of any order suspending the effectiveness thereof. -12- (c) SUPPLEMENTS AND AMENDMENTS. The Issuers shall promptly supplement and amend any Shelf Registration if required by the rules, regulations or instructions applicable to the registration form used for such Shelf Registration, if required by the Securities Act, or if reasonably requested by the Holders of a majority in aggregate principal amount of the Registrable Notes covered by such Registration Statement or by any underwriter of such Registrable Notes. 4. ADDITIONAL INTEREST (a) The Issuers and the Initial Purchaser agree that the Holders of Registrable Notes will suffer damages if the Issuer fail to fulfill their obligations under Section 2 or Section 3 hereof and that it would not be feasible to ascertain the extent of such damages with precision. Accordingly, the Issuers agree to pay, as liquidated damages, additional interest on the Notes ("ADDITIONAL INTEREST") under the circumstances and to the extent set forth below (without duplication): (i) if (A) neither the Exchange Offer Registration Statement nor the Shelf Registration has been filed on or prior to the Filing Date applicable thereto or (B) notwithstanding that the Issuers have consummated or will consummate the Exchange Offer, the Issuers are required to file a Shelf Registration and such Shelf Registration is not filed on or prior to the Filing Date applicable thereto, then, commencing on the day after such applicable Filing Date, Additional Interest shall accrue on the principal amount of the Notes so affected at a rate of 0.35% per annum for the first 90 days immediately following each such required Filing Date, and such Additional Interest rate shall increase by an additional 0.35% per annum at the beginning of each subsequent 90-day period; or (ii) if (A) neither the Exchange Offer Registration Statement nor the Shelf Registration is declared effective by the SEC on or prior to the Effectiveness Date applicable thereto or (B) notwithstanding that the Issuers have consummated or will consummate the Exchange Offer, the Issuers are required to file a Shelf Registration and such Shelf Registration is not declared effective by the SEC on or prior to the Effectiveness Date in respect of such Shelf Registration, then, commencing on the day after such Effectiveness Date, Additional Interest shall accrue on the principal amount of the Notes so affected at a rate of -13- 0.35% per annum for the first 90 days immediately following the day after such Effectiveness Date, and such Additional Interest rate shall increase by an additional 0.35% per annum at the beginning of each subsequent 90-day period; or (iii) if (A) the Issuers have not exchanged Exchange Notes for all Notes validly tendered and not withdrawn in accordance with the terms of the Exchange Offer on or prior to the 30th day after the date on which the Exchange Offer Registration Statement relating thereto was declared effective or (B) if applicable, a Shelf Registration has been declared effective and such Shelf Registration ceases to be effective at any time during the Effectiveness Period, then Additional Interest shall accrue on the principal amount of the Notes so affected at a rate of 0.35% per annum for the first 90 days commencing on the (x) 31st day after such effective date, in the case of (A) above, or (y) the day such Shelf Registration ceases to be effective in the case of (B) above, such Additional Interest rate shall increase by an additional 0.35% per annum at the beginning of each such subsequent 90-day period; PROVIDED, HOWEVER, that the Additional Interest rate on any affected Note may not exceed at any one time in the aggregate 1.5% per annum; and PROVIDED, FURTHER, HOWEVER, that (1) upon the filing of the Exchange Offer Registration Statement or a Shelf Registration (in the case of clause (i) of this Section 4(a)), (2) upon the effectiveness of the Exchange Offer Registration Statement or the Shelf Registration (in the case of clause (ii) of this Section 4(a)), or (3) upon the exchange of Exchange Notes for all Notes tendered (in the case of clause (iii)(A) of this Section 4(a)), or upon the effectiveness of the Shelf Registration which had ceased to remain effective (in the case of clause (iii)(B) of this Section 4(a)), Additional Interest on the Notes as a result of such clause (or the relevant subclause thereof), as the case may be, shall cease to accrue. (b) The Issuers shall notify the Trustee within one business day after each and every date on which an event occurs in respect of which Additional Interest is required to be paid (an "EVENT DATE"). Any amounts of Additional Interest due pursuant to (a)(i), (a)(ii) or (a)(iii) of this Section 4 will be payable in cash semi-annually on each January 31 and July 31 (to the holders of record on the January 15 and July 15 immediately preceding such dates), commencing with the first such date occurring after any such Additional Interest commences to -14- accrue. The amount of Additional Interest will be determined by multiplying the applicable Additional Interest rate by the principal amount of the Registrable Notes, multiplied by a fraction, the numerator of which is the number of days such Additional Interest rate was applicable during such period (determined on the basis of a 360-day year consisting of twelve 30-day months and, in the case of a partial month, the actual number of days elapsed) and the denominator of which is 360. 5. REGISTRATION PROCEDURES In connection with the filing of any Registration Statement pursuant to Sections 2 or 3 hereof, the Issuers shall effect such registrations to permit the sale of the securities covered thereby in accordance with the intended method or methods of disposition thereof, and pursuant thereto and in connection with any Registration Statement filed by the Issuers hereunder, the Issuers shall: (a) Prepare and file with the SEC on or prior to the Filing Date, a Registration Statement or Registration Statements as prescribed by Sections 2 or 3 hereof, and use their best efforts to cause each such Registration Statement to become effective and remain effective as provided herein; PROVIDED, HOWEVER, that, if (1) such filing is pursuant to Section 3 hereof or (2) a Prospectus contained in an Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, before filing any Registration Statement or Prospectus or any amendments or supplements thereto, the Issuers shall furnish to and afford the Holders of the Registrable Notes covered by such Registration Statement or each such Participating Broker-Dealer, as the case may be, their Special Counsel and the managing underwriters, if any, a reasonable opportunity to review copies of all such documents (including upon written request copies of any documents to be incorporated by reference therein and all exhibits thereto) proposed to be filed (in each case at least three business days prior to such filing). The Issuers shall not file any Registration Statement or Prospectus or any amendments or supplements thereto if the Holders of a majority in aggregate principal amount of the Registrable Notes covered by such Registration Statement, or any such Participating Broker-Dealer, as the case may be, or their counsel, or the managing underwriters, if any, shall reasonably object in writing. -15- (b) Prepare and file with the SEC such amendments and post-effective amendments to each Shelf Registration or Exchange Offer Registration Statement, as the case may be, as may be necessary to keep such Registration Statement continuously effective for the Effectiveness Period or the Applicable Period, as the case may be; cause the related Prospectus to be supplemented by any prospectus supplement required by applicable law, and as so supplemented to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; and comply with the provisions of the Securities Act and the Exchange Act applicable to it with respect to the disposition of all securities covered by such Registration Statement as so amended or in such Prospectus as so supplemented and with respect to the subsequent resale of any securities being sold by a Participating Broker-Dealer covered by any such Prospectus; the Issuers shall be deemed not to have used their respective best efforts to keep a Registration Statement effective during the Applicable Period or the Effectiveness Period, as the case may be, if any Issuer voluntarily takes any action that would result in selling Holders of the Registrable Notes covered thereby or Participating Broker-Dealers seeking to sell Exchange Notes not being able to sell such Registrable Notes or such Exchange Notes during that period, unless such action is required by applicable law or permitted by this Agreement. (c) If (1) a Shelf Registration is filed pursuant to Section 3 hereof or (2) a Prospectus contained in an Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, notify the selling Holders of Registrable Notes, or each such Participating Broker-Dealer, as the case may be, their Special Counsel and the managing underwriters, if any, and, if requested by any such person, confirm such notice in writing, (i) when a Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective under the Securities Act (including in such notice a written statement that any Holder may, upon written request, obtain, at the sole expense of the Issuers, one conformed copy of such Registration Statement or post-effective amendment including financial statements and schedules, documents incorporated or deemed to be in- -16- corporated by reference and exhibits), (ii) of the issuance by the SEC of any stop order suspending the effectiveness of a Registration Statement or of any order preventing or suspending the use of any preliminary prospectus or the initiation of any proceedings for that purpose, (iii) of the receipt by any Issuer of any notification with respect to the suspension of the qualification or exemption from qualification of a Registration Statement or any of the Registrable Notes or the Exchange Notes to be sold by any Participating Broker-Dealer for offer or sale in any jurisdiction, or the initiation or written threat of any proceeding for such purpose, (iv) of the happening of any event or any information becoming known to the Issuers that makes any statement made in such Registration Statement or related Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in such Registration Statement, Prospectus or documents so that, in the case of the Registration Statement (including documents incorporated by reference), it 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 not misleading, and that in the case of the Prospectus (including documents incorporated by reference), it 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 and (v) of the Issuers' determination that a post-effective amendment to a Registration Statement would be appropriate. (d) Use their reasonable best efforts to prevent the issuance of any order suspending the effectiveness of a Registration Statement or of any order preventing or suspending the use of a Prospectus or suspending the qualification (or exemption from qualification) of any of the Registrable Notes or the Exchange Notes for sale in any jurisdiction and, if any such order is issued, to use their reasonable best efforts to obtain the withdrawal of any such order at the earliest possible moment. (e) If a Shelf Registration is filed pursuant to Section 3 and if requested in writing by the managing underwriter or underwriters, if any, or the Holders of a majority in aggregate principal amount of the Registrable Notes being sold in connection with an underwritten offer- -17- ing, (i) promptly incorporate in a prospectus supplement or post-effective amendment such information as the managing underwriter or underwriters, if any, such Holders or counsel for any of them determine is reasonably necessary to be included therein, (ii) make all required filings of such prospectus supplement or such post-effective amendment as soon as practicable after an Issuer has received notification in writing of the matters to be incorporated in such prospectus supplement or post-effective amendment and (iii) supplement or make amendments to such Registration Statement. (f) If (1) a Shelf Registration is filed pursuant to Section 3 hereof or (2) a Prospectus contained in an Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, upon written request, furnish to each selling Holder of Registrable Notes and to each such Participating Broker-Dealer who so requests and to their Special Counsel and each managing underwriter, if any, at the sole expense of the Issuers, one conformed copy of the Registration Statement or Registration Statements and each post-effective amendment thereto, including financial statements and schedules and, if requested in writing, all documents incorporated or deemed to be incorporated therein by reference and all exhibits. (g) If (1) a Shelf Registration is filed pursuant to Section 3 hereof or (2) a Prospectus contained in an Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, deliver to each selling Holder of Registrable Notes, or each such Participating Broker-Dealer, as the case may be, their Special Counsel and the underwriters, if any, at the sole expense of the Issuers, as many copies of the Prospectus or Prospectuses (including each form of preliminary prospectus) and each amendment or supplement thereto and, upon written request, any documents incorporated by reference therein as such Persons may reasonably request; and, subject to the last paragraph of this Section 5, the Issuers hereby consent to the use in accordance with applicable law of such Prospectus and each amendment or supplement thereto by each of the selling Holders of Registrable Notes or each such Participating Broker-Dealer, as the -18- case may be, and the underwriters or agents, if any, and dealers, if any, in connection with the offering and sale of the Registrable Notes covered by, or the sale by Participating Broker-Dealers of the Exchange Notes pursuant to, such Prospectus and any amendment or supplement thereto. (h) Prior to any public offering of Registrable Notes or Exchange Notes or any delivery of a Prospectus contained in the Exchange Offer Registration Statement by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, to use their reasonable best efforts to register or qualify and to cooperate with the selling Holders of Registrable Notes or each such Participating Broker-Dealer, as the case may be, the managing underwriter or underwriters, if any, and their Special Counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Notes for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any selling Holder, Participating Broker-Dealer or the managing underwriter or underwriters reasonably request in writing; keep each such registration or qualification (or exemption therefrom) effective during the period such Registration Statement is required to be kept effective and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Exchange Notes held by Participating Broker-Dealers or the Registrable Notes covered by the applicable Registration Statement; PROVIDED, HOWEVER, that no Issuer shall be required to (A) qualify generally to do business in any jurisdiction where it is not then so qualified, (B) take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or (C) subject itself to taxation in any such jurisdiction where it is not then so subject. (i) If a Shelf Registration is filed pursuant to Section 3 hereof, cooperate with the selling Holders of Registrable Notes and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Notes to be sold, which certificates shall not bear any restrictive legends and shall be in a form eligible for deposit with The Depository Trust Company; and enable such Registrable Notes to be in such denominations and registered in such names as the managing underwriter or underwriters, if any, -19- or Holders may request at least two Business Days prior to sales of Notes pursuant to such registration. (j) If (1) a Shelf Registration is filed pursuant to Section 3 hereof or (2) a Prospectus contained in an Exchange Offer Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, upon the occurrence of any event contemplated by paragraph 5(c)(iv) or 5(c)(v) hereof, as promptly as practicable prepare and (subject to Section 5(a) hereof) file with the SEC, at the Issuers' sole expense, a supplement or post-effective amendment to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, or file any other required document so that, as the Prospectus, is thereafter delivered any such Prospectus will not contain (including documents incorporated by reference) an untrue statement of a material fact or omit to state a 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. (k) Use their reasonable best efforts to cause the Registrable Notes covered by a Registration Statement or the Exchange Notes, as the case may be, to be rated with the appropriate rating agencies, if so requested by the Holders of a majority in aggregate principal amount of Registrable Notes covered by such Registration Statement or the Exchange Notes, as the case may be, or the managing underwriter or underwriters, if any. (l) Prior to the effective date of the first Registration Statement relating to the Registrable Notes, (i) provide the Trustee with certificates for the Registrable Notes or Exchange Notes, as the case may be, in a form eligible for deposit with The Depository Trust Company and (ii) provide a CUSIP number for the Exchange Notes (and Private Exchange Notes, if applicable). (m) In connection with any underwritten offering of Registrable Notes pursuant to a Shelf Registration, enter into an underwriting agreement to be negotiated between the parties in good faith as is customary in underwritten offerings of debt securities similar to the Notes and take all such other actions as are reasonably requested by the managing underwriter or underwriters in order to expedite -20- or facilitate the registration or the disposition of such Registrable Notes. (n) In the case of a Shelf Registration, if requested by Holders of a majority in aggregate principal amount, their Special Counsel, or the managing underwriters (if any) in connection with any Shelf Registration, shall use its best efforts to cause (w) the counsel to the Issuers to deliver an opinion relating to the Registration Statement and the Notes or the Exchange Notes, as applicable, in customary form, (x) officers of the Issuers to execute and deliver all customary documents and certificates requested by Holders of a majority in aggregate principal amount, their Special Counsel, or the managing underwriters (if any) and (y) the independent public accountants of the Issuers to provide a comfort letter in customary form, subject to receipt of appropriate documentation as contemplated, and only if permitted by Statement of Auditing Standards No. 72. (o) In the case of a Shelf Registration, (i) make reasonably available for inspection by a representative of, and Special Counsel acting for, the Holders, and any underwriter participating in any disposition pursuant to a Shelf Registration, all relevant financial and other records, pertinent corporate documents and properties of the Issuers and (ii) cause their officers, directors and employees to supply all relevant information reasonably requested by such representative, counsel or any such underwriter (an "INSPECTOR") in connection with any such Registration Statement, subject to executing a confidentiality undertaking in customary form with respect to confidential and/or proprietary information of the Issuers. (p) Provide an indenture trustee for the Registrable Notes or the Exchange Notes, as the case may be, and cause the Indenture or the trust indenture provided for in Section 2(a) hereof, as the case may be, to be qualified under the TIA not later than the effective date of the Exchange Offer or the first Registration Statement relating to the Registrable Notes; and in connection therewith, cooperate with the trustee under any such indenture and the Holders of the Registrable Notes, to effect such changes to such indenture as may be required for such indenture to be so qualified in accordance with the terms of the TIA; and execute, and use their best efforts to cause such trustee to execute, all documents as may be required to effect such changes and all other forms and documents re- -21- quired to be filed with the SEC to enable such indenture to be so qualified in a timely manner. (q) Comply with all applicable rules and regulations of the SEC and make generally available to its securityholders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) no later than 60 days after the end of any fiscal quarter (or 120 days after the end of any fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Notes are sold to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of MergerCo or, immediately after the Effective Time, of EHI, after the effective date of a Registration Statement, which statements shall cover said fiscal periods. (r) Upon consummation of an Exchange Offer or a Private Exchange, obtain an opinion of counsel to the Issuers, who may, at the election of the Issuers, be internal counsel to the Issuers, in a form customary for underwritten transactions, addressed to the Trustee for the benefit of all Holders of Registrable Notes participating in the Exchange Offer or the Private Exchange, as the case may be, that the Exchange Notes or Private Exchange Notes, as the case may be, and the related indenture constitute legal, valid and binding obligations of the Issuers, enforceable against the Issuers in accordance with its respective terms, subject to customary exceptions and qualifications. (s) If an Exchange Offer or a Private Exchange is to be consummated, upon delivery of the Registrable Notes by Holders to the Issuers (or to such other Person as directed by the Issuers) in exchange for the Exchange Notes or the Private Exchange Notes, as the case may be, the Issuers shall mark, or cause to be marked, on such Registrable Notes that such Registrable Notes are being cancelled in exchange for the Exchange Notes or the Private Exchange Notes, as the case may be; in no event shall such Registrable Notes be marked as paid or otherwise satisfied. (t) Cooperate with each seller of Registrable Notes covered by any Registration Statement and each underwriter, if any, participating in the disposition of such Registrable Notes and their respective counsel in connec- -22- tion with any filings required to be made with the National Association of Securities Dealers, Inc. (the "NASD"). (u) Use their reasonable best efforts to take all other steps necessary or advisable to effect the registration of the Registrable Notes covered by a Registration Statement contemplated hereby. The Issuers may require each Holder of Registrable Notes as to which any registration is being effected to furnish to the Issuers, such information regarding such Holder and the distribution of such Registrable Notes as the Issuers may, from time to time, reasonably request and in such event shall have no further obligation under this Agreement (including, without limitation, obligations under Section 4 hereof) with respect to such Holder or any subsequent holder of such Registrable Notes. The Issuers may exclude from such registration the Registrable Notes of any Holder who fails to furnish such information within a reasonable time after receiving such request and in such event shall have no further obligation under this Agreement (including, without limitation, obligations under Section 4 hereof) with respect to such seller or any subsequent holder of such Registrable Notes. Each seller as to which any Shelf Registration is being effected agrees to furnish promptly to the Issuers all information required to be disclosed in order to make the information previously furnished to the Issuers by such seller not materially misleading. Each Holder of Registrable Notes and each Participating Broker-Dealer agrees by acquisition of such Registrable Notes or Exchange Notes to be sold by such Participating Broker-Dealer, as the case may be, that, upon actual receipt of any notice from the Issuers of the happening of any event of the kind described in Sections 5(c)(ii), 5(c)(iv), 5(c)(v) or 5(c)(vi) hereof, such Holder will forthwith discontinue disposition of such Registrable Notes covered by such Registration Statement or Prospectus or Exchange Notes to be sold by such Holder or Participating Broker-Dealer, as the case may be, until such Holder's or Participating Broker-Dealer's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 5(k) hereof, or until it is advised in writing (the "ADVICE") by the Issuers that the use of the applicable Prospectus may be resumed, and has received copies of any amendments or supplements thereto. In the event that the Issuers shall give any such notice, each of the Effectiveness Period and the Applicable Period shall be extended by the number of days during such periods from and including the date of the -23 giving of such notice to and including the date when each seller of Registrable Notes covered by such Registration Statement or Exchange Notes to be sold by such Participating Broker-Dealer, as the case may be, shall have received (x) the copies of the supplemented or amended Prospectus contemplated by Section 5(k) hereof or (y) the Advice. 6. REGISTRATION EXPENSES (a) All fees and expenses incident to the performance of or compliance with this Agreement by the Issuers shall be borne by the Issuers whether or not the Exchange Offer or a Shelf Registration is filed or becomes effective, including, without limitation, (i) all registration and filing fees (including, without limitation, (A) fees with respect to filings required to be made with the NASD in connection with an underwritten offering and (B) fees and expenses of compliance with state securities or Blue Sky laws, (ii) printing expenses, including, without limitation, expenses of printing certificates for Registrable Notes or Exchange Notes in a form eligible for deposit with The Depository Trust Company and of printing prospectuses if the printing of prospectuses is requested by the managing underwriter or underwriters, if any, or by the Holders of a majority in aggregate principal amount of the Registrable Notes included in any Registration Statement or Prospectus sold by any Participating Broker-Dealer during the Applicable Period, as the case may be, (iii) messenger, telephone and delivery expenses, (iv) reasonable fees and disbursements of counsel for the Issuers and, in the case of a Shelf Registration Statement, reasonable fees and disbursements of Special Counsel for the sellers of Registrable Notes (subject to the provisions of Section 6(b) hereof), (v) fees and disbursements of all independent certified public accountants referred to in Section 5(n)(iii) hereof (including, without limitation, the expenses of any special audit and "cold comfort" letters required by or incident to such performance), (vi) rating agency fees, if any, and any fees associated with making the Registrable Notes or Exchange Notes eligible for trading through the Depository Trust Company, (vii) Securities Act liability insurance, if the Issuers desire such insurance, (viii) fees and expenses of all other Persons retained by the Issuers, (ix) internal expenses of the Issuers (including, without limitation, all salaries and expenses of officers and employees of the Issuers performing legal or accounting duties), (x) the expense of any annual audit, (xi) the fees and expenses incurred in connection with the listing of the securities to be registered on any securities exchange, if applicable, and (xii) the expenses relating to printing, word processing and distributing -24- of all Registration Statements, underwriting agreements, securities sales agreements, indentures and any other documents necessary to comply with this Agreement. (b) The Issuers shall (i) reimburse the Holders of the Registrable Notes being registered in a Shelf Registration for the reasonable fees and disbursements of not more than one counsel (in addition to appropriate local counsel) chosen by the Holders of a majority in aggregate principal amount of the Registrable Notes to be included in such Registration Statement and (ii) reimburse out-of-pocket expenses (other than legal expenses) of Holders of Registrable Notes incurred in connection with the registration and sale of the Registrable Notes pursuant to a Shelf Registration Statement or in connection with the exchange of Registrable Notes pursuant to the Exchange Offer. 7. INDEMNIFICATION (a) Each of the Issuers, jointly and severally, agrees to indemnify and hold harmless each Holder of Registrable Notes offered pursuant to a Shelf Registration Statement and each Participating Broker-Dealer selling Exchange Notes during the Applicable Period, the officers, directors, employees and agents of each such Person or their affiliates, and each other Person, if any, who controls any such Person or their affiliates within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act (each, a "PARTICIPANT"), from and against any and all losses, claims, damages and liabilities (including, without limitation, the reasonable legal fees and other reasonable expenses actually incurred in connection with any suit, action or proceeding or any claim asserted) caused by, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement pursuant to which the offering of such Registrable Notes or Exchange Notes, as the case may be, is registered (or any amendment thereto) or related Prospectus (or any amendments or supplements thereto) or any related preliminary prospectus, or caused by, arising out of or based upon any omission or alleged omission to state therein a 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; PROVIDED, HOWEVER, that the Issuers will not be required to indemnify a Participant if (i) such losses, claims, damages or liabilities are caused by any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information relating to any Participant furnished to MergerCo, EHI and/or Elgar or any of the foregoing's -25- agents or advisors in writing by or on behalf of such Participant expressly for use therein or (ii) such Participant sold to the Person asserting the claim the Registrable Notes or Exchange Notes that are the subject of such claim and such untrue statement or omission or alleged untrue statement or omission was contained or made in any preliminary prospectus and corrected in the Prospectus or any amendment or supplement thereto and the Prospectus does not contain any other untrue statement or omission or alleged untrue statement or omission of a material fact that was the subject matter of the related proceeding and it is established by the Issuers in the related proceeding that such Participant failed to deliver or provide a copy of the Prospectus (as amended or supplemented) to such Person with or prior to the confirmation of the sale of such Registrable Notes or Exchange Notes sold to such Person if required by applicable law, unless such failure to deliver or provide a copy of the Prospectus (as amended or supplemented) was a result of noncompliance by MergerCo or, immediately after the Effective Time, by EHI with Section 5 of this Agreement. (b) Each Participant agrees, severally and not jointly, to indemnify and hold harmless the Issuers, their respective officers, directors, employees and agents and each Person who controls each Issuer within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Issuers to each Participant, but only (i) with reference to information relating to such Participant furnished to MergerCo, EHI and/or Elgar or any of the foregoing's agents or advisors in writing by or on behalf of such Participant expressly for use in any Registration Statement or Prospectus, any amendment or supplement thereto or any preliminary prospectus or (ii) with respect to any untrue statement or representation made by such Participant in writing to MergerCo, EHI and/or Elgar or any of the foregoing's agents or advisors. The liability of any Participant under this paragraph shall in no event exceed the proceeds received by such Participant from sales of Registrable Notes or Exchange Notes giving rise to such obligations. (c) If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any Person in respect of which indemnity may be sought pursuant to either of the two preceding paragraphs, such Person (the "INDEMNIFIED PERSON") shall promptly notify the Person against whom such indemnity may be sought (the "INDEMNIFYING PERSON") in writing, and the Indemnifying Person, upon request of the Indemnified Person, shall retain counsel reasonably satisfactory to the Indemnified -26- Person to represent the Indemnified Person and any others the Indemnifying Person may reasonably designate in such proceeding and shall pay the reasonable fees and expenses actually incurred by such counsel related to such proceeding; PROVIDED, HOWEVER, that the failure to so notify the Indemnifying Person shall not relieve it of any obligation or liability that it may have hereunder or otherwise (unless and only to the extent that such failure directly results in the loss or compromise of any material rights or defenses by the Indemnifying Person and the Indemnifying Person was not otherwise aware of such action or claim). In any such proceeding, any Indemnified Person 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 Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed in writing to the contrary, (ii) the Indemnifying Person shall have failed within a reasonable period of time to retain counsel reasonably satisfactory to the Indemnified Person or (iii) the named parties in any such proceeding (including any impleaded parties) include both the Indemnifying Person and the Indemnified Person and representation of both parties by the same counsel would be inappropriate due to actual or potential conflicting interests between them. It is understood that, unless there exists a conflict among Indemnified Persons, the Indemnifying Person shall not, in connection with any one such proceeding or separate but substantially similar related proceeding in the same jurisdiction arising out of the same general allegations, be liable for the reasonable fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons, and that all such fees and expenses shall be reimbursed promptly as they are incurred. Any such separate firm for the Participants and such control Persons of Participants shall be designated in writing by Participants who sold a majority in interest of Registrable Notes and Exchange Notes sold by all such Participants and any such separate firm for the Issuers, their officers, directors, employees and agents and such control Persons of such Issuer shall be designated in writing by such Issuer and shall be reasonably acceptable to the Participants. The Indemnifying Person shall not be liable for any settlement of any proceeding effected without its prior written consent, which consent shall not be unreasonably withheld, but if settled with such consent or if there be a final non-appealable judgment for the plaintiff for which the Indemnified Person is entitled to indemnification pursuant to this Agreement, the Indemnifying Person agrees to indemnify and hold harmless each Indemnified Person from and against any loss or -27- liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an Indemnified Person shall have requested an Indemnifying Person to reimburse the Indemnified Person for fees and expenses actually incurred by counsel as contemplated by the third sentence of this paragraph, the Indemnifying Person agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such Indemnifying Person of the aforesaid request and (ii) such Indemnifying Person shall not have reimbursed the Indemnified Person in accordance with such request prior to the date of such settlement; PROVIDED, HOWEVER, that the Indemnifying Person shall not be liable for any settlement effected without its consent pursuant to this sentence if the Indemnifying Person is contesting, in good faith, the request for reimbursement. No Indemnifying Person shall, without the prior written consent of the Indemnified Person, effect any settlement or compromise of any pending or threatened proceeding in respect of which any Indemnified Person is or could have been a party, and indemnity could have been sought hereunder by such Indemnified Person, unless such settlement (A) includes an unconditional written release of such Indemnified Person, in form and substance reasonably satisfactory to such Indemnified Person, from all liability on claims that are the subject matter of such proceeding and (B) does not include any statement as to an admission of fault, culpability or failure to act by or on behalf of any Indemnified Person. (d) If the indemnification provided for in the first and second paragraphs of this Section 7 is for any reason unavailable to, or insufficient to hold harmless, an Indemnified Person in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Person under such paragraphs, in lieu of indemnifying such Indemnified Person thereunder and in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect (i) the relative benefits received by the Indemnifying Person or Persons on the one hand and the Indemnified Person or Persons on the other from the offering of the Notes or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, not only such relative benefits but also the relative fault of the Indemnifying Person or Persons on the one hand and the Indemnified Person or Persons on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof). The -28- relative fault of the parties 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 Issuers on the one hand or such Participant or such other Indemnified Person, as the case may be, on the other, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. (e) The parties agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by PRO RATA allocation (even if the Participants were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any reasonable legal or other expenses actually incurred by such Indemnified Person in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7, in no event shall a Participant be required to contribute any amount in excess of the amount by which proceeds received by such Participant from sales of Registrable Notes or Exchange Notes, as the case may be, exceeds the amount of any damages that such Participant has otherwise been required to pay or has paid 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. (f) The indemnity and contribution agreements contained in this Section 7 will be in addition to any liability that the Indemnifying Persons may otherwise have to the Indemnified Persons referred to above. 8. RULE 144 AND 144A Each of the Issuers covenants and agrees that it will use its best efforts to file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder in a timely manner in accordance with the requirements of the Securities -29- Act and the Exchange Act and, if at any time such Issuer is not required to file such reports, such Issuer will, upon the written request of any Holder or beneficial owner of Registrable Notes, make publicly available annual reports and such information, documents and other reports of the type specified in Sections 13 and 15(d) of the Exchange Act so long as necessary to permit sales of their Notes pursuant to Rule 144 and 144A. Each of the Issuers further covenants and agrees for so long as any Registrable Notes remain outstanding, to make available to any Holder or beneficial owner of Registrable Notes in connection with any sale thereof and any prospective purchaser of such Registrable Notes from such Holder or beneficial owner the information required by Rule 144A(d)(4) under the Securities Act in order to permit resales of such Registrable Notes pursuant to Rule 144A. 9. UNDERWRITTEN REGISTRATIONS If any of the Registrable Notes covered by any Shelf Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will manage the offering will be selected by the Holders of a majority in aggregate principal amount of such Registrable Notes included in such offering and reasonably acceptable to the Issuers. No Holder of Registrable Notes may participate in any underwritten registration hereunder unless such Holder (a) agrees to sell such Holder's Registrable Notes 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 required under the terms of such underwriting arrangements. 10. MISCELLANEOUS (a) NO INCONSISTENT AGREEMENTS. The Issuers have not, as of the date hereof, and shall not, after the date of this Agreement, enter into any agreement with respect to any of their securities that is inconsistent with the rights granted to the Holders of Registrable Notes in this Agreement or otherwise conflicts with the provisions hereof. 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 any of the Issuers' other issued and outstanding securities under any such agreements. The Issuers have not entered and will not enter into any agreement with respect to any of their secu- -30- rities that will grant to any Person piggy-back registration rights with respect to a Registration Statement. (b) ADJUSTMENTS AFFECTING REGISTRABLE NOTES. The Issuers shall not, directly or indirectly, take any action with respect to the Registrable Notes as a class that would adversely affect the ability of the Holders of Registrable Notes to include such Registrable Notes in a registration undertaken pursuant to this Agreement. (c) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, otherwise than with the prior written consent of (A) the Holders of not less than a majority in aggregate principal amount of the then outstanding Registrable Notes, or (B) in circumstances that would adversely affect the Participating Broker-Dealers, the Participating Broker-Dealers holding not less than a majority in aggregate principal amount of the Exchange Notes held by all Participating Broker-Dealers; PROVIDED, HOWEVER, that Section 7 and this Section 10(c) may not be amended, modified or supplemented without the prior written consent of each Holder (including any Person who was a Holder of Registrable Notes disposed of pursuant to any Registration Statement). Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders of Registrable Notes whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect, impair, limit or compromise the rights of other Holders of Registrable Notes may be given by Holders of at least a majority in aggregate principal amount of the Registrable Notes being sold by such Holders pursuant to such Registration Statement. (d) NOTICES. All notices and other communications (including without limitation any notices or other communications to the Trustee) provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, next-day air courier or facsimile: 1. if to a Holder of the Registrable Notes or any Participating Broker-Dealer, at the most current address of such Holder or Participating Broker-Dealer, as the case may be, set forth on the records of the registrar under the Indenture, with a copy in like manner to the Initial Purchaser as follows: -31- BT ALEX. BROWN INCORPORATED 130 Liberty Street New York, New York 10006 Facsimile No.: (212) 250-7200 Attention: Corporate Finance Department with a copy to: CAHILL GORDON & REINDEL 80 Pine Street New York, New York 10005 Facsimile No.: (212) 269-5420 Attention: William M. Hartnett, Esq. 2. if to the Initial Purchaser, at the addresses specified in Section 10(d)(1); 3. if to the Issuers, at the address as follows: ELGAR HOLDINGS, INC. 9250 Brown Deer Road San Diego, California 92121 Facsimile No.: (619) 458-0257 Attention: Chief Financial Officer with copies to: J.F. LEHMAN & COMPANY 450 Park Avenue New York, New York 10022 Facsimile No.: (212) Attention: Keith Oster GIBSON DUNN & CRUTCHER, LLP 333 South Grand Avenue Los Angeles, California 90007 Facsimilie No.: (213) 229-7000 Attention: Kenneth M. Doran All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; one business day after being timely delivered to a next-day air courier; and when receipt is acknowledged by the addressee, if sent by facsimile. Copies of all such notices, demands or other communications shall be concurrently delivered by the Person giving -32- the same to the Trustee at the address and in the manner specified in such Indenture. (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 hereto; PROVIDED, HOWEVER, that this Agreement shall not inure to the benefit of or be binding upon a successor or assign of a Holder unless and to the extent such successor or assign holds Registrable Notes. (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, AS APPLIED TO CONTRACTS MADE AND PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. (i) SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (j) SECURITIES HELD BY THE ISSUERS OR THEIR RESPECTIVE AFFILIATES. Whenever the consent or approval of Holders of a specified percentage of Registrable Notes is required hereunder, Registrable Notes held by the Issuers or their af- -33- filiates (as such term is defined in Rule 405 under the Securities Act) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. (k) THIRD PARTY BENEFICIARIES. Holders of Registrable Notes and Participating Broker-Dealers are intended third party beneficiaries of this Agreement and this Agreement may be enforced by such Persons. (l) ENTIRE AGREEMENT. This Agreement, together with the Purchase Agreement and the Indenture, is intended by the parties as a final and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein and any and all prior oral or written agreements, representations, or warranties, contracts, understandings, correspondence, conversations and memoranda between the Initial Purchaser on the one hand and the Issuers on the other, or between or among any agents, representatives, parents, subsidiaries, affiliates, predecessors in interest or successors in interest with respect to the subject matter hereof and thereof are merged herein and replaced hereby. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. JFL-EEC MERGER SUB CO., By: /s/ Donald Glickman ------------------------------------ Name: Donald Glickman Title: President BT ALEX. BROWN INCORPORATED, as Initial Purchaser By: /s/ Pedro Garcia ------------------------------------ Name: Pedro Garcia Title: Vice President EX-4.6 13 EXHIBIT 4.6 Exhibit 4.6 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE SUCH A REGISTRATION IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFERS SET FORTH IN A SHAREHOLDERS AGREEMENT, DATED AS OF FEBRUARY 3, 1998 (AS AMENDED, MODIFIED OR SUPPLEMENTED THROUGH THE DATE HEREOF, THE "SHAREHOLDERS AGREEMENT"), BY AND AMONG ELGAR HOLDINGS, INC. AND THE SHAREHOLDERS NAMED THEREIN, A COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICES OF THE COMPANY. NO TRANSFER OF SUCH SECURITIES WILL BE MADE ON THE BOOKS OF THE COMPANY UNLESS ACCOMPANIED BY EVIDENCE OF COMPLIANCE WITH THE TERMS OF SUCH AGREEMENTS. EXERCISABLE AT ANY TIME SUBJECT TO THE PROVISIONS HEREOF NO.___ JFL-EEC MERGER SUB CO. WARRANT CERTIFICATE Warrant Certificate for Warrants to Purchase _______ Warrant Shares This Warrant Certificate certifies that, for value received, [warrantholder] (the "Holder") is the owner of the number of Warrants (as defined in Section 1.2(a) below) set forth above, each of which entitles the Holder to purchase from JFL-EEC MERGER SUB CO., a Delaware corporation (the "Company") at any time from and after the date hereof and until the Expiration Date (as defined in Section 2.1 hereof) one Warrant Share (as defined below), at the purchase price stated in Section 2.3 hereof (the "Exercise Price"). The number of Warrant Shares purchasable upon exercise of the Warrants and the Exercise Price shall be subject to adjustment from time to time as herein provided. For purposes of this Warrant Certificate, "Warrant Shares" shall mean shares of the Company's Common Stock, $.01 par value per share (the "Common Stock"); PROVIDED, HOWEVER, that if, in accordance with Section 6.3 hereof, the securities issuable upon exercise of the Warrants are issued by an entity other than the Company or there is a change in the class of securities so issuable, then the "Warrant Shares" shall mean the securities so issuable by such entity or the securities of the class of securities so issuable. The Warrants are subject to the following terms, conditions and provisions: SECTION 1. REGISTRATION; TRANSFERABILITY; EXCHANGE OF WARRANT CERTIFICATE. 1.1 REGISTRATION. The Company shall number and register the Warrants in a register (the "Warrant Register") maintained at the principal office of the Company (the "Office"). The Company shall be entitled to treat the Holder of the Warrants as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrants on the part of any other person. 1.2 TRANSFER AND EXCHANGE. (a) Subject to compliance with any restrictions on transfer set forth in the Shareholders Agreement, dated as of February 3, 1998, by and among Elgar Holdings, Inc., JFL-EEC LLC, a Delaware limited liability company, Jackson National Life Insurance Company ("Jackson National"), Indosuez Electronics Partners, a Delaware general partnership ("Indosuez"), Old Hickory Fund, L.L.C. and the other shareholders named therein (the "Shareholders' Agreement") (Jackson National, Indosuez and Old Hickory Fund I, L.L.C. shall sometimes be collectively referred to herein as the "Initial Warrantholders"), the warrants issued to the Initial Warrantholders (the "Warrants") shall be transferable only on the Warrant Register upon delivery thereof by the Holder or by his duly authorized attorney or representative or accompanied by proper evidence of succession, assignment or authority to transfer. Upon any such registration of transfer, a new Warrant Certificate, in substantially the form of this Warrant Certificate, evidencing the Warrants so transferred shall be issued to the transferee of such Warrants and a new Warrant Certificate, in substantially the form of this Warrant Certificate, evidencing the remaining Warrants, if any, not so transferred, shall be issued to the Holder. In all cases of transfer by an attorney, the original power of attorney, duly approved, or a copy thereof, duly certified, shall be deposited and shall remain with the Company. In case of transfers by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be produced, and may be required to be deposited and to remain with the Company in its discretion. No transfer of the Warrants or any interest therein other than in compliance with this Section 1.2 shall be made or recorded in the Warrant Register, and any such purported transfer shall be void and of no effect. (b) This Warrant Certificate is exchangeable, in whole or in part, upon the surrender hereof by the holder hereof at the Office for new Warrant Certificates, in substantially the form of this Warrant Certificate, evidencing in the aggregate the right to purchase the number of Warrant Shares that may then be purchased hereunder, each of such new Warrant Certificates to be dated the date of such exchange and to represent the right to purchase such number of Warrant Shares as shall be designated by the holder of such new Warrant Certificates at the time of such surrender. 2 SECTION 2. TERM OF WARRANTS; EXERCISE OF WARRANTS. 2.1 TERM OF WARRANT. Subject to the terms of this Warrant Certificate, the Holder shall have the right, which may be exercised by the registered Holder hereof from time to time on any Business Day before 5:00 P.M. (New York City time) during the period through and including August 3, 2008 (the "Expiration Date") to purchase from the Company an aggregate of _______ fully paid and nonassessable Warrant Shares or such other number of Warrant Shares which the Holder may at the time be entitled to purchase in accordance with this Warrant Certificate. At 5:00 P.M. (New York City time) on the Expiration Date, each Warrant not exercised prior thereto shall be and become void and of no value. 2.2 EXERCISE OF WARRANTS. Subject to the terms of this Warrant Certificate, the Warrants evidenced by this Warrant Certificate may be exercised in whole or in part, upon surrender to the Company, at its Office, of this Warrant Certificate, with a Purchase Form substantially in the form attached hereto duly completed and signed, and upon payment to the Company of the Exercise Price. Payment of the aggregate Exercise Price shall be in cash; PROVIDED, HOWEVER, that in lieu of payment in cash, the Holder may, at its option, pay all or a portion of the aggregate Exercise Price by tendering shares it holds of the Series A 10% Cumulative Redeemable Preferred Stock of the Company, which shares shall be valued at their stated liquidation value, plus any accrued but unpaid dividends thereon, to the date of exercise pursuant to this Section 2.2. Payment of the aggregate Exercise Price in cash shall be by wire transfer in immediately available funds to an account designated in writing by the Company to the Holder. Upon the surrender of this Warrant Certificate, with the Purchase Form duly executed, and payment of the Exercise Price as aforesaid, the Company shall (subject to compliance, if necessary, with applicable provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended), promptly and, in any event within ten Business Days, issue and deliver to or upon the written order of the Holder and in such name or names as the Holder may designate a certificate or certificates for such number of Warrant Shares so purchased. Such certificate or certificates shall be dated and deemed to have been issued as of the date of the surrender of this Warrant Certificate and payment of the Exercise Price, as aforesaid. The right of purchase represented by this Warrant Certificate shall be exercisable, at the election of the Holder, in full at any time or in part from time to time. In the event the Holder shall exercise fewer than all the Warrants evidenced hereby, a new Warrant Certificate shall be issued evidencing the remaining unexercised Warrants. 2.3 EXERCISE PRICE. The price per share at which each Warrant Share shall be purchased upon exercise of each Warrant (the "Exercise Price") shall be $5.00, subject to adjustment pursuant to Section 6 LESS an amount per Warrant equal to the dividends in respect of the Warrant Shares that the holder would have received had such Warrant been exercised on February 3, 1998. The aggregate Exercise Price for all Warrant Shares subject to this Warrant Certificate shall be rounded to the next higher $0.01. 3 SECTION 3. PAYMENT OF TAXES. The Company covenants and agrees that it will pay when due and payable all documentary, stamp and other similar taxes, if any, which may be payable in respect of the issuance or delivery of the Warrants or of the Warrant Shares purchasable and issuable upon the exercise of the Warrants; PROVIDED, HOWEVER, that the Company shall not be required to pay any such tax or other charge imposed in respect of the transfer of Warrants, or the issuance or delivery of certificates for Warrant Shares or other Securities in respect of the Warrant Shares upon the exercise of Warrants, to a person or entity other than a then-existing registered Holder of Warrants. SECTION 4. MUTILATED OR MISSING WARRANTS. In the event this Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company shall issue and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and in substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent right or interest, but only upon, in the event of a lost, stolen or destroyed certificate, receipt of evidence satisfactory to the Company of such loss, theft or destruction and, if requested by the Company, upon indemnity that also is satisfactory to it; PROVIDED that a written undertaking of such loss, theft or destruction of this Warrant Certificate by the registered Holder hereof shall be deemed a satisfactory indemnity of the Company for purposes of this Section 4. In making application for such a substitute Warrant Certificate, the Holder shall also comply with such other reasonable requirements as the Company may prescribe. SECTION 5. RESERVATION AND AVAILABILITY OF WARRANT SHARES; PURCHASE AND CANCELLATION OF WARRANTS. 5.1 RESERVATION OF WARRANT SHARES. (a) The Company shall at all times reserve and keep available free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock, for the purpose of enabling it to satisfy any obligations to issue the Warrant Shares upon exercise of the Warrants, the full number of Warrant Shares deliverable upon the exercise of all the Warrants evidenced by this Warrant Certificate. The Company or, if appointed, the transfer agent for the Common Stock and every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of any of the rights of purchase aforesaid (each, a "Transfer Agent") shall be irrevocably authorized and directed at all times to reserve such number of authorized shares of Common Stock as shall be required for such purpose. The Company will keep a copy of this Warrant Certificate on file with each Transfer Agent. The Company will furnish such Transfer Agent a copy of all notices of adjustments and certificates related thereto which are transmitted to the Holder pursuant to Section 6 hereof. (b) The Company covenants that all Warrant Shares issuable upon exercise of the Warrants will, upon issuance, be fully paid, nonassessable and free from preemptive rights and free from all taxes, liens, charges and security interests with respect to the issuance thereof. 4 (c) Before taking any action which would cause an adjustment pursuant to Section 6, the Company will take any and all corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares at the Exercise Price as so adjusted. 5.2 WARRANT SHARES RECORD DATE. Each person in whose name any stock certificate for Warrant Shares is issued shall for all purposes be deemed to have become the holder of record of the Warrant Shares represented thereby, and such stock certificate shall be dated the date upon which this Warrant Certificate was duly surrendered and payment of the Exercise Price (and any applicable transfer taxes) was made. 5.3 CANCELLATION OF WARRANT. Upon surrender of the Warrant Certificate for exchange, substitution, transfer or exercise, it shall be cancelled by the Company and retired. SECTION 6. ADJUSTMENT OF NUMBER OF WARRANT SHARES AND EXERCISE PRICE. The number of securities purchasable upon the exercise of each Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of certain events as hereinafter described. 6.1 MANDATORY ADJUSTMENTS. The number of securities purchasable upon the exercise of the Warrants and the Exercise Price shall be subject to adjustment as follows: (a) In case the Company shall (i) declare or pay a dividend on any of its outstanding Common Stock in shares of Common Stock or make a distribution to holders of its outstanding Common Stock in shares of Common Stock, (ii) subdivide any of its outstanding Common Stock into a greater number of shares of Common Stock, (iii) combine any of its outstanding Common Stock into a smaller number of shares of Common Stock or (iv) issue by reclassification of any of its shares of Common Stock other securities of the Company (including any such reclassification in connection with a consolidation, merger or other business combination in which the Company is the surviving corporation), the number and kind of Warrant Shares purchasable and issuable upon exercise of the Warrants shall be adjusted so that the Holder, upon exercise thereof, shall be entitled to receive the number and kind of Warrant Shares and other securities of the Company that the Holder would have owned or have been entitled to receive after the happening of any of the events described above had the Warrants been exercised and the relevant Warrant Shares issued in the name of the Holder immediately prior to the happening of such event or, if applicable, any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective on the date of the dividend payment, subdivision, combination or issuance retroactive to the record date with respect thereto, if any, for such event. Upon adjustment of the number of Warrant Shares as provided in this paragraph (a), the Exercise Price payable upon exercise of each Warrant shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of each Warrant immediately prior to such 5 adjustment and of which the denominator shall be the number of Warrant Shares purchasable immediately thereafter. (b) In case the Company shall distribute to all holders of its outstanding Common Stock evidences of indebtedness of the Company, cash (including cash dividends payable out of consolidated earnings or earned surplus) or assets or securities other than its Common Stock (including stock of a subsidiary or securities convertible into or exercisable for such stock but excluding dividends or distributions referred to in Sections 6.1(a) above or Section 6.1(c) below) (any such evidences of indebtedness, cash, assets or securities, the "assets or securities"), then, in each case, the Exercise Price shall be adjusted by subtracting from the Exercise Price then in effect the value per share (as determined in accordance with Section 6.2(b)) of the assets or securities that the Holder would have been entitled to receive as a result of such distribution had the Warrant been exercised and the relevant Warrant Shares issued in the name of the Holder immediately prior to the record date for such distribution; PROVIDED that if, after giving effect to such adjustment, the Exercise Price would be less than $0.01 per share, the Company shall distribute such assets or securities to the Holder as if the Holder had exercised the Warrants and the Warrant Shares had been issued in the name of the Holder immediately prior to the record date for such distribution. Any adjustment required by this Section 6.1(b) shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of shareholders entitled to receive such distribution. (c) If at any time after the date hereof the Company shall issue or sell any shares of Common Stock or any warrants, options or rights to subscribe for or purchase Common Stock or securities convertible into Common Stock (but excluding distributions referred to in paragraph (a) or (b) above or (d) below), and the consideration per share for, or the price per share at which such warrant, option or right is exercisable for or convertible into, such Common Stock is less than the Fair Market Value (as defined below) of the Common Stock immediately prior to such issuance or sale, then, forthwith upon such issuance or sale, the Exercise Price shall be reduced to the price determined by multiplying the Exercise Price in effect immediately prior to the time of such issuance or sale by a fraction the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issuance or sale MULTIPLIED BY the Fair Market Value immediately prior to such issuance or sale and (ii) the consideration received by the Company upon such issuance or sale, and the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such issuance or sale MULTIPLIED BY the Fair Market Value immediately prior to such issuance or sale. Notwithstanding the foregoing, the Company may, without adjustment to the Exercise Price pursuant to this Section 6.1(c), issue options, warrants or rights to subscribe for shares of its Common Stock to officers, directors, employees, 6 consultants or agents of the Company pursuant to the terms of any stock option plan or arrangement approved by the Board of Directors, and may issue shares of its Common Stock upon the exercise of any such stock options, warrants or rights; PROVIDED, HOWEVER, that the aggregate number of shares of Common Stock that may be issued at any one time under such stock option plan or arrangement without adjustment to the Exercise Price under this Section 6.1(c) shall not exceed, in the aggregate 300,000 shares (appropriately adjusted for stock splits, dividends and/or combinations. As used herein, "Fair Market Value" of the Common Stock or other securities means, on any date, the average of the last sale price, regular way, for the 10-business day period immediately preceding such date, or if no such sales took place during such 10-business day period, the average of the closing bid and asked prices, regular way, for each day in such 10-business day period, in either case as reported on the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares of Common Stock or such other securities are listed, or, if the Common Stock or such other securities are not listed or admitted to trading on any national securities exchange, the average of the last quoted sale price for such 10-business day period or, if not so quoted, the average of the high bid and low asked prices for each day in such 10-business day period in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or such other system then in use, or, if on any such date the Common Stock is not quoted by any such organization, the average of the closing bid and asked prices during such 10-business day period as furnished by a professional market maker making a market in the Common Stock or such other securities selected by the Board of Directors of the Company. If the shares of Common Stock or such other securities are not publicly held or so listed or publicly traded, "Fair Market Value" shall mean the fair market value per share of Common Stock or such other securities as determined by the Company and the holders of at least a majority of the Warrants issued to the Warrantholders that are then outstanding. negotiating in good faith toward agreeing upon such value. If no agreement can be reached within 14 days from the date of receipt by Required Purchasers of the notice required by Section 6.2(a), the Company and the Required Purchasers shall appoint within 21 days from the date of such receipt a mutually acceptable independent investment banking firm to determine the Fair Market Value. Such firm shall make the necessary determination which shall be binding absent actual fraud or manifest error. The fees of such firm for making such determination and any related reimbursable expenses shall be paid by the Company. (d) If at any time after the date hereof the Company shall issue or sell to any person any securities convertible into or exercisable for Common Stock ("Convertible Securities") (other than securities distributed in a transaction described in paragraph (b) or (c) above), whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common 7 Stock is issuable upon such conversion or exchange shall be less than the Fair Market Value in effect immediately prior to the time of such issue or sale, then the Exercise Price shall be adjusted as provided in subparagraph (c) above on the basis that (i) the maximum number of shares of Common Stock necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding, (ii) the price per share of such shares shall be deemed to be the lowest possible price in any range of prices at which such additional shares are available to such holders, and (iii) the Company shall be deemed to have received all of the consideration payable therefor, if any, as of the date of actual issuance of such Convertible Securities. No adjustment of the Exercise Price shall be made under this subparagraph (d) upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights pursuant to subparagraph (c) above. No further adjustments of the Exercise Price shall be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities and, if any issue or sale of such Convertible Securities is made upon exercise of any warrant or other right to subscribe for or to purchase any such Convertible Securities for which adjustments of the Exercise Price have been or are to be made pursuant to other provisions of this Section 6.1, no further adjustments of the Exercise Price shall be made by reason of such issue or sale. For the purposes of this subparagraph (d), the date as of which the Exercise Price shall be computed shall be the earlier of (i) the date on which the Company shall enter into a firm contract for the issuance of such Convertible Securities and (ii) the date of actual issuance of such Convertible Securities. Such adjustments shall be made upon each issuance of Convertible Securities and shall become effective immediately after such issuance. (e) No adjustment in the number of Warrant Shares purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least one quarter of one percent (0.25%) in the number of Warrant Shares purchasable upon the exercise of each Warrant; PROVIDED, HOWEVER, that any adjustments which by reason of this Section 6.1(e) are not required to be made shall be made immediately prior to any exercise of any Warrants or, if no such exercise occurs prior to the time that any subsequent adjustment would be made, carried forward and taken into account in such subsequent adjustment. All calculations shall be made to the nearest one-thousandth of a share. No adjustment need be made for a change in the par value of the Warrant Shares. (f) Upon each adjustment of the Exercise Price pursuant to paragraphs (b) through (d) of this Section 6.1, this Warrant Certificate shall be deemed to evidence the right to purchase, at the adjusted Exercise Price, that number of Warrant Shares obtained by multiplying the number of Warrant Shares covered by this Warrant Certificate immediately prior to such adjustment by the Exercise Price in 8 effect prior to such adjustment and dividing the product so obtained by the Exercise Price in effect after such adjustment. (g) The number of shares of Common Stock outstanding at any given time shall not include shares directly or indirectly owned or held by or for the account of the Company or any of its subsidiaries, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of this Section 6.1. 6.2 NOTICE OF ADJUSTMENT. (a) The Company hereby agrees that whenever any adjustment of the number of Warrant Shares purchasable upon the exercise of the Warrants or the Exercise Price of such Warrants is effected as herein provided, the Company shall promptly notify the Holder, by first class mail, postage prepaid, of such adjustment and shall deliver to the Holder a certificate of the Chief Financial Officer of the Company, setting forth in reasonable detail (i) the number of Warrant Shares purchasable upon the exercise of the Warrants and the Exercise Price of the Warrants after such adjustment, (ii) a brief statement of the facts requiring such adjustment and (iii) the computation by which such adjustment was made. (b) If any adjustment is required to be made pursuant to Section 6.1(b) (unless the PROVISO to the first sentence of that Section is applicable to the action), the Company and the holders of at least a majority of the Warrants issued to the Warrantholders that are then outstanding shall negotiate in good faith toward agreeing upon the value of the assets or securities and the necessary adjustment. If no agreement can be reached within 14 days from the date of receipt by Required Purchasers of such notice, the Company and the Required Purchasers shall appoint within 21 days from the date of such receipt a mutually acceptable independent investment banking firm to determine the necessary adjustment. Such firm shall make the necessary determination which shall be binding absent actual fraud or manifest error. The fees of such firm for making such determination and any related reimbursable expenses shall be paid by the Company. 6.3 PRESERVATION OF PURCHASE RIGHTS UPON MERGER, CONSOLIDATION, ETC. (a) In the event of any merger, consolidation or other acquisition or business combination in which the Company is not the surviving corporation or in which all of the outstanding Common Stock of the Company is converted into, acquired or exchanged for securities, cash or property or in the event of the sale or other disposition of all or substantially all the assets of the Company, then, and in each such case, proper provision shall be made so that, upon the basis and upon the terms and in the manner provided in this Section 6.3, the holder of this Warrant Certificate, upon the exercise of any of its Warrants at any time after the consummation of such consolidation, merger, transfer, reorganization or reclassification, shall be entitled to receive, in lieu of shares of Common Stock issuable upon such exercise prior to such consummation, the stock, securities, cash and assets to which such holder would have been entitled upon such consummation if such holder had so exercised 9 such Warrant immediately prior thereto, at the aggregate Exercise Price in effect for all shares of Common Stock issuable upon such exercise immediately prior to such consummation as adjusted to the time of such transaction (subject to adjustments subsequent to such corporate action as nearly equivalent as possible to the adjustments provided for in Section 6.1 above); provided, however, that the holder of this Warrant Certificate shall not be required to accept as consideration any property or securities the holding of which by such holder would be prohibited by any law, rule or regulation of any governmental entity or insurance industry regulatory body. Such undertaking shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 6; PROVIDED, HOWEVER, that if upon such consolidation, merger, transfer, reorganization or reclassification, different holders of Common Stock shall be entitled to receive different forms of consideration for their Common Stock, the form of such consideration thereafter deliverable upon the exercise of the Warrants shall be as determined in good faith by the Board of Directors, whose determination shall be conclusive. The provisions of this Section 6.3 shall also apply to successive mergers or consolidations. (b) Upon any liquidation, dissolution or winding up of the Company, the Holder shall receive such cash or property (less the Exercise Price) which the Holder would have been entitled to receive upon the happening of such liquidation, dissolution or winding up had the Warrants been exercised and the Warrant Shares issued immediately prior to the occurrence of such liquidation, dissolution or winding up. 6.4 STATEMENT ON THE WARRANT. Irrespective of any adjustments in the number or kind of securities purchasable upon the exercise of the Warrant or the Exercise Price, any Warrant Certificate theretofore or thereafter issued may continue to express the same price and number and any kind of shares as are stated in this Warrant Certificate. SECTION 7. FRACTIONAL INTERESTS. The Holder shall not be required to accept fractional securities on the exercise of Warrants. If any fraction of a security would be issuable on the exercise of Warrants, the Holder may, at its option, require the Company to pay to the Holder of such Warrants an amount in cash equal to the fair market value of such fraction. SECTION 8. REGISTRATION. The Holder shall, from time to time, have the rights, if any, with respect to registration of Warrant Shares as are set forth in the Registration Rights Agreement for such Warrant Shares. SECTION 9. NO RIGHTS AS A SHAREHOLDER; NOTICES TO HOLDER. Nothing contained in this Warrant Certificate shall be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a shareholder in respect of any meeting of shareholders of the Company for the election of the directors of the Company or any other matter, or any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the exercise of the Warrants evidenced by this Warrant Certificate, any of the following events shall occur: 10 (a) the Company shall declare any dividend payable in cash or in any securities upon its shares of Common Stock or make any distribution to the holders of its shares of Common Stock; (b) the Company shall offer to all holders of its shares of Common Stock any additional shares of Common Stock or securities convertible into or exchangeable for shares of Common Stock or any right to subscribe for or purchase any thereof; (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation, merger, sale, transfer or lease of all or substantially all of its property, assets and business as an entirety) shall be proposed; or (d) any consolidation or merger to which the Company is a party and for which approval of the holders of Common Stock is required, or of the conveyance or transfer of all or substantially all assets of the Company as, or substantially as, an entirety, or of any reclassification or change of outstanding shares of Common Stock issuable upon exercise of the Warrant (other than a change in par value to no par value, or from no par value to par value) or as a result of a subdivision or combination (except the merger of the Company into Elgar Holdings, Inc. (formerly Carlyle-EEC Holdings, Inc.) pursuant to that certain Agreement and Plan of Merger dated January 2, 1998), then in any one or more of said events, the Company shall give to the Holder the greater of 15 business days' written notice and the number of days written notice required to be given to shareholders with respect to such action prior to the applicable record date hereinafter specified, stating (i) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such dividends, rights or warrants are to be determined or (ii) the date on which any such dissolution, liquidation, winding up, consolidation, merger, conveyance or transfer is expected to become effective and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation, or winding up. SECTION 10. IDENTITY OF TRANSFER AGENT. Forthwith upon the appointment of any Transfer Agent for the Common Stock, or any other shares of the Company's capital stock issuable upon the exercise of the Warrants, the Company shall promptly notify the Holder of the name and address of such Transfer Agent. SECTION 11. NOTICES. Any notice, except as provided in Section 9 of this Warrant Certificate, or demand authorized by this Warrant Certificate to be given by the Holder to the Company, shall be in writing and shall be delivered in person or by facsimile transmission, or mailed by overnight courier, or otherwise delivered, to the Company, in care of J.F. Lehman & Company, 450 Park Avenue, New York, New York 10022, attention of 11 Mr. Donald Glickman. The Company may change the address to which notices to it are to be delivered or mailed hereunder by notice to the Holder. Any notice pursuant to this Warrant Certificate by the Company to the Holder shall be in writing and shall be mailed by overnight courier or otherwise delivered, to the Holder at its address set forth in the Warrant Register. In addition, a courtesy copy of any such notice shall be delivered to Schwartz, Cooper, Greenberger & Krauss, 180 North LaSalle Street, Suite 2700, Chicago, Illinois 60601 Attention: Brian O'Neil, Esq. Notices delivered personally shall be effective at the time delivered by hand, notices sent by mail shall be effective when received, notices sent by facsimile transmission shall be effective when confirmed and notices sent by courier guaranteeing next day delivery shall be effective on the next business day after timely delivery to the courier. SECTION 12. AMENDMENT AND WAIVER. Any term, covenant, agreement or condition in this Warrant Certificate may be amended, or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), by a written instrument or written instruments executed by the Company and the holders of at least 66K% of the Warrants issued to the Warrantholders that are then outstanding; PROVIDED, HOWEVER, that no such amendment or waiver shall change the number of Warrant Shares issuable under the Warrants, change the Exercise Price, change the period during which the Warrants may be exercised or modify any provision of Section 6 or this Section 12 without the consent of the holders of all such Warrants then outstanding or shall have a disparate and adverse impact on any Warrantholder. SECTION 13. SUCCESSORS. All the covenants and provisions of this Warrant Certificate by or for the benefit of the Company shall bind and inure to the benefit of its respective successors and assigns hereunder. SECTION 14. GOVERNING LAW. This Warrant Certificate shall be construed in accordance with and governed by the internal laws of the State of Delaware applicable to contracts executed and to be performed wholly within such state, without regard to the principles of conflicts or choice of law. SECTION 15. BENEFITS OF THIS WARRANT CERTIFICATE. Nothing in this Warrant Certificate shall be construed to give to any person or entity other than the Company and the Holder any legal or equitable right, remedy or claim under this Warrant Certificate; and this Warrant Certificate shall be for the sole and exclusive benefit of this Company and the Holder. SECTION 16. SURVIVAL OF RIGHTS AND DUTIES. This Warrant Certificate shall terminate and be of no further force and effect on the earlier of 5:00 P.M. (New York City time) on the Expiration Date or the date on which all of the Warrants have been exercised. 12 SECTION 17. AGREEMENT TO BE BOUND. The Holder acknowledges and hereby agrees to be bound by such terms and conditions of the Shareholders' Agreement as are by their terms applicable to the Holder. Any and all Warrant Shares issued upon exercise hereof shall, immediately upon such issuance, and without further action by or on behalf of the Holder or the Company, become subject to such terms and conditions of the Shareholders' Agreement as are by their terms applicable to such Warrant Shares. SECTION 17. CAPTIONS. The captions of the Sections and paragraphs of this Warrant Certificate have been inserted for convenience only and shall have no substantive effect. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed this 3 day of February 1998. JFL-EEC MERGER SUB CO. By: -------------------------------- Donald Glickman President 13 FORM OF ELECTION TO PURCHASE (To Be Executed by the Holder if the Holder Desires to Exercise Warrants Evidenced by the Foregoing Warrant Certificate) To JFL-EEC Merger Sub Co.: The undersigned hereby irrevocably elects to exercise ____________ Warrants evidenced by the foregoing Warrant Certificate for, and to purchase thereunder, ____________ full shares of Common Stock issuable upon exercise of said Warrants and delivery of $_____ in cash (or in liquidation preference of the Series A 10% Cumulative Redeemable Preferred Stock of the Company, or any combination thereof) with and any applicable taxes payable by the undersigned pursuant to such Warrant Certificate. The undersigned requests that certificates for such shares be issued in the name of ____________________________. PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER (Please print name and address) ------------------------------ ------------------------------ ------------------------------ If said number of Warrants shall not be all the Warrants evidenced by the foregoing Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so exercised be issued in the name of and delivered to: - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Please print name and address) By: ---------------------------- Name: Title: Dated: ----------------------- FORM OF ASSIGNMENT FOR VALUE RECEIVED, ____________________ hereby sells, assigns and transfers to each assignee set forth below all of the rights of the undersigned in and to the number of Warrants (as defined in and evidenced by the foregoing Warrant Certificate) set opposite the name of such assignee below and in and to the foregoing Warrant Certificate with respect to said Warrants and the shares of Common Stock issuable upon exercise of said Warrants:
Name of Assignee Address Number of Warrants - -------------------- ----------- ----------------------
If the total of said Warrants shall not be all the Warrants evidenced by the foregoing Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so assigned be issued in the name of and delivered to the undersigned. By: --------------------------------- Name: Title: Dated: ------------------------- EX-10.1 14 EXHIBIT 10.1 ASSUMPTION AGREEMENT ASSUMPTION AGREEMENT (this "Agreement"), dated as of February 3, 1998, is by Elgar Holdings, Inc., a Delaware corporation (the "Company"), and Elgar Electronics Corporation, a California corporation (the "Subsidiary Guarantor"). W I T N E S S E T H WHEREAS, JFL-EEC Merger Sub Co., a Delaware corporation ("MergerCo"), has heretofore executed and delivered to the Initial Purchaser a purchase agreement (the "Purchase Agreement"), dated as of January 30, 1998, providing for the terms pursuant to which the Initial Purchaser will purchase $90,000,000 aggregate principal amount of 9 7/8% Senior Notes due 2008 (the "Notes") of MergerCo; WHEREAS, MergerCo has heretofore executed and delivered to the Initial Purchaser a registration rights agreement (the "Registration Rights Agreement"), dated as of February 3, 1998, providing for the registration of the Notes and the Exchange Notes of MergerCo under the Securities Act of 1933, as amended; WHEREAS, MergerCo has been merged with and into the Company (the "Merger"); WHEREAS, pursuant to the Purchase Agreement and the Registration Rights Agreement, the Company upon consummation of the Merger is required to assume all of the obligations of MergerCo under the Purchase Agreement and the Registration Rights Agreement and to execute and deliver this Agreement concurrently with the Merger; and WHEREAS, pursuant to the Purchase Agreement and the Registration Rights Agreement, immediately subsequent to the Merger, the Subsidiary Guarantor is required to become a party to the Purchase Agreement and the Registration Rights Agreement and to guarantee the obligations of the Company with respect to the Notes thereunder; NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Company and the Subsidiary Guarantor mutually covenant and agree for the benefit of the Initial Purchaser as follows: -2- 1. ASSUMPTION. The Company hereby agrees to assume all of the obligations of MergerCo and all of its own obligations under each of the Purchase Agreement and the Registration Rights Agreement. 2. SUBSIDIARY GUARANTOR. The Subsidiary Guarantor hereby agrees to be deemed the "Subsidiary Guarantor" or the "Subsidiary" for all purposes under the Purchase Agreement and the "Subsidiary Guarantor" and an "Issuer" for all purposes under the Registration Rights Agreement and to perform all obligations and duties of the Subsidiary Guarantor, the Subsidiary or an Issuer, as the case may be, thereunder. 3. DEFINITIONS. Capitalized terms used herein but not defined shall have the meanings given to such terms in the Purchase Agreement and the Registration Rights Agreement. 4. NEW YORK LAW TO GOVERN. The internal law of the State of New York, without regard to the choice of law rules thereof, shall govern and be used to construe this Agreement. 5. COUNTERPARTS. The parties may sign any number of copies of this Agreement. 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. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered, all as of the date first above written, which is the date of the Merger. ELGAR HOLDINGS, INC. By: /s/ Donald Glickman --------------------------------------- Name: Donald Glickman Title: President ELGAR ELECTRONICS CORPORATION By: /s/ Christopher W. Kelford --------------------------------------- Name: Christopher W. Kelford Title: Vice President--Finance, Chief Financial Officer and Treasurer EX-10.2 15 EXHIBIT 10.2 INVESTMENT AGREEMENT INVESTMENT AGREEMENT, dated as of February 3, 1998 (this "AGREEMENT"), by and among JFL-EEC MERGER SUB CO., a Delaware corporation (the "COMPANY"), JACKSON NATIONAL LIFE INSURANCE COMPANY ("PURCHASER I"), INDOSUEZ ELECTRONICS PARTNERS ("PURCHASER II) and OLD HICKORY FUND I, L.L.C. ("PURCHASER III," and, together with Purchaser I and Purchaser II, the "PURCHASERS"). Capitalized terms not otherwise defined where used shall have the meanings ascribed thereto in Article I. WHEREAS, the Boards of Directors of the Company and Elgar Holdings, Inc., a Delaware corporation ("HOLDINGS") have determined to effect a recapitalization of Holdings and its wholly-owned subsidiary Elgar Electronics Corporation ("ELGAR") pursuant to which, among other things, (i) JFL-EEC LLC, a Delaware limited liability company ("JFL-EEC LLC"), will make a capital contribution in the amount of approximately $19.0 million to the Company, (ii) the Company will issue, on the terms and subject to the conditions set forth in this Agreement, shares of its Series A 10% Cumulative Redeemable Preferred Stock (the "PREFERRED STOCK") and certain warrants (the "WARRANTS") in exchange for an aggregate of $10.0 million, (iii) the Company will offer and issue $90.0 million in aggregate principal amount of 9 7/8% Senior Notes due 2008 (the "SENIOR NOTES"), (iv) the Company will merge with and into Holdings, with Holdings surviving such merger and assuming the liabilities and obligations of the Company (the "MERGER"), including without limitation the liabilities and obligations with respect to the Series A Preferred Stock, the Warrants and the Senior Notes, (v) pursuant to the Merger Agreement, (A) immediately prior to the Merger, Holdings will effect an approximately 9,220 to 1 stock split, such at the effective time of the Merger there will be approximately 9,220,000 shares of Holdings common stock, $.01 par value per share (the "COMMON STOCK") issued and outstanding, (B) Carlyle-EEC Acquisition Partners, L.P., the owner of all of the issued and outstanding capital stock of Holdings immediately prior to the Merger, will liquidate and distribute the shares of Common Stock to its partners, and (C) each share of the Common Stock issued and outstanding immediately prior to the Merger, other than certain shares held by certain shareholders and members of management, will be converted into the right to receive cash, and (v) Holdings and Elgar will enter into a new credit facility providing for revolving credit borrowings of up to $15.0 million (all such transactions shall be collectively referred to herein as the "RECAPITALIZATION"); WHEREAS, as a part of and a condition to the Recapitalization, Purchasers have agreed, severally and not jointly, to purchase, and the Company has agreed to sell, subject to the terms and conditions of this Agreement, (i) shares of its Series A Preferred Stock to the Purchasers and (ii) Warrants to purchase its Common Stock; and WHEREAS, the Company and Purchasers desire to set forth certain agreements herein. NOW THEREFORE, in consideration of the premises and the representations, warranties and agreements herein contained and intending to be legally bound hereby, the parties hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. DEFINITIONS. As used in this Agreement, the following terms shall have the meanings set forth below: "AFFILIATE" shall mean, with respect to any Person, any other Person which directly or indirectly controls or is controlled by or is under common control with such Person. As used in this definition, "control" (including its correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to (i) direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise) or (ii) vote 10% or more of the securities having ordinary voting power for the election of directors (or Persons performing similar duties) of such Person. For purposes hereof, "Affiliates" of the Company shall include all holders of Common Stock and securities exercisable for or convertible into Common Stock party to the Shareholders Agreement. "ANCILLARY DOCUMENTS" shall mean the Certificate of Designations, the Registration Rights Agreement and the Warrants. "BUSINESS DAY" shall mean any day, other than a Saturday, Sunday or a day on which banking institutions in New York, New York are authorized or obligated by law or executive order to close. "CERTIFICATE OF DESIGNATIONS" shall mean the Certificate of Designations, Preferences and Relative Participating, Optional and Other Special Rights of the Series A Preferred Stock which is attached hereto as EXHIBIT A. "CLOSING" and "CLOSING DATE" shall have the meanings set forth in Section 2.02(a). "COMMON STOCK" shall mean the Company's common stock, $.01 par value per share. "COMPANY SUBSIDIARY" shall mean any Subsidiary of the Company. 2 "CONTRACTUAL OBLIGATION" shall mean, as to any Person, any provision of any note, bond or security issued by such Person, or of any mortgage, indenture, deed of trust, lease, license, franchise, contract, agreement, instrument or undertaking to which such Person is a party or by which it or any of its property is subject. "DEBT OFFERING MEMORANDUM" shall mean the final offering memorandum dated January 30, 1998 with respect to the offering and issuance by the Company of the Senior Notes, which final offering memorandum was delivered to Purchasers prior to the date of this Agreement. "ELGAR" shall have the meaning set forth in the Recitals hereto. "ELIGIBLE TRANSFEREE" shall mean, and any partner of any Purchaser, any Person who controls or is under common control with any Purchaser, any successor to any Purchaser or any such other Person and any "qualified institutional buyer" as defined in Rule 144A promulgated under the Securities Act. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. "GAAP" shall mean generally accepted accounting principles in the United States of America in effect from time to time. "GOVERNMENTAL ENTITY" shall mean any nation or government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any self-regulating organization, securities exchange or securities trading system. "HOLDINGS" shall have the meaning set forth in the Recitals hereto. "INITIAL PERCENTAGE" shall mean 13.33% of the Common Stock of Holdings on the Closing Date, calculated after consummation of the Recapitalization on a fully diluted basis after giving effect to (i) the conversion and exercise of all outstanding warrants, options and other securities of the Company convertible or exercisable for Common Stock (whether or not such securities are then currently exercisable) and (ii) the issuance and exercise of the Warrants, and prior to giving effect to any Management Incentive Stock Option Plan. "INITIAL PURCHASERS" shall mean Purchaser I, Purchaser II and Purchaser III. "JFL-EEC LLC" shall mean JFL-EEC LLC, a Delaware limited liability company. "LEHMAN" shall mean J.F. Lehman & Company, a Delaware corporation. 3 "LEHMAN AGREEMENT" shall mean the management agreement to be entered by and among Holdings, Elgar, and Lehman on the Closing Date. "LIEN" shall mean any mortgage, pledge, hypothecation, assignment, encumbrance, lien (statutory or other) or security agreement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement or any financing lease having substantially the same effect as any of the foregoing). "MANAGEMENT INCENTIVE STOCK OPTION PLAN" means a plan to be adopted, at the sole discretion of the Company, providing for the granting of options to purchase up to 300,000 shares of Common Stock to directors and officers of the Company, Holdings and Elgar. "MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on (i) the assets, properties, business, financial condition, results of operations or prospects of the Company and the Company Subsidiaries taken as a whole, (ii) the ability of the Company or any Company Subsidiary to perform its obligations under this Agreement or the Ancillary Documents or (iii) the validity or enforceability of this Agreement or any of the Ancillary Documents or the rights or remedies of any Purchaser hereunder and thereunder. "MERGER" shall mean the merger of the Company with and into Holdings on the Closing Date, with Holdings as the surviving entity. "MERGER AGREEMENT" shall mean the Agreement and Plan of Merger, dated as of January 2, 1998, by and among JFL-EEC LLC, Holdings , the Company and TC Group, L.L.C., pursuant to which, among other things, the Company has agreed to merge with and into Holdings, with Holdings as the surviving entity. "PERMITS" shall have the meaning set forth in Section 3.01(h). "PERSON" shall mean an individual, corporation, limited liability company, unincorporated association, partnership, group (as defined in Section 13(d)(3) of the Exchange Act), trust, joint stock company, joint venture, business trust or unincorporated organization, any Governmental Entity or any other entity of whatever nature. "PREFERRED STOCK" shall mean the authorized preferred stock of the Company, $.01 par value per share. "PRO RATA SHARE" with respect to each Purchaser, shall mean a fraction the numerator of which is the aggregate purchase price payable by such Purchaser pursuant to this Agreement and the denominator of which is $10.0 million. 4 "RECAPITALIZATION" shall have the meaning set forth in the Recitals. "REGISTRATION RIGHTS AGREEMENT" shall mean the Warrantholders Registration Rights Agreement to be entered into by and among the Company and the Purchasers at the Closing, which shall be in the form attached hereto as EXHIBIT B. "RELATED DOCUMENTS" shall mean the collective reference to the Merger Agreement, the Debt Offering Memorandum, the Indenture with respect to the Senior Notes, the Senior Notes, the Credit Agreement and the Lehman Agreement. "REQUIREMENT OF LAW" shall mean, as to any Person, the certificate of incorporation and by-laws or other organizational documents of such Person, and any law, statute, order, treaty, rule, regulation or guideline, or judgment, decree, determination or order of any arbitrator, court or other Governmental Entity, applicable to or binding upon such Person or any of its property. "SEC" shall mean the United States Securities and Exchange Commission. "SECURITIES" shall mean the collective reference to the Series A Preferred Stock and the Warrants. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "SENIOR NOTES" shall mean the 9 7/8% Senior Notes Due 2008 of the Company to be offered pursuant to the Debt Offering Memorandum. "SERIES A PREFERRED STOCK" shall mean the Series A 10% Cumulative Redeemable Preferred Stock of the Company, $.01 par value per share, stated liquidation value of $1,000 per share and having the voting powers, preferences and relative participating, optional and other special rights and the qualifications, limitations or restrictions set forth in the Certificate of Designations. "SHAREHOLDERS AGREEMENT" shall mean the Shareholders Agreement dated as of the Closing Date, to be executed and delivered by Holdings, JFL-EEC LLC, the Purchasers in their capacity as holders of Warrant Shares upon exercise of the Warrants and by the other shareholders of the Company named therein, which shall be in the form of EXHIBIT C hereto. "SUBSIDIARY" shall mean, as to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. 5 "WARRANT" shall mean a warrant, in the form of EXHIBIT D, issued by the Company to acquire upon exercise one share of Common Stock (as adjusted from time to time pursuant to the terms thereof) and any warrant issued upon transfer, division or combination thereof or in substitution therefor. "WARRANT SHARES" shall mean shares of Common Stock issued upon exercise of Warrants. ARTICLE II AUTHORIZATION, SALE AND PURCHASE OF THE SECURITIES SECTION 2.01. AUTHORIZATION; AGREEMENT TO SELL AND PURCHASE. (a) Upon and subject to the terms and conditions set forth in this Agreement, the Company has authorized the issuance and sale to Purchasers of (i) 10,000 shares of Series A Preferred Stock and (ii) Warrants exercisable for a number of Warrant Shares equal to the Initial Percentage (which Warrant Shares shall be subject to adjustment from time to time pursuant to the terms of the Warrants). (b) Upon and subject to the terms and conditions of this Agreement, and in reliance upon the representations and warranties hereinafter set forth, the Company agrees to issue, sell and deliver to Purchasers at the Closing provided for in Section 2.02 hereof, and each Purchaser severally and not jointly agrees to purchase from the Company, the number of shares of Series A Preferred Stock set forth on ANNEX I hereto along with the Warrants as shall be exercisable for a number of Warrant Shares equal to the Purchaser's Pro Rata Share of the Initial Percentage (which Warrant Shares shall be subject to adjustment from time to time pursuant to the terms of the Warrants) (which such number of Warrants is set forth on ANNEX I hereto), for an aggregate purchase price with respect to each such Purchaser as is set forth on ANNEX I hereto. SECTION 2.02. CLOSING. (a) Subject to the satisfaction or waiver of the conditions set forth in this Agreement, the purchase and sale of the Securities pursuant to Section 2.01 (the "CLOSING") shall take place at the offices of Gibson, Dunn & Crutcher LLP, 200 Park Avenue, 48th Floor, New York, New York, on the first day on which the conditions in Sections 5.01 and 5.02 are satisfied or waived by Purchasers or the Company, as the case may be (the "CLOSING DATE"), or at such other time and place as may be mutually agreed upon by Purchasers and the Company. (b) At the Closing: (i) the Company shall deliver to each Purchaser, against payment of the purchase price therefor, (A) certificates for the Series A Preferred Stock sold in accordance with the provisions of Section 2.01, registered in the name of such Purchaser 6 or its nominee and in such denominations as such Purchaser shall specify not less than two Business Days prior to the Closing Date and (B) certificates evidencing the Warrants to be sold in accordance with the provisions of Section 2.01, registered in the name of such Purchaser or its nominee; (ii) each Purchaser, in full payment for such Securities, against delivery of the stock certificates and Warrants referred to above shall deliver to the Company on the Closing Date immediately available funds, by wire transfer to such account as the Company shall specify at least three Business Days prior to the Closing Date, in the amount of the purchase price to be paid hereunder by such Purchaser pursuant to Section 2.01; and (iii) each party shall take or cause to be taken such other actions, and shall execute and deliver such other instruments or documents, as shall be required under Article V hereof. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.01. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. (a) ORGANIZATION AND GOOD STANDING OF THE COMPANY. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, operate and lease its properties and to carry on its businesses as they are now being conducted. The Company is duly licensed or qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which its ownership or leasing of properties, or the conduct of its businesses requires such licensing or qualification and good standing, except where the failure to be so licensed or qualified and in good standing in any such jurisdiction would not have a Material Adverse Effect. The Company has, prior to the date hereof, delivered to Purchasers a true and complete copy of its certificate of incorporation and by-laws in each case as in effect on the date of this Agreement. (b) AUTHORIZATION; NO CONFLICTS. The Company has full corporate power and authority to enter into this Agreement and the Ancillary Documents and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement and each Ancillary Document and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of the Company. This Agreement has been, and on or prior to the Closing Date each Ancillary Document will be, duly and validly executed and delivered by the Company. This Agreement constitutes, and upon its execution and delivery on or prior to the Closing Date each Ancillary Document will constitute, a valid and legally binding obligation of the Company enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors generally and by general equitable principles. The execution, delivery and performance of this Agreement and the Ancillary Documents, the consummation of the transactions by the Company contemplated hereby and thereby and the compliance by the Company with the provisions hereof and thereof will not conflict with, violate or result in a 7 breach of any provision of, require a consent, approval or notice under, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any Lien upon any of the properties or assets of the Company under, (i) the certificate of designations or by-laws of the Company, (ii) any Contractual Obligation of the Company or (iii) assuming that the filings, consents and approvals specified in Schedule 3.01(c) have been obtained, any Requirement of Law applicable to the Company. (c) CONSENTS. No consent, approval, order or authorization of, registration, declaration or filing with, or notice to, any Governmental Entity is required in connection with the execution, delivery and performance of this Agreement and the Ancillary Documents by the Company, the consummation by the Company of the transactions contemplated hereby and thereby or the performance by the Company of its obligations hereunder and thereunder, except for (i) such filings as may be required under the blue sky laws of the various states and (ii) such consents, approvals, orders, authorizations, registrations, declarations, filings and notices as may be required in connection with the exercise of the rights set forth in the Registration Rights Agreement. (d) CAPITALIZATION. (i) Giving effect to the Recapitalization and immediately thereafter, (A) the authorized capital stock of the Company will consist of 5,000,000 shares of Common Stock and 20,000 shares of Preferred Stock, (B) 2,300,000 shares of Common Stock will be issued and outstanding, no shares of Common Stock will be held in treasury, and 353,744 shares of Common Stock will be reserved for issuance upon exercise of outstanding warrants (including the Warrants issuable to the Purchasers) and (C) 20,000 shares of Preferred Stock will be designated Series A Preferred Stock, of which 10,000 will be issued and outstanding upon consummation of the Recapitalization. (ii) All of the issued and outstanding shares of the Company's capital stock have been duly and validly authorized and issued and are fully paid and nonassessable. Upon delivery of and payment for the shares of Series A Preferred Stock on the Closing Date as provided herein, such shares of Series A Preferred Stock will be duly and validly authorized and issued, fully paid and nonassessable, and each Purchaser will acquire good title thereto, free and clear of all Liens (other than any Lien created by such Purchaser). The Warrant Shares have been reserved for issuance and, when issued upon exercise of the Warrants, will be duly and validly authorized and issued, fully paid and nonassessable and the owner of such Warrant Shares will acquire good title thereto, free and clear of all Liens (other than any Lien created by such Warrant owner). 8 No class of capital stock of the Company and no holder of capital stock (or rights to acquire capital stock) of the Company is entitled to preemptive rights, other than as set forth in the Shareholders Agreement. There are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, shares of any capital stock of the Company, or contracts, commitments, understandings, or arrangements by which the Company is or may become bound to issue additional shares of its capital stock or options, warrants or rights to purchase or acquire any shares of its capital stock, except for the Management Incentive Stock Option Plan. (e) DISCLOSURE. This Agreement, the certificates and disclosure statements delivered by or on behalf of the Company or the Company Subsidiaries, and all other written materials delivered by the Company to Purchasers prior to the date of this Agreement in connection with the transactions contemplated hereby (including, without limitation, the Merger Agreement and the Debt Offering Memorandum, taken as a whole and taking into account any written revisions or corrections to such written materials delivered to Purchasers prior to the date of this Agreement and including any statements, representations or warranties incorporated herein by reference pursuant to Section 3.01(g)), do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein, as of the respective dates of such written materials, not misleading. There is no fact peculiar to the Company or any of its Subsidiaries which the Company has not disclosed to each Purchaser in writing which materially affects adversely or, so far as the Company can now reasonably foresee, will materially affect adversely the properties, business, or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole or the ability of the Company to perform this Agreement, the Related Documents or its obligations in respect of the shares of Preferred Stock and the Warrants. (f) OFFERING OF SECURITIES. Neither the Company nor any Person acting on its behalf has taken or will take any action (including, without limitation, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of the Series A Preferred Stock or the Warrants under the Securities Act and the rules and regulations of the SEC thereunder) which might subject the offering, issuance or sale of any of the Series A Preferred Stock or Warrants to the registration requirements of the Securities Act. The offer, sale and issuance of the Series A Preferred Stock and Warrants by the Company under this Agreement will not violate the Securities Act, the Exchange Act or any applicable state securities or "blue sky" laws. (g) INCORPORATION BY REFERENCE OF REPRESENTATIONS AND WARRANTIES IN PURCHASE AGREEMENT. The representations and warranties made by the Company in respect of Company Holdings and its Subsidiaries and their business, properties, capitalization, financial condition and operations in the Purchase Agreement dated as of January 30, 1998 related to the Senior Notes and in the Credit Agreement are incorporated herein as if made by the Company to the Purchasers and as if set forth fully herein. 9 (h) OFFERING OF SHARES. Neither the Company nor any person acting on its behalf has offered the Series A Preferred Stock, the Warrants or any similar securities of the Company for sale to, solicited any offers to buy the Preferred Stock, the Warrants or any similar securities of the Company from or otherwise approached or negotiated with respect to the Company with any Person other than the Purchasers and not more than 35 other institutional investors. Neither the Company nor any Person acting on its behalf has taken or will take any action (including, without limitation, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of the Preferred Stock and the Warrants under the Securities Act and the rules and regulations of the Commission thereunder) which might subject the offering, issuance or sale of the Preferred Stock and the Warrants to the registration requirements of Section 5 of the Securities Act. SECTION 3.02. REPRESENTATIONS AND WARRANTIES OF PURCHASERS. Each Purchaser, severally and not jointly, represents and warrants to, and agrees with, the Company as follows: (a) SECURITIES ACT. Such Purchaser (i) is acquiring the Securities solely for the purpose of investment and not with a view to, or for resale in connection with, any distribution thereof in violation of the Securities Act; (ii) has had the opportunity to ask questions of the officers and directors of, and has had access to information concerning, the Company and the terms of the Securities and Warrant Shares; (iii) is an "accredited investor" as defined in Rule 501(a) under the Securities Act; (iv) has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the investment in the Securities; (v) has so evaluated the merits and risks of such investment; (vi) is able to bear the economic risk of such investment; and (vii) is able to afford a complete loss of such investment. (b) BROKERS AND FINDERS. None of the Purchasers nor any of their officers, directors, employees or agents has utilized any broker, finder, placement agent or financial advisor or incurred any liability for any fees or commissions in respect thereof in connection with any of the transactions contemplated hereby or by the Ancillary Documents. Such Purchaser agrees to indemnify the Company and to hold it harmless from and against any and all claims, liabilities or obligations with respect to any fees or other amounts payable as a result of any act or statement made by such Purchaser or any of its Affiliates. (c) LEGAL INVESTMENT. Each of the Purchasers represents and warrants to the Company that its purchase of the Series A Preferred Stock and Warrants hereunder is a legal investment for such Purchaser and such investment is not a prohibited investment for such Purchaser under any insurance or other regulations applicable to such Purchaser or its business. 10 ARTICLE IV ADDITIONAL AGREEMENTS OF THE PARTIES SECTION 4.01. TAKING OF NECESSARY ACTION. (a) Each of the parties hereto agrees to use all reasonable efforts promptly to take or cause to be taken all actions and promptly to do or cause to be done all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement and the Ancillary Documents. Without limiting the foregoing, the Company and Purchasers will, and the Company shall cause the Company Subsidiaries to, each use all reasonable efforts to make all filings and obtain all consents of Governmental Entities which may be necessary or, in the opinion of such Purchaser or the Company, as the case may be, advisable for the consummation of the transactions contemplated by this Agreement and the Ancillary Documents. (b) The Company shall provide to the Purchasers copies of all applications and filings in advance of filing with the applicable Governmental Entity and shall consult with the other parties regarding the contents thereof. SECTION 4.02. CONDUCT OF BUSINESS; LINE OF BUSINESS. (a) Except as required to (i) perform its obligations under this Agreement and the Ancillary Documents and (ii) effect the transactions described in the Debt Offering Memorandum, from the date hereof to the Closing Date, the Company shall, and shall cause each of the Company Subsidiaries to conduct its operations in accordance with its ordinary course of business and consistent with past practice and use its best efforts to preserve intact the business organizations of the Company and the Company Subsidiaries, to keep available the services of their respective officers and key employees and to preserve the good will of those having business relationships with the Company and Company Subsidiaries. (b) After the consummation of the Recapitalization, the Company will continue to engage principally in the business now conducted by it or a business or businesses similar thereto or reasonably compatible therewith. SECTION 4.03. INSPECTION OF PROPERTY. (a) The Company will keep, and will cause each Subsidiary to keep, proper books of record and account in which full and correct entries will be made of all dealings or transactions of or in relation to the business and affairs of the Company or such Subsidiary, in accordance with GAAP consistently maintained. For so long as any Purchaser or their respective Eligible Transferees owns any shares of Series A Preferred Stock, Warrants or Warrant Shares, the Company shall permit a representative of Purchaser or such Eligible Transferee to visit any of its properties and inspect its corporate books and financial records (but excluding any such books, records, agreements and files which are protected by 11 attorney-client privilege or which the Company is prohibited from disclosing to Purchasers or such Eligible Transferees pursuant to any nondisclosure agreements to which the Company or any Company Subsidiary is a party; PROVIDED that, to the extent permitted under any such nondisclosure agreement, the Company shall disclose any information subject to such nondisclosure agreement upon execution and delivery by such Purchaser or Eligible Transferee of a confidentiality agreement for the benefit of the parties to such nondisclosure agreement and PROVIDED, FURTHER, that no such nondisclosure agreement shall be effective with respect to financial records to the Company), and will discuss its accounts, affairs and finances with a representative of Purchaser or such Eligible Transferee during reasonable business hours, at such times as Purchaser or such Eligible Transferee may reasonably request. In addition, the Company will provide from time to time such information regarding results of operations, financial condition, business or prospects of the Company and the Company Subsidiaries as such Purchaser or Eligible Transferee may reasonably request. (b) No investigation by or on behalf of any Purchaser pursuant to this Section or otherwise shall affect any representation or warranty of the Company herein or the conditions to the obligations of the parties hereunder. SECTION 4.04. USE OF PROCEEDS. The proceeds of the sale of the Securities shall be used by the Company to effect the Recapitalization. SECTION 4.05. TRANSFER OF SECURITIES. (a) Each Purchaser acknowledges and agrees that as of the date hereof neither the Securities nor the Warrant Shares have been or will be registered under the Securities Act or the securities laws of any state and that they may be sold or otherwise disposed of only in one or more transactions registered under the Securities Act and, where applicable, such laws, or as to which an exemption from the registration requirements of the Securities Act and, where applicable, such laws, is available. Each Purchaser acknowledges that, except as provided in the Registration Rights Agreement with respect to the Warrant Shares, such Purchaser has no right to require the Company to register the Securities or Warrant Shares. Each Purchaser agrees not to sell, transfer, pledge or hypothecate any Securities or Warrant Shares except pursuant to (i) an effective registration statement for such Securities or Warrant Shares under the Securities Act or (ii) a transaction that is exempt from the registration requirements of the Securities Act; PROVIDED that the transferee of such Purchaser acknowledges and agrees to abide by the provisions of this Section 4.06 and, in the case of the transfer of any Warrants or Warrant Shares, the applicable provisions of the Shareholders Agreement. Except in the case of a transfer pursuant to Rule 144A under the Securities Act, the Holder may be required, upon reasonable request of the Company, to provide the Company with an opinion of counsel to such Purchaser (which opinion may be given by in-house counsel and otherwise to be in form and substance reasonably satisfactory to the Company) to the effect that such transfer is exempt from the registration requirements of the 12 Securities Act. Notwithstanding the foregoing, the Securities and Warrant Shares may be transferred to any Eligible Transferee of such Purchaser without any registration or opinion, subject to the foregoing restrictions on future sale, transfer, pledge or hypothecation by such Eligible Transferee. The Company shall cooperate with Purchasers and their transferees in supplying such information as may be necessary for such Purchasers or transferees to complete and file any information reporting forms currently or hereafter required by the SEC as a condition to the availability of an exemption from the registration requirements of the Securities Act for the sale of restricted securities. (b) Each Purchaser further acknowledges and agrees that each certificate for the Securities and Warrant Shares shall bear the following legend: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS, AND MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF ONLY IF REGISTERED PURSUANT TO THE PROVISIONS OF THE ACT AND SUCH LAWS, OR IF AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THIS CERTIFICATE IS ISSUED PURSUANT TO AND SUBJECT TO THE PROVISIONS OF AN INVESTMENT AGREEMENT, DATED FEBRUARY 3, 1998 (AS AMENDED, SUPPLEMENTED OR OTHERWISE MODIFIED, THE "INVESTMENT AGREEMENT"), BETWEEN THE COMPANY AND THE PURCHASERS REFERRED TO THEREIN, A COPY OF WHICH IS ON FILE WITH THE COMPANY." Any holder of Securities or Warrant Shares may request the Company to remove any legend described herein from the certificates evidencing such Securities or Warrant Shares by submitting to the Company such certificates, together with an opinion of counsel, if requested, reasonably satisfactory to the Company to the effect that such legend is no longer required under the Securities Act. In addition, each Purchaser further acknowledges that the Warrants and the Warrant Shares shall bear the following additional legend: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE ALSO SUBJECT TO A SHAREHOLDERS AGREEMENT DATED AS OF FEBRUARY 3, 1998 (THE "AGREEMENT"), WHICH CONTAINS PROVISIONS REGARDING (I) CERTAIN RESTRICTIONS ON THE TRANSFER OF SUCH SECURITIES, (II) CERTAIN RIGHTS OF FIRST OFFER, TAG-ALONG RIGHTS AND DRAG-ALONG RIGHTS APPLICABLE TO THIS SECURITY AND (III) CERTAIN OTHER MATTERS. A COPY OF SUCH AGREEMENT IS AVAILABLE FOR INSPECTION AT THE 13 PRINCIPAL OFFICE OF THE COMPANY. ANY TRANSFER OF THE SECURITIES EVIDENCED BY THIS CERTIFICATE IN VIOLATION OF THE AGREEMENT IS NULL AND VOID." SECTION 4.06. FURTHER ASSURANCES. Each party shall execute and deliver such additional instruments and other documents and shall take such further actions as may be necessary or appropriate to effectuate, carry out and comply with all of the terms of this Agreement and the transactions contemplated hereby, including, without limitation, making application as soon as practicable for all consents and approvals required in connection with the transactions contemplated hereby and diligently pursuing the receipt of such consents and approvals in good faith. SECTION 4.07. ALLOCATION OF PURCHASE PRICE. The parties agree that for tax purposes, a reasonable allocation of the total purchase price is to allocate $ 9,755,000 to the purchase price of the Series A Preferred Stock and $ 245,000 to the purchase price of the Warrants. The parties agree that all tax returns filed by the Company and Purchasers shall be prepared in a manner consistent with such allocation. SECTION 4.08. INFORMATION RIGHTS. (a) The Company covenants that during the period commencing on the Closing Date and for so long as an Initial Purchaser or its Eligible Transferee holds $1 million in stated liquidation value of Series A Preferred Stock, the Company will deliver to such Initial Purchaser, at its address set forth in the records of the Company: (i) as soon as practicable and in any event within 45 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, unaudited consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its subsidiaries for the period from the beginning of such quarterly period and from the beginning of the then current fiscal year to the end of such quarterly period, and a consolidated balance sheet of the Company and the Company Subsidiaries as of the end of such quarterly period, setting forth in each case in comparative form figures for the corresponding period or date in the preceding fiscal year; and (ii) as soon as practicable and in any event within 90 days after the end of each fiscal year, an audited consolidated balance sheet of the Company and the Company Subsidiaries as of the end of such fiscal year and the related consolidated statements of income, changes in shareholders' equity and cash flows for such fiscal year, setting forth in each case in comparative form the corresponding figures from the preceding fiscal year, together with the audit report of the independent public accountants of recognized standing selected by the Company. 14 (c) In addition, the Company covenants that for such period as a Purchaser is entitled to receive the reports set forth in Section 4.08(a) above, the Company shall provide such holder with (i) monthly unaudited financial statements of the Company and the Company Subsidiaries not later than 30 days after the last day of each fiscal quarter and (ii) such other information relating to the Company's operations as such Purchaser may reasonably request from time to time. ARTICLE V CONDITIONS SECTION 5.01. CONDITIONS OF PURCHASE. The respective obligations of each Purchaser to purchase the Securities to be purchased by it at the Closing is subject to the satisfaction or waiver of each of the following conditions on or prior to the Closing Date: (a) REPRESENTATIONS AND WARRANTIES; COVENANTS. The representations and warranties of the Company contained in or incorporated by reference in this Agreement and the Ancillary Documents shall be true and correct in all material respects on and as of the date of this Agreement or the date of such Ancillary Documents, as the case may be, and on and as of the Closing Date, with the same effect as though made on and as of such date, except to the extent any such representation and warranty is made as of a specified date, in which case such representation and warranty shall be true and correct in all material respects on and as of such specified date, and the Company shall have performed in all material respects all obligations, agreements, undertakings, covenants and conditions of this Agreement and the Ancillary Documents to be performed at or prior to the Closing Date. (b) NO INJUNCTION. There shall not be in effect any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits consummation of the transactions contemplated hereby. (c) REGULATORY APPROVALS. All permits, consents, authorizations, orders and approvals of, and filings and registrations required under any Federal or state law, rule or regulation for or in connection with the execution and delivery of this Agreement and the Ancillary Documents and the consummation by the parties hereto of the transactions contemplated on such parties' part hereby and thereby shall have been obtained or made and all statutory waiting periods thereunder in respect thereof shall have expired. (d) ISSUANCE OF SENIOR NOTES; RECAPITALIZATION. Prior to or simultaneously with the issuance of the Securities, (i) the Recapitalization shall have been effected on terms and pursuant to such agreements as are reasonably satisfactory in all respects to Purchasers, the Senior Notes shall have been issued on terms and pursuant to such agreements and documents as shall be reasonably satisfactory to Purchasers in all respects and (ii) each of the 15 Related Documents shall have been executed and delivered by each of the parties thereto and shall be reasonably satisfactory to Purchasers in all respects. (e) OPINION OF COUNSEL. Each Purchaser shall have received at the Closing from Gibson, Dunn & Crutcher LLP, counsel to the Company, a favorable written opinion dated as of the Closing Date which shall address each of the matters set forth in EXHIBIT E and which shall otherwise be in form and substance satisfactory to Purchasers. (f) REGISTRATION RIGHTS AGREEMENT. The Registration Rights Agreement shall have been duly executed and delivered by the Company. (g) SHAREHOLDERS AGREEMENT. The Shareholders Agreement shall have been duly executed and delivered by the Company and each Shareholder party thereto. (h) CERTIFICATE OF DESIGNATIONS. The Certificate of Designations of the Company shall have been filed with the Secretary of State of the State of Delaware as set forth in EXHIBIT A hereto. (i) AMENDMENT OF BY-LAWS. The By-Laws of the Company shall have been amended and restated as set forth in EXHIBIT F hereto. SECTION 5.02. CONDITIONS OF SALE. The obligation of the Company to sell the Securities to be sold at the Closing is subject to satisfaction or waiver of each of the following conditions precedent: (a) REPRESENTATIONS AND WARRANTIES; COVENANTS. The representations and warranties of Purchasers contained in this Agreement shall be true and correct in all material respects on and as of the date of this Agreement and on and as of the Closing Date with the same effect as though made on and as of such date, except to the extent any such representation and warranty is made as of a specified date, in which case such representation and warranty shall be true and correct in all material respects on and as of such specified date, and Purchasers shall have performed in all material respects all obligations, agreements, undertakings, covenants and conditions required by them to be performed at or prior to the Closing. (b) NO INJUNCTION. There shall not be in effect any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits consummation of the transactions contemplated hereby. (c) REGULATORY CONSENTS. All permits, consents, authorizations, orders and approvals of, and filings and registrations required under Federal or state law, rule or regulation for or in connection with the execution and delivery of this Agreement and the Ancillary Documents and the consummation by the parties hereto of the transactions 16 contemplated on such parties' part hereby and thereby shall have been obtained or made and all statutory waiting periods thereunder in respect thereof shall have expired. (d) ISSUANCE OF SENIOR NOTES; RECAPITALIZATION. Prior to or simultaneously with the issuance of the Securities, each of the following shall have occurred: (i) the Senior Notes shall have been issued by the Company, (ii) the Credit Agreement shall have been executed and delivered by the parties thereto and (iii) the Recapitalization shall have been effected. (e) REGISTRATION RIGHTS AGREEMENT. The Registration Rights Agreement shall have been duly executed and delivered by Purchasers. (f) SHAREHOLDERS AGREEMENT. The Shareholders Agreement shall have been duly executed and delivered by Purchasers in their capacity as holders of Warrant Shares upon exercise of the Warrants. ARTICLE VI TERM SECTION 6.01. TERMINATION. This Agreement may be terminated on or any time prior to the Closing: (a) by the mutual written consent of Purchasers and the Company; or (b) by either the Company or Purchasers if the Closing shall have not have occurred on or prior to February 28, 1998, unless the failure of such occurrence shall be due to the failure of the party seeking to terminate this Agreement to perform or observe its agreements set forth herein required to be performed or observed by such party on or before the Closing; or (c) by the Company or Purchasers pursuant to notice if any Governmental Entity of competent jurisdiction shall have denied any approval under any of the laws, rules or regulations necessary for the consummation of the transactions contemplated hereby by a final and unappealable order. SECTION 6.02. EFFECT OF TERMINATION. In the event of the termination of this Agreement as provided in Section 6.01, this Agreement shall forthwith become void, except for the obligations set forth in this Section and in 7.06 and 7.07 and there shall be no liability or obligation on the part of the parties hereto except as otherwise provided in this Agreement. The termination of this Agreement under Section 6.01(b) shall not relieve any party of any liability for breach of this Agreement prior to the date of termination. 17 ARTICLE VII MISCELLANEOUS SECTION 7.01. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties made herein shall survive the execution and delivery of this Agreement and the issuance and delivery of the Series A Preferred Stock and the Warrants. SECTION 7.02. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given, if delivered personally, by telecopier or sent by overnight courier as follows: (a) if to the Purchasers and their counsel: (i) if to Purchaser I, to: Jackson National Life Insurance Company c/o PPM America, Inc. 225 West Wacker Drive, Suite 1200 Attention: Debbie Ackerman --------------- Fax: (312) 634-0054 WITH A COURTESY COPY TO: Schwartz, Cooper, Greenberger & Krauss 180 North LaSalle Street, Suite 2700 Chicago, Illinois 60601 Attention: Brian O'Neil, Esq. Phone: (312) 845-5404 Fax: (312) 782-8416 (ii) if to Purchaser II, to Indosuez Capital 1211 Avenue of the Americas New York, NY 10036-8701 Attention: Ken Kencel, Thierry de Vergnes WITH A COURTESY COPY TO: Ropes & Gray 18 One International Place Boston, MA 02110 Attention: Daniel Evans, Esq. (iii) if to Purchaser III, to: Old Hickory Fund I, L.L.C. c/o PPM America, Inc. 225 West Wacker Drive, Suite 1200 Attention: Debbie Ackerman --------------- Fax: (312) 634-0054 WITH A COURTESY COPY TO: Schwartz, Cooper, Greenberger & Krauss 180 North LaSalle Street, Suite 2700 Chicago, Illinois 60601 Attention: Brian O'Neil, Esq. Phone: (312) 845-5404 Fax: (312) 782-8416 (b) if to the Company to: JFL-EEC Merger Sub Co. C/O J.F. Lehman & Company 450 Park Avenue, Sixth Floor New York, New York 10022 Attention: Mr. Donald Glickman Phone: (212) 634-1160 Fax: (212) 634-1155 AND WITH A COURTESY COPY TO: Gibson, Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, California 90071 Attention: Kenneth M. Doran, Esq. Phone: (213) 229-7000 Fax: (213) 229-7520 or to such other address or addresses as shall be designated in writing. All notices shall be effective when received. 19 SECTION 7.03. ENTIRE AGREEMENT; AMENDMENT. This Agreement, the Ancillary Documents and the documents described herein and therein or attached or delivered pursuant hereto or thereto set forth the entire agreement between the parties hereto with respect to the transactions contemplated by this Agreement. Any provision of this Agreement may be amended or modified in whole or in part at any time by an agreement in writing between the parties hereto executed in the same manner as this Agreement. No failure on the part of any party to exercise, and no delay in exercising, any right shall operate as a waiver thereof nor shall any single or partial exercise by any party of any right preclude any other or future exercise thereof or the exercise of any other right. No investigation by Purchasers of the Company or any Company Subsidiary prior to or after the date hereof shall stop or prevent Purchasers from exercising any right hereunder or be deemed to be a waiver of any such right. SECTION 7.04. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to constitute an original, but all of which together shall constitute one and the same document. SECTION 7.05. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN THAT STATE. SECTION 7.06. PUBLIC ANNOUNCEMENTS. Each of the parties hereto agrees to hold in strict confidence and not to disclose to others the status of any discussions or relations among the parties with respect to the subject matter of this Agreement until such time as the parties mutually agree to publicly disclose such information or are obligated by any legal or regulatory agency requirement to disclose such information; PROVIDED that a description of this transaction mutually satisfactory to the Company and the Purchasers may be included in the Debt Offering Memorandum. SECTION 7.07. FEES AND EXPENSES. The Company or an Affiliate of the Company shall be responsible for the costs and expenses incurred by the Purchasers, the Company and its Affiliates in connection with this Agreement and the Ancillary Documents and the transactions contemplated hereby, including the reasonable fees and expenses of their counsel, Schwartz, Cooper, Greenberger & Krauss. 20 SECTION 7.08. SUCCESSORS AND ASSIGNS. Subject to applicable law, any Purchaser may assign its rights under this Agreement in whole or in part, but no such assignment shall relieve such Purchaser of its obligations hereunder. The Company may not assign any of its rights or delegate any of its duties under this Agreement without the prior written consent of Purchasers; PROVIDED, HOWEVER, that it is understood and agreed by the parties that the Company will be merged with and into Holdings, with Holdings as the surviving corporation, pursuant to the Merger Agreement and, upon consummation of the Merger, this Agreement and the rights and obligations of the Company hereunder will be transferred to and assumed by Holdings. Any purported assignment in violation of this Section shall be void. SECTION 7.09. ARBITRATION. Any controversy, dispute or claim arising out of, in connection with or in relation to the interpretation, performance or breach of this Agreement shall be determined, at the request of any party, by arbitration in a city mutually agreeable to the parties to such controversy, dispute or claim, or, failing such agreement, in New York, New York, before and in accordance with the then-existing Rules for Commercial Arbitration of the American Arbitration Association, and any judgment or award rendered by the arbitrator will be final, binding and unappealable and judgment may be entered by any state or Federal court having jurisdiction thereof. The pre-trial discovery procedures of the Federal Rules of Civil Procedure shall apply to any arbitration under this Section 7.09. Any controversy concerning whether a dispute is an arbitrable dispute or as to the interpretation or enforceability of this Section 7.09 shall be determined by the arbitrator. The arbitrator shall be a retired or former United States District Judge or other person acceptable to each of the parties, provided such individual has substantial professional experience with regard to corporate or partnership legal matters. The parties intend that this agreement to arbitrate be valid, enforceable and irrevocable. SECTION 7.10. SPECIFIC PERFORMANCE. The Company acknowledges that the rights granted to Purchasers in this Agreement are of a special, unique and extraordinary character, and that any breach of this Agreement by the Company could not be compensated for by damages. Accordingly, if the Company breaches its obligations under this Agreement, Purchasers shall be entitled, in addition to any other remedies that they may have, to enforcement of this Agreement by a decree of specific performance requiring the Company to fulfill its obligations under this Agreement. SECTION 7.11. CAPTIONS. The captions contained in this Agreement are for reference purposes only and are not part of this Agreement. 21 SECTION 7.12. MUTUAL WAIVER OF JURY TRIAL. THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO ENFORCE OR DEFEND ANY RIGHTS OR REMEDIES UNDER THIS AGREEMENT. IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto or by their respective duly authorized representatives, all as of the date first above written. JFL-EEC MERGER SUB CO. By: /s/ Donald Glickman ------------------------------- Donald Glickman, President JACKSON NATIONAL LIFE INSURANCE COMPANY By: PPM America, Inc., its agent By: /s/ Debbie Ackerman ------------------------------- Debbie Ackerman, Managing Director INDOSUEZ ELECTRONICS PARTNERS By: Indosuez CM II, Inc., its Managing General Partner By: /s/ Michael Walsh ------------------------------- Michael Walsh, Vice President By: /s/ Allen Gruenhut ------------------------------- Allen Gruenhut, Vice President OLD HICKORY FUND I, L.L.C. By: PPM America, Inc., its agent By:/s/ Debbie Ackerman ------------------------------- Debbie Ackerman, Managing Director 22 ANNEX I NUMBER OF SHARES OF PREFERRED STOCK; NUMBER OF WARRANTS AND PURCHASE PRICE ----------------------------------------------
- -------------------------------------------------------------------------------- NUMBER NUMBER PURCHASE PURCHASER OF SHARES OF WARRANTS PRICE - -------------------------------------------------------------------------------- Jackson National Life Insurance Company 7,880 278,750 $7,880,000 - -------------------------------------------------------------------------------- Indosuez Electronics Partners 2,000 70,749 $2,000,000 - -------------------------------------------------------------------------------- Old Hickory Fund I, L.L.C. 120 4,245 $120,000 - -------------------------------------------------------------------------------- Total 10,000 353,744 $10,000,000 - --------------------------------------------------------------------------------
EX-10.3 16 EXHIBIT 10.3 SHAREHOLDERS AGREEMENT SHAREHOLDERS AGREEMENT, dated as of February 3, 1998, among ELGAR HOLDINGS, INC., a Delaware corporation (the "Company"), JFL-EEC LLC, a Delaware limited liability company ("JFL"), JACKSON NATIONAL LIFE INSURANCE COMPANY ("Purchaser I"), INDOSUEZ ELECTRONICS PARTNERS, a Delaware general partnership ("Purchaser II") and OLD HICKORY FUND I, L.L.C. ("Purchaser III") (such holders, in their capacity as holders of the Warrants or the Warrant Shares (each, as defined below), the "Warrantholders"), and each of the persons whose names are listed on SCHEDULE A hereto (the "Continuing Shareholders"). JFL, the Warrantholders and the Continuing Shareholders are hereinafter sometimes referred to collectively as the "Shareholders" and individually as a "Shareholder." R E C I T A L S WHEREAS, as of the date hereof, the Shareholders, other than the Warrantholders, own all of the issued and outstanding shares of the Company's Common Stock, par value $.01 per share (the "Common Stock"); WHEREAS, the Shareholders desire to enter into this Agreement setting forth rights and obligations with respect to all shares of Common Stock owned and hereafter acquired by them. A G R E E M E N T NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. CORPORATE GOVERNANCE. (a) COMPOSITION AND ELECTION OF BOARD OF DIRECTORS. (i) So long as, together with its Related Transferees, Purchaser I holds in the aggregate Warrants and shares obtained upon exercise of the Warrants representing at least seventy-five percent (75%) of the Warrants initially issued to Purchaser I, Purchaser I shall have the right to designate one member of the Board of Directors of the Company (collectively, the "Directors" and, each individually, a "Director"). (ii) So long as the Common Stock held by the Continuing Shareholders designated on SCHEDULE A as "Non-Management Shareholders" (the "Non-Management Shareholders") constitutes in the aggregate at least five percent (5%) of the issued and outstanding Common Stock, then the Non-Management Shareholders collectively shall have the right to designate one Director. (iii) Subject to the rights of the holders of the Series A 10% Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") to elect Directors upon the occurrence of certain events pursuant to the terms of the Certificate of Designations, Preferences and Relative Participating, Optional and Other Special Rights of the Series A Preferred Stock (the "Certificate of Designation"), JFL shall be entitled to designate all Directors of the Company not designated by Purchaser I or the Non-Management Shareholders. (iv) Each Shareholder agrees to vote all shares of Common Stock now or hereafter owned by it, to cause each of its Related Transferees to vote all shares of Common Stock now or hereafter owned by it and otherwise to use its reasonable best efforts, to: (A) elect as Directors the persons designated by JFL, by Purchaser I and by the Non-Management Shareholders in accordance with Section 1(a)(i), (ii) and (iii); (B) remove, with or without cause, (x) any Director designated by JFL in accordance with Section 1(a)(iii), if requested by JFL, (y) any Director designated by Purchaser I in accordance with Section 1(a)(i), if requested by Purchaser I; and (z) any Director designated by the Non-Management Shareholders in accordance with Section 1(a)(ii), if requested by the Non-Management Shareholders; (C) cause any vacancy on the Board of Directors of the Company created by the death, resignation, incapacity or removal of (x) any Director designated by JFL in accordance with Section 1(a)(iii) to be filled by a replacement Director designated by JFL, (y) any Director designated by Purchaser I in accordance with Section 1(a)(i) to be filled by a replacement Director designated by Purchaser I, and (z) any Director designated by the Non-Management Shareholders in accordance with Section 1(a)(ii) to be filled by a replacement Director designated by the Non-Management Shareholders. (b) INFORMATION RIGHTS OF SHAREHOLDERS. (i) Until such time as the Company shall have become subject to the reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company shall (A) provide each Shareholder with quarterly financial statements and reports of and any other regularly prepared monthly financial data related to the Company's and its subsidiaries' performance, (B) use reasonable efforts to deliver all other financial information distributed by the Company to any Shareholder (in its capacity as such) to each other Shareholder and (C) cause members of senior management of the Company to be available to each Shareholder from time to time to review the Company's performance. (ii) So long as, together with its Related Transferees, Purchaser I holds in the aggregate Warrants and shares obtained upon exercise of the Warrants representing at least five percent (5%) of the issued and outstanding Common Stock, Purchaser I shall have the right to designate two representatives (less the number of Directors Purchaser I, in its capacity as a Warrantholder or in its capacity as a holder of the Series A 10.0% Cumulative Redeemable Preferred Stock of the Company, has designated or elected) to attend all meetings of the Board of Directors of the Company and all committees thereof as non-voting observers. 2 The Company shall deliver to Purchaser I, concurrently with the delivery to the directors of the Company, all notices of meetings of the Board of Directors of the Company or committees thereof, and copies of all written reports and other material given to the Board of Directors or committees thereof in connection with such meetings (whether or not its observers attend) or actions by consent in lieu thereof. Notwithstanding any provision of this Agreement to the contrary, the rights of Purchaser I pursuant to this Section 1(b)(ii) may not be assigned without the consent of the Company, other than to a Related Transferee. 2. RESTRICTIONS ON TRANSFER OF SECURITIES. (a) GENERAL. No Shareholder shall, directly or indirectly, transfer or otherwise dispose of any shares of Common Stock or Warrants owned by such Shareholder, or any interest therein, except pursuant to a Permitted Transfer described in Section 2(b), unless such transfer or disposition is made in accordance with the applicable provisions of Sections 3, 4 and 5 of this Agreement. Any attempt by a Shareholder to effect a transfer or disposition in violation of this Agreement shall be void and ineffective for all purposes. The words "transfer" and "dispose" mean the making of any sale, exchange, assignment, gift, security interest, pledge or other encumbrance, or any contract therefor, any voting trust or other agreement or arrangement with respect to the transfer or voting rights or any other beneficial interests, the creation of any other claim thereto or any other transfer or disposition whatsoever, whether voluntary or involuntary, affecting the right, title, interest or possession in or to the Common Stock or Warrants; PROVIDED, HOWEVER, that in the case of any Warrantholder, neither a pledge of the Warrants, the shares obtained upon exercise of the Warrants or any shares obtained pursuant to Section 3 in connection with a financing transaction nor foreclosure of such pledge shall constitute a transfer or disposition prohibited by this Section 2 if the person acquiring such Warrants or shares pursuant to such foreclosure executes an instrument acknowledging that it shall thereafter be bound by the terms of this Agreement. (b) PERMITTED TRANSFERS. None of the restrictions contained in this Agreement with respect to transfers of Common Stock or Warrants (other than those set forth in this Section 2(b) and Section 2(c)) shall apply: (i) to any transfer (including any gift) by any Shareholder who is an individual to: (A) such Shareholder's spouse or children (collectively, "relatives"); (B) a trust of which there are no beneficiaries other than one or more of such Shareholder and the relatives of such Shareholder; (C) a partnership of which there are no partners other than one or more of such Shareholder and the relatives of such Shareholder; (D) a corporation of which there are no Shareholders other than one or more of such Shareholder and the relatives of such Shareholder; 3 (E) a legal representative or guardian of such Shareholder or a relative of such Shareholder if such Shareholder or relative becomes mentally incompetent; or (F) any person by will or by the laws of descent; (ii) (A) to any transfer by any Shareholder (other than JFL or an Affiliate of JFL) that is not an individual to any Affiliate thereof, as such term is defined in Rule 12b-2 of the Exchange Act ("Affiliate"), (B) to any transfer by any Shareholder (other than JFL or an Affiliate of JFL) to any Qualified Institutional Buyer, as such term is defined in Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"); (C) to any transfer by JFL or an Affiliate of JFL to (1) an entity in which 100% of the equity interests are, in the case of a transfer by JFL, owned by JFL or, in the case of a transfer by an Affiliate of JFL, by such Affiliate or (2) an entity which owns 100% of the equity interests in JFL or the Affiliate of JFL making such transfer (other than a transfer to the limited partners of J.F. Lehman Equity Investors I, L.P. by J.F. Lehman Equity Investors I, L.P.), or (D) to any transfer by JFL or an Affiliate of JFL for no consideration. (iii) other than by JFL or an Affiliate of JFL, (A) to any transfer by any Shareholder that is a corporation to a shareholder in such corporation, (B) to any transfer by any Shareholder that is a partnership to the general and/or limited partners of such partnership and (C) to any transfer by any Shareholder that is a limited liability company to any member of such limited liability company; (iv) to any transfer by a Selling Shareholder (as hereinafter defined) made in accordance with the applicable provisions of Section 3 and, unless such transfer is to an Offeree Shareholder (as hereinafter defined), the applicable provisions of Section 4; (v) to any transfer by a Tag-Along Shareholder (as hereinafter defined) pursuant to the Tag-Along Right (as hereinafter defined); and (vi) to any transfer by a Drag-Along Shareholder (as hereinafter defined) made pursuant to the Drag-Along Right (as hereinafter defined); and (vii) to any transfer by a Shareholder for cash in a bona fide public offering (a "Registered Offering") pursuant to an effective registration statement under the Securities Act. Transfers made pursuant to this Section 2(b) are referred to herein as "Permitted Transfers" and transferees taking under a Permitted Transfer are referred to herein as "Permitted Transferees." Transferees taking under a Permitted Transfer described in Sections 2(b)(i) through (iii) are referred to herein as "Related Transferees." (c) REGISTRATION OF TRANSFER BY COMPANY. No transfer of Common Stock or Warrants by any Shareholder (other than transfers pursuant to a Registered Offering) shall be effective (and the Company shall not transfer on its books any such shares) unless (i) the certificates representing such Common Stock or Warrants issued to the Permitted Transferee shall 4 bear any legends required by Section 10, (ii) the Permitted Transferee (if not already a party hereto) shall have executed and delivered to the Company, as a condition precedent to such transfer, an instrument or instruments in form and substance reasonably satisfactory to the Company confirming that the Permitted Transferee agrees to be bound by the terms of this Agreement to the same extent as its transferor. In addition, no transfer of Common Stock or Warrants shall be made by any Shareholder unless such transfer is effected in connection with a Registered Offering or is exempt from registration under the Securities Act and, in the case of any such transfer by any Shareholder to any person that is not an Affiliate of such Shareholder, the Company, should it so request, has received a written legal opinion (which may be rendered by in-house legal counsel of any Shareholder that is not an individual) satisfactory to its counsel that the proposed transfer is exempt from such registration. (d) LEGEND. In the event that any shares of Common Stock or Warrants become free of the rights and restrictions imposed by this Agreement, including without limitation under the provisions of the Securities Act, the Shareholders holding such securities shall be entitled to receive, promptly upon presentment to the Company of the certificate or certificates evidencing the same, a new certificate or certificates not bearing the restrictive legend provided for in the second paragraph of Section 10. In the event that any shares of Common Stock or Warrants bearing a legend are (i) transferred in connection with a Registered Offering or (ii) transferred pursuant to an exemption from registration under the Securities Act and the Company has received a written legal opinion (which may be rendered by in-house legal counsel of any Shareholder that is not an individual) satisfactory to its counsel (A) as to the availability of and the compliance with such exemption and (B) that such shares need not bear the restrictive legend set forth in the first paragraph of Section 9 hereof, Company shall issue a new certificate or certificates representing such securities not bearing such legend. 3. RIGHT OF FIRST OFFER. (a) FIRST OFFER NOTICE. If a Shareholder (the "Selling Shareholder") desires to transfer any shares of Common Stock or Warrants other than (i) to a Related Transferee, (ii) as a Tag-Along Shareholder (as hereinafter defined) or (iii) as a Drag-Along Shareholder, such Selling Shareholder shall, prior to soliciting a BONA FIDE written offer from an independent third-party (the "Third-Party Offer"), deliver to each remaining Shareholder (collectively, the "Offeree Shareholders") and the Company a written notice (the "First Offer Notice") offering to sell the Common Stock or Warrants proposed to be sold ("Offered Securities") to the Offeree Shareholders, and, under the circumstances set forth herein, to the Company. The First Offer Notice shall state (i) that the Selling Shareholder desires to sell the Offered Securities and (ii) the purchase price per share and other material terms on which and the material conditions subject to which the Offered Securities are offered. (b) EXERCISE OF RIGHT OF FIRST OFFER. (i) Upon receipt of the First Offer Notice, each Offeree Shareholder shall have the option (the "Shareholders' Right of First Offer"), which shall be exercisable by written notice (the "Notice of Election") delivered to the Selling Shareholder within ten (10) days after the date of the First Offer Notice (the "Shareholders' First Offer Option Period"), to 5 purchase from the Selling Shareholder, at the price and upon the terms specified in the First Offer Notice, a number of shares of Common Stock and a number of Warrants up to the sum of (A) the number of shares of Common Stock and Warrants included in the Offered Securities multiplied by a fraction, the numerator of which is the number of shares of Common Stock and shares of Common Stock issuable upon exercise of Warrants ("Common Stock Equivalents") owned by such Offeree Shareholder and the denominator of which is the number of shares of Common Stock and Common Stock Equivalents held by all Offeree Shareholders and (B) the number of shares of Common Stock and Warrants that, under the formula in clause (A), all Offeree Shareholders could have elected to purchase but did not so elect, multiplied by a fraction, the numerator of which is the number of shares of Common Stock and Common Stock Equivalents owned by such Offeree Shareholder and the denominator of which is the total number of shares of Common Stock and Common Stock Equivalents owned by the Offeree Shareholders (including such Offeree Shareholder) that exercised the option provided herein. Each Offeree Shareholder who desires to exercise its option to purchase Offered Securities shall state in its Notice of Election the number of shares of Common Stock and Warrants that such Offeree Shareholder proposes to purchase determined in accordance with clause (b)(i)(A) plus an amount of additional shares and Warrants, if any, that such Offeree Shareholder would be willing to purchase from the Selling Shareholder in the event that one or more Offeree Shareholders (other than such Offeree Shareholder) elect not to exercise their Shareholders' Right of First Offer, in whole or in part. If any Offeree Shareholder shall fail to deliver the Notice of Election within the Shareholders' First Offer Option Period, such failure shall be deemed an election not to purchase any Offered Securities subject to the Shareholders' Right of First Offer and such Shareholders' Right of First Offer shall thereupon expire with respect to the Offered Securities only. (ii) If the number of shares of Common Stock with respect to which the Shareholders' Right of First Offer has been exercised is less than the number of Offered Securities, the Company shall have the option (the "Company's Right of First Offer"), which shall be exercisable by written notice delivered to the Selling Shareholder within five (5) days after the expiration of the Shareholders' First Offer Option Period (the "Company's First Offer Option Period"), to purchase any or all of the Offered Securities not purchased by the Offeree Shareholders at the price and upon the terms specified in the First Offer Notice. If the Company shall fail to deliver a notice (the "Company Notice") of its election to exercise the Company's Right of First Offer within the Company First Offer Option Period, such failure shall be deemed an election not to purchase any Offered Securities subject to the Company's Right of First Offer and the Company's Right of First Offer shall thereupon expire with respect to the Offered Securities only. (iii) The Shareholders' Right of First Offer and the Company's Right of First Offer shall be exercisable only if the Offeree Shareholders and/or the Company, in the aggregate, elect to purchase all, and not less than all, of the Offered Securities. Each Notice of Election and Company Notice shall recite that such Notice of Election or Company Notice, as the case may be, constitutes a binding obligation of the Offeree Shareholder or the Company, as the case may be, submitting same to purchase, upon the same terms and subject to the same conditions as the Third-Party Offer, up to the number of shares set forth in the Notice of Election or the Company Notice, as the case may be. 6 (iv) The closing of the purchase of the Offered Securities subscribed to by the Offeree Shareholders and the Company pursuant to this Section 3 shall be held at the principal office of the Company at 10:00 a.m., local time not later than the thirtieth (30th) day after the Company First Offer Option Period shall have expired. (c) SALE TO THIRD-PARTY PURCHASER. (i) If the First Offer Notice shall have been duly delivered, and the Offeree Shareholders and the Company together shall not have exercised the Shareholders' Right of First Offer and the Company's Right of First Offer to purchase all of the Offered Securities, the Selling Shareholder may solicit Third-Party Offers to purchase all (but not less than all) of the Offered Securities and, so long as any sale of the Offered Securities made pursuant to a Third-Party Offer that is (A) upon such terms, including price, and subject to such conditions as are, in the aggregate, no less favorable to the Selling Shareholder than those set forth in the First Offer Notice; PROVIDED, HOWEVER, that the price may be not less than 90% of the price set forth in the First Offer Notice, (B) BONA FIDE, (C) consummated within one hundred eighty (180) days from the expiration date of the Company First Offer Option Period, (D) if applicable, subject to any Tag-Along Right and (E) in accordance with clause (ii) below, such transfer may be consummated without further restriction under this Section 3 and shall be a Permitted Transfer under this Agreement. (ii) All Offered Securities transferred by the Selling Shareholder in accordance with clause (i) above shall remain, and the third-party purchaser shall agree to take and hold such Offered Securities, subject to all of the obligations and restrictions imposed upon the Selling Shareholder by this Agreement. No transfer of Offered Securities to which the preceding sentence applies shall be effective unless and until the third-party purchaser shall have executed and delivered to the Company an appropriate instrument to the foregoing effect. 4. TAG-ALONG RIGHTS. (a) THE RIGHT. If JFL and/or any of its Affiliates (collectively, the "JFL Group") proposes to transfer any shares of Common Stock owned by it on the date hereof to an independent third party (a "Prospective Purchaser") other than in a Permitted Transfer (a "Tag-Along Sale"), then each of the remaining Shareholders shall have the right to participate in any such sale of Common Stock by the JFL Group in accordance with the procedures set forth below; PROVIDED that such right may not be exercised with respect to any shares acquired by any such remaining Shareholder pursuant to the exercise of a Right of First Offer within One Hundred Eighty (180) days prior to the proposed date of consummation of the Tag-Along Sale; PROVIDED FURTHER, HOWEVER, that such participation shall be on the same terms and subject to the same conditions as those on which the JFL Group proposes to transfer its shares; and PROVIDED STILL FURTHER, HOWEVER, that, in addition to receiving their ratable portion of any consideration paid in respect of the Common Stock or Warrants, the Shareholders shall be entitled to receive a ratable portion of any consideration to be paid to the JFL Group other than in respect of the Common Stock or Warrants, to the extent that such consideration exceeds (i) the fair market value of any tangible property transferred by the JFL Group in exchange for such consideration or (ii) an 7 amount that is customary and reasonable for any intangible property rights or transferred or granted in exchange for such consideration. (b) ELECTION TO PARTICIPATE. Shareholders shall have the right (the "Tag-Along Right") for thirty (30) days from receipt of the First Offer Notice described in Section 3(a) (the "Tag-Along Option Period") to elect to participate in the Tag-Along Sale. Any remaining Shareholder electing to participate in the Tag-Along Sale (a "Tag-Along Shareholder") shall give all other Shareholders and Company written notice thereof (the "Election Notice") within the Tag-Along Option Period. The Election Notice shall specify the number of shares of Common Stock that such Tag-Along Shareholder desires to sell to the Prospective Purchaser, which amount shall be equal to or less than the total number of shares of Common Stock held by such Shareholder multiplied by a fraction, the numerator of which is the total number of shares of Common Stock proposed to be sold by the JFL Group and the denominator of which is the total number of shares of Common Stock then owned by the JFL Group. The failure of any remaining Shareholder to submit an Election Notice within the Tag-Along Option Period shall constitute an election by such remaining Shareholder not to participate in such Tag-Along Sale, PROVIDED such Tag-Along Sale is consummated within forty-five (45) days of the expiration of the Tag-Along Option Period. By delivering an Election Notice to JFL within the Tag-Along Option Period, a Tag-Along Shareholder shall have the right to sell to the Prospective Purchaser that number of shares of Common Stock specified in the Election Notice; PROVIDED, HOWEVER, that, to the extent the Prospective Purchaser is unwilling or unable to purchase all of the shares proposed to be sold by the JFL Group and the Tag-Along Shareholders, the number of shares to be sold by each of the JFL Group and each of the Tag-Along Shareholders shall be ratably reduced so that the number of shares to be sold by the JFL Group and each of the Tag-Along Shareholders equals the number of shares that the Prospective Purchaser is willing or able to purchase. The only representations, warranties or indemnities that a Tag-Along Shareholder shall be required to give in connection with a Tag-Along Sale shall be as to due authority and execution, validity and marketability of title and the absence of liens or other encumbrances with respect to such Tag-Along Shareholder's shares of Common Stock. 5. DRAG-ALONG RIGHTS. (a) THE RIGHT. If one or more Shareholders holding, in the aggregate, a majority of the issued and outstanding Common Stock (the "Majority Shareholders") propose to sell all the Common Stock owned by such Majority Shareholders (whether owned by such Shareholders on the date hereof or hereafter acquired in a manner consistent with this Agreement) to a Prospective Purchaser, other than a Related Transferee, then such Majority Shareholders shall have the right (the "Drag-Along Right") to compel the remaining Shareholders (the "Drag-Along Shareholders") to sell all of the shares of Common Stock and Warrants owned by them to the Prospective Purchaser for such consideration per share (reduced by the exercise price of the Warrants, in the case of the Warrants), and on the same terms and subject to the same conditions, as the Majority Shareholders are able to obtain; provided, however, that any such sale by a remaining Shareholder does not violate applicable law. The Majority Shareholders shall exercise the Drag-Along Right by giving written notice (the "Drag-Along Notice") to the Company and the Drag-Along Shareholders stating (i) that they propose to effect such transaction, (ii) the name and address of the Prospective Purchaser, (iii) the proposed purchase price per share and other 8 terms and conditions of the proposed sale (including any consideration proposed to be paid other than in respect of the Common Stock or Warrants) and (iv) that all the Shareholders shall be obligated to sell their shares of Common Stock and Warrants upon the same terms and subject to the same conditions (subject to applicable law); PROVIDED, HOWEVER, that, in addition to receiving their ratable portion of any consideration paid in respect of the Common Stock or Warrants, the Shareholders shall be entitled to receive a ratable portion of any consideration paid other than in respect of the Common Stock or Warrants, to the extent that such consideration exceeds (i) the fair market value of any tangible property transferred by the Majority Shareholders in exchange for such consideration or (ii) an amount that is customary and reasonable for any intangible property or rights transferred or granted in exchange for such consideration. (b) PROCEDURE. Not later than twenty (20) days following the date of receipt of the Drag-Along Notice, each of the other Shareholders shall deliver to the Majority Shareholders certificates representing all shares of Common Stock held by a Drag-Along Shareholder, accompanied by duly executed stock powers, and all Warrants held by such Drag-Along Shareholder with duly executed assignments thereof. If any Drag-Along Shareholder fails to deliver such certificates and Warrants to the Majority Shareholders, the Company shall cause the books and records of the Company to show that the shares represented by such certificates and Warrants of such Drag-Along Shareholder are bound by the provisions of this Section 5 and are transferable only to the Prospective Purchaser or a Related Transferee of such Prospective Purchaser upon surrender for transfer by the holder thereof. Upon the consummation of the sale of the Common Stock of the Majority Shareholders and the Drag-Along Shareholders pursuant to this Section 5, the Majority Shareholders shall give notice thereof to the Drag-Along Shareholders and shall remit to each of the Drag-Along Shareholders the total sales price received for the shares of Common Stock of such Drag-Along Shareholder sold pursuant hereto. Notwithstanding anything herein to the contrary, no Shareholder shall be obligated to receive as consideration for any Drag-Along Sale any property or securities the holding of which by such Shareholder would be prohibited by any law, rule or regulation of any governmental entity or insurance industry regulatory body. 6. SUBSCRIPTION OFFER WITH RESPECT TO PRIMARY ISSUANCES. (a) SUBSCRIPTION OFFER. The Company shall not issue (a "Primary Issuance") equity securities, or securities convertible into equity securities, of the Company to any person (in such capacity, a "Primary Purchaser") unless the Company has offered to issue to each of the other Shareholders, on a pro rata basis, an opportunity to purchase such securities on the same terms, including price, and subject to the same conditions as those applicable to the Primary Purchaser. Notwithstanding the foregoing, this Section 6 shall not apply to the issuance of options, warrants or rights to subscribe for shares of Common Stock to officers, directors, employees, consultants or agents of the Company pursuant to the terms of any stock option plan or arrangement approved by the Board of Directors, or the issuance of shares of its Common Stock upon the exercise of any such stock options, warrants or rights; PROVIDED, HOWEVER, that the aggregate number of shares of Common Stock that may be issued under such stock option plan or arrangement without application of this Section 6 to such issuance shall not exceed, in the aggregate, 300,000 shares (appropriately adjusted for stock splits, dividends and/or combinations). 9 (b) PROCEDURE. Not less than ten (10) days prior to the date described in clause (i) of this paragraph, the Company shall make to each Shareholder an offer (the "Subscription Offer") to purchase any securities that are the subject of a Primary Issuance, which offer shall specify (i) the date on which the Company and the Primary Purchaser intend to consummate the Primary Issuance, (ii) the material rights, preferences, privileges and restrictions granted to or imposed upon the securities, including, if applicable, the certificate of determination or indenture governing such securities, (iii) the principal terms of and conditions applicable to the Primary Issuance, including, without limitation, the price at which such securities are being offered to the Primary Purchaser and (iv) the number of securities proposed to be issued to the Primary Purchaser pursuant to the Primary Issuance multiplied by a fraction, the numerator of which is the number of shares of Common Stock held by such Shareholder and the denominator of which is the total number of shares of Common Stock outstanding, on a fully diluted basis. Each Shareholder electing to participate in the Primary Issuance (a "Subscribing Shareholder") shall give the Primary Purchaser, the Company and each other Shareholder written notice (the "Subscription Notice") of such election not less than five (5) days after receipt of the Subscription Offer (the "Subscription Period"). The Subscription Notice shall specify the number of securities with respect to which such Shareholder desires to subscribe, which amount shall be equal to or less than the total number of securities set forth in the Subscription Offer. The failure of any Shareholder to submit a Subscription Notice within the Subscription Period shall constitute an election by such Shareholder not to accept such Subscription Offer, PROVIDED that the Primary Issuance is consummated not later than the date described in clause (i) of this paragraph. 7. REGISTRATION RIGHTS. Each of the Shareholders shall have the rights, if any, with respect to registration of the shares of Common Stock held by them as are set forth in the Shareholders Registration Rights Agreement, the form of which is attached hereto as EXHIBIT C. Each of the Warrantholders shall have the rights, if any, with respect to registration of the shares of Common Stock held or to be held by them as are set forth in the Warrantholders Registration Rights Agreement, the form of which is attached hereto as EXHIBIT D. 8. CERTAIN CLOSING CONDITIONS. At the closing of any transfer or disposition of Common Stock or Warrants pursuant to this Agreement, in addition to any other conditions specifically set out herein concerning such transfer or disposition, the transferor shall (i) deliver the certificates representing the Common Stock and the Warrants that are the subject of the transfer, duly endorsed for transfer and bearing any necessary tax stamps; (ii) by delivering such certificates and Warrants, be deemed to have represented and warranted that the transferor has valid and marketable title to the Common Stock represented by such certificates and the Warrants free of all encumbrances and (iii) deliver such certificates of authority, tax releases, consents to transfer and evidences of title as may reasonably be required by the transferee. The transferor shall be responsible for the payment of all transfer taxes unless otherwise specified. 9. LEGENDS. Each stock certificate representing shares of Common Stock and each Warrant certificate now held or hereafter acquired by any Shareholder shall bear the following legend: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES 10 ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS, AND MAY BE OFFERED, PLEDGED, SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF ONLY IF REGISTERED PURSUANT TO THE PROVISIONS OF THE ACT AND SUCH LAWS, OR IF AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE ALSO SUBJECT TO A SHAREHOLDERS AGREEMENT DATED AS OF FEBRUARY 4, 1998 (THE "AGREEMENT"), WHICH CONTAINS PROVISIONS REGARDING (I) CERTAIN RESTRICTIONS ON THE TRANSFER OF SUCH SECURITIES, (II) CERTAIN RIGHTS OF FIRST OFFER, TAG-ALONG RIGHTS AND DRAG-ALONG RIGHTS APPLICABLE TO THIS SECURITY AND (III) CERTAIN OTHER MATTERS. A COPY OF SUCH AGREEMENT IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE COMPANY. ANY TRANSFER OF THE SECURITIES EVIDENCED BY THIS CERTIFICATE IN VIOLATION OF THE AGREEMENT IS NULL AND VOID." 10. TERMINATION. (a) TERMINATION AS TO SHAREHOLDER. This Agreement shall terminate with respect to any Shareholder at such time as the Shareholder ceases to hold any shares of Common Stock or Warrants; PROVIDED, HOWEVER, that the provisions of this Agreement shall continue in effect for the purpose of enforcing against such Shareholder all obligations and undertakings that shall have theretofore become operative; PROVIDED, FURTHER, HOWEVER, that the provisions of this Agreement shall be binding upon any transferee of any Shareholder, whether such transfer was pursuant to a Permitted Transfer (other than a Registered Offering) or otherwise. Notwithstanding the foregoing, the benefits of this Agreement shall inure only to a Permitted Transferee of a Shareholder. (b) TERMINATION AS TO SHARES. This Agreement shall terminate with respect to any particular shares of Common Stock or Warrants when such shares or Warrants shall have been sold in a Registered Offering or distributed to the public pursuant to Rule 144 under the Securities Act. (c) TERMINATION AS TO CERTAIN SHAREHOLDERS. Upon any Registered Offering, this Agreement shall terminate with respect to each Non-Management Shareholder. (d) TERMINATION OF AGREEMENT. This Agreement shall terminate upon the earliest to occur of (i) the Agreement having been terminated as to all Shareholders and all transferees of all Shareholders pursuant to paragraph (a) hereof; (ii) the Agreement having been terminated as to all shares of Common Stock and Warrants pursuant to paragraph (b) hereof; 11 (iii) the sale of shares of Common Stock at an aggregate offering price of at least $25,000,000 in a Registered Offering and (iv) the tenth anniversary of this Agreement. 11. MISCELLANEOUS PROVISIONS. (a) FURTHER ACTION. Each party hereto agrees to execute and deliver any instrument and take any action that may reasonably be requested by any other party for the purpose of effectuating the provisions of this Agreement. (b) INCORPORATION OF SCHEDULE AND EXHIBITS. The schedule and exhibits attached hereto are incorporated into this Agreement and shall be deemed a part hereof as if set forth herein in full. References herein to "this Agreement" and the words "herein," "hereof" and words of similar import refer to this Agreement (including its schedules and exhibits) as an entirety. In the event of any conflict between the provisions of this Agreement and any such schedule or exhibit, the provisions of this Agreement shall control. (c) ASSIGNMENT. Except as otherwise provided in this Section 11(c) or in Sections 2, 3, 4 and 5 hereof, no right under this Agreement shall be assignable and any attempted assignment, in violation of this provision shall be void. The Company shall have the right to assign its rights and obligations hereunder to any successor entity (including any entity acquiring substantially all of the assets of the Company), whereupon references herein to the Company shall be deemed to be to such successor. Except as expressly otherwise provided herein, this Agreement, and the rights and obligations of the parties hereunder, shall be binding upon and inure to the benefit of any and all transferees of the Common Stock or Warrants subject hereto, in each case with the same force and effect as if such transferees were named herein as parties hereto. (d) ENFORCEMENT. The parties recognize that irreparable damage will result in the event that this Agreement shall not be specifically performed. Should any dispute arise concerning the disposition of any Common Stock or Warrants hereunder, the parties hereto agree that an injunction may be issued restraining such disposition pending determination of such controversy and that no bond or other security may be required in connection therewith. Should any dispute arise concerning the right or obligation of the Shareholders or the Company to purchase or sell any of the Common Stock or Warrants subject hereto, such right or obligation shall be enforceable by a decree of specific performance. Such remedies shall, however, not be exclusive and shall be in addition to any other remedy which the parties may have. (e) NOTICES. Any notice or other communication required or which may be given hereunder shall be in writing by hand delivery, registered or certified first class mail, telecopier or air courier guaranteeing overnight delivery: (i) if to the Company, to: c/o Elgar Electronics Corporation 9250 Brown Deer Road San Diego, CA 02121 12 Attention: Chief Executive Officer Fax: (619) 458-0257 WITH A COURTESY COPY TO: C/O J.F. Lehman & Company 450 Park Avenue Sixth Floor New York, New York 10022 Attention: Donald Glickman Fax: (212) 634-1155 (ii) if to JFL, to: C/O J.F. Lehman & Company 450 Park Avenue Sixth Floor New York, New York 10022 Attention: Donald Glickman Fax: (212) 634-1155 IN EITHER CASE, WITH A COURTESY COPY TO: Gibson, Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, California 90071 Attention: Kenneth M. Doran, Esq. Fax: (213) 229-7520 13 (iii) if to Purchaser I, to: Jackson National Life Insurance Company c/o PPM America, Inc. 225 West Wacker Drive, Suite 1200 Chicago, IL 60606 Attention: Debbie Ackerman Fax: (312) 634-0054 (iv) if to Purchaser II, to: Indosuez Capital 1211 Avenue of the Americas New York, NY 10036-8701 Attention: Ken Kencel, Thierry de Vergnes WITH A COURTESY COPY TO: Ropes & Gray One International Place Boston, MA 02110 Attention: Daniel Evans, Esq. (v) if to Purchaser III, to c/o Jackson National Life Insurance Company c/o PPM America, Inc. 225 West Wacker Drive, Suite 1200 Chicago, IL 60606 Attention: Debbie Ackerman Fax: (312) 634-0054 IN THE CASE OF ANY WARRANTHOLDER OR PREFERRED STOCKHOLDER, WITH A COURTESY COPY TO: Schwartz, Cooper, Greenberger & Krauss 180 North LaSalle Street Suite 2700 Chicago, Illinois 60601 Attention: Brian O'Neil, Esq. Fax: (312) 782-8416 (vi) if to any other Shareholder, to his or its address set forth on SCHEDULE A attached hereto, 14 WITH A COURTESY COPY TO: Latham & Watkins 1001 Pennsylvania Ave., N.W. Suite 1300 Washington, D.C. 20004-2505 Attention: Scott Herlihy, Esq. Fax: 202-637-2201 or at such other address, notice of which is given in accordance with the provisions of this Section 10(e). All such notices shall be deemed to have been duly given when delivered by hand, if personally delivered; five (5) business days after being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged, if telecopied; and on the next business day, if timely delivered to an air courier guaranteeing overnight delivery. (g) APPLICABLE LAW. This Agreement shall be governed by, and construed and enforced in accordance with and subject to, the laws of California applicable to agreements made and to be performed entirely within such State, without giving effect to the conflicts-of-law principles thereof. (h) ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof. The failure of any party to seek redress for the violation of or to insist upon the strict performance of any term of this Agreement shall not constitute a waiver of such term and such party shall be entitled to enforce such term without regard to such forbearance. This Agreement may be amended, each party hereto may take any action herein prohibited or omit to take action herein required to be performed by it, and any breach of or compliance with any covenant, agreement, warranty or representation may be waived, only by the prior written consent or written waiver of Shareholders holding (i) a majority of all shares of Common Stock, on a fully diluted basis and (ii) 95% of the shares of Common Stock, on a fully diluted basis, adversely affected by any such amendment, action, omission or waiver; PROVIDED that such Shareholder shall be given five (5) days advance notice of any such proposed amendment, action, omission or waiver; and PROVIDED, FURTHER, that such consent or waiver shall be effective only in the specific instance and for the specific purpose for which given. Without limiting the foregoing, (i) any amendment to Section 1(a)(i) shall require the consent of Purchaser I, (ii) any amendment to Section 1(a)(ii) shall require the consent of a majority of the shares of Common Stock, on a fully diluted basis, owned by the Non-Management Shareholders, and (iii) any amendment to this Section 11(h) shall require the consent of 95% of the shares of Common Stock, on a fully diluted basis (i) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 15 IN WITNESS WHEREOF, the undersigned have executed this Shareholders Agreement as of the date first set forth above. ELGAR HOLDINGS, INC. By: /s/ Donald Glickman ------------------------------- Name: Donald Glickman Title: President JFL-EEC LLC, a Delaware limited liability company By: /s/ Donald Glickman ------------------------------- Name: Donald Glickman Title: Manager JACKSON NATIONAL LIFE INSURANCE COMPANY By: PPM America, Inc., its agent By: /s/ Debbie Ackerman ------------------------------- Name: Debbie Ackerman Title: Managing Director INDOSUEZ ELECTRONICS PARTNERS By: Indosuez CM II, Inc., its Managing General Partner By: /s/ Michael Walsh ------------------------------- Name: Michael Walsh Title: Vice President By: /s/ Allen Gruenhut ------------------------------- Name: Allen Gruenhut Title: Vice President 16 OLD HICKORY FUND I, L.L.C. By: PPM America, Inc., as Manager By: /s/ Debbie Ackerman ------------------------------- Name: Debbie Ackerman Title: Managing Director CARLYLE-ELGAR INTERNATIONAL PARTNERS, L.P. By: TC Group, L.L.C., its General Partner By: TCG Holdings, L.L.C., its Managing Member By: /s/ Daniel A. D'Aniello ------------------------------- Daniel A. D'Aniello Managing Director CARLYLE-ELGAR PARTNERS, L.P. By: TC Group, L.L.C., its General Partner By: TCG Holdings, L.L.C., its Managing Member By: /s/ Daniel A. D'Aniello ------------------------------- Daniel A. D'Aniello Managing Director CARLYLE PARTNERS II, L.P. By: TC Group, L.L.C., its General Partner By: TCG Holdings, L.L.C., its Managing Member By: /s/ Daniel A. D'Aniello ------------------------------- Daniel A. D'Aniello Managing Director 17 CARLYLE PARTNERS III, L.P. By: TC Group, L.L.C., its General Partner By: TCG Holdings, L.L.C., its Managing Member By: /s/ Daniel A. D'Aniello ------------------------------- Daniel A. D'Aniello Managing Director CARLYLE INTERNATIONAL PARTNERS II, L.P. By: TC Group, L.L.C., its General Partner By: TCG Holdings, L.L.C., its Managing Member By: /s/ Daniel A. D'Aniello ------------------------------- Daniel A. D'Aniello Managing Director CARLYLE INTERNATIONAL PARTNERS III, L.P. By: TC Group, L.L.C., its General Partner By: TCG Holdings, L.L.C., its Managing Member By: /s/ Daniel A. D'Aniello ------------------------------- Daniel A. D'Aniello Managing Director C/S INTERNATIONAL PARTNERS By: TC Group, L.L.C., its General Partner By: TCG Holdings, L.L.C., its Managing Member By: /s/ Daniel A. D'Aniello ------------------------------- Daniel A. D'Aniello Managing Director 18 SBC MASTER PENSION TRUST By: /s/ Shannon Green ------------------------------- Name: Shannon Green ------------------------------- Title: Executive Vice President, McGahan Green McHugh Capital Management, LLC ------------------------------- STATE STREET BANK AS TRUSTEE FOR THE CHAMPION INTERNATIONAL RETIREMENT TRUST By: /s/ Scott Kennedy ------------------------------- Name: Scott Kennedy ------------------------------- Title: Assistant Secretary ------------------------------- DELAWARE STATE EMPLOYEES' RETIREMENT FUND By: TC Group, L.L.C., its General Partner By: TCG Holdings, L.L.C., its Managing Member By: /s/ Daniel A. D'Aniello ------------------------------- Name: Daniel A. D'Aniello ------------------------------- Title: Managing Director ------------------------------- MELLON BANK, N.A., solely in its capacity as Trustee for FIRST PLAZA GROUP TRUST, (as directed by General Motors Investment Management Corporation), and not in its individual capacity By: /s/ Bernadette Rist ------------------------------- Name: Bernadette Rist ------------------------------- Title: Authorized Signatory ------------------------------- CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYSTEM By: TC Group, L.L.C., its General Partner By: TCG Holdings, L.L.C., its Managing Member By: /s/ Daniel A D'Aniello ------------------------------- Name: Daniel A. D'Aniello ------------------------------- Title: Managing Director ------------------------------- INDOSUEZ ELGAR PARTNERS LP By: Indosuez CM II, Inc, its Managing General Partner By: /s/ Michael Walsh ------------------------------- Name: Michael Walsh Title: Vice President By: /s/ Allen Gruenhut ------------------------------- Name: Allen Gruenhut Title: Vice President 19 RIT CAPITAL PARTNERS plc By: /s/ A. H. Bloom ------------------------------- Name: A. H. Bloom ------------------------------- Title: Authorized Signatory ------------------------------- DURHAM ENTERPRISES LTD. By: /s/ C. P. M. Harris ------------------------------- Name: C. P. M. Harris ------------------------------- Title: Director ------------------------------- GFI PARTNERS L.L.C. By: /s/ Ian Schapiro ------------------------------- Name: Ian Schapiro ------------------------------- Title: Chief Financial Officer ------------------------------- GFI ONE L.L.C. By: /s/ Ian Schapiro ------------------------------- Name: Ian Schapiro ------------------------------- Title: Chief Financial Officer ------------------------------- /s/ Kenneth R. Kilpatrick -------------------------------------- Kenneth R. Kilpatrick /s/ Ronald Garrett -------------------------------------- Ronald Garrett /s/ Normand E. Precourt -------------------------------------- Normand E. Precourt /s/ Christopher W. Kelford -------------------------------------- Christopher W. Kelford /s/ Tom Erickson -------------------------------------- Tom Erickson Tom Erickson IRA By: /s/ Dawn Phillips ------------------------------- Name: Dawn Phillips ------------------------------- Title: Assistant Vice President, Bank of Commerce ------------------------------- /s/ Samuel A. Lewis -------------------------------------- Samuel A. Lewis 20 /s/ Raymond Daniel -------------------------------------- Raymond Daniel /s/ Daniel E. Donati -------------------------------------- Daniel E. Donati /s/ Grant A. Moore -------------------------------------- Grant A. Moore 21 SCHEDULE A
MANAGEMENT SHAREHOLDERS NON-MANAGEMENT SHAREHOLDERS Kenneth R. Kilpatrick Carlyle-Elgar International Partners, L.P. Ronald Garrett Carlyle-Elgar Partners, L.P. Normand E. Precourt Carlyle Partners II, L.P. Christopher W. Kelford Carlyle Partners III, L.P. Tom Erickson Carlyle International Partners II, L.P. Tom Erickson IRA Carlyle International Partners III, L.P. Samuel A. Lewis C/S International Partners Raymond Daniel SBC Master Pension Trust Daniel E. Donati State Street Bank as Trustee for the Champion International Retirement Trust Grant A. Moore Delaware State Employees' Retirement Fund Mellon Bank, NA as Trustee for First Plaza Group Trust California Public Employees' Retirement System Indosuez-Elgar Partners LP RIT Capital Partners plc Durham Enterprises Ltd. GFI Partners LLC GFI One LLC
EX-10.4 17 EXHIBIT 10.4 Exhibit 10.4 SHAREHOLDERS REGISTRATION RIGHTS AGREEMENT SHAREHOLDERS REGISTRATION RIGHTS AGREEMENT, dated as of February 3, 1998 (this "Agreement"), by and among ELGAR HOLDINGS, INC., a Delaware corporation ("Company"), and the Persons listed on the signature pages hereto (the "Shareholders"). WHEREAS, the Board of Directors of the Company has effected a recapitalization of the Company pursuant to which, among other things, JFL-EEC Merger Sub. Co., a Delaware corporation ("MergerCo"), a wholly owned subsidiary of JFL-EEC LLC, a Delaware limited liability company, has merged with and into the Company, with the Company surviving such merger (the "Merger"), pursuant to which the Company assumed the liabilities and obligations of MergerCo; WHEREAS, the Board of Directors of the Company has determined that it is in the best interests of the Company and the Shareholders that, in connection with the Merger, the Company provide the registration rights set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. DEFINITIONS. Unless otherwise defined herein, the following terms shall have the following meanings below: "COMMON STOCK" shall mean the common stock of the Company, $.01 par value per share, upon consummation of the Merger. "OTHER HOLDERS" shall mean Persons who are holders of record of equity securities of the Company who have valid contractual registration rights under the Warrantholders Registration Rights Agreement. "PERSON" shall mean an individual, corporation, unincorporated association, partnership, group (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934), trust, joint stock company, joint venture, business trust or unincorporated organization, any governmental entity or any other entity of whatever nature. "REGISTRABLE SHARES" shall mean any shares of Common Stock which may be (i) held from time to time by the Shareholders or (ii) issued or distributed in respect of the Common Stock referred to in clause (i) above by way of stock dividend or stock split or other distribution, recapitalization or reclassification. As to any particular Registrable Share, such Registrable Share shall cease to be a Registrable Share when (i) it shall have been sold, transferred or otherwise disposed of or exchanged pursuant to a registration statement under the Securities Act or (ii) it shall have been distributed to the public pursuant to Rule 144 (or any successor provision) under the Securities Act. "WARRANTHOLDERS REGISTRATION RIGHTS AGREEMENT" shall mean that certain agreement dated as of February 4, 1998 entered into among certain holders of warrants to purchase Common Stock of the Company and the Company. 2. INCIDENTAL REGISTRATIONS. (a) RIGHT TO INCLUDE REGISTRABLE SHARES. After the completion of the initial public offering by the Company of its Common Stock, each time the Company shall determine to file a registration statement under the Securities Act in connection with the proposed offer and sale for cash of Common Stock (other than debt securities which are convertible into Common Stock and other than registration statements on Form S-4 or S-8) either by it or by any holders of its outstanding equity securities, the Company shall give prompt written notice of its determination to each Shareholder and of such Shareholder's rights under this Section 2, at least 20 days prior to the anticipated filing date of such registration statement. Upon the written request of each Shareholder made within 15 days after the receipt of any such notice from the Company, (which request shall specify the Registrable Shares intended to be disposed of by such Shareholder), the Company shall, subject to Section 2(b), effect the registration under the Securities Act of all Registrable Shares which the Company has been so requested to register by the Shareholders thereof, to the extent required to permit the disposition of the Registrable Shares so to be registered; PROVIDED, HOWEVER, that (i) if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to proceed with the proposed registration of the securities to be sold by it, the Company may, at its election, give written notice of such determination to each Shareholder of Registrable Shares and thereupon shall be relieved of its obligation to register any Registrable Shares in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith) and (ii) if such registration involves an underwritten offering, all Shareholders of Registrable Shares requesting to be included in the Company's registration must sell their Registrable Shares to the underwriters on the same terms and conditions as apply to the Company, with such differences, including any with respect to indemnification, as may be customary or appropriate in combined primary and secondary offerings (provided that no Shareholder shall be required to provide indemnification which is more expansive than the indemnification provided in Section 9(b) hereof and provided, further, that the representations and warranties provided by any Shareholder shall be limited to such matters as the authority of such Shareholder to sell its Registrable Shares, its title thereto and the absence of liens thereon). If a registration requested pursuant to this Section 2(a) involves an underwritten public offering, any Shareholder of Registrable Shares requesting to be included in such registration may elect in writing prior to the effective date of the registration statement filed in connection with such registration, not to register such securities in connection with such registration. No registration effected under this Section 2 shall relieve the Company of its obligations to effect one registration upon request under Section 4 hereof. (b) PRIORITY IN INCIDENTAL REGISTRATIONS. If a registration pursuant to this Section 2 involves an underwritten offering and the managing underwriter in good faith advises the Company in writing that, in its opinion, the number of securities which the Company, the Shareholders and any other Persons intend to include in such registration exceeds the largest 2 number of securities which can be sold in such offering without having an adverse effect on such offering (including the price at which such securities can be sold), then the Company shall include in such registration: (i) FIRST, 100% of the securities the Company proposes to sell for its own account; and (ii) SECOND, such number of Registrable Shares which the Shareholders have requested to be included in such registration and such number of securities which Other Holders have requested to be included in such registration which, in the opinion of such managing underwriter, can be sold without having the adverse effect referred to above, such number of Registrable Shares and securities of Other Holders to be included on a pro rata basis among all requesting Shareholders and Other Holders on the basis of the relative number of shares of Common Stock requested to be included in such registration by such Shareholders and Other Holders; and (iii) THIRD, to the extent that the number of securities which are to be included in such registration pursuant to clauses (i) and (ii), in the aggregate, is less than the number of securities which the Company has been advised can be sold in such offering without having the adverse effect referred to above, such number of other securities requested to be included in the offering for the account of any other Persons which, in the opinion of such managing underwriter, can be sold without having the adverse effect referred to above, such number to be allocated pro rata among all holders of such other securities on the basis of the relative number of such other securities each other person has requested to be included in such registration. 3. HOLDBACK AGREEMENTS. If any registration of Registrable Shares shall be effected in connection with an underwritten public offering, the Shareholders agree not to effect any public sale or distribution without the consent of the managing underwriter (except in connection with such public offering), of any equity securities of the Company, or of any security convertible into or exchangeable or exercisable for any equity security of the Company (in each case, other than as part of such underwritten public offering), during the 120-day period (or such lesser period as the managing underwriter may permit) beginning on the effective date of such registration, if, and to the extent, the managing underwriter of any such offering determines such action is necessary or desirable to effect such offering and if and to the extent that each director and executive officer of the Company so agrees; PROVIDED, HOWEVER, that each Shareholder has received the written notice required by Section 2(a) hereof. 4. REGISTRATION ON DEMAND. (a) DEMAND BY SHAREHOLDERS. At any time on or after the later of (i) February 3, 2003 and (ii) the one hundred and eighty-first (181st) day after completion of the initial public offering by the Company of its Common Stock, upon the written request by Shareholders of at least 66-2/3% of all Registrable Shares, that the Company effect the registration under the Securities Act of all or part of the Registrable Shares of such requesting party, and specifying the amount and intended method of disposition thereof, the Company shall promptly give notice of such requested registration to all other Shareholders and, as expeditiously as possible, use its best efforts to effect the registration under the Securities Act of: (i) the Registrable Shares which the Company has been so requested to register; and (ii) all other Registrable Shares which the Company has been requested to register by any other Shareholder by written request received by the Company within 15 days after the giving of such written notice by the Company (which request shall specify the intended method of disposition of such Registrable Shares); PROVIDED, HOWEVER, that the Company shall not be required to effect such 3 registration unless the Registrable Shares requested to be so registered have an aggregate proposed offering price of not less than $5,000,000; and PROVIDED, FURTHER, HOWEVER, that the Company shall not be required to effect more than one registration pursuant to this Section 4(a) unless (X) all of the Registrable Shares that the Shareholders initially requesting registration pursuant to this Section 4(a) requested to be registered are not included in such registration statement or (Y) the Company is eligible to file on Form S-3, in which case the Shareholders shall be entitled to request an unlimited number of registrations pursuant to this Section 4(a) except that the Company shall not be required to effect such registration pursuant to this clause (Y) unless the Registrable Shares requested to be so registered have an aggregate proposed offering price of not less than $5,000,000 and no other registration statement on Form S-3 has been filed by the Company and been declared effective within the previous twelve months. Promptly after the expiration of the 15-day period referred to in clause (ii) above, the Company shall notify all Shareholders to be included in the registration of the other Shareholders participating in such registration and the number of Registrable Shares requested to be included therein. The Shareholders initially requesting a registration pursuant to this Section 4(a) may, at any time prior to the effective date of the registration statement relating to such registration, revoke such request by providing a written notice to the Company revoking such request; PROVIDED, HOWEVER, that if such revocation occurs after the date of the filing of such registration statement, then the Registration Expenses incurred by the Company in connection with the revoked request shall be payable by the Shareholders participating in such demand registration. (b) EFFECTIVE REGISTRATION STATEMENT. A registration requested pursuant to this Section 4 shall not be deemed to have been effected unless it has become effective under the Securities Act and has remained effective for 180 days or such shorter period as all the Registrable Shares included in such registration have actually been sold thereunder. (c) PRIORITY IN DEMAND REGISTRATIONS. If a demand registration pursuant to this Section 4 involves an underwritten offering and the managing underwriter in good faith advises the Company in writing that, in its opinion, the number of securities requested to be included in such registration (including securities of the Company which are not Registrable Shares) exceeds the largest number of securities which can be sold in such offering without having an adverse effect on such offering (including the price, acceptable to the Shareholders requesting such registration, at which such securities can be sold), then the Company will include in such registration (i) FIRST, 100% of the Registrable Shares requested to be registered pursuant to Section 4(a) (provided that if the number of Registrable Shares requested to be registered pursuant to Section 4(a) exceeds the number which the Company has been advised can be sold in such offering without having the adverse effect referred to above, the number of such Registrable Shares to be included in such registration by the Shareholders shall be allocated pro rata among such Shareholders on the basis of the relative number of Registrable Shares each Shareholder has requested to be included in such registration); and (ii) SECOND, to the extent that the number of Registrable Shares requested to be registered pursuant to Section 4(a) is less than the number of securities which the Company has been advised can be sold in such offering without having the adverse effect referred to above, such number of shares of equity securities that, FIRST, the Company and, SECOND, Other Holders may request to be included in such registration. 4 5. REGISTRATION PROCEDURES. (a) If and whenever the Company is required by the provisions of Sections 2 or 4 hereof to use its best efforts to effect or cause the registration of Registrable Shares, the Company shall as expeditiously as possible: (i) prepare and, in any event within 60 days after the end of the period within which a request for registration may be given to the Company, file with the Securities and Exchange Commission (the "SEC") a registration statement with respect to such Registrable Shares and use its best efforts to cause such registration statement to become effective; (ii) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period not in excess of 180 days and to comply with the provisions of the Securities Act, the Exchange Act, and the rules and regulations promulgated thereunder with respect to the disposition of all the securities covered by such registration statement during such period in accordance with the intended methods of disposition by the Shareholders thereof set forth in such registration statement; PROVIDED, that the Company shall notify each Shareholder of Registrable Shares covered by such registration statement of any stop order issued or threatened by the SEC, any other order suspending the use of any preliminary prospectus or of the suspension of the qualification of the registration statement for offering or sale in any jurisdiction, and take all reasonable actions required to prevent the entry of such stop order, other order or suspension or to remove it if entered; (iii) furnish to each Shareholder and each underwriter, if applicable, of Registrable Shares covered by such registration statement such number of copies of the registration statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and summary prospectus), in conformity with the requirements of the Securities Act, and such other documents as each Shareholder of Registrable Shares covered by such registration statement may reasonably request in order to facilitate the disposition of the Registrable Shares owned by such Shareholder; (iv) use its best efforts to register or qualify such Registrable Shares covered by such registration statement under the state securities or blue sky laws of such jurisdictions as each Shareholder of Registrable Shares covered by such registration statement and, if applicable, each underwriter, may reasonably request, and do any and all other acts and things which may be reasonably necessary to consummate the disposition in such jurisdictions of the Registrable Shares owned by such Shareholder; PROVIDED, HOWEVER, that in connection therewith, the Company shall not be required to (A) qualify as a foreign corporation to do business or to register as a broker or dealer in any such jurisdiction where it would not otherwise be required to qualify or register but for this clause (iv), (B) subject itself to taxation in any jurisdiction or (C) file a general consent to service of process in any such jurisdiction. 5 (v) use its best efforts to cause such Registrable Shares covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the Shareholders thereof to consummate the disposition of such Registrable Shares; (vi) if at any time when a prospectus relating to the Registrable Shares is required to be delivered under the Securities Act any event shall have occurred as the result of which any such prospectus as then in effect would include 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, immediately give written notice thereof to each Shareholder and the managing underwriter, if any, of such Registrable Shares and prepare and furnish to each such Shareholder a reasonable number of copies of an amended or supplemental prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Shares, such prospectus shall not include an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (vii) use its best efforts to cause such Registrable Shares to be accepted for listing or quotation on any securities exchange or automated quotation system on which similar securities of the Company are then listed, and enter into customary agreements including a listing application and indemnification agreement in customary form, provided that the applicable listing requirements are satisfied, and provide a transfer agent and registrar for such Registrable Shares covered by such registration statement not later than the effective date of such registration statement; (viii) enter into such customary agreements (including an underwriting agreement in customary form) and take such other actions as each Shareholder of Registrable Shares being sold or the underwriter, if any, reasonably requests in order to expedite or facilitate the disposition of such Registrable Shares, including customary indemnification and opinions; (ix) to the extent reasonably requested by the Shareholders of at least 51% of the Registrable Shares being sold, or the underwriters, if any, use its best efforts to obtain a "cold comfort" letter or letters from the Company's independent public accountants in customary form and covering matters of the type customarily covered by "cold comfort" letters; (x) make available, at the Company's expense, for inspection by representatives of any Shareholder of Registrable Shares covered by such registration statement, by any underwriter participating in any disposition to be effected pursuant to such registration statement and by any attorney, accountant or other agent retained by such Shareholders or any such underwriter (collectively, the "SHAREHOLDER REPRESENTATIVES"), all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries (excluding any such records and documents as are protected by attorney-client privilege or which the Company is prohibited from disclosing pursuant to the terms of any nondisclosure agreements to which the Company or any of its subsidiaries is a party; PROVIDED that, to the extent permitted under any such nondisclosure agreement, the Company shall disclose any information subject to such nondisclosure agreement upon execution and delivery by such Shareholder or Shareholder 6 Representative of a confidentiality agreement for the benefit of the parties to such nondisclosure agreement); (xi) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable after the effective date of the registration statement, an earnings statement which shall satisfy the provisions of Section 11(a) of the Securities Act and the rules and regulations promulgated thereunder; and (xii) notify counsel for the Shareholders of Registrable Shares included in such registration statement and the managing underwriter, if any, immediately, and confirm the notice in writing, (A) when the registration statement, or any post-effective amendment to the registration statement, shall have become effective, or any supplement to the prospectus or any amendment prospectus shall have been filed and (B) of any request of the SEC to amend the registration statement or amend or supplement the prospectus or for additional information. (b) Each Shareholder of Registrable Shares hereby agrees that, upon receipt of any notice from the Company of the happening of any event of the type described in Section 5(a)(vi) hereof, such Shareholder shall forthwith discontinue disposition of such Registrable Shares covered by such registration statement or related prospectus until such Shareholder's receipt of the copies of the supplemental or amended prospectus contemplated by Section 5(a)(vi) hereof. In the event the Company shall give any such notice, the period mentioned in Section 5(a)(ii) hereof shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 5(a)(vi) hereof and including the date when such Shareholder shall have received the copies of the supplemental or amended prospectus contemplated by Section 5(a)(vi) hereof. If for any other reason the effectiveness of any registration statement filed pursuant to Section 4 hereof is suspended or interrupted prior to the expiration of the time period regarding the maintenance of the effectiveness of such Registration Statement required by Section 5(a)(ii) hereof so that Registrable Shares may not be sold pursuant thereto, the applicable time period shall be extended by the number of days equal to the number of days during the period beginning with the date of such suspension or interruption to and ending with the date when the sale of Registrable Shares pursuant to such registration statement may be recommenced. (c) Each Shareholder hereby agrees to provide the Company, upon receipt of its request, with such information about such Shareholder to enable the Company to comply with the requirements of the Securities Act and to execute such certificates as the Company may reasonably request in connection with such information and otherwise to satisfy any requirements of law. Each Shareholder further agrees to furnish to the Company in writing such information regarding the Shareholder and his, her or its proposed distribution of Registrable Shares as the Company may from time to time reasonably request. 6. UNDERWRITTEN REGISTRATIONS. Subject to the provisions of Sections 2, 3 and 4 hereof, any of the Registrable Shares covered by a registration statement may be sold in an underwritten offering at the discretion of the Shareholder thereof. In the case of an underwritten 7 offering pursuant to Section 2 or Section 4 hereof, the managing underwriter or underwriters that will administer the offering shall be selected by the Company, PROVIDED that such managing underwriter or underwriters is reasonably satisfactory to the Shareholders of a majority of the Registrable Shares to be registered. 7. SUSPENSION OF REGISTRATION REQUIREMENT. (a) Notwithstanding anything to the contrary set forth in this Agreement, the Company's obligation to use its best efforts to cause a registration statement and any filings with any state securities authorities to become effective or to amend or supplement any such registration statement or filings shall be suspended during such period as circumstances exist (including, without limitation, pending negotiations relating to, or the consummation of, any transaction) which (i) would require additional disclosure of material information by the Company in such registration statement or filing which the Company has a bona fide business purpose for not disclosing in such registration statement or (ii) render the Company unable to comply with SEC requirements (any such circumstances hereinafter referred to as a "Suspension Event"); PROVIDED that any suspension as a result of a Suspension Event shall occur on not more than one occasion during any 365-day period and shall continue only for so long as such event or its effect is continuing and in no event shall any such suspension continue for more than 120 days. The Company shall use all commercially reasonable efforts to minimize the length of such suspension as a result of a Suspension Event. To the extent that any such suspension occurs during a period in which a registration statement has been filed pursuant hereto and remains effective, the time during which the Company shall be required to maintain the effectiveness of such registration statement shall be extended for the number of days during which such suspension continued. (b) Notwithstanding anything to the contrary set forth in this Agreement, the Company shall not be required to cause a registration statement requested pursuant to Section 4(a) to become effective during the period beginning 30 days prior to the Company's good faith estimate of the date of filing of, and ending 180 days after the effective date of, a Company-initiated registration, provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective. (c) The Company shall give the Shareholders written notice immediately upon the occurrence of any Suspension Event instructing such Shareholders to suspend sales of Registrable Shares as a result of such Suspension Event. The Shareholders agree that after receipt of such notice they will not effect any sales of Registrable Shares pursuant to any registration statement filed pursuant to this Agreement until such time as such Shareholders shall have received further notice from the Company that such sales may be recommenced, which notice shall be given by the Company not later than five days after the conclusion of any such Suspension Event. 8 8. EXPENSES. (a) The fees, costs and expenses of all registrations in accordance with Sections 2 and 4 hereof shall be borne by the Company, subject to the provisions of Section 8(b) hereof. (b) The fees, costs and expenses of registration to be borne as provided in Section 8(a) hereof shall include, without limitation, all expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all SEC and stock exchange or NASD registration and filing fees and expenses, fees and expenses of compliance with securities or blue sky laws (including without limitation reasonable fees and disbursements of counsel for the underwriters, if any, or for the selling Shareholders in connection with blue sky qualifications of the Registrable Shares), rating agency fees, printing expenses (including expenses of printing certificates for Registrable Shares and prospectuses), the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange or automated quotation system on which similar securities issued by the Company are then listed, and fees and disbursements of counsel for the Company and all independent certified public accountants (including the expenses of any annual audit, special audit and "cold comfort" letters required by or incident to such performance and compliance) (but in any event not including any underwriting discounts or commissions or transfer taxes, if any, attributable to the sale of Registrable Shares by such Shareholders) (collectively, "Registration Expenses"). 9. INDEMNIFICATION. (a) INDEMNIFICATION BY THE COMPANY. In the event of any registration of any securities of the Company under the Securities Act pursuant to Sections 2 or 4 hereof, the Company shall, and it hereby does, indemnify and hold harmless, to the extent permitted by law, each of the Shareholders of any Registrable Shares covered by such registration statement, each affiliate of such Shareholder and their respective directors and officers (and the directors, officers, affiliates and controlling Persons thereof), each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such Shareholder or any such underwriter within the meaning of the Securities Act (collectively, the "Indemnified Parties"), against any and all losses, claims, damages or liabilities, joint or several, and expenses (including any amounts paid in any settlement effected with the Company's consent, which consent shall not be unreasonably withheld and including any expenses paid in connection with the enforcement of the indemnification rights contained herein) to which any Indemnified Party may become subject under the Securities Act, state securities or blue sky laws, common law, any other applicable law, foreign or domestic, or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof, whether or not such Indemnified Party is a party thereto) or expenses arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary, final or summary prospectus contained therein, or any amendment or supplement thereto, (ii) 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 or (iii) any violation by the Company of 9 any federal, state or common law rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with any such registration, and the Company shall reimburse such Indemnified Party for any legal or any other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, liability, action or proceeding; PROVIDED that the Company shall not be liable to any Indemnified Party in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or amendment or supplement thereto or in any such preliminary, final or summary prospectus in reliance upon and in conformity with written information with respect to such Shareholder furnished to the Company by such Shareholder specifically for use therein. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Shareholder or any Indemnified Party and shall survive the transfer of such securities by such Shareholder. (b) INDEMNIFICATION BY THE SHAREHOLDERS AND UNDERWRITERS. The Company may require, as a condition to including any Registrable Shares in any registration statement filed in accordance with Sections 2 or 4 hereof, that the Company shall have received an undertaking reasonably satisfactory to it from the Shareholders of such Registrable Shares or any underwriter to, severally and not jointly, indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 9(a) hereof) the Company with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary, final or summary prospectus contained therein, or any amendment or supplement, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information with respect to such Shareholder or such underwriter furnished to the Company by such Shareholder or such underwriter specifically for use in such registration statement, preliminary, final or summary prospectus or amendment or supplement, or a document incorporated by reference into any of the foregoing; PROVIDED that no such Shareholder shall be liable for any indemnity claims in excess of the amount of net proceeds received by such Shareholder from the sale of Registrable Shares. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any of the Shareholders, or any of their respective affiliates, directors, officers or controlling Persons, and shall survive the transfer of such securities by such Shareholder. (c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to this Section 9, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; PROVIDED that the failure of the indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Section 9, except to the extent that the indemnifying party is actually materially prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense thereof, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable 10 costs of investigation; PROVIDED that the indemnified party shall have the right to employ counsel to represent the indemnified party and its respective controlling persons, directors, officers, general or limited partners, employees or agents who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the indemnified party against such indemnifying party under this Section 9 PROVIDED that the employment of such counsel shall be at the expense of the indemnified party, unless (i) the indemnifying party shall have agreed in writing to pay the expenses of such counsel, (ii) the indemnifying party shall not have promptly employed counsel reasonably satisfactory to the indemnified party to assume the defense of such action or counsel or (iii) any indemnified party shall have reasonably concluded that there may be defenses available to such indemnified party or its respective controlling persons, directors, officers, employees or agents which are in conflict with or in addition to those available to the indemnifying party, and in that event the reasonable fees and expenses of one firm of separate counsel for the indemnified party (in addition to the reasonable fees and expenses of one firm serving as local counsel) shall be paid by the indemnifying party. No indemnifying party shall consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) CONTRIBUTION. If the indemnification provided for in this Section 9 shall for any reason be unavailable to any indemnified party under Section 9(a) or 9(b) hereof or is insufficient to hold it harmless in respect of any loss, claim, damage or liability, or any action in respect thereof referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the indemnified party and indemnifying party or (ii) if the allocation provided by clause (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 (i) but also the relative fault of the indemnified party and indemnifying party with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. Notwithstanding any other provision of this Section 9(d), no Shareholder of Registrable Shares shall be required to contribute an amount greater than the dollar amount of the proceeds received by such Shareholder with respect to the sale of any such Registrable Shares. 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. (e) OTHER INDEMNIFICATION. Indemnification and contribution similar to that specified in the preceding subdivisions of this Section 9 (with appropriate modifications) shall be given by the Company and each Shareholder of Registrable Shares with respect to any required registration or other qualification of securities under any federal or state law or regulation or governmental authority other than the Securities Act. (f) NON-EXCLUSIVITY. The obligations of the parties under this Section 9 shall be in addition to any liability which any party may otherwise have to any other party. 11 10. ASSIGNABILITY. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. In addition, and whether or not any express assignment shall have been made, the provisions of this Agreement which are for the benefit of the parties hereto other than the Company shall also be for the benefit of and enforceable by any subsequent Shareholder of any Registrable Shares, subject to the provisions contained herein. The Company may not assign any of its rights or delegate any of its duties under this Agreement without the written consent of the Shareholders of a majority of the Registrable Shares. 11. NOTICES. Any and all notices, designations, consents, offers, acceptances or any other communications shall be given in writing by either (a) personal delivery to and receipted for by the addressee or by (b) telecopy or registered or certified mail which shall be addressed, in the case of the Company, to the Company c/o Elgar Electronics Corporation, 9250 Brown Deer Road, San Diego, CA 02121, facsimile (619) 458-0257, attention of Chief Executive Officer, with a copy to J.F. Lehman Equity Investors I, L.P., 450 Park Avenue, New York, New York 10022, facsimile (212) 634-1155, attention of Mr. Donald Glickman, and in the case of Shareholders, to the address or addresses thereof appearing on the books of the Company or of the transfer agent and registrar for the Registrable Shares. All such notices and communications shall be deemed to have been duly given and effective: when delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; and when receipt acknowledged, if telecopied. 12. ARBITRATION. Any controversy, dispute or claim arising out of, in connection with or in relation to the interpretation, performance or breach of this Agreement shall be determined, at the request of any party, by arbitration in a city mutually agreeable to the parties to such controversy, dispute or claim, or, failing such agreement, in New York, New York, before and in accordance with the then-existing Rules for Commercial Arbitration of the American Arbitration Association, and any judgment or award rendered by the arbitrator will be final, binding and unappealable and judgment may be entered by any state or Federal court having jurisdiction thereof. The pre-trial discovery procedures of the Federal Rules of Civil Procedure shall apply to any arbitration under this Section 12. Any controversy concerning whether a dispute is an arbitrable dispute or as to the interpretation or enforceability of this Section 12 shall be determined by the arbitrator. The arbitrator shall be a retired or former United States District Judge or other person acceptable to each of the parties, provided such individual has substantial professional experience with regard to corporate or partnership legal matters. The parties intend that this agreement to arbitrate be valid, enforceable and irrevocable. 13. SEVERABILITY. If any provision of this Agreement or any portion thereof is finally determined to be unlawful or unenforceable, such provision or portion thereof shall be deemed to be severed from this Agreement. Every other provision, and any portion of such an invalidated provision that is not invalidated by such a determination, shall remain in full force and effect. 12 14. AMENDMENTS, WAIVERS. This Agreement may not be amended, modified or supplemented and no waivers of or consents to departures from the provisions hereof may be given unless consented to in writing by the Company and the Shareholders of at least a majority of the Registrable Shares. 15. ATTORNEYS' FEES. In any action or proceeding brought to enforce any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. 16. ENTIRE AGREEMENT. This Agreement contains the entire agreement among the parties hereto with respect to the transactions contemplated herein and understandings among the parties relating to the subject matter hereof. Any and all previous agreements and understandings between or among the parties hereto regarding the subject matter hereof are, whether written or oral, superseded by this Agreement. 17. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which, together, shall constitute one and the same instrument. 18. CAPTIONS. The captions contained in this Agreement are for reference purposes only and are not part of this Agreement. 19. LIMITATION OF LIABILITY OF SHAREHOLDERS AND OFFICERS OF COMPANY. ANY OBLIGATION OR LIABILITY WHATSOEVER OF THE COMPANY WHICH MAY ARISE AT ANY TIME UNDER THIS AGREEMENT OR ANY OBLIGATION OR LIABILITY WHICH MAY BE INCURRED BY IT PURSUANT TO ANY INSTRUMENT, TRANSACTION OR UNDERTAKING CONTEMPLATED HEREBY SHALL BE SATISFIED OUT OF THE COMPANY'S ASSETS ONLY. NO SUCH OBLIGATION OR LIABILITY SHALL BE PERSONALLY BINDING UPON, NOR SHALL RESORT FOR THE ENFORCEMENT THEREOF BE HAD TO, THE PROPERTY OF ANY OF THE COMPANY'S SHAREHOLDERS (SOLELY AS A RESULT OF THEIR STATUS AS SHAREHOLDERS), DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS, REGARDLESS OF WHETHER SUCH OBLIGATION OR LIABILITY IS IN THE NATURE OF CONTRACT, TORT OR OTHERWISE. NOTWITHSTANDING THE FOREGOING, THIS SECTION 19 SHALL NOT IN ANY WAY AFFECT OR LIMIT ANY RIGHTS OR OBLIGATIONS OF THE COMPANY OR ANY SHAREHOLDER UNDER THIS AGREEMENT. 20. LIMITATION OF LIABILITY OF SHAREHOLDERS AND OFFICERS OF EACH SHAREHOLDER. ANY OBLIGATION OR LIABILITY WHATSOEVER OF ANY SHAREHOLDER WHICH MAY ARISE AT ANY TIME UNDER THIS AGREEMENT OR ANY OBLIGATION OR LIABILITY WHICH MAY BE INCURRED BY IT PURSUANT TO ANY INSTRUMENT, TRANSACTION OR UNDERTAKING CONTEMPLATED HEREBY SHALL BE SATISFIED OUT OF THE SHAREHOLDER'S ASSETS ONLY. NO SUCH OBLIGATION OR LIABILITY SHALL BE PERSONALLY BINDING UPON, NOR SHALL RESORT FOR THE ENFORCEMENT THEREOF BE HAD TO, THE PROPERTY OF ANY 13 OF SUCH SHAREHOLDERS SHAREHOLDERS (SOLELY AS A RESULT OF THEIR STATUS AS SHAREHOLDERS), DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS, REGARDLESS OF WHETHER SUCH OBLIGATION OR LIABILITY IS IN THE NATURE OF CONTRACT, TORT OR OTHERWISE. NOTWITHSTANDING THE FOREGOING, THIS SECTION 20 SHALL NOT IN ANY WAY AFFECT OR LIMIT ANY RIGHTS OR OBLIGATIONS OF THE COMPANY OR ANY SHAREHOLDER UNDER THIS AGREEMENT. 21. GOVERNING LAW. This Agreement is made pursuant to and shall be construed in accordance with the laws of the State of New York. 14 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective authorized officers as of the date aforesaid. ELGAR HOLDINGS, INC. By: /s/ Donald Glickman -------------------------- Name: Donald Glickman Title: President THE SHAREHOLDERS: JFL-EEC LLC, a Delaware limited liability company By: /s/ Donald Glickman -------------------------- Name: Donald Glickman Title: Manager CARLYLE-ELGAR INTERNATIONAL PARTNERS, L.P. By: TC Group, L.L.C., its General Partner By: TCG Holdings, L.L.C., its Managing Member By: /s/ Daniel A. D'Aniello -------------------------- Daniel A. D'Aniello Managing Director CARLYLE-ELGAR PARTNERS, L.P. By: TC Group, L.L.C., its General Partner By: TCG Holdings, L.L.C., its Managing Member By: /s/ Daniel A. D'Aniello -------------------------- Daniel A. D'Aniello Managing Director 15 CARLYLE PARTNERS II, L.P. By: TC Group, L.L.C., its General Partner By: TCG Holdings, L.L.C., its Managing Member By: /s/ Daniel A. D'Aniello ----------------------------- Daniel A. D'Aniello Managing Director CARLYLE PARTNERS III, L.P. By: TC Group, L.L.C., its General Partner By: TCG Holdings, L.L.C., its Managing Member By: /s/ Daniel A. D'Aniello ----------------------------- Daniel A. D'Aniello Managing Director CARLYLE INTERNATIONAL PARTNERS II, L.P. By: TC Group, L.L.C., its General Partner By: TCG Holdings, L.L.C., its Managing Member By: /s/ Daniel A. D'Aniello ----------------------------- Daniel A. D'Aniello Managing Director CARLYLE INTERNATIONAL PARTNERS III, L.P. By: TC Group, L.L.C., its General Partner By: TCG Holdings, L.L.C., its Managing Member By: /s/ Daniel A. D'Aniello ----------------------------- Daniel A. D'Aniello Managing Director 16 C/S INTERNATIONAL PARTNERS By: TC Group, L.L.C., its General Partner By: TCG Holdings, L.L.C., its Managing Member By: /s/ Daniel A. D'Aniello ----------------------------- Daniel A. D'Aniello Managing Director SBC MASTER PENSION TRUST By: /s/ Shannon Greene ----------------------------- Name: Shannon Greene ----------------------------- Title: Executive Vice President, McGahan Greene HcHugh Capital Management, LLC ----------------------------- STATE STREET BANK AS TRUSTEE FOR THE CHAMPION INTERNATIONAL RETIREMENT TRUST By: /s/ Scott Kennedy ----------------------------- Name: Scott Kennedy ----------------------------- Title: Assistant Secretary ----------------------------- DELAWARE STATE EMPLOYEES' RETIREMENT FUND By: TC Group, L.L.C., its General Partner By: TCG Holdings, L.L.C., its Managing Member By: /s/ Daniel A. D'Aniello ----------------------------- Daniel A. D'Aniello Managing Director MELLON BANK, N.A., solely in its capacity as Trustee for FIRST PLAZA GROUP TRUST, (as directed by General Motors Investment Management Corporation), and not in its individual capacity By: /s/ Bernadette Rist ----------------------------- Name: Bernadette Rist ----------------------------- Title: Authorized Signatory ----------------------------- CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYSTEM By: TC Group, L.L.C., its General Partner By: TCG Holdings, L.L.C., its Managing Member By: /s/ Daniel A. D'Aniello ----------------------------- Daniel A. D'Aniello Managing Director 17 INDOSUEZ ELGAR PARTNERS LP By: Indosuez CM II, Inc, its Managing General Partner By: /s/ Michael Walsh ----------------------------- Name: Michael Walsh ----------------------------- Title: Vice President ----------------------------- By: /s/ Allen Gruenhut ----------------------------- Name: Allen Gruenhut ----------------------------- Title: Vice President ----------------------------- RIT CAPITAL PARTNERS PLC By: /s/ A. H. Bloom ----------------------------- Name: A. H. Bloom ----------------------------- Title: Authorized Signatory ----------------------------- DURHAM ENTERPRISES LTD. By: /s/ C. P. M. Harris ----------------------------- Name: C. P. M. Harris ----------------------------- Title: Director ----------------------------- GFI PARTNERS L.L.C. By: /s/ Ian Schapiro ----------------------------- Name: Ian Schapiro ----------------------------- Title: Chief Financial Officer ----------------------------- GFI ONE L.L.C. By: /s/ Ian Schapiro ----------------------------- Name: Ian Schapiro ----------------------------- Title: Chief Financial Officer ----------------------------- /s/ Kenneth R. Kilpatrick ----------------------------------- Kenneth R. Kilpatrick /s/ Ronald Garrett ----------------------------------- Ronald Garrett /s/ Normand E. Precourt ----------------------------------- Normand E. Precourt /s/ Christopher W. Kelford ----------------------------------- Christopher W. Kelford 18 /s/ Tom Erickson ----------------------------------- Tom Erickson TOM ERICKSON I.R.A. By /s/ Dawn Phillips -------------------------------- Name: Dawn Phillips Title: Assistant Vice President, Bank of Commerce /s/ Samuel A. Lewis ----------------------------------- Samuel A. Lewis /s/ Raymond Daniel ----------------------------------- Raymond Daniel /s/ Daniel E. Donati ----------------------------------- Daniel E. Donati /s/ Grant A. Moore ----------------------------------- Grant A. Moore 19 EX-10.5 18 EXHIBIT 10.5 Exhibit 10.5 WARRANTHOLDERS REGISTRATION RIGHTS AGREEMENT WARRANTHOLDERS REGISTRATION RIGHTS AGREEMENT, dated as of February 3, 1998 (this "Agreement"), by and among JFL-EEC MERGER SUB. CO., a Delaware corporation ("Company"), JACKSON NATIONAL LIFE INSURANCE COMPANY ("Purchaser I"), INDOSUEZ ELECTRONICS PARTNERS, and OLD HICKORY FUND, L.L.C. ("Purchaser III," and, together with Purchaser I and Purchaser II, the "Holders"). WHEREAS, the Boards of Directors of the Company and Elgar Holdings, Inc., a Delaware corporation ("Holdings") have determined to effect a recapitalization of Holdings and its wholly-owned subsidiary Elgar Electronics Corporation ("Elgar") pursuant to which, among other things, (i) JFL-EEC LLC, a Delaware limited liability company ("JFL-EEC LLC"), will make a capital contribution in the amount of approximately $19.0 million to the Company, (ii) the Company will issue, on the terms and subject to the conditions set forth in this Agreement, shares of its Series A 10% Cumulative Redeemable Preferred Stock (the "Preferred Stock") and certain warrants (the "Warrants") in exchange for an aggregate of $10.0 million, (iii) the Company will offer and issue $90.0 million in aggregate principal amount of 9 7/8% Senior Notes due 2008 (the "Senior Notes"), (iv) the Company will merge with and into Holdings, with Holdings surviving such merger and assuming the liabilities and obligations of the Company (the "Merger"), including without limitation the liabilities and obligations with respect to the Series A Preferred Stock, the Warrants and the Senior Notes, (v) pursuant to the Merger Agreement, (A) immediately prior to the Merger, Holdings will effect an approximately 9,220 to 1 stock split, such at the effective time of the Merger there will be approximately 9,220,000 shares of Holdings common stock, $.01 par value per share (the "Common Stock") issued and outstanding, (B) Carlyle-EEC Acquisition Partners, L.P., the owner of all of the issued and outstanding capital stock of Holdings immediately prior to the Merger, will liquidate and distribute the shares of Common Stock to its partners, and (C) each share of the Common Stock issued and outstanding immediately prior to the Merger, other than certain shares held by certain shareholders and members of management, will be converted into the right to receive cash, and (v) Holdings and Elgar will enter into a new credit facility providing for revolving credit borrowings of up to $15.0 million (all such transactions shall be collectively referred to herein as the "Recapitalization");and WHEREAS, to induce the Holders to purchase the Preferred Stock and Warrants, the Company agreed to provide the registration rights set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. DEFINITIONS. Unless otherwise defined herein, the following terms shall have the following meanings below: "COMMON STOCK" shall mean the common stock of the Company, no par value, upon consummation of the Merger. "OTHER HOLDERS" shall mean Persons who are holders of record of equity securities of the Company who have valid contractual registration rights under the Shareholders Registration Rights Agreement entered into among certain shareholders of the Company and the Company. "PERSON" shall mean an individual, corporation, unincorporated association, partnership, group (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934), trust, joint stock company, joint venture, business trust or unincorporated organization, any governmental entity or any other entity of whatever nature. "REGISTRABLE SHARES" shall mean any shares of Common Stock which may be (i) issued upon exercise of the Warrants or (ii) issued or distributed in respect of the Common Stock referred to in clause (i) above by way of stock dividend or stock split or other distribution, recapitalization or reclassification. As to any particular Registrable Share, such Registrable Share shall cease to be a Registrable Share when (i) it shall have been sold, transferred or otherwise disposed of or exchanged pursuant to a registration statement under the Securities Act or (ii) it shall have been distributed to the public pursuant to Rule 144 (or any successor provision) under the Securities Act. 2. INCIDENTAL REGISTRATIONS. (a) RIGHT TO INCLUDE REGISTRABLE SHARES. After the completion of the initial public offering by the Company of its Common Stock, each time the Company shall determine to file a registration statement under the Securities Act in connection with the proposed offer and sale for cash of Common Stock (other than debt securities which are convertible into Common Stock and other than registration statements on Form S-4 or S-8) either by it or by any holders of its outstanding equity securities, the Company shall give prompt written notice of its determination to each Holder and of such Holder's rights under this Section 2, at least 20 days prior to the anticipated filing date of such registration statement. Upon the written request of each Holder made within 15 days after the receipt of any such notice from the Company, (which request shall specify the Registrable Shares intended to be disposed of by such Holder), the Company shall use its best efforts to effect the registration under the Securities Act of all Registrable Shares which the Company has been so requested to register by the Holders thereof, to the extent required to permit the disposition of the Registrable Shares so to be registered; PROVIDED, HOWEVER, that (i) if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to proceed with the proposed registration of the securities to be sold by it, the Company may, at its election, give written notice of such determination to each Holder of Registrable Shares and thereupon shall be relieved of its obligation to register any Registrable Shares in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith) and (ii) if such registration involves an underwritten offering, all Holders of Registrable Shares requesting to be included in the Company's registration must sell their Registrable Shares to the underwriters on the same terms and conditions as apply to the Company, with such differences, including any with respect to indemnification, as may be customary or appropriate in combined primary and secondary offerings (provided that no Holder shall be required to provide indemnification which is more 2 expansive than the indemnification provided in Section 9(b) hereof and provided, further, that the representations and warranties provided by any Holder shall be limited to such matters as the authority of such Holder to sell its Registrable Shares, its title thereto and the absence of liens thereon). If a registration requested pursuant to this Section 2(a) involves an underwritten public offering, any Holder of Registrable Shares requesting to be included in such registration may elect in writing prior to the effective date of the registration statement filed in connection with such registration, not to register such securities in connection with such registration. No registration effected under this Section 2 shall relieve the Company of its obligations to effect one registration upon request under Section 4 hereof. (b) PRIORITY IN INCIDENTAL REGISTRATIONS. If a registration pursuant to this Section 2 involves an underwritten offering and the managing underwriter in good faith advises the Company in writing that, in its opinion, the number of securities which the Company, the Holders and any other Persons intend to include in such registration exceeds the largest number of securities which can be sold in such offering without having an adverse effect on such offering (including the price at which such securities can be sold), then the Company shall include in such registration: (i) FIRST, 100% of the securities the Company proposes to sell for its own account; and (ii) SECOND, such number of Registrable Shares which the Holders have requested to be included in such registration and such number of securities which Other Holders have requested to be included in such registration which, in the opinion of such managing underwriter, can be sold without having the adverse effect referred to above, such number of Registrable Shares and securities of Other Holders to be included on a pro rata basis among all requesting Holders and Other Holders on the basis of the relative number of shares of Common Stock requested to be included in such registration by such Holders and Other Holders; and (iii) THIRD, to the extent that the number of securities which are to be included in such registration pursuant to clauses (i) and (ii), in the aggregate, is less than the number of securities which the Company has been advised can be sold in such offering without having the adverse effect referred to above, such number of other securities requested to be included in the offering for the account of any other Persons which, in the opinion of such managing underwriter, can be sold without having the adverse effect referred to above, such number to be allocated pro rata among all holders of such other securities on the basis of the relative number of such other securities each other person has requested to be included in such registration. 3. HOLDBACK AGREEMENTS. If any registration of Registrable Shares shall be effected in connection with an underwritten public offering, the Holders agree not to effect any public sale or distribution without the consent of the managing underwriter (except in connection with such public offering), of any equity securities of the Company, or of any security convertible into or exchangeable or exercisable for any equity security of the Company (in each case, other than as part of such underwritten public offering), during the 120-day period (or such lesser period as the managing underwriter may permit) beginning on the effective date of such registration, if, and to the extent, the managing underwriter of any such offering determines such action is necessary or desirable to effect such offering and if and to the extent that each director and executive officer of the Company so agrees; PROVIDED, HOWEVER, that each Holder has received the written notice required by Section 2(a) hereof. 3 4. REGISTRATION ON DEMAND. (a) DEMAND BY HOLDERS. At any time on or after the later of (i) the February 3, 2003 and (ii) the one hundred and eighty-first (181st) day after completion of the initial public offering by the Company of its Common Stock, upon the written request by Holders of at least 66K% of all Registrable Shares, that the Company effect the registration under the Securities Act of all or part of the Registrable Shares of such requesting party, and specifying the amount and intended method of disposition thereof, the Company shall promptly give notice of such requested registration to all other Holders and, as expeditiously as possible, use its best efforts to effect the registration under the Securities Act of: (i) the Registrable Shares which the Company has been so requested to register; and (ii) all other Registrable Shares which the Company has been requested to register by any other Holder by written request received by the Company within 15 days after the giving of such written notice by the Company (which request shall specify the intended method of disposition of such Registrable Shares); PROVIDED, HOWEVER, that the Company shall not be required to effect such registration unless the Registrable Shares requested to be so registered have an aggregate proposed offering price of not less than $5,000,000; and PROVIDED, FURTHER, HOWEVER, that the Company shall not be required to effect more than one registration pursuant to this Section 4(a) unless (X) all of the Registrable Shares that the Holders initially requesting registration pursuant to this Section 4(a) requested to be registered are not included in such registration statement or (Y) the Company is eligible to file on Form S-3, in which case the Holders shall be entitled to request an unlimited number of registrations pursuant to this Section 4(a) except that the Company shall not be required to effect such registration pursuant to this clause (Y) unless the Registrable Shares requested to be so registered have an aggregate proposed offering price of not less than $5,000,000 and no other registration statement on Form S-3 has been filed by the Company and been declared effective within the previous twelve months. Promptly after the expiration of the 15-day period referred to in clause (ii) above, the Company shall notify all Holders to be included in the registration of the other Holders participating in such registration and the number of Registrable Shares requested to be included therein. The Holders initially requesting a registration pursuant to this Section 4(a) may, at any time prior to the effective date of the registration statement relating to such registration, revoke such request by providing a written notice to the Company revoking such request; PROVIDED, HOWEVER, that if such revocation occurs after the date of the filing of such registration statement, then the Registration Expenses incurred by the Company in connection with the revoked request shall be payable by the Holders participating in such demand registration. (b) EFFECTIVE REGISTRATION STATEMENT. A registration requested pursuant to this Section 4 shall not be deemed to have been effected unless it has become effective under the Securities Act and has remained effective for 180 days or such shorter period as all the Registrable Shares included in such registration have actually been sold thereunder. (c) PRIORITY IN DEMAND REGISTRATIONS. If a demand registration pursuant to this Section 4 involves an underwritten offering and the managing underwriter in good faith advises the Company in writing that, in its opinion, the number of securities requested to be included in such registration (including securities of the Company which are not Registrable Shares) exceeds the largest number of securities which can be sold in such offering without having 4 an adverse effect on such offering (including the price, acceptable to the Holders requesting such registration, at which such securities can be sold), then the Company will include in such registration (i) FIRST, 100% of the Registrable Shares requested to be registered pursuant to Section 4(a) (provided that if the number of Registrable Shares requested to be registered pursuant to Section 4(a) exceeds the number which the Company has been advised can be sold in such offering without having the adverse effect referred to above, the number of such Registrable Shares to be included in such registration by the Holders shall be allocated pro rata among such Holders on the basis of the relative number of Registrable Shares each Holder has requested to be included in such registration); and (ii) SECOND, to the extent that the number of Registrable Shares requested to be registered pursuant to Section 4(a) is less than the number of securities which the Company has been advised can be sold in such offering without having the adverse effect referred to above, such number of shares of equity securities that, FIRST, the Company and, SECOND, Other Holders may request to be included in such registration. 5. REGISTRATION PROCEDURES. (a) If and whenever the Company is required by the provisions of Sections 2 or 4 hereof to use its best efforts to effect or cause the registration of Registrable Shares, the Company shall as expeditiously as possible: (i) prepare and, in any event within 60 days after the end of the period within which a request for registration may be given to the Company, file with the Securities and Exchange Commission (the "SEC") a registration statement with respect to such Registrable Shares and use its best efforts to cause such registration statement to become effective; (ii) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period not in excess of 180 days and to comply with the provisions of the Securities Act, the Exchange Act, and the rules and regulations promulgated thereunder with respect to the disposition of all the securities covered by such registration statement during such period in accordance with the intended methods of disposition by the Holders thereof set forth in such registration statement; PROVIDED, that the Company shall notify each Holder of Registrable Shares covered by such registration statement of any stop order issued or threatened by the SEC, any other order suspending the use of any preliminary prospectus or of the suspension of the qualification of the registration statement for offering or sale in any jurisdiction, and take all reasonable actions required to prevent the entry of such stop order, other order or suspension or to remove it if entered; (iii) furnish to each Holder and each underwriter, if applicable, of Registrable Shares covered by such registration statement such number of copies of the registration statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and summary prospectus), in conformity with the requirements of the Securities Act, and such other documents as each Holder of Registrable 5 Shares covered by such registration statement may reasonably request in order to facilitate the disposition of the Registrable Shares owned by such Holder; (iv) use its best efforts to register or qualify such Registrable Shares covered by such registration statement under the state securities or blue sky laws of such jurisdictions as each Holder of Registrable Shares covered by such registration statement and, if applicable, each underwriter, may reasonably request, and do any and all other acts and things which may be reasonably necessary to consummate the disposition in such jurisdictions of the Registrable Shares owned by such Holder; PROVIDED, HOWEVER, that in connection therewith, the Company shall not be required to (A) qualify as a foreign corporation to do business or to register as a broker or dealer in any such jurisdiction where it would not otherwise be required to qualify or register but for this clause (iv), (B) subject itself to taxation in any jurisdiction or (C) file a general consent to service of process in any such jurisdiction. (v) use its best efforts to cause such Registrable Shares covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the Holders thereof to consummate the disposition of such Registrable Shares; (vi) if at any time when a prospectus relating to the Registrable Shares is required to be delivered under the Securities Act any event shall have occurred as the result of which any such prospectus as then in effect would include 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, immediately give written notice thereof to each Holder and the managing underwriter, if any, of such Registrable Shares and prepare and furnish to each such Holder a reasonable number of copies of an amended or supplemental prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Shares, such prospectus shall not include an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (vii) use its best efforts to cause such Registrable Shares to be accepted for listing or quotation on any securities exchange or automated quotation system on which similar securities of the Company are then listed, and enter into customary agreements including a listing application and indemnification agreement in customary form, provided that the applicable listing requirements are satisfied, and provide a transfer agent and registrar for such Registrable Shares covered by such registration statement not later than the effective date of such registration statement; (viii) enter into such customary agreements (including an underwriting agreement in customary form) and take such other actions as each Holder of Registrable Shares being sold or the underwriter, if any, reasonably requests in order to expedite or facilitate the disposition of such Registrable Shares, including customary indemnification and opinions; (ix) to the extent reasonably requested by the Holders of at least 51% of the Registrable Shares being sold, or the underwriters, if any, use its best efforts to obtain 6 a "cold comfort" letter or letters from the Company's independent public accountants in customary form and covering matters of the type customarily covered by "cold comfort" letters; (x) make available, at the Company's expense, for inspection by representatives of any Holder of Registrable Shares covered by such registration statement, by any underwriter participating in any disposition to be effected pursuant to such registration statement and by any attorney, accountant or other agent retained by such Holders or any such underwriter (collectively, the "HOLDER REPRESENTATIVES"), all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries (excluding any such records and documents as are protected by attorney-client privilege or which the Company is prohibited from disclosing pursuant to the terms of any nondisclosure agreements to which the Company or any of its subsidiaries is a party; PROVIDED that, to the extent permitted under any such nondisclosure agreement, the Company shall disclose any information subject to such nondisclosure agreement upon execution and delivery by such Holder or Holder Representative of a confidentiality agreement for the benefit of the parties to such nondisclosure agreement); (xi) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable after the effective date of the registration statement, an earnings statement which shall satisfy the provisions of Section 11(a) of the Securities Act and the rules and regulations promulgated thereunder; and (xii) notify counsel for the Holders of Registrable Shares included in such registration statement and the managing underwriter, if any, immediately, and confirm the notice in writing, (A) when the registration statement, or any post-effective amendment to the registration statement, shall have become effective, or any supplement to the prospectus or any amendment prospectus shall have been filed and (B) of any request of the SEC to amend the registration statement or amend or supplement the prospectus or for additional information. (b) Each Holder of Registrable Shares hereby agrees that, upon receipt of any notice from the Company of the happening of any event of the type described in Section 5(a)(vi) hereof, such Holder shall forthwith discontinue disposition of such Registrable Shares covered by such registration statement or related prospectus until such Holder's receipt of the copies of the supplemental or amended prospectus contemplated by Section 5(a)(vi) hereof. In the event the Company shall give any such notice, the period mentioned in Section 5(a)(ii) hereof shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 5(a)(vi) hereof and including the date when such Holder shall have received the copies of the supplemental or amended prospectus contemplated by Section 5(a)(vi) hereof. If for any other reason the effectiveness of any registration statement filed pursuant to Section 4 hereof is suspended or interrupted prior to the expiration of the time period regarding the maintenance of the effectiveness of such Registration Statement required by Section 5(a)(ii) hereof so that Registrable Shares may not be sold pursuant thereto, the applicable time period shall be extended by the number of days equal to the number of days during the period beginning with the date of such suspension or interruption to and ending with the date when the sale of Registrable Shares pursuant to such registration statement may be recommenced. 7 (c) Each Holder hereby agrees to provide the Company, upon receipt of its request, with such information about such Holder to enable the Company to comply with the requirements of the Securities Act and to execute such certificates as the Company may reasonably request in connection with such information and otherwise to satisfy any requirements of law. Each Holder further agrees to furnish to the Company in writing such information regarding the Holder and his, her or its proposed distribution of Registrable Shares as the Company may from time to time reasonably request. 6. UNDERWRITTEN REGISTRATIONS. Subject to the provisions of Sections 2, 3 and 4 hereof, any of the Registrable Shares covered by a registration statement may be sold in an underwritten offering at the discretion of the Holder thereof. In the case of an underwritten offering pursuant to Section 2 hereof, the managing underwriter or underwriters that will administer the offering shall be selected by the Company, PROVIDED that such managing underwriter or underwriters is reasonably satisfactory to the Holders of a majority of the Registrable Shares to be registered. In the case of any underwritten offering pursuant to Section 4 hereof, the managing underwriter or underwriters that will administer the offering shall be selected by the Holders of a majority of the Registrable Shares to be registered, PROVIDED that such underwriters are reasonably satisfactory to the Company. 7. SUSPENSION OF REGISTRATION REQUIREMENT. (a) Notwithstanding anything to the contrary set forth in this Agreement, the Company's obligation to use its best efforts to cause a registration statement and any filings with any state securities authorities to become effective or to amend or supplement any such registration statement or filings shall be suspended during such period as circumstances exist (including, without limitation, pending negotiations relating to, or the consummation of, any transaction) which (i) would require additional disclosure of material information by the Company in such registration statement or filing which the Company has a bona fide business purpose for not disclosing in such registration statement or (ii) render the Company unable to comply with SEC requirements (any such circumstances hereinafter referred to as a "Suspension Event"); PROVIDED that any suspension as a result of a Suspension Event shall occur on not more than one occasion during any 365-day period and shall continue only for so long as such event or its effect is continuing and in no event shall any such suspension continue for more than 120 days. To the extent that any such suspension occurs during a period in which a registration statement has been filed pursuant hereto and remains effective, the time during which the Company shall be required to maintain the effectiveness of such registration statement shall be extended for the number of days during which such suspension continued. (b) Notwithstanding anything to the contrary set forth in this Agreement, the Company shall not be required to cause a registration statement requested pursuant to Section 4(a) to become effective during the period beginning 30 days prior to the Company's good faith estimate of the date of filing of, and ending 180 days after the effective date of, a Company-initiated registration, provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective. 8 (c) The Company shall give the holders written notice immediately upon the occurrence of any Suspension Event instructing such holders to suspend sales of Registrable Shares as a result of such Suspension Event. The Holders agree that after receipt of such notice they will not effect any sales of Registrable Shares pursuant to any registration statement filed pursuant to this Agreement until such time as such Holders shall have received further notice from the Company that such sales may be recommenced, which notice shall be given by the Company not later than five days after the conclusion of any such Suspension Event. 8. EXPENSES. (a) The fees, costs and expenses of all registrations in accordance with Sections 2 and 4 hereof shall be borne by the Company, subject to the provisions of Section 8(b) hereof. (b) The fees, costs and expenses of registration to be borne as provided in Section 8(a) hereof shall include, without limitation, all expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all SEC and stock exchange or NASD registration and filing fees and expenses, fees and expenses of compliance with securities or blue sky laws (including without limitation reasonable fees and disbursements of counsel for the underwriters, if any, or for the selling Holders in connection with blue sky qualifications of the Registrable Shares), rating agency fees, printing expenses (including expenses of printing certificates for Registrable Shares and prospectuses), the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange or automated quotation system on which similar securities issued by the Company are then listed, and fees and disbursements of counsel for the Company and all independent certified public accountants (including the expenses of any annual audit, special audit and "cold comfort" letters required by or incident to such performance and compliance) (but in any event not including any underwriting discounts or commissions or transfer taxes, if any, attributable to the sale of Registrable Shares by such Holders) (collectively, "Registration Expenses"). 9. INDEMNIFICATION. (a) INDEMNIFICATION BY THE COMPANY. In the event of any registration of any securities of the Company under the Securities Act pursuant to Sections 2 or 4 hereof, the Company shall, and it hereby does, indemnify and hold harmless, to the extent permitted by law, each of the Holders of any Registrable Shares covered by such registration statement, each affiliate of such Holder and their respective directors and officers (and the directors, officers, affiliates and controlling Persons thereof), each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such Holder or any such underwriter within the meaning of the Securities Act (collectively, the "Indemnified Parties"), against any and all losses, claims, damages or 9 liabilities, joint or several, and expenses (including any amounts paid in any settlement effected with the Company's consent, which consent shall not be unreasonably withheld and including any expenses paid in connection with the enforcement of the indemnification rights contained herein) to which any Indemnified Party may become subject under the Securities Act, state securities or blue sky laws, common law, any other applicable law, foreign or domestic, or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof, whether or not such Indemnified Party is a party thereto) or expenses arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary, final or summary prospectus contained therein, or any amendment or supplement thereto, (ii) 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 or (iii) any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with any such registration, and the Company shall reimburse such Indemnified Party for any legal or any other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, liability, action or proceeding; PROVIDED that the Company shall not be liable to any Indemnified Party in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or amendment or supplement thereto or in any such preliminary, final or summary prospectus in reliance upon and in conformity with written information with respect to such Holder furnished to the Company by such Holder specifically for use therein. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Holder or any Indemnified Party and shall survive the transfer of such securities by such Holder. (b) INDEMNIFICATION BY THE HOLDERS AND UNDERWRITERS. The Company may require, as a condition to including any Registrable Shares in any registration statement filed in accordance with Sections 2 or 4 hereof, that the Company shall have received an undertaking reasonably satisfactory to it from the Holders of such Registrable Shares or any underwriter to, severally and not jointly, indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 9(a) hereof) the Company with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary, final or summary prospectus contained therein, or any amendment or supplement, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information with respect to such Holder or such underwriter furnished to the Company by such Holder or such underwriter specifically for use in such registration statement, preliminary, final or summary prospectus or amendment or supplement, or a document incorporated by reference into any of the foregoing; PROVIDED that no such Holder shall be liable for any indemnity claims in excess of the amount of net proceeds received by such Holder from the sale of Registrable Shares. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any of the Holders, or any of their respective affiliates, directors, officers or controlling Persons, and shall survive the transfer of such securities by such Holder. (c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to this Section 9, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; PROVIDED that the failure of the indemnified party to give notice as provided herein shall not relieve the indemnifying party of its 10 obligations under this Section 9, except to the extent that the indemnifying party is actually materially prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense thereof, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation; PROVIDED that the indemnified party shall have the right to employ counsel to represent the indemnified party and its respective controlling persons, directors, officers, general or limited partners, employees or agents who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the indemnified party against such indemnifying party under this Section 9 PROVIDED that the employment of such counsel shall be at the expense of the indemnified party, unless (i) the indemnifying party shall have agreed in writing to pay the expenses of such counsel, (ii) the indemnifying party shall not have promptly employed counsel reasonably satisfactory to the indemnified party to assume the defense of such action or counsel or (iii) any indemnified party shall have reasonably concluded that there may be defenses available to such indemnified party or its respective controlling persons, directors, officers, employees or agents which are in conflict with or in addition to those available to the indemnifying party, and in that event the reasonable fees and expenses of one firm of separate counsel for the indemnified party (in addition to the reasonable fees and expenses of one firm serving as local counsel) shall be paid by the indemnifying party. No indemnifying party shall consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) CONTRIBUTION. If the indemnification provided for in this Section 9 shall for any reason be unavailable to any indemnified party under Section 9(a) or 9(b) hereof or is insufficient to hold it harmless in respect of any loss, claim, damage or liability, or any action in respect thereof referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the indemnified party and indemnifying party or (ii) if the allocation provided by clause (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 (i) but also the relative fault of the indemnified party and indemnifying party with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. Notwithstanding any other provision of this Section 9(d), no Holder of Registrable Shares shall be required to contribute an amount greater than the dollar amount of the proceeds received by such Holder with respect to the sale of any such Registrable Shares. 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. (e) OTHER INDEMNIFICATION. Indemnification and contribution similar to that specified in the preceding subdivisions of this Section 9 (with appropriate modifications) shall be given by the Company and each Holder of Registrable Shares with respect to any required 11 registration or other qualification of securities under any federal or state law or regulation or governmental authority other than the Securities Act. (f) NON-EXCLUSIVITY. The obligations of the parties under this Section 9 shall be in addition to any liability which any party may otherwise have to any other party. 10. ASSIGNABILITY. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. In addition, and whether or not any express assignment shall have been made, the provisions of this Agreement which are for the benefit of the parties hereto other than the Company shall also be for the benefit of and enforceable by any subsequent Holder of any Registrable Shares, subject to the provisions contained herein. The Company may not assign any of its rights or delegate any of its duties under this Agreement without the written consent of the Holders of 66K% of the Registrable Shares; PROVIDED, HOWEVER, that it is understood and agreed by the parties that the Company will be merged with and into Holdings, with Holdings as the surviving corporation, pursuant to the Merger, and, upon consummation of the Merger, this Agreement and the rights and obligations of the Company hereunder will be transferred to and assumed by Holdings, and the definition of "Registrable Shares" contained herein will refer to the common stock of Holdings issuable upon exercise of the Warrants (which such Warrants will become exercisable for shares of the common stock of Holdings by operation of law upon consummation of the Merger). 11. NOTICES. Any and all notices, designations, consents, offers, acceptances or any other communications shall be given in writing by either (a) personal delivery to and receipted for by the addressee or by (b) telecopy or registered or certified mail which shall be addressed, in the case of the Company, in care of J.F. Lehman & Company, 450 Park Avenue, New York, New York 10022, facsimile (212) 634-1155, attention of Mr. Donald Glickman, and in the case of Holders, to the address or addresses thereof appearing on the books of the Company or of the transfer agent and registrar for the Registrable Shares. All such notices and communications shall be deemed to have been duly given and effective: when delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; and when receipt acknowledged, if telecopied. 12. ARBITRATION. Any controversy, dispute or claim arising out of, in connection with or in relation to the interpretation, performance or breach of this Agreement shall be determined, at the request of any party, by arbitration in a city mutually agreeable to the parties to such controversy, dispute or claim, or, failing such agreement, in New York, New York, before and in accordance with the then-existing Rules for Commercial Arbitration of the American Arbitration Association, and any judgment or award rendered by the arbitrator will be final, binding and unappealable and judgment may be entered by any state or Federal court having jurisdiction thereof. The pre-trial discovery procedures of the Federal Rules of Civil Procedure shall apply to any arbitration under this Section 12. Any controversy concerning whether a dispute is an arbitrable dispute or as to the interpretation or enforceability of this Section 12 shall be determined by the arbitrator. The arbitrator shall be a retired or former United States District Judge or other person acceptable to each of the parties, provided such individual has substantial 12 professional experience with regard to corporate or partnership legal matters. The parties intend that this agreement to arbitrate be valid, enforceable and irrevocable. 13. SEVERABILITY. If any provision of this Agreement or any portion thereof is finally determined to be unlawful or unenforceable, such provision or portion thereof shall be deemed to be severed from this Agreement. Every other provision, and any portion of such an invalidated provision that is not invalidated by such a determination, shall remain in full force and effect. 14. AMENDMENTS, WAIVERS. This Agreement may not be amended, modified or supplemented and no waivers of or consents to departures from the provisions hereof may be given unless consented to in writing by the Company and the Holders of at least 66K% of the Registrable Shares. 15. ATTORNEYS' FEES. In any action or proceeding brought to enforce any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. 16. ENTIRE AGREEMENT. This Agreement contains the entire agreement among the parties hereto with respect to the transactions contemplated herein and understandings among the parties relating to the subject matter hereof. Any and all previous agreements and understandings between or among the parties hereto regarding the subject matter hereof are, whether written or oral, superseded by this Agreement. 17. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which, together, shall constitute one and the same instrument. 18. CAPTIONS. The captions contained in this Agreement are for reference purposes only and are not part of this Agreement. 19. LIMITATION OF LIABILITY OF SHAREHOLDERS AND OFFICERS OF COMPANY. ANY OBLIGATION OR LIABILITY WHATSOEVER OF THE COMPANY WHICH MAY ARISE AT ANY TIME UNDER THIS AGREEMENT OR ANY OBLIGATION OR LIABILITY WHICH MAY BE INCURRED BY IT PURSUANT TO ANY INSTRUMENT, TRANSACTION OR UNDERTAKING CONTEMPLATED HEREBY SHALL BE SATISFIED OUT OF THE COMPANY'S ASSETS ONLY. NO SUCH OBLIGATION OR LIABILITY SHALL BE PERSONALLY BINDING UPON, NOR SHALL RESORT FOR THE ENFORCEMENT THEREOF BE HAD TO, THE PROPERTY OF ANY OF THE COMPANY'S SHAREHOLDERS (SOLELY AS A RESULT OF THEIR STATUS AS SHAREHOLDERS), DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS, REGARDLESS OF WHETHER SUCH OBLIGATION OR LIABILITY IS IN THE NATURE OF CONTRACT, TORT OR OTHERWISE. NOTWITHSTANDING THE FOREGOING, THIS SECTION 19 SHALL NOT IN ANY WAY AFFECT OR LIMIT ANY RIGHTS OR OBLIGATIONS OF THE COMPANY OR ANY HOLDER UNDER THIS AGREEMENT. 13 20. GOVERNING LAW. This Agreement is made pursuant to and shall be construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective authorized officers as of the date aforesaid. JFL-EEC MERGER SUB CO. By: /s/ Donald Glickman ------------------------------------- Name: Donald Glickman, Title: President JACKSON NATIONAL LIFE INSURANCE COMPANY By: PPM America, Inc., its agent By: /s/ Debbie Ackerman ------------------------------------- Name: Debbie Ackerman Title: Managing Director INDOSUEZ ELECTRONICS PARTNERS By: /s/ Michael Walsh ----------------------------------- Name: Michael Walsh Title: Vice President By: /s/ Allen Gruenhut ----------------------------------- Name: Allen Gruenhut Title: Vice President OLD HICKORY FUND I, L.L.C. By: PPM America, Inc., as Manager By: /s/ Debbie Ackerman ------------------------------------- Name: Debbie Ackerman Title: Managing Director 14 EX-10.6 19 EXHIBIT 10.6 Exhibit 10.6 MANAGEMENT AGREEMENT This Management Agreement (this "AGREEMENT"), dated as of February 3, 1998, by and between Elgar Holdings, Inc., a Delaware corporation ("HOLDINGS"), Elgar Electronics Corporation, a California corporation ("ELGAR") and J.F. Lehman & Company, Inc., a Delaware corporation (the "ADVISOR"). WHEREAS, the Board of Directors of the Holdings has determined to effect a recapitalization of Holdings and Elgar pursuant to which, among other things, (i) JFL-EEC LLC, a Delaware limited liability company ("JFL-LLC"), an affiliate of the Advisor, will make a capital contribution in the amount of approximately $19.0 million to JFL-EEC Merger Sub. Co., a wholly owned subsidiary of JFL-LLC and an affiliate of the Advisor ("MERGERCO"), (ii) MergerCo will issue to certain purchasers shares of its Series A 10% Cumulative Redeemable Preferred Stock (the "SERIES A PREFERRED STOCK") and certain warrants (the "WARRANTS") in exchange for an aggregate of $10.0 million, (iii) MergerCo will offer and issue $90.0 million in aggregate principal amount of 9 7/8% Senior Notes due 2008 (the "SENIOR NOTES"), (iv) MergerCo will merge with and into Holdings, with Holdings surviving such merger and assuming the liabilities and obligations of MergerCo (the "MERGER"), including without limitation the liabilities and obligations with respect to the Series A Preferred Stock, the Warrants and the Senior Notes, (v) (A) immediately prior to the Merger, Holdings will effect an approximately 9,220 to 1 stock split, such at at the effective time of the Merger there will be approximately 9,220,000 shares of Holdings common stock, $.01 par value per share (the "COMMON STOCK") issued and outstanding, (B) Carlyle-EEC Acquisition Partners, L.P., the owner of all of the issued and outstanding capital stock of Holdings immediately prior to the Merger, will liquidate and distribute the shares of Common Stock to its partners, and (C) each share of the Common Stock issued and outstanding immediately prior to the Merger, other than certain shares held by certain shareholders and members of management, will be converted into the right to receive cash, and (v) Holdings and Elgar will enter into a new credit facility providing for revolving credit borrowings of up to $15.0 million (all such transactions shall be collectively referred to herein as the "RECAPITALIZATION"); WHEREAS, each of Holdings and Elgar desire to retain the Advisor to provide management, consulting and financial services to Holdings and Elgar after consummation of the Recapitalization; and WHEREAS, the Advisor wishes to provide such services to Holdings and Elgar and Holdings and Elgar wish to compensate the Advisor for such services. NOW, THEREFORE, in consideration of the premises and the covenants and conditions contained herein, the parties hereto agree as follows: 1. COMPENSATION. (a) RECAPITALIZATION FEE. Upon consummation of the Recapitalization, Holdings shall pay to the Advisor a one-time advisory fee (the "RECAPITALIZATION FEE") in the amount of $1,000,000 in consideration for services rendered by the Advisor to Holdings in connection with the Recapitalization. The Recapitalization Fee shall be paid upon consummation of the Recapitalization in immediately available funds by wire transfer to such account as the Advisor shall specify prior to the consummation of the Recapitalization. (b) ANNUAL FEE. In consideration for the advisory and consulting services to be rendered by the Advisor to Holdings and Elgar hereunder, including services in connection with strategic financial planning, investment management, management and administration and other matters relating to the business and operations of Holdings and Elgar, Elgar shall pay to the Advisor a fee (the "ANNUAL FEE") in the amount of $500,000 per annum for each year during the period commencing on the effective date of the Merger (the"Effective Date") and ending on the date of the termination this Agreement. The Annual Fee shall be payable in semi-annual installments, payable in advance (i) for the period from the Effective Date through July 31, 1998, as soon as practicable after the Effective Date, (ii) for every six month period thereafter until the date of termination of this Agreement, on the first day of such six month period. If for any reason the Annual Fee, or any portion thereof, shall not be paid timely pursuant to this Section 1(b), then each of Holdings and Elgar shall be jointly and severally liable to the Advisor with respect to the unpaid portion of such Annual Fee. (c) FUTURE TRANSACTION FEES. The Advisor shall be entitled to receive additional compensation under this Agreement for services rendered in transactions such as mergers, consolidations, sales or purchases of a significant amount of assets or capital stock, and financings involving the public or private offering of the debt or equity securities of Holdings or Elgar or the incurrence of bank debt by Holdings or Elgar. The compensation to be payable to the Advisor for services rendered in connection with any such transaction shall be such compensation as is customary for the type of services rendered in similar transactions and as may be agreed upon by Holdings or Elgar, as the case may be, and the Advisor at such time. (d) REIMBURSEMENTS FOR OUT-OF-POCKET EXPENSES. In addition to the fees set forth above, Holdings and Elgar shall reimburse the Advisor for, and shall be jointly liable for, all reasonable out-of-pocket expenses incurred by the Advisor in rendering the services to Holdings and Elgar contemplated by paragraphs (a), (b) and (c) above. All reimbursements for out-of-pocket expenses shall be made promptly upon or as soon as practicable, and in any event not later than 30 days, after presentation by the Advisor to Holdings or Elgar of a reasonably detailed statement of expenses in connection therewith. 2. INTEREST. In the event that either Holdings or Elgar shall fail to pay all or any part of the fees or out-of-pocket expenses described in Section 1 hereof within 10 days after the date when due, then the Advisor shall be entitled to interest on the unpaid amount thereof at a rate equal to 10% per annum until paid. 3. INDEMNIFICATION. Holdings and Elgar will jointly and severally indemnify and hold harmless the Advisor, its affiliates and their respective partners (both general and limited), officers, directors, employees, agents and representatives (each such person being an "INDEMNIFIED PARTY") from and against any and all losses, claims, damages and liabilities, whether joint or several (the "LIABILITIES"), related to, arising out of or in connection with the services contemplated by this Agreement or the engagement of the Advisor pursuant to, and the performance by the Advisor of the services contemplated by, this Agreement. Holdings and Elgar will jointly and severally reimburse any Indemnified Party for all reasonable costs and expenses 2 (including reasonable attorneys' fees and expenses) as are incurred in connection with investigating, preparing, pursuing, defending or assisting in the defense of any action, claim, suit, investigation or proceeding for which the Indemnified Party would be entitled to indemnification under the terms of the previous sentence, or any action or proceeding arising therefrom, whether or not such Indemnified Party is a party hereto. Neither Holdings nor Elgar will be liable under the foregoing indemnification provision with respect to any Indemnified Party, to the extent that any loss, claim, damage, liability, cost or expense is determined by a court, in a final judgment from which no further appeal may be taken, to have resulted primarily from the gross negligence or willful misconduct of the Advisor. 4. TERM. This Agreement shall be effective as of the date hereof and shall continue in effect until the earliest to occur of (i) the tenth anniversary of this Agreement and (ii) the closing of a sale to an entity which is not an "Affiliate" (as defined in Section 12b-2 of the Securities Exchange Act of 1934) of Holdings or any of its existing shareholders on the date hereof of all or substantially all of the capital stock or assets of Holdings. The provisions of Sections 1(d), 2, 3 and otherwise as the context so requires shall survive the termination of this Agreement. 5. PERMISSIBLE ACTIVITIES. Subject to applicable law, nothing herein shall in any way preclude the Advisor, its affiliates or their respective partners (both general and limited), officers, directors, employees, agents or representatives from engaging in any business activities or from performing services for its or their own account or for the account of others, including for companies that may be in competition with the business conducted by Holdings and Elgar. 6. CONSULTING RELATIONSHIP. It is understood and agreed that the Advisor shall for all purposes hereof be deemed to be an independent contractor and shall not, unless otherwise expressly authorized by the Holdings or Elgar, as the case may be, have any authority to act for or represent Holdings or Elgar in any way, execute any transaction on behalf of Holdings or Elgar or otherwise be deemed an agent of Holdings or Elgar. No federal, state or local withholding deductions shall be withheld from the fees and other amounts payable to the Advisor pursuant to this Agreement unless otherwise required by law. 7. MISCELLANEOUS. (a) No amendment or waiver of any provision of this Agreement, or consent to any departure by either party hereto from any such provision, shall be effective unless the same shall be in writing and signed by each of the parties hereto. Any amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 3 (b) Any and all notices hereunder shall, in the absence of receipted hand delivery, be deemed duly given when mailed, if the same shall be sent by registered or certified mail, return receipt requested, and the mailing date shall be deemed the date from which all time periods pertaining to a date of notice shall run. Notices shall be addressed to the parties at the following addresses: If to the Advisor: J.F. Lehman & Company, Inc. 450 Park Avenue New York, New York 10022 Attention: Mr. Donald Glickman If to Holdings or Elgar: Elgar Electronics Corporation 9250 Brown Deer Road San Diego, CA 92121 Attention: Mr. Ken Kilpatrick (c) This Agreement shall constitute the entire agreement between the parties with respect to the subject matter hereof, and shall supersede all previous oral and written (and all contemporaneous oral) negotiations, commitments, agreements and understandings relating hereto. (d) THIS AGREEMENT SHALL BE GOVERNED BY, AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN THAT STATE. This Agreement shall inure to the benefit of, and be binding upon, the Advisor, Holdings and Elgar, and their respective successors and permitted assigns. None of the rights or obligations of the parties hereunder may be assigned by either party without the prior written consent of the other party hereto, PROVIDED that the Advisor may assign its rights and obligations hereunder to any corporation or other entity controlled by or under common control with the Advisor. (e) This Agreement may be executed by one or more parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. (f) The waiver by any party of any breach of this Agreement shall not operate as or be construed to be a waiver by such party of any subsequent breach. (g) Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 4 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers or agents as of the date first above written. ELGAR HOLDINGS, INC. By: /s/ Donald Glickman --------------------------------- Name: Donald Glickman Title: President ELGAR ELECTRONICS CORPORATION By: /s/ Chris Kelford --------------------------------- Name: Chris Kelford Title: Treasurer J.F. LEHMAN & CO., INC. By: /s/ Donald Glickman --------------------------------- Donald Glickman, Managing Principal 5 EX-10.7 20 EXHIBIT 10.7 Exhibit 10.7 STOCK PURCHASE AGREEMENT This STOCK PURCHASE AGREEMENT (the "AGREEMENT") is made and entered into as of May 5, 1998, by and among Elgar Electronics Corporation, a California corporation (the "BUYER"), Vincent S. Mutascio ("MUTASCIO") and Joseph A. Varozza, Jr. ("VAROZZA"). Mutascio and Varozza are sometimes referred to individually as a "STOCKHOLDER" and together as the "STOCKHOLDERS." The Buyer and the Stockholders are sometimes referred to herein as the "PARTIES" or individually as a "PARTY." R E C I T A L S WHEREAS, the Stockholders are the sole stockholders of Power Ten, a California corporation (the "COMPANY"). Each Stockholder owns that number and class of shares (the "SHARES") of the capital stock of the Company as set forth opposite such Stockholders name on EXHIBIT A hereto. The Shares constitute all of the issued and outstanding shares of capital stock, and rights to purchase capital stock, of the Corporation. WHEREAS, the Stockholders are selling the Shares to Buyer, and Buyer is purchasing the Shares from the Stockholders, on the terms and subject to the conditions contained in this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto agree as follows: A G R E E M E N T 1. PURCHASE AND SALE OF SHARES. (a) PURCHASE PRICE. Subject to the terms and conditions hereof, the Stockholders will sell the Shares to the Buyer, and the Buyer will purchase the Shares from the Stockholders, for an aggregate purchase price (the "PURCHASE PRICE") of $17,800,000, subject to the post-Closing adjustment set forth in Section 1(b) below. The Purchase Price shall be payable to the Stockholders in the amount set forth beside each Seller's name on EXHIBIT A. (b) PURCHASE PRICE ADJUSTMENT. (i) Within 60 days after the Closing Date, Arthur Andersen LLP shall prepare and deliver to the Stockholders and the Buyer an audit of the balance sheet of the Company at and as of the Closing Date (the "AUDITED CLOSING DATE BALANCE SHEET"). The Audited Closing Date Balance Sheet will be prepared in accordance with the Company's procedures as represented in Section 3(f). The Buyer will bear the fees and expenses incurred in connection with the preparation and audit of the Audited Closing Date Balance Sheet. Both Parties will make their work papers and other materials available to Arthur Andersen LLP. (ii) In the event that either the Stockholders or the Buyer dispute any item(s) on the Audited Closing Date Balance Sheet, such Party shall deliver a detailed statement describing such objections to the other Parties within 15 days after receiving the Audited Closing Date Balance Sheet. The Buyer and the Stockholders will use reasonable efforts to resolve any such objections themselves. If the Parties do not obtain a final resolution within 90 calendar days from the Closing Date, the Buyer and the Stockholders will select another "Big Five" accounting firm mutually acceptable to them (the "INDEPENDENT ACCOUNTANTS") to resolve any remaining objections. If the Buyer and the Stockholders are unable to agree on the choice of an accounting firm, they will select the Independent Accountants by lot (after excluding their respective regular outside accounting firms). All unresolved objections will be submitted to the Independent Accountants for resolution. The cost of retaining the Independent Accountants shall be borne by the disputing party; PROVIDED, HOWEVER, that the non-disputing party shall reimburse the disputing party for 50% of the cost of the Independent Accountants in the event that such review results in an increase (if the Stockholders are the disputing party) or decrease (if the Buyer is the disputing party) of more than $25,000 in total stockholders' equity as reflected on the Audited Closing Date Balance Sheet audited by Arthur Andersen LLP. The determination of the Independent Accountants shall be made in writing within 30 days of its selection, and the determination shall be conclusive, final and binding on the Parties. (iii) The Purchase Price will be adjusted as follows: (1) If the total stockholders' equity, as reflected on the Audited Closing Date Balance Sheet as finally determined, is less than $1,750,000, then the Stockholders will pay to the Buyer, in immediately available funds within ten (10) days of delivery of the Audited Closing Date Balance Sheet as finally determined, an amount equal to the difference between $1,750,000 and the total stockholders' equity as reflected on the Audited Closing Date Balance Sheet as finally determined. (2) If the total stockholders' equity, as reflected on the Audited Closing Date Balance Sheet as finally determined, is greater than $1,750,000, then the Buyer will pay to the Stockholders, in immediately available funds within ten (10) days of delivery of the Audited Closing Date Balance Sheet as finally determined, an amount equal to the difference between the total stockholders' equity as reflected on the Audited Closing Date Balance Sheet as finally determined and $1,750,000. (3) If the total stockholders' equity, as reflected on the Audited Closing Date Balance Sheet as finally determined, is equal to $1,750,000, then there will be no adjustment to the Purchase Price. 2. CLOSING. (a) CLOSING DATE AND TIME. The closing of the sale and purchase of the Shares (the "CLOSING") shall, unless the parties otherwise agree, take place at the offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California 94304, at 10:00 a.m. Pacific time, on May 15, 1998, or such other date or location as the Buyer may designate in writing to the Stockholders no less than two business days prior to such date (the "CLOSING DATE"), but in no event later than May 29, 1998. 2 (b) CLOSING DELIVERABLES BY THE STOCKHOLDERS. At the Closing, the Stockholders shall deliver or cause to be delivered to the Buyer: (i) free and clear of any liens or encumbrances, one or more certificates representing the number of Shares set forth beside such Stockholder's name on EXHIBIT A hereto, duly endorsed in blank or accompanied by stock powers or other instruments of transfer executed by such Stockholder; (ii) a long-form certificate of good standing and a certificate of tax good standing for the Company issued by the Secretary of State of the State of California and the Franchise Tax Board, respectively, certifying that the Company is in good standing upon the records of their offices, together with certificate(s) to transact business as a foreign corporation in each state in which the Company is so qualified, each as of a date reasonably close to the Closing Date; (iii) copies of the Articles of Incorporation and Bylaws of the Company, in each case as amended to date, certified by the secretary or an assistant secretary of the Company; (iv) the written opinion of Wilson Sonsini Goodrich & Rosati, special counsel to the Stockholders, substantially in the form set forth in Section 6(f) hereof; (v) resignations, or removals by the Stockholders, of the Stockholders as directors of the Company; (vi) the official stock register and minute books of the Company, certified by the secretary or an assistant secretary of the Company; (vii) the certificate required by Section 6(c)(iii) hereof; (viii) any consents, approvals or other authorizations necessary to effect the transactions contemplated hereby; and (ix) such other documents and instruments as Buyer or its counsel deems reasonably necessary or desirable to effectuate the transactions contemplated by this Agreement. (c) CLOSING DELIVERABLES BY THE BUYER. At the Closing, the Buyer shall deliver or cause to be delivered to the Stockholders: (i) payment in the amount set forth beside each Stockholder's name on EXHIBIT A by wire transfer of immediately available funds to the bank account specified in written instructions of such Stockholder given to the Buyer at least two business days prior to the Closing Date; 3 (ii) a long-form certificate of good standing for the Buyer issued by the Secretary of State of the State of California, as of a date reasonably close to the Closing Date, certifying that Buyer is in good standing upon the records of its office; (iii) a certified copy of the resolutions of the Board of Directors of the Buyer authorizing all actions necessary to consummate the transactions contemplated by this Agreement; (iv) the written opinion of Gibson, Dunn & Crutcher LLP, counsel to the Buyer, substantially in the form set forth in Section 7(e) hereof; (v) the certificate required by Section 7(c)(iii) hereof; (vi) any consents, approvals or other authorizations necessary to effect the transactions contemplated hereby; and (vii) such other documents and instruments as the Stockholders or their counsel deems reasonably necessary or desirable to effectuate the transactions contemplated by this Agreement. 3. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS. Except as set forth in the Disclosure Schedule attached hereto as EXHIBIT B, the Stockholders jointly represent and warrant to the Buyer as follows: (a) ORGANIZATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of California and has full corporate power and authority to conduct its business and to own or lease and to operate its properties as and in the places where such business is conducted and such properties are owned, leased or operated. The Company is duly qualified or licensed to do business and is in good standing in each of the jurisdictions where qualification is required. The Stockholders have delivered to the Buyer complete and correct copies of its Articles of Incorporation and Bylaws (the "ORGANIZATIONAL DOCUMENTS") of the Company, as amended or modified through and in effect on the date hereof. The Organizational Documents of the Company are in full force and effect. The Company is not in violation of any of the provisions of its Organizational Documents. The minute books of the Company, which have heretofore been made available to the Buyer, correctly reflect in all material respects (i) all corporate actions taken by the shareholders, (ii) all corporate actions taken by the directors of the Company and (iii) all other corporate actions taken by the shareholders and directors of the Company (including by any committee of the board of directors of the Company). The Company has no subsidiaries and does not own any equity interest in any other person or entity. (b) AUTHORIZED AND ISSUED SHARES. The authorized capital stock of the Company consists of 10,000,000 shares of common stock, without par value, of which only the Shares are issued and outstanding. The Shares have been duly authorized and validly issued and are fully paid and nonassessable. There are no preemptive or similar rights on the part of any holders of any class of securities of the Company. Except pursuant to the terms of this 4 Agreement, there are no subscriptions, options, warrants, conversion or other rights, agreements, commitments, arrangements or understandings obligating the Company or any of the Stockholders or any other person or entity, contingently or otherwise, to issue or sell, or cause to be issued or sold, any shares of capital stock of any class of the Company, or any securities convertible into or exchangeable for any such shares, outstanding, and no authorization therefor has been given. There are no outstanding contractual or other rights or obligations to or of any of the Stockholders or any other person or entity to repurchase, redeem or otherwise acquire any outstanding shares or other equity interests of the Company. Neither Stockholder is a party to any voting trust, proxy agreement, stockholders' agreement or other understanding (written or oral) with respect to the voting of any capital stock of the Company. (c) TITLE TO SHARES. Each Stockholder owns, beneficially and of record, free and clear of any liens or encumbrances, the number of Shares set forth beside such Stockholder's name on EXHIBIT A hereto. The delivery of a certificate or certificates at the Closing representing the Shares in the manner provided in Section 1 will transfer to Buyer good and valid title to the Shares free and clear of any liens or encumbrances. (d) AUTHORIZATION OF TRANSACTIONS. Each Stockholder has full power and authority to execute and deliver this Agreement and the employment agreements (collectively, the "EMPLOYMENT AGREEMENTS") to which he shall be a party, to perform his obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. Each Stockholder has duly executed and delivered this Agreement and on the Closing Date will have duly executed and delivered the Employment Agreement to which he shall be a party. This Agreement constitutes, and each such Employment Agreement when so executed and delivered will constitute, the legal, valid and binding obligation of such Stockholder, enforceable against such Stockholder in accordance with its terms. (e) NO VIOLATION. The execution, delivery and performance of this Agreement and the Employment Agreements by each respective Stockholder and the consummation of the transactions contemplated hereby and thereby, do not and will not conflict with, contravene, result in a violation or breach of or default under (with or without the giving of notice or the lapse of time or both), or result in the creation of any lien or encumbrance upon any of the properties or assets of the Company under, (i) to the knowledge of Stockholders, any law applicable to the Company or any of its properties or assets, (ii) any provision of any of the Organizational Documents of the Company or (iii) to the knowledge of Stockholders, any contract, or any other agreement or instrument to which the Company is a party or by which any of its properties or assets may be bound. (f) FINANCIAL STATEMENTS. The financial statements attached hereto as EXHIBIT C (the "FINANCIAL STATEMENTS") (i) are correct and complete in all material respects and present fairly the financial position of the Company as at the respective dates thereof, and the results of operations and cash flows of the Company for the respective periods indicated, (ii) have been derived from the accounting books and records of the Company (which books and records are correct and complete in all material respects), and (iii) have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods presented in the Financial Statements subject, in the case of interim unaudited Financial 5 Statements, to normal recurring year-end adjustments and except that such interim unaudited financial statements do not include full financial footnotes. (g) ABSENCE OF CHANGES. Since April 4, 1998, there has not been any adverse change in the assets, liabilities, business, financial condition, operations or results of operations of the Company. Without limiting the generality of the foregoing, since that date: (i) the Company has not transferred, assigned, conveyed or liquidated any of its assets or business, other than for fair value and in the ordinary course of its business; (ii) the Company has not suffered any destruction, damage or loss relating to its assets or business involving more than $10,000, whether or not covered by insurance; (iii) the Company has not suffered, permitted or incurred the imposition of any lien or encumbrance (other than arising in the ordinary course of business) or other claim upon any of its assets or business; (iv) the Company has not defaulted in the performance of any of its obligations under or with respect to any agreement or contract to which it is a party in any manner which, individually or in the aggregate, has had or could have a material adverse effect upon its business, prospects, operations or assets, or which could otherwise result in the termination of any such agreement or contract or the incurrence of any material liability thereunder; (v) the Company has not made or agreed to any change in the terms of any agreement or contract to which it is a party in any manner which has materially increased the expenses of the Company related thereto, materially modified the term or duration thereof or otherwise materially adversely affected the rights of the Company thereunder, or terminated, or suffered the termination of, any agreement or contract, which was of any material value or benefit to the Company; (vi) the Company has not waived, terminated or canceled any claim or right relating to its assets or business which it has against others, other than such settlements or compromises with respect to the payment of its accounts receivable as made in the ordinary course in a manner consistent with past practice; (vii) the Company has not (A) granted any increase in the compensation or other benefits payable to any of the Company's directors, officers, employees, agents, representatives or independent contractors or (B) made any loan to, or entered into any other transaction with, any of its directors, officers and employees outside the ordinary course of business or involving more than $10,000, giving rise to any claim or right on its part against the person or on the part of the person against it; (viii) the Company has not incurred any other material liability or obligation or entered into any transaction other than as incurred in the ordinary course of 6 the Company's business and consistent in nature and amount with past practice and experience; (ix) the Company has not entered into any contract, lease, sublease, license or sublicense (or series or related contracts, leases, subleases, licenses and sublicenses), except orders for the Company's products, either involving more than $50,000 or outside the ordinary course of business; (x) the Company has not accelerated, terminated, modified or canceled any contract, lease, sublease, license or sublicense (or series of related contracts, leases, subleases, licenses and sublicenses) involving more than $50,000 to which the Company is a party or by which it is bound, except orders shipped "c.o.d."; (xi) no party has notified the Company of any acceleration, termination, modification or cancellation of any material customer contract or any contract, agreement, lease, sublease, license or sublicense (or series of related contracts, leases, subleases, licenses and sublicenses) involving more than $50,000 to which the Company is a party or by which it is bound; (xii) the Company has not made any capital expenditure (or series of related capital expenditures) either involving more than $10,000 individually or $25,000 in the aggregate, or outside the ordinary course of business; (xiii) the Company has not made any capital investment in, any loan to, or any acquisition of the securities or assets of any other person (or series of related capital investments, loans or acquisitions) either involving more than $10,000 individually or $25,000 in the aggregate; (xiv) the Company has not delayed or postponed (beyond its normal practice) the payment of accounts payable and other liabilities; (xv) there has been no change made or authorized in its Articles or Bylaws; (xvi) the Company has not entered into any employment contract or collective bargaining agreement, written or oral, or modified the terms of any existing such contract or agreement with any of its full-time staff employees; (xvii) the Company has not adopted any (A) bonus, (B) profit-sharing, (C) incentive compensation, (D) pension, (E) retirement, (F) medical, hospitalization, life, or other insurance, (G) severance or (H) other plan, contract or commitment for any of its directors, officers and employees, or modified or terminated any existing such plan, contract or commitment; (xviii) the Company has not lost and does not have notice of any potential loss of any significant customer or supplier; 7 (xix) the Company has not changed its accounting methods or principles; (xx) the Company has not suffered any material shortages of raw materials used in the production of its products; (xxi) the Company has not made any material provisions for inventory markdowns or inventory shrinkage; (xxii) the Company has not made or paid any non-cash dividends or distributions to Stockholders or any other persons whether or not upon or in respect of its capital stock; (xxiii) the Company has not redeemed or otherwise acquired any shares of its capital stock or issued any capital stock or any option, warrant or right relating thereto or any securities convertible into or exchangeable for any shares of its capital stock; and (xxiv) the Company has not agreed to do any of the foregoing. (h) REAL PROPERTY; TANGIBLE ASSETS. (i) The Company does not own any real property. The Company has good and valid leasehold interests in, and on the Closing Date will have good and valid leasehold interests in, all real property which is leased by the Company for operation of its business (the "REAL PROPERTY"). A list of all Real Property currently leased by the Company is set forth on SCHEDULE 3(h)(i) hereto. All such leases of Real Property are valid, binding and enforceable in accordance with their respective terms. The Company is not in material default under any such leases, and to the knowledge of the Stockholders, there does not exist under any such lease any material default of any other party or any event which with notice or lapse of time or both would constitute a material default. To the knowledge of the Stockholders, the Real Property is free from any defects that have, or reasonably could have, a material adverse effect on the Company. (ii) The Company has good and valid title to, or a valid leasehold in, all assets that are material to the Company, including but not limited to all such assets reflected in the balance sheet dated as of April 4, 1998 (the "INTERIM BALANCE SHEET") contained in the Financial Statements or acquired since the date thereof (except as may be disposed of in the ordinary course of business), in each case free and clear of any liens or encumbrances, except those for taxes not yet due and payable, statutory liens and encumbrances for sums not yet delinquent, and liens and encumbrances not interfering in any material respect with the ordinary course of business. The tangible assets (whether owned or leased) of the Company, in the aggregate, are in good operating condition, ordinary wear and tear excepted. A list of all tangible property currently leased by the Company is set forth on SCHEDULE 3(h)(ii) hereto. The Interim Balance Sheet reflects all tangible assets and properties, real or personal, utilized by the Company in the conduct of its business, except to the extent such assets and properties have been sold or transferred in the ordinary course of business since the date of the Interim Balance Sheet. 8 (i) LITIGATION. There are no lawsuits, actions, suits, claims or other proceedings at law or in equity, or to the knowledge of the Stockholders, investigations, before or by any court, arbitral body or quasi-judicial or administrative authority of any federal, state, local or foreign jurisdiction (a "GOVERNMENTAL BODY") pending or, to the knowledge of the Stockholders, threatened, against the Company. There are no outstanding orders, judgments, decrees or injunctions issued by any Governmental Body against the Company. (j) INSURANCE. SCHEDULE 3(j) hereto contains an accurate and complete list of all policies of fire, liability, keyman life insurance, worker's compensation, products liability and other forms of insurance owned or held by or beneficially for the Company. All such policies are in full force and effect, no premiums with respect thereto are past due and no notice of cancellation or termination has been received by the Stockholders or the Company with respect to any such policy. The Company has complied in all material respects with the terms and provisions of such policies. Neither the Stockholders nor the Company has received any notification that material changes are required in the conduct of the Company's business as a condition to the continuation of coverage under or renewal of any such policy. True, correct and complete copies of such insurance policies have been made available to the Buyer. (k) EMPLOYEE CONTRACTS AND LOANS. (i) SCHEDULE 3(k) hereto sets forth a true, complete and correct list of all of the current directors and officers of the Company. (ii) The Company is not a party to, and does not have any obligations, contingent or otherwise, under, (1) any employment or consulting agreement with any employee, agent or independent contractor or (2) any collective bargaining agreement or other contract with a labor or employee group (collectively, "EMPLOYEE CONTRACTS"). (iii) There are no outstanding loans which the Company has made to any of its employees, stockholders, directors or officers of the Company (collectively, "INSIDER LOANS"). All Insider Loans owing from the Stockholders or any directors of the Company have been fully repaid to the Company on or before the Closing Date. (iv) (1) The Company (x) does not maintain any employee benefit plan (including, for this purpose, without limitation, any employee benefit plan within the meaning of Section 3(3) of ERISA and any other plan, program, contract or arrangement providing pension, profit sharing, retirement, health, life, disability, deferred compensation, equity participation, severance and vacation pay benefits), (y) does not presently contribute to any employee benefit plan maintained by any other person or entity and (z) is not liable for any payments pursuant to any employee benefit plan maintained by the Company or any other person or entity, except for routine claims for benefits under the Company's employee benefit plans, (2) with respect to each employee benefit plan set forth on the Disclosure Schedule, if any, (x) there are no material benefit obligations for which contributions have not been made or properly accrued, (y) the Company has no "accumulated funding deficiency" (as defined in Section 412 of the Internal Revenue Code of 1986, as amended (the "CODE"), whether or not waived and (z) each plan has been 9 maintained in all material respects in accordance with its terms and in compliance with the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (in the case of plans governed by ERISA), the Code and all other applicable laws and (C) no "prohibited transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) has occurred with respect to any such plan which is an Employee Pension Benefit Plan (as defined in ERISA), or its related trust, which could subject the Company, or any officer, director or employee of the Company, to any tax or penalty imposed under Section 4975 of the Code, or Section 502(l) of ERISA, or liability under Section 406 of ERISA. (v) No employee benefit plans exist which provide for health, medical or life insurance benefits with respect to current or former employees of the Company beyond their retirement date or other termination of service (other than coverage mandated by applicable law or benefits the full cost of which is to be borne by the current or former employee or his or her beneficiary), nor has the Company maintained or contributed to any employee benefit plan which is a "defined benefit plan" as such term is defined in Section 3(35) of ERISA or a "multiemployer plan" as such term is defined in Section 3(37) of ERISA. With respect to all of its past and present employees, the Company has complied in all material respects with the notice and continuation requirements of Part 6 of Subtitle B of Title I of ERISA and of Section 4980B of the Code. All contributions (including all employer contributions and employee salary reduction contributions, if any) have been paid within the statutory time periods to each such plan which is an Employee Pension Benefit Plan. (vi) To the Stockholders' knowledge, each employee benefit plan which is intended to meet the requirements of Section 125 of the Code meets such requirements, in all material respects, and each program of benefits for which employee contributions are provided pursuant to elections under any such employee benefit plan meets, in all material respects, the requirements of the Code applicable thereto. Each employee benefit plan which is intended to be a qualified plan within the meaning of Section 401(a) of the Code has been determined by the IRS to be so qualified and nothing has occurred to cause the loss of such qualified status. With respect to each plan governed by ERISA, the Company previously has made available to Buyer a true and correct copy of, where applicable, the most recent annual report (Form 5500) filed with the IRS, the plan document, each trust agreement and group annuity contract, if any, relating to such plan, the most recent summary plan description and the most recent determination letter issued by the Internal Revenue Service, and all related service, management and insurance contracts or policies. (vii) No employee or director of the Company shall be entitled to any additional benefit under any employee benefit plan by reason of the consummation of the transactions contemplated by this Agreement. (l) EMPLOYEES, LABOR MATTERS, ETC. The Company is not a party to or bound by any collective bargaining or other labor agreement, and there are no labor unions or other organizations representing, or attempting to represent, any employees employed by the Company. There are no labor disputes currently subject to any grievance procedure, arbitration or litigation 10 and there is no representation petition pending or, to the knowledge of the Stockholders, threatened with respect to any employee of the Company. There is no unfair labor practice complaint against the Company pending before the National Labor Relations Board or any other governmental authority. There is no labor strike, dispute, slowdown or work stoppage actually pending or threatened against or involving the Company, nor has the Company experienced any such strikes, slowdowns, work stoppages or other material labor difficulty at any time since January 1, 1990. (m) CONTRACTS. SCHEDULE 3(m) hereto contains a complete and correct list, as of the date hereof, of all material agreements or contracts of the Company, whether written or oral. The Stockholders have delivered to the Buyer complete and correct copies of all such written agreements or contracts and written summaries of any such oral contracts. All such agreements and contracts are legal, valid, binding, in full force and effect and enforceable against each party thereto, subject to limitations of public policy, bankruptcy, moratorium, insolvency and similar laws. There does not exist under any agreement or contract any material violation, breach or event of default, or event or condition that, after notice or lapse of time or both, would constitute a material violation, breach or event of default thereunder, on the part of the Company or any other person or entity. (n) BANK ACCOUNTS. SCHEDULE 3(n) hereto sets forth a complete and correct list of each bank in which the Company has an account or safe deposit or lock box, the account or box number, as the case may be, and the name of every person authorized to draw thereon or having access thereto. (o) COMPLIANCE WITH LAWS. The Company is not, and has not been, in any material respect, in conflict with or in violation or breach of or default under (and there exists no event that, with notice or passage of time or both, would constitute a conflict, violation, breach or default with, of or under) (i) to the knowledge of the Stockholders, any applicable law, rule or regulation relating to any of the Company's properties or assets, or the protection of the health and safety of employees or the public, (ii) any provision of its Organizational Documents, or (iii) any material agreement or contract to which the Company is a party or by which it or any of its properties or assets is bound or affected, except in the case of the foregoing clauses (i) and (iii) for any such conflicts, breaches, violations and defaults that, individually and in the aggregate, have not had or resulted in or could not reasonably be expected to have or result in a material adverse effect on the Company. The Company has not received any notice alleging any such conflict, violation, breach or default. (p) PERMITS. The Company is the record holder of, and possesses, all licenses, permits and other authorizations, approvals or consents necessary for the conduct of its business, the ownership or use of any of its assets or properties or the use or occupancy of the business premises. The consummation of the transactions contemplated hereby will not result in, or give rise to any basis for, the termination of any such license, permit or other authorization, approval or consent, nor does any other reasonable basis currently exist for the termination of any such license, permit or other authorization, approval or consent. 11 (q) INVENTORIES. All current inventories of raw materials, supplies, work in progress and finished goods of the Company are of good, usable and merchantable quality. All such inventories are of such quality as to meet the quality control standards of the Company, and all such inventories are recorded on the books at the lower of first-in, first-out weighted average cost or net realizable market value determined in accordance with GAAP consistent with the Company's past practices, and the books do not reflect the inclusion of any obsolete items, except those written down to their net realizable market value. (r) ACCOUNTS RECEIVABLE. SCHEDULE 3(r) hereto (the "RECEIVABLE SCHEDULE") sets forth a true, complete and correct schedule of the accounts receivables of the Company as of the Closing Date, together with an accurate aging of the same. All outstanding accounts receivable have arisen from valid and BONA FIDE sales in the ordinary course of business, are not subject to any offset or counterclaim and are collectible in the ordinary course of business. (s) ACCOUNTS PAYABLE. SCHEDULE 3(s) attached hereto (the "PAYABLES SCHEDULE") sets forth a true, complete and correct schedule of all accounts payable of the Company as of the Closing Date, together with an accurate aging of the same. All of the outstanding accounts payable arose from BONA FIDE purchases of goods or services in the ordinary course of business. (t) LOCATION AND CONDITION OF PROPERTY. All tangible personal property of the Company, both owned and leased, is located at the business premises. The business premises and all machinery, equipment and all other material items of personal property (exclusive of inventory) used in the production operations of the Company are adequate and in good condition and repair, reasonable wear and tear consistent with age and usage excepted, and sufficient to permit the business of the Company to be operated in a manner consistent with past practice. (u) AFFILIATE TRANSACTIONS. Except for such compensation arrangements as have existed with respect to services rendered by the Stockholders as employees of the Company, and except for any Insider Loans otherwise disclosed in the Disclosure Schedule, no business arrangements or transactions exist between the Company and either of the Stockholders, any member of such Stockholder's family or any other business entity owned or controlled by or affiliated with either such Stockholder. (v) SUPPLIERS; CUSTOMERS; RAW MATERIALS. SCHEDULE 3(v) attached hereto sets forth a true, complete and correct list of the 30 highest order-generating customers of the Company for each of (i) the Company's fiscal year ended September 30, 1997 and (ii) the six-month period ended April 4, 1998. The Stockholders have not been notified that, nor do they have knowledge that, any supplier or customer would or may cancel or otherwise modify its relationship with the Company or materially decrease or limit its supply of services or products to the Company or its purchases of the services or products of the Company following, or as a result of, the consummation of the transactions contemplated hereby. (w) TAX MATTERS. The Company has filed, or caused to be filed in compliance with applicable law, true, correct and complete returns, declarations of estimated tax, tax reports, information returns and statements required to be filed by it prior to the Closing relating to all 12 taxes payable by the Company (collectively, the "TAX RETURNS") and has paid all taxes required to have been paid with respect to such Tax Returns and has accrued for taxes not yet due and payable on the Audited Closing Date Balance Sheet in accordance with GAAP. The Company has not waived any statute of limitations affecting any tax liability or agreed to any extension of time during which a tax assessment or deficiency assessment may be made. There are no pending audits of any Tax Returns, and the Company has not received written notice of any unresolved questions or claims concerning its tax liability. The Company is not, nor has it been, a party to any tax sharing agreement and has not, during the five-year period ending on the Closing Date, been a personal holding company within the meaning of Section 541 of the Code. The Company has complied in all respects with all applicable laws, rules and regulations relating to the payment and withholding of taxes and has withheld all amounts required by applicable law to be withheld from the wages or salaries of employees. The Company is not a "consenting corporation" under Section 341(f) of the Code. The Company is not required to make any payments that would result in a non-deductible expense under Section 280G of the Code. The Company has not been a member of an affiliated group of corporations under Section 1504 of the Code. (x) INTELLECTUAL PROPERTY. (i) SCHEDULE 3(x)(i) attached hereto sets forth a true, complete and correct list, including the nature (e.g., patent, trademark, etc.), of the application or registration number, the jurisdiction and the record owner, of (i) all patents, pending patent applications, trademarks, servicemarks, pending trademark or servicemark applications and trade names licensed to, applied for or registered in the name of, the Company and (ii) all material copyright registrations or pending applications for registrations of the Company (the "LISTED INTELLECTUAL PROPERTY"). The Listed Intellectual Property together with all other trade secrets, know-how and confidential information used in the conduct of the business of the Company is referred to herein as the "INTELLECTUAL PROPERTY RIGHTS." Each Intellectual Property Right owned or used by the Company immediately prior to the Closing Date will be owned or available for use by the Company on identical terms and conditions immediately subsequent to the Closing Date. (ii) To the knowledge of each Stockholder, no registration relating to any Listed Intellectual Property has lapsed, expired or been abandoned or canceled, nor the subject of any cancellation proceedings; (iii) To the knowledge of the Stockholders, the Company has not interfered with, infringed upon, misappropriated or otherwise come into conflict with any intellectual property rights of third parties, and neither the Stockholders, the Company nor any of its officers (or employees with responsibility for intellectual property matters) has received within the past year any charge, complaint, claim or notice alleging any such interference, infringement, misappropriation or violation; (iv) All such Intellectual Property Rights are free and clear of any claims, or any proprietary, financial or other interest, of any other person, including the Stockholders or any present or former employee of the Company or any predecessor of the Company; 13 (v) SCHEDULE 3(x)(v) of the Disclosure Schedule also identifies each item of intellectual property that any third party owns and that the Company uses pursuant to license, sublicense, agreement or permission (other than general commercial software). With respect to each such item of used intellectual property: (A) to the knowledge of the Stockholders, the license, sublicense, agreement or permission covering the item is legal, valid, binding, enforceable and in full force and effect; (B) to the knowledge of the Stockholders, the license, sublicense, agreement or permission will continue to be legal, valid, binding, enforceable and in full force and effect on identical terms following the Closing; (C) the Company is not, and to the knowledge of the Stockholders and officers (and employees with responsibility for intellectual property matters) of the Company, no other party to the license, sublicense, agreement, or permission is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default or permit termination, modification or acceleration thereunder; and (D) to the knowledge of the Stockholders and officers (and employees with responsibility for intellectual property matters) of the Company, no charge, complaint, action, suit, proceedings, hearing, investigation, claim or demand is pending or is threatened which challenges the legality, validity or enforceability of the underlying item of intellectual property. (y) ENVIRONMENTAL MATTERS. (i) the Real Property, and properties formerly owned or operated by the Company, and all activities and conduct of the Company related thereto, comply and have at all times complied with Environmental Laws in all material respects; (ii) there has been no disposal, release, or threatened release of Hazardous Substances by the Company on, under, in, from or about the Real Property, or properties formerly owned or operated by the Company, that has subjected or could reasonably be expected to subject the Company to material liability under any Environmental Law; (iii) the Company has not disposed or arranged for disposal of Hazardous Substances on any third-party property that has subjected or, to the knowledge of the Stockholders, may subject the Company to material liability under any Environmental Law; (iv) the Company has not received any notice, demand, letter, claim or request for information relating to the Real Property or properties formerly owned or operated by the Company alleging violation of or liability under any Environmental Law and there are no proceedings, actions, orders, decrees, injunctions or other claims pending 14 before any court, arbitral body or governmental authority, or to the knowledge of the Company, any threatened actions or claims, relating to or otherwise alleging liability under any Environmental Law; (v) the Company has not exposed any employee or third party to any Hazardous Substance or condition which has subjected or may, to the knowledge of the Stockholders, subject the Company to material liability under any Environmental Law; (vi) no underground storage tanks, asbestos-containing material or polychlorinated biphenyls have ever been located on the Real Property or properties formerly owned or operated by the Company; and (vii) the Company has delivered to Buyer copies of all material environmental assessments, audits, studies and other environmental reports in its possession relating to the Real Property or any property formerly owned or operated by the Company. As used herein: "ENVIRONMENTAL LAW" means any federal, state, local or foreign law, statute, ordinance, rule, regulation or treaty; all judicial, administrative, and regulatory orders, judgments, decrees, permits and authorizations; and common law relating to (1) the protection, investigation, remediation, or restoration of the environment or natural resources, (2) the handling, use, storage, treatment, disposal, release or threatened release of any Hazardous Substance or (3) any injury or threat of injury to persons or property arising out of exposure to any Hazardous Substance; and "HAZARDOUS SUBSTANCE" means any substance, material or waste that is (1) listed, classified or regulated in any concentration pursuant to any Environmental Law, (2) any petroleum hydrocarbon, asbestos-containing material, lead-containing paint or plumbing, polychlorinated biphenyls, radioactive materials or radon or (3) any other substance, material or waste which is subject to any Environmental Law. (z) ORDERS AND BACKLOG. SCHEDULE 3(z) attached hereto (the "ORDER SCHEDULE") sets forth a true, complete and correct schedule of all product orders and backlog of the Company as of the Closing. (aa) BROKERS' FEES. Except for or as related to such arrangements as may exist with The Geneva Companies, neither the Company nor either Stockholder has any liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated hereby or based in any way upon agreements, arrangements or understandings made by or on behalf of either such Stockholder hereunder or under any of the other documents to which either Stockholder is a party. 15 (bb) COMPLETENESS OF DISCLOSURE. The Stockholders have delivered or made available true and complete copies of each document that has been requested by the Buyer or its counsel. No representation or warranty by the Stockholders in this Agreement, or in any agreement, instrument or other documents contemplated to be executed by either Stockholder pursuant hereto, when read together, contains any untrue statement of a material fact or to the knowledge of each of the Stockholders, omits to state a material fact necessary to be stated, when read together, to make the statements contained herein or therein not misleading in light of the circumstances in which they were made. (cc) CONSENTS. Neither the Stockholders nor the Company is required to obtain the consent, waiver, approval or authorization of, or make a filing with, any governmental authority in connection with the execution and delivery of this Agreement and the Employment Agreements or the consummation of the transactions contemplated hereby and thereby. (dd) HSR MATTERS. (x) SIZE OF ACQUIRED PERSON--ASSETS. The total assets of the Company, as shown on its most recent, regularly prepared balance sheet, when added separately to the total assets of each additional entity (if any) controlled by either of the Stockholders within the meaning of 16 C.F.R. Section 801.1(b), and all other income-producing assets (as defined in 16 C.F.R. Section 801.11) of either of the Stockholders considered separately, are less than $10,000,000. (y) SIZE OF ACQUIRED PERSON--SALES. The annual net sales of the Company, as shown on its most recent annual statement of income and expense, when added separately to the annual net sales of each additional entity (if any) controlled by either of the Stockholders within the meaning of 16 C.F.R. Section 801.1(b), and all other annual net sales of either of the Stockholders considered separately, are less than $10,000,000. (ee) UNDISCLOSED LIABILITIES. As of April 4, 1998, all liabilities of the Company (whether accrued, unmatured, contingent or otherwise and whether due or to become due) are set forth or adequately reserved against or otherwise disclosed on the Interim Balance Sheet, in each case in accordance with GAAP, consistently applied by the Company. Since April 4, 1998, the Company has not incurred any other liabilities, except for liabilities incurred in the ordinary course of business as theretofore conducted which are not materially adverse to the operations or prospects (financial or otherwise) of the Company's business. (ff) CERTAIN BUSINESS PRACTICES. Neither the Stockholders, the Company nor any of its directors, officers, agents or employees has (i) used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns or violated any provision of the Foreign Corrupt Practices Act of 1977, as amended or (iii) to the knowledge of the Stockholders, made any other unlawful payment. 16 (gg) WARRANTIES. There is no outstanding action, suit, arbitration or other proceeding, and no claim, demand, demand letter, lien or notice of noncompliance or violation has been asserted in writing against the Company and, to the knowledge of the Stockholders, no event or circumstance has occurred that could reasonably be expected to constitute the basis of any claim against the Company for injury to any person or any property suffered as a result of the manufacture, distribution or sale of any product or material by the Company, including any claim arising out of the defective or unsafe nature, or allegedly defective or unsafe nature, of any such product or material. 4. REPRESENTATIONS AND WARRANTIES OF THE BUYER. The Buyer represents and warrants to the Stockholders as follows: (a) CORPORATE STATUS; AUTHORIZATION, ETC. The Buyer is a corporation duly incorporated and validly existing and in good standing under the laws of California, and has full corporate power and authority to execute and deliver this Agreement and the Employment Agreements to which the Buyer shall be a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Employment Agreements to which the Buyer shall be a party, the performance of its obligations hereunder and thereunder, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by all requisite corporate action of the Buyer. The Buyer has duly executed and delivered this Agreement and the Employment Agreements to which it shall be a party. This Agreement constitutes, and each such Employment Agreement when so executed and delivered by the Buyer will constitute, the legal, valid and binding obligation of the Buyer, enforceable against the Buyer in accordance with its respective terms. (b) CONSENTS. No consent, waiver, approval, or authorization of, or filing with, any governmental authority is required by or with respect to Buyer in connection with the execution and delivery of this Agreement and the Employment Agreements or the consummation of the transactions contemplated hereby and thereby. (c) NO CONFLICTS, ETC. The execution, delivery and performance by the Buyer of this Agreement and the Employment Agreements to which the Buyer is a party, and the consummation of the transactions contemplated hereby and thereby, do not and will not conflict with, contravene, result in a violation or breach of or default under (with or without the giving of notice or the lapse of time, or both), under (i) any law applicable to the Buyer or any of its properties or assets, (ii) any provision of any of the Organizational Documents of the Buyer or (iii) any contract, agreement or other instrument to which the Buyer is a party. (d) LITIGATION REGARDING PREVIOUS ACQUISITIONS OR OPERATIONS. There is not nor has there been (i) any litigation arising out of or in connection with the acquisition by Buyer of any entity or (ii) any litigation arising out of or in connection with the employment of any individual who was employed by Buyer arising out of or in connection with any acquisition by Buyer of any entity. 17 5. PRE-CLOSING COVENANTS. The Parties agree as follows with respect to the period between the execution of this Agreement and the Closing. (a) GENERAL. Each of the Parties will use its reasonable best efforts to take all action and to do all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement. (b) NOTICES AND CONSENTS. The Stockholders will cause the Company to give any notices to third parties, and will cause the Company to use its reasonable best efforts to obtain third-party consents, that the Buyer may reasonably request in connection with the matters pertaining to the Company disclosed or required to be disclosed in the Disclosure Schedule. Each of the Parties will take any additional action (and the Stockholders will cause the Company to take any additional action) that may be necessary, proper or advisable in connection with any other notices to, filings with, and authorizations, consents, and approvals of Governmental Bodies, and third parties that he, she or it may be required to give, make or obtain. (c) OPERATION OF BUSINESS. Except as contemplated hereby or as may be incidental to or in furtherance of the transactions contemplated hereby or as may have been set forth herein or in the Disclosure Schedule, the Stockholders will not cause or permit the Company to engage in any practice, take any action, embark on any course of inaction or enter into any transaction outside the ordinary course of business or that would constitute a breach of the representation and warranty contained in Section 3(g) if such action, inaction or transaction occurred after April 4, 1998 and prior to the date of this Agreement. (d) PRESERVATION OF BUSINESS. Except as contemplated hereby or as may be incidental to or in furtherance of the transactions contemplated hereby or as may have been set forth herein or in the Disclosure Schedule, the Stockholders will cause the Company to use its best efforts to keep its business and properties substantially intact, including its present operations, physical facilities, working conditions, and relationships with lessors, licensors, suppliers, customers and employees. (e) ACCESS. Only in the event that neither the Buyer nor the Stockholders exercised its right to terminate this Agreement as provided in Section 11 herein, the Stockholders will permit, and the Stockholders will cause the Company to permit, representatives of the Buyer to have access at reasonable times, and in a manner so as not to interfere with the normal business operations of the Company, to the headquarters and all other facilities of the Company, to all books, records, contracts, tax records and documents of or pertaining to the Company and to all employees, customers and suppliers of the Company. (f) NOTICE OF DEVELOPMENTS. The Stockholders will give prompt written notice to the Buyer of any material development affecting the assets, liabilities, business, financial condition, operations, results of operations or future prospects of the Company. Each Party will give prompt written notice to the others of any material development affecting the ability of the Parties to consummate the transactions contemplated by this Agreement. 18 (g) EXCLUSIVITY. The Stockholders will not (and the Stockholders will not cause or permit the Company to) (i) solicit, initiate or encourage the submission of any proposal or offer from any person relating to any (A) liquidation, dissolution or recapitalization, (B) merger or consolidation, (C) acquisition or purchase of securities or assets or (D) similar transaction or business combination involving the Company or (ii) participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate in or facilitate in any other manner any effort or attempt by any person to do or seek, any of the foregoing. The Stockholders will notify the Buyer immediately if any person makes any proposal, offer, inquiry or contact with respect to any of the foregoing. (h) AUDITS. The Stockholders shall cause the Company to cooperate with Buyer in connection with any audit by Arthur Andersen LLP of the Company's financial statements for the twelve-month period ended April 4, 1998 (which audit shall be paid for by Buyer) or for other prior periods, including causing the Company to provide Buyer with access to all related work papers and other documents of the Company relating to any such audits. 6. CONDITIONS PRECEDENT OF THE BUYER. The obligations of the Buyer to consummate the transactions contemplated hereby shall be subject to the fulfillment or waiver on or prior to the Closing Date of the following conditions: (a) NO INJUNCTION, ETC. Consummation of the transactions contemplated hereby or by the Employment Agreements shall not have been restrained, enjoined or otherwise prohibited or made illegal by any applicable law, including any order, injunction, decree or judgment of any court, arbitral body or governmental authority. No action or proceeding shall be pending or threatened by any governmental authority or other person or entity on the Closing Date before any court or other governmental authority to restrain, enjoin or otherwise prevent the consummation of the transactions contemplated hereby or by the Employment Agreements. (b) EMPLOYMENT AGREEMENTS. The Employment Agreements, the form of which is attached hereto as EXHIBIT D, shall have been duly executed and delivered by each party. (c) REPRESENTATIONS; PERFORMANCE. (i) The representations and warranties of the Stockholders contained in Section 3 or in any Employment Agreement shall be true and correct in all material respects on the date of this Agreement and at and as of the Closing Date. (ii) The Stockholders shall have in all material respects duly performed and complied with all agreements, covenants and conditions required by this Agreement to be performed or complied with by the Stockholders on or prior to the Closing Date. (iii) The Stockholders shall have delivered to the Buyer a certificate dated the Closing Date and signed by the Stockholders certifying to the satisfaction of the requirements of Sections 6(c)(i) and (ii) above. (d) CONSENTS. All governmental approvals and consents required to be made or obtained by the Stockholders in connection with the execution and delivery of this Agreement 19 and the Employment Agreements or the consummation of the transactions contemplated hereby or thereby shall have been made or obtained. Complete and correct copies of all such governmental approvals and consents shall have been delivered to the Buyer. (e) NO MATERIAL ADVERSE EFFECT. No event, occurrence, fact, condition, change, development or effect shall exist or have occurred or come to exist or been threatened that, individually or in the aggregate, has had or resulted in, or could reasonably be expected to become or result in, a material adverse effect on the business, operations or prospects of the Company. (f) OPINION OF COUNSEL. The Buyer shall have received an opinion, addressed to it and dated the Closing Date, from Wilson Sonsini Goodrich & Rosati, special counsel to the Stockholders (which will specifically state that the Buyer's lenders are entitled to rely on such opinion as if it were addressed to them), to the effect that: (i) The Company is duly organized, validly existing and in good standing under the laws of the State of California, and it has all requisite power to own, lease and operate its assets, properties and business as now conducted. The Company does not own, directly or indirectly, any interest or investment (whether equity or debt) in any corporation, partnership, business, trust or other entity. (ii) The Company is duly qualified or licensed to do business as a foreign corporation and is in good standing in every jurisdiction in which the nature of business or the location of its properties requires such qualification or licensing. (iii) Based solely upon a review of the Company's Articles of Incorporation, the authorized capital stock of the Company consists solely of 10,000,000 shares of common stock, without par value. The Shares (A) are owned of record by the Stockholders in the amounts set forth on EXHIBIT A attached hereto, (B) have been duly authorized, are validly issued and outstanding, are fully paid and nonassessable and (C) based solely upon a review of the Company's stock book and minute book, constitute all of the issued and outstanding shares of capital stock of the Company. To our knowledge, there are outstanding no securities convertible into, exchangeable for or carrying the right to acquire equity securities of the Company, or subscriptions, warrants, options, rights, calls, agreements, demands or other arrangements or commitments of any character obligating the Company to issue or dispose of any of its equity securities or any ownership interests in the capital stock of the Company. (iv) Assuming the Buyer is acquiring the Shares in good faith without notice of any adverse claim, upon payment for, and delivery of, the Shares to Buyer pursuant to the Agreement, the Buyer will acquire the Shares, free of any adverse claim. (v) Neither the execution and delivery of this Agreement and the documents contemplated hereby nor the consummation of the transactions contemplated thereby will violate any provision of the Organizational Documents, or, to the knowledge of such counsel, (1) constitute a violation of, be in conflict with, constitute a breach or 20 default under any material agreement or contract (listed in Exhibit A to such opinion) or any judgment, decree, order, regulation or rule of any court, arbitral body, or governmental authority to which the Company is subject or by which it or any of its assets or properties are otherwise expressly bound, (2) result in the acceleration of the maturity of, or give any person or entity the right to so accelerate the maturity of, any debt, liability or obligation of the Company payable to any bank, institutional lender or other creditor in respect of any agreement or contract (listed in Exhibit A to such opinion) or (3) require any authorization, consent or approval of, exemption or other action by, or notice to, any federal or California governmental agency. (vi) Except as set forth in the Disclosure Schedule, to such counsel's knowledge, there is no claim, action, suit, investigation or proceeding of any kind pending in any federal or California court, arbitral tribunal, or before any federal or California governmental agency in which the Company has been served with process or otherwise received actual notice, and, to our knowledge, there is no threat of any such claim, action, suit, investigation or proceeding against, involving, affecting or relating to the Company. (g) INDEBTEDNESS. All promissory notes or other indebtedness owing to the Company from any officer or director of the Company or any of the Stockholders shall have been paid in full, and any promissory notes or other indebtedness of the Company owing to any officer or director of the Company or any of the Stockholders shall have been paid in full, and the President of the Company shall have delivered a certificate to the Buyer so stating. (h) CORPORATE AND OTHER PROCEEDINGS. All corporate proceedings of the Company in connection with the transactions contemplated by this Agreement and the Employment Agreements, and all documents and instruments incident thereto that are documents and instruments required to evidence corporate approval, shall be reasonably satisfactory in substance and form to the Buyer and its counsel, and the Buyer and its counsel shall have received all such documents and instruments, or copies thereof, certified if requested, as may be reasonably requested. The Company shall have amended its Bylaws prior to the Closing Date to delete Section 8.7 thereof. 7. CONDITIONS TO OBLIGATIONS OF THE STOCKHOLDERS. The obligation of the Stockholders to consummate the transactions contemplated hereby shall be subject to the fulfillment, on or prior to the Closing Date, of the following conditions: (a) NO INJUNCTION, ETC. Consummation of the transactions contemplated hereby or by the Employment Agreements shall not have been restrained, enjoined or otherwise prohibited or made illegal by any applicable law, including any order, injunction, decree or judgment of any court, arbitral body or governmental authority. No action or proceeding shall be pending or threatened by any governmental authority or other person or entity on the Closing Date before any court or other governmental authority to restrain, enjoin or otherwise prevent the consummation of the transactions contemplated hereby or by the Employment Agreements. (b) EMPLOYMENT AGREEMENTS. The Employment Agreements, the form of which is attached hereto as EXHIBIT D, shall have been duly executed and delivered by each party. 21 (c) REPRESENTATIONS, PERFORMANCE, ETC. (i) The representations and warranties of the Buyer contained in Section 4 shall be true and correct in all material respects on the date of this Agreement and at and as of the Closing Date. (ii) The Buyer shall have in all material respects duly performed and complied with all agreements, covenants and conditions required by this Agreement to be performed or complied with by it on or prior to the Closing Date. (iii) The Buyer shall have delivered to the Stockholders a certificate dated the Closing Date and signed by the Buyer's President or a Vice President certifying to the satisfaction of the requirements of Sections 7(c)(i) and (ii) above. (d) CONSENTS. All governmental approvals and consents required to be made or obtained by the Buyer in connection with the execution and delivery of this Agreement and the Employment Agreements or the consummation of the transactions contemplated hereby or thereby shall have been made or obtained. Complete and correct copies of all such governmental approvals and consents shall have been delivered to the Stockholders. (e) OPINION OF COUNSEL. The Stockholders shall have received an opinion, addressed to them and dated the Closing Date, of Gibson Dunn & Crutcher LLP, counsel for the Buyer to the effect that: (i) Buyer is a corporation duly organized and validly existing and in good standing under the laws of the State of California, with all requisite corporate power and authority to purchase and own the shares of capital stock acquired hereunder. (ii) This Agreement has been duly executed and delivered by Buyer, and all action required to be taken by Buyer by law to authorize the execution, delivery and performance of this Agreement has been taken, and the Agreement constitutes a binding obligation of the Buyer enforceable against the Buyer in accordance with its terms (subject to customary assumptions, limitations and exceptions). (iii) To the knowledge of such counsel, neither the execution and delivery by Buyer of this Agreement, nor compliance with the terms and provisions hereof, will result (1) in a breach of, or default under, any of the terms, conditions or provisions of any material agreement or contract of Buyer or any judgment, decree, order, regulation or rule of any court, arbitral body, or governmental authority to which the Buyer is a party, or any injunction to which Buyer is subject or (2) require any authorization, consent or approval of, exemption or other action by, or notice to, any federal or California governmental agency. (f) CORPORATE PROCEEDINGS. All corporate proceedings of the Buyer in connection with the transactions contemplated by this Agreement and the Employment Agreements, and all documents and instruments incident thereto, shall be reasonably satisfactory in substance and form to the Stockholders and their counsel, and the Stockholders and their 22 counsel shall have received all such documents and instruments, or copies thereof, certified if requested, as may be reasonably requested. 8. POST-CLOSING COVENANTS. (a) EMPLOYMENT OF MESSRS. WALSH AND BAKER. The Buyer agrees to retain as employees of the Company Hugh Walsh and John Baker for a period of two years after the Closing Date at their current or greater salary, with benefits as available to all of the Company employees generally. Buyer agrees that the location of employment for Messrs. Walsh and Baker will be within a 35-mile radius of the Company's current location. Messrs. Walsh or Baker may terminate their employment voluntarily at any time, and the Company may terminate the employment of Messrs. Walsh or Baker prior to the end of the two year period after the Closing Date only (i) with the written consent of Varozza, or if Varozza is unavailable, then with the written consent of Mutascio, in which event the Company would have no further obligations to Messrs. Walsh or Baker, as the case may be or (ii) without cause, provided the Company provides for the payment of the salaries and continuation of benefits to Messrs. Walsh and Baker for the full two-year period following the Closing Date. If the Company terminates Messrs. Walsh or Baker before the expiration of the two-year period after the Closing (in which case the Company will provide for the payment of salaries and continuation of benefits for each terminated person), and if either or both of Messrs. Walsh and Baker desire to continue his benefits for any period up to and including 18 months after the expiration of the two-year period after Closing (the "COBRA PERIOD"), then the Company will provide for a continuation of benefits for Messrs. Walsh or Baker, or both of them, as the case may be, during the COBRA Period, provided that the person choosing to continue his benefits must pay the amount that he would be obliged to pay to continue his benefits if COBRA continuation of benefits were available. (b) WAIVER OF SICK PAY. Each Stockholder agrees to forever relinquish and waive any and all claims such Stockholder may have for sick pay accrued in connection with such Stockholder's services to the Company prior to the Closing Date. 9. INDEMNIFICATION. (a) INDEMNIFICATION BY THE STOCKHOLDERS. The Stockholders shall, jointly and severally, indemnify, defend and hold harmless the Buyer, the Buyer's successors and assigns, the Buyer's officers, directors and agents (individually, an "INDEMNIFIED PERSON") from and against any all damages, awards, judgments, payments, all interest thereon, all reasonable costs and expenses of investigating any claim, lawsuit or arbitration and any appeal therefrom, all actual reasonable attorney's fees incurred in connection therewith, and all amounts paid incident to any compromise or settlement of any such claim, lawsuit or arbitration (individually a "Loss" and collectively, "Losses"), absolute or contingent, sustained by an Indemnified Person by reason of, or arising out of, (i) the inaccuracy, untruth or breach of any representation or warranty made by the Stockholders in this Agreement, the Disclosure Schedule hereto or the Employment Agreement, (ii) the breach of any express, written covenant or agreement contained in Section 5 or Section 9 hereof required to be performed or observed by the Stockholders hereunder, (iii) any liability for taxes of the Company described in Section 10 below, (iv) any liabilities arising out of or related to the operation of the Company's business prior to the Closing Date, which liabilities are not set 23 forth or adequately reserved against or otherwise disclosed on the Interim Balance Sheet or the footnotes thereto, including without limitation any liabilities relating to the Company's or the Stockholders' prior dealings with present or former officers, directors or stockholders and (v) any and all claims made by any party to the lawsuit filed by Rapid Power Technologies, Inc. against the Company and certain other parties thereto, pending in the United States District Court for the District of Oregon (case no. CV 97 407 AS), including any and all claims against the Company made in any other lawsuit or proceeding relating thereto. (b) INDEMNIFICATION BY BUYER. Buyer shall indemnify, defend and hold harmless the Stockholders, the Stockholder's successors and assigns, and the Stockholders' agents from and against any and all Losses, absolute or contingent, sustained by a Stockholder by reason of, or arising out of (i) the inaccuracy, untruth or breach of any representation or warranty made by the Buyer in Section 4 hereof or in any other document delivered in connection with the transactions contemplated by this Agreement and (ii) the breach by the Buyer or the Company of any covenant or agreement required to be performed or observed by either the Buyer or Company hereunder. (c) NOTIFICATION OF CLAIMS. If any Party (or parties) the ("INDEMNIFIED PARTY") reasonably believes that he or it is entitled to indemnification hereunder, or otherwise receives notice of the assertion or commencement of any third-party claim, action or proceeding (a "THIRD-PARTY CLAIM"), with respect to which such other Party (parties) (the "INDEMNIFYING PARTY") is obligated to provide indemnification pursuant to Section 9(a) or (b) above, the Indemnified Party shall promptly give the Indemnifying Party written notice of such claim for indemnification (an "INDEMNITY CLAIM") specifying (i) the nature of such Indemnity Claim and the basis therefor (including a reference to the specific sections of this Agreement or any agreement or document related thereto under which such claim is made) and (ii) the Loss, if any, that has occurred. The delivery of such notice (a "CLAIM NOTICE") shall be a condition precedent to any liability of the Indemnifying Party for indemnification hereunder. The Indemnifying Party shall have twenty (20) business days from the receipt of a Claim Notice (the "NOTICE PERIOD") to notify the Indemnified Party of (i) whether or not the Indemnifying Party disputes its liability to the Indemnified Party hereunder with respect to such Indemnity Claim and (ii) in the case of any Third-Party Claim, whether or not, notwithstanding any such dispute, they desire, at their sole cost and expense, to defend the Indemnified Party against such claim or demand. (d) RESOLUTION OF INDEMNITY CLAIMS. With respect to any Indemnity Claim involving a Third-Party Claim: (i) If the Indemnifying Party disputes its liability with respect to such Indemnity Claim or the amount thereof (whether or not the Indemnifying Party desires to defend the Indemnified Party against a Third-Party Claim as provided in paragraphs (ii) and (iii) below), such dispute shall be resolved in accordance with Section 12(c) hereof. Pending the resolution of any dispute by the Indemnifying Party of its liability with respect to any such Indemnity Claim, the Third-Party Claim or demand shall not be settled without the prior written consent of the Indemnified Party. (ii) In the event that the Indemnifying Party notifies the Indemnified Party within the Notice Period that they desire to defend the Indemnified Party against the 24 Third-Party Claim then, except as hereinafter provided, the Indemnifying Party shall have the right to defend the Indemnified Party by appropriate proceedings, which proceedings shall be settled or prosecuted by the Indemnifying Party; PROVIDED, HOWEVER, that the Indemnifying Party shall not, without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld), consent to the entry of any judgment against the Indemnified Party or enter into any settlement or compromise which does not include, as an unconditional term thereof, the claimant or plaintiff giving the Indemnified Party a release, in form and substance reasonably satisfactory to the Indemnified Party, from all liability in respect of such claim or litigation. If any Indemnified Party desires to participate in, but not control, any such defense or settlement, it may do so at its sole cost and expense. In the event an Indemnified Party should make an Indemnity Claim against the Indemnifying Party that does not involve a Third-Party Claim, the amount of such claim shall be deemed a liability of the Indemnifying Party unless such Indemnifying Party shall timely dispute its liability with respect to such claim or demand within the Notice Period. So long as such Indemnity Claim is so timely disputed by the Indemnifying Party within the Notice Period, the liability of the Indemnifying Party shall be resolved in accordance with Section 12(c) hereof. (e) ATTORNEYS' FEES. In connection with any litigation arising out of this Agreement or to enforce any claim pursuant to this Section 9 or Section 10 hereof, the prevailing party shall be entitled to recover from the nonprevailing party its reasonable attorneys' fees and costs, on appeal or otherwise. (f) PAYMENT. Upon the determination of the liability for a Loss under this Section 9, the appropriate party shall pay to the other, as the case may be, within ten (10) days after such determination, the amount of any Loss so determined. In the event that the indemnified party is not paid in full within such ten (10) day period then, in addition to any other rights that it may have against any other person, firm or corporation for any such Loss, interest shall accrue on the amount so required to be paid at the rate which is the lesser of (i) a rate of ten percent (10%) per annum, compounded annually or (ii) the maximum rate of interest permitted under applicable law. (g) TIME LIMITATION FOR BREACH OF WARRANTY AND OTHER INDEMNIFICATION. Any and all claims for indemnification under this Section 9 must be brought prior to the eighteenth (18th) month anniversary of the Closing Date, except for claims based upon (i) the inaccuracy, untruth or breach of any representation or warranty made by the Stockholders in Sections 3(c), 3(h) or 3(y), which must be brought prior to the third anniversary of the Closing Date and (ii) the inaccuracy, untruth or breach of any representation or warranty made by the Stockholders in Section 3(w) or for breach of the indemnity agreement contained in Section 10 hereof, which must be brought prior to the date which is 90 days following the earlier of (A) the expiration of the statute of limitations applicable to the respective tax matter referred to in such Section 3(w) or Section 10 or (B) the fourth anniversary of the Closing Date. Notwithstanding anything herein to the contrary, the limitations set forth in this Section 9(g) shall not apply to any claims arising out of fraud in the making of representations and warranties set forth herein. 25 (h) INDEMNITY BASKET; CAP; OTHER LIMITATIONS. (A) Notwithstanding the foregoing provisions of this Section 9, Buyer, on behalf of each of the Indemnified Persons, agrees that the Indemnified Persons shall have no right to indemnity under the provisions of Section 9(a) until such time as the aggregate amount of Losses suffered or incurred by all of the Indemnified Persons, as a group, exceeds $100,000 (the "Indemnity Basket"), and that if such aggregate Losses as aforesaid do eventually exceed the Indemnity Basket, then all Losses in excess of such $100,000 shall thereupon be subject to indemnification hereunder. In addition, prior to asserting any claim for indemnity under this Agreement, the party seeking such indemnity must first seek reimbursement for any and all Losses from any applicable insurance coverage. The parties agree that any indemnity provided by this Agreement is not to be deemed insurance (whether primary or excess or otherwise) for purposes of seeking reimbursement from the applicable insurance coverage. (B) The maximum aggregate amount payable by the Stockholders for any and all Losses or any other matter whatsoever arising out of, related to, or in connection with, this Agreement, any of the other documents or certificates delivered hereby, or any of the transactions contemplated hereby or thereby, is $5,000,000 (the "CAP"). (C) Notwithstanding the provisions of Section 9(i)(A) and 9(i)(B) above, Losses arising from (i) a breach of the representations and warranties set forth in Section 3(w) or for breach of the indemnity agreement contained in Section 10 hereof and (ii) claims for indemnification arising under clause (v) of Section 9(a) above shall be indemnifiable from the first dollar without regard to the Indemnity Basket or Cap. (D) In addition to the other applicable limitations herein, the Parties agree that any adjustment to the Audited Closing Date Balance Sheet that increases an account for a liability, reserve, accrual or the like will preclude an Indemnified Person from seeking indemnification of a Loss hereunder to the extent of such adjustment. The Parties further agree that there shall not be any multiple recovery for any Loss. (E) In calculating the amount of any indemnifiable Loss there shall be deducted any actual tax benefit realized by the Indemnified Person. 10. TAXES. (a) TAXES SUBJECT TO INDEMNIFICATION. The taxes subject to indemnification under Section 10(a) are all taxes of the Company, including interest and penalties, in excess of any liability accrued for taxes (excluding reserves for deferred taxes) reflected on the Audited Closing Date Balance Sheet: (i) imposed on the Company with respect to taxable periods ending on or before the Closing, including taxes imposed under Section 1.1502-6 of the Treasury Regulations and similar provisions of state or local law; or 26 (ii) resulting from the breach of any representation or warranty of Stockholders contained in Section 3(w) hereof which shall not be eligible for indemnification under Section 9 of this Agreement. (b) COMPUTATION OF TAX LIABILITY. For purposes of computing the amount of the tax liability subject to indemnification pursuant to paragraph (i) of subsection (a) and the amount of tax liability subject to reimbursement under subsection (c), any taxable year or other period that begins before and ends after the Closing shall be deemed to end at the close of business on the Closing. Taxes attributable to pre-Closing and post-Closing periods shall be computed based on a closing of the books method, except that periodic taxes such as real and personal property taxes shall be prorated. (c) PREPARATION OF RETURNS. The Company shall cause to be prepared all returns which are in respect of the taxes of the Company or any predecessor-in-interest for taxable years or periods beginning prior to the Closing but which are due to be filed (taking into account any applicable extensions of time for filing) after the Closing. The Company shall in a timely fashion prepare such returns in a manner consistent with prior practice and applicable law and treating as deductible expenses all amounts paid by the Company as compensation. In the event the Stockholders disagree with a return as prepared by the Company, the matter will be submitted to the Independent Accountants for resolution. Upon completion of any return, the Stockholders, upon proper notification and satisfactory documentation of the amount of tax due with respect to the return in question, shall pay to the Company, within ten (10) business days of demand by the Company, the amount of tax due in accordance with Section 10(a) above. (d) COOPERATION; NOTICE. The Company and Stockholders shall cooperate with each other in the conduct of any audit or other proceedings involving the Company or any entity with which it is consolidated or combined for any tax purposes. In the event a written claim shall be made by any governmental authority which, if successful, would result in an obligation on the part of either of the Stockholders to indemnify any Indemnified Person pursuant to this section, the Indemnified Person shall within ten (10) business days of receipt of such claim give notice to Stockholders of the same in writing specifying in reasonable detail the basis of such claim, action or suit and the facts pertaining thereto, and shall not make payment of the tax claimed for at least thirty (30) days after the giving of such notice. If either or both of the Stockholders wishes to contest such claim, such Stockholder(s) shall have the right to control and make all decisions regarding such audit or contest, including selection of a forum for contest, and the Indemnified Person agrees that in such event it shall execute, deliver and file a power of attorney naming the Stockholders and its counsel or appropriate agent as attorneys-in-fact for such audit or contest and such other instruments or documents as may be reasonably requested by such Stockholder(s) to carry out the provisions of this paragraph; provided, however, that without the consent of the Company (which consent shall not be unreasonably withheld), the Stockholders shall not settle or otherwise compromise any such audit or contest if it would have the effect of materially increasing the Company's liability for taxes for any taxable period after the Closing. 27 11. TERMINATION. (a) TERMINATION OF AGREEMENT. The Parties may terminate this Agreement as provided below: (i) the Buyer and the Stockholders may terminate this Agreement by mutual written consent at any time prior to the Closing; (ii) the Buyer may terminate this Agreement by giving written notice to the Stockholders at any time prior to the Closing in the event the Stockholders are in breach of any representation, warranty or covenant contained in this Agreement and such breach has not been cured within fifteen (15) days of written notice thereof, and the Stockholders may terminate this Agreement by giving written notice to the Buyer at any time prior to the Closing in the event the Buyer is in breach of any representation, warranty or covenant contained in this Agreement and such breach has not been cured within fifteen (15) days of written notice thereof; (iii) the Buyer may terminate this Agreement by giving written notice to the Stockholders at any time prior to the Closing if the Closing shall not have occurred on or before May 29, 1998 by reason of the failure of any condition precedent under Section 6 hereof (unless the failure results primarily from the Buyer itself breaching any representation, warranty or covenant contained in this Agreement); or (iv) the Stockholders may terminate this Agreement by giving written notice to the Buyer at any time prior to the Closing if the Closing shall not have occurred on or before May 29, 1998 by reason of the failure of any condition precedent under Section 7 hereof (unless the failure results primarily from the Stockholders itself breaching any representation, warranty or covenant contained in this Agreement). Nothing contained in this Section 11(a) shall alter, affect, modify or restrict any Parties' rights to rely on and/or seek indemnification for a breach of any of the representations and warranties and/or conditions or covenants of any of the Parties contained in this Agreement. (b) EFFECT OF TERMINATION. If either the Buyer or the Stockholders terminate this Agreement pursuant to Section 11(a) above, all obligations of the Parties hereunder shall terminate without any liability of any Party to any other Party. 12. MISCELLANEOUS. (a) EXPENSES. Except as set forth below in this Section 12 or as otherwise specifically provided for in this Agreement, the Company shall bear its expenses and the expenses of the Stockholders, and the Buyer shall bear its expenses (including in each case the fees of attorneys, auditors and financial advisors) in connection with the transactions contemplated hereby, whether or not the transactions contemplated hereby shall be consummated. (b) NOTICES. All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and 28 shall be deemed to have been duly given if (i) delivered personally, (ii) mailed, certified or registered mail, with postage prepaid or (iii) sent by next-day or overnight mail or delivery or sent by telecopy or telegram, as follows: (i) if to the Buyer, prior to the Closing and the Company, after the Closing, to: Elgar Electronics Corporation 9250 Brown Deer Road San Diego, CA 92121 Attn: Christopher W. Kelford Ph: 619-450-0085 Fax: 619-458-0257 and J.F. Lehman & Company 450 Park Avenue New York, NY 10022 Attn: Keith Oster Ph: 212-634-1150 Fax: 212-634-1155 with copies to: Gibson Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, CA 90071 Attn: Kenneth M. Doran Ph: 213-229-7537 Fax: 213-229-6537 (ii) if to the Stockholders, to: Joseph A. Varozza, Jr. 106 Ravinia Way Los Gatos, California 95030 Ph: 408-356-5388 Vincent S. Mutascio 400 Santa Rosa Drive Los Gatos, California 95032 Ph: 408-358-1798 29 with a copy to: Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304-1050 Attn: John B. Goodrich and Thomas C. Klein Ph: 650-493-9300 Fax: 650-493-6811 or, in each case, at such other address as may be specified in writing to the other parties hereto. All such notices, requests, demands, waivers and other communications shall be deemed to have been received (i) if by personal delivery on the day after such delivery, (ii) if by certified or registered mail, on the seventh business day after the mailing thereof, (iii) if by next-day or overnight mail or delivery, on the day delivered, (iv) if by telecopy or telegram, on the next day following the day on which such telecopy or telegram was sent, provided that a copy is also sent by certified or registered mail. (c) GOVERNING LAW; JURISDICTION FOR DISPUTES; ETC. Buyer and the Stockholders hereby irrevocably submit to the exclusive jurisdiction of the courts of the State of California and the Federal courts of the United States of America located in the State of California in respect of the interpretation and enforcement of the provisions of this Agreement and the other documents, and in respect of the transactions contemplated hereby and thereby, and hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement hereof or thereof, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that this Agreement or the other documents may not be enforced in or by such courts, and the parties hereto irrevocably agree that all claims with respect to such actions or proceedings shall be heard and determined exclusively in such a California State or Federal court located in the State of California. The Buyer and the Stockholders consent to and grant any such court jurisdiction over the person of such parties and over the subject matter of any such dispute and agree that mailing of process or other papers in connection with any such action or proceeding in the manner provided in Section 11(b) or in such other manner as may be permitted by law, shall be valid and sufficient service thereof. (d) BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. (e) ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of his or its rights, interests or obligations hereunder without the prior written approval of the Buyer and the Stockholders; PROVIDED, HOWEVER, that the Buyer may assign its rights to indemnity hereunder as additional collateral to its lenders. (f) NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement shall confer any rights upon any person or entity other than the parties hereto and their respective heirs, successors 30 and permitted assigns, except that the post-closing covenant in Section 8(a) hereof shall be for the benefit of Messrs. Walsh and Baker who shall have rights pursuant to only such Section 8(a). (g) AMENDMENT; WAIVERS, ETC. No amendment, modification or discharge of this Agreement, and no waiver hereunder, shall be valid or binding unless set forth in writing and duly executed by the party against whom enforcement of the amendment, modification, discharge or waiver is sought. Any such waiver shall constitute a waiver only with respect to the specific matter described in such writing and shall in no way impair the rights of the party granting such waiver in any other respect or at any other time. Neither the waiver by any of the parties hereto of a breach of or a default under any of the provisions of this Agreement, nor the failure by any of the parties, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right or privilege hereunder, shall be construed as a waiver of any other breach or default of a similar nature, or as a waiver of any of such provisions, rights or privileges hereunder. (h) ENTIRE AGREEMENT. This Agreement, including the Schedules, Disclosure Schedule and Exhibits hereto, constitutes the entire agreement and supersede all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. (i) SEVERABILITY. If any provision, including any phrase, sentence, clause, section or subsection, of this Agreement is invalid, inoperative or unenforceable for any reason, such circumstances shall not have the effect of rendering such provision in question invalid, inoperative or unenforceable in any other case or circumstance, or of rendering any other provision herein contained invalid, inoperative, or unenforceable to any extent whatsoever; provided that the material economic terms of the transaction are not materially modified by such circumstances. (j) HEADINGS. The headings contained in this Agreement are for purposes of convenience only and shall not affect the meaning or interpretation of this Agreement. (k) COUNTERPARTS; FACSIMILE. This Agreement may be executed in several counterparts, each of which shall be deemed an original and all of which shall together constitute one and the same instrument. The reproduction of signatures by means of telecopying device shall be treated as though such reproductions are executed originals. (l) SOLE REMEDY. Other than rights to equitable relief to the extent available, the Buyer's and the Stockholders' (and any and all Indemnified Party's) sole remedy for any and all matters arising out of, or related to, this Agreement, shall be limited to the indemnification rights set forth in Sections 9 and 10 (subject to the limitations contained therein). 31 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. JOSEPH A. VAROZZA, JR. /s/ Joseph A. Varozza, Jr. ----------------------------------------- VINCENT S. MUTASCIO /s/ Vincent S. Mutascio ----------------------------------------- ELGAR ELECTRONICS CORPORATION By: /s/ Kenneth R. Kilpatrick -------------------------------------- Kenneth R. Kilpatrick, President and Chief Executive Officer By: /s/ Christopher W. Kelford -------------------------------------- Christopher W. Kelford, Vice President--Finance and Chief Financial Officer 32 EXHIBIT A SHARE OWNERSHIP AND PURCHASE PRICE ALLOCATION NAME SHARES OWNED PURCHASE PRICE - ---- ------------ -------------- Vincent S. Mutascio 384,000 $8,900,000 Joseph A. Varozza, Jr. 384,000 $8,900,000 i EX-10.8 21 EXHIBIT 10.8 POWER TEN EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is entered into as of this 29th day of May, 1998 by and between Power Ten, a California corporation (the "Company"), and Joseph A. Varozza, Jr. ("Executive"). RECITALS WHEREAS, Executive is the President, Chief Executive Officer and Chief Financial Officer of Power Ten, a company engaged in the business of manufacturing power supplies; WHEREAS, the shareholders of the Company have entered into a Stock Purchase Agreement (the "Acquisition Agreement"), dated as of May 5, 1998, providing for the purchase by Elgar Electronics Corporation, a California corporation ("Elgar"), of all the issued and outstanding shares of common stock of the Company on the Closing Date (as defined in the Acquisition Agreement); WHEREAS, the Company desires to continue to avail itself of the benefit of Executive's services, and the Company is willing to compensate Executive adequately therefor; and WHEREAS, Executive desires to continue in the employ of the Company on the terms hereinafter specified. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and the covenants and conditions contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. EMPLOYMENT. (a) The Company agrees to employ Executive as the President, Chief Executive Officer and Chief Financial Officer of the Company, and Executive agrees to act in such capacities, all in accordance with the terms and conditions contained in this Agreement. Executive shall have responsibility for operating and managing the business of the Company, with the powers and duties customarily accorded to the President and Chief Executive Officer of a wholly owned subsidiary, and shall perform such other duties consistent therewith as may be assigned, subject to the terms of this Agreement, to Executive from time to time by the Board of Directors of the Company. Executive will report directly to the President and Chief Executive Officer of Elgar. (b) The principal place of employment hereunder shall at all times be within 35 miles of current location of the Company in the state of California, subject to reasonable travel requirements in connection with the performance of Executive's duties hereunder. (c) Executive shall devote his full and exclusive time and efforts to the business and affairs of the Company in the manner he has done so prior to the date of this Agreement, and shall not, except as may be approved in writing in advance by the Board of Directors of the Company, engage in any other business activity that may, in the Company's reasonable belief, interfere with the performance by Executive of his duties hereunder. 2. COMMENCEMENT AND TERMINATION. The term of this Agreement, and Executive's employment hereunder, shall begin upon the Closing Date and shall continue until his replacement has been hired and trained, which term in no event shall exceed 2 years from the date of the Closing Date. The Company hereby agrees to recruit, hire and train the Executive's replacement as promptly as reasonably practicable without disruption to the Company's business, and in any event during the term of this Agreement. 3. COMPENSATION. (a) The Company shall pay Executive a total of $150,000 as his regular annual salary during the term of employment hereunder. All salary payments hereunder shall be made in installments consistent with the Company's general payroll practices as in effect from time to time. (b) Executive will participate in an incentive compensation plan (the "Plan") substantially equivalent to the plan established on a fiscal-year basis for the executive officers of Elgar, with the budgeted targets to be mutually agreed upon in good faith by the Company and Executive for the remainder of fiscal year 1999 and for each subsequent fiscal year under the term of this Agreement. Bonuses earned under the Plan will be paid on a PRO RATA basis during any fiscal year for which Executive was employed by the Company for less than the entire fiscal year. Executive will have the opportunity to earn bonuses of up to 40% of his annual salary (on an annualized, PRO RATA basis) upon the achievement of the budgeted targets, and a greater percentage in the event that Executive exceeds such targets. (c) Executive will be entitled to continued usage of a Company-provided automobile under that certain lease agreement, dated September 24, 1997, between Jaguar Credit Corporation and the Company, and continuation of Company-paid automobile expenses in connection therewith. (d) The Company shall reimburse Executive for all expenses reasonably incurred by Executive in connection with the business of the Company and the performance of Executive's duties under this Agreement consistent with the Company's regular operating policies and procedures. (e) Executive shall be entitled to paid vacation time in accordance with the Company's standard practices as in effect from time to time, and shall be eligible to participate in 2 all employee benefit plans offered from time to time by the Company to its executive employees, including, without limitation, all such plans of health, dental and disability insurance. 4. TERMINATION. (a) The Company may terminate this Agreement at any time for any reason or no reason effective upon delivery of two weeks prior written notice of termination to Executive. (b) This Agreement shall terminate automatically upon Executive's death or disability for which Executive is eligible for coverage under the Company's disability insurance for Executive. (c) If this Agreement is terminated in any manner, Executive or his estate shall be entitled to receive any earned but unpaid regular, salaried compensation and benefits, including bonuses and expense reimbursements accrued up to the effective date of termination. (d) Executive may terminate this Agreement prior to the expiration of the term without liability to the Company if (a) the Company is in material breach of any provision of this Agreement, (b) the Company relocates the Executive to a facility more than 35 miles from the Company's current premises or (iii) the Company effects any material change in the Executive's duties and responsibilities, wages, or title as forth in this Agreement. 5. COVENANT NOT TO COMPETE. (a) In consideration for Executive's covenant not to compete set forth in Section 5(b) below, the Company agrees to pay to Executive $120,000 upon execution of this Agreement. (b) Executive hereby agree that during his employment with the Company and for five years following termination of such employment, Executive shall not engage in, own (except for owning less than 5% of the voting stock of publicly-traded company), manage or control, or materially participate in the ownership (except for owning less than 5% of the voting stock of publicly-traded company), management or control, directly or indirectly, of any person, firm, corporation or other entity engaged in any business that manufactures or sells products that compete against those sold by the Company (the "Restricted Business") in any jurisdiction in which the Company, or their affiliates are engaged in the Restricted Business (the "Restricted Area"); PROVIDED, HOWEVER, that Executive shall not be deemed to have engaged in a Restrictive Business solely as a result of his employment by a division or subsidiary of a third party not engaged in a Restricted Business where the third party has other divisions or subsidiaries that are engaged in the Restricted Business. If the Company breaches this Agreement in any material respect, then this noncompetition provision shall not be enforceable by the Company against Executive. 3 6. GENERAL PROVISIONS. (a) AMENDMENT. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. (b) NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or mailed by registered or certified mail (return receipt requested) or sent by telecopy, confirmation received, to the parties at the following addresses and telecopy numbers (or at such other address or number for a party as shall be specified by like notice): (i) if to the Company to: Power Ten 120 Knowles Drive Los Gatos, CA 95030 Attn: Secretary Phone: 408-871-1790 Fax.: 408-871-1700 with a copy to: Elgar Electronics Corporation 9250 Brown Deer Road San Diego, CA 92121 Attn: Christopher W. Kelford Phone: 619-450-0085 Fax: 619-458-0257 and J.F. Lehman & Company 450 Park Avenue New York, NY 10022 Attn: Keith Oster Phone: 212-634-1150 Fax: 212-634-1155 4 and Gibson Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, CA 90071 Attn: Kenneth M. Doran Phone: 213-229-7537 Fax: 213-229-6537 (ii) if to Executive to: Joseph A. Varozza, Jr. 106 Ravinia Way Los Gatos, CA 95030 Phone: 408-356-5388 with a copy to: Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, CA 94304 Attn: Thomas C. Klein, Esq. Phone: 650-493-6811 Fax: 650-493-9300 (c) COUNTERPARTS. This Agreement may be executed in counterparts, both of which shall be considered one and the same agreement. (d) ENTIRE AGREEMENT. This Agreement and the documents, instruments and other agreements executed in connection with the Acquisition Agreement (including without limitation the Confidentiality Agreement) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and are not intended to confer upon any other person any rights or remedies hereunder except as otherwise expressly provided herein. (e) NO TRANSFER. This Agreement and the rights and obligations set forth herein may not be transferred or assigned by the Executive, but may be transferred or assigned (including by operation of law) by the Company so long as the assignee agrees to be bound by the terms and conditions hereof. (f) SEVERABILITY. If any provision of this Agreement, or the application thereof, will for any reason and to any extent be invalid or unenforceable, the remainder of this Agreement and application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to 5 replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of the void or unenforceable provision. (g) OTHER REMEDIES. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby or by law or equity on such party, and the exercise of any one remedy will not preclude the exercise of any other. (h) FURTHER ASSURANCES. Each party agrees to cooperate fully with the other party and to execute such further instruments, documents and agreements and to give such further written assurances as may be reasonably requested by the other party to evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement. (i) ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provision of this Agreement is intended, nor will he interpreted, to provide to create any third party beneficiary rights or any other rights of any kind in any customer, affiliate, stockholder, employee, partner or any party hereto or any other person or entity unless specifically provided otherwise herein,, and, except as so provided, all provisions hereof will be personal solely between the parties to this Agreement. (j) GOVERNING LAW, JURISDICTION FOR DISPUTES. This Agreement shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of California (without giving effect to its choice of law principles). All disputes arising out of, or related to, this Agreement shall be adjudicated exclusively in the state courts of California located in the county of Santa Clara, California. The parties hereby consent to exclusive personal jurisdiction in such county, and service of process by first class United States mail shall be sufficient to constitute adequate service of process. 6 IN WITNESS WHEREOF, each of the parties has executed this Agreement or caused it to be executed by its duly authorized representative as of the day and year first written above. POWER TEN By:/s/Vincent S. Mutascio ------------------------------- Vincent S. Mutascio, Vice President--Marketing EXECUTIVE: /s/Joseph A. Varozza, Jr. ----------------------------------- Joseph A. Varozza, Jr. 7 EX-10.9 22 EXHIBIT 10.9 POWER TEN EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is entered into as of this 29th day of May, 1998 by and between Power Ten, a California corporation (the "Company"), and Vincent S. Mutascio ("Executive"). RECITALS WHEREAS, Executive is the Vice President--Marketing of Power Ten, a company engaged in the business of manufacturing power supplies; WHEREAS, the shareholders of the Company have entered into a Stock Purchase Agreement (the "Acquisition Agreement"), dated as of May 5, 1998, providing for the purchase by Elgar Electronics Corporation, a California corporation ("Elgar"), of all the issued and outstanding shares of common stock of the Company on the Closing Date (as defined in the Acquisition Agreement); WHEREAS, the Company desires to continue to avail itself of the benefit of Executive's services, and the Company is willing to compensate Executive adequately therefor; and WHEREAS, Executive desires to continue in the employ of the Company on the terms hereinafter specified. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and the covenants and conditions contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. EMPLOYMENT. (a) The Company agrees to employ Executive as the Vice President--Marketing of the Company, and Executive agrees to act in such capacity, all in accordance with the terms and conditions contained in this Agreement. Executive shall have the powers and duties customarily accorded to the Vice President--Marketing of a wholly owned subsidiary, and shall perform such other duties consistent therewith as may be assigned, subject to the terms of this Agreement, to Executive from time to time by the President of the Company or the Board of Directors of the Company. Executive will report directly to the President and Chief Executive Officer of the Company. (b) The principal place of employment hereunder shall at all times be within 35 miles of current location of the Company in the state of California, subject to reasonable travel requirements in connection with the performance of Executive's duties hereunder. (c) Executive shall devote his full and exclusive time and efforts to the business and affairs of the Company in the manner he has done so prior to the date of this Agreement, and shall not, except as may be approved in writing in advance by the Board of Directors of the Company, engage in any other business activity that may, in the Company's reasonable belief, interfere with the performance by Executive of his duties hereunder. 2. COMMENCEMENT AND TERMINATION. The term of this Agreement, and Executive's employment hereunder, shall begin upon the Closing Date and shall continue until his replacement has been hired and trained, which term in no event shall exceed 2 years from the date of the Closing Date. The Company hereby agrees to recruit, hire and train the Executive's replacement as promptly as reasonably practicable without disruption to the Company's business, and in any event during the term of this Agreement. 3. COMPENSATION. (a) The Company shall pay Executive a total of $150,000 as his regular annual salary during the term of employment hereunder. All salary payments hereunder shall be made in installments consistent with the Company's general payroll practices as in effect from time to time. (b) Executive will participate in an incentive compensation plan (the "Plan") substantially equivalent to the plan established on a fiscal-year basis for the executive officers of Elgar, with the budgeted targets to be mutually agreed upon in good faith by the Company and Executive for the remainder of fiscal year 1999 and for each subsequent fiscal year under the term of this Agreement. Bonuses earned under the Plan will be paid on a PRO RATA basis during any fiscal year for which Executive was employed by the Company for less than the entire fiscal year. Executive will have the opportunity to earn bonuses of up to 40% of his annual salary (on an annualized, PRO RATA basis) upon the achievement of the budgeted targets, and a greater percentage in the event that Executive exceeds such targets. (c) Executive will be entitled to continued usage of a Company-provided automobile under that certain lease agreement, dated September 26, 1997, between Jaguar Credit Corporation and the Company, and continuation of Company-paid automobile expenses in connection therewith. (d) The Company shall reimburse Executive for all expenses reasonably incurred by Executive in connection with the business of the Company and the performance of Executive's duties under this Agreement consistent with the Company's regular operating policies and procedures. (e) Executive shall be entitled to paid vacation time in accordance with the Company's standard practices as in effect from time to time, and shall be eligible to participate in all employee benefit plans offered from time to time by the Company to its executive employees, including, without limitation, all such plans of health, dental and disability insurance. 2 4. TERMINATION. (a) The Company may terminate this Agreement at any time for any reason or no reason effective upon delivery of two weeks prior written notice of termination to Executive. (b) This Agreement shall terminate automatically upon Executive's death or disability for which Executive is eligible for coverage under the Company's disability insurance for Executive. (c) If this Agreement is terminated in any manner, Executive or his estate shall be entitled to receive any earned but unpaid regular, salaried compensation and benefits, including bonuses and expense reimbursements accrued up to the effective date of termination. (d) Executive may terminate this Agreement prior to the expiration of the term without liability to the Company if (a) the Company is in material breach of any provision of this Agreement, (b) the Company relocates the Executive to a facility more than 35 miles from the Company's current premises or (iii) the Company effects any material change in the Executive's duties and responsibilities, wages, or title as forth in this Agreement. 5. COVENANT NOT TO COMPETE. (a) In consideration for Executive's covenant not to compete set forth in Section 5(b) below, the Company agrees to pay to Executive $120,000 upon execution of this Agreement. (b) Executive hereby agree that during his employment with the Company and for five years following termination of such employment, Executive shall not engage in, own (except for owning less than 5% of the voting stock of publicly-traded company), manage or control, or materially participate in the ownership (except for owning less than 5% of the voting stock of publicly-traded company), management or control, directly or indirectly, of any person, firm, corporation or other entity engaged in any business that manufactures or sells products that compete against those sold by the Company (the "Restricted Business") in any jurisdiction in which the Company, or their affiliates are engaged in the Restricted Business (the "Restricted Area"); PROVIDED, HOWEVER, that Executive shall not be deemed to have engaged in a Restrictive Business solely as a result of his employment by a division or subsidiary of a third party not engaged in a Restricted Business where the third party has other divisions or subsidiaries that are engaged in the Restricted Business. If the Company breaches this Agreement in any material respect, then this noncompetition provision shall not be enforceable by the Company against Executive. 6. GENERAL PROVISIONS. (a) AMENDMENT. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 3 (b) NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or mailed by registered or certified mail (return receipt requested) or sent by telecopy, confirmation received, to the parties at the following addresses and telecopy numbers (or at such other address or number for a party as shall be specified by like notice): (i) if to the Company to: Power Ten 120 Knowles Drive Los Gatos, CA 95030 Attn: Secretary Phone: 408-871-1790 Fax.: 408-871-1700 with a copy to: Elgar Electronics Corporation 9250 Brown Deer Road San Diego, CA 92121 Attn: Christopher W. Kelford Phone: 619-450-0085 Fax: 619-458-0257 and J.F. Lehman & Company 450 Park Avenue New York, NY 10022 Attn: Keith Oster Phone: 212-634-1150 Fax: 212-634-1155 and Gibson Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, CA 90071 Attn: Kenneth M. Doran Phone: 213-229-7537 Fax: 213-229-6537 4 (ii) if to Executive to: Vincent S. Mutascio 400 Santa Rosa Drive Los Gatos, CA 95032 Phone: 408-358-1798 with a copy to: Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, CA 94304 Attn: Thomas C. Klein, Esq. Phone: 650-493-6811 Fax: 650-493-9300 (c) COUNTERPARTS. This Agreement may be executed in counterparts, both of which shall be considered one and the same agreement. (d) ENTIRE AGREEMENT. This Agreement and the documents, instruments and other agreements executed in connection with the Acquisition Agreement (including without limitation the Confidentiality Agreement) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and are not intended to confer upon any other person any rights or remedies hereunder except as otherwise expressly provided herein. (e) NO TRANSFER. This Agreement and the rights and obligations set forth herein may not be transferred or assigned by the Executive, but may be transferred or assigned (including by operation of law) by the Company so long as the assignee agrees to be bound by the terms and conditions hereof. (f) SEVERABILITY. If any provision of this Agreement, or the application thereof, will for any reason and to any extent be invalid or unenforceable, the remainder of this Agreement and application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of the void or unenforceable provision. (g) OTHER REMEDIES. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby or by law or equity on such party, and the exercise of any one remedy will not preclude the exercise of any other. 5 (h) FURTHER ASSURANCES. Each party agrees to cooperate fully with the other party and to execute such further instruments, documents and agreements and to give such further written assurances as may be reasonably requested by the other party to evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement. (i) ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provision of this Agreement is intended, nor will he interpreted, to provide to create any third party beneficiary rights or any other rights of any kind in any customer, affiliate, stockholder, employee, partner or any party hereto or any other person or entity unless specifically provided otherwise herein,, and, except as so provided, all provisions hereof will be personal solely between the parties to this Agreement. (j) GOVERNING LAW, JURISDICTION FOR DISPUTES. This Agreement shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of California (without giving effect to its choice of law principles). All disputes arising out of, or related to, this Agreement shall be adjudicated exclusively in the state courts of California located in the county of Santa Clara, California. The parties hereby consent to exclusive personal jurisdiction in such county, and service of process by first class United States mail shall be sufficient to constitute adequate service of process. IN WITNESS WHEREOF, each of the parties has executed this Agreement or caused it to be executed by its duly authorized representative as of the day and year first written above. POWER TEN By: /s/Joseph A. Varozza, Jr. ---------------------------------------- Joseph A. Varozza, Jr., President, Chief Executive Officer and Chief Financial Officer EXECUTIVE: /s/Vincent S. Mutascio --------------------------------------------- Vincent S. Mutascio 6 EX-10.10 23 EXHIBIT 10.10 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is effective as of February 3, 1998, by and between Elgar Electronics Corporation, a California corporation ("Employer"), and Kenneth R. Kilpatrick ("Employee"). RECITALS A. WHEREAS, Employer is engaged in the design, manufacture and distribution of a wide range of high technology, programmable, variable output power supply products, predominantly for test and measurement applications. B. WHEREAS, Carlyle EEC Holdings, Inc. ("Holdings", which on or about February 3, 1998 changed its name to Elgar Holdings, Inc.) is the owner of all of the shares of common stock of Employer. C. WHEREAS, Holdings, JFL-EEC LLC, a Delaware limited liability company ("JFL- EEC"), JFL-EEC Merger Sub Co. ("MergerCo") and TC Group, L.L.C., have entered into an Agreement and Plan of Merger, dated as of January 2, 1998 (the "Recapitalization Agreement"). D. WHEREAS, in connection with the Recapitalization Agreement, Holdings has determined to effect a recapitalization of Holdings and Elgar pursuant to which, among other things, (i) JFL-EEC will make a capital contribution in the amount of approximately $19.0 million to MergerCo (the "Lehman Investment"), (ii) MergerCo will issue to certain purchasers shares of its Series A 10% Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") and certain warrants (the "Warrants") in exchange for an aggregate of $10.0 million, (iii) MergerCo will offer and issue $90.0 million in aggregate principal amount of its 9-7/8% Senior Notes due 2008 (the "Senior Notes"), (iv) MergerCo will merge with and into this Company, with this Company surviving such merger and assuming the liabilities and obligations of MergerCo (the "Merger"), including without limitation the liabilities and obligations with respect to the Series A Preferred Stock, the Warrants and the Senior Notes, (v) pursuant to the Recapitalization Agreement, (A) immediately prior to the Merger, Holdings will effect an approximately 9,340 to 1 stock split, such that at the effective time of the Merger there will be approximately 9,340,000 shares of Holdings' common stock, $.01 par value per share (the "Common Stock") issued and outstanding, (B) Carlyle-EEC Acquisition Partners, L.P., the owner of all of the issued and outstanding capital stock of Holdings immediately prior to the Merger, will liquidate and distribute the shares of Common Stock to its partners, and (C) each share of the Common Stock issued and outstanding immediately prior to the Merger, other than certain shares held by certain shareholders and members of management (the "Continuing Shares"), will be converted into the right to receive cash, and (vi) Holdings and Employer will enter into a new credit facility providing for revolving credit borrowings of up to $15.0 million (all such transactions described in this paragraph shall be collectively referred to herein as the Recapitalization"). 1 E. WHEREAS, Employee will receive substantial benefits from the Recapitalization, including without limitation the receipt of a portion of the cash consideration for the Merger. F. WHEREAS, Employee will remain a shareholder of Holdings as a result of continuing to own certain of the Continuing Shares. G. WHEREAS, Employer desires to engage Employee and Employee desires to accept such engagement to provide such services to Employer as are set forth in this Agreement. NOW THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth, the parties hereto hereby agree as follows: AGREEMENT 1. EMPLOYMENT. Employer engages Employee to serve as President and Chief Executive Officer and Employee hereby accepts such engagement upon the terms and conditions set forth herein. 2. TERM. Employee's term of employment under this Agreement shall commence upon the date hereof and shall continue until terminated in accordance with Section 4 herein. 3.. DUTIES. Employee will devote his full business time, utmost knowledge and best skill to the performance of the duties and responsibilities as President and Chief Executive Officer of Employer, as such duties and responsibilities are performed by Employee as of the date of this Agreement. Employee shall report directly to the Board of Directors of Employer. Employee will not engage in any other gainful occupation which requires his personal attention without prior consent of the Board of Directors of Employer. Notwithstanding the foregoing, Employee shall perform such other duties as the Board of Directors reasonably may require from time to time. 4. TERMINATION. 4.1. EVENTS TRIGGERING TERMINATION. At the written election of Employer in its sole discretion, this Agreement shall terminate immediately, effective upon the occurrence of any one of the following events: (a) Employee's conviction of a felony or other crime involving moral turpitude; (b) Employee's material breach of or failure to perform his obligations hereunder, failure by Employee to abide by, conform with or otherwise observe any material written policy of Employer, or the continuing failure to conform to the reasonable directives of the Board of Directors of Employer; (c) The death of Employee; (d) The total and permanent disability of Employee. Employee shall be deemed totally and permanently disabled if the Employee shall become incapacitated by reason of 2 sickness, accident or other physical or mental disability and shall for a period of thirty (30) consecutive days be unable to perform his normal duties hereunder, with or without reasonable accommodation by Employer; or (e) The sixty-fifth birthday of Employee. In the event that Employee's employment is terminated by Employer pursuant to Sections 4.1(a), 4.1(b), 4.1(c), or 4.1(e) hereof, Employer shall promptly pay to Employee (or in the event that such termination is pursuant to Section 4.1(c), to Employee's estate or other legal representative) the annual base salary provided for in Section 5.1 accrued to the date of Employee's termination and not theretofore paid to Employee. Rights and benefits of Employee under the benefits plans and programs of Employer shall be determined in accordance with the terms of such plans and programs. 4.2 TERMINATION BY WRITTEN NOTICE. This Agreement may also be terminated by either party for any reason or for no reason upon thirty (30) days prior written notice to the other. 4.3. SEVERANCE COMPENSATION. If Employer terminates this Agreement and such termination is not pursuant to Sections 4.1 (a), 4.1 (b), 4.1(c) or 4.1(e), or for no reason, then Employer shall continue to pay to Employee his annual base salary in the same periodic installments provided for in Section 5.1 hereof for a period of twelve (12) consecutive months following the date of such termination (the "Severance Period"); provided, however, that the severance compensation to be paid to Employee in respect of a termination for the reason specified in Section 4.1(d) shall be integrated with any disability insurance proceeds paid to Employee during the Severance Period so that Employee receives no more than an amount equal to 100% of his annual base salary under Section 5.1 during the Severance Period. In addition, during the Severance Period Employer shall continue to pay the allowance set forth in Section 5.5 and make all Employer contributions to medical and dental and life insurance premiums for all Employer maintained plans under which Employee is an insured or covered as of the commencement of the Severance Period. 5. COMPENSATION. 5.1 BASE SALARY. As compensation for all services rendered by Employee under this Agreement, Employer shall pay Employee an annual base salary of One Hundred Eighty Five Thousand Dollars ($185,000), payable bi-weekly in arrears or otherwise in accordance with the standard payroll practices of Employer. This annual base salary may be augmented by salary increases as determined by the Board of Directors. All regular compensation shall be paid in accordance with Employer's standard payroll procedures. 5.2 OTHER BONUSES. Employee shall be eligible for additional bonus compensation as may be determined by the Board of Directors. 5.3 WITHHOLDING. All compensation paid to Employee under this Agreement shall be subject to customary withholding and employment taxes as required by federal and state law. 3 5.4 OTHER BENEFITS. Employee shall be entitled to such other benefits, including retirement benefits, as are provided to other full-time employees of Employer, subject to any terms, conditions or restrictions associated with such benefits, all as determined by written company policy in effect from time to time during the term of this Agreement. 5.5 AUTOMOBILE ALLOWANCE. During the term of this Agreement, including any Severance Period, Employee shall receive a $750 per month automobile allowance. 6. VACATION. Employee shall be entitled to four (4) weeks annual paid vacation per year, subject to accrual and use in accordance with written company policy in effect from time to time during the term of this Agreement and applicable law. Employee's vacation will be scheduled at those times which are mutually convenient to Employer's business and Employee. 7. BUSINESS EXPENSES. During the term of this Agreement, Employer shall reimburse Employee for all reasonable and necessary out-of-pocket business expenses of Employee related to Employee's duties hereunder in accordance with the policies and procedures of Employer in effect from time to time, including, without limitation: (a) Actual expenses for travel, meals and lodging for necessary travel between Employer's business locations; (b) Actual expenses for travel, meals and lodging for other travel approved in advance by Employer; and (c) Professional entertainment and promotional expenses approved in advance by Employer. 8. TRADE SECRETS. 8.1 TRADE SECRETS IN GENERAL. During the course of Employee's employment, Employee will have access to various trade secrets of Employer. For purposes of this Agreement, "Trade Secret" shall mean information which is not generally known to the public and, as a result, is of economic benefit to Employer in the conduct of its business. Employee and Employer agree that Trade Secrets shall include but not be limited to all information developed or obtained by Employer and comprising the following items, whether or not such items have been reduced to tangible form (e.g., physical writing): all methods, techniques, processes, ideas, trade names, service marks, slogans, forms, customer lists, pricing structures, menus, business forms, marketing programs and plans, layouts and designs, financial information, operational methods and tactics, cost information, the identity of or contractual arrangements with suppliers, the identity or buying habits of customers, accounting procedures, and any document, record or other information of Employer relating to the above. Trade Secrets include not only information belonging to Employer which existed before the date of this Agreement, but also information developed by Employee for Employer or its employees during the term of this Agreement. 8.2 RESTRICTION ON USE OF TRADE SECRETS. Employee agrees that his use of Trade Secrets is subject to the following restrictions during the term of the Agreement and for an 4 indefinite period thereafter so long as the Trade Secrets have not become generally known to the public: (a) NON-DISCLOSURE. Employee will not publish or disclose, or allow to be published or disclosed, Trade Secrets to any person who is not an employee of Employer unless such disclosure is necessary for the performance of Employee's obligations under this Agreement. (b) USE RESTRICTION. Employee shall use any Trade Secret only for the limited purpose for which it was disclosed. Employee shall not disclose any Trade Secret to any third party (including subcontractors) other than in accordance with customary practices and existing agreements with customers and shall disclose the Trade Secret only to other employees of Employer or as provided under such agreements with customers having a need to know. Employee shall promptly notify Employer of any Trade Secret disclosed other than in accordance herewith. (c) NON-REMOVAL. Employee will not remove any Trade Secrets from the offices of Employer or the premises of any facility in which Employer is performing services, or allow such removal, other than in accordance with customary practices and existing agreements with customers. (d) SURRENDER UPON TERMINATION. Upon termination of his employment with Employer for any reason, Employee will surrender to Employer all documents and materials in his possession or control which contain Trade Secrets. (e) PROHIBITION AGAINST UNFAIR COMPETITION. At any time after the termination of his employment with Employer for any reason, Employee will not engage in competition with Employer while making use of the Trade Secrets of Employer. 8.3 INVENTIONS. Any and all inventions, innovations, or improvements ("Inventions") made, developed or created by the Employee (whether at the request or suggestion of Employer or otherwise, whether alone or in conjunction with others, and whether during regular hours of work or otherwise) during the term hereof which may be directly or indirectly useful in, or relate to, the business of Employer, shall be promptly and fully disclosed by Employee to Employer and shall be Employer's exclusive property as against Employee and Employee shall promptly deliver to an appropriate representative of Employer all papers, drawings, models, data and other material relating to any Inventions made, developed or created by him as aforesaid. Employee shall, at the request of Employer, and without any payment therefor, execute any documents necessary or advisable in the opinion of Employer's counsel to direct issuance of patents or copyrights to Employer with respect to such Inventions as are to be Employer's exclusive property as against Employee or to vest in Employer title to such Inventions as against Employee. The expense of securing any such patent or copyright shall be borne by Employer. Notwithstanding the foregoing, the Agreement does not require assignment of an Invention which qualifies fully for protection under Section 2870 of the California Labor Code, a copy which is attached as Exhibit A. 5 8.4 NON SOLICITATION. During the term of employment of Employee and until the expiration of twenty-four (24) months following the termination of the employment of Employee, Employee shall not: (a) advise or in any way encourage any person, firm or corporation who is, at the time of termination of employment of Employee, or was at any time during the term of employment of Employee with Employer, a customer or client of Employer, to breach any contract with Employer; (b) recruit, hire, assist others in the soliciting, recruiting or hiring, or discuss other employment with, any person who is at the time of termination of the employment of Employee with Employer, or was at anytime during the employment of Employee with Employer, an employee of Employer, or induce or attempt to induce any such employee to terminate his or her employment with Employer; or (c) use or disclose to any person, firm or corporation the name of any present, former, prospective customer, client or employee of Employer. 8.5 COVENANT. During the term of employment of Employee and until the expiration of twenty-four (24) months following the termination of the employment of Employee, Employee shall not, directly or indirectly, engage in or carry on, or have any interest in any person, firm, corporation, or business (whether as an employee, officer, director, agent, partner, security holder, creditor, consultant, or otherwise) that engages in or carries on, any business which is the same as, similar to, or competitive with the business presently conducted on the date hereof by Employer (a "Competitive Business") within the Area set forth below; provided, however, Employee may purchase or otherwise acquire up to one percent of any class of securities of any person (but without participating in the activities of such person) if such securities are listed on any national or regional securities exchange, or have been registered under Section 12(g) of the Securities Exchange Act of 1934. Competitive Business shall mean any person, firm, corporation, a company, enterprise or person which manufactures or distributes programmable power supply equipment, whether AC, DC or both. The Area shall include the county of San Diego, California and all other counties within the United States in which Elgar Electronics Corporation now or ever has engaged in or conducted business or elects in the future to conduct business prior to the termination of employment of Employee. Employee acknowledges and agrees that this covenant is given in connection with the Recapitalization and is reasonable with respect to its duration, geographical area and scope. It is the intention of Employee and Employer that this covenant shall be enforceable to the maximum extent, and if a court is called upon to interpret this covenant, it is agreed and stipulated by Employee and Employer that such court shall so interpret this covenant to provide that it shall cover the greatest geographical area for the greatest period of time not to exceed the expiration of twenty-four (24) months following the termination of the employment of Employee. 9. UNFAIR COMPETITION, MISAPPROPRIATION OF TRADE SECRETS AND VIOLATION OF SOLICITATION CLAUSES. Employee acknowledges that unfair competition, misappropriation of Trade Secrets or violation of any of the provisions contained in Section 8 would cause irreparable injury to 6 Employer, that the remedy at law for any violation or threatened violation thereof would be inadequate, and that Employer shall be entitled to temporary and permanent injunctive or other equitable relief without the necessity of proving actual damages. Employee agrees that such relief shall be available in a court of law regardless of the arbitration provisions contained in Section 17 of this Agreement. 10. CONFLICT OF INTEREST. Employee acknowledges that the obligations and services to be provided by Employee hereunder are special and unique. Employee agrees that he will not at any time during the term of employment serve as an officer, director, employee, or otherwise have an interest in any entity that engages in business similar to that of Employer and Employer's subsidiaries. This provision shall not apply to equity or stock ownership interests of less than 5% of any publicly traded company. 11. SUCCESSORS AND ASSIGNS. The rights and obligations of the Employer under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of Employer. Employee shall not be entitled to assign any of his rights or obligations under this Agreement. 12. GOVERNING LAW. This Agreement shall be interpreted, construed, governed and enforced in accordance with the laws of the State of California. 13. AMENDMENTS. No amendment or modification of the terms or conditions of this Agreement shall be valid unless in writing and signed by the parties hereto. 14. SEVERABILITY. Each term, condition, covenant or provision of this Agreement shall be viewed as separate and distinct, and in the event that any such term, covenant or provision shall be held by a court of competent jurisdiction to be invalid, the remaining provisions shall continue in full force and effect. 15. WAIVER. A waiver by either party of a breach of provision or provisions of this Agreement shall not constitute a general waiver, or prejudice the other party's right otherwise to demand strict compliance with that provision or any other provisions in this Agreement. 16. NOTICES. Any notice required or permitted to be given under this Agreement shall be sufficient, if in writing, sent by certified mail to his residence in the case of Employee, or hand delivered to the Employee, or to its principal office (corporate office) in the case of the Employer. 17. ARBITRATION. Except as provided in Section 9, any dispute or claim that may arise out of the provisions of this Agreement which cannot be resolved by agreement of the parties acting in good faith within a reasonable time, including any interpretation or alleged breach hereof, shall be resolved by arbitration in accordance with the then-effective employment arbitration rules of the San Diego, California, Chapter of the American Arbitration Association. Except as otherwise set forth in Section 9 hereof, the parties intend that litigation not be used to settle any dispute or claim arising out of this Agreement. The written determination and award of the arbitrator or arbitrators, as applicable, shall be final, binding and conclusive, and such determination may be 7 entered in any court of competent jurisdiction with each side to pay their own attorneys' fees and costs. 18. ENTIRE AGREEMENT. Employee acknowledges receipt of this Agreement and agrees that this Agreement and Exhibit A attached hereto represent the entire Agreement with Employer concerning the subject matter hereof, and supersedes any previous oral or written communications, representations, understandings or Agreements with Employer or any officer or agent thereof. Employee understands that no representative of the Employer has been authorized to enter into any Agreement or commitment with Employee which is inconsistent in any way with the terms of this Agreement. 19. CONSTRUCTION. This Agreement shall not be construed against any party on the grounds that such party drafted the Agreement. 20. ACKNOWLEDGMENT. Employee acknowledges that he has had the opportunity to consult with independent counsel of his own choice concerning this Agreement, and that he has taken advantage of that opportunity to the extent that he desires. Employee further acknowledges that he has read and understands this Agreement, is fully aware of its legal effect, and has entered into it voluntarily based on his own judgment. 21. SURVIVORSHIP. The respective rights and obligations of Employee and Employer hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 22. COUNTERPARTS. This Agreement may be executed in one or more counterpart copies, each of which shall be deemed to be an original and all of which taken together shall be deemed one and the same instrument. Elgar Electronics Corporation, a California corporation Dated: February 3, 1998 By:/s/ Donald Glickman --------------------------------------- Donald Glickman, Chairman of the Board Dated: February 3, 1998 /s/ Kenneth R. Kilpatrick ------------------------------------------ Kenneth R. Kilpatrick 8 EXHIBIT A SECTION 2870 CALIFORNIA LABOR CODE (a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; or (2) Result from any work performed by the employee for the employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable. EX-10.11 24 EXHIBIT 10.11 FORM OF EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is effective as of February 3, 1998, by and between Elgar Electronics Corporation, a California corporation ("Employer"), and ___________ ("Employee"). RECITALS A. WHEREAS, Employer is engaged in the design, manufacture and distribution of a wide range of high technology, programmable, variable output power supply products, predominantly for test and measurement applications. B. WHEREAS, Carlyle EEC Holdings, Inc. ("Holdings", which on or about February 3, 1998 changed its name to Elgar Holdings, Inc.) is the owner of all of the shares of common stock of Employer. C. WHEREAS, Holdings, JFL-EEC LLC, a Delaware limited liability company ("JFL- EEC"), JFL-EEC Merger Sub Co. ("MergerCo") and TC Group, L.L.C., have entered into an Agreement and Plan of Merger, dated as of January 2, 1998 (the "Recapitalization Agreement"). D. WHEREAS, in connection with the Recapitalization Agreement, Holdings has determined to effect a recapitalization of Holdings and Elgar pursuant to which, among other things, (i) JFL-EEC will make a capital contribution in the amount of approximately $19.0 million to MergerCo (the "Lehman Investment"), (ii) MergerCo will issue to certain purchasers shares of its Series A 10% Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") and certain warrants (the "Warrants") in exchange for an aggregate of $10.0 million, (iii) MergerCo will offer and issue $90.0 million in aggregate principal amount of its 9-7/8% Senior Notes due 2008 (the "Senior Notes"), (iv) MergerCo will merge with and into this Company, with this Company surviving such merger and assuming the liabilities and obligations of MergerCo (the "Merger"), including without limitation the liabilities and obligations with respect to the Series A Preferred Stock, the Warrants and the Senior Notes, (v) pursuant to the Recapitalization Agreement, (A) immediately prior to the Merger, Holdings will effect an approximately 9,340 to 1 stock split, such that at the effective time of the Merger there will be approximately 9,340,000 shares of Holdings' common stock, $.01 par value per share (the "Common Stock") issued and outstanding, (B) Carlyle-EEC Acquisition Partners, L.P., the owner of all of the issued and outstanding capital stock of Holdings immediately prior to the Merger, will liquidate and distribute the shares of Common Stock to its partners, and (C) each share of the Common Stock issued and outstanding immediately prior to the Merger, other than certain shares held by certain shareholders and members of management (the "Continuing Shares"), will be converted into the right to receive cash, and (vi) Holdings and Employer will enter into a new credit facility providing for revolving credit borrowings of up to $15.0 million (all such transactions described in this paragraph shall be collectively referred to herein as the Recapitalization"). 1 E. WHEREAS, Employee will receive substantial benefits from the Recapitalization, including without limitation the receipt of a portion of the cash consideration for the Merger. F. WHEREAS, Employee will remain a shareholder of Holdings as a result of continuing to own certain of the Continuing Shares. G. WHEREAS, Employer desires to engage Employee and Employee desires to accept such engagement to provide such services to Employer as are set forth in this Agreement. NOW THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth, the parties hereto hereby agree as follows: AGREEMENT 1. EMPLOYMENT. Employer engages Employee to serve as __________ and Employee hereby accepts such engagement upon the terms and conditions set forth herein. 2. TERM. Employee's term of employment under this Agreement shall commence upon the date hereof and shall continue until terminated in accordance with Section 4 herein. 3.. DUTIES. Employee will devote his full business time, utmost knowledge and best skill to the performance of the duties and responsibilities as President and Chief Executive Officer of Employer, as such duties and responsibilities are performed by Employee as of the date of this Agreement. Employee shall report directly to the President of Employer. Employee will not engage in any other gainful occupation which requires his personal attention without prior consent of the President of Employer. Notwithstanding the foregoing, Employee shall perform such other duties as the President reasonably may require from time to time. 4. TERMINATION. 4.1. EVENTS TRIGGERING TERMINATION. At the written election of Employer in its sole discretion, this Agreement shall terminate immediately, effective upon the occurrence of any one of the following events: (a) Employee's conviction of a felony or other crime involving moral turpitude; (b) Employee's material breach of or failure to perform his obligations hereunder, failure by Employee to abide by, conform with or otherwise observe any material written policy of Employer, or the continuing failure to conform to the reasonable directives of the Board of Directors of Employer; (c) The death of Employee; (d) The total and permanent disability of Employee. Employee shall be deemed totally and permanently disabled if the Employee shall become incapacitated by reason of sickness, accident or other physical or mental disability and shall for a period of thirty (30) 2 consecutive days be unable to perform his normal duties hereunder, with or without reasonable accommodation by Employer; or (e) The sixty-fifth birthday of Employee. In the event that Employee's employment is terminated by Employer pursuant to Sections 4.1(a), 4.1(b), 4.1(c), or 4.1(e) hereof, Employer shall promptly pay to Employee (or in the event that such termination is pursuant to Section 4.1(c), to Employee's estate or other legal representative) the annual base salary provided for in Section 5.1 accrued to the date of Employee's termination and not theretofore paid to Employee. Rights and benefits of Employee under the benefits plans and programs of Employer shall be determined in accordance with the terms of such plans and programs. 4.2 TERMINATION BY WRITTEN NOTICE. This Agreement may also be terminated by either party for any reason or for no reason upon thirty (30) days prior written notice to the other. 4.3. SEVERANCE COMPENSATION. If Employer terminates this Agreement and such termination is not pursuant to Sections 4.1 (a), 4.1 (b), 4.1(c) or 4.1(e), or for no reason, then Employer shall continue to pay to Employee his annual base salary in the same periodic installments provided for in Section 5.1 hereof for a period of twelve (12) consecutive months following the date of such termination (the "Severance Period"); provided, however, that the severance compensation to be paid to Employee in respect of a termination for the reason specified in Section 4.1(d) shall be integrated with any disability insurance proceeds paid to Employee during the Severance Period so that Employee receives no more than an amount equal to 100% of his annual base salary under Section 5.1 during the Severance Period. In addition, during the Severance Period Employer shall continue to pay the allowance set forth in Section 5.5 and make all Employer contributions to medical and dental and life insurance premiums for all Employer maintained plans under which Employee is an insured or covered as of the commencement of the Severance Period. 5. COMPENSATION. 5.1 BASE SALARY. As compensation for all services rendered by Employee under this Agreement, Employer shall pay Employee an annual base salary of __________, payable bi-weekly in arrears or otherwise in accordance with the standard payroll practices of Employer. This annual base salary may be augmented by salary increases as determined by the President. All regular compensation shall be paid in accordance with Employer's standard payroll procedures. 5.2 OTHER BONUSES. Employee shall be eligible for additional bonus compensation as may be determined by the President and/or the Board of Directors. 5.3 WITHHOLDING. All compensation paid to Employee under this Agreement shall be subject to customary withholding and employment taxes as required by federal and state law. 3 5.4 OTHER BENEFITS. Employee shall be entitled to such other benefits, including retirement benefits, as are provided to other full-time employees of Employer, subject to any terms, conditions or restrictions associated with such benefits, all as determined by written company policy in effect from time to time during the term of this Agreement. 6. VACATION. Employee shall be entitled to four (4) weeks annual paid vacation per year, subject to accrual and use in accordance with written company policy in effect from time to time during the term of this Agreement and applicable law. Employee's vacation will be scheduled at those times which are mutually convenient to Employer's business and Employee. 7. BUSINESS EXPENSES. During the term of this Agreement, Employer shall reimburse Employee for all reasonable and necessary out-of-pocket business expenses of Employee related to Employee's duties hereunder in accordance with the policies and procedures of Employer in effect from time to time, including, without limitation: (a) Actual expenses for travel, meals and lodging for necessary travel between Employer's business locations; (b) Actual expenses for travel, meals and lodging for other travel approved in advance by Employer; and (c) Professional entertainment and promotional expenses approved in advance by Employer. 8. TRADE SECRETS. 8.1 TRADE SECRETS IN GENERAL. During the course of Employee's employment, Employee will have access to various trade secrets of Employer. For purposes of this Agreement, "Trade Secret" shall mean information which is not generally known to the public and, as a result, is of economic benefit to Employer in the conduct of its business. Employee and Employer agree that Trade Secrets shall include but not be limited to all information developed or obtained by Employer and comprising the following items, whether or not such items have been reduced to tangible form (e.g., physical writing): all methods, techniques, processes, ideas, trade names, service marks, slogans, forms, customer lists, pricing structures, menus, business forms, marketing programs and plans, layouts and designs, financial information, operational methods and tactics, cost information, the identity of or contractual arrangements with suppliers, the identity or buying habits of customers, accounting procedures, and any document, record or other information of Employer relating to the above. Trade Secrets include not only information belonging to Employer which existed before the date of this Agreement, but also information developed by Employee for Employer or its employees during the term of this Agreement. 8.2 RESTRICTION ON USE OF TRADE SECRETS. Employee agrees that his use of Trade Secrets is subject to the following restrictions during the term of the Agreement and for an indefinite period thereafter so long as the Trade Secrets have not become generally known to the public: 4 (a) NON-DISCLOSURE. Employee will not publish or disclose, or allow to be published or disclosed, Trade Secrets to any person who is not an employee of Employer unless such disclosure is necessary for the performance of Employee's obligations under this Agreement. (b) USE RESTRICTION. Employee shall use any Trade Secret only for the limited purpose for which it was disclosed. Employee shall not disclose any Trade Secret to any third party (including subcontractors) other than in accordance with customary practices and existing agreements with customers and shall disclose the Trade Secret only to other employees of Employer or as provided under such agreements with customers having a need to know. Employee shall promptly notify Employer of any Trade Secret disclosed other than in accordance herewith. (c) NON-REMOVAL. Employee will not remove any Trade Secrets from the offices of Employer or the premises of any facility in which Employer is performing services, or allow such removal, other than in accordance with customary practices and existing agreements with customers. (d) SURRENDER UPON TERMINATION. Upon termination of his employment with Employer for any reason, Employee will surrender to Employer all documents and materials in his possession or control which contain Trade Secrets. (e) PROHIBITION AGAINST UNFAIR COMPETITION. At any time after the termination of his employment with Employer for any reason, Employee will not engage in competition with Employer while making use of the Trade Secrets of Employer. 8.3 INVENTIONS. Any and all inventions, innovations, or improvements ("Inventions") made, developed or created by the Employee (whether at the request or suggestion of Employer or otherwise, whether alone or in conjunction with others, and whether during regular hours of work or otherwise) during the term hereof which may be directly or indirectly useful in, or relate to, the business of Employer, shall be promptly and fully disclosed by Employee to Employer and shall be Employer's exclusive property as against Employee and Employee shall promptly deliver to an appropriate representative of Employer all papers, drawings, models, data and other material relating to any Inventions made, developed or created by him as aforesaid. Employee shall, at the request of Employer, and without any payment therefor, execute any documents necessary or advisable in the opinion of Employer's counsel to direct issuance of patents or copyrights to Employer with respect to such Inventions as are to be Employer's exclusive property as against Employee or to vest in Employer title to such Inventions as against Employee. The expense of securing any such patent or copyright shall be borne by Employer. Notwithstanding the foregoing, the Agreement does not require assignment of an Invention which qualifies fully for protection under Section 2870 of the California Labor Code, a copy which is attached as Exhibit A. 8.4 NON SOLICITATION. During the term of employment of Employee and until the expiration of twenty-four (24) months following the termination of the employment of Employee, Employee shall not: 5 (a) advise or in any way encourage any person, firm or corporation who is, at the time of termination of employment of Employee, or was at any time during the term of employment of Employee with Employer, a customer or client of Employer, to breach any contract with Employer; (b) recruit, hire, assist others in the soliciting, recruiting or hiring, or discuss other employment with, any person who is at the time of termination of the employment of Employee with Employer, or was at anytime during the employment of Employee with Employer, an employee of Employer, or induce or attempt to induce any such employee to terminate his or her employment with Employer; or (c) use or disclose to any person, firm or corporation the name of any present, former, prospective customer, client or employee of Employer. 8.5 COVENANT. During the term of employment of Employee and until the expiration of twenty-four (24) months following the termination of the employment of Employee, Employee shall not, directly or indirectly, engage in or carry on, or have any interest in any person, firm, corporation, or business (whether as an employee, officer, director, agent, partner, security holder, creditor, consultant, or otherwise) that engages in or carries on, any business which is the same as, similar to, or competitive with the business presently conducted on the date hereof by Employer (a "Competitive Business") within the Area set forth below; provided, however, Employee may purchase or otherwise acquire up to one percent of any class of securities of any person (but without participating in the activities of such person) if such securities are listed on any national or regional securities exchange, or have been registered under Section 12(g) of the Securities Exchange Act of 1934. Competitive Business shall mean any person, firm, corporation, a company, enterprise or person which manufactures or distributes programmable power supply equipment, whether AC, DC or both. The Area shall include the county of San Diego, California and all other counties within the United States in which Elgar Electronics Corporation now or ever has engaged in or conducted business or elects in the future to conduct business prior to the termination of employment of Employee. Employee acknowledges and agrees that this covenant is given in connection with the Recapitalization and is reasonable with respect to its duration, geographical area and scope. It is the intention of Employee and Employer that this covenant shall be enforceable to the maximum extent, and if a court is called upon to interpret this covenant, it is agreed and stipulated by Employee and Employer that such court shall so interpret this covenant to provide that it shall cover the greatest geographical area for the greatest period of time not to exceed the expiration of twenty-four (24) months following the termination of the employment of Employee. 9. UNFAIR COMPETITION, MISAPPROPRIATION OF TRADE SECRETS AND VIOLATION OF SOLICITATION CLAUSES. Employee acknowledges that unfair competition, misappropriation of Trade Secrets or violation of any of the provisions contained in Section 8 would cause irreparable injury to Employer, that the remedy at law for any violation or threatened violation thereof would be inadequate, and that Employer shall be entitled to temporary and permanent injunctive or other equitable relief without the necessity of proving actual damages. Employee agrees that such 6 relief shall be available in a court of law regardless of the arbitration provisions contained in Section 17 of this Agreement. 10. CONFLICT OF INTEREST. Employee acknowledges that the obligations and services to be provided by Employee hereunder are special and unique. Employee agrees that he will not at any time during the term of employment serve as an officer, director, employee, or otherwise have an interest in any entity that engages in business similar to that of Employer and Employer's subsidiaries. This provision shall not apply to equity or stock ownership interests of less than 5% of any publicly traded company. 11. SUCCESSORS AND ASSIGNS. The rights and obligations of the Employer under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of Employer. Employee shall not be entitled to assign any of his rights or obligations under this Agreement. 12. GOVERNING LAW. This Agreement shall be interpreted, construed, governed and enforced in accordance with the laws of the State of California. 13. AMENDMENTS. No amendment or modification of the terms or conditions of this Agreement shall be valid unless in writing and signed by the parties hereto. 14. SEVERABILITY. Each term, condition, covenant or provision of this Agreement shall be viewed as separate and distinct, and in the event that any such term, covenant or provision shall be held by a court of competent jurisdiction to be invalid, the remaining provisions shall continue in full force and effect. 15. WAIVER. A waiver by either party of a breach of provision or provisions of this Agreement shall not constitute a general waiver, or prejudice the other party's right otherwise to demand strict compliance with that provision or any other provisions in this Agreement. 16. NOTICES. Any notice required or permitted to be given under this Agreement shall be sufficient, if in writing, sent by certified mail to his residence in the case of Employee, or hand delivered to the Employee, or to its principal office (corporate office) in the case of the Employer. 17. ARBITRATION. Except as provided in Section 9, any dispute or claim that may arise out of the provisions of this Agreement which cannot be resolved by agreement of the parties acting in good faith within a reasonable time, including any interpretation or alleged breach hereof, shall be resolved by arbitration in accordance with the then-effective employment arbitration rules of the San Diego, California, Chapter of the American Arbitration Association. Except as otherwise set forth in Section 9 hereof, the parties intend that litigation not be used to settle any dispute or claim arising out of this Agreement. The written determination and award of the arbitrator or arbitrators, as applicable, shall be final, binding and conclusive, and such determination may be entered in any court of competent jurisdiction with each side to pay their own attorneys' fees and costs. 7 18. ENTIRE AGREEMENT. Employee acknowledges receipt of this Agreement and agrees that this Agreement and Exhibit A attached hereto represent the entire Agreement with Employer concerning the subject matter hereof, and supersedes any previous oral or written communications, representations, understandings or Agreements with Employer or any officer or agent thereof. Employee understands that no representative of the Employer has been authorized to enter into any Agreement or commitment with Employee which is inconsistent in any way with the terms of this Agreement. 19. CONSTRUCTION. This Agreement shall not be construed against any party on the grounds that such party drafted the Agreement. 20. ACKNOWLEDGMENT. Employee acknowledges that he has had the opportunity to consult with independent counsel of his own choice concerning this Agreement, and that he has taken advantage of that opportunity to the extent that he desires. Employee further acknowledges that he has read and understands this Agreement, is fully aware of its legal effect, and has entered into it voluntarily based on his own judgment. 21. SURVIVORSHIP. The respective rights and obligations of Employee and Employer hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 22. COUNTERPARTS. This Agreement may be executed in one or more counterpart copies, each of which shall be deemed to be an original and all of which taken together shall be deemed one and the same instrument. Elgar Electronics Corporation, a California corporation Dated: February 3, 1998 By: ------------------------------- Donald Glickman, Chairman of the Board Dated: February 3, 1998 ---------------------------------- [Executive] 8 EXHIBIT A SECTION 2870 CALIFORNIA LABOR CODE (a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; or (2) Result from any work performed by the employee for the employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable. EX-10.12 25 EXHIBIT 10.12 LEASE AGREEMENT 1. PARTIES This Lease, dated February 1, 1984, for reference purposes only, is made by and between Carroll Ridge Park, a California General Partnership (herein called "Lessor"), and Elgar Corporation, a California Corporation (herein called "Lessee"). 2. DESCRIPTION OF PREMISES Lessor hereby leases to Lessee and Lessee hires from Lessor on the terms, covenants and conditions hereinafter set forth, the real property described in Exhibit "A" attached hereto together with the improvements described below. Said real property and improvements are described in the map and floor plan attached hereto as Exhibit "B." Said real property and improvements are hereinafter referred to as the leased premises. Effective on the vacation by the City of San Diego of Carroll Park Court, the leased premises shall include said Carroll Park Court. The leased premises are being transferred to Lessee subject to all those matters set forth in Exhibit "C" attached hereto. 3. TERM 3.1 INITIAL TERM - The initial term of this Lease shall be for ten (10) years commencing on August 1, 1984 (the "commencement date") and ending on July 31, 1994, unless sooner terminated pursuant to any provision hereof. 3.2 OPTION TO RENEW - Lessee shall have the option to extend the Lease for two (2) additional periods of five (5) years each. Lessee may exercise its right to extend for the first option term by notifying Lessor of its election to so extend no later than sixty (60) days prior to the termination of the initial Lease term period and no earlier than six (6) months prior to said termination and for the second option term by giving notice not later than sixty (60) days prior to the termination of the term under the first option and no earlier than six (6) months prior to said termination. Provided, however, Lessee shall have no extension right if at the time for giving such notice or at the commencement of such extension there exists any uncured default hereunder by Lessee for which Lessee has received ten (10) days prior written notice from Landlord. All terms and conditions of this Lease shall remain in full force and effect during the option term except that the rent payable hereunder by Lessee to Lessor for the first year of each option term shall be adjusted to the fair market rental of the land and building (but excluding all Lessee's Improvements) as of the commencement of each option term. For purposes of this Lease, unfair market rental shall be determined by agreement between the parties within ten (10) days after Lessee notifies Lessor of its intention to exercise the Option hereunder. If within said ten (10) days the parties are unable to agree upon a "fair market rental," then each shall select an appraiser within five (5) days thereafter with a designation of "M.A.I." or in the event M.A.I., appraisers are no longer available, a comparable designation and within five (5) days after such appointment, the two appraisers shall agree upon a third appraiser. Within thirty (30) days thereafter, the appraisers shall notify the parties in writing their appraisal of the fair market rental and the average of the two appraisals, which are closest in amount shall be deemed the fair market rental. Each party shall pay the cost of its own appraiser and the parties shall share the cost of the third appraiser. In the event the appraisals are not returned to the parties prior to the commencement of the option term, Lessee shall continue to pay rent at the then current rate until the determination of the fair rental value whereupon the rent shall be adjusted retroactively to the fair market rental and any additional amounts shall be paid to the Lessor by Lessee with the next regular monthly payment following such determination. For a period of one hundred twenty (120) days after the determination of the fair market rental by the parties, as set forth above Lessee shall have the right to terminate the Lease by delivering written notice to Lessor of its election to so terminate. In the event, such notice is delivered to Lessor within said one-hundred twenty (120) day period; the Lease shall terminate sixty (60) days thereafter. Lessee shall be responsible for the payment of rent to Lessor in the amount determined to be the fair market rental until the date of such termination. 3.3 COMMENCEMENT AND POSSESSION - Notwithstanding the commencement date, Lessor shall deliver to Lessee Possession (as defined below) of the manufacturing warehouse portion of the leased premises consisting of approximately 44,000 square feet on or before July 1, 1984 and Possession of the office portion of the leased premises consisting of approximately 43,000 square feet on or before September 1, 1984. For purposes of this Section 3.3, the term "Possession" shall mean the earlier to occur of (i) the tender of actual physical possession of the leased premises by Lessor to Lessee accompanied by a Certificate of occupancy from the City of San Diego or an agreement from the City of San Diego that the leased premises may be occupied without such Certificate, or (ii) the operation of Lessee's business from the leased premises. If Lessor shall not have completed and delivered Possession of the entire leased premises within one hundred twenty (120) days from the commencement date, Lessee may, at Lessee's option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If Lessee occupies the leased premises prior to the commencement date, such occupancy shall be subject to all provisions hereof except payment of rent. Notwithstanding occupancy or the date of delivery of Possession, neither the commencement date nor the termination date hereunder shall be delayed or advanced. Lessor acknowledges and agrees that its failure to deliver Possession of the leased premises to Lessee at the time and in the manner set forth above shall cause Lessee damage in an amount which would be impractical or difficult to calculate, but a reasonable estimate of, which would be Five Hundred Dollars ($500.00) for each day after July 1, 1984 and until delivery of Possession of the manufacturing warehouse, and Two Hundred Dollars ($200.00) for each day after September l, 1984 and until delivery of Possession of the office facilities. Therefore, Lessor and Lessee agree that, in addition to Lessee's right to cancel the Lease as set forth above and the reduction of rent as set forth in Section 4.1, in the event of the delay in delivery of Possession to Lessee, Lessor shall pay liquidated damages to Lessee in the amount of Five Hundred Dollars ($500.00) per day for each day of delay after July 1, 1984 with respect to the manufacturing warehouse and Two Hundred Dollars ($200.00) per day for each day after September 11, 1984, with respect to the office building until the Lease is terminated if terminated as set forth above. Lessor's obligations hereunder are subject to any extensions pursuant to the force majeure clause set forth in the General Provisions below. 2 4. RENT 4.1 MONTHLY RENTAL - Lessee agrees to pay Lessor fixed monthly rent for the building structure of $0.54 per square foot based upon the number of square feet of the entire leased premises as built. Based upon the agreed area of the entire leased premises of 87,000 square feet, the total fixed monthly rent shall be $46,980. Fixed monthly rent shall be payable in advance, without prior notice or demand and without set off or deduction, in lawful money of the United States of America. Subject to Section 3.2 above, rent shall commence on August 1, 1984 with the first payment thereof due on August 10, 1984 in the amount of Fifty-Eight Thousand Seven Hundred Twenty-Five Dollars ($58,725.00) for the period from August 1, 1984 to September 9, 1984 and thereafter rent in the amount of Forty-Six Thousand Nine Hundred Eighty Dollars ($46,980.00) per month for the period from the 10th of such month to the 10th of the next month shall be paid on the 10th day of each and every calendar month during the term hereof. Provided however, if Possession of the office portion of the leased premises is not tendered to Lessee on or before September 1, 1984, a pro-rata portion of the rent here under shall be abated by 49.4% for each day of delay retroactive to August 1, 1984, until the time such Possession is tendered to Lessee; and if Possession of the manufacturing portion of the leased premises is not tendered to Lessee on or before July 1, 1984, a pro-rata portion of the rent hereunder shall be abated by 50.6% for each day from July 1, 1984, until the time such Possession is tendered to Lessee. Provided further, if Possession of the office portion of the leased premises is tendered to Lessee on or before September 1, 1984, Lessee shall pay as additional rent to Lessor an amount equal to 49.4% of a pro-rata portion of the rent for each day prior to September 1, 1984 that such Possession is tendered to Lessee. 4.2 RENTAL ADJUSTMENT - The fixed monthly rent under Section 4.1 of this Lease shall be subject to adjustment upwards only at the end of each one year period of the lease term hereof including option periods, if any. For the first month of the second year, as determined by Section 3.1 of this Lease, and the first month of every year thereafter for the duration of this Lease the monthly rental for the ensuing twelve (12) months shall be adjusted upward only at the rate of five percent (5%) per year, using the monthly rental of the previous year as the base to calculate such increase. The rent so fixed and adjusted shall be the rent for the one-year period commencing with the date on which said rent is to be adjusted as herein provided. The rent for the last month prior to the adjustment date shall be increased by the pro-rata increase in the rent for the first ten (10) day of the next succeeding month. Provided, however, if one or both of the options to extend the Lease are exercised by Lessee the adjustment for the first year of each option term shall be as provided in Section 3.2 rather than this Section 4.2. 5. CONSTRUCTION 5.1 LESSOR'S IMPROVEMENTS - Lessor agrees that subject to the force majeure clause in the General Provisions below, it will at its own cost and expense construct and deliver possession of a building and other improvements on, the leased premises to Lessee on the dates specified in Section 3.3 above consisting of all specifications (the "Lessor's improvements") set forth in the following plans: 3 (a) Sholders a Sanford Grading Plan for Elgar Job #10403A (page 1 of 1). (b) Roger Deweese Associates Elgar Preliminary Flatwork and Grading January 26, 1984 (page 1 of 1). (c) Austin Hansen, Inc. pages 1A-11 inclusive entitled Elgar dated 1/26/84. (d) Beckett and Wong pages Sl-10 inclusive Job #2881. (e) Landscaping Plans and Specifications prepared by Lessor and approved by Lessee, which approval will not be unreasonably withheld. Lessor shall deliver such plans and specifications to Lessee on or before February 15, 1984 and Lessee shall have ten (10) working days thereafter to notify Lessor of its disapproval of such plans and specifications or the same shall be deemed approved. The term "working days" shall include the days Monday through Friday only. If Lessee disapproves said plans and specifications within said ten (10) working day period and the parties are unable to agree upon plans and specifications within five (5) days thereafter, they shall submit the matter to arbitration in San Diego County within twenty (20) days thereafter in accordance with the rules of the American Arbitration Association. Any delays caused hereunder shall not relieve the Lessor of its obligations under Section 3.3 hereof nor affect Lessee's right to liquidated damages and abatement of rent. The above plans and specifications may not be altered or modified except for nonmaterial field changes or requirements of the City of San Diego, without the prior written consent of Lessee, which consent shall not be unreasonably withheld. 5.2 LESSEE'S IMPROVEMENTS - Lessee shall, at its own cost and expense, provide Lessor with plans and specifications for completion of interior improvements to the building on the leased premises to the satisfaction of Lessee (hereinafter referred to as "Lessee's Improvements"). Lessee shall deliver to Lessor the plans and specifications for Lessee's Improvements in the manufacturing portion of the leased premises on or before February 15, 1984 and in the office portion of the leased premises on or before April 1, 1984, thirty (30) days after receipt of the respective plans and specifications, Lessor shall provide Lessee with a written construction cost bid on the Lessee's Improvements from Lessor's contractor. Within fifteen (15) days thereafter, Lessee shall have the right to approve or disapprove such bid. Failure of Lessee to either approve or disapprove such bid in writing within said fifteen (15) day period shall be deemed an approval by Lessee. In the event, Lessee disapproves such bid, Lessor shall have no responsibility with respect to the Lessee's Improvements and Lessee will be required to construct Lessee's Improvements without the assistance of Lessor. Also, in the event Lessee disapproves such bid, the term "Possession" as used in Section 3.3 shall be redefined to mean actual tender possession of the premises with substantial completion and the recordation of a Notice of Completion. If Lessee elects to provide its own Lessee's improvements, Lessor shall allow Lessee access to the building on or before June 1, 1984 for installation of Lessee's Improvements. Lessee and Lessor shall cooperate in installation of the Lessee's Improvements and Lessee shall do nothing to delay, hinder, or interfere with Lessor's construction hereunder. In the event, Lessee approves such bid; Lessor shall have the responsibility to construct Lessee's Improvements on the terms set forth below: 4 (a) Lessor shall construct Lessee's Improvements in accordance with the plans and specifications submitted by Lessee prior to the dates upon which Lessor is to tender possession of the Leased Premises to Lessee under Section 3.3. Lessor's failure to complete the Lessee's Improvements at the times set forth in Section 3.3 shall entitle Lessee to all rights and remedies under Section 3.3 including liquidated damages. Provided, however, it shall be Lessee's responsibility to obtain from the City of San Diego approval for such plans and specifications for Lessee's Improvements in the manufacturing warehouse portion of the leased premises and deliver the same to Lessor on or before April 1, 1984 and for Lessee's Improvements in the office portion of the leased premises and deliver the same to Lessor on or before June 1, 1984. In the event Lessee fails to obtain such approvals by such dates, the dates upon which possession is to be tendered under Section 3.3 hereof shall be delayed one day for each day such approvals are delayed. (b) Lessor shall complete the Lessee's Improvements for a cost not to exceed the bid price plus any change orders approved in writing by Lessee, which approval will not be unreasonably withheld. Lessee shall be responsible to pay all City and utility fees with respect to the construction of Lessee's Improvements directly to the City. All other costs and fees for Lessee's Improvements shall be paid by Lessor to the contractor. Lessee agrees to pay Lessor the amounts required by the contractor (to the extent those amounts do not exceed the bid price or any approved changes) within twenty (20) days after receipt from Lessor of invoices from the contractor. All Lessees' Improvements shall be and remain the property of Lessee until termination or expiration of the Lease at which time they shall immediately become the property of Lessor. Provided, however, if the Lease is terminated by Lessee pursuant to Section 3.3 hereof, Lessor shall reimburse Lessee the amounts paid by Lessee to Lessor for such Improvements to the extent Lessor is benefited by such Improvements. 6. USE AND QUIET ENJOYMENT 6.1 The Lessee may use and occupy the leased premises for manufacturing storage, general office, and any other lawful purpose reasonably related thereto except that Lessee shall not use or occupy nor permit the leased premises or any part thereof to be used or occupied for any unlawful business, use, or purpose, nor for any business, use or purpose deemed disreputable or extra-hazardous, nor for any purpose or in any manner which is in violation of any present or future governmental laws or regulations. Any extra hazardous use, to which Lessee wishes to engage in, must be consented to by Lessor in writing. 6.2 The Lessee, upon payment of the rent herein reserved and upon the performance of all its obligations under this Lease, shall at all times during the Lease term and during any extension or renewal term peaceably hold and quietly enjoy the leased premises without interruption by the Lessor, any mortgagee, or any other person, firm or corporation claiming under either of them. 5 7. UTILITIES Lessee shall pay for all water, gas, heat, light, power, telephone service and all other services to the leased premises. 8. INSURANCE AND INDEMNITY 8.1 LIABILITY INSURANCE - Lessee shall, during the entire term here of at its expense obtain and keep in full force and effect a policy of Combined Single Limit, Bodily Injury and Property Damage Insurance with respect to the leased premises, the sidewalks in front of the leased premises, and the business operated by Lessee and any subtenants of Lessee in the leased premises in which the limits of public liability shall be not less than $1,000,000.00 per occurrence. The policy shall contain cross liability endorsements and shall insure performance by Lessee of the indemnity provisions of this Section B. The policy shall name Lessee as insured and Lessor, any person, firms or corporations designated by Lessor as an additional insured, and shall contain a clause that the insurer will not cancel or change the insurance without first giving the Lessor thirty (30) days prior written notice. The insurance shall in an insurance company approved by Lessor and a copy of the policy or a certificate of insurance shall be delivered to Lessor. Not more frequently than each 3 years, if, in the reasonable opinion of Lessor, the amount of liability insurance required hereunder is inadequate, Lessee shall increase said insurance coverage as required by Lessor. If Lessee installs and uses a boiler and the leased premises, it shall obtain boiler broad form insurance in a reasonable amount in the name of Lessor and Lessee. 8.2 PROPERTY INSURANCE - Lessee shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the leased premises, in the amount equal to the actual replacement cost of the insurable portion of the leased premises at the time of loss, against all perils included within the classification of fire, extended coverage vandalism malicious mischief, special extended perils (all risk) and sprinkler leakage. Said insurance shall provide for payment of loss thereunder to Lessor or to the holder of a first mortgage or deed of trust encumbering Lessor's interest in the leased premises or any portion thereof. If Lessee shall fail to procure and maintain said insurance Lessor may, but shall not be required top procure and maintain the same, but at the expense of Lessee; bills for above premiums shall be rendered by Lessor to Lessee, and shall be due from, and payable by Lessee when rendered, and the amount thereof shall be deemed to be, and be paid as, additional rent. 8.3 BLANKET POLICY OF INSURANCE - Notwithstanding anything to the contrary contained herein, Lessee's obligation to carry the insurance provided for in this Section 8 may be brought within the coverage of a so called blanket policy or policies of insurance carried and maintained by Lessee. 8.4 INDEMNIFICATION OF LESSOR - Lessee will indemnify Lessor and save it harmless from and against any and all claims, actions, damages, liability, and expense in connection with loss of life, personal injury and/or damage to property arising from or out of any occurrence in, upon or at the leased premises, or the occupancy or use by Lessee of the leased premises or any part thereof, or occasioned wholly or in part by any act or omission of 6 Lessee, its agents, contractors, employees, servants, Lessees or concessionaires. (However, Lessor shall be liable for its negligent or willful acts or omissions and those of its agents, contractors, employees and servants.) In case Lessor shall, without fault on its part, be made a party to any litigation by reason of the above, then Lessee shall protect and hold Lessor harmless and shall pay all costs, expenses and reasonable attorney's fees incurred or paid by Lessor in connection with such litigation. Lessee shall also pay all costs, expenses and reasonable attorney's fees that may be incurred or paid by Lessor in enforcing the covenants and agreements in this Lease. 8.5 WAIVER OF SUBROGATION - Lessor and Lessee each hereby waive any and all rights of recovery against the other, or against the officers, employees, agents and representatives of the other, for loss of or damage to such waiving party or its property or the property of others under its control to the extent that such loss or damage is insured against under any insurance policy in force at the time of such loss or damages. Lessee shall, upon obtaining the policies of insurance required hereunder, give notice to the insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease. 9. ALTERATIONS AND IMPROVEMENTS No alteration, addition or improvement to the leased premises, except non-structural changes which will cost less than $25,000, shall be made by the Lessee without the written consent of Lessor, which consent will not be unreasonably withheld and all such alterations, additions and improvements will be completed in a lien free manner. All alterations, additions and improvements by Lessee shall be in compliance with applicable building codes and in conformance with building plans previously approved by Lessor. Any alteration, addition, or improvement made by Lessee and any fixtures installed as part thereof shall become the property of Lessor upon the expiration or other sooner termination of this Lease. 10. GOVERNMENTAL REGULATIONS Lessee shall, at Lessee's sole cost and expense, comply with all of the requirements of all City, County, Municipal, State, Federal and other applicable governmental authorities, now in force, or which may hereafter be in force, pertaining to the leased premises, including the installation of additional facilities as required for the conduct and continuance of occupancy of the leased premises, and shall faithfully observe in the use of the leased premises all municipal and county ordinances and state and federal statutes now in force or which may hereafter be in force. 11. MAINTENANCE AND REPAIR 11.1 LESSEE'S OBLIGATIONS - Lessee shall during the term of this Lease and any renewal or extension thereof, keep the premises in as good order and repair as it is at the date of the commencement of this Lease including the removal of all garbage, refuse, trash and the like at Lessee's expense, reasonable wear and tear excepted. Lessee shall maintain the grounds of the leased premises in a neat and orderly fashion, including but not limited to the parking area, the cutting of grass, the watering of the grass and watering of trees and shrubs. Lessee shall not 7 be obliged to make any repair which is occasioned by defective materials or defective workmanship in the Lessor's Improvements, and such repairs shall be made by Lessor at its own expense. 11.2 LESSOR'S OBLIGATIONS - Lessor shall maintain in good working order and be responsible for the repair of the slab and all structural portions of the walls (other than Lessee Improvement walls), and roof and glazing problems caused by structural defects. Lessor shall also be responsible for keeping, maintaining, and repairing any leaks in the roof for a period of two years after the commencement of this Lease. Lessor shall not be responsible for repair of any of the above mentioned items for damage caused by Lessee, in which case, Lessee shall be responsible for such repairs. Lessee agrees to replace all glass hereafter broken on said leased premises during the term hereof not covered by Lessor's obligation hereunder. 12. SURRENDER UPON TERMINATION Lessee shall on the last day of: the term, or upon the sooner termination of the term, peaceably and quietly surrender the leased premises to the Lessor including all alterations, replacements, changes or additions placed by the Lessee thereon, in as good condition and repair as at the commencement, of the term, and as any new structures, replacements, additions, or improvements constructed, erected, added or placed thereon by Lessee are when completed, with the natural wear and tear thereof excepted. Lessee shall also, upon termination or expiration of this Lease, remove all personal property located upon the leased premises belonging to Lessee or being kept thereat by Lessee. Unless other arrangements are made with Lessor, any personal property remaining on the leased premises subsequent to the expiration of the Lease term may be removed by Lessor and stored by Lessor at Lessee's expense. 13. AUCTIONS AND SIGNS 13.1 Lessee shall not conduct, or permit to be conducted any sale by auction on the leased premises. Lessee shall not display nor direct any lettering, signs, advertisement, awning, or any other projection in or on the leased premises or in or on the building of which forms a part without the prior written consent of Lessor, which consent shall not be unreasonably withheld. 14. LESSOR RIGHT OF ACCESS Lessor or its agent shall have the right to enter the leased premises at reasonable times in order to examine it, to show it to prospective purchasers or Lessees, or to make such decorations, repairs, alterations, improvements or additions as the Lessor may deem necessary to desirable. Lessor shall be allowed to take all material into and upon the leased premises that may be required therefor without the same constituting an eviction of the Lessee in whole or in part. The rent reserved shall not abate while decorations, repairs, alterations, improvements or additions are being made whether by reason of loss or interruption of the business of the Lessee or otherwise. Unless Lessee has exercised its right of extension, Lessee shall permit "For Rent" signs to be put and remain on said premises, sixty (60) days before the expiration of the 8 term of this Lease or any renewal as appropriate, without hindrance or molestation. Lessor agrees that when entering upon the leased premises for the purposes set forth in this paragraph, it shall do so at a reasonable time and shall attempt to do so with the least amount of disruption to Lessee. 15. REAL PROPERTY TAXES 15.1 PAYMENT OF TAXES - Lessee shall pay all real property taxes applicable to the leased premises during the term of this Lease. All such payments shall be made prior to the delinquency date of such payment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes paid by Lessee shall cover any period of time prior to or after the expiration of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year during which this Lessor shall be in effect, and Lessor shall promptly repay such amount to Lessee. 15.2 DEFINITION OF "REAL PROPERTY" TAX - As used herein, the term "real property tax" shall include any form of assessment, license fee, commercial rental tax, levy, penalty, or tax (other than income, inheritance or estate taxes) imposed by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, lighting, drainage or other improvement district thereof, on any legal or equitable interest of Lessor in the leased premises or in the real property of which the leased premises are a part, as against Lessor's right to rent therefrom, or as against Lessor's business of leasing the leased premises. 15.3 PERSONAL PROPERTY TAXES. (a) Lessee shall pay prior to delinquency all taxes assessed against and levied on trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the leased premises or elsewhere. When possible, Lessee shall cause said trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. (b) If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within 10 days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 16. ABANDONMENT Lessee shall not vacate nor abandon the leased premises at any time during the term of this Lease, nor permit the leased premises to remain unoccupied for a period longer than ten (10) consecutive days during the term of this Lease; and if Lessee shall abandon, vacate or surrender the leased premises, or be dispossessed by process of law, or otherwise, any personal property belonging to Lessee and left on the leased premises shall, at the option of the Lessor, be deemed abandoned. 9 17. ASSIGNMENT AND SUBLETTING CONSENT REQUIRED - Lessee will not assign this Lease in whole or in part, nor sublet all or any part of the leased premises, without the prior written consent of Lessor in each instance, which prior written consent Lessor agrees it will not unreasonably withhold or delay. The consent by Lessor to any assignment or subletting shall not constitute a waiver of the necessity for such consent to any subsequent assignment or subletting. This prohibition against assigning or subletting shall be construed to include a prohibition against any assignment or subletting by operation of law. If this Lease be assigned, or if the leased premises or any part thereof be sublet or occupied by anybody other than Lessee, Lessor may collect rent from the assignee, sublessee or occupant, and apply the net amount collected to the rent herein reserved, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, sublessee or occupant as Lessee, or a release of Lessee from the further performance by Lessee of covenants on the part of Lessee herein contained. Notwithstanding any assignment or sublease, Lessee shall remain fully liable on this Lease and shall not be released from performing any of the terms, covenants and conditions of this Lease. Lessee may assign this Lease as part of a merger, sale of assets or other corporation reorganization to a parent subsidiary or successor corporation. 18. DEFAULT OF THE LESSEE 18.1 DEFAULT - The occurrence of any of the following shall constitute a material default of this Lease by Lessee: (a) Any failure by Lessee to pay the rent or any other monetary sums required to be paid hereunder; (b) The abandonment or vacation of the leased premises by Lessee; (c) A failure by Lessee to observe and perform any other provision of this Lease to be observed or performed by Lessee where such failure continues for thirty (30) days after written notice thereof by Lessor to Lessor provided however, that if the nature of such default is such that the same cannot reasonably be cured within such thirty (30) day period, Lessee shall within such period commence such cure and thereafter diligently prosecute the same to completion; (d) The making by Lessee of any general assignment or general arrangement for the benefit of creditors; the filing by or against Lessee of a petition to have Lessee adjudged a bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); the appointment of a trustee, or receiver to take possession of substantially all of Lessee's assets located at the leased premises or of Lessee's interest in this Lease where possession is not restored to Lessee within sixty (60) days; or the attachment execution or other judicial seizure of substantially all of Lessee's assets located at the leased premises or of Lessee's interest in this Lease, where such seizure is not discharged within sixty (60) days. 10 18.2 REMEDIES IN EVENT OF DEFAULT - In the event of any such material default by Lessee, Lessor may at any time thereafter, with or without notice and demand and without limiting Lessor in the exercise of any right or remedy at law or in equity which Lessor may have by reason of such default or breach: (a) Maintain this Lease in full force and recover the rent and other monetary charges as they become due, with the right to sue monthly or periodically at its election, without terminating the Lessee's right of possession, irrespective of whether Lessee shall have abandoned the leased premises. In the event Lessor elects not to terminate the Lease, Lessor shall have the right to attempt to relet the leased premises at such rent and upon such conditions and for such a term and to do all acts necessary to maintain or preserve the leased premises as Lessor deems reasonable and necessary without being deemed to have elected to terminate the Lease including removal of all persons and property from the leased premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account off Lessee. In the event any such releting occurs, this Lease shall terminate automatically upon the new Lessee taking possession of the leased premises. Notwithstanding that Lessor, fails to elect to terminate the Lease initially, Lessor at any time during the term of this Lease may elect to terminate this Lease by virtue of such previous default of Lessee. (b) Terminate Lessee's right to possession by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession of the leased premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including without limitation thereto, the following: (i) the worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus, (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that is proved by Lessee could have been reasonably avoided; plus, (iii) the worth at the time of award of the amount, which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that is provided by Lessee could be reasonably avoided; plus (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by Lessee's failure to perform his obligation under the Lease or which in the ordinary course of things would be likely to result therefrom; plus (v) at Lessor's electric, such other amounts in addition to or in lieu of the foregoing is may be permitted from time to time by applicable state law. Upon any such reentry, Lessor shall have the right to make any reasonable repairs, alterations or modifications to the leased premises, which Lessor in its sole discretion deems reasonable and necessary. As used in the subparagraphs (i) and (ii) above, the "worth at the time of award" is computed by allowing interest at the rate of ten percent (10%) per annum from the date of default. As used in subparagraph (iii) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). The term "rent," as used in this Section, shall be deemed to be and to mean the rent to be 11 paid pursuant to Section 4 and all other monetary sums required to be paid by Lessee pursuant to the terms of this Lease. 18.3 LEGAL EXPENSE - In case suit shall be brought for enforcement rights under this Lease, or because of the breach of any other covenant herein contained, the losing party shall pay to the prevailing party all expenses incurred therefore, including reasonable attorneys' fees. 19. DESTRUCTION In the event of (a) a partial or total destruction of the leased premises or the building containing same during said term which requires repairs to either the leased premises or said building, or (b) the leased premises or said building being declared unsafe or unfit for occupancy by any authorized public authority for any reason other than Lessee's act, use or occupation which declaration requires repairs to either the leased premises or said building. Lessor shall forthwith make such repairs, including Lessee's Improvements and alterations (unless Lessee elects to make such repairs), provided such repairs can be made within one hundred twenty (120) days under the laws and regulation or authorized public authorities, but such destruction (including any destruction necessary in order to make repairs required by any such declaration) shall in no way annul or void this Lease, except that Lessee shall be entitled to a proportionate reduction of rent while such repairs are being made, such proportionate reduction to be based upon the extent to which the damage and making of such repairs shall interfere with the business carried on by Lessee on the leased premises; provided that in making such repairs, with regard to glazing Lessor shall be obligated to replace only such glazing as shall have been damaged by fire and other damaged glazing shall be replaced by Lessee. In making such repairs, Lessor shall be entitled to all insurance proceeds from any policies hereunder, which are applicable to such repairs. Within thirty (30) days from the date of such destruction if Lessor determines in good faith such repairs cannot be made within one hundred twenty (120) days, it shall so notify Lessee in writing and state the estimated number of days for repair. Within seven (7) days after receipt of Lessor's notice Lessee may terminate the Lease upon thirty (30) days notice to Lessor if Lessee does not terminate the Lease in this manner, Lessor shall use its best efforts to make all repairs in the time set forth in its notice to Lessee. Notwithstanding the above, Lessor shall not be required to proceed with repairs if there are not sufficient insurance proceeds to cover such repairs. In such event Lessee shall have the right to (i) terminate the Lease upon thirty (30) days notice to Lessor, (ii) continue the Lease without repair, or (iii) to pay for that portion of the repairs not covered by insurance. 20. SURRENDER OF LEASE NOT MERGER The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subleases, and/or subtenancies, or may, at the option of Lessor, operate as an assignment to them of any or all of such subleases or subtenancies. 21. CONDEMNATION 12 If any part of the leased premises shall be taken or condemned for a public or quasi-public use, and a part thereof remains which is susceptible of occupation hereunder, this Lease shall, as to the part so taken, terminate as of the date title shall vest in the condemnor, and the rent payable hereunder shall, be adjusted so that the Lessee shall be required to pay for the remainder of the term only such portion of such rent as the fair market value of the part remaining after the condemnation bears to the rental value of the entire leased premises at the date of condemnation; but in such event Lessor shall have the option to terminate this Lease as of the date when title to the part so condemned vests in the condemnor. If all the leased premises or such part thereof be taken or condemned so that there does not remain a portion-susceptible for occupation hereunder, this Lease shall thereupon terminate. If a part or all of the leased premises be taken or condemned, all compensation awarded upon such condemnation or taking shall go to the Lessor and the Lessee shall have no claim thereto, and the Lessee hereby irrevocably assigns and transfers to the Lessor any right to compensation or damages to which the Lessee may be entitled during the term hereof by reason of the condemnation of all, or a part of the leased premises. Any dispute between Lessor and Lessee concerning the provisions of this paragraph shall be submitted to arbitration in accordance with the rules of the American Arbitration Association. However, Lessee shall be entitled to any award for its trade fixtures, relocation expenses, business losses and disruption. 22. GENERAL PROVISIONS 22.1 ESTOPPEL CERTIFICATE (a) Either party shall at any time upon not less than ten (10) days prior written notice from the other execute, acknowledge and deliver to the other a statement in writing (1) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect and the date to which the rent and other charges are paid in advance, if any, (2) acknowledging that there are not, to such party's knowledge, any uncured defaults on the part of the other party hereunder, or specifying such defaults if any are claimed and (3) such other reasonable matters as may be required by the lender. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the leased premises. The requesting party shall pay the cost of preparation of such Estoppel certificate including attorneys' fees, but not to exceed $500. (b) A party's failure to deliver such statement within such time shall be conclusive upon such party (1) that this Lease is in full force and effect, without modification except as may be represented by the other party (2) that there are no uncured defaults in the other party's performance, and (3) that not more than one month's rent has been paid in advance. 22.2 LESSOR'S LIABILITY - The term "Lessor" as used herein shall mean only the owner or owners at the time in question of the fee title and, except as expressly herein provided, in the event of any transfer of such title or interest Lessor herein named (and in case of any 13 subsequent transfers the then grantor) shall be relieved from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or then grantor at the time of such transfer, in which Lessee has as interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 22.3 SEVERABILITY - Any provision of this Lease determined to be invalid by a court of competent jurisdiction shall in no way affect any other provision hereof. 22.4 LESSEE'S FINANCIAL STATEMENTS - Within thirty (30) days of Lessor's request, Lessee shall supply Lessor with the most recent internal financial statement of Lessee and, at the election of Lessor, of Lessee's parent corporation. Lessor may not make such a request more often than once per lease year. 22.5 TIME - Time is of the essence. 22.6 CAPTIONS - Article and paragraph captions are not a part hereof. 22.7 ENTIRE AGREEMENT - This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior agreement or understanding pertaining to any such matter shall be effective. It may be modified in writing only, signed by the parties in interest at the time of the modification. 22.8 NOTICES - Any notice required or permitted to be given hereunder shall be in writing and may be served personally or by certified mail, return receipt requested, postage prepaid, addressed to Lessor and Lessee respectively at the addresses set forth after their signatures below. If notice is mailed in the manner set forth above it shall be deemed delivered forty-eight (48) hours after deposit in the United States mail. Either party may by notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the leased premises, the leased premises and Lessee's address beneath its signature at the end of this Lease shall both constitute Lessee's addresses for notice purposes. 22.9 WAIVER - No waiver by Lessor of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to or approval of any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. 22.10 RECORDING - The parties shall concurrently with execution hereof, record a short form memorandum of this Lease in the Official Records of the Recorder's Office of San Diego County. 22.11 HOLDING OVER - If Lessee remains in possession of the leased premises or any part thereof after the expiration of the term hereof without the express written consent of Lessor, such occupancy shall be a tenancy from month-to-month at a rental in amount of one 14 hundred ten percent (110%) of the last monthly rental plus all other charges payable hereunder, and upon all the terms hereof applicable to a month-to-month tenancy. 22.12 CUMULATIVE REMEDIES - No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies in law or equity. 22.13 COVENANTS AND CONDITIONS - Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. 22.14 BINDING EFFECT - Subject to any provisions hereof restricting assignment or subletting by Lessee, this Lease shall bind the parties, their personal representatives, successors and assigns; it shall be governed by the laws of the State of California. 22.15 SUBORDINATION - This Lease, except for Sections 23 and 24f at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust or any other hypothecation for security now or hereafter placed upon the real property of which the leased premises are a part and to any and all advances made on the security, thereof and to all renewals, modifications, consolidations, replacements and extensions, thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the leased premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground Lessor shall elect to have this Lease prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease shall be deemed prior to such mortgage, deed of trust, or ground lease, whether this Lease is dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. Lessee agrees to execute any documents not inconsistent with this Lease required to effectuate such subordination or to make this Lease prior to the lien of any ground lease, mortgage or deed of trust, as the case may be, within ten (10) days after written demand. Provided, any such document reflects the fact that Lessee may continue its right of quiet possession in the leased premises in the event of any foreclosure if it attorns to the purchaser at any foreclosure sale. 22.16 FORCE MAJEURE - Any prevention, delay or stoppage due to enemy or hostile governmental action, civil commotion, fire or other casualty, other similar acts of God, or extraordinary material shortages, which are-beyond the reasonable control of the party obligated to perform, or which are caused by the acts of the other party or the failure of the other party to fulfill its obligations under this Lease, shall excuse the performance by such party for a period equal to any such prevention, delay or stoppage. 22.17 NO OPTION - The submission of this Lease for examination does not constitute a reservation of or option for the leased premises and this Lease becomes effective as a Lease only upon execution and delivery thereof by Lessor and Lessee. 15 22.18 COVENANT AND WARRANTY OF PRIOR USE - Lessor hereby covenants, represents and warrants to Lessee that to Lessor's knowledge the leased premises have been raw acreage and not used in any other manner, and will not be used in any other manner, prior to the commencement of the Lease. Specifically, Lessor represents and warrants that it has no knowledge of any toxic waste or other dumping that has taken place on the leased premises. 23. OPTION TO PURCHASE Lessor hereby grants to Lessee an option to purchase the leased premises on or before July 31, 1984 for a purchase price and on terms and conditions mutually agreeable between the parties. Lessee may exercise this option by delivering notice of such exercise to Lessor on or before July 1, 1984. Within thirty (30) days after receipt of said notice, the parties agree to negotiate in good faith to attempt to establish the price, terms and conditions of the sale of the leased premises from Lessor to Lessee. The parties agree and acknowledge that the covenants set forth in this Section 24 are independent of those set forth elsewhere in the Lease. In the event, the provisions of this Section 24 are held to be invalid or unenforceable for any reason, it shall in no way affect any other provision of this Lease. 24. RIGHT OF FIRST REFUSAL If Lessor desires to exchange, sell, ground lease, option or otherwise transfer excluding encumbrances, ("Transfer") or agree to Transfer all or any part of the leased premises, Lessor shall first notify Lessee in writing of the price and/or terms on which Lessor will Transfer. If Lessee, within thirty (30) days after Lessor's notice has been delivered indicates in writing its agreement to acquire the leased premises, on the terms stated in Lessor's notice, Lessor shall Transfer the leased premises to for the price and/or on the terms stated in Lessor's notice, except that in the event of an exchange Lessee may elect to pay Lessor the equity value of Lessor's property rather than exchange for "like kind" property; provided that Lessee will reasonably cooperate with Lessor in any exchange if it is at no added cost or expense to Lessee. If Lessee does not indicate its agreement in writing within said thirty (30) days; Lessor shall have the right to transfer the leased premises to any purchaser, tenant or optionee on the-same terms as stated in the notice in the event of a proposed Transfer of the property, if Lessor does not enter into a binding contract and escrow to Transfer within six (6) months from the date Lessor's notice is delivered to Lessee, or in any event, if Lessor does not actually Transfer the property within nine (9) months after Lessor's notice is delivered to Lessee any further transaction shall be deemed a new determination by Lessor to Transfer the leased premises and the provisions of this right of first refusal shall be applicable. If Lessor receives an offer with respect to a Transfer of the leased premises within said six (6) month period which is on price or financial terms different from those set forth in Lessor's notice to Lessee, before accepting such offer Lessor shall first notify Lessee in writing of the terms of the offer. If Lessee, within fifteen (15) days after Lessor's notice of such different terms has been delivered, indicates in writing its agreement to accept the Transfer of the leased premises, Lessor shall Transfer the leased premises to Lessee for the price and on the terms stated in the notice. If Lessee does not indicate its agreement within said fifteen (15) days, Lessor shall have the right 16 to Transfer the leased premises to the purchaser on the terms of the notice provided such Transfer is completed within the nine (9) month period mentioned above. IN WITNESS WHEREOF, Lessor and Lessee each by its duly authorized officer have signed and sealed this Lease as of the day and year first above written. LESSOR: Carroll Ridge Park, a Partnership 10510 Sorrento Valley Road, Ste. 301 San Diego, California 92121 By: H W Building Co. By:/s/Neal Hooberman -------------------------------------------- Neal Hooberman, President LESSEE Elgar Corporation, a California Corporation 8225 Mercury Court San Diego, California 92111 By:/s/ -------------------------------------------- Its: By:/s/ -------------------------------------------- Its: 17 EX-10.13 26 EXHIBIT 10.13 FIRST AMENDMENT TO LEASE This First Amendment to Lease is dated November 5, 1992, between RREEF WEST-VI, a California Group Trust, successor in interest to Carroll Ridge Park, a California General Partnership, (Lessor), whose address is 8949-C Complex Drive, San Diego, CA 92123, and Elgar Electronics Corporation, a California Corporation, also known as Elgar Corporation, a California Corporation ("Lessee"), whose address is 9250 Brown Deer Road, San Diego, CA 92121 agree as follows: 1. RECITALS. This amendment to lease is made with reference to the following facts and objectives: a. Lessor and Lessee entered into a written lease dated February 1, 1984 (the "Lease"), in which Lessor leased to Lessee, and Lessee leased from Lessor, premises located in the County of San Diego, State of California, commonly known as 9250 Brown Deer Road, San Diego, CA 92121 (the "leased premises"), and further described as approximately 87,314 sq. ft. shown on Exhibit A attached hereto and made a part hereof. b. The term of this Lease expires July 31, 1994. c. The parties desire to amend the existing lease and extend the term of the lease as set forth in Section 2 below. 2. EXTENSION OF TERM. Notwithstanding anything to the contrary otherwise stated in this Lease, the term of the Lease shall be extended for an additional period of ten (10) years from and after January 1, 1993, so that the term of the Lease shall extend to and include December 31, 2002. 3. Section 4.1 and 4.2 of the Lease entitled Monthly Rental and Rental Adjustment, respectively, are deleted in their entirety and replaced with the following: 4.1 MINIMUM MONTHLLY RENT. Minimum monthly rent for the extended term shall be as follows: Rent for the period 01/01/93-12/31/93 shall be $43,657.00 monthly. Rent for the period 01/01/94-12/31/94 shall be $45,185.00 monthly. Rent for the period 01/01/95-12/31/95 shall be $46,766.00 monthly Rent for the period 01/01/96-12/31/96 shall be $48,403.00 monthly. Rent for the period 01/01/97-12/31/97 shall be $50,097.00 monthly. Rent for the period 01/01/98-12/31/98 shall be $51,851.00 Monthly Rent for the period 01/01/99-12/31/99 shall be $53,666.00 monthly. Rent for the period 01/01/2000-12/31/2000 shall be $55,544.00 monthly. Rent for the period 01/01/2001-12/31/2001 shall be $57,488.00 monthly. Rent for the period 01/01/2002-12/31/2002 shall be $59,500.00 monthly. 1 Fixed monthly rental shall be payable in advance, without prior notice or demand and without set-off or deduction, in lawful money of the United States of America and paid on the first) day of each and every calendar month during the term hereof. 4. Section 3.2 of the Lease entitled Option to Renew is deleted in its entirety and replaced with the following: 3.2. RENEWAL OPTION. Lessee shall, provided the Lease is in full force and effect and Lessee is not in default under any of the other terms and conditions of the Lease at the time of notification or commencement, have one (1) successive option to renew this Lease for a term of five (5) years, for the portion of the leased premises being leased by Lessee as of the date the renewal term is to commence, on the same terms and conditions set forth in the Lease, except as modified by the terms, covenants and conditions as set forth below: (a) If Lessee elects to exercise said option, then Lessee shall provide Lessor with written notice no earlier than the date which is 360 days prior to the expiration of the then current term of the Lease but no later than the date which is 120 days prior to the expiration of the current term of the Lease, and the Annual Rent and Monthly Installment in effect at the expiration of the then current term of the Lease shall he increased, commencing oil the first day of the new renewal term, to reflect the adjusted rental rate as calculated below. If Lessee falls to provide such notice, Lessee shall have no further or additional right to extend or renew the term of the Lease. The notice shall be given in the manner provided in the Lease for the giving of notices to Lessor. (b) The option period rental rate ("Adjusted Rental Rate") shall be the first year rental rate of $43,657.00 multiplied times 95* of the factor which has as its denominator the CPI Index (Los Angeles/Anaheim/ Riverside, All Urban Consumers) ("Index") for September, 1992 and has as its numerator the Index for September, 2002. The Adjusted Rental Rate will be increased three and one-half (3.5%) percent per annum in Years 2-5 of the option term. In no event shall the Adjusted Rental Rate be less than the rental rate in effect at the expiration of the initial lease term. (c) This option is not transferable; the parties hereto acknowledge and agree that they intend that the aforesaid option to renew this Lease shall be "personal" to Lessee as set forth above and that in no event will any assignee or sublessee have any rights to exercise the aforesaid option to renew. 5. Section 6.1 of the Lease entitled Use is deleted in its entirety and replaced with the following: 6.1 USE. The leased premises shall be used and occupied only for manufacturing, warehousing and distributing electronic parts and for related administrative offices or any other use, which is reasonably comparable, and for no other purpose. Lessee shall comply 2 with all governmental laws, ordinances and regulations applicable to the use of the leased premises and its occupancy and shall promptly comply with all governmental orders and direction for the correction, prevention and abatement of any violations in or upon, or in connection with, the leased premises, all at Lessee's sole cost and expense. Lessee shall not use nor permit the use of the leased premises in any manner that will tend to create waste or a nuisance. 6. HAZARDOUS MATERIALS. (a) Lessee agrees that Lessee, its agents and contractors, licensees, or invitees shall not handle, use, manufacture, store or dispose of any flammables, explosives, radioactive materials, hazardous wastes or materials, petroleum products or derivatives (collectively "Hazardous Materials") on, under, or about the leased premises, except in compliance with all laws relating to any Hazardous Materials so brought or used or kept in or about the leased premises. Annually during t1je lease term, Lessee shall provide Lessor with a written list of Hazardous Materials used in connection with its manufacturing operations on the leased premises. (b) Lessee shall secure and comply with all permits necessary for Lessee's operations on the leased premises. Lessee shall give or post all notices required by all applicable laws pertaining to Hazardous Materials. If Lessee shall at any time fail to comply with this Paragraph, Lessee shall promptly notify Lessor in writing of such noncompliance. (c) Lessee shall not store Hazardous Materials on the premises for more than 90 days unless such storage is in compliance with applicable laws; "hazardous waste" has the meaning given it by the Resource Conservation and Recovery Act of 1976, as amended. Lessee and Lessor acknowledge there is an existing 550-gallon single-walled underground diesel fuel tank, which shall be operated in compliance with all applicable laws. Lessee shall not install any other underground storage tanks on the leased premises, and any above ground storage tanks shall be operated in compliance with law including without limitation any double-containment requirements. Lessee shall not dispose of any Hazardous Materials on the leased premises. In performing any alterations of the leased premises permitted by the Lease, Lessee shall not install any Hazardous Material in the leased premises without the specific consent of Lessor attached as an exhibit to this Rider which consent shall not be unreasonably withheld. (d) Any increase in the premiums for necessary insurance on the Property, which arises from Lessee's use, and/or storage of Hazardous Materials shall be solely at Lessee's expense. Lessee shall procure and maintain at its sole expense such additional insurance as may be necessary to comply with any requirement of any Federal, State or local governmental agency with jurisdiction. (e) If Lessor, in its sole discretion, reasonably believes that the leased premises have become contaminated with Hazardous Materials that must be removed under the laws of the state where the leased premises are located, as a result of a breach by Lessee under the provisions of this Lease, Lessor, in addition to its other rights under this Lease, may enter 3 upon the leased premises and obtain samples from the leased premises, including without limitation the soil and groundwater under the leased premises, for the purposes of analyzing the same to determine whether and to what extent the leased premises have become so contaminated provided, however, that such action shall not unreasonably disrupt the Lessee's operations at the premises. If such testing discloses that, there exists contamination for which Lessee is liable under the Lease, and if Lessee refused Lessor's prior request to conduct such testing, then Lessee shall reimburse Lessor for its reasonable costs of such testing. Lessee may not perform any sampling, testing, or drilling to locate any Hazardous Materials on the leased premises without Lessor's prior written consent unless Lessee is required by law, rule or order. (f) Without limiting the above, Lessee shall reimburse, defend, indemnify and hold Lessor harmless from and against any and all claims, losses, liabilities, damages, costs and expenses, including without limitation, loss of rental income, loss due to business interruption, and attorneys fees and costs, arising out of or in any way connected with the use, manufacture, storage, or disposal of Hazardous Materials by Lessee, its agents or contractors on, under or about the leased Premises including, without limitation, the costs of any required or necessary investigation, repair, cleanup or detoxification and the preparation of any closure or other required plans in connection herewith, whether voluntary or compelled by governmental authority. The indemnity obligation of Lessee under this clause shall survive any termination of the Lease. Lessee shall perform any required or necessary investigation, repair, cleanup, or detoxification of the leased premises. In such case, Lessor shall have the right to approve all plans and consultants, provided the Lessor's approval rights shall not supersede any government regulations. Lessee shall provide Lessor on a timely basis with (I) copies of all documents, reports, and communications with governmental authorities; and (ii) notice and an opportunity to attend all meetings with regulatory authorities. Lessee shall comply with all notice requirements and Lessor and Lessee agree to cooperate with governmental authorities seeking access to the leased premises for purposes of sampling or inspection. No disturbance of Lessee's use of the leased premises resulting from activities conducted pursuant to this Paragraph shall constitute an actual or constructive eviction of Lessee from the leased premises. (g) Notwithstanding anything set forth in this Lease, Lessee shall only be responsible for contamination of Hazardous Materials or any cleanup resulting directly therefrom, resulting directly from matters occurring or Hazardous Materials deposited by Lessee (or by contractors, invitees, agents or representatives of Lessee) during the Lease term, and any other period of time during which Lessee is in actual or constructive occupancy of the leased premises. Lessee shall take reasonable precautions to prevent the contamination of the Premise with Hazardous Materials by third parties. (h) It shall not be unreasonable for Lessor to withhold its consent to any proposed assignment or sublease if (i) the proposed assignee's or sublessee's anticipated use of the leased premises involves the generation, storage, use, treatment or disposal of Hazardous Materials; in a materially different manner or magnitude as Lessee's (ii) the proposed 4 assignee or sublessee has been required by any prior landlord, lender, or governmental authority to take remedial action in connection with Hazardous Materials contaminating a property if the contamination resulted from such assignee's or sublessee's actions or use of the property in question; or (iii) the proposed assignee or sublessee is subject to an enforcement order issued by any governmental authority in connection with the use, disposal or storage of a Hazardous Material; and with respect to clauses (ii) and (iii) , that the circumstances giving rise to such requirement of remedial action or such enforcement order and Assignee's response thereto reasonably and adversely reflect upon Assignee's capacity to conduct its operations on the leased premises in a responsible manner so as to reasonably ensure that no such remedial action is required or order is issued with respect to Assignee's activities on the leased premises, or if such remedial action is required or order is issued, that Assignee will respond thereto in a responsible manner. (i) If any of Lessee's insurance insures against claims of the type dealt with in this Rider shall be considered primary coverage for claims against the Property arising out of or under this paragraph. (j) In the event of (i) any transfer of Lessee's interest under this Lease; or (ii) the termination of this Lease, by lapse of time or otherwise, Lessee shall be solely responsible for compliance with any and all then effective federal, state or local laws concerning the presence of Hazardous Materials in or on the leased premises, Building, or Property (for example, the New Jersey Environmental Cleanup Responsibility Act, the Illinois Responsible Property Transfer Act, or similar applicable state laws), including but not limited to any reporting or filing requirements imposed by such laws. All consents given by Lessor pursuant to this Rider shall be in writing and shall be attached as amendments to this Rider 7. Section 8.1 of the Lease entitled Liability Insurance is deleted in its entirety and replaced with the following: 8.1 LIABILITY INSURANCE. Lessee shall, during the entire term hereof, at its sole cost and expense, obtain and keep in full force and effect a policy of Combined Single Limit, Bodily Injury and Property Damage Insurance with respect to the leased premises, the sidewalks in front of the leased premises, and the business operated by Lessee and any subtenants of Lessee in the, leased Premises in which the limits of Public liability shall be not less than $3,000,000 per occurrence, with an annual aggregate of $3,000,000. The policy shall contain cross liability endorsements and shall insure performance by Lessee of the indemnity provisions of this Section 8. The policy shall name Lessee as insured and Lessor, any person, firms or corporations designated by Lessor as an additional insured, and shall contain a clause that the insurer will not cancel or change the insurance without first giving the Lessor thirty (30) days prior written notice. The insurance shall be in an insurance company approved by Lessor, with general policy holder's rating of not less than "A" and financial ratings of not less than Class X, as rated in the most current available Best Rating Guide, and which are qualified to do business in the state of 5 California, and a copy of the policy or a certificate of insurance shall be delivered to Lessor. Not more frequently than each five (5) years, if, in the reasonable opinion of Lessor, the amount of liability insurance required hereunder is inadequate, Lessee shall increase said insurance coverage as required by Lessor, but in no event by more than $2,000,000 in each five year period. If Lessee installs and uses a boiler 017 the leased premises, it shall obtain boiler broad form insurance in a reasonable amount in the name of Lessor and Lessee. 8. Section 8.2 of the Lease entitled Property Insurance is deleted in its entirety and replaced with the following: 8.2 PROPERTY INSURANCE. Lessee shall, during the entire term hereof ' at its sole cost and expense, obtain and keep in full force and effect a policy or policies of insurance covering loss or damage to the leased premises, in the amount equal to the actual replacement cost of the insurable portion of the leased premises at the time of loss, against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended perils (all risk) and sprinkler leakage. Said insurance shall be in an insurance company approved by Lessor, with general policy holder's rating of not less than "A" and financial ratings of not less than Class X, as rated in the most current available Best Rating Guide, and which are qualified to do business in the state of California, and shall provide for payment of loss thereunder to Lessor or to the holder of a first mortgage or deed of trust encumbering Lessor's interest in the leased premises or any portion thereof. If Lessee shall fail to procure and maintain said insurance, Lessor may, but shall not be required to, procure and maintain the same, but at the expense of Lessee; bills for above premiums shall be rendered by Lessor to Lessee, and shall be due from, and payable by Lessee when rendered, and the amount thereof shall be deemed to be, and be paid as, additional rent. 9. IMPROVEMENTS TO THE LEASED PREMISES. Lessor will undertake the following improvements to the leased premises: (a) Lessor will slurry seal the entire parking lot at the leased premises one time and one time only and concurrently will repair one time and one time only, as required, in the exercise of Lessor's sole and absolute discretion, any portion of the parking lot at the leased premises requiring repair, within twenty-four (24) months of execution of this First Amendment to Lease upon sixty (60) days written notice from Lessee. (b) The carpeting on the ground floor will be removed and replaced with similar quality carpet at any time within the next twenty-four (24) months upon sixty (60) days written notice from Lessee. (c) The office area will be repainted with one (1) coat of building standard paint one time during the lease term upon sixty (60) days written notice from Lessee. (d) Lessee agrees to fully cooperate with Lessor in providing access to the leased premises during normal business hours for construction of the agreed upon improvements 6 at the leased premises. Lessor shall use reasonable efforts not to unreasonably interfere with Lessee's business at, the Leased premises while constructing the agreed upon improvements at the leased premises. Lessee agrees to hold Lessor harmless and indemnify Lessor from any and all claims for damages to goods, equipment, personal injury or for inconvenience or interruption of Lessee's business arising out of the construction of the agreed upon improvements at the leased premises. Lessee agrees to execute upon presentment from Lessor a written acknowledgment confirming that all of agreed upon improvements to the leased premises have been satisfactorily completed by Lessor. 10. Section 18.1(a) of the Lease is deleted in its entirety and replaced by the following: 18.1(a) DEFAULT. The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due when such failure shall continue for a period of three (3) days after written notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. 11. Section 22.4 of the Lease is deleted in its entirety and replaced by the following: 22.4 FURNISHING OF FINANCIAL STATEMENTS; LESSEE'S REPRESENTATIONS. In order to induce Lessor to enter into this First Amendment to Lease, Lessee agrees that it shall promptly furnish Lessor, from time to time, but in no event more frequently than twice per calendar year, within twenty (20) days of Lessor's written request, with a mid-year report and an annual report, which shall be accurate in all material respects, reflecting Lessee's current financial condition and, at the election of Lessor, an interim report and annual report, which shall be accurate in all material respects, of the Guarantor, Dobson Park Industries plc. Lessor agrees to hold said financial statements and reports in confidence except that the Lessor specifically reserves the right to provide the same to any potential purchaser of the leased premises or any potential or then existing lender of Lessor. 12. Section 22.8 of the Lease is deleted in its entirety and replaced by the following: 22.8 NOTICES. Except as otherwise required by law, any notice, information, request or reply ("Notice" for purposes of this Section 22.8 only) required or permitted to be given under the provisions of this Lease shall be in writing and shall be given or served either personally or by mail. If given or served by mail, such Notice shall be deemed sufficiently given if (a) deposited in the United States Mail, Certified, Return Receipt Requested, Postage Prepaid; or (b) sent by Federal Express Mail or other similar overnight service, provided proof of service is available. Any Notice given or served by mail shall be deemed delivered twenty-four (24) hours after deposit in the mail. The Notice address for Lessor shall be 8949-c Complex Drive, San Diego, California 92.123. The Notice address for the Lessee shall be the -leased premises. A copy of all Notices required or permitted to be given to Lessor hereunder shall he concurrently transmitted to 7 such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 13. The following paragraph shall be added to the end of Section 15 of the Lease. 15.4 CONTEST OF REAL PROPERTY TAXES. Lessee shall have the right, at its own cost and expense, to seek to have reviewed, reduced, equalized or abated any real property taxes payable hereunder, but Lessee shall pay under protest prior to it becoming delinquent any such real property taxes or installments thereof during such time as Lessee is contesting or Protesting the same or seeking to have the same reviewed, reduced, equalized or abated; provided, however, that Lessee shall take such steps as may be required to perfect the contest, including, but without limitation, payment of the real property taxes under protest prior to an appeal of an adverse determination of the contest. Lessee shall also pay any interest and/or penalties which may have accrued on the real property taxes contested as well as any other item or real property taxes shown on the same tax bill which could not be paid pending the contest. If necessary to enable Lessee to prosecute any contest, review or proceedings, Lessor, without any obligation to incur "out of pocket" costs or expenses, shall join with Lessee and execute any and all documents, applications, petitions, instruments or complaints necessary for any such protest, contest, review or other proceedings reasonably desired or conducted by Lessee. Upon final determination of any such contest, review or proceedings (and if the real property taxes have not already been paid under protest by Lessee), Lessee shall pay the real property taxes as they are finally determined and all penalties, interest, costs and expenses which may thereupon be due or have resulted therefrom. Lessee shall indemnify and hold Lessor and the property of Lessor, including the leased premises, free and harmless from any liability, loss or damage (including reasonable attorneys' fees) resulting from any real property taxes, assessments or other charges required by this Section to be paid by Lessee and from all interest, penalties and other sums imposed thereon from any sales or other proceedings to enforce collection of any such real property taxes, assessments or other charges. Any refund received by Lessor as a result of the Lessee's contest of the 1993 assessed value shall be refunded to Lessee upon receipt by Lessor. Subject to all of the terms and conditions herein above, Lessee and Lessor agree that Lessee shall contest the real property taxes during the calendar year 1993. 14. Section 22.15 of the Lease entitled Subordination is deleted in its entirety and replaced with the following: 22.15 SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT. This Lease, except for Section 24, at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation for security now or hereafter placed upon the real property of which the leased premises are a part and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the leased premises pursuant to this Lease shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform 8 all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease is dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the. date of recording thereof. Lessor agrees, upon request by Lessee, to use best efforts to obtain a commercially reasonable non-disturbance agreement from any such mortgagee beneficiary of a deed of trust or lessor of Lessor. Lessee agrees to execute any documents not inconsistent with this Lease required to effectuate such subordination or to make this Lease prior to the lien of any ground lease, mortgage or written deed of trust, as the case may be, within tell (10) days after written demand. Failure of Lessee to execute any statements or instruments necessary or desirable to effectuate this Section 22.15 with-in ten (10) days after written request by Lessor to do so shall constitute a material default under this Lease. In the event any Proceedings are brought for foreclosure, or in the event of the exercise of the Power of sale under any mortgage or deed of trust made by Lessor covering the leased premises, or should the lease in which Lessor is the lessee be terminated, Lessee shall attorn to the Purchaser or lessor under such lease upon any foreclosure, sale or lease termination and recognize the purchaser or lessor as Lessor under this Lease, provided that the purchaser or lessor shall acquire and accept the leased premises subject to this Lease. Upon failure by Lessee to execute any statements or instruments necessary or desirable to effect the foregoing provisions of this Section 22.15 within ten (10) days after written request to do so by Lessor, in addition to any other rights or remedies of Lessor hereunder, Lessee hereby irrevocably appoints Lessor as its attorney-in-fact with the full power and authority to execute and deliver in the name of Lessee any of the statements or instruments set forth in this Section 22.15. 15. Section 24 of the Lease entitled Right of First Refusal is deleted in its entirety and replaced with the following: 24. RIGHT OF FIRST REFUSAL. Notwithstanding any other provision of the Lease to the contrary, Lessee shall have no right to exercise its Right of First Refusal, and Lessee's exercise of said Right of First Refusal may be nullified by Lessor and deemed of no further force or effect whatsoever, if Lessee shall be in default of any monetary obligation or material non-monetary obligation under the terms of the Lease (or would be in such default under the Lease but for the passage of time or giving of notice, or both) as of the date that Lessor first notifies Lessee in writing of the price and/or terms on which Lessor will Transfer the leased premises. If Lessor desires to exchange, sell, ground lease, option or otherwise transfer, excluding encumbrances, ("Transfer") or agree to Transfer all or any part of the leased premises, Lessor shall first notify Lessee in writing of the price and/or terms on which Lessor will Transfer. If Lessee, within fifteen (15) business days after Lessor's notice has been delivered indicates in writing its agreement to acquire the leased premises, on the terms stated in Lessor's notice, Lessor shall Transfer the leased premises to Lessee for the price and/or on the terms stated in Lessors notice, except that 9 in the event of an exchange, Lessee may elect to pay Lessor the equity value of Lessor's leased premises rather than exchange for "like kind" property; provided that Lessee will reasonably cooperate with Lessor in any exchange if it is at no added cost or expense to Lessee. If Lessee does not indicate its agreement in writing within said fifteen (15) business days; Lessor shall have the right to Transfer the leased premises to any purchaser, tenant or on the same terms as stated in the notice. In the event of a proposed Transfer of the leased premises, if Lessor does not enter into a binding contract and escrow to Transfer within six (6) months from the date Lessor's notice is delivered to Lessee, or in any event, if Lessor does not actually Transfer the leased premises within nine (9) months after Lessor's notice is delivered to Lessee, any further transaction shall be deemed a new determination by Lessor to Transfer the leased premises and the Provisions of this right of first refusal shall be applicable. If Lessor receives an offer with respect to a Transfer of the leased premises with-in said six (6) month period which is on price or financial terms different from those set forth in Lessor's notice to Lessee, before accepting such offer, Lessor shall first notify Lessee in writing of the terms of the offer. If Lessee, within fifteen (15) business days after Lessor's notice of such different terms has been delivered, indicates in writing its agreement to accept the transfer of the leased premises, Lessor shall Transfer the leased premises to Lessee for the price and on the terms stated in the notice. If Lessee does not indicate its agreement within said fifteen (15) business days, Lessor shall have the r1qht to Transfer the leased premises to the Purchaser on the terms of the notice Provided such Transfer is completed within the nine (9) month period mentioned above. This Right of First Refusal is not transferable; the parties hereto acknowledge and agree that they intend that the aforesaid Right of First Refusal to purchase the leased premises shall be "Personal" to Lessee as set forth above and that in no event will any assignee or sublessee have any rights to exercise the aforesaid Right of First Refusal. 16. The following shall be added to the end of Section 9 of the Lease: 9. ALTERATIONS AND IMPROVEMENTS. Notwithstanding anything in this Lease to the contrary, all manufacturing equipment and trade fixtures installed by Lessee shall become the property of Lessee upon expiration of or sooner termination of this Lease. 17. Section 12 of the Lease entitled Surrender upon Termination is deleted in its entirety and replaced with the following: 12. SURRENDER UPON TERMINATION. On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the leased premises to Lessor in the same condition as when received, ordinary wear and tear excepted, clean and free of debris. Lessee shall repair any damage to the leased premises occasioned by the installation or removal of Lessee's trade fixtures, furnishings and equipment. Notwithstanding anything to the contrary otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing and fencing on the leased premises in good operating condition, given the age 10 of the improvements. 18. BROKER'S FEE. Upon execution of this First Amendment to Lease by both parties and upon execution of the Continuing Lease Guaranty by Dobson Park Industries, p1c, Lessor shall pay to Sande/Hanchett, Inc., a California Corporation a commission equal to four percent (4%) of the total lease consideration for the first five (5) years of the extended term and two percent (2%) of the total lease consideration for the second five (5) years of the extended term and pay to CB Commercial, licensed real estate broker(s), a fee set forth in a separate agreement between Lessor and said broker(s) for brokerage services rendered by said broker(s) to Lessor in this transaction. 19. EFFECTIVENESS OF LEASE. Except as set forth in this First Amendment to Lease, all the provisions of the Lease shall remain unchanged and in full force and effect. 20. Section 8.4 of the Lease entitled Indemnification of Lessor is deleted in its entirety and replaced with the following: 8.4 INDEMNIFICATION PROVISION. Lessor shall not be liable and Lessee hereby waives all claims against Lessor for any damage to any property or any injury to any person in or about the leased premises by or from any cause whatsoever, (including without limiting the foregoing, rain or water leakage of any character from the roof, windows, walls, basement, pipes, plumbing works or appliances, the leased premises not being in good condition or repair, gas, fire, oil, electricity or theft); except that Lessor will indemnify and hold Lessee harmless from such claims to the extent caused by the negligent or willful] act of Lessor, or its agents, employees or contractors. Lessee shall defend, indemnify, and save Lessor harmless from and against any and all claims, actions, lawsuits, damages, liability, and expense, including, without limitation, attorneys' fees arising from: (a) the act, neglect, fault, or omission to meet the standards imposed by any duty with respect to the loss, damage, or injury by Lessee, its agents, servants, employees, contractors, customers or invitees; (b) the conduct or management of any work or thing whatsoever done by the Lessee in or about the leased premises or from transactions of the, Lessee concerning the leased premises; (c) Lessee's failure to comply with any and ail government laws, ordinances and regulations applicable to the use of all the leased premises and its occupancy; or (d) any breach or default on the part of the Lessee -in the performance of any covenant or agreement on the part of the Lessee to be performed pursuant to the Lease. The provisions of this Section shall survive the, termination of this Lease with respect to any claims or liability occurring prior to such termination. 21. LIMITATION OF LESSOR'S LIABILITY. Notwithstanding any other provision of the Lease to the contrary, redress for any claims against Lessor under this Lease shall only be made against Lessor's interest in the property to which the leased premises are a part. The obligations of Lessor under this Lease shall not be personally binding on, nor shall any resort be had to the private properties of, any of its trustees or board of directors and officers, as the case may be, the general partners thereof or any beneficiaries, stockholders, employees or agents of Lessor, or the 11 investment manager. 22. CORPORATE AUTHORITY. If Lessee is a corporation, Lessee represents and warrants that this First Amendment to Lease and the undersigned's execution of this First Amendment to Lease has been duly authorized and approved by the corporation's Board of Directors. The undersigned officers and representatives of the corporation executing this First Amendment to Lease on behalf of the corporation represent and warrant that they are officers of the corporation with authority to execute this First Amendment to Lease on behalf of the Corporation. LESSOR: LESSEE: RREEF WEST-VI ELGAR ELECTRONICS CORPORATION, A California Group Trust A California Corporation, also known as Elgar Corporation, BY: RREEF Management Company, a California Corporation BY:/s/Christopher W. Kelford --------------------------------- BY:/s/ Geolf Biehl Christopher W. Kelford, Treasurer -------------------------------- Geolf Biehl, District Manager Date: November 6, 1992 Date: December 7, 1992 By:/s/Kenneth Kilpatrick --------------------------------- By:/s/Douglas Mejia Kenneth Kilpatrick, President -------------------------------- Douglas Mejia, Vice President, Date: November 6, 1992 Director of Properties Date: December 8, 1992 By:/s/Michael D. Roos -------------------------------- Michael D. Roos, Vice President, Portfolio Manager Date: December 15, 1992 12 EX-10.14 27 EXHIBIT 10.14 SECOND AMENDMENT TO LEASE I. PARTIES AND DATE This Second Amendment to Lease (the "Second Amendment") dated February 12, 1998, is by and between THE IRVINE COMPANY, as successor-in-interest to Carroll Ridge Park, a California general partnership ("Lessor"), and ELGAR ELECTRONICS CORPORATION, a California Corporation ("Lessee"). II. RECITALS On February 1, 1984, Lessor and Lessee entered into a lease for space in a building located at 9250 Brown Deer Road, San Diego, California ("Premises"), which lease was subsequently amended by a First Amendment to Lease dated November 5, 1992 (as amended, the "Lease"). Lessor and Lessee each desire to modify the Lease as set forth in "III. MODIFICATIONS" next below. III. MODIFICATIONS PAYMENT OF REAL PROPERTY TAXES. Effective as of January 1, 1998, Section 15.1 of the Lease entitled "Payment of Property Taxes" shall be deleted in its entirety and the following shall be substituted in lieu thereof. "15. 1. PAYMENT OF TAXES (a) Lessee shall reimburse to Lessor, as additional rent, all "Real Property Taxes" (as defined in Section 5.2 below) applicable to the Premises during the Term of this Lease. Lessor shall give Lessee a written estimate of the amount of Property Taxes for the current calendar year. Lessee shall pay the estimated amounts to Lessor in two (2) installments, in advance, on March I and August I of each calendar year. Within one hundred twenty (120) days after the end of each calendar year, Lessor shall furnish to Lessee a statement showing in reasonable detail the actual Real Property Taxes incurred by Lessor during that period, and the parties shall within thirty (30) days thereafter make any payment or allowance necessary to adjust Lessee's estimated payments, if any, to Lessee's actual owed amounts as shown by the annual statement. Any delay or failure by Lessor in delivering any statement hereunder shall not constitute a waiver of Lessor's right to require Lessee to pay Real Property Taxes pursuant hereto. Any amount due Lessee shall be credited against installments next coming due under this Section 15.1, and any deficiency shall be paid by Lessee together with the next installment. Should Lessee fail to object in writing to Lessor's determination of actual Real Property Taxes within sixty (60) days following delivery of Lessor's expense statement, Lessor's determination of actual Real Property Taxes for the applicable period shall be conclusive and binding on the parties and any future 1 claims to the contrary shall be barred. (b) Even though the Lease has terminated and the Lessee has, vacated the Premises, when the final determination is made of Real Property Taxes for the year in which the Lease terminates, Lessee shall upon notice pay the entire increase due over the estimated expenses paid. Conversely, any overpayment made in the event expenses decrease shall be rebated by Lessor to Lessee." IV. GENERAL A. EFFECT OF AMENDMENTS - The Lease shall remain in full force and effect except to the extent that it is modified by this Amendment. B. ENTIRE AGREEMENT - This Amendment embodies the entire understanding between Lessor and Lessee with respect to the modifications set forth in "III. MODIFICATIONS" above and can be changed only by a writing signed by Lessor and Lessee. C. COUNTERPARTS - If this Amendment is executed in counterparts, each is hereby declared to be an original; all, however, shall constitute but one and the same amendment. In any action or proceeding, any photographic, photostatic, or other copy of this Amendment may be introduced into evidence without foundation. D. DEFINED TERMS - All words commencing with initial capital letters in this Amendment and defined in the Lease shall have the same meaning in this Amendment as in the Lease, unless they are otherwise defined in this Amendment. E. CORPORATE AND PARTNERSHIP AUTHORITY - If Lessee is a corporation or partnership, or is comprised of either or both of them, each individual executing this Amendment for the corporation or partnership represents that he or she is duly authorized to execute and deliver this Amendment on behalf of the corporation or partnership and that this Amendment is binding upon the corporation or partnership in accordance with its terms. F. ATTORNEYS' FEES - The provisions of the Lease respecting payment of attorneys' fees shall also apply to this Amendment. 2 V. EXECUTION Lessor and Lessee executed this Amendment on the date as set forth in "I. PARTIES AND DATE." above. LESSOR: LESSEE: THE IRVINE COMPANY ELGAR ELECTRONICS CORPORATION, a California Corporation By:/s/Clarence W. Barker By: /s/Christopher W. Kelford ------------------------------------- ------------------------------ Clarence W. Barker, President, Christopher W. Kelford, Chief Irvine Industrial Company, a division Financial Officer of The Irvine Company By:/s/John C. Tsu By: /s/Kenneth R. Kilpatrick ------------------------------------- ----------------------------- John C. Tsu, Assistant Secretary Kenneth R. Kilpatrick, President 3 EX-12.1 28 EXHIBIT 12.1 EXHIBIT 12.1 COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED ----------------------------------------------------- 1994 1995 1996 1997 1998 --------- --------- --------- --------- --------- Interest expense............................................ $ 2,722 $ 2,979 $ 3,540 $ 1,824 $ 3,340 Estimated interest portion of rent expense.................. 41 59 62 55 66 --------- --------- --------- --------- --------- Fixed charges............................................... $ 2,763 $ 3,038 $ 3,602 $ 1,879 $ 3,406 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) before income taxes........................... $ (1,338) $ (358) $ (1,460) $ 3,709 $ 9,221 Fixed charges............................................... 2,763 3,038 3,602 1,879 3,406 --------- --------- --------- --------- --------- Earnings.................................................... $ 1,425 $ 2,680 $ 2,142 $ 5,588 $ 12,627 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Fixed charges............................................... $ 2,763 $ 3,038 $ 3,602 $ 1,879 $ 3,406 Preferred stock dividend requirements....................... -- -- -- -- 150 Accretion of carrying value of preferred stock.............. -- -- -- -- 28 --------- --------- --------- --------- --------- Combined fixed charges and preferred stock dividends........ $ 2,763 $ 3,038 $ 3,602 $ 1,879 $ 3,584 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Ratio of earnings to combined fixed charges and preferred stock dividends............................................ 0.52x 0.88x 0.59x 2.97x 3.52x --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
EX-21.1 29 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES SUBSIDIARIES OF ELGAR HOLDINGS, INC.: Elgar Electronics Corporation (100% wholly owned) SUBSIDIARIES OF ELGAR ELECTRONICS CORPORATION: Elgar FSC Corporation (100% wholly owned) Power Ten (100% wholly owned) EX-23.2 30 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use in this registration statement of our report dated May 1, 1998, except with respect to the matter discussed in Note 11, as to which the date is May 5, 1998, relating to the consolidated financial statements of Elgar Holdings, Inc. included herein and to all references to our Firm included in this registration statement. /s/ ARTHUR ANDERSEN LLP San Diego, California May 28, 1998 EX-25.1 31 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) _______ -------------------------- UNITED STATES TRUST COMPANY OF NEW YORK (Exact name of trustee as specified in its charter) New York 13-3818954 (Jurisdiction of incorporation (I. R. S. Employer if not a U. S. national bank) Identification No.) 114 West 47th Street 10036-1532 New York, New York (Zip Code) (Address of principal executive offices) -------------------------- ELGAR HOLDINGS, INC. (Exact name of OBLIGOR as specified in its charter) Delaware 51-0373329 (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) -------------------------- ELGAR ELECTRONICS CORPORATION (Exact name of OBLIGOR as specified in its charter) California 33-0198753 (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) -------------------------- 9-7/8% Senior Notes Due 2008 (Title of the indenture securities) - 2 - GENERAL 1. GENERAL INFORMATION Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Federal Reserve Bank of New York (2nd District), New York, New York (Board of Governors of the Federal Reserve System) Federal Deposit Insurance Corporation, Washington, D.C. New York State Banking Department, Albany, New York (b) Whether it is authorized to exercise corporate trust powers. The trustee is authorized to exercise corporate trust powers. 2. AFFILIATIONS WITH THE OBLIGOR If the obligor is an affiliate of the trustee, describe each such affiliation. None 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15: The obligors currently are not in default under any of its outstanding securities for which United States Trust Company of New York is Trustee. Accordingly, responses to Items 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15 of Form T-1 are not required under General Instruction B. 16. LIST OF EXHIBITS T-1.1 -- Organization Certificate, as amended, issued by the State of New York Banking Department to transact business as a Trust Company, is incorporated by reference to Exhibit T-1.1 to Form T-1 filed on September 15, 1995 with the Commission pursuant to the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990 (Registration No. 33-97056). T-1.2 -- Included in Exhibit T-1.1. T-1.3 -- Included in Exhibit T-1.1. - 3 - 16. LIST OF EXHIBITS (CONT'D) T-1.4 -- The By-Laws of United States Trust Company of New York, as amended, is incorporated by reference to Exhibit T-1.4 to Form T-1 filed on September 15, 1995 with the Commission pursuant to the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990 (Registration No. 33-97056). T-1.6 -- The consent of the trustee required by Section 321(b) of the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990. T-1.7 -- A copy of the latest report of condition of the trustee pursuant to law or the requirements of its supervising or examining authority. NOTE As of May 22, 1998, the trustee had 2,999,020 shares of Common Stock outstanding, all of which are owned by its parent company, U.S. Trust Corporation. The term "trustee" in Item 2, refers to each of United States Trust Company of New York and its parent company, U. S. Trust Corporation. In answering Item 2 in this statement of eligibility as to matters peculiarly within the knowledge of the obligor or its directors, the trustee has relied upon information furnished to it by the obligor and will rely on information to be furnished by the obligor and the trustee disclaims responsibility for the accuracy or completeness of such information. -------------------------- Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, United States Trust Company of New York, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York, and State of New York, on the 22nd day of May 1998. UNITED STATES TRUST COMPANY OF NEW YORK, Trustee By:/s/Cynthia Chaney --------------- Cynthia Chaney Assistant Vice President EXHIBIT T-1.6 The consent of the trustee required by Section 321(b) of the Act. United States Trust Company of New York 114 West 47th Street New York, NY 10036 September 1, 1995 Securities and Exchange Commission 450 5th Street, N.W. Washington, DC 20549 Gentlemen: Pursuant to the provisions of Section 321(b) of the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990, and subject to the limitations set forth therein, United States Trust Company of New York ("U.S. Trust") hereby consents that reports of examinations of U.S. Trust by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. Very truly yours, UNITED STATES TRUST COMPANY OF NEW YORK /s/Gerard F. Ganey ------------------------ By: Gerard F. Ganey Senior Vice President EXHIBIT T-1.7 UNITED STATES TRUST COMPANY OF NEW YORK CONSOLIDATED STATEMENT OF CONDITION MARCH 31, 1998 ($ IN THOUSANDS)
ASSETS Cash and Due from Banks $ 303,692 Short-Term Investments 325,044 Securities, Available for Sale 650,954 Loans 1,717,101 Less: Allowance for Credit Losses 16,546 ---------- Net Loans 1,700,555 Premises and Equipment 58,868 Other Assets 120,865 ---------- TOTAL ASSETS $3,159,978 ---------- ---------- LIABILITIES Deposits: Non-Interest Bearing $ 602,769 Interest Bearing 1,955,571 ---------- Total Deposits 2,558,340 Short-Term Credit Facilities 293,185 Accounts Payable and Accrued Liabilities 136,396 ---------- TOTAL LIABILITIES $2,987,921 ---------- STOCKHOLDER'S EQUITY Common Stock 14,995 Capital Surplus 49,541 Retained Earnings 105,214 Unrealized Gains on Securities Available for Sale (Net of Taxes) 2,307 ---------- TOTAL STOCKHOLDER'S EQUITY 172,057 ---------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $3,159,978 ---------- ----------
I, Richard E. Brinkmann, Senior Vice President & Comptroller of the named bank do hereby declare that this Statement of Condition has been prepared in conformance with the instructions issued by the appropriate regulatory authority and is true to the best of my knowledge and belief. Richard E. Brinkmann, SVP & Controller May 6, 1998 EX-27.1 32 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SELECTED HISTORICAL FINANCIAL DATA OF ELGAR HOLDINGS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIL STATEMENS. 0001061976 ELGAR HOLDINGS, INC. 1,000 YEAR YEAR YEAR APR-03-1996 MAR-29-1997 MAR-28-1998 APR-02-1995 APR-04-1996 MAR-30-1997 APR-03-1996 MAR-29-1997 MAR-28-1998 0 691 2,666 0 0 0 0 6,548 6,650 0 189 197 0 5,829 8,305 0 13,926 18,895 0 3,407 4,595 0 795 1,643 0 36,597 44,912 0 7,248 7,886 0 13,512 90,019 0 0 8,478 0 0 0 0 93 23 0 15,744 (61,494) 0 36,597 44,912 42,309 45,578 62,496 42,309 45,578 62,496 26,468 26,973 32,944 40,191 40,030 49,934 0 0 0 0 0 0 3,578 1,839 3,341 (1,460) 3,709 9,221 176 1,872 4,448 (1,636) 1,837 4,773 0 0 0 0 0 0 0 0 0 (1,636) 1,837 4,773 0 0 0 0 0 0
EX-27.2 33 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY UNAUDITED FINANCIAL INFORMATION EXTRACTED FROM THE SELECTED HISTORICAL FINANCIAL DATA OF POWER TEN AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH UNAUDITED FINANCIAL STATEMENTS. 0001062458 POWER TEN 1,000 YEAR APR-04-1998 APR-05-1997 APR-04-1998 1,240 0 844 0 1,046 3,160 536 101 3,302 1,386 350 0 0 141 1,425 3,302 10,076 10,076 5,568 9,608 0 0 39 429 246 183 0 0 0 183 0 0
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