-----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, D8DT1wdf0EeuiUFsTKmvsn6pV6mLJVTXDt/3iV/IlWCDoaDb5b4hRh8sHG+9yZz2 g/juR/mmrq524LylZks2CQ== 0001047469-98-027160.txt : 19980717 0001047469-98-027160.hdr.sgml : 19980717 ACCESSION NUMBER: 0001047469-98-027160 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19980714 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELGAR HOLDINGS INC CENTRAL INDEX KEY: 0001061976 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 510373329 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-55797 FILM NUMBER: 98665462 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/A SEC ACT: SEC FILE NUMBER: 333-55797-01 FILM NUMBER: 98665463 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/A SEC ACT: SEC FILE NUMBER: 333-55797-02 FILM NUMBER: 98665464 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/A 1 S-4/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 14, 1998 REGISTRATION NO. 333-55797 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 1 TO 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. / / -------------------------- 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 JULY 14, 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 18 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 June 30, 1998, the Company had $15 million of 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.............................................................. 18 The Recapitalization...................................................... 24 Use of Proceeds........................................................... 25 The Exchange Offer........................................................ 26 Capitalization............................................................ 34 Selected Historical Consolidated Financial Data........................... 35 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 37 Business.................................................................. 42 Management................................................................ 53 Security Ownership of Certain Beneficial Owners and Management............ 57 Certain Relationships and Related Transactions............................ 58 Description of Notes...................................................... 61 Description of New Credit Facility........................................ 90 Description of Preferred Stock and Warrants............................... 92 Book-Entry; Delivery and Form............................................. 98 Plan of Distribution...................................................... 99 Legal Matters............................................................. 99 Experts................................................................... 100 Index to 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. 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 four 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. All four new products slated for introduction by fiscal 2000 are programmable DC products, two of which are for benchtop applications and two of which are ATE lines. The four new product-line extensions slated for introduction in fiscal 1999 consist of three programmable AC products and one high-power programmable DC product. See "Business--Principal Markets and Products." 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, additional revenue opportunities exist in these markets. 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 only approximately 2.6% of its total net sales for Fiscal 1998. 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 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, $552,000 of operating income and $2.5 million of earnings before interest, taxes, depreciation and amortization and certain non-recurring expenses ("Adjusted EBITDA"). Although management believes Adjusted EBITDA is one indicator of a company's ability to service debt, Adjusted EBITDA should not be considered as an alternative to net income or to cash flows from operating activities (each as determined in accordance with generally accepted accounting principles) in determining a company's operating performance or liquidity. 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 5 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 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 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. 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. 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 exploring strategic alternatives for their investment in Elgar, the Company's former controlling stockholders decided to sell the Company to its current stockholders, and the Merger and the Recapitalization were the means for transferring ownership of the Company. 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 6 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 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 38,426 --------- ----------- ----------- ----------- Gross profit..................................................................... 15,841 18,605 29,552 34,146 Selling, general and administrative expense...................................... 7,406 7,770 9,434 10,905 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 13,998 Interest expense, net(4)......................................................... 3,578 1,839 3,341 10,670 --------- ----------- ----------- ----------- Income (loss) before income tax provision........................................ (1,460) 3,709 9,221 3,328 Income tax provision (5)......................................................... 176 1,872 4,448 2,534 --------- ----------- ----------- ----------- Net income (loss)................................................................ $ (1,636) $ 1,837 $ 4,773 $ 794 --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- BALANCE SHEET DATA: Total assets..................................................................... $ 37,891 $ 36,597 $ 44,912 $ 48,321 Total debt....................................................................... 19,676 15,216 90,000 105,350 OTHER DATA: Operating cash flows............................................................. $ 2,192 $ 5,312 $ 7,462 $ 10,491 Investing cash flows............................................................. $ (611) $ (14,593) $ (1,218) $ (1,273) Financing cash flows............................................................. $ (442) $ 9,499 $ (4,269) $ (4,394) Adjusted EBITDA(6)............................................................... $ 5,052 $ 7,668 $ 15,118 $ 17,352 Adjusted EBITDA margin(6)........................................................ 11.9% 16.8% 24.2% 23.9% Depreciation..................................................................... $ 785 $ 806 $ 883 $ 942 Capital expenditures............................................................. $ 611 $ 621 $ 1,228 $ 1,318
- ---------------------------------- (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 approximately $16 million 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 changes to income tax provision 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) Adjusted EBITDA is the sum of income (loss) before income taxes, interest, depreciation, amortization and certain non-recurring expenses. Adjusted EBITDA is presented because the Company believes that it is a widely accepted financial indicator of a company's ability to service indebtedness. However, Adjusted EBITDA should not be considered as an alternative to net income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of a company's operating performance or as a measure of liquidity. In Fiscal 1998 and combined pro forma Fiscal 1998, Adjusted EBITDA excludes the nonrecurring expenditures described in note (2) above. 13 SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA The following unaudited pro forma financial data of EHI as of and for the fiscal year ended March 28, 1998 give effect to the Recapitalization as if it had occurred on March 30, 1997, with respect to the Unaudited Pro Forma Combined Statement of Income. The unaudited pro forma financial 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, with respect to the Unaudited Pro Forma Combined Statement of Income, and March 28, 1998, with respect to the Unaudited Pro Forma Consolidated Balance Sheet. 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 5,482 -- 38,426 ------------- ------- ------------- ----------- ----------- ----------- Gross profit................. 29,552 -- 29,552 4,594 -- 34,146 Selling, general and administrative expenses.... 9,434 (139) (1) 9,295 3,453 (1,843)(4) 10,905 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............. 12,562 139 12,701 552 745 13,998 Interest expense, net........ 3,341 6,088(2) 9,429 5 1,236(6) 10,670 ------------- ------- ------------- ----------- ----------- ----------- Income before provision (benefit) for income taxes...................... 9,221 (5,949) 3,272 547 (491) 3,328 Provision (benefit) for income taxes............... 4,448 (2,380)(3) 2,068 223 243(3) 2,534 ------------- ------- ------------- ----------- ----------- ----------- Net income................... $ 4,773 $ (3,569) $ 1,204 $ 324 $ (734) $ 794 ------------- ------- ------------- ----------- ----------- ----------- ------------- ------- ------------- ----------- ----------- ----------- Adjusted EBITDA.............. $ 14,759 $ 139 $ 14,898 $ 611 $ 1,843 $ 17,352
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 and the exclusion of approximately $359 for EHI of nonrecurring expenditures relating to the Recapitalization. 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 $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 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF MARCH 28, 1998 (DOLLARS IN THOUSANDS)
ELGAR HOLDINGS, INC. POWER TEN PRO FORMA COMBINED AT MAR 28, 1998 AT APR 4, 1998 ADJUSTMENTS PRO FORMA --------------- --------------- ----------- ----------- Current Assets: Cash and Cash Equivalents...................... $ 2,666 $ 1,240 $ 1,535(1) $ 5,441 Accounts Receivable............................ 6,453 844 7,297 Inventories.................................... 8,305 1,052 9,357 Deferred Tax Asset............................. 1,098 101 1,199 Prepaids and Other............................. 373 30 403 --------------- ------ ----------- Total Current Assets......................... 18,895 3,267 23,697 Property, Plant and Equipment, net............... 2,952 101 3,053 Other Assets..................................... -- 41 41 Intangible Assets................................ 22,412(2) -- 16,684 )(3 39,096 Deferred Tax Assets.............................. 653 -- 653 --------------- ------ ----------- $ 44,912 $ 3,409 $ 66,540 --------------- ------ ----------- --------------- ------ ----------- Current Liabilities: Accounts Payable............................... $ 3,068 $ 372 $ 3,440 Accrued Liabilities............................ 4,801 906 5,707 Current Portion of Long-Term Debt.............. -- -- 1,500(4) 1,500 Current Portion of Capital Lease............... 17 -- 17 --------------- ------ ----------- ----------- Total Current Liabilities.................... 7,886 1,278 10,664 --------------- ------ ----------- Capital Lease Obligations........................ 19 -- 19 Long Term Debt, net of current portion........... 90,000 350 13,500(4) 103,850 --------------- ------ ----------- Total Liabilities............................ 97,905 1,628 114,533 --------------- ------ ----------- Series A Redeemable Preferred Stock.............. 8,478(5) -- 8,478 --------------- ------ ----------- Stockholders' Equity: Series B Convertible Preferred Stock........... -- -- 5,000(6) 5,000 Common Stock................................... 23 141 (141)(7) 23 Additional Paid-in Capital..................... (67,926) -- (67,926) Retained Earnings.............................. 6,432 1,640 (1,640)(7) 6,432 --------------- ------ ----------- Total Stockholders' Equity................... (61,471) 1,781 (56,471) --------------- ------ ----------- $ 44,912 $ 3,409 $ 66,540 --------------- ------ ----------- --------------- ------ -----------
16 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS) The unaudited pro forma consolidated financial data has been derived from the application of pro forma adjustments to both EHI's and Power Ten's historical financial statements for the period noted. (1) Reflects net cash received in connection with the funds raised to finance the Power Ten Acquisition. (2) Includes $1,425 of amounts paid to Lehman in connection with the Recapitalization and the Power Ten Acquisition. (3) Reflects the excess of purchase price over net assets acquired, non-compete agreements and deferred financing costs recorded in connection with the Power Ten Acquisition. (4) The pro forma adjustment to current and long-term obligations reflects the amounts borrowed under the $15,000 Term Facility. All of the proceeds from the Term Facility were used to finance the Power Ten Acquisition. (5) 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. Also 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." (6) 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." (7) Reflects the elimination of Power Ten stockholders' equity balances. 17 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." As of June 30, 1998, the Company had $15 million of secured indebtedness outstanding which effectively ranked senior to the Notes. Other than the $90 million aggregate principal amount of Notes outstanding and $15 million of indebtedness under the New Credit Facility, the Company does not have any other long-term indebtedness. 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. 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 next 12 months and 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. Elgar's ability to make such payments may be restricted by, among other things, applicable state corporate laws and other laws and regulations. Based on Elgar's historic cash flow, the Company believes it will have sufficient cash flow to satisfy its debt service obligations for the next 12 months and the forseeable future. 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 18 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 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. 19 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 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 20 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. In addition, based on audits conducted by the government with respect to its contracts, profits may be renegotiated with respect to certain programs and contracts, as has recently occurred with respect to certain aspects of the Company's CASS Program. In the last five years, the Company has experienced only one cancellation of a contract at the government's convenience (in 1993). At no time has the Company experienced a government cancellation by default. There can be no assurance that any current or 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. The Phase I environmental reports did not reveal any material environmental issues at the Company's facilities, but did reveal minor compliance issues which were promptly remedied. 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. Indemnification for the benefit of the Company under the Recapitalization Agreement (including for environmental claims) must exceed $500,000 in the aggregate and is limited to $7,000,000 in the aggregate. 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 21 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 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 22 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 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. 23 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. 24 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. 25 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 26 as 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 27 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 28 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. 29 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. 30 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 31 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 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, and that a court would not sustain, a position contrary to that 32 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. In the opinion of Gibson, Dunn & Crutcher LLP, exchanges of Old Notes for Notes pursuant to the Exchange Offer will 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. 33 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." 34 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 six-month overlap includes $20,220,000 of net sales and $207,000 of net income. 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 ---------- ---------- --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- BALANCE SHEET DATA:(4) 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) OTHER DATA: Operating cash flows................................... $ 2,192 $ 5,312 $ 7,462 Investing cash flows................................... $ (611) $ (14,593) $ (1,218) Financing cash flows................................... $ (442) $ 9,499 $ (4,269) Adjusted EBITDA(5)..................................... $ 3,987 $ 5,495 $ 5,052 $ 7,668 $ 15,118 Adjusted EBITDA margin(5).............................. 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(6)......................... 0.52x 0.88x 0.59x 2.97x 3.52x
- ------------------------------ (1) Presents certain data of the Predecessor prior to the acquisition of Elgar by Carlyle-EEC Holdings, Inc. on April 3, 1996. 35 (2) In Fiscal 1998, selling, general and administrative expenses include approximately $359 of nonrecurring expenditures relating to the Recapitalization. (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) 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. (5) 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. (6) 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. In fiscal 1994, 1995 and 1996, earnings were insufficient to cover fixed charges by approximately $1,338,000, $358,000 and $1,460,000, respectively. 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 audited 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 thereto included elsewhere in this Prospectus.
FISCAL YEAR ENDED APRIL 4, 1998 ---------------- (IN THOUSANDS) OPERATING DATA: Net sales................................................................... $ 10,076 Cost of sales............................................................... 5,482 ------- Gross profit................................................................ 4,594 Selling, general and administrative expense(1).............................. 3,453 Research and development and engineering expenses........................... 589 ------- Operating income............................................................ 552 Interest expense, net....................................................... 5 ------- Income before income tax provision.......................................... 547 Income tax provision........................................................ 223 ------- Net income.................................................................. $ 324 ------- ------- BALANCE SHEET DATA: Total assets................................................................ $ 3,409 Total debt.................................................................. 1,628 Stockholders' equity........................................................ 1,781 OTHER DATA: Adjusted EBITDA(2).......................................................... $ 2,454 Adjusted EBITDA margin(2)................................................... 24.4% Depreciation................................................................ $ 59 Capital expenditures........................................................ $ 90
- ------------------------------ (1) Selling, general and administrative expense includes $1,843 of nonrecurring expenditures relating to compensation to the principal stockholders of Power Ten. (2) Adjusted EBITDA is the sum of income before income taxes, interest, depreciation and amortization and certain non-recurring expenses. Adjusted EBITDA is presented because the Company believes that it is a widely accepted financial indicator of a company's ability to service indebtedness. However, Adjusted EBITDA should not be considered as an alternative to net income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of a company's operating performance or as a measure of liquidity. Adjusted EBITDA for the fiscal year ended April 4, 1998 excludes the nonrecurring expenditures described in Note (1) above. 36 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." 37 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: Adjusted 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. The increase in sales from Fiscal 1997 to Fiscal 1998 was due to volume increases. 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. 38 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 39 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 in cash flow provided by operating activities was primarily attributable to a $2.9 million increase in net income and a $1.9 million increase in accrued liabilities, offset by a $2.5 million increase in inventories and a $0.1 million increase in accounts receivable. 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 next 12 months and 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 40 assurance can be given, however, that this will be the case. As a holding company with no operations or assets other than its ownership of the capital stock of Elgar, 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. Although the payment of dividends from Power Ten to Elgar and from Elgar to EHI may be restricted by state corporate laws, there are no contractual restrictions which prohibit Power Ten and Elgar from making such upstream distributions. 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 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. POWER TEN ACQUISITION. On May 29, 1998, the Company acquired all of the outstanding capital stock of Power Ten for $17,800,000, subject to certain post-closing working capital adjustments. The Company financed the purchase price and certain transaction expenses with $15 million of proceeds from the Term Facility and the issuance of $5 million in aggregate liquidation value of Convertible Preferred Stock. 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 Many computer programs have been written using two digits rather than four to define the applicable year. Computer programs with time-sensitive software may recognize a date using "00" as the year 1900 rather the year 2000. This "year 2000" issue could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. With a view to the year 2000 issue, the Company has undertaken a detailed review of all of the operating systems, software applications and hardware used in its operations. The Company anticipates completing all necessary software updates by the end of calendar 1998, and all hardware updates by the middle of calendar 1999, in order to be fully year-2000 compliant. Based on the foregoing, management does not believe that 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. 41 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, $552,000 of operating income and $2.5 million of Adjusted 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. 42 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 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 43 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 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 four 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. All four new products slated for introduction by fiscal 2000 are programmable DC products, two of which are for benchtop applications and two of which are ATF lines. The four new product-line extensions slated for introduction in fiscal 1999 consist of three programmable AC products and one high-power programmable DC product. See "Business--Principal Markets and products." 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, additional revenue opportunities exist in these markets. 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. - CONTINUED IMPROVEMENTS IN COSTS AND MANUFACTURING PROCESSES. The Company is continually introducing measures to increase its profitability and maintain a competitive advantage. Management is 44 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. 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 45 $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, which is one of the Company's four new products slated for introduction by fiscal 2000 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. In addition to the Company's new programmable DC product being introduced for Racal, the Company expects to introduce three additional new programmable DC products by fiscal 2000. These products include two mid-power benchtop models and one mid-power ATE product. The Company also intends in fiscal 1999 to introduce a high-power programmable DC product-line extension. 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. Based on contracts awarded and the Company's understanding of its competition, the Company believes it is one of 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 46 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 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 47 dominated by military spending in the past, is a small but steady and attractive niche for the Company. 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. Contracts with the United States government (whether directly or indirectly) are subject to cancellation for default or convenience by the government if deemed in its best interests. See "Risk Factors--Government Procurement Policies." In addition, based on audits conducted by the government with respect to its contracts, profits may be renegotiated with respect to certain programs and contracts, as has recently occurred with respect to certain aspects of the Company's CASS Program. In the last five years, the Company has experienced only one cancellation of a contract at the government's convenience (in 1993). At no time has the Company experienced a government cancellation by default. As 23.7% of the Company's net sales in 1997 were made directly or indirectly to the U.S. Government, a significant portion of its business is subject to the government prerogatives described above. 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 two additional product-line extensions, including an integrated test system, in the third quarter of fiscal 1999. 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. 48 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 $4.2 million, $4.0 million and $6.2 million in Fiscal 1996, Fiscal 1997 and Fiscal 1998, respectively, and historically have been approximately 10% of net sales. Customer-funded research and development comprised $0.3 million, $0.6 million and $0.3 million of the Company's overall research and development incurred in Fiscal 1996, Fiscal 1997 and Fiscal 1998, respectively. 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." 49 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 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. 50 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 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. 51 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. 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. The Phase I environmental reports did not reveal any material environmental issues at the Company's facilities, but did reveal minor compliance issues which were promptly remedied. 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." Indemnification for the benefit of the Company under the Recapitalization Agreement (including for environmental claims) must exceed $500,000 in the aggregate and is limited to $7,000,000 in the aggregate. 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. 52 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. 53 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. 54 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 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. 55 COMPENSATION OF DIRECTORS Other than Mr. Kilpatrick, directors receive a $15,000 annual retainer, $1,500 for each board meeting attended and reimbursement of reasonable expenses incurred in attending such meetings (the directors do not receive additional fees for attending committee meetings). In addition, the Company will pay Lehman certain fees for various management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analyses, negotiating and structuring financing and exploring expansion opportunities. See "Certain Relationships and Related Transactions." EXECUTIVE COMPENSATION The following table sets forth for the fiscal years ended April 3, 1996, March 29, 1997 and March 28, 1998 the historical compensation for services to the Company of the Chief Executive Officer and the four other most highly compensated executive officers of the Company as of March 28, 1998 (collectively, the "Named Executive Officers").
LONG-TERM COMPENSATION ANNUAL COMPENSATION(1) ------------- SECURITIES ALL OTHER ------------------------ UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) 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 without cause (as set forth in the agreements) or for no reason at all, then the executive shall be entitled to payment of his annual base salary for a period of one year following the date of such termination. Each Employment Agreement contains provisions prohibiting the executive, during the period of his employment with the Company and for two years thereafter, from directly or indirectly engaging in competition with the Company. Each Employment Agreement also contains provisions requiring the executive to maintain the confidentiality of certain information related to the Company. 56 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. 57 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 58 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." 59 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. 60 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 61 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 62 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 63 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. See "--Certain Definitions--Change of Control." 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. 64 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 65 (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 66 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 67 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 68 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 69 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 70 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 71 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. 72 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 73 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. 74 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 75 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 76 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 77 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 78 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. 79 "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 80 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. 81 "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 82 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; 83 (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 84 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; 85 (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. 86 "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. 87 "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, 88 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. 89 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, 90 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. 91 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 92 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 93 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% 94 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 95 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. 96 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. 97 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 98 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. 99 LEGAL MATTERS The legality of the New Notes will be passed upon for the Company by Gibson, Dunn & Crutcher LLP, Los Angeles, California. 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. The Balance Sheet of Power Ten as of April 4, 1998 and the related Statements of Income, Stockholders' Equity and Cash Flows of Power Ten for the fiscal year ended April 4, 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. 100 ELGAR HOLDINGS, INC. AND SUBSIDIARY INDEX TO 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.............................................. F-18 Balance Sheet as of April 4, 1998.......................................................................... F-19 Statement of Income for the fiscal year ended April 4, 1998................................................ F-20 Statement of Stockholders' Equity for the fiscal year ended April 4, 1998.................................. F-21 Statement of Cash Flows for the fiscal year ended April 4, 1998............................................ F-22 Notes to Financial Statements.............................................................................. F-23
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 Proceeds from borrowings................................................... 3,488 1,301 580 Repayments on debt......................................................... (3,930) (5,761) (15,796) Payments under capital leases.............................................. -- (41) (36) Deferred financing costs................................................... -- -- (5,414) Recapitalization consideration (Note 1).................................... -- -- (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 ------------- ----------- ----------- ------------- ----------- ----------- Elgar acquisition debt..................................................... $ -- $ 19,000 $ -- ------------- ----------- ----------- ------------- ----------- -----------
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. CUSTOMER-FUNDED RESEARCH AND DEVELOPMENT The Company capitalizes certain costs associated with customer-funded research and development. Revenue is recorded when earned under such projects and costs incurred are charged to cost of sales. The amount of customer-funded research and development was insignificant in fiscal 1996, fiscal 1997 and fiscal 1998. 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. F-9 ELGAR HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 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. F-10 ELGAR HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 $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 are guaranteed by the Company's wholly owned subsidiary, Elgar. Such guarantee is full and unconditional. The only direct or indirect subsidiary of the Company that is not a guarantor of the Senior Notes is insignificant to the consolidated financial statements. In management's opinion, separate financial statements of the guarantors have not been presented as they would not be material to investors. 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. F-11 ELGAR HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT (CONTINUED) 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. 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. F-12 ELGAR HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT (CONTINUED) 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. 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 F-13 ELGAR HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. REDEEMABLE PREFERRED STOCK (CONTINUED) 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 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 ----- ----------- ----------- ----- ----------- -----------
F-14 ELGAR HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. INCOME TAXES (CONTINUED) 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 --------- --------- ----------- --------- ----------- --------- --------- --------- ----------- --------- ----------- ---------
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. F-15 ELGAR HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. COMMITMENTS AND CONTINGENCIES (DOLLARS IN THOUSANDS) (CONTINUED) 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. 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 --- ---
F-16 ELGAR HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Power Ten: We have audited the accompanying balance sheet of Power Ten (a California corporation) as of April 4, 1998, and the related statements of income, stockholders' equity and cash flows for the year then ended. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Power Ten as of April 4, 1998 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP San Diego, California June 25, 1998 F-18 POWER TEN BALANCE SHEET AS OF APRIL 4, 1998 (IN THOUSANDS EXCEPT FOR SHARE INFORMATION) ASSETS CURRENT ASSETS: Cash and cash equivalents......................................................... $ 1,240 Accounts receivable............................................................... 844 Inventories (Note 2).............................................................. 1,052 Deferred tax asset................................................................ 101 Prepaids and other................................................................ 30 --------- Total current assets............................................................ 3,267 PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated depreciation and amortization of $435 (Note 2)...................................................... 101 OTHER ASSETS........................................................................ 41 --------- $ 3,409 --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.................................................................. $ 372 Accrued liabilities (Note 3)...................................................... 906 --------- Total current liabilities....................................................... 1,278 LONG-TERM DEBT (Note 4)............................................................. 350 --------- Total liabilities............................................................... 1,628 --------- COMMITMENTS AND CONTINGENCIES (Note 6) STOCKHOLDERS' EQUITY: Common stock, no par value, 10,000,000 shares authorized, 768,000 shares issued and outstanding................................................................. 141 Retained earnings................................................................. 1,640 --------- Total stockholders' equity...................................................... 1,781 --------- $ 3,409 --------- ---------
The accompanying notes to financial statements are an integral part of this balance sheet. F-19 POWER TEN STATEMENT OF INCOME FOR THE YEAR ENDED APRIL 4, 1998 (IN THOUSANDS) NET SALES.......................................................................... $ 10,076 COST OF SALES...................................................................... 5,482 --------- Gross profit................................................................... 4,594 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................................... 3,453 RESEARCH & DEVELOPMENT AND ENGINEERING EXPENSES.................................... 589 --------- Operating income............................................................... 552 INTEREST EXPENSE................................................................... 39 INTEREST INCOME.................................................................... 34 --------- Income before provision for income taxes....................................... 547 PROVISION FOR INCOME TAXES......................................................... 223 --------- Net income..................................................................... $ 324 --------- ---------
The accompanying notes to financial statements are an integral part of this financial statement. F-20 POWER TEN STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED APRIL 4, 1998 (IN THOUSANDS, EXCEPT SHARES)
COMMON STOCK ---------------------- RETAINED SHARES AMOUNT EARNINGS TOTAL --------- ----------- ----------- --------- BALANCE, March 29, 1997.................................................. 768,000 $ 141 $ 1,316 $ 1,457 Net income............................................................. -- -- 324 324 --------- ----- ----------- --------- BALANCE, April 4, 1998................................................... 768,000 $ 141 $ 1,640 $ 1,781 --------- ----- ----------- --------- --------- ----- ----------- ---------
The accompanying notes to financial statements are an integral part of this statement. F-21 POWER TEN STATEMENT OF CASH FLOWS FOR THE YEAR ENDED APRIL 4, 1998 (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................................ $ 324 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................................................................... 105 Deferred tax asset............................................................ (27) Prepaids and other............................................................ (29) Increases (decreases) in liabilities: Accounts payable.............................................................. 30 Accrued liabilities........................................................... 438 --------- 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: 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-22 POWER TEN NOTES TO 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. 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........................................................................ $ 433 Work-in-process...................................................................... 619 --------- $ 1,052 --------- ---------
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 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. F-23 POWER TEN NOTES TO FINANCIAL STATEMENTS (CONTINUED) APRIL 4, 1998 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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, if any, the adoption of SOP 98-1 will have on its financial statements, results of operations or related disclosures thereto. F-24 POWER TEN NOTES TO FINANCIAL STATEMENTS (CONTINUED) APRIL 4, 1998 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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.................................................................. $ 233 Warranty reserve..................................................................... 29 Bonuses.............................................................................. 543 Professional fees.................................................................... 50 Other................................................................................ 51 --------- $ 906 --------- ---------
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 repaid the credit line in April 1997 and did not utilize the credit line during the remainder of 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-25 POWER TEN NOTES TO FINANCIAL STATEMENTS (CONTINUED) APRIL 4, 1998 5. INCOME TAXES The provision for income taxes consists of the following (in thousands):
YEAR ENDED APRIL 4, 1998 ------------- Current Federal....................................................................... $ 212 State......................................................................... 38 ------ 250 ------ Deferred Federal....................................................................... (23) State......................................................................... (4) ------ Provision....................................................................... $ 223 ------ ------
The provision for income taxes reconciles to the amounts computed by applying the Federal statutory rate to income before taxes as follows (in thousands):
YEAR ENDED APRIL 4, 1998 -------------------- Computed statutory tax................................................... 34.00% $ 186 State income taxes, net of federal benefit............................... 6.00% 33 Other.................................................................... 0.66% 4 --------- --------- Provision for income taxes............................................... 40.66% $ 223 --------- --------- --------- ---------
The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets are as follows (in thousands):
APRIL 4, 1998 --------------- State taxes..................................................................... $ 15 Inventory and other reserves.................................................... 28 Accrued expenses................................................................ 58 ----- Total deferred tax assets..................................................... $ 101 ----- -----
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 financial statements. 6. 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. F-26 POWER TEN NOTES TO FINANCIAL STATEMENTS (CONTINUED) APRIL 4, 1998 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) 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 2001. The Company's primary facility lease expires in fiscal year 2001. 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 ----- $ 200 ----- -----
7. 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. 8. SUBSEQUENT EVENT On May 29, 1998, pursuant to a Stock Purchase Agreement dated as of May 5, 1998, Elgar acquired all of the Company's issued and outstanding shares of capital stock for $17.8 million in cash. F-27 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 3.7 Articles of Incorporation of Power Ten 3.8 Bylaws of Power Ten *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
II-1 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (CONTINUED)
EXHIBIT NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- *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 *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 Subsidiaries Guaranty, dated as of May 29, 1998, made by Power Ten in 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
II-2 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (CONTINUED)
EXHIBIT NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 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 (included in Exhibit 5.1) 23.2 Consent of Arthur Andersen LLP 24.1 Powers of Attorney (see page II-7 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
- ------------------------ * Previously filed. (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. II-3 ITEM 22. UNDERTAKINGS. (CONTINUED) 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. 4. To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any acts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; 5. That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 6. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, each of the Registrants has duly caused this Amendment No. 1 to 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 13th day of July, 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
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to 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 officers listed below for each Registrant listed above). SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- Director and President and /s/ KENNETH R. KILPATRICK Chief Executive Officer - ------------------------------ (Principal Executive July 13, 1998 Kenneth R. Kilpatrick Officer) Vice President--Finance, /s/ CHRISTOPHER W. KELFORD Chief Financial Officer - ------------------------------ and Treasurer (Principal July 13, 1998 Christopher W. Kelford Financial and Accounting Officer) * - ------------------------------ Director and Vice July 13, 1998 Donald Glickman President * - ------------------------------ Director July 13, 1998 John F. Lehman II-5 SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- * - ------------------------------ Director July 13, 1998 George Sawyer * - ------------------------------ Director and Secretary July 13, 1998 Keith Oster * - ------------------------------ Director July 13, 1998 Joseph A. Stroud * - ------------------------------ Director July 13, 1998 William Paul * - ------------------------------ Director July 13, 1998 Bruce D. Gorchow * - ------------------------------ Director July 13, 1998 Glenn A. Youngkin *By: /s/ CHRISTOPHER W. KELFORD - ------------------------------ Christopher W. Kelford ATTORNEY-IN-FACT II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Gatos, State of California on the 13th day of July, 1998. POWER TEN By: /s/ JOSEPH A. VAROZZA, JR. ----------------------------------------- Joseph A. Varozza, Jr. PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Joseph A. Varozza, Jr., Christopher W. Kelford and Keith Oster as 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. SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- President and Chief /s/ JOSEPH A. VAROZZA, JR. Executive Officer - ------------------------------ (Principal Executive July 13, 1998 Joseph A. Varozza, Jr. Officer) Vice President--Finance, /s/ CHRISTOPHER W. KELFORD Chief Financial Officer - ------------------------------ and Treasurer (Principal July 13, 1998 Christopher W. Kelford Financial and Accounting Officer) /s/ DONALD GLICKMAN - ------------------------------ Director and Vice July 13, 1998 Donald Glickman President /s/ KEITH OSTER - ------------------------------ Director and Secretary July 13, 1998 Keith Oster /s/ KENNTH R. KILPATRICK - ------------------------------ Director and Vice July 13, 1998 Kenneth R. Kilpatrick President II-7 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 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 3.7 Articles of Incorporation of Power Ten 3.8 Bylaws of Power Ten *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.
EXHIBIT NO. DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- *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 Subsidiaries Guaranty, dated as of May 29, 1998, made by Power Ten in 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 (included in Exhibit 5.1) 23.2 Consent of Arthur Andersen LLP 24.1 Powers of Attorney (see page II-7 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
- ------------------------ * Previously filed. EX-3.7 2 EXHIBIT 3.7 ARTICLES OF INCORPORATION OF POWER TEN I The name of this corporation is Power Ten. 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 The name and address in the State of California of this corporation's initial agent for service of process is Joseph Varozza at 18959 Mellon Drive, Saratoga, California 95070. IV This corporation is authorized to issue only one class of shares of stock which shall be designated "Common"; and the total number of shares which this corporation is authorized to issue is 1,000,000. Dated: November 16, 1981. /s/ Joseph Varozza, Incorporator I hereby declare that I am the person who executed the foregoing Articles of Incorporation, which execution is my act and deed. /s/ Joseph Varozza CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION Joseph A. Varozza, Jr. and Vince S. Mutascio certify that: 1. They are the President and Secretary, respectively, of Power Ten, a California corporation. 2. Article IV of the Articles of Incorporation of this corporation is amended to read as follows: "ARTICLE IV This corporation is authorized to issue only one class of shares of stock which shall be designated Common Stock. The total number of shares which this corporation is authorized to issue is ten million (10,000,000)." 3. The foregoing amendment of Articles of Incorporation has been duly approved by the board of directors. 4. The foregoing amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with sections 902 and 903 of Corporations Code. The total number of outstanding shares of the corporation is 900,000. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50%. Dated: March 31, 1983. /s/Joseph A. Varozza, Jr. President /s/ Vince S. Mutascio, Secretary The undersigned declare under penalty of perjury that the matters set forth in the foregoing certificate are true of their own knowledge. Executed at Saratoga, California on March 31, 1983. /s/ Joseph A. Varozza, Jr. /s/ Vince S. Mutascio EX-3.8 3 EXHIBIT 3.8 BY-LAWS OF POWER TEN ARTICLE I CORPORATE OFFICES 1.1 PRINCIPAL OFFICE. The board of directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside such state, and the corporation has one or more business offices in such state, the board of directors shall fix and designate a principal business office in the State of California. 1.2 OTHER OFFICES. The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS 2.1 PLACE OF MEETINGS. Meetings of shareholders shall be held at any place within or outside the State of California designated by the board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. 2.2 ANNUAL MEETING. The annual meeting of shareholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of shareholders shall be held on the 15th day of January in each year at 7:00 p.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. 2.3 SPECIAL MEETING. A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these by-laws, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held. 2.4 NOTICE OF SHAREHOLDERS' MEETINGS. All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 2.5 of these by-laws not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees whom, at the time of the notice, management intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California (the "Code"), (ii) an amendment of the articles of incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of the Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall also state the general nature of that proposal. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any meeting of shareholders shall be given either personally or by first-class mail or telegraphic or other written communication, charges prepaid, addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by first-class mail or telegraphic or other written communication to the corporation's 2 principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period of one (1) year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be PRIMA FACIE evidence of the giving of such notice. 2.6 QUORUM. The presence in person or by proxy of the holders of a majority of the shares entitled to vote thereat constitutes a quorum for the transaction of business at all meetings of shareholders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. 2.7 ADJOURNED MEETING; NOTICE. Any shareholders' meeting, annual or special, whether or not a quorum is present, MAY be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at that meeting, except as provided in Section 2.6 of these by-laws. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days from the date set for the original meeting, in which case notice of the adjourned meeting shall be given. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of these by-laws. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. 3 2.8 VOTING. The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11 of these by-laws, subject to the provisions of Sections 702 to 704, inclusive, of the Code (relating to voting shares held by a fiduciary, in the name of a corporation or in joint ownership). The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder before the voting has begun. On any matter other than the election of directors, any shareholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares which the shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented and voting at a duly-held meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number, or voting by classes, is required by the Code or by the articles of incorporation. At a shareholders' meeting at which directors are to be elected, no shareholder shall be entitled to cumulate votes (I.E. cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) unless the candidates' names have been placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates placed in nomination and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are entitled, or distribute the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. 2.9 VALIDATION OF MEETINGS: WAIVER OF NOTICE; CONSENT. The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 2.4 of these by-laws, the waiver of notice or consent shall state the general 4 nature of the proposal. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of a matter not included in the notice of the meeting, if that objection is expressly made at the meeting. 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case of election of directors, such a consent shall be effective only if signed holders of all outstanding shares entitled to vote for the election of directors. All such consents shall be maintained in the corporate records, Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares, or a personal representative of the shareholder, or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary. If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent of all such shareholders shall not have been received, the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. Such notice shall be given in the manner specified in Section 2.5 of these by-laws. In the case of approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 3 10 of the Code, (ii) indemnification of a corporate "agent", pursuant to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. 2.11 RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND GIVING CONSENTS. For purposes of determining the shareholders entitled to notice of any meeting or to vote thereat or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in such event only shareholders of record on the date so fixed are 5 entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Code. If the board of directors does not so fix a record date: (a) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; and (b) the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given or (ii) when prior action by the board has been taken, shall be the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. The record date for any other purpose shall be as provided in Article VIII of these by-laws. 2.12 PROXIES. Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder 5 name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the corporation stating that the proxy is revoked, or by a subsequent proxy executed by the person executing the prior proxy and presented to the meeting, or as to any meeting by attendance at such meeting and voting in person by the person executing the proxy or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Code. 2.13 INSPECTORS OF ELECTION. Before any meeting of shareholders, the board of directors may appoint an inspector or inspectors of election to act at the meeting or its adjournment. If no inspection of election is so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint an inspector or inspectors of election to act at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting pursuant to the request of one (1) or more shareholders or proxies, the holders of a 6 majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. Such inspectors shall: (a) Determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; (b) Receive votes, ballots or consents; (c) Hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) Count and tabulate all votes or consents; (e) Determine when the polls shall close; (f) Determine the result; and (g) Do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE III DIRECTORS 3.1 POWERS. Subject to the provisions of the Code and any limitations in the articles of incorporation and these by-laws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 7 3.2 NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of directors shall be three (3) until changed by a duly adopted amendment to the articles of incorporation or by an amendment to this by-law adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be elected at each annual meeting of shareholders to hold office until the next such annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. 3.4 VACANCIES. Vacancies in the board of directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, except that a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the vote of a majority of the outstanding shares entitled to vote thereon represented at a duly held meeting at which a quorum is present, or by the unanimous written consent of all shares entitled to vote thereon. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the board of directors shall be deemed to exist in the event of the death, resignation or removal of any director, or if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, or if the authorized number of directors is increased, or if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be elected at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election other than to fill a vacancy created by removal, if by written consent, shall require the consent of the holders of a majority of the outstanding shares entitled to vote thereon. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. Regular meetings of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the 8 State of California that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting. 3.6 REGULAR MEETINGS. Regular meetings of the board of directors may be held without notice if the times of such meetings are fixed by the board of directors. 3.7 SPECIAL MEETINGS. Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally, or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.8 QUORUM. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.10 of these by-laws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the Code (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of the Code (as to appointment of committees) and Section 317(e) of the Code (as to indemnification of directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 9 3.9 WAIVER OF NOTICE. The transactions of any meeting of the board of directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes thereof. The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Notice of a meeting shall also be deemed given to any director who attends the meeting without protesting, before or at its commencement, the lack of notice to that director. 3.10 ADJOURNMENT. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. 3.11 NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four (24) hours, in which case notice of the time and place shall be given before the time of the adjourned meeting, in the manner specified in Section 3.7 of these by-laws, to the directors who were not present at the time of the adjournment. 3.12 ACTION WITHOUT MEETING. Any action required or permitted to be taken by the board of directors may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board. 3.13 FEES AND COMPENSATION OF DIRECTORS. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the board of directors. This Section 3.13 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise, and receiving compensation for those services. 10 ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS. The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) the approval of any action which, under the Code, also requires shareholders' approval or approval of the outstanding shares; (b) the filling of vacancies in the board of directors or in any committee; (c) the fixing of compensation of the directors for serving on the board or any committee; (d) the amendment or repeal of these by-laws or the adoption of new by-laws; (e) the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) the appointment of any other committees of the board of members of such committees. 4.2 MEETINGS AND ACTION OF COMMITTEES. Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these by-laws, Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), Section 3.10 (adjournment), Section 3.11 (notice of adjournment) and Section 3.12 (action without meeting), with such changes in the context of those by-laws as are necessary to substitute the committee and its members for the board of directors and its members, except that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee; special meetings of committees may also be called by resolution of the board of directors; and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to 11 attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these by-laws. ARTICLE V OFFICERS 5.1 OFFICERS. The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of these by-laws. Any number of offices may be held by the same person. 5.2 ELECTION OF OFFICERS. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these by-laws, shall be chosen by the board, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS. The board of directors may appoint, or may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in these by-laws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors at any regular or special meeting of the board or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these by-laws for regular appointments to that office. 12 5.6 CHAIRMAN OF THE BOARD. The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the board of directors or prescribed by these by-laws. If there is no president, the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these by-laws. 5.7 PRESIDENT. Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction and control of the business and the officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the chairman of the board, or if there be none, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or these by-laws. 5.8 VICE PRESIDENTS. In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all 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. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these by-laws, the president or the chairman of the board. 5.9 SECRETARY. The secretary shall keep or cause to be kept, at the principal executive office of the corporation, or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and shareholders, with the time and place of holding, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. 13 The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required by these by-laws or by law to be given, and he shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these by-laws. 5.10 CHIEF FINANCIAL OFFICER. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these by-laws. ARTICLE VI INDEMNIFICATION OF DIRECTORS, AND OFFICERS, EMPLOYEES AND OTHER AGENTS The corporation shall, to the maximum extent and in the manner permitted by the Code, indemnify each of its agents against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact any such person is or was an agent of the corporation. For purposes of this Article VI, an "agent" of the corporation includes any person who is or was a director, officer, employee or other 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, or was a director, officer, employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER. The corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, if either be appointed and as determined by resolution of the board of directors, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each shareholder. 14 A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation or who holds at least one percent (1%) of such voting shares and has filed a Schedule 14B with the Securities and Exchange Commission relating to the election of directors, may (i) inspect and copy the records of shareholders' names and addresses and shareholdings during usual business hours on five (5) days' prior written demand on the corporation, (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the names and addresses of the shareholders who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand. Such list shall be made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received or five (5) days after the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder, 5 interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 7.1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. 7.2 MAINTENANCE AND INSPECTION OF BY-LAWS. The corporation shall keep at its principal executive office, or if its principal executive office is not in the State of California, at its principal business office in such state, the original or a copy of these by-laws as amended to date, which by-laws shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in such state, the secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of these by-laws as amended to date. 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The accounting books and records, and the minutes of proceedings of the shareholders and the board of directors and any committee or committees of the board of directors, shall be kept at such place or places designated by the board of directors or, in absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person 15 or by an agent or attorney, and shall include the right to copy and make extracts. Such rights of inspection shall extend to the records of each subsidiary corporation of the corporation. 7.4 INSPECTION BY DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect all books, records and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. Such inspection by a director may be made in person or by an agent or attorney, and the right of inspection includes the right to copy and make extracts of documents. 7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER. The board of directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation. Such report shall be sent at least fifteen (15) days before the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 2.5 of these by-laws for giving notice to shareholders of the corporation. The annual report shall contain a balance sheet as of the end of the fiscal year and an income statement and statement of changes in financial position for the fiscal year accompanied by any report of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. The foregoing requirement of an annual report shall be waived so long as the shares of the corporation are held by less than one hundred (100) holders of record. 7.6 FINANCIAL STATEMENTS. A copy of any annual financial statement and any income statement of the corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of the corporation as of the end of each such period, that has been prepared by the corporation shall be kept on file in the principal executive office of the corporation for twelve (12) months; and each such statement shall be exhibited at all reasonable times to any shareholder demanding an examination of any such statement or a copy shall be mailed to any such shareholder. If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and for a balance sheet of the corporation as of the end of that period, the chief financial officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the corporation has not sent to the shareholders its annual report for the last 16 fiscal year, such report shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request. The corporation shall also, on the written request of any shareholder, mail to the shareholder a copy of the last annual, semi-annual or quarterly income statement which it has prepared, and a balance sheet as of the end of that period. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. ARTICLE VIII GENERAL MATTERS 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For purposes of determining the shareholders 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 lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action, and in that case only shareholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the Code. If the board of directors does not so fix a record date, the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. 8.2 CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks, drafts, or other orders for payment of money, notes, or other evidences 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 of directors. 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED. The board of directors, except as other-wise provided in these by-laws, may authorize any officer or officers, or 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, unless so authorized or ratified by the board of directors or within the 17 agency power of an officer, no officer, agent or employees 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 for any amount. 8.4 CERTIFICATES FOR SHARES. A certificate or certificates for shares of the corporation shall be issued to each shareholder when any of such shares are fully paid, and the board of directors may authorize the issuance of certificates or shares as partly paid provided that these certificates shall state the amount of the consideration to be paid for them and the amount paid. All certificates shall be signed in the name of the corporation by the chairman of the board or vice chairman of the board or the president or a vice president and by the chief financial officer or an assistant treasurer or the secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures or the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be that officer, transfer agent or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue. 8.5 LOST CERTIFICATES. Except as provided in this Section 8.5 no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and canceled at the same time. The board of directors may in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the board may require, including provision for indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 8.6 CONSTRUCTION AND DEFINITIONS. Unless the context requires otherwise the general provisions, rules of construction and definitions in the Code shall govern the construction of these by-laws. Without limiting the generality of this provision the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 18 ARTICLE IX AMENDMENTS 9.1 AMENDMENT BY SHAREHOLDERS. New by-laws may be adopted or these by-laws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the number of authorized directors of the corporation, the authorized number of directors may be changed only by an amendment as required by applicable law. 9.2 AMENDMENT BY DIRECTORS. Subject to the rights of the shareholders as provided in Section 9.1 of these by-laws, by-laws, other than a by-law or an amendment of a by-law changing the authorized number of directors (except to fix the authorized number of directors pursuant to a by-law providing for a variable number of directors), may be adopted, amended, or repealed by the board of directors. 19 EX-4.3 4 EXHIBIT 4.3 ELGAR HOLDINGS, INC. as Issuer, ELGAR ELECTRONICS CORPORATION, as Subsidiary Guarantor POWER TEN as Subsidiary Guarantor and UNITED STATES TRUST COMPANY OF NEW YORK as Trustee SECOND SUPPLEMENTAL INDENTURE Dated as of May 29, 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 SECOND SUPPLEMENTAL INDENTURE, dated as of May 29, 1998, by and between Elgar Holdings, Inc., a Delaware corporation (the "EHI"), Elgar Electronics Corporation, a California corporation ("Elgar), Power Ten, a California corporation ("Power Ten," together with Elgar referred to herein as the "Subsidiary Guarantors"), and United States Trust Company of New York, a New York banking corporation, 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, EHI subsequently executed and delivered to the Trustee the first supplemental indenture dated as of February 3, 1998 (the "First Supplemental Indenture") by and among EHI, Elgar and the Trustee through which EHI expressly assumed all of MergerCo's debts, liabilities, duties and obligations in respect of the Notes under the Indenture and Elgar became a Subsidiary Guarantor under the Indenture; and WHEREAS, Elgar, Vincent S. Mutascio and Joseph A. Varozza entered into a Stock Purchase Agreement dated May 5, 1998, which contemplates the purchase by Elgar of all of the outstanding capital stock of Power Ten; and WHEREAS, EHI and Elgar desire to have Power Ten become a Restricted Subsidiary under the Indenture; and WHEREAS, domestic Restricted Subsidiaries are required to become Subsidiary Guarantors pursuant to Section 4.18 of the Indenture prior to guaranteeing Indebtedness of EHI; and WHEREAS, Power Ten desires to become a Subsidiary Guarantor by guaranteeing the obligations of EHI under the Indenture in accordance with the terms thereof; and WHEREAS, the EHI, Elgar and Power Ten have been duly authorized by each of their respective Board of Directors to enter into, execute and deliver this Second Supplemental Indenture; and NOW THEREFORE, for and in consideration of the premises and covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, EHI, Elgar, Power Ten and the Trustee agree as follows: 2 ADDITIONAL SUBSIDIARY GUARANTOR SECTION 1. Simultaneously with the execution of this Second Supplemental Indenture, Power Ten shall be deemed to be a "Subsidiary Guarantor" under and as defined in the Indenture and hereby unconditionally guarantees, as principal obligor and not only as a surety, to the Holder of the Notes the cash payments in United States dollars of principal of, premium, if any, and interest and Additional Interest, if any, on the Notes 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 the Notes, if lawful, and the payment or performance of all other obligations of EHI under the Indenture or the Notes, to the Holder of the Note and the Trustee, all in accordance with and subject to the terms and limitations of the Notes and Article Ten of the Indenture. This Note Guarantee will become effective in accordance with Article Ten of the Indenture and its terms shall be evidenced therein. SECTION 2. Except as expressly supplemented by this Second Supplemental Indenture, the Indenture and the Notes issued thereunder are in all respects ratified and confirmed and all of the rights, remedies, terms, conditions, covenants and agreements of the Indenture and Notes issued thereunder shall remain in full force and effect. Capitalized terms used herein but not defined herein shall have the meaning provided in the Indenture. SECTION 3. This Second Supplemental Indenture is executed as and shall constitute an indenture supplemental to the Indenture and shall be construed in connection with and as part of the Indenture. This Second Supplemental Indenture shall be governed by and construed in accordance with the laws of the jurisdiction that governs the Indenture and its construction. SECTION 3. This Second Supplemental Indenture may be executed in any number of counterparts, each of which shall be deemed to be an original for all purposes; but such counterparts shall together be deemed to constitute but one and the same instrument. SECTION 4. Any and all notices, requests, certificates and other instrument executed and delivered after the execution and delivery of this Second Supplemental Indenture may refer to the Indenture without making specific reference to this Second Supplemental Indenture, but nevertheless all such references shall include this Second Supplemental Indenture unless the context otherwise requires. SECTION 5. This Second Supplemental Indenture shall be deemed to have become effective upon the date first above written. SECTION 6. In the event of a conflict between the terms of this Second Supplemental Indenture and the Indenture, this Second Supplemental Indenture shall control. SECTION 7. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Second Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made solely by EHI, Elgar and Power Ten. 3 IN WITNESS WHEREOF, the parties have caused this Second Supplemental Indenture to be duly executed, and their respective corporate seals, if any, to be hereunto affixed and attested, all as of the day and year first above written. ELGAR HOLDINGS, INC.. By: /s/ Donald Glickman Attest: /s/ Keith Oster ------------------------------- ------------------------------- Name: Donald Glickman Name: Keith Oster Title: Vice President Title: Secretary ELGAR ELECTRONICS CORPORATION By: /s/ Donald Glickman Attest: /s/ Keith Oster ------------------------------- ------------------------------- Name: Donald Glickman Name: Keith Oster Title: Vice President Title: Secretary POWER TEN By: /s/ Keith Oster Attest: /s/ Louis N. Mintz ------------------------------- ------------------------------- Name: Keith Oster Name: Louis N. Mintz Title: Vice President Title: Assistant Secretary UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee By: /s/ Cynthia Chaney ------------------------------- Name: Cynthia Chaney Title: Assistant Vice President 4 EX-5.1 5 EXHIBIT 5.1 [LETTERHEAD OF GIBSON, DUNN & CRUTCHER LLP] July __, 1998 (213) 229-7000 C 26292-00003 Elgar Holdings, Inc. 9250 Brown Deer Road San Diego, California 92121 Re: ELGAR HOLDINGS, INC. -- REGISTRATION STATEMENT ON FORM S-4 (REG. NO. 333-55797) Ladies and Gentlemen: We have acted as special counsel for Elgar Holdings, Inc., a Delaware corporation (the "Company"), in connection with the Company's registration of up to $90,000,000 aggregate principal amount of the Company's 9-7/8% Senior Notes due 2008 (the "New Notes") on Form S-4 Registration Statement No. 333-55797 (the "Registration Statement") under the Securities Act of 1933, as amended. The New Notes will be offered in exchange for a like principal amount of the Company's 9-7/8% Senior Subordinated Notes due 2008 (the "Old Notes") pursuant to that certain Registration Rights Agreement, dated as of February 3, 1998, by and among the Company, Elgar Electronics Corporation, a California corporation and wholly owned subsidiary of the Company (the "Elgar"), and BT Alex. Brown Incorporated (the "Registration Rights Agreement"). The Registration Rights Agreement was executed in connection with the private placement of the Old Notes. We have also acted as special counsel for the Elgar and Power Ten, a California corporation and wholly owned subsidiary of Elgar ("Power Ten," and collectively with Elgar, the "Subsidiary Guarantors"), in connection with the registration of the guarantees of the New Notes by the Subsidiary Guarantors under the Registration Statement (the "Guarantees"). Elgar Holdings, Inc. July __, 1998 Page 2 The New Notes will be issued pursuant to that certain Indenture dated as of February 3, 1998, by and among the Company, the Subsidiary Guarantors, and United States Trust Company of New York, N.A., as Trustee, as amended or supplemented from time to time (the "Indenture"). We are familiar with the actions taken and to be taken by the Company and the Subsidiary Guarantors in connection with the offering of the New Notes and the issuance of the Guarantees. On the basis of such knowledge and such investigation as we have deemed necessary, we are of the opinion that: (i) the New Notes have been duly authorized by the Company and, when issued in exchange for the Old Notes pursuant to the terms of the exchange offer described in the Registration Statement and the Indenture, will be validly issued and will constitute legal and binding obligations of the Company; and (ii) the Guarantees have been duly authorized by the Subsidiary Guarantors and, when issued along with the New Notes in accordance with the terms of the Indenture, will be validly issued and will constitute the legal and binding obligations of the Subsidiary Guarantors. Our opinions are subject to limitations imposed by (i) applicable 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 or preferential transfers or (ii) general principles of equity, whether considered at law or at equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing. We hereby consent to the filing of this opinion as an exhibit to Registration Statement No. 333-55797 and to the reference to this firm under the heading "Legal Matters" contained in the prospectus that forms a part of the Registration Statement. Very truly yours, GIBSON, DUNN & CRUTCHER LLP KMD/wmr EX-8.1 6 EXHIBIT 8.1 [LETTERHEAD OF GIBSON, DUNN & CRUTCHER LLP] July __, 1998 (213) 229-7000 C 26292-00003 Elgar Holdings, Inc. 9250 Brown Deer Road San Diego, California 92121 Re: EXCHANGE OF 9-7/8% SENIOR SUBORDINATED NOTES DUE 2008 Gentlemen: We have acted as special counsel to Elgar Holdings, Inc., a Delaware corporation (the "Company"), in connection with the issuance by the Company of $90 million principal amount of 9-7/8% Senior Notes Due 2008 (the "Exchange Notes") issued in exchange for $90 million principal amount of the Company's 9-7/8% Senior Notes due 2008 (the "Old Notes"). The terms of the Old Notes and the Exchange Notes are described in the Prospectus dated July __, 1998 (the "Prospectus") and the operative documents described therein. This opinion is based on the accuracy of the facts described and the representations made in the Prospectus. We have made such legal and factual examinations and inquiries as we have deemed necessary or appropriate for purposes of this opinion. We are opining herein as to the effect on the subject transaction only of the federal income tax laws of the United States, and we express no opinion with respect to the applicability thereto, or the effect thereon, of other federal laws, the laws of any other jurisdiction or as to any matters of municipal law or the laws of any other local agencies within any state. Elgar Holdings, Inc. July __, 1998 Page 2 Based on the foregoing, we hereby confirm our opinion in the Prospectus described under the caption "Federal Income Tax Consequences." This opinion is based on various statutory provisions, regulations promulgated thereunder and interpretations thereof by the Internal Revenue Service and the courts having jurisdiction over such matters, all of which are subject to change either prospectively or retroactively. Any variation or difference in the facts from those set forth in the Prospectus or the operative documents described therein may affect the conclusions stated herein. We hereby consent to the use of our name and our opinion under the caption "Federal Income Tax Consequences" in the Prospectus. Very truly yours, GIBSON, DUNN & CRUTCHER LLP HB/wmr EX-10.15 7 EXHIBIT 10.15 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- AMENDED AND RESTATED CREDIT AGREEMENT among ELGAR HOLDINGS, INC., ELGAR ELECTRONICS CORPORATION, VARIOUS BANKS and BANKERS TRUST COMPANY, as AGENT ---------------------------------------- Dated as of February 3, 1998 and Amended and Restated as of May 29, 1998 ---------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ---- SECTION 1. Amount and Terms of Credit . . . . . . . . . . . . . . . . . . . 1 1.01 The Commitments . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.02 Minimum Amount of Each Borrowing. . . . . . . . . . . . . . . . . 4 1.03 Notice of Borrowing . . . . . . . . . . . . . . . . . . . . . . . 4 1.04 Disbursement of Funds . . . . . . . . . . . . . . . . . . . . . . 5 1.05 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.06 Conversions . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.07 Pro Rata Borrowings . . . . . . . . . . . . . . . . . . . . . . . 7 1.08 Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.09 Interest Periods. . . . . . . . . . . . . . . . . . . . . . . . . 8 1.10 Increased Costs, Illegality, etc. . . . . . . . . . . . . . . . . 9 1.11 Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . .11 1.12 Change of Lending Office. . . . . . . . . . . . . . . . . . . . .12 1.13 Replacement of Banks. . . . . . . . . . . . . . . . . . . . . . .12 SECTION 2. Letters of Credit. . . . . . . . . . . . . . . . . . . . . . . .13 2.01 Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . .13 2.02 Maximum Letter of Credit Outstandings; Final Maturities . . . . .14 2.03 Letter of Credit Requests; Minimum Stated Amount. . . . . . . . .14 2.04 Letter of Credit Participations . . . . . . . . . . . . . . . . .15 2.05 Agreement to Repay Letter of Credit Drawings. . . . . . . . . . .17 2.06 Increased Costs . . . . . . . . . . . . . . . . . . . . . . . . .17 SECTION 3. Commitment Commission; Fees; Reductions of Commitment. . . . . .18 3.01 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 3.02 Voluntary Termination of Unutilized Revolving Loan Commitments. .19 3.03 Mandatory Reduction of Commitments. . . . . . . . . . . . . . . .20 SECTION 4. Prepayments; Payments; Taxes . . . . . . . . . . . . . . . . . .20 4.01 Voluntary Prepayments.. . . . . . . . . . . . . . . . . . . . . .20 4.02 Mandatory Repayments. . . . . . . . . . . . . . . . . . . . . . .21 4.03 Method and Place of Payment . . . . . . . . . . . . . . . . . . .25 4.04 Net Payments. . . . . . . . . . . . . . . . . . . . . . . . . . .25 SECTION 5. Conditions Precedent to the Restatement Effective Date . . . . .27 5.01 Execution of Agreement; Notes . . . . . . . . . . . . . . . . . .27 5.02 Officer's Certificate . . . . . . . . . . . . . . . . . . . . . .28 5.03 Opinions of Counsel . . . . . . . . . . . . . . . . . . . . . . .28
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Page ---- 5.04 Corporate Documents; Proceedings; etc.. . . . . . . . . . . . . .28 5.05 Plans; Shareholders' Agreements; Management Agreements; Employment Agreements; Non-Compete Agreements; Collective Bargaining Agreements; Tax Sharing Agreements; Existing Indebtedness Agreements . . . . . . . . . . . . . . . . . . . .28 5.06 Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . .29 5.07 Existing Credit Agreement . . . . . . . . . . . . . . . . . . . .30 5.08 Adverse Change, etc.. . . . . . . . . . . . . . . . . . . . . . .30 5.09 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . .31 5.10 Pledge Agreement. . . . . . . . . . . . . . . . . . . . . . . . .31 5.11 Security Agreement. . . . . . . . . . . . . . . . . . . . . . . .31 5.12 Subsidiaries Guaranty . . . . . . . . . . . . . . . . . . . . . .32 5.13 Capital Call Agreement. . . . . . . . . . . . . . . . . . . . . .32 5.14 Landlord Waivers. . . . . . . . . . . . . . . . . . . . . . . . .32 5.15 Financial Statements; Pro Forma Financial Statements, Projections . . . . . . . . . . . . . . . . . . . . . . . . . .32 5.16 Solvency Certificate; Insurance Certificates. . . . . . . . . . .32 5.17 Initial Borrowing Base Certificate. . . . . . . . . . . . . . . .32 5.18 Fees, etc.. . . . . . . . . . . . . . . . . . . . . . . . . . . .32 SECTION 6. Conditions Precedent to All Credit Events. . . . . . . . . . . .32 6.01 Restatement Effective Date. . . . . . . . . . . . . . . . . . . .33 6.02 No Default; Representations and Warranties. . . . . . . . . . . .33 6.03 Notice of Borrowing; Letter of Credit Request . . . . . . . . . .33 SECTION 7. Representations, Warranties and Agreements . . . . . . . . . . .33 7.01 Corporate Status. . . . . . . . . . . . . . . . . . . . . . . . .34 7.02 Corporate and Other Power and Authority . . . . . . . . . . . . .34 7.03 No Violation. . . . . . . . . . . . . . . . . . . . . . . . . . .34 7.04 Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 7.05 Financial Statements; Financial Condition; Undisclosed Liabilities; Projections; etc.. . . . . . . . . . . . . . . . .35 7.06 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . .36 7.07 True and Complete Disclosure. . . . . . . . . . . . . . . . . . .36 7.08 Use of Proceeds; Margin Regulations . . . . . . . . . . . . . . .37 7.09 Tax Returns and Payments. . . . . . . . . . . . . . . . . . . . .37 7.10 Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . .37 7.11 The Security Documents. . . . . . . . . . . . . . . . . . . . . .38 7.12 Representations and Warranties in the Documents . . . . . . . . .39 7.13 Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . .39 7.14 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . .39 7.15 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . .40 7.16 Compliance with Statutes, etc.. . . . . . . . . . . . . . . . . .40 7.17 Investment Company Act. . . . . . . . . . . . . . . . . . . . . .40 7.18 Public Utility Holding Company Act. . . . . . . . . . . . . . . .40 7.19 Environmental Matters . . . . . . . . . . . . . . . . . . . . . .41 7.20 Labor Relations . . . . . . . . . . . . . . . . . . . . . . . . .41
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Page ---- 7.21 Patents, Licenses, Franchises and Formulas. . . . . . . . . . . .42 7.22 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . .42 7.23 Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . .42 7.24 Special Purpose Corporation.. . . . . . . . . . . . . . . . . . .42 7.25 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 SECTION 8. Affirmative Covenants. . . . . . . . . . . . . . . . . . . . . .43 8.01 Information Covenants . . . . . . . . . . . . . . . . . . . . . .43 (a) Monthly Reports . . . . . . . . . . . . . . . . . . . . . . .43 (b) Quarterly Financial Statements. . . . . . . . . . . . . . . .43 (c) Annual Financial Statements.. . . . . . . . . . . . . . . . .43 (d) Management Letters. . . . . . . . . . . . . . . . . . . . . .44 (e) Budgets . . . . . . . . . . . . . . . . . . . . . . . . . . .44 (f) Officer's Certificates. . . . . . . . . . . . . . . . . . . .44 (g) Notice of Default or Litigation . . . . . . . . . . . . . . .44 (h) Other Reports and Filings . . . . . . . . . . . . . . . . . .44 (i) Environmental Matters . . . . . . . . . . . . . . . . . . . .44 (j) Borrowing Base Certificate. . . . . . . . . . . . . . . . . .45 (k) Other Information . . . . . . . . . . . . . . . . . . . . . .46 8.02 Books, Records, Inspections, Audits and Annual Meetings . . . . .46 8.03 Maintenance of Property; Insurance. . . . . . . . . . . . . . . .46 8.04 Corporate Franchises. . . . . . . . . . . . . . . . . . . . . . .47 8.05 Compliance with Statutes, etc.. . . . . . . . . . . . . . . . . .47 8.06 Compliance with Environmental Laws. . . . . . . . . . . . . . . .47 8.07 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 8.08 End of Fiscal Years; Fiscal Quarters. . . . . . . . . . . . . . .49 8.09 Performance of Obligations. . . . . . . . . . . . . . . . . . . .49 8.10 Payment of Taxes. . . . . . . . . . . . . . . . . . . . . . . . .49 8.11 Additional Security; Further Assurances . . . . . . . . . . . . .50 8.12 Contributions . . . . . . . . . . . . . . . . . . . . . . . . . .51 8.13 Preferred Stock Dividends . . . . . . . . . . . . . . . . . . . .51 8.14 Interest Rate Protection. . . . . . . . . . . . . . . . . . . . .51 SECTION 9. Negative Covenants . . . . . . . . . . . . . . . . . . . . . . .51 9.01 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51 9.02 Consolidation, Merger, Purchase or Sale of Assets, etc. . . . . .54 9.03 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . .57 9.04 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . .58 9.05 Advances, Investments and Loans . . . . . . . . . . . . . . . . .59 9.06 Transactions with Affiliates. . . . . . . . . . . . . . . . . . .61 9.07 Consolidated Fixed Charge Coverage Ratio. . . . . . . . . . . . .62 9.09 Minimum Consolidated EBITDA . . . . . . . . . . . . . . . . . . .63 9.10 Limitation on Payments of Certain Indebtedness; Modifications of Certain Indebtedness; Modifications of Certificate of Incorporation, By-Laws and Certain Other Agreements; etc. . . .64
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Page ---- 9.11 Limitation on Certain Restrictions on Subsidiaries. . . . . . . .64 9.12 Limitation on Issuance of Capital Stock . . . . . . . . . . . . .65 9.13 Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . .65 9.14 Limitation on Creation of Subsidiaries. . . . . . . . . . . . . .66 9.15 Additional Restriction on the Incurrence of Certain Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . .66 SECTION 10. Events of Default . . . . . . . . . . . . . . . . . . . . . . .67 10.01 Payments.. . . . . . . . . . . . . . . . . . . . . . . . . . . .67 10.02 Representations, etc.. . . . . . . . . . . . . . . . . . . . . .67 10.03 Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . .67 10.04 Default Under Other Agreements . . . . . . . . . . . . . . . . .67 10.05 Bankruptcy, etc. . . . . . . . . . . . . . . . . . . . . . . . .68 10.06 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68 10.07 Security Documents . . . . . . . . . . . . . . . . . . . . . . .69 10.08 Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . .69 10.09 Judgments. . . . . . . . . . . . . . . . . . . . . . . . . . . .69 10.10 Change of Control. . . . . . . . . . . . . . . . . . . . . . . .69 10.11 Capital Call Agreement . . . . . . . . . . . . . . . . . . . . .69 SECTION 11. Definitions and Accounting Terms. . . . . . . . . . . . . . . .70 11.01 Defined Terms. . . . . . . . . . . . . . . . . . . . . . . . . .70 SECTION 12. The Agent . . . . . . . . . . . . . . . . . . . . . . . . . . .93 12.01 Appointment. . . . . . . . . . . . . . . . . . . . . . . . . . .93 12.02 Nature of Duties . . . . . . . . . . . . . . . . . . . . . . . .93 12.03 Lack of Reliance on the Agent. . . . . . . . . . . . . . . . . .94 12.04 Certain Rights of the Agent. . . . . . . . . . . . . . . . . . .94 12.05 Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . .94 12.06 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . .94 12.07 The Agent in its Individual Capacity . . . . . . . . . . . . . .95 12.08 Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . .95 12.09 Resignation by the Agent . . . . . . . . . . . . . . . . . . . .95 SECTION 13. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . .96 13.01 Payment of Expenses, etc.. . . . . . . . . . . . . . . . . . . .96 13.02 Right of Setoff. . . . . . . . . . . . . . . . . . . . . . . . .97 13.03 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . .98 13.04 Benefit of Agreement; Assignments; Participations. . . . . . . .98 13.05 No Waiver; Remedies Cumulative . . . . . . . . . . . . . . . . .99 13.06 Payments Pro Rata. . . . . . . . . . . . . . . . . . . . . . . 100 13.07 Calculations; Computations; Accounting Terms . . . . . . . . . 100 13.08 GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . 101 13.09 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 102
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Page ---- 13.10 Effectiveness. . . . . . . . . . . . . . . . . . . . . . . . . 102 13.11 Headings Descriptive . . . . . . . . . . . . . . . . . . . . . 102 13.12 Amendment or Waiver; etc.. . . . . . . . . . . . . . . . . . . 102 13.13 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 13.14 Domicile of Loans. . . . . . . . . . . . . . . . . . . . . . . 104 13.15 Register . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 13.16 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . 105 13.17 Holdings Merger. . . . . . . . . . . . . . . . . . . . . . . . 105 SECTION 14. Holdings Guaranty . . . . . . . . . . . . . . . . . . . . . . 106 14.01 Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 14.02 Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . 106 14.03 Nature of Liability. . . . . . . . . . . . . . . . . . . . . . 106 14.04 Independent Obligation . . . . . . . . . . . . . . . . . . . . 107 14.05 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . 107 14.06 Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 14.07 Subordination. . . . . . . . . . . . . . . . . . . . . . . . . 108 14.08 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 14.09 Nature of Liability. . . . . . . . . . . . . . . . . . . . . . 110
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SCHEDULE I Commitments SCHEDULE II Bank Addresses SCHEDULE III Real Properties SCHEDULE IV Plans SCHEDULE V Subsidiaries SCHEDULE VI Existing Indebtedness SCHEDULE VII Insurance SCHEDULE VIII Existing Liens SCHEDULE IX Existing Investments SCHEDULE X Certain Tax Matters SCHEDULE XI Existing Letters of Credit SCHEDULE XII Certain Affiliate Transactions SCHEDULE XIII Litigation EXHIBIT A Form of Notice of Borrowing EXHIBIT B-1 Form of Term Note EXHIBIT B-2 Form of Revolving Note EXHIBIT B-3 Form of Swingline Note EXHIBIT C Form of Letter of Credit Request EXHIBIT D Form of Section 4.04(b)(ii) Certificate EXHIBIT E Form of Opinion of Gibson, Dunn & Crutcher LLP, Special Counsel to the Credit Parties EXHIBIT F Form of Officers' Certificate EXHIBIT G Form of Pledge Agreement EXHIBIT H Form of Security Agreement EXHIBIT I Form of Subsidiaries Guaranty EXHIBIT J Form of Capital Call Agreement EXHIBIT K Form of Solvency Certificate EXHIBIT L Form of Borrowing Base Certificate EXHIBIT M Form of Assignment and Assumption Agreement EXHIBIT N Form of Intercompany Note
(vi) AMENDED AND RESTATED CREDIT AGREEMENT, dated as of February 3, 1998 and amended and restated as of May 29, 1998, among ELGAR HOLDINGS, INC., a Delaware corporation ("Holdings"), ELGAR ELECTRONICS CORPORATION, a California corporation (the "Borrower"), the Banks party hereto from time to time, and BANKERS TRUST COMPANY, as Agent (all capitalized terms used herein and defined in Section 11 are used herein as therein defined). W I T N E S S E T H : WHEREAS, Holdings, the Borrower, the Existing Banks and Bankers Trust Company, as Agent, are party to a Credit Agreement, dated as of February 3, 1998 (as the same has been amended, modified or supplemented to, but not including, the Restatement Effective Date, the "Existing Credit Agreement"); and WHEREAS, the parties hereto wish to amend and restate the Existing Credit Agreement as herein provided; NOW, THEREFORE, the parties hereto agree that the Existing Credit Agreement shall be and is hereby amended and restated in its entirety as follows: NOW, THEREFORE, IT IS AGREED: SECTION 1. AMOUNT AND TERMS OF CREDIT. 1.01 THE COMMITMENTS. (a) Subject to and upon the terms and conditions set forth herein, each Bank with a Term Loan Commitment severally agrees to make a term loan (each a "Term Loan" and, collectively, the "Term Loans") to the Borrower, which Term Loans (i) shall be incurred by the Borrower on the Restatement Effective Date, (ii) shall, at the option of the Borrower, be incurred and maintained as, and/or converted into, Base Rate Loans or Eurodollar Loans, PROVIDED THAT, (A) except as otherwise specifically provided in Section 1.10(b), all Term Loans comprising the same Borrowing shall at all times be of the same Type and (B) unless the Agent has determined (and has notified the Borrower) that the Syndication Date has occurred (at which time this clause (B) shall no longer be applicable), no more than three Borrowings of Term Loans to be maintained as Eurodollar Loans may be incurred prior to the 90th day after the Restatement Effective Date (each of which Borrowings of Eurodollar Loans may only have an Interest Period of one month, and the first of which Borrowings may only be made on the Restatement Effective Date or on or prior to the sixth Business Day after the Restatement Effective Date, the second of which Borrowings may only be made on the last day of the Interest Period of the first such Borrowing and the third of which Borrowings may only be made on the last day of the Interest Period of the second such Borrowing) and (iii) shall be made by each such Bank in that aggregate principal amount which does not exceed the Term Loan Commitment of such Bank on the Restatement Effective Date (before giving effect to the termination thereof on such date pursuant to Section 3.03(b)). Once repaid, Term Loans incurred hereunder may not be reborrowed. (b) Subject to and upon the terms and conditions set forth herein, each Bank with a Revolving Loan Commitment severally agrees (I) to convert, on the Restatement Effective Date, Existing Revolving Loans made by such Bank to the Borrower pursuant to the Existing Credit Agreement and outstanding on the Restatement Effective Date into a Borrowing of Revolving Loans hereunder and (II) at any time and from time to time on and after the Restatement Effective Date and prior to the Final Maturity Date, to make one or more additional Revolving Loans to the Borrower, all of which Revolving Loans (i) shall, at the option of the Borrower, be incurred and maintained as, and/or converted into, Base Rate Loans or Eurodollar Loans, PROVIDED that (A) except as otherwise specifically provided in Section 1.10(b), all Revolving Loans comprising the same Borrowing shall at all times be of the same Type and (B) unless the Agent has determined (and has notified the Borrower) that the Syndication Date has occurred (at which time this clause (B) shall no longer be applicable), no more than three Borrowings of Revolving Loans to be maintained as Eurodollar Loans may be incurred prior to the 90th day after the Restatement Effective Date (each of which Borrowings of Eurodollar Loans may only have an Interest Period of one month, and the first of which Borrowings may only be made on the same day as the first day of the first Interest Period of the Term Loans that are maintained as Eurodollar Loans, the second of which Borrowings may only be made on the last day of the Interest Period of the first such Borrowing and the third of which Borrowings may only be made on the last day of the Interest Period of the second such Borrowing), (ii) may be repaid and reborrowed in accordance with the provisions hereof, (iii) shall not exceed for any such Bank at any time outstanding that aggregate principal amount which, when added to the product of (x) such Bank's RL Percentage and (y) the sum of (I) the aggregate amount of all Letter of Credit Outstandings (exclusive of Unpaid Drawings which are repaid with the proceeds of, and simultaneously with the incurrence of, the respective incurrence of Revolving Loans) at such time and (II) the aggregate principal amount of all Swingline Loans (exclusive of Swingline Loans which are repaid with the proceeds of, and simultaneously with the incurrence of, the respective incurrence of Revolving Loans) then outstanding, equals the Available Revolving Loan Commitment of such Bank at such time and (iv) shall not exceed for all such Banks at any time outstanding that aggregate principal amount which, when added to the sum of (I) the aggregate amount of all Letter of Credit Outstandings (exclusive of Unpaid Drawings which are repaid with the proceeds of, and simultaneously with the incurrence of, the respective incurrence of Revolving Loans) at such time and (II) the aggregate principal amount of all Swingline Loans (exclusive of Swingline Loans which are repaid with the proceeds of, and simultaneously with the incurrence of, the respective incurrence of Revolving Loans) then outstanding, equals the lesser of (A) the Borrowing Base at such time (based on the Borrowing Base Certificate last delivered) and (B) the Total Available Revolving Loan Commitment at such time. (c) Subject to and upon the terms and conditions set forth herein, the Swingline Bank agrees to make, at any time and from time to time on and after the Restatement Effective Date and prior to the Swingline Expiry Date, a revolving loan or revolving loans (each a "Swingline Loan" and, collectively, the "Swingline Loans") to the Borrower, which Swingline Loans (i) shall be made and maintained as Base Rate Loans, (ii) may be repaid and reborrowed in accordance with the provisions hereof, (iii) shall not exceed in aggregate principal amount at any time outstanding, when combined with the aggregate principal amount of all Revolving Loans then outstanding and the aggregate amount of all Letter of Credit Outstandings at such time, an -2- amount equal to the lesser of (A) the Borrowing Base at such time (based on the Borrowing Base Certificate last delivered) and (B) the Total Available Revolving Loan Commitment at such time, and (iv) shall not exceed in aggregate principal amount at any time outstanding the Maximum Swingline Amount. Notwithstanding anything to the contrary contained in this Section 1.01(c), (x) the Swingline Bank shall not be obligated to make any Swingline Loans at a time when a Bank Default exists unless the Swingline Bank has entered into arrangements satisfactory to it and the Borrower to eliminate the Swingline Bank's risk with respect to the Defaulting Bank's or Banks' participation in such Swingline Loans, including by cash collateralizing such Defaulting Bank's or Banks' RL Percentage of the outstanding Swingline Loans and (y) the Swingline Bank shall not make any Swingline Loan after it has received written notice from the Borrower, any other Credit Party or the Required Banks stating that a Default or an Event of Default exists and is continuing until such time as the Swingline Bank shall have received written notice (I) of rescission of all such notices from the party or parties originally delivering such notice or (II) of the waiver of such Default or Event of Default by the Required Banks. (d) On any Business Day, the Swingline Bank may, in its sole discretion, give notice to the Banks with a Revolving Loan Commitment that the Swingline Bank's outstanding Swingline Loans shall be funded with one or more Borrowings of Revolving Loans (PROVIDED that such notice shall be deemed to have been automatically given upon the occurrence of a Default or an Event of Default under Section 10.05 or upon the exercise of any of the remedies provided in the last paragraph of Section 10), in which case one or more Borrowings of Revolving Loans constituting Base Rate Loans (each such Borrowing, a "Mandatory Borrowing") shall be made on the immediately succeeding Business Day by all such Banks PRO RATA based on each such Bank's RL Percentage (determined before giving effect to any termination of the Revolving Loan Commitments pursuant to the last paragraph of Section 10) and the proceeds thereof shall be applied directly by the Swingline Bank to repay the Swingline Bank for such outstanding Swingline Loans. Each such Bank hereby irrevocably agrees to make Revolving Loans upon one Business Day's notice pursuant to each Mandatory Borrowing in the amount and in the manner specified in the preceding sentence and on the date specified in writing by the Swingline Bank notwithstanding (i) the amount of the Mandatory Borrowing may not comply with the Minimum Borrowing Amount otherwise required hereunder, (ii) whether any conditions specified in Section 6 are then satisfied, (iii) whether a Default or an Event of Default then exists, (iv) the date of such Mandatory Borrowing and (v) the amount of the Borrowing Base or the Total Available Revolving Loan Commitment at such time. In the event that any Mandatory Borrowing cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code with respect to the Borrower), then each such Bank hereby agrees that it shall forthwith purchase (as of the date the Mandatory Borrowing would otherwise have occurred, but adjusted for any payments received from the Borrower on or after such date and prior to such purchase) from the Swingline Bank such participations in the outstanding Swingline Loans as shall be necessary to cause such Banks to share in such Swingline Loans ratably based upon their respective RL Percentages (determined before giving effect to any termination of the Revolving Loan Commitments pursuant to the last paragraph of Section 10), PROVIDED that (x) all interest payable on the Swingline Loans shall be for the account of the Swingline Bank until the date as of which the respective participation is required to be purchased and, to the extent attributable to the purchased participation, shall be -3- payable to the participant from and after such date and (y) at the time any purchase of participations pursuant to this sentence is actually made, the purchasing Bank shall be required to pay the Swingline Bank interest on the principal amount of participation purchased for each day from and including the day upon which the Mandatory Borrowing would otherwise have occurred to but excluding the date of payment for such participation, at the overnight Federal Funds Rate for the first three days and at the rate otherwise applicable to Base Rate Loans hereunder for each day thereafter. 1.02 MINIMUM AMOUNT OF EACH BORROWING. The aggregate principal amount of each Borrowing of Loans under a respective Tranche shall not be less than the Minimum Borrowing Amount applicable to such Tranche. More than one Borrowing may occur on the same date, but at no time shall there be outstanding more than eight Borrowings of Eurodollar Loans. 1.03 NOTICE OF BORROWING. (a) Whenever the Borrower desires to incur (x) Eurodollar Loans hereunder, the Borrower shall give the Agent at the Notice Office at least three Business Days' prior notice of each Eurodollar Loan to be incurred hereunder and (y) Base Rate Loans hereunder (excluding Swingline Loans and Revolving Loans made pursuant to a Mandatory Borrowing), the Borrower shall give the Agent at the Notice Office at least one Business Day's prior notice of each Base Rate Loan to be incurred hereunder, PROVIDED that (in each case) any such notice shall be deemed to have been given on a certain day only if given before 12:00 Noon (New York time) on such day. Each such notice (each a "Notice of Borrowing"), except as otherwise expressly provided in Section 1.10, shall be irrevocable and shall be given by the Borrower in writing, or by telephone promptly confirmed in writing, in the form of Exhibit A, appropriately completed to specify the aggregate principal amount of the Loans to be incurred pursuant to such Borrowing, the date of such Borrowing (which shall be a Business Day), whether the Loans being incurred pursuant to such Borrowing shall constitute Term Loans or Revolving Loans, whether the Loans being incurred pursuant to such Borrowing are to be initially maintained as Base Rate Loans or, to the extent permitted hereunder, Eurodollar Loans and, if Eurodollar Loans, the initial Interest Period to be applicable thereto. The Agent shall promptly give each Bank which is required to make Loans of the Tranche specified in the respective Notice of Borrowing, notice of such proposed Borrowing, of such Bank's proportionate share thereof and of the other matters required by the immediately preceding sentence to be specified in the Notice of Borrowing. (b)(i) Whenever the Borrower desires to incur Swingline Loans hereunder, the Borrower shall give the Swingline Bank no later than 1:00 P.M. (New York time) on the date that a Swingline Loan is to be incurred, written notice or telephonic notice promptly confirmed in writing of each Swingline Loan to be incurred hereunder. Each such notice shall be irrevocable and specify in each case (A) the date of Borrowing (which shall be a Business Day) and (B) the aggregate principal amount of the Swingline Loans to be incurred pursuant to such Borrowing. (ii) Mandatory Borrowings shall be made upon the notice specified in Section 1.01(d), with the Borrower irrevocably agreeing, by its incurrence of any Swingline Loan, to the making of the Mandatory Borrowings as set forth in Section 1.01(d). -4- (c) Without in any way limiting the obligation of the Borrower to confirm in writing any telephonic notice of any Borrowing or prepayment of Loans, the Agent or the Swingline Bank, as the case may be, may act without liability upon the basis of telephonic notice of such Borrowing or prepayment, as the case may be, believed by the Agent or the Swingline Bank, as the case may be, in good faith to be from the Chairman of the Board, the President, the Chief Financial Officer, the Treasurer or any Assistant Treasurer of the Borrower, or from any other authorized officer of the Borrower designated in writing by the Borrower to the Agent as being authorized to give such notices, prior to receipt of written confirmation. In each such case, the Borrower hereby waives the right to dispute the Agent's or Swingline Bank's record of the terms of such telephonic notice of such Borrowing or prepayment of Loans, as the case may be, absent manifest error. 1.04 DISBURSEMENT OF FUNDS. No later than 12:00 Noon (New York time) on the date specified in each Notice of Borrowing (or (x) in the case of Swingline Loans, no later than 3:00 P.M. (New York time) on the date specified pursuant to Section 1.03(b)(i) or (y) in the case of Mandatory Borrowings, no later than 1:00 P.M. (New York time) on the date specified in Section 1.01(d)), each Bank with a Commitment of the respective Tranche will make available its PRO RATA portion (determined in accordance with Section 1.07) of each such Borrowing requested to be made on such date (or in the case of Swingline Loans, the Swingline Bank will make available the full amount thereof). All such amounts will be made available in Dollars and in immediately available funds at the Payment Office, and, except for Revolving Loans made pursuant to a Mandatory Borrowing, the Agent will make available to the Borrower at the Payment Office the aggregate of the amounts so made available by the Banks. Unless the Agent shall have been notified by any Bank prior to the date of Borrowing that such Bank does not intend to make available to the Agent such Bank's portion of any Borrowing to be made on such date, the Agent may assume that such Bank has made such amount available to the Agent on such date of Borrowing and the Agent may (but shall not be obligated to), in reliance upon such assumption, make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Agent by such Bank, the Agent shall be entitled to recover such corresponding amount on demand from such Bank. If such Bank does not pay such corresponding amount forthwith upon the Agent's demand therefor, the Agent shall promptly notify the Borrower and the Borrower shall immediately pay such corresponding amount to the Agent. The Agent also shall be entitled to recover on demand from such Bank or the Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Agent to the Borrower until the date such corresponding amount is recovered by the Agent, at a rate per annum equal to (i) if recovered from such Bank, at the overnight Federal Funds Rate and (ii) if recovered from the Borrower, the rate of interest applicable to the respective Borrowing, as determined pursuant to Section 1.08. Nothing in this Section 1.04 shall be deemed to relieve any Bank from its obligation to make Loans hereunder or to prejudice any rights which the Borrower may have against any Bank as a result of any failure by such Bank to make Loans hereunder. 1.05 NOTES. (a) The Borrower's obligation to pay the principal of, and interest on, the Loans made by each Bank shall be evidenced (i) if Term Loans, by a promissory note duly executed and delivered by the Borrower substantially in the form of Exhibit B-1, with blanks appropriately completed in conformity herewith (each a "Term Note" and, collectively, the "Term -5- Notes"), (ii) if Revolving Loans, by a promissory note duly executed and delivered by the Borrower substantially in the form of Exhibit B-2, with blanks appropriately completed in conformity herewith (each a "Revolving Note" and, collectively, the "Revolving Notes") and (iii) if Swingline Loans, by a promissory note duly executed and delivered by the Borrower substantially in the form Exhibit B-3, with blanks appropriately completed in conformity herewith (the "Swingline Note"). (b) The Term Note issued to each Bank that has a Term Loan Commitment or outstanding Term Loans shall (i) be executed by the Borrower, (ii) be payable to such Bank or its registered assigns and be dated the Restatement Effective Date (or, if issued after the Restatement Effective Date, be dated the date of the issuance thereof), (iii) be in a stated principal amount equal to the Term Loans made by such Bank on the Restatement Effective Date (or, if issued after the Restatement Effective Date, be in a stated principal amount equal to the outstanding principal amount of Term Loans of such Bank at such time) and be payable in the outstanding principal amount of Term Loans evidenced thereby, (iv) mature on the Final Maturity Date, (v) bear interest as provided in the appropriate clause of Section 1.08 in respect of the Base Rate Loans and Eurodollar Loans, as the case may be, evidenced thereby, (vi) be subject to voluntary prepayment as provided in Section 4.01, and mandatory repayment as provided in Section 4.02, and (vii) be entitled to the benefits of this Agreement and the other Credit Documents. (c) The Revolving Note issued to each Bank shall (i) be executed by the Borrower, (ii) be payable to such Bank or its registered assigns and be dated the Restatement Effective Date (or, if issued after the Restatement Effective Date, be dated the date of the issuance thereof), (iii) be in a stated principal amount equal to the Revolving Loan Commitment of such Bank (or, if issued after the termination thereof, be in a stated principal amount equal to the outstanding Revolving Loans of such Bank at such time) and be payable in the outstanding principal amount of the Revolving Loans evidenced thereby, (iv) mature on the Final Maturity Date, (v) bear interest as provided in the appropriate clause of Section 1.08 in respect of the Base Rate Loans and Eurodollar Loans, as the case may be, evidenced thereby, (vi) be subject to voluntary prepayment as provided in Section 4.01, and mandatory repayment as provided in Section 4.02, and (vii) be entitled to the benefits of this Agreement and the other Credit Documents. (d) The Swingline Note issued to the Swingline Bank shall (i) be executed by the Borrower, (ii) be payable to the Swingline Bank or its registered assigns and be dated the Restatement Effective Date, (iii) be in a stated principal amount equal to the Maximum Swingline Amount and be payable in the outstanding principal amount of the Swingline Loans evidenced thereby from time to time, (iv) mature on the Swingline Expiry Date, (v) bear interest as provided in the appropriate clause of Section 1.08 in respect of the Base Rate Loans evidenced thereby, (vi) be subject to voluntary prepayment as provided in Section 4.01, and mandatory repayment as provided in Section 4.02, and (vii) be entitled to the benefits of this Agreement and the other Credit Documents. (e) Each Bank will note on its internal records the amount of each Loan made by it and each payment in respect thereof and will prior to any transfer of any of its Notes endorse on the reverse side thereof the outstanding principal amount of Loans evidenced thereby. Failure to -6- make any such notation or any error in such notation shall not affect the Borrower's obligations in respect of such Loans. 1.06 CONVERSIONS. The Borrower shall have the option to convert, on any Business Day occurring after the Restatement Effective Date, all or a portion equal to at least the Minimum Borrowing Amount of the outstanding principal amount of Loans (other than Swingline Loans which may not be converted pursuant to this Section 1.06) made pursuant to one or more Borrowings (so long as of the same Tranche) of one or more Types of Loans into a Borrowing (of the same Tranche) of another Type of Loan, PROVIDED that, (i) except as otherwise provided in Section 1.10(b), Eurodollar Loans may be converted into Base Rate Loans only on the last day of an Interest Period applicable to the Loans being converted and no such partial conversion of Eurodollar Loans shall reduce the outstanding principal amount of such Eurodollar Loans made pursuant to a single Borrowing to less than the Minimum Borrowing Amount applicable thereto, (ii) Base Rate Loans may only be converted into Eurodollar Loans if no Default or Event of Default is in existence on the date of the conversion, (iii) unless the Agent has determined (and has notified the Borrower) that the Syndication Date has occurred (at which time this clause (iii) shall no longer be applicable), prior to the 90th day after the Restatement Effective Date, conversions of Base Rate Loans into Eurodollar Loans may only be made if any such conversion is effective on the first day of the first, second or third Interest Period referred to in clause (B) of each of Sections 1.01(a)(ii) and 1.01(b)(i) and so long as such conversion does not result in a greater number of Borrowings of Eurodollar Loans prior to the 90th day after the Restatement Effective Date as are permitted under such Sections, and (iv) no conversion pursuant to this Section 1.06 shall result in a greater number of Borrowings of Eurodollar Loans than is permitted under Section 1.02. Each such conversion shall be effected by the Borrower by giving the Agent at the Notice Office prior to 12:00 Noon (New York time) at least three Business Days' prior notice (each a "Notice of Conversion") specifying the Loans to be so converted, the Borrowing or Borrowings pursuant to which such Loans were made and, if to be converted into Eurodollar Loans, the Interest Period to be initially applicable thereto. The Agent shall give each Bank prompt notice of any such proposed conversion affecting any of its Loans. Upon any such conversion the proceeds thereof will be deemed to be applied directly on the day of such conversion to prepay the outstanding principal amount of the Loans being converted. Swingline Loans may not be converted pursuant to this Section 1.06. 1.07 PRO RATA BORROWINGS. All Borrowings of Term Loans and Revolving Loans under this Agreement shall be incurred from the Banks PRO RATA on the basis of their Term Loan Commitments and Revolving Loan Commitments. It is understood that no Bank shall be responsible for any default by any other Bank of its obligation to make Loans hereunder and that each Bank shall be obligated to make the Loans provided to be made by it hereunder, regardless of the failure of any other Bank to make its Loans hereunder. 1.08 INTEREST. (a) The Borrower agrees to pay interest in respect of the unpaid principal amount of each Base Rate Loan from the date of Borrowing thereof until the earlier of (i) the maturity thereof (whether by acceleration or otherwise) and (ii) the conversion of such Base Rate Loan to a Eurodollar Loan pursuant to Section 1.06, at a rate per annum which shall be equal to the sum of the Applicable Base Rate Margin plus the Base Rate in effect from time to time. -7- (b) The Borrower agrees to pay interest in respect of the unpaid principal amount of each Eurodollar Loan from the date of Borrowing thereof until the earlier of (i) the maturity thereof (whether by acceleration or otherwise) and (ii) the conversion of such Eurodollar Loan to a Base Rate Loan pursuant to Section 1.06, 1.09 or 1.10, as applicable, at a rate per annum which shall, during each Interest Period applicable thereto, be equal to the sum of the Applicable Eurodollar Rate Margin plus the Eurodollar Rate for such Interest Period. (c) Overdue principal and, to the extent permitted by law, overdue interest in respect of each Loan and any other overdue amount payable hereunder shall, in each case, bear interest at a rate per annum equal to the greater of (x) the rate which is 2% in excess of the rate then borne by such Loans and (y) the rate which is 2% in excess of the rate otherwise applicable to Base Rate Loans of the respective Tranche from time to time. Interest which accrues under this Section 1.08(c) shall be payable on demand. (d) Accrued (and theretofore unpaid) interest shall be payable (i) in respect of each Base Rate Loan, quarterly in arrears on each Quarterly Payment Date, (ii) in respect of each Eurodollar Loan, on the last day of each Interest Period applicable thereto and, in the case of an Interest Period in excess of three months, on each date occurring at three month intervals after the first day of such Interest Period and (iii) in respect of each Loan, on any repayment or prepayment (on the amount repaid or prepaid), at maturity (whether by acceleration or otherwise) and, after such maturity, on demand. (e) Upon each Interest Determination Date, the Agent shall determine the Eurodollar Rate for each Interest Period applicable to Eurodollar Loans and shall promptly notify the Borrower and the Banks thereof. Each such determination shall, absent manifest error, be final and conclusive and binding on all parties hereto. 1.09 INTEREST PERIODS. At the time the Borrower gives any Notice of Borrowing or Notice of Conversion in respect of the making of, or conversion into, any Eurodollar Loan (in the case of the initial Interest Period applicable thereto) or on the third Business Day prior to the expiration of an Interest Period applicable to such Eurodollar Loan (in the case of any subsequent Interest Period), the Borrower shall have the right to elect, by giving the Agent notice thereof, the interest period (each an "Interest Period") applicable to such Eurodollar Loan, which Interest Period shall, at the option of the Borrower (but otherwise subject to the limitation set forth in clause (B) of the proviso in each of Sections 1.01(a)(ii) and 1.01(b)(i)), be a one, two, three or six-month period, PROVIDED that: (i) all Eurodollar Loans comprising a Borrowing shall at all times have the same Interest Period; (ii) the initial Interest Period for any Eurodollar Loan shall commence on the date of Borrowing of such Eurodollar Loan (including the date of any conversion thereto from a Base Rate Loan) and each Interest Period occurring thereafter in respect of such Eurodollar Loan shall commence on the day on which the next preceding Interest Period applicable thereto expires; -8- (iii) if any Interest Period for a Eurodollar Loan begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period, such Interest Period shall end on the last Business Day of such calendar month; (iv) if any Interest Period for a Eurodollar Loan would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, PROVIDED, HOWEVER, that if any Interest Period for a Eurodollar Loan would otherwise expire on a day which is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; (v) no Interest Period may be selected at any time when a Default or an Event of Default is then in existence; (vi) no Interest Period in respect of any Borrowing of Eurodollar Loans shall be selected which extends beyond the Final Maturity Date; and (vii) no Interest Period in respect of any Borrowing of Term Loans shall be selected which extends beyond any date upon which a mandatory repayment of Term Loans will be required to be made under Section 4.02(b), if the aggregate principal amount of Term Loans which have Interest Periods which will expire after such date will be in excess of the aggregate principal amount of Term Loans then outstanding less the aggregate amount of such required repayment. If upon the expiration of any Interest Period applicable to a Borrowing of Eurodollar Loans, the Borrower has failed to elect, or is not permitted to elect, a new Interest Period to be applicable to such Eurodollar Loans as provided above, the Borrower shall be deemed to have elected to convert such Eurodollar Loans into Base Rate Loans effective as of the expiration date of such current Interest Period. 1.10 INCREASED COSTS, ILLEGALITY, ETC. (a) In the event that any Bank shall have determined (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto but, with respect to clause (i) below, may be made only by the Agent): (i) on any Interest Determination Date that, by reason of any changes arising after the date of this Agreement affecting the interbank Eurodollar market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of Eurodollar Rate; or (ii) at any time, that such Bank shall incur increased costs or reductions in the amounts received or receivable hereunder with respect to any Eurodollar Loan because of (x) any change since the date of this Agreement in any applicable law or governmental rule, regulation, order, guideline or request (whether or not having the force of law) or in the interpretation or administration thereof and including the introduction of any new law or governmental rule, regulation, order, guideline or request, such as, for example, but not limited to: (A) a change in the basis of taxation of payment to any Bank of the principal of -9- or interest on the Notes or any other amounts payable hereunder (except for changes in the rate of tax on, or determined by reference to, the net income or profits of such Bank pursuant to the laws of the jurisdiction in which such Bank is organized or in which such Bank's principal office or applicable lending office is located or any subdivision thereof or therein), but, in any event, without duplication of any amounts payable to such Bank under Section 4.04 (although no such Bank shall be entitled to any amounts under this Section 1.10(a)(ii) in respect of any Taxes to the extent that such Bank fails to provide the forms or certification required to be provided by it under Section 4.04(b)) or (B) a change in official reserve requirements, but, in all events, excluding reserves required under Regulation D to the extent included in the computation of the Eurodollar Rate and/or (y) other circumstances occurring since the date of this Agreement affecting such Bank, the interbank Eurodollar market or the position of such Bank in such market; or (iii) at any time, that the making or continuance of any Eurodollar Loan has been made (x) unlawful by any law or governmental rule, regulation or order, (y) impossible by compliance by any Bank in good faith with any governmental request (whether or not having force of law) or (z) impracticable as a result of a contingency occurring after the date of this Agreement which materially and adversely affects the interbank Eurodollar market; then, and in any such event, such Bank (or the Agent, in the case of clause (i) above) shall promptly give notice (by telephone promptly confirmed in writing) to the Borrower and, except in the case of clause (i) above, to the Agent of such determination (which notice the Agent shall promptly transmit to each of the other Banks). Thereafter (x) in the case of clause (i) above, Eurodollar Loans shall no longer be available until such time as the Agent notifies the Borrower and the Banks that the circumstances giving rise to such notice by the Agent no longer exist, and any Notice of Borrowing or Notice of Conversion given by the Borrower with respect to Eurodollar Loans which have not yet been incurred (including by way of conversion) shall be deemed rescinded by the Borrower, (y) in the case of clause (ii) above, the Borrower shall pay to such Bank, within 30 days after such Bank's written request therefor, such additional amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Bank in its reasonable discretion shall determine) as shall be required to compensate such Bank for such increased costs or reductions in amounts received or receivable hereunder (a written notice as to the additional amounts owed to such Bank, showing in reasonable detail the basis for the calculation thereof, submitted to the Borrower by such Bank shall, absent manifest error, be final and conclusive and binding on all the parties hereto) and (z) in the case of clause (iii) above, the Borrower shall take one of the actions specified in Section 1.10(b) as promptly as possible and, in any event, within the time period required by law. (b) At any time that any Eurodollar Loan is affected by the circumstances described in Section 1.10(a)(ii) or (iii), the Borrower may (and in the case of a Eurodollar Loan affected by the circumstances described in Section 1.10(a)(iii) shall) either (x) if the affected Eurodollar Loan is then being made initially or pursuant to a conversion, cancel such Borrowing by giving the Agent telephonic notice (confirmed in writing) on the same date that the Borrower was notified by the affected Bank or the Agent pursuant to Section 1.10(a)(ii) or (iii) or (y) if the affected Eurodollar Loan is then outstanding, upon at least three Business Days' written notice to -10- the Agent, require the affected Bank to convert such Eurodollar Loan into a Base Rate Loan, PROVIDED that, if more than one Bank is affected at any time, then all affected Banks must be treated the same pursuant to this Section 1.10(b). (c) If any Bank determines that after the date of this Agreement the introduction of or any change in any applicable law or governmental rule, regulation, order, guideline, directive or request (whether or not having the force of law) concerning capital adequacy, or any change in interpretation or administration thereof by any governmental authority, central bank or comparable agency, will have the effect of increasing the amount of capital required or expected to be maintained by such Bank or any corporation controlling such Bank based on the existence of such Bank's Commitments hereunder or its obligations hereunder, then the Borrower shall pay to such Bank, within 30 days after its written demand therefor, such additional amounts as shall be required to compensate such Bank or such other corporation for the increased cost to such Bank or such other corporation or the reduction in the rate of return to such Bank or such other corporation as a result of such increase of capital. In determining such additional amounts, each Bank will act reasonably and in good faith and will use averaging and attribution methods which are reasonable, PROVIDED that such Bank's determination of compensation owing under this Section 1.10(c) shall, absent manifest error, be final and conclusive and binding on all the parties hereto. Each Bank, upon determining that any additional amounts will be payable pursuant to this Section 1.10(c), will give prompt written notice thereof to the Borrower, which notice shall show in reasonable detail the basis for calculation of such additional amounts. (d) Notwithstanding anything to the contrary contained in this Section 1.10, unless a Bank gives notice to the Borrower that the Borrower is obligated to pay any amount under this Section 1.10 within 180 days after the later of (x) the date such Bank incurs the respective increased costs or reduction in return the rate of return or (y) the date such Bank has actual knowledge of its incurrence of the respective increased costs or reduction in the rate of return, then such Bank shall only be entitled to be compensated for such amount by the Borrower pursuant to this Section 1.10 to the extent the respective increased costs or reduction in the rate of return are incurred or suffered on or after the date which occurs 180 days prior to such Bank giving notice to the Borrower that the Borrower is obligated to pay the respective amounts pursuant to this Section 1.10. 1.11 COMPENSATION. The Borrower shall compensate each Bank, upon its written request (which request shall set forth in reasonable detail the basis for requesting such compensation), for all reasonable losses, expenses and liabilities (including, without limitation, any loss, expense or liability incurred by reason of the liquidation or reemployment of deposits or other funds required by such Bank to fund its Eurodollar Loans but excluding loss of anticipated profits) which such Bank may sustain: (i) if for any reason (other than a default by such Bank or the Agent) a Borrowing of, or conversion from or into, Eurodollar Loans does not occur on a date specified therefor in a Notice of Borrowing or Notice of Conversion (whether or not withdrawn by the Borrower or deemed withdrawn pursuant to Section 1.10(a)); (ii) if any repayment (including any repayment made pursuant to Section 4.01, Section 4.02 or as a result of an acceleration of the Loans pursuant to Section 10) or conversion of any of its Eurodollar Loans occurs on a date which is not the last day of an Interest Period with respect thereto; (iii) if any prepayment of any of its Eurodollar Loans is not made on any date specified in a notice of -11- prepayment given by the Borrower; or (iv) as a consequence of (x) any other default by the Borrower to repay its Loans when required by the terms of this Agreement or any Note held by such Bank or (y) any election made pursuant to Section 1.10(b). 1.12 CHANGE OF LENDING OFFICE. Each Bank agrees that on the occurrence of any event giving rise to the operation of Section 1.10(a)(ii) or (iii), Section 1.10(c), Section 2.06 or Section 4.04 with respect to such Bank, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Bank) to designate another lending office for any Loans or Letters of Credit affected by such event, PROVIDED that such designation is made on such terms that such Bank and its lending office suffer no economic, legal or regulatory disadvantage, with the object of avoiding the consequence of the event giving rise to the operation of such Section. Nothing in this Section 1.12 shall affect or postpone any of the obligations of the Borrower or the right of any Bank provided in Sections 1.10, 2.06 and 4.04. 1.13 REPLACEMENT OF BANKS. (x) If any Bank becomes a Defaulting Bank or otherwise defaults in its obligations to make Loans, (y) upon the occurrence of an event giving rise to the operation of Section 1.10(a)(ii) or (iii), Section 1.10(c), Section 2.06 or Section 4.04 with respect to any Bank which results in such Bank charging to the Borrower increased costs in excess of those being generally charged by the other Banks or (z) in the case of a refusal by a Bank to consent to certain proposed changes, waivers, discharges or terminations with respect to this Agreement which have been approved by the Required Banks as (and to the extent) provided in Section 13.12(b), the Borrower shall have the right, if no Default or Event of Default then exists (or, in the case of preceding clause (z), no Default or Event of Default will exist immediately after giving effect to such replacement), to replace such Bank (the "Replaced Bank") with one or more other Eligible Transferees, none of whom shall constitute a Defaulting Bank at the time of such replacement (collectively, the "Replacement Bank") and each of whom shall be required to be reasonably acceptable to the Agent, PROVIDED that (i) at the time of any replacement pursuant to this Section 1.13, the Replacement Bank shall enter into one or more Assignment and Assumption Agreements pursuant to Section 13.04(b) (and with all fees payable pursuant to said Section 13.04(b) to be paid by the Replacement Bank) pursuant to which the Replacement Bank shall acquire all of the Commitments and outstanding Loans of, and in each case participations in Letters of Credit by, the Replaced Bank and, in connection therewith, shall pay to (x) the Replaced Bank in respect thereof an amount equal to the sum of (I) an amount equal to the principal of, and all accrued interest on, all outstanding Loans of the Replaced Bank, (II) an amount equal to all Unpaid Drawings that have been funded by (and not reimbursed to) such Replaced Bank, together with all then unpaid interest with respect thereto at such time and (III) an amount equal to all accrued, but theretofore unpaid, Fees owing to the Replaced Bank pursuant to Section 3.01, (y) the Issuing Bank an amount equal to such Replaced Bank's RL Percentage of any Unpaid Drawing (which at such time remains an Unpaid Drawing) to the extent such amount was not theretofore funded by such Replaced Bank to such Issuing Bank and (z) the Swingline Bank an amount equal to such Replaced Bank's RL Percentage of any Mandatory Borrowing to the extent such amount was not theretofore funded by such Replaced Bank to the Swingline Bank and (ii) all obligations of the Borrower due and owing to the Replaced Bank at such time (other than those specifically described in clause (i) above in respect of which the assignment purchase price has been, or is concurrently being, paid) shall be paid in full to such Replaced Bank concurrently with such replacement. Upon the execution of the respective -12- Assignment and Assumption Agreement, the payment of amounts referred to in clauses (i) and (ii) above and, if so requested by the Replacement Bank, delivery to the Replacement Bank of the appropriate Note or Notes executed by the Borrower, the Replacement Bank shall become a Bank hereunder and the Replaced Bank shall cease to constitute a Bank hereunder, except with respect to indemnification provisions under this Agreement (including, without limitation, Sections 1.10, 1.11, 2.06, 4.04, 12.06 and 13.01), which shall survive as to such Replaced Bank. SECTION 2. LETTERS OF CREDIT. 2.01 LETTERS OF CREDIT. (a) Subject to and upon the terms and conditions set forth herein, the Borrower may request that the Issuing Bank issue, at any time and from time to time on and after the Restatement Effective Date and prior to the 30th day prior to the Final Maturity Date, (x) for the account of the Borrower and for the benefit of any holder (or any trustee, agent or other similar representative for any such holders) of L/C Supportable Obligations of the Borrower or any of its Subsidiaries, an irrevocable standby letter of credit, in a form customarily used by the Issuing Bank or in such other form as has been approved by the Issuing Bank (each such standby letter of credit, a "Standby Letter of Credit"), in support of such L/C Supportable Obligations and (y) for the account of the Borrower, an irrevocable sight commercial letter of credit in a form customarily used by the Issuing Bank or in such other form as has been approved by the Issuing Bank (each such commercial letter of credit, a "Trade Letter of Credit", and each such Trade Letter of Credit and each Standby Letter of Credit, a "Letter of Credit"), in support of customary commercial transactions of the Borrower and its Subsidiaries. All Letters of Credit shall be denominated in Dollars and shall be issued on a sight basis only. (b) Subject to and upon the terms and conditions set forth herein, the Issuing Bank agrees that it will, at any time and from time to time on and after the Restatement Effective Date and prior to the 30th day prior to the Final Maturity Date, following its receipt of the respective Letter of Credit Request, issue for the account of the Borrower, one or more Letters of Credit (x) in the case of Standby Letters of Credit, in support of such L/C Supportable Obligations of the Borrower or any of its Subsidiaries as are permitted to remain outstanding without giving rise to a Default or an Event of Default, hereunder and (y) in the case of Trade Letters of Credit, in support of customary commercial transactions of the Borrower or any of its Subsidiaries, PROVIDED that the Issuing Bank shall be under no obligation to issue any Letter of Credit of the types described above if at the time of such issuance: (i) any order, judgment or decree of any governmental authority or arbitrator shall purport by its terms to enjoin or restrain the Issuing Bank from issuing such Letter of Credit or any requirement of law applicable to the Issuing Bank or any request or directive (whether or not having the force of law) from any governmental authority with jurisdiction over the Issuing Bank shall prohibit, or request that the Issuing Bank refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon the Issuing Bank with respect to such Letter of Credit any restriction or reserve or capital requirement (for which the Issuing Bank is not otherwise compensated under Section 2.06 or otherwise) not in effect on the date hereof, or any unreimbursed loss, cost or expense which was not applicable or in effect with respect to the Issuing Bank as of the -13- date hereof and which the Issuing Bank reasonably and in good faith deems material to it; or (ii) the Issuing Bank shall have received notice from the Borrower, any other Credit Party or the Required Banks prior to the issuance of such Letter of Credit of the type described in the second sentence of Section 2.03(b). (c) Schedule XI contains a description of all letters of credit issued by the Issuing Bank pursuant to the Existing Credit Agreement and which are to remain outstanding on the Restatement Effective Date. Each such letter of credit, including any extension thereof (each an "Existing Letter of Credit") shall constitute a "Letter of Credit" for all purposes of this Agreement. Each Existing Letter of Credit shall be deemed issued for purposes of Sections 2.01(a), 2.01(b), 2.04(a), 3.01(b) and 3.01(c) on the Restatement Effective Date 2.02 MAXIMUM LETTER OF CREDIT OUTSTANDINGS; FINAL MATURITIES. Notwithstanding anything to the contrary contained in this Agreement, (i) no Letter of Credit shall be issued the Stated Amount of which, when added to the Letter of Credit Outstandings (exclusive of Unpaid Drawings which are repaid on the date of, and prior to the issuance of, the respective Letter of Credit) at such time would exceed either (x) $1,000,000 or (y) when added to the aggregate principal amount of all Revolving Loans then outstanding and the aggregate principal amount of all Swingline Loans then outstanding, an amount equal to the lesser of (A) the Borrowing Base at such time (based on the Borrowing Base Certificate last delivered) and (B) the Total Available Revolving Loan Commitment at such time and (ii) each Letter of Credit shall by its terms terminate on or before the earlier of (x) (A) in the case of Standby Letters of Credit, the date which occurs 12 months after the date of the issuance thereof (although any such Standby Letter of Credit may be extendable for successive periods of up to 12 months, but not beyond the third Business Day prior to the Final Maturity Date, on terms acceptable to the Issuing Bank) and (B) in the case of Trade Letters of Credit, the date which occurs 180 days after the date of issuance thereof and (y) three Business Days prior to the Final Maturity Date. 2.03 LETTER OF CREDIT REQUESTS; MINIMUM STATED AMOUNT. (a) Whenever the Borrower desires that a Letter of Credit be issued for its account, the Borrower shall give the Agent and the Issuing Bank at least five Business Days' (or such shorter period as is acceptable to the Issuing Bank) written notice thereof. Each notice shall be in the form of Exhibit C appropriately completed (each a "Letter of Credit Request"). (b) The making of each Letter of Credit Request shall be deemed to be a representation and warranty by the Borrower that such Letter of Credit may be issued in accordance with, and will not violate the requirements of, Section 2.02. Unless the Issuing Bank has received notice from the Borrower, any other Credit Party or the Required Banks before it issues a Letter of Credit that one or more of the conditions specified in Section 5 or 6 are not then satisfied, or that the issuance of such Letter of Credit would violate Section 2.02, then the Issuing Bank shall, subject to the terms and conditions of this Agreement, issue the requested Letter of Credit for the account of the Borrower in accordance with the Issuing Bank's usual and customary practices. Upon its issuance of or amendment or modification to any Standby Letter of Credit, the Issuing Bank shall promptly notify the Borrower and the Agent of such issuance, -14- amendment or modification and such notification shall be accompanied by a copy of the issued Letter of Credit or amendment or modification. Notwithstanding anything to the contrary contained in this Agreement, in the event that a Bank Default exists, the Issuing Bank shall not be required to issue any Letter of Credit unless the Issuing Bank has entered into an arrangement satisfactory to it and the Borrower to eliminate the Issuing Bank's risk with respect to the participation in Letters of Credit by the Defaulting Bank or Banks, including by cash collateralizing such Defaulting Bank's or Banks' RL Percentage of the Letter of Credit Outstandings. (c) The initial Stated Amount of each Letter of Credit shall not be less than $10,000 or such lesser amount as is reasonably acceptable to the Issuing Bank. 2.04 LETTER OF CREDIT PARTICIPATIONS. (a) Immediately upon the issuance by the Issuing Bank of any Letter of Credit, the Issuing Bank shall be deemed to have sold and transferred to each Bank with a Revolving Loan Commitment, other than the Issuing Bank (each such Bank, in its capacity under this Section 2.04, a "Participant"), and each such Participant shall be deemed irrevocably and unconditionally to have purchased and received from the Issuing Bank, without recourse or warranty, an undivided interest and participation, to the extent of such Participant's RL Percentage, in such Letter of Credit, each drawing or payment made thereunder and the obligations of the Borrower under this Agreement with respect thereto, and any security therefor or guaranty pertaining thereto. Upon any change in the Revolving Loan Commitments or RL Percentages of the Banks pursuant to Section 1.13 or 13.04, it is hereby agreed that, with respect to all outstanding Letters of Credit and Unpaid Drawings, there shall be an automatic adjustment to the participations pursuant to this Section 2.04 to reflect the new RL Percentages of the assignor and assignee Bank, as the case may be. (b) In determining whether to pay under any Letter of Credit, the Issuing Bank shall not have an obligation relative to the other Banks other than to confirm that any documents required to be delivered under such Letter of Credit appear to have been delivered and that they appear to substantially comply on their face with the requirements of such Letter of Credit. Any action taken or omitted to be taken by the Issuing Bank under or in connection with any Letter of Credit if taken or omitted in the absence of gross negligence or willful misconduct (as finally determined by a court of competent jurisdiction), shall not create for the Issuing Bank any resulting liability to the Borrower, any other Credit Party, any Bank or any other Person. (c) In the event that the Issuing Bank makes any payment under any Letter of Credit and the Borrower shall not have reimbursed such amount in full to the Issuing Bank pursuant to Section 2.05(a), the Issuing Bank shall promptly notify the Agent, which shall promptly notify each Participant of such failure, and each Participant shall promptly and unconditionally pay to the Issuing Bank the amount of such Participant's RL Percentage of such unreimbursed payment in Dollars and in same day funds. If the Agent so notifies, prior to 11:00 A.M. (New York time) on any Business Day, any Participant required to fund a payment under a Letter of Credit, such Participant shall make available to the Issuing Bank in Dollars such Participant's RL Percentage of the amount of such payment on such Business Day in same day funds. If and to the extent such Participant shall not have so made its RL Percentage of the amount of such payment available to the Issuing Bank, such Participant agrees to pay to the Issuing Bank, forthwith on demand such amount, together with interest thereon, for each day -15- from such date until the date such amount is paid to the Issuing Bank at the overnight Federal Funds Rate for the first three days and at the interest rate applicable to Revolving Loans maintained as Base Rate Loans for each day thereafter. The failure of any Participant to make available to the Issuing Bank its RL Percentage of any payment under any Letter of Credit shall not relieve any other Participant of its obligation hereunder to make available to the Issuing Bank its RL Percentage of any Letter of Credit on the date required, as specified above, but no Participant shall be responsible for the failure of any other Participant to make available to the Issuing Bank such other Participant's RL Percentage of any such payment. (d) Whenever the Issuing Bank receives a payment of a reimbursement obligation as to which it has received any payments from the Participants pursuant to clause (c) above, the Issuing Bank shall pay to each Participant which has paid its RL Percentage thereof, in Dollars and in same day funds, an amount equal to such Participant's share (based upon the proportionate aggregate amount originally funded by such Participant to the aggregate amount funded by all Participants) of the principal amount of such reimbursement obligation and interest thereon accruing after the purchase of the respective participations. (e) Upon the request of any Participant, the Issuing Bank shall furnish to such Participant copies of any Letter of Credit issued by it and such other documentation as may reasonably be requested by such Participant. (f) The obligations of the Participants to make payments to the Issuing Bank with respect to Letters of Credit issued by it shall be irrevocable and not subject to any qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement under all circumstances, including, without limitation, any of the following circumstances: (i) any lack of validity or enforceability of this Agreement or any of the other Credit Documents; (ii) the existence of any claim, setoff, defense or other right which the Borrower or any of its Subsidiaries may have at any time against a beneficiary named in a Letter of Credit, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Agent, any Participant, or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between the Borrower or any Subsidiary of the Borrower and the beneficiary named in any such Letter of Credit); (iii) any draft, certificate or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Credit Documents; or -16- (v) the occurrence of any Default or Event of Default. 2.05 AGREEMENT TO REPAY LETTER OF CREDIT DRAWINGS. (a) The Borrower agrees to reimburse the Issuing Bank, by making payment to the Agent in immediately available funds at the Payment Office, for any payment or disbursement made by the Issuing Bank under any Letter of Credit (each such amount, so paid until reimbursed, an "Unpaid Drawing"), not later than one Business Day following receipt by the Borrower of notice of such payment or disbursement (provided that no such notice shall be required to be given if a Default or an Event of Default under Section 10.05 shall have occurred and be continuing, in which case the Unpaid Drawing shall be due and payable immediately without presentment, demand, protest or notice of any kind (all of which are hereby waived by the Borrower)), with interest on the amount so paid or disbursed by the Issuing Bank, to the extent not reimbursed prior to 1:00 P.M. (New York time) on the date of such payment or disbursement, from and including the date paid or disbursed to but excluding the date the Issuing Bank was reimbursed by the Borrower therefor at a rate per annum which shall be the Base Rate plus the Applicable Base Rate Margin, each as in effect from time to time; PROVIDED, HOWEVER, to the extent such amounts are not reimbursed prior to 1:00 P.M. (New York time) on the third Business Day following the receipt by the Borrower of notice of such payment or disbursement or following the occurrence of a Default or an Event of Default under Section 10.05, interest shall thereafter accrue on the amounts so paid or disbursed by the Issuing Bank (and until reimbursed by the Borrower) at a rate per annum which shall be the Base Rate in effect from time to time plus the Applicable Base Rate Margin for Revolving Loans plus 2%, in each such case, with interest to be payable on demand. The Issuing Bank shall give the Borrower prompt written notice of each Drawing under any Letter of Credit, PROVIDED that the failure to give any such notice shall in no way affect, impair or diminish the Borrower's obligations hereunder. (b) The obligations of the Borrower under this Section 2.05 to reimburse the Issuing Bank with respect to Unpaid Drawings (including, in each case, interest thereon) shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against any Bank (including in its capacity as issuer of the Letter of Credit or as Participant), including, without limitation, any defense based upon the failure of any drawing under a Letter of Credit (each a "Drawing") to conform to the terms of the Letter of Credit or any nonapplication or misapplication by the beneficiary of the proceeds of such Drawing; PROVIDED, HOWEVER, that the Borrower shall not be obligated to reimburse the Issuing Bank for any wrongful payment made by the Issuing Bank under a Letter of Credit as a result of acts or omissions constituting willful misconduct or gross negligence on the part of the Issuing Bank (as finally determined by a court of competent jurisdiction). 2.06 INCREASED COSTS. (a) If at any time after the date of this Agreement, the introduction of or any change in any applicable law, rule, regulation, order, guideline or request or in the interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by the Issuing Bank or any Participant with any request or directive by any such authority (whether or not having the force of law), shall either (i) impose, modify or make applicable any reserve, deposit, capital adequacy or similar requirement against letters of credit issued by the Issuing Bank or participated in by any -17- Participant, or (ii) impose on the Issuing Bank or any Participant any other conditions relating, directly or indirectly, to this Agreement; and the result of any of the foregoing is to increase the cost to the Issuing Bank or any Participant of issuing, maintaining or participating in any Letter of Credit, or reduce the amount of any sum received or receivable by the Issuing Bank or any Participant hereunder or reduce the rate of return on its capital with respect to Letters of Credit (except for changes in the rate of tax on, or determined by reference to, the net income or profits of the Issuing Bank or such Participant pursuant to the laws of the jurisdiction in which it is organized or in which its principal office or applicable lending office is located or any subdivision thereof or therein), then, within 30 days after the delivery of the certificate referred to below to the Borrower by the Issuing Bank or any Participant (a copy of which certificate shall be sent by the Issuing Bank or such Participant to the Agent), the Borrower shall pay to the Issuing Bank or such Participant such additional amount or amounts as will compensate such Bank for such increased cost or reduction in the amount receivable or reduction on the rate of return on its capital. The Issuing Bank or any Participant, upon determining that any additional amounts will be payable pursuant to this Section 2.06, will give prompt written notice thereof to the Borrower, which notice shall include a certificate submitted to the Borrower by the Issuing Bank or such Participant (a copy of which certificate shall be sent by the Issuing Bank or such Participant to the Agent), setting forth in reasonable detail the basis for the calculation of such additional amount or amounts necessary to compensate the Issuing Bank or such Participant. The certificate required to be delivered pursuant to this Section 2.06 shall, absent manifest error, be final and conclusive and binding on the Borrower. (b) Notwithstanding anything to the contrary contained in this Section 2.06, unless the Issuing Bank or a Participant gives notice to the Borrower that the Borrower is obligated to pay any amount under this Section 2.06 within 180 days after the later of (x) the date the Issuing Bank or such Participant incurs the respective increased costs or reduction in return the rate of return or (y) the date the Issuing Bank or such Participant has actual knowledge of its incurrence of the respective increased costs or reduction in the rate of return, then the Issuing Bank or such Participant shall only be entitled to be compensated for such amount by the Borrower pursuant to this Section 2.06 to the extent the respective increased costs or reduction in the rate of return are incurred or suffered on or after the date which occurs 180 days prior to the Issuing Bank or such Participant giving notice to the Borrower that the Borrower is obligated to pay the respective amounts pursuant to this Section 2.06. SECTION 3. COMMITMENT COMMISSION; FEES; REDUCTIONS OF COMMITMENT. 3.01 FEES. (a) The Borrower agrees to pay to the Agent for distribution to each Non-Defaulting Bank with a Revolving Loan Commitment, a commitment commission (the "Commitment Commission") for the period from and including the Restatement Effective Date to but excluding the Final Maturity Date (or such earlier date on which the Total Revolving Loan Commitment shall have been terminated), computed at a rate for each day equal to the Applicable Commitment Commission Percentage on the daily average Unutilized Revolving Loan Commitment of such Non-Defaulting Bank. Accrued Commitment Commission shall be due and payable quarterly in arrears on each Quarterly Payment Date and on the Final Maturity Date (or such earlier date on which the Total Revolving Loan Commitment shall have been terminated). -18- (b) The Borrower agrees to pay to the Agent for distribution to each Bank with a Revolving Loan Commitment (based on each such Bank's respective RL Percentage) a fee in respect of each Letter of Credit issued hereunder (the "Letter of Credit Fee") for the period from and including the date of issuance of such Letter of Credit to and including the date of termination or expiration of such Letter of Credit, computed at a rate per annum equal to the Applicable Eurodollar Rate Margin then in effect on the daily Stated Amount of such Letter of Credit. Accrued Letter of Credit Fees shall be due and payable quarterly in arrears on each Quarterly Payment Date and on the first day after the termination of the Total Revolving Loan Commitment upon which no Letters of Credit remain outstanding. (c) The Borrower agrees to pay to the Issuing Bank, for its own account, a facing fee in respect of each Letter of Credit issued hereunder (the "Facing Fee") for the period from and including the date of issuance of such Letter of Credit to and including the date of the termination of such Letter of Credit, computed at a rate per annum equal to 1/4 of 1% on the daily Stated Amount of such Letter of Credit, provided that in any event the minimum amount of the Facing Fee payable in any 12 month period for each Letter of Credit shall be $500; it being agreed that, on the date of issuance of any Letter of Credit and on each anniversary thereof prior to the termination of such Letter of Credit, if $500 will exceed the amount of Facing Fees that will accrue with respect to such Letter of Credit for the immediately succeeding 12 month period, the full $500 shall be payable on the date of issuance of such Letter of Credit and on each such anniversary thereof. Except as otherwise provided in the proviso to the immediately preceding sentence, accrued Facing Fees shall be due and payable quarterly in arrears on each Quarterly Payment Date and upon the first day after the termination of the Total Revolving Loan Commitment upon which no Letters of Credit remain outstanding. (d) The Borrower agrees to pay to the Issuing Bank, for its own account, upon each payment under, issuance of, or amendment to, any Letter of Credit, such amount as shall at the time of such event be the administrative charge and the reasonable expenses which the Issuing Bank is generally imposing in connection with such occurrence with respect to letters of credit. (e) The Borrower agrees to pay to the Agent, for its own account, such other fees as have been agreed to in writing by the Borrower and the Agent. 3.02 VOLUNTARY TERMINATION OF UNUTILIZED REVOLVING LOAN COMMITMENTS. (a) Upon at least one Business Day's prior written notice to the Agent at the Notice Office (which notice the Agent shall promptly transmit to each of the Banks), the Borrower shall have the right, at any time or from time to time, without premium or penalty, to terminate the Total Unutilized Revolving Loan Commitment, in whole or in part, pursuant to this Section 3.02(a), in an integral multiple of $100,000, in the case of partial reductions to the Total Unutilized Revolving Loan Commitment, PROVIDED that each such reduction shall apply proportionately to permanently reduce the Revolving Loan Commitment of each Bank with such a Commitment. (b) In the event of a refusal by a Bank to consent to certain proposed changes, waivers, discharges or terminations with respect to this Agreement which have been approved by the Required Banks as (and to the extent) provided in Section 13.12(b), the Borrower may, subject to its compliance with the requirements of Section 13.12(b), upon five Business Days' -19- prior written notice to the Agent at the Notice Office (which notice the Agent shall promptly transmit to each of the Banks) terminate all of the Commitments of such Bank, so long as all Loans, together with accrued and unpaid interest, Fees and all other amounts, owing to such Bank are repaid concurrently with the effectiveness of such termination pursuant to Section 4.01(b) (at which time Schedule I shall be deemed modified to reflect such changed amounts), and at such time, such Bank shall no longer constitute a "Bank" for purposes of this Agreement, except with respect to indemnifications under this Agreement (including, without limitation, Sections 1.10, 1.11, 2.06, 4.04, 12.06 and 13.01), which shall survive as to such repaid Bank. 3.03 MANDATORY REDUCTION OF COMMITMENTS. (a) The Total Commitment (and each of the Commitments of each Bank) shall terminate in its entirety on June 15, 1998 unless the Restatement Effective Date has occurred on or before such date and in the event of such termination this Agreement shall cease to be of any force or effect and the Existing Credit Agreement shall continue to be effective, as the same may have been, or may thereafter be, amended, modified or supplemented from time to time. (b) In addition to any other mandatory commitment reductions pursuant to this Section 3.03, the Total Term Loan Commitment (and the Term Loan Commitment of each Bank) shall terminate in its entirety on the Restatement Effective Date (after giving effect to the incurrence of the Term Loans on such date). (c) In addition to any other mandatory commitment reductions pursuant to this Section 3.03, the Total Revolving Loan Commitment (and the Revolving Loan Commitment of each Bank) shall terminate in its entirety on the earlier of (i) the date on which a Change of Control occurs and (ii) the Final Maturity Date. (d) In addition to any other mandatory commitment reductions pursuant to this Section 3.03, on each date after the Restatement Effective Date upon which a mandatory repayment of Term Loans pursuant to any of Sections 4.02(d), 4.02(e) and/or 4.02(g) is required (and exceeds in amount the aggregate principal amount of Term Loans then outstanding) or would be required if Term Loans were then outstanding, the Total Revolving Loan Commitment shall be permanently reduced by the amount, if any, by which the amount required to be applied pursuant to said Sections (determined as if an unlimited amount of Term Loans were actually outstanding) exceeds the aggregate principal amount of Term Loans then outstanding. Each reduction to the Total Revolving Loan Commitment pursuant to this Section 3.03(d) shall be applied proportionately to permanently reduce the Revolving Loan Commitment of each Bank with such a Commitment. SECTION 4. PREPAYMENTS; PAYMENTS; TAXES. 4.01 VOLUNTARY PREPAYMENTS. (a) The Borrower shall have the right to prepay the Loans, without premium or penalty, in whole or in part at any time and from time to time on the following terms and conditions: (i) the Borrower shall give the Agent prior to 1:00 P.M. (New York time) at the Notice Office (x) at least one Business Day's prior written notice (or telephonic notice promptly confirmed in writing) of its intent to prepay Base Rate Loans (or same day notice in the case of a prepayment of Swingline Loans) and (y) at least three Business Days' prior -20- written notice (or telephonic notice promptly confirmed in writing) of its intent to prepay Eurodollar Loans, whether Term Loans, Revolving Loans or Swingline Loans shall be prepaid, the amount of such prepayment and the Types of Loans to be prepaid and, in the case of Eurodollar Loans, the specific Borrowing or Borrowings pursuant to which made, which notice the Agent shall, except in the case of Swingline Loans, promptly transmit to each of the Banks; (ii) (x) each partial prepayment of Term Loans pursuant to this Section 4.01(a) shall be in an aggregate principal amount of at least $250,000 and in integral multiples of $50,000 in excess thereof, (y) each partial prepayment of Revolving Loans pursuant to this Section 4.01(a) shall be in an aggregate principal amount of at least $250,000 and in integral multiples of $50,000 in excess thereof, and (z) each partial prepayment of Swingline Loans pursuant to this Section 4.01(a) shall be in an aggregate principal amount of at least $50,000 and in integral multiples of $50,000 in excess thereof, PROVIDED that if any partial prepayment of Eurodollar Loans made pursuant to any Borrowing shall reduce the outstanding principal amount of Eurodollar Loans made pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount applicable thereto, then such Borrowing may not be continued as a Borrowing of Eurodollar Loans and any election of an Interest Period with respect thereto given by the Borrower shall have no force or effect; (iii) each prepayment pursuant to this Section 4.01(a) in respect of any Loans made pursuant to a Borrowing shall be applied PRO RATA among such Loans, PROVIDED that at the Borrower's election in connection with any prepayment of Revolving Loans pursuant to this Section 4.01(a), such prepayment shall not, so long no Default or Event of Default then exists, be applied to any Revolving Loan of a Defaulting Bank; and (iv) each voluntary prepayment of Term Loans pursuant to this Section 4.01(a) shall be applied to reduce the then remaining Scheduled Repayments of Term Loans on a PRO RATA basis (based upon the then remaining unpaid principal amounts of such Scheduled Repayments after giving effect to all prior reductions thereto). (b) In the event of a refusal by a Bank to consent to certain proposed changes, waivers, discharges or terminations with respect to this Agreement which have been approved by the Required Banks as (and to the extent) provided in Section 13.12(b), the Borrower may, upon five Business Days' prior written notice to the Agent at the Notice Office (which notice the Agent shall promptly transmit to each of the Banks) repay all Loans of, together with accrued and unpaid interest, Fees and other amounts owing to, such Bank in accordance with, and subject to the requirements of, said Section 13.12(b) so long as (A) all of the Commitments of such Bank are terminated concurrently with such repayment pursuant to Section 3.02(b) (at which time Schedule I shall be deemed modified to reflect the changed Revolving Loan Commitments) and (B) the consents, if any, required under Section 13.12(b) in connection with the repayment pursuant to this clause (b) have been obtained. 4.02 MANDATORY REPAYMENTS. (a) On any day on which the sum of the aggregate outstanding principal amount of the Revolving Loans, Swingline Loans and the Letter of Credit Outstandings exceeds either (A) the Borrowing Base at such time (based on the Borrowing Base Certificate last delivered) or (B) the Total Available Revolving Loan Commitment as then in effect, the Borrower shall prepay on such day the principal of Swingline Loans and, after all Swingline Loans have been repaid in full (if no Swingline Loans are outstanding), Revolving Loans in an amount equal to such excess. If, after giving effect to the prepayment of all outstanding Swingline Loans and Revolving Loans, the aggregate amount of the Letter of Credit -21- Outstandings exceeds either (A) the Borrowing Base at such time (based on the Borrowing Base Certificate last delivered) or (B) the Total Available Revolving Loan Commitment as then in effect, the Borrower shall pay to the Agent at the Payment Office on such day an amount of cash and/or Cash Equivalents equal to the amount of such excess (up to a maximum amount equal to the Letter of Credit Outstandings at such time), such cash and/or Cash Equivalents to be held as security for all obligations of the Borrower to the Issuing Bank and the Banks hereunder in a cash collateral account to be established by the Agent. (b) In addition to any other mandatory repayments pursuant to this Section 4.02, on each date set forth below, the Borrower shall be required to repay that principal amount of Term Loans, to the extent then outstanding, as is set forth opposite such date below (each such repayment, as the same may be reduced as provided in Sections 4.01(a) and 4.02(h), a "Scheduled Repayment"):
SCHEDULE REPAYMENT DATE AMOUNT ----------------------- ------ September 30, 1998 $500,000 December 31, 1998 $500,000 March 31, 1999 $500,000 June 30, 1999 $500,000 September 30, 1999 $625,000 December 31, 1999 $625,000 March 31, 2000 $625,000 June 30, 2000 $625,000 September 30, 2000 $875,000 December 31, 2000 $875,000 March 31, 2001 $875,000 June 30, 2001 $875,000 September 30, 2001 $1,000,000 December 31, 2001 $1,000,000 March 31, 2002 $1,000,000 June 30, 2002 $1,000,000 September 30, 2002 $1,000,000 December 31, 2002 $1,000,000 Final Maturity Date $1,000,000
(c) In addition to any other mandatory repayments pursuant to this Section 4.02, on each date on or after the Restatement Effective Date upon which Holdings or any of its Subsidiaries receives any cash proceeds from any capital contribution or any sale or issuance of its equity (other than cash proceeds received (i) as part of the Equity Financing, (ii) from the issuance by Holdings of shares of its common stock (including as a result of the exercise of any options -22- with regard thereto), or options to purchase to shares of its common stock, to officers, directors and employees of Holdings or any of its Subsidiaries, (iii) from equity contributions made to Holdings in an aggregate amount not to exceed $5,000,000 to the extent made by any Person that is a shareholder of Holdings on the Restatement Effective Date or (iv) from equity contributions to any Subsidiary of Holdings to the extent made by Holdings or another Subsidiary of Holdings), an amount equal to 100% of the Net Equity Proceeds of such capital contribution or sale or issuance of equity shall be applied as a mandatory repayment of principal of outstanding Term Loans in accordance with the requirements of Sections 4.02(h) and (i) (it being understood and agreed that, in any event and notwithstanding anything to the contrary contained above in this Section 4.02(c), 100% of the amount of any capital contribution made to Holdings pursuant to the Capital Call Agreement shall be applied as provided in Sections 4.02(h) and (i)). (d) In addition to any other mandatory repayments pursuant to this Section 4.02, on each date on or after the Restatement Effective Date upon which Holdings or any of its Subsidiaries receives any cash proceeds from any incurrence by Holdings or any of its Subsidiaries of Indebtedness for borrowed money (other than Indebtedness for borrowed money permitted to be incurred pursuant to Section 9.04 as such Section is in effect on the Restatement Effective Date), an amount equal to 100% of the Net Debt Proceeds of the respective incurrence of Indebtedness shall be applied as a mandatory repayment of principal of outstanding Term Loans in accordance with the requirements of Sections 4.02(h) and (i). (e) In addition to any other mandatory repayments pursuant to this Section 4.02, within five Business Days after each date on or after the Restatement Effective Date upon which Holdings or any of its Subsidiaries receives any cash proceeds from any Asset Sale, an amount equal to 100% of the Net Sale Proceeds from such Asset Sale shall be applied as a mandatory repayment of principal of outstanding Term Loans in accordance with the requirements of Sections 4.02(h) and (i); PROVIDED that with respect to no more than $1,000,000 in the aggregate of cash proceeds from Asset Sales in any fiscal year of Holdings, such Net Sale Proceeds shall not be required to be so applied on such date to the extent that no Default or Event of Default then exists and Holdings has delivered a certificate to the Agent on or prior to such date stating that such Net Sale Proceeds shall be used to purchase assets that replace the assets that were the subject of such Asset Sale or assets that will be used in the business of the Borrower or its Subsidiaries (collectively, "Replacement Assets") within 350 days following the date of such Asset Sale (which certificate shall set forth the estimates of the proceeds to be so expended); PROVIDED FURTHER that, if all or any portion of such Net Sale Proceeds not required to be applied to the repayment of outstanding Term Loans are not so reinvested in Replacement Assets within such 350 day period, such remaining portion shall be applied on the last day of such period as a mandatory repayment of principal of outstanding Term Loans as provided above in this Section 4.02(e) without regard to the immediately preceding proviso. (f) In addition to any other mandatory repayments pursuant to this Section 4.02, on each Excess Cash Payment Date, an amount equal to the Applicable Excess Cash Flow Percentage of the Excess Cash Flow for the relevant Excess Cash Payment Period shall be applied as a mandatory repayment of principal of outstanding Term Loans in accordance with the requirements of Sections 4.02(h) and (i). -23- (g) In addition to any other mandatory repayments pursuant to this Section 4.02, within 10 days following each date on or after the Restatement Effective Date upon which Holdings or any of its Subsidiaries receives any cash proceeds from any Recovery Event, an amount equal to 100% of the Net Insurance Proceeds from such Recovery Event shall be applied as a mandatory repayment of principal of outstanding Term Loans in accordance with the requirements of Sections 4.02(h) and (i), PROVIDED that so long as no Default or Event of Default then exists and such Net Insurance Proceeds do not exceed $5,000,000, such Net Insurance Proceeds shall not be required to be so applied on such date to the extent that Holdings has delivered a certificate to the Agent on or prior to such date stating that such Net Insurance Proceeds shall be used to replace or restore any properties or assets in respect of which such Net Insurance Proceeds were paid within 350 days following the date of the receipt of such Net Insurance Proceeds (which certificate shall set forth the estimates of the proceeds to be so expended), and PROVIDED FURTHER, that (i) if the amount of such Net Insurance Proceeds exceeds $5,000,000, then the entire amount of such Net Insurance Proceeds, and not just the portion of such Net Insurance Proceeds in excess of $5,000,000, shall be applied as a mandatory repayment of Term Loans as provided above in this Section 4.02(g) without regard to the immediately preceding proviso and (ii) if all or any portion of such Net Insurance Proceeds not required to be applied to the repayment of outstanding Term Loans pursuant to the immediately preceding proviso are not so used within 350 days after the date of the receipt of such Net Insurance Proceeds, such remaining portion shall be applied on the last day of such period as a mandatory repayment of principal of outstanding Term Loans as provided above in this Section 4.02(g) without regard to the immediately preceding proviso. (h) Each amount required to be applied to repay outstanding Term Loans pursuant to Sections 4.02(c) through (g), inclusive, shall be applied to reduce the then remaining Scheduled Repayments on a PRO RATA basis (based upon the then remaining unpaid principal amounts of such Scheduled Repayments after giving effect to all prior reductions thereto). (i) With respect to each repayment of Loans required by this Section 4.02 (including repayments resulting from the reduction of the Total Revolving Loan Commitment pursuant to Section 3.03(d)), the Borrower may designate the Types of Loans of the respective Tranche which are to be repaid and, in the case of Eurodollar Loans, the specific Borrowing or Borrowings of the respective Tranche pursuant to which made, PROVIDED that: (i) repayments of Eurodollar Loans pursuant to this Section 4.02 may only be made on the last day of an Interest Period applicable thereto unless all Eurodollar Loans of the respective Tranche with Interest Periods ending on such date of required repayment and all Base Rate Loans of the respective Tranche have been paid in full; (ii) if any repayment of Eurodollar Loans made pursuant to a single Borrowing shall reduce the outstanding Eurodollar Loans made pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount applicable thereto, such Borrowing shall be converted at the end of the then current Interest Period into a Borrowing of Base Rate Loans; and (iii) each repayment of any Loans made pursuant to a Borrowing shall be applied PRO RATA among such Loans. In the absence of a designation by the Borrower as described in the preceding sentence, the Agent shall, subject to the above, make such designation in its sole discretion. Notwithstanding the foregoing provisions of this Section 4.02, if at any time the mandatory prepayment of Term Loans pursuant to Sections 4.02(c) through (g) above would result, after giving effect to the procedures set forth above, in the Borrower incurring breakage costs under Section 1.11 -24- as a result of Eurodollar Loans being prepaid other than on the last day of an Interest Period applicable thereto (the "Affected Eurodollar Loans"), then, so long as no Default or Event of Default then exists, the Borrower may in its sole discretion initially deposit a portion (up to 100%) of the amounts that otherwise would have been paid in respect of the Affected Eurodollar Loans with the Agent (which deposit must be equal in amount to the amount of Affected Eurodollar Loans not immediately prepaid) to be held as security for the obligations of the Borrower hereunder pursuant to a cash collateral agreement (which shall permit investments in Cash Equivalents satisfactory to the Agent) to be entered into in form and substance reasonably satisfactory to the Agent, with such cash collateral to be directly applied upon the first occurrence (or occurrences) thereafter of the last day of an Interest Period applicable to the relevant Term Loans that are Eurodollar Loans (or such earlier date or dates as shall be requested by the Borrower), to repay an aggregate principal amount of such Term Loans equal to the Affected Eurodollar Loans not initially repaid pursuant to this sentence. Notwithstanding anything to the contrary contained in the immediately preceding sentence, all amounts deposited as cash collateral pursuant to the immediately preceding sentence shall be held for the benefit of the Banks whose Term Loans would otherwise have been immediately repaid with the amounts deposited and upon the taking of any action by the Agent or the Banks pursuant to the remedial provisions of Section 10, any amounts held as cash collateral pursuant to this Section 4.02(i) shall, subject to the requirements of applicable law, be immediately applied first to the relevant Term Loans. (j) Notwithstanding anything to the contrary contained in this Agreement or in any other Credit Document, (i) all then outstanding Loans shall be repaid in full on the Final Maturity Date, (ii) all then outstanding Loans shall be repaid in full on the date on which a Change of Control occurs and (iii) all then outstanding Swingline Loans shall be repaid in full on the Swingline Expiry Date. 4.03 METHOD AND PLACE OF PAYMENT. Except as otherwise specifically provided herein, all payments under this Agreement or under any Note shall be made to the Agent for the account of the Bank or Banks entitled thereto not later than 1:00 P.M. (New York time) on the date when due and shall be made in Dollars in immediately available funds at the Payment Office. Whenever any payment to be made hereunder or under any Note shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall be payable at the applicable rate during such extension. 4.04 NET PAYMENTS. (a) All payments made by the Borrower hereunder or under any Note will be made without setoff, counterclaim or other defense. Except as provided in Section 4.04(b), all such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein with respect to such payments (but excluding, except as provided in the second succeeding sentence, any tax imposed on or measured by the net income or profits of a Bank pursuant to the laws of the jurisdiction in which it is organized or the jurisdiction in which the principal office or applicable lending office of such Bank is located or, in each case, any subdivision thereof or therein) and all interest, penalties or similar liabilities with respect to such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges being referred -25- to collectively as "Taxes"). If any Taxes are so levied or imposed, the Borrower agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement or under any Note, after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein or in such Note. If any amounts are payable in respect of Taxes pursuant to the preceding sentence, the Borrower agrees to reimburse each Bank, upon the written request of such Bank, for taxes imposed on or measured by the net income or profits of such Bank pursuant to the laws of the jurisdiction in which such Bank is organized or in which the principal office or applicable lending office of such Bank is located or under the laws of any political subdivision or taxing authority of any such jurisdiction in which such Bank is organized or in which the principal office or applicable lending office of such Bank is located and for any withholding of taxes as such Bank shall determine are payable by, or withheld from, such Bank, in respect of such amounts so paid to or on behalf of such Bank pursuant to the preceding sentence and in respect of any amounts paid to or on behalf of such Bank pursuant to this sentence. The Borrower will furnish to the Agent within 45 days after the date the payment of any Taxes is due pursuant to applicable law certified copies of tax receipts evidencing such payment by the Borrower. The Borrower agrees to indemnify and hold harmless each Bank, and reimburse such Bank upon its written request, for the amount of any Taxes so levied or imposed and paid by such Bank. (b) Each Bank that is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for U.S. Federal income tax purposes agrees to deliver to the Borrower and the Agent on or prior to the Restatement Effective Date, or in the case of a Bank that is an assignee or transferee of an interest under this Agreement pursuant to Section 1.13 or 13.04 (unless the respective Bank was already a Bank hereunder immediately prior to such assignment or transfer), on the date of such assignment or transfer to such Bank, (i) two accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001 (or successor forms) certifying to such Bank's entitlement to a complete exemption from United States withholding tax with respect to payments to be made under this Agreement and under any Note, or (ii) if the Bank is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code and cannot deliver either Internal Revenue Service Form 1001 or 4224 (or successor forms) pursuant to clause (i) above, (x) a certificate substantially in the form of Exhibit D (any such certificate, a "Section 4.04(b)(ii) Certificate") and (y) two accurate and complete original signed copies of Internal Revenue Service Form W-8 (or successor form) certifying to such Bank's entitlement to a complete exemption from United States withholding tax with respect to payments of interest to be made under this Agreement and under any Note. In addition, each Bank agrees that from time to time after the Restatement Effective Date, when a lapse in time or change in circumstances renders the previous certification obsolete or inaccurate in any material respect, such Bank will deliver to the Borrower and the Agent two new accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001 (or successor forms), or Form W-8 (or successor form) and a Section 4.04(b)(ii) Certificate, as the case may be, and such other forms as may be required in order to confirm or establish the entitlement of such Bank to a continued exemption from or reduction in United States withholding tax with respect to payments under this Agreement and any Note, or such Bank shall immediately notify the Borrower and the Agent of its inability to deliver any such Form or Section 4.04(b)(ii) Certificate, in which case such Bank shall not be required to deliver any such Form or Section 4.04(b)(ii) Certificate pursuant to this -26- Section 4.04(b). Notwithstanding anything to the contrary contained in Section 4.04(a), but subject to the immediately succeeding sentence, (x) the Borrower shall be entitled, to the extent it is required to do so by law, to deduct or withhold income or similar taxes imposed by the United States (or any political subdivision or taxing authority thereof or therein) from interest, Fees or other amounts payable hereunder for the account of any Bank which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for U.S. Federal income tax purposes to the extent that such Bank has not provided to the Borrower U.S. Internal Revenue Service Forms that establish a complete exemption from such deduction or withholding and (y) the Borrower shall not be obligated pursuant to Section 4.04(a) hereof to gross-up payments to be made to a Bank in respect of income or similar taxes imposed by the United States if (I) such Bank has not provided to the Borrower the Internal Revenue Service Forms or the Section 4.04(b)(ii) Certificate required to be provided to the Borrower pursuant to this Section 4.04(b) or (II) in the case of a payment, other than interest, to a Bank described in clause (ii) above, to the extent that such Forms do not establish a complete exemption from withholding of such taxes. Notwithstanding anything to the contrary contained in the preceding sentence or elsewhere in this Section 4.04, the Borrower agrees to pay any additional amounts and to indemnify each Bank in the manner set forth in Section 4.04(a) (without regard to the identity of the jurisdiction requiring the deduction or withholding) in respect of any Taxes deducted or withheld by it as described in the immediately preceding sentence solely as a result of any changes after the Restatement Effective Date in any applicable law, treaty, governmental rule, regulation, guideline or order, or in the interpretation thereof, relating to the deducting or withholding of such Taxes. (c) If the Borrower pays any additional amounts under this Section 4.04 to a Bank and such Bank determines in its sole discretion that it has actually received or realized in connection therewith any refund or any reduction of, or credit against, its Tax liabilities in or with respect to the taxable year in which the additional amount is paid (a "Tax Benefit"), such Bank shall pay to the Borrower an amount that such Bank shall, in its sole discretion, determine is equal to the net benefit, after tax, which was obtained by such Bank in such year as a consequence of such Tax Benefit; PROVIDED, HOWEVER, that (i) any Bank may determine, in its sole discretion, whether to seek a Tax Benefit, (ii) any Taxes that are imposed on a Bank as a result of a disallowance or reduction (including through the expiration of any tax credit carryover or carryback of such Bank that otherwise would not have expired) of any Tax Benefit with respect to which such Bank has made a payment to the Borrower pursuant to this Section 4.04(c) shall be treated as a Tax for which the Borrower is obligated to indemnify such Bank pursuant to this Section 4.04 without any exclusions or defenses and (iii) nothing in this Section 4.04(c) shall require any Bank to disclose any confidential information to the Borrower (including, without limitation, its tax returns). SECTION 5. CONDITIONS PRECEDENT TO THE RESTATEMENT EFFECTIVE DATE. The occurrence of the Restatement Effective Date pursuant to Section 13.10 and the obligation of each Bank to make Loans, and the obligation of the Issuing Bank to issue Letters of Credit, on the Restatement Effective Date, is subject to the satisfaction of the following conditions: 5.01 EXECUTION OF AGREEMENT; NOTES. On or prior to the Restatement Effective Date, (i) this Agreement shall have been executed and delivered as provided in Section 13.10 and (ii) there shall have been delivered to the Agent for the account of each of the Banks the -27- appropriate Term Note and/or Revolving Note executed by the Borrower and to the Swingline Bank, the Swingline Note executed by the Borrower, in each case, in the amount, maturity and as otherwise provided herein. 5.02 OFFICER'S CERTIFICATE. On the Restatement Effective Date, the Agent shall have received a certificate from each of Holdings and the Borrower, dated the Restatement Effective Date and signed on behalf of each such Credit Party by the Chairman of the Board, the President or any Vice President of such Credit Party, stating on behalf of such Credit Party that all of the conditions in Sections 5.06, 5.07, 5.08, 5.09 and 6.02 have been satisfied on such date. 5.03 OPINIONS OF COUNSEL. On the Restatement Effective Date, the Agent shall have received from Gibson, Dunn & Crutcher LLP, special counsel to the Credit Parties, (i) an opinion addressed to the Agent, the Collateral Agent and each of the Banks and dated the Restatement Effective Date covering the matters set forth in Exhibit E and (ii) a reliance letter addressed to the Agent, the Collateral Agent and each of the Banks and dated the Restatement Effective Date entitling such Persons to rely on their opinion delivered as part of the Acquisition. 5.04 CORPORATE DOCUMENTS; PROCEEDINGS; ETC. (a) On the Restatement Effective Date, the Agent shall have received a certificate from each Credit Party, dated the Restatement Effective Date, signed by the Chairman of the Board, the President or any Vice President of such Credit Party, and attested to by the Secretary or any Assistant Secretary of such Credit Party, in the form of Exhibit F with appropriate insertions, together with copies of the certificate of incorporation (or equivalent organizational document) and by-laws of such Credit Party and the resolutions of such Credit Party referred to in such certificate, and the foregoing shall be in form and substance reasonably acceptable to the Agent. (b) All corporate and legal proceedings and all instruments and agreements in connection with the transactions contemplated by this Agreement and the other Documents shall be reasonably satisfactory in form and substance to the Agent and the Required Banks, and the Agent shall have received all information and copies of all documents and papers, including records of corporate proceedings, governmental approvals, good standing certificates and bring-down telegrams or facsimiles, if any, which the Agent reasonably may have requested in connection therewith, such documents and papers where appropriate to be certified by proper corporate or governmental authorities. 5.05 PLANS; SHAREHOLDERS' AGREEMENTS; MANAGEMENT AGREEMENTS; EMPLOYMENT AGREEMENTS; NON-COMPETE AGREEMENTS; COLLECTIVE BARGAINING AGREEMENTS; TAX SHARING AGREEMENTS; EXISTING INDEBTEDNESS AGREEMENTS. On or prior to the Restatement Effective Date, there shall have been delivered or made available to the Agent true and correct copies of the following documents (in each case to the extent entered into after February 3, 1998 or relating to Power Ten or any of its Subsidiaries): (i) all Plans (and for each Plan that is required to file an annual report on Internal Revenue Service Form 5500-series, a copy of the most recent such report (including, to the extent required, the related financial and actuarial statements and opinions and other supporting statements, certifications, schedules and information), and -28- for each Plan that is a "single-employer plan," as defined in Section 4001(a)(15) of ERISA, the most recently prepared actuarial valuation therefor) and any other "employee benefit plans," as defined in Section 3(3) of ERISA, and any other material agreements, plans or arrangements, with or for the benefit of current or former employees of Holdings or any of its Subsidiaries or any ERISA Affiliate (provided that the foregoing shall apply in the case of any multiemployer plan, as defined in 4001(a)(3) of ERISA, only to the extent that any document described therein is in the possession of Holdings or any Subsidiary of Holdings or any ERISA Affiliate or reasonably available thereto from the sponsor or trustee of any such plan); (ii) all collective bargaining agreements applying or relating to any employee of Holdings or any of its Subsidiaries (collectively, the "Collective Bargaining Agreements"); (iii) all agreements entered into by Holdings or any of its Subsidiaries governing the terms and relative rights of its capital stock and any agreements entered into by shareholders relating to any such entity with respect to its capital stock (collectively, the "Shareholders' Agreements"); (iv) all material agreements with members of, or with respect to, the management of Holdings or any of its Subsidiaries (collectively, the "Management Agreements"); (v) all material employment agreements entered into by Holdings or any of its Subsidiaries (collectively, the "Employment Agreements"); (vi) any non-compete agreement entered into by Holdings or any of its Subsidiaries (collectively, the "Non-Compete Agreements"); (vii) all tax sharing, tax allocation and other similar agreements entered into by Holdings or any of its Subsidiaries (collectively, the "Tax Sharing Agreements"); and (viii) all agreements evidencing or relating to Indebtedness of Holdings or any of its Subsidiaries which is to remain outstanding after giving effect to the Restatement Effective Date (collectively, the "Existing Indebtedness Agreements"); all of which Plans, Collective Bargaining Agreements, Shareholders' Agreements, Management Agreements, Employment Agreements, Non-Compete Agreements, Tax Sharing Agreement and Existing Indebtedness Agreements shall be in form and substance reasonably satisfactory to the Agent and the Required Banks and shall be in full force and effect on the Restatement Effective Date. 5.06 TRANSACTION. (a) On or prior to the Restatement Effective Date, Holdings shall have received gross cash proceeds of at least $4,000,000 from the Equity Financing and shall have contributed the full amount thereof to the Borrower. (b) On the Restatement Effective Date, all conditions precedent to the consummation of the Acquisition as set forth in the Acquisition Documents shall have been -29- satisfied, and not waived unless consented to by the Agent and the Required Banks (which consent shall not be unreasonably withheld or delayed), to the reasonable satisfaction of the Agent and the Required Banks. The Acquisition shall have been consummated in all material respects in accordance with the Acquisition Documents and all applicable laws. At the time of the consummation of the Acquisition, all Liens, if any, on the capital stock and assets of Power Ten and its Subsidiaries shall have been released and terminated and all commitments in respect of any Indebtedness for borrowed money of Power Ten and its Subsidiaries shall have been terminated and all amounts owing thereunder shall have been repaid in full. (c) On or prior to the Restatement Effective Date, there shall have been delivered to the Agent true and correct copies of all Acquisition Documents and Equity Financing Documents, and all of the terms and conditions of such Documents shall be in form and substance reasonably satisfactory to the Agent and the Required Banks. (d) The Agent shall have received evidence, in form and substance satisfactory to it, that the matters set forth in clauses (a) and (b) of this Section 5.06 have been satisfied as of the Restatement Effective Date. 5.07 EXISTING CREDIT AGREEMENT. On the Restatement Effective Date, (i) each Existing Bank shall have surrendered to the Agent for cancellation the promissory notes issued to it pursuant to the Existing Credit Agreement in respect of its Existing Revolving Loans and (ii) the Borrower shall have paid all interest and fees (including commitment fees) owing under the Existing Credit Agreement through the Restatement Effective Date (whether or not due and payable at such time under the Existing Credit Agreement). 5.08 ADVERSE CHANGE, ETC. (a) Since March 28, 1998 (or, in the case of Power Ten and its Subsidiaries, since September 30, 1997) and except as (and to the extent) disclosed in writing to the Agent and the Banks prior to the Restatement Effective Date, nothing shall have occurred (and neither the Agent nor the Banks shall have become aware of any facts or conditions not previously known) which the Agent or the Required Banks shall reasonably determine (a) has had, or could reasonably be expected to have, a material adverse effect on the rights or remedies of the Banks or the Agent, or on the ability of any Credit Party to perform its obligations to them hereunder or under any other Credit Document or (b) has had, or could reasonably be expected to have, a material adverse effect on the Transaction or on the business, operations, property, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole or Power Ten and its Subsidiaries taken as a whole. (b) On or prior to the Restatement Effective Date, all necessary governmental (domestic and foreign) and third party approvals and/or consents in connection with the Transaction and the other transactions contemplated by the Documents and otherwise referred to herein or therein shall have been obtained and remain in effect, and all applicable waiting periods with respect thereto shall have expired without any action being taken by any competent authority which restrains, prevents or imposes materially adverse conditions upon, the consummation of the Transaction or the other transactions contemplated by the Documents or otherwise referred to herein or therein. Additionally, there shall not exist any judgment, order, injunction or other restraint issued or filed or a hearing seeking injunctive relief or other restraint pending or notified -30- prohibiting or imposing materially adverse conditions upon, or materially delaying, or making economically unfeasible, the consummation of the Transaction or the other transactions contemplated by the Documents or otherwise required to herein or therein. 5.09 LITIGATION. On the Restatement Effective Date, there shall be no actions, suits or proceedings pending or threatened (i) with respect to the Transaction, this Agreement or any other Document or (ii) except as disclosed on Schedule XIII, which the Agent or the Required Banks shall reasonably determine could reasonably be expected to have a material adverse effect on (a) the Transaction or on the business, operations, property, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole or Power Ten and its Subsidiaries taken as a whole, (b) the rights or remedies of the Banks or the Agent hereunder or under any other Credit Document or (c) the ability of any Credit Party to perform its respective obligations to the Banks or the Agent hereunder or under any other Credit Document. 5.10 PLEDGE AGREEMENT. On the Restatement Effective Date, each Credit Party shall have duly authorized, executed and delivered the Amended and Restated Pledge Agreement in the form of Exhibit G (as amended, modified or supplemented from time to time, the "Pledge Agreement") and shall have delivered to the Collateral Agent, as pledgee thereunder, all of the Pledged Securities, if any, referred to therein and owned by such Credit Party, (x) endorsed in blank in the case of promissory notes constituting Pledged Securities and (y) together with executed and undated stock powers in the case of capital stock constituting Pledged Securities. 5.11 SECURITY AGREEMENT. On the Restatement Effective Date, each Credit Party shall have duly authorized, executed and delivered the Amended and Restated Security Agreement in the form of Exhibit H (as modified, supplemented or amended from time to time, the "Security Agreement") covering all of such Credit Party's present and future Security Agreement Collateral, together with: (i) proper Financing Statements (Form UCC-1 or the equivalent) fully executed for filing under the UCC or other appropriate filing offices of each jurisdiction as may be necessary or, in the reasonable opinion of the Collateral Agent, desirable to perfect the security interests purported to be created by the Security Agreement; (ii) certified copies of Requests for Information or Copies (Form UCC-11), or equivalent reports, listing all effective financing statements that name Power Ten or any of its Subsidiaries as debtor and that are filed in the jurisdictions referred to in clause (i) above, together with copies of such other financing statements that name Power Ten or any of its Subsidiaries as debtor (none of which shall cover the Collateral except to the extent evidencing Permitted Liens or in respect of which the Collateral Agent shall have received termination statements (Form UCC-3 or the equivalent) as shall be required by local law fully executed for filing); (iii) evidence of the completion of all other recordings and filings of, or with respect to, the Security Agreement as may be necessary to perfect the security interests intended to be created by the Security Agreement; and -31- (iv) evidence that all other actions necessary to perfect and protect the security interests purported to be created by the Security Agreement have been taken. 5.12 SUBSIDIARIES GUARANTY. On the Restatement Effective Date, each Subsidiary Guarantor, if any, shall have duly authorized, executed and delivered the Amended and Restated Subsidiaries Guaranty in the form of Exhibit I (as amended, modified or supplemented from time to time, the "Subsidiaries Guaranty"). 5.13 CAPITAL CALL AGREEMENT. On the Restatement Effective Date, JFLEI, Holdings and the Borrower shall have duly authorized, executed and delivered the Capital Call Agreement in the form of Exhibit J (as amended, modified or supplemented from time to time, the "Capital Call Agreement"). 5.14 LANDLORD WAIVERS. On the Restatement Effective Date, the Collateral Agent shall have received landlord waivers with respect to the Leaseholds of Power Ten and its Subsidiaries, which landlord waivers shall be in form and substance reasonably satisfactory to the Agent. 5.15 FINANCIAL STATEMENTS; PRO FORMA FINANCIAL STATEMENTS, PROJECTIONS. On or prior to the Restatement Effective Date, the Agent shall have received true and correct copies of the historical financial statements, the PRO FORMA financial statements and the Projections referred to in Sections 7.05(a) and (d). 5.16 SOLVENCY CERTIFICATE; INSURANCE CERTIFICATES. On or prior to the Restatement Effective Date, the Agent shall have received: (i) a solvency certificate from an authorized officer of Holdings in the form of Exhibit K; and (ii) certificates of insurance complying with the requirements of Section 8.03 for the business and properties of Holdings and its Subsidiaries, in form and substance reasonably satisfactory to the Agent and naming the Collateral Agent as an additional insured and as loss payee, and stating that such insurance shall not be cancelled without at least 30 days prior written notice by the insurer to the Collateral Agent (or such shorter period of time as a particular insurance company generally provides). 5.17 INITIAL BORROWING BASE CERTIFICATE. On the Restatement Effective Date, the Agent shall have received the initial Borrowing Base Certificate meeting the requirements of Section 8.01(j). 5.18 FEES, ETC. On the Restatement Effective Date, the Borrower shall have paid to the Agent all costs, fees and expenses (including, without limitation, legal fees and expenses) payable to the Agent to the extent then due. SECTION 6. CONDITIONS PRECEDENT TO ALL CREDIT EVENTS. The obligation of each Bank to make Loans (including any Loans made on the Restatement Effective Date), and the -32- obligation of the Issuing Bank to issue Letters of Credit, is subject, at the time of each such Credit Event (except as hereinafter indicated), to the satisfaction of the following conditions: 6.01 RESTATEMENT EFFECTIVE DATE. The Restatement Effective Date shall have occurred. 6.02 NO DEFAULT; REPRESENTATIONS AND WARRANTIES. At the time of each such Credit Event and also after giving effect thereto (i) there shall exist no Default or Event of Default and (ii) all representations and warranties contained herein and in the other Credit Documents shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on the date of such Credit Event (it being understood and agreed that any representation or warranty which by its terms is made as of a specified date shall be required to be true and correct in all material respects only as of such specified date). 6.03 NOTICE OF BORROWING; LETTER OF CREDIT REQUEST. (a) Prior to the making of each Loan (other than a Revolving Loan made pursuant to a Mandatory Borrowing), the Agent shall have received a Notice of Borrowing meeting the requirements of Section 1.03(a). Prior to the making of each Swingline Loan, the Swingline Bank shall have received the notice referred to in Section 1.03(b)(i). (b) Prior to the issuance of each Letter of Credit, the Agent and the Issuing Bank shall have received a Letter of Credit Request meeting the requirements of Section 2.03. The occurrence of the Restatement Effective Date and the acceptance of the benefits of each Credit Event shall constitute a representation and warranty by Holdings and the Borrower to the Agent and each of the Banks that all the conditions specified in Section 5 (with respect to the occurrence of the Restatement Effective Date and Credit Events on the Restatement Effective Date) and in this Section 6 (with respect to the occurrence of the Restatement Effective Date and Credit Events on or after the Restatement Effective Date) and applicable to such Credit Event exist as of that time. All of the Notes, certificates, legal opinions and other documents and papers referred to in Section 5 and in this Section 6, unless otherwise specified, shall be delivered to the Agent at the Notice Office for the account of each of the Banks and, except for the Notes, in sufficient counterparts or copies for each of the Banks and shall be in form and substance reasonably satisfactory to the Agent and the Required Banks. SECTION 7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. In order to induce the Banks to enter into this Agreement and to make the Loans, and issue (or participate in) the Letters of Credit as provided herein, each of Holdings and the Borrower makes the following representations, warranties and agreements, in each case after giving effect to the Transaction, all of which shall survive the execution and delivery of this Agreement and the Notes and the making of the Loans and issuance of the Letters of Credit, and with the occurrence of the Restatement Effective Date and each other Credit Event on or after the Restatement Effective Date being deemed to constitute a representation and warranty that the matters specified in this Section 7 are true and correct in all material respects on and as of the Restatement Effective Date and on the date of each such other Credit Event (it being understood and agreed that any representation or -33- warranty which by its terms is made as of a specified date shall be required to be true and correct in all material respects only as of such specified date). 7.01 CORPORATE STATUS. Each Credit Party and each of its Subsidiaries (i) is a duly organized and validly existing corporation in good standing under the laws of the jurisdiction of its organization, (ii) has the corporate power and authority to own its property and assets and to transact the business in which it is engaged and presently proposes to engage and (iii) is duly qualified and is authorized to do business and is in good standing in each jurisdiction where the ownership, leasing or operation of its property or the conduct of its business requires such qualifications except for failures to be so qualified which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole. 7.02 CORPORATE AND OTHER POWER AND AUTHORITY. Each Credit Party has the corporate power and authority to execute, deliver and perform the terms and provisions of each of the Documents to which it is party and has taken all necessary corporate action to authorize the execution, delivery and performance by it of each of such Documents. Each Credit Party has duly executed and delivered each of the Documents to which it is party, and each of such Documents constitutes its legal, valid and binding obligation enforceable in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law). 7.03 NO VIOLATION. Neither the execution, delivery or performance by any Credit Party of the Documents to which it is a party, nor compliance by it with the terms and provisions thereof, (i) will contravene any provision of any law, statute, rule or regulation or any order, writ, injunction or decree of any court or governmental instrumentality, (ii) will conflict with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien (except pursuant to the Security Documents) upon any of the property or assets of Holdings or any of its Subsidiaries pursuant to the terms of any indenture (including without limitation, the Senior Note Indenture), mortgage, deed of trust, credit agreement or loan agreement, or any other material agreement, contract or instrument, to which Holdings or any of its Subsidiaries is a party or by which it or any of its property or assets is bound or to which it may be subject or (iii) will violate any provision of the certificate of incorporation or by-laws (or equivalent organizational documents) of Holdings or any of its Subsidiaries. 7.04 APPROVALS. No order, consent, approval, license, authorization or validation of, or filing, recording or registration with (except for those that have otherwise been obtained or made on or prior to the Restatement Effective Date and which remain in full force and effect on the Restatement Effective Date), or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with, (i) the execution, delivery and performance of any Document or (ii) the legality, validity, binding effect or enforceability of any such Document. -34- 7.05 FINANCIAL STATEMENTS; FINANCIAL CONDITION; UNDISCLOSED LIABILITIES; PROJECTIONS; ETC. (a) The consolidated balance sheets of Holdings and its Subsidiaries for the fiscal years ended on March 29, 1997 and March 28, 1998, respectively, and the related consolidated statements of income, cash flows and shareholders' equity of Holdings and its Subsidiaries for the fiscal years ended on such dates, copies of which have been furnished to the Banks prior to the Restatement Effective Date, present fairly in all material respects the consolidated financial position of Holdings and its Subsidiaries at the date of such balance sheets and the consolidated results of the operations of Holdings and its Subsidiaries for the periods covered thereby. The balance sheets of Power Ten for the fiscal year and six-month period ended on September 30, 1997 and April 4, 1998, respectively, and the related statements of income, cash flows and shareholders' equity of Power Ten for the fiscal year or six-month period, as the case may be, ended on such dates, copies of which have been furnished to the Banks prior to the Restatement Effective Date, present fairly in all material respects the financial position of Power Ten at the date of such balance sheets and the results of the operations of Power Ten for the periods covered thereby. All of the foregoing historical financial statements have been prepared in accordance with generally accepted accounting principles consistently applied except as disclosed in the notes thereto. The PRO FORMA consolidated financial statements of Holdings and its Subsidiaries as of March 28, 1998 (or April 4, 1998, to the extent relating to Power Ten), in each case after giving effect to the Transaction and the financing therefor, copies of which have been furnished to the Banks prior to the Restatement Effective Date, present fairly in all material respects the PRO FORMA consolidated financial position of Holdings and its Subsidiaries as of such date and the PRO FORMA consolidated results of operations of Holdings and its Subsidiaries for the period ended on such date. After giving effect to the Transaction (but for this purpose assuming that the Transaction and the related financing had occurred prior to March 28, 1998), since March 28, 1998 and except as (and to the extent) disclosed in writing to the Agent and the Banks prior to the Restatement Effective Date, nothing shall have occurred that has had, or could reasonably be expected to have, a material adverse effect on the business, operations, property, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole. (b) On and as of the Restatement Effective Date and after giving effect to the Transaction and to all Indebtedness (including any Loans) being incurred or assumed and Liens created by the Credit Parties in connection therewith (a) the sum of the assets, at a fair valuation, of each of the Borrower on a stand-alone basis and of Holdings and its Subsidiaries taken as a whole will exceed its debts; (b) each of the Borrower on a stand-alone basis and Holdings and its Subsidiaries taken as a whole has not incurred and does not intend to incur, and does not believe that it will incur, debts beyond its ability to pay such debts as such debts mature; and (c) each of the Borrower on a stand alone basis and Holdings and its Subsidiaries taken as a whole will have sufficient capital with which to conduct its business. For purposes of this Section 7.05(b), "debt" means any liability on a claim, and "claim" means (i) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured or (ii) right to an equitable remedy for breach of performance if such breach gives rise to a payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured. The amount of contingent liabilities at any time shall be computed as the -35- amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. (c) Except as fully disclosed in the financial statements delivered pursuant to Section 7.05(a), there were as of the Restatement Effective Date no liabilities or obligations with respect to Holdings or any of its Subsidiaries of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether or not due) which, either individually or in aggregate, could reasonably be expected to be material to Holdings and its Subsidiaries taken as a whole. As of the Restatement Effective Date, neither Holdings nor the Borrower knows of any basis for the assertion against it or any of its Subsidiaries of any liability or obligation of any nature whatsoever that is not fully disclosed in the financial statements delivered pursuant to Section 7.05(a) which, either individually or in the aggregate, could reasonably be expected to be material to Holdings and its Subsidiaries taken as a whole. (d) On and as of the Restatement Effective Date, the Projections delivered to the Agent and the Banks prior to the Restatement Effective Date have been prepared in good faith and are based on reasonable assumptions, and there are no statements or conclusions in the Projections which are based upon or include information known to Holdings or the Borrower to be misleading in any material respect or which fail to take into account material information known to Holdings or the Borrower regarding the matters reported therein. On the Restatement Effective Date, Holdings and the Borrower believe that the Projections are reasonable, it being recognized by the Banks, however, that projections as to future events are not to be viewed as facts and that the actual results during the period or periods covered by the Projections may differ from the projected results and that the differences may be material. 7.06 LITIGATION. There are no actions, suits or proceedings pending or, to the best knowledge of Holdings and the Borrower, threatened (i) with respect to the Transaction or any Document, (ii) with respect to any material Indebtedness of Holdings or any of its Subsidiaries or (iii) except as disclosed on Schedule XIII (but only so long as no adverse judgment is rendered against Holdings or any of its Subsidiaries in an amount of $2,500,000 or more and the Required Banks shall have reasonably determined that the Borrower is not likely to receive any indemnification payments in respect thereof under the Acquisition Agreement (or that the sellers of Power Ten do not have the financial resources to make such indemnity payments), that are reasonably likely to materially and adversely affect the business, operations, property, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole. 7.07 TRUE AND COMPLETE DISCLOSURE. All factual information (taken as a whole) furnished by or on behalf of any Credit Party in writing to the Agent or any Bank (including, without limitation, all information contained in the Documents) for purposes of or in connection with this Agreement, the other Credit Documents or any transaction contemplated herein or therein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of any Credit Party in writing to the Agent or any Bank will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided. -36- 7.08 USE OF PROCEEDS; MARGIN REGULATIONS. (a) All proceeds of Revolving Loans shall be used for the working capital and general corporate purposes of the Borrower and its Subsidiaries and not to finance the Transaction (it being understood, however, that up to $500,000 of the proceeds of the Revolving Loans may be used to fund any purchase price adjustment required to be paid by the Borrower pursuant to the Acquisition Agreement). (b) All proceeds of Term Loans shall be utilized solely to finance the Acquisition and to pay fees and expenses relating thereto. (c) No part of any Credit Event (or the proceeds thereof) will be used to purchase or carry any Margin Stock or to extend credit for the purpose of purchasing or carrying any Margin Stock. Neither the making of any Loan nor the use of the proceeds thereof nor the occurrence of any other Credit Event will violate or be inconsistent with the provisions of Regulation T, U or X of the Board of Governors of the Federal Reserve System. 7.09 TAX RETURNS AND PAYMENTS. Each of Holdings and each of its Subsidiaries has filed all federal and state income tax returns and all other material tax returns, domestic and foreign, required to be filed by it and has paid all federal and state income taxes and all other material taxes and assessments payable by it which have become due, except for those contested in good faith and fully provided for on the financial statements of Holdings and its Subsidiaries in accordance with generally accepted accounting principles. Holdings and each of its Subsidiaries have at all times paid, or have provided adequate reserves (in the good faith judgment of the management of Holdings) for the payment of, all federal, state and material local and foreign income taxes applicable for all prior fiscal years and for the current fiscal year to date. Except as disclosed on Schedule X, there is no material action, suit, proceeding, investigation, audit or claim now pending or, to the best knowledge of Holdings and the Borrower threatened, by any authority regarding any taxes relating to Holdings or any of its Subsidiaries. As of the Restatement Effective Date, neither Holdings nor any of its Subsidiaries has entered into an agreement or waiver or been requested to enter into an agreement or waiver extending any statute of limitations relating to the payment or collection of taxes of Holdings or any of its Subsidiaries, or is aware of any circumstances that would cause the taxable years or other taxable periods of Holdings or any of its Subsidiaries not to be subject to the normally applicable statute of limitations. 7.10 COMPLIANCE WITH ERISA. Schedule IV sets forth, as of the Restatement Effective Date, each Plan; each Plan (and each related trust, insurance contract or fund) is in substantial compliance with its terms and with all applicable laws, including, without limitation, ERISA and the Code; each Plan (and each related trust, if any) which is intended to be qualified under Section 401(a) of the Code has received a determination letter from the Internal Revenue Service to the effect that it meets the requirements of Sections 401(a) and 501(a) of the Code or application for such determination has been made; no Reportable Event has occurred; no Plan which is a multiemployer plan (as defined in Section 4001(a)(3) of ERISA) is insolvent or in reorganization; no Plan has an Unfunded Current Liability; no Plan which is subject to Section 412 of the Code or Section 302 of ERISA has an accumulated funding deficiency, within the meaning of such sections of the Code or ERISA, or has applied for or received a waiver of an accumulated funding deficiency or an extension of any amortization period, within the meaning of -37- Section 412 of the Code or Section 303 or 304 of ERISA; all contributions required to be made with respect to a Plan have been timely made except as would not result in any material liability; neither Holdings nor any Subsidiary of Holdings nor any ERISA Affiliate has incurred any material liability (including any indirect, contingent or secondary liability) to or on account of a Plan pursuant to Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971 or 4975 of the Code or expects to incur any such material liability under any of the foregoing sections with respect to any Plan; no condition exists which presents a material risk to Holdings or any Subsidiary of Holdings or any ERISA Affiliate of incurring a material liability to or on account of a Plan pursuant to the foregoing provisions of ERISA and the Code; no proceedings have been instituted to terminate or appoint a trustee to administer any Plan which is subject to Title IV of ERISA; no action, suit, proceeding, hearing, audit or investigation with respect to the administration, operation or the investment of assets of any Plan (other than routine claims for benefits) is pending, or to the knowledge of Holdings and its Subsidiaries, expected or threatened; using actuarial assumptions and computation methods consistent with Part 1 of subtitle E of Title IV of ERISA, the aggregate liabilities of Holdings and its Subsidiaries and its ERISA Affiliates to all Plans which are multiemployer plans (as defined in Section 4001(a)(3) of ERISA) in the event of a complete withdrawal therefrom, as of the close of the most recent fiscal year of each such Plan ended prior to the date of the most recent Credit Event, would not exceed $50,000; each group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) which covers or has covered employees or former employees of Holdings, any Subsidiary of Holdings or any ERISA Affiliate has at all times been operated in material compliance with the provisions of Part 6 of subtitle B of Title I of ERISA and Section 4980B of the Code; no lien imposed under the Code or ERISA on the assets of Holdings or any Subsidiary of Holdings or any ERISA Affiliate exists or is likely to arise on account of any Plan; and Holdings and its Subsidiaries may cease contributions to or terminate any employee benefit plan maintained by any of them without incurring any material liability. 7.11 THE SECURITY DOCUMENTS. (a) The provisions of the Security Agreement are effective to create in favor of the Collateral Agent for the benefit of the Secured Creditors a legal, valid and enforceable security interest in all right, title and interest of the Credit Parties in the Security Agreement Collateral described therein to the extent that a security interest can be created therein under the UCC, and the Collateral Agent, for the benefit of the Secured Creditors, has a fully perfected first lien on, and security interest in, all right, title and interest of the Credit Parties in all of the Security Agreement Collateral described therein (to the extent such security interest can be perfected by filing a UCC-1 financing statement or, to the extent required by the Security Agreement, by taking possession of the respective Security Agreement Collateral), subject to no other Liens other than Permitted Liens. In addition, the recordation of the Grant of Security Interest in U.S. Patents and Trademarks in the form attached to the Security Agreement in the United States Patent and Trademark Office, together with filings on Form UCC-1 made pursuant to the Security Agreement, will create, as may be perfected by such filing and recordation, a perfected security interest in the United States trademarks and patents covered by the Security Agreement and specifically identified in such Grant and the recordation of the Grant of Security Interest in U.S. Copyrights in the form attached to the Security Agreement with the United States Copyright Office, together with filings on Form UCC-1 made pursuant to the Security Agreement, will create, as may be perfected by such filing and recordation, a perfected -38- security interest in the United States copyrights covered by the Security Agreement and specifically identified in such Grant. (b) The security interests created in favor of the Collateral Agent, as pledgee, for the benefit of the Secured Creditors, under the Pledge Agreement constitute first priority perfected security interests in the Pledge Agreement Collateral described therein (other than with respect to certain Pledged Securities constituting promissory notes to the extent not required to be delivered pursuant to the Pledge Agreement), subject to no security interests of any other Person. No filings or recordings are required to perfect (or maintain the perfection or priority of) the security interests created in the Pledge Agreement Collateral. (c) After the execution and delivery thereof pursuant to Section 8.11, the Mortgages create, for the obligations purported to be secured thereby, a valid and enforceable perfected security interest in and mortgage lien on all of the Mortgaged Properties in favor of the Collateral Agent (or such other trustee as may be required or desired under local law) for the benefit of the Secured Creditors, superior to and prior to the rights of all third persons (except that the security interest and mortgage lien created in the Mortgaged Properties may be subject to the Permitted Encumbrances related thereto and other Permitted Liens) and subject to no other Liens (other than Permitted Liens). Schedule III contains a true and complete list of each parcel of Real Property owned or leased by Holdings and its Subsidiaries on the Restatement Effective Date, and the type of interest therein held by Holdings or such Subsidiary. Holdings and each of its Subsidiaries have good and marketable title to all fee-owned Real Property and valid leasehold title to all Leaseholds, in each case free and clear of all Liens except those described in the first sentence of this subsection (c). 7.12 REPRESENTATIONS AND WARRANTIES IN THE DOCUMENTS. Except to the extent waived by the Required Banks in accordance with Section 5.06(b), all representations and warranties set forth in the other Documents were true and correct in all material respects at the time as of which such representations and warranties were made (or deemed made) and shall be true and correct in all material respects as of the Restatement Effective Date as if such representations and warranties were made on and as of such date, unless stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date. 7.13 PROPERTIES. Holdings and each of its Subsidiaries have good and marketable title to all material properties owned by them, including all property reflected in the balance sheets referred to in Section 7.05(a) (except as sold or otherwise disposed of since the date of such balance sheet in the ordinary course of business or as permitted by the terms of this Agreement), free and clear of all Liens, other than Permitted Liens. 7.14 CAPITALIZATION. (a) On the Restatement Effective Date and after giving effect to the Transaction and the other transactions contemplated hereby, the authorized capital stock of Holdings shall consist of (i) 5,000,000 shares of common stock, $.01 par value per share, of which approximately 2,300,000 shares shall be issued and outstanding and approximately 353,744 shares shall be reserved for issuance upon the exercise of outstanding warrants and (ii) 50,000 shares of preferred stock, $.01 par value per share, of which (x)10,000 shares shall be issued and -39- outstanding in the form of the Series A Preferred Stock and (y) ______ shares shall be issued and outstanding as Series B Preferred Stock. All outstanding shares of capital stock of Holdings have been duly and validly issued and are fully paid and non-assessable. Holdings does not have outstanding any securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreement providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock other than (i) options, rights or warrants that may be issued from time to time to purchase shares of common stock of Holdings, (ii) options, rights or warrants as set forth in the Shareholders' Agreements delivered pursuant to, or referred to in, Section 5.05 of the Existing Credit Agreement and (iii) Qualified Preferred Stock of Holdings that is convertible into shares of common stock of Holdings. (b) On the Restatement Effective Date and after giving effect to the Transaction and the other transactions contemplated hereby, the authorized capital stock of the Borrower shall consist of 200 shares of common stock, $.01 par value per share, all of which shall be issued and outstanding and owned by Holdings. All outstanding shares of capital stock of the Borrower have been duly and validly issued, are fully paid and nonassessable. The Borrower does not have outstanding any securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreement providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock. 7.15 SUBSIDIARIES. As of the Restatement Effective Date, Holdings has no Subsidiaries other than the Borrower and its Subsidiaries and the Borrower has no Subsidiaries other than those Subsidiaries listed on Schedule V. Schedule V correctly sets forth, as of the Restatement Effective Date, the percentage ownership (direct or indirect) of Holdings in each class of capital stock or other equity of each of its Subsidiaries and also identifies the direct owner thereof. 7.16 COMPLIANCE WITH STATUTES, ETC. Each of Holdings and each of its Subsidiaries is in compliance with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls), except such noncompliances as could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole. 7.17 INVESTMENT COMPANY ACT. Neither Holdings nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 7.18 PUBLIC UTILITY HOLDING COMPANY ACT. Neither Holdings nor any of its Subsidiaries is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. -40- 7.19 ENVIRONMENTAL MATTERS. (a) Holdings and each of its Subsidiaries have complied with, and on the date of each Credit Event are in compliance with, all applicable Environmental Laws and the requirements of any permits issued under such Environmental Laws. There are no pending or, to the knowledge of Holdings and the Borrower, threatened Environmental Claims against Holdings or any of its Subsidiaries (including any such claim arising out of the ownership, lease or operation by Holdings or any of its Subsidiaries of any Real Property no longer owned, leased or operated by Holdings or any of its Subsidiaries) or any Real Property owned, leased or operated by Holdings or any of its Subsidiaries. There are no facts, circumstances, conditions or occurrences with respect to the business or operations of Holdings or any of its Subsidiaries, or any Real Property owned, leased or operated by Holdings or any of its Subsidiaries (including any Real Property formerly owned, leased or operated by Holdings or any of its Subsidiaries but no longer owned, leased or operated by Holdings or any of its Subsidiaries) or, to the knowledge of Holdings or the Borrower, any property adjoining or adjacent to any such Real Property, that could reasonably be expected (i) to form the basis of an Environmental Claim against Holdings or any of its Subsidiaries or any Real Property owned, leased or operated by Holdings or any of its Subsidiaries or (ii) to cause any Real Property owned, leased or operated by Holdings or any of its Subsidiaries to be subject to any restrictions on the ownership, occupancy or transferability of such Real Property by Holdings or any of its Subsidiaries under any applicable Environmental Law. (b) Hazardous Materials have not at any time been generated, used, treated or stored on, or transported to or from, any Real Property owned, leased or operated by Holdings or any of its Subsidiaries where such generation, use, treatment or storage has violated or has given rise to an Environmental Claim under, or could reasonably be expected to violate or give rise to an Environmental Claim under, any Environmental Law. Hazardous Materials have not at any time been Released or disposed of on or from any Real Property owned, leased or operated by Holdings or any of its Subsidiaries where such Release or disposal has violated or given rise to an Environmental Claim under, or could reasonably be expected to violate or give rise to an Environmental Claim under, any applicable Environmental Law. (c) Notwithstanding anything to the contrary in this Section 7.19, the representations and warranties made in this Section 7.19 shall not be untrue unless the effect of any or all violations, claims, restrictions, failures and noncompliances of the types described above in this Section 7.19 could reasonably be expected to, either individually or in the aggregate, have a material adverse effect on the business, operations, property, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole. 7.20 LABOR RELATIONS. Neither Holdings nor any of its Subsidiaries is engaged in any unfair labor practice that could reasonably be expected to have a material adverse effect on Holdings and its Subsidiaries taken as a whole. There is (i) no unfair labor practice complaint pending against Holdings or any of its Subsidiaries or, to the knowledge of Holdings or the Borrower, threatened against any of them, before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is so pending against Holdings or any of its Subsidiaries or, to the knowledge of Holdings and the Borrower, threatened against any of them, (ii) no strike, labor dispute, slowdown or stoppage pending against Holdings or any of its Subsidiaries or, to the knowledge of Holdings and the -41- Borrower, threatened against Holdings or any of its Subsidiaries and (iii) no union representation question exists with respect to the employees of Holdings or any of its Subsidiaries, except (with respect to any matter specified in clause (i), (ii) or (iii) above, either individually or in the aggregate) such as could not reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole. 7.21 PATENTS, LICENSES, FRANCHISES AND FORMULAS. Each of Holdings and each of its Subsidiaries owns or has the right to use all the patents, trademarks, permits, service marks, trade names, copyrights, licenses, franchises, proprietary information (including but not limited to rights in computer programs and databases) and formulas, or rights with respect to the foregoing, and has obtained assignments of all leases and other rights of whatever nature, necessary for the present conduct of its business, without any known conflict with the rights of others which, or the failure to obtain which, as the case may be, could reasonably be expected to result in a material adverse effect on the business, operations, property, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole. 7.22 INDEBTEDNESS. Schedule VI sets forth a true and complete list of all Indebtedness (including Contingent Obligations) of Holdings and its Subsidiaries as of the Restatement Effective Date and which is to remain outstanding after giving effect to the Transaction (excluding the Loans, the Letters of Credit and the Senior Notes, the "Existing Indebtedness"), in each case showing the aggregate principal amount thereof and the name of the respective borrower and any Credit Party or any of its Subsidiaries which directly or indirectly guarantees such debt. 7.23 TRANSACTION. At the time of consummation thereof, the Transaction shall have been consummated in all material respects in accordance with the terms of the applicable Documents and all applicable laws. At the time of consummation of the Transaction, all third party approvals and all consents and approvals of, and filings and registrations with, and all other actions in respect of, all governmental agencies, authorities or instrumentalities required in order to make or consummate the Transaction will have been obtained, given, filed or taken and are or will be in full force and effect (or effective judicial relief with respect thereto has been obtained). All applicable waiting periods with respect thereto have or, prior to the time when required, will have, expired without, in all such cases, any action being taken by any competent authority which restrains, prevents, or imposes material adverse conditions upon the Transaction. Additionally, there does not exist any judgment, order or injunction prohibiting the Transaction or the performance by Holdings or any of its Subsidiaries of their respective obligations under the Documents. All actions taken by Holdings or any of its Subsidiaries pursuant to or in furtherance of the Transaction have been taken in all material respects in compliance with the Documents and all applicable laws. 7.24 SPECIAL PURPOSE CORPORATION. (a) Holdings has no significant assets (other than the capital stock of the Borrower) or material liabilities (other than those liabilities under this Agreement, the other Documents to which it is a party and as otherwise permitted by Section 9.13(b)). -42- (b) Elgar FSC has no significant assets or material liabilities (other than those liabilities permitted by Section 9.13(c)). 7.25 INSURANCE. Schedule VII sets forth a true and complete listing of all insurance maintained by Holdings and its Subsidiaries as of the Restatement Effective Date, and with the amounts insured (and any deductibles) set forth therein. SECTION 8. AFFIRMATIVE COVENANTS. Each of Holdings and the Borrower hereby covenants and agrees that on and after the Restatement Effective Date and until the Total Commitment and all Letters of Credit have terminated and the Loans, Notes and Unpaid Drawings, together with interest, Fees and all other Obligations (other than indemnities described in Section 13.13 which are not then due and payable) incurred hereunder and thereunder, are paid in full: 8.01 INFORMATION COVENANTS. Holdings will furnish to each Bank: (a) MONTHLY REPORTS. Within 30 days after the end of each fiscal month of the Borrower, the consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal month and the related consolidated statements of income, shareholders' equity and statement of cash flows for such fiscal month and for the elapsed portion of the fiscal year ended with the last day of such fiscal month, in each case setting forth comparative figures for the corresponding fiscal month in the prior fiscal year and comparable budgeted figures for such fiscal month. (b) QUARTERLY FINANCIAL STATEMENTS. Within 45 days after the close of the first three quarterly accounting periods in each fiscal year of Holdings, the consolidated balance sheet of Holdings and its Subsidiaries as at the end of such quarterly accounting period and the related consolidated statements of income, shareholders' equity and statement of cash flows for such quarterly accounting period and for the elapsed portion of the fiscal year ended with the last day of such quarterly accounting period, in each case setting forth comparative figures for the related periods in the prior fiscal year, all of which shall be certified by the Chief Financial Officer of the Borrower, subject to normal year-end audit adjustments and the absence of footnotes. (c) ANNUAL FINANCIAL STATEMENTS. Within 90 days after the close of each fiscal year of Holdings, (i) the consolidated balance sheet of Holdings and its Subsidiaries as at the end of such fiscal year and the related consolidated statements of income, shareholders' equity and statement of cash flows for such fiscal year setting forth comparative figures for the preceding fiscal year and certified by Arthur Andersen LLP or such other independent certified public accountants of recognized national standing reasonably acceptable to the Agent, together with a report of such accounting firm stating that in the course of its regular audit of the financial statements of Holdings and its Subsidiaries, which audit was conducted in accordance with generally accepted auditing standards, such accounting firm obtained no knowledge of any Default or an Event of Default relating to accounting matters which has occurred and is continuing or, if in the opinion of such accounting firm such a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof and (ii) management's discussion and analysis of the material operational and financial developments during such fiscal year (it being understood -43- that, to the extent such management's discussion and analysis is included in any report on Form 10-K that is filed with the SEC in respect of such fiscal year and such report is delivered to the Banks pursuant to this Agreement, no separate management discussion and analysis shall be required to be delivered in respect of such fiscal year). (d) MANAGEMENT LETTERS. Promptly after Holdings' or any of its Subsidiaries' receipt thereof, a copy of any "management letter" received from its certified public accountants and management's response thereto. (e) BUDGETS. No later than 30 days following the first day of each fiscal year of Holdings, a budget in form reasonably satisfactory to the Agent (including budgeted statements of income and sources and uses of cash and balance sheets) prepared by Holdings (i) for each of the twelve months of such fiscal year prepared in substantially the same detail as the Projections and (ii) for each of the immediately three succeeding fiscal years prepared in summary form, in each case setting forth, with appropriate discussion, the principal assumptions upon which such budgets are based. (f) OFFICER'S CERTIFICATES. At the time of the delivery of the financial statements provided for in Sections 8.01(b) and (c), a certificate of the Chief Financial Officer of the Borrower to the effect that, to the best of such officer's knowledge, no Default or Event of Default has occurred and is continuing or, if any Default or Event of Default has occurred and is continuing, specifying the nature and extent thereof, which certificate shall set forth in reasonable detail the calculations required to establish whether Holdings and its Subsidiaries were in compliance with the provisions of Sections 4.02(e), 4.02(g), 9.04 and 9.07 through 9.09, inclusive, at the end of such fiscal quarter or year, as the case may be. (g) NOTICE OF DEFAULT OR LITIGATION. Promptly upon, and in any event within five Business Days after, any senior or executive officer of any Credit Party obtains knowledge thereof, notice of (i) the occurrence of any event which constitutes a Default or an Event of Default and (ii) any litigation or governmental investigation or proceeding pending (x) against Holdings or any of its Subsidiaries which could reasonably be expected to materially and adversely affect the business, operations, property, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole, (y) with respect to any material Indebtedness of Holdings or any of its Subsidiaries or (z) with respect to the Transaction or any Document. (h) OTHER REPORTS AND FILINGS. Promptly after the filing or delivery thereof, copies of all financial information, proxy materials and reports, if any, which Holdings or any of its Subsidiaries shall publicly file with the Securities and Exchange Commission or any successor thereto (the "SEC") or deliver to holders of its material Indebtedness pursuant to the terms of the documentation governing such Indebtedness (or any trustee, agent or other representative therefor). (i) ENVIRONMENTAL MATTERS. Promptly after any senior or executive officer of any Credit Party obtains knowledge thereof, notice of one or more of the following environmental matters, unless such environmental matters could not, individually or when aggregated with all -44- other such environmental matters, be reasonably expected to materially and adversely affect the business, operations, property, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole: (i) any pending or threatened Environmental Claim against Holdings or any of its Subsidiaries or any Real Property owned, leased or operated by Holdings or any of its Subsidiaries; (ii) any condition or occurrence on or arising from any Real Property owned, leased or operated by Holdings or any of its Subsidiaries that (a) results in noncompliance by Holdings or any of its Subsidiaries with any applicable Environmental Law or (b) could reasonably be expected to form the basis of an Environmental Claim against Holdings or any of its Subsidiaries or any such Real Property; (iii) any condition or occurrence on any Real Property owned, leased or operated by Holdings or any of its Subsidiaries that could reasonably be expected to cause such Real Property to be subject to any restrictions on the ownership, occupancy, use or transferability by Holdings or any of its Subsidiaries of such Real Property under any Environmental Law; and (iv) the taking of any removal or remedial action in response to the actual or alleged presence of any Hazardous Material on any Real Property owned, leased or operated by Holdings or any of its Subsidiaries as required by any Environmental Law or any governmental or other administrative agency; PROVIDED, that in any event Holdings shall deliver to each Bank all notices received by Holdings or any of its Subsidiaries from any government or governmental agency under, or pursuant to, CERCLA which identify Holdings or any of its Subsidiaries as potentially responsible parties for remediation costs or which otherwise notify Holdings or any of its Subsidiaries of potential liability under CERCLA. All such notices shall describe in reasonable detail the nature of the claim, investigation, condition, occurrence or removal or remedial action and Holdings' or such Subsidiary's response thereto. (j) BORROWING BASE CERTIFICATE. (x) On the Restatement Effective Date, (y) not later than 3:00 P.M. (New York time) on the fifteenth day of each fiscal month of Holdings thereafter, and (z) prior to, or at the time of, the consummation of any Permitted Acquisition, a borrowing base certificate in the form of Exhibit L (each, a "Borrowing Base Certificate"), which shall be prepared (A) as of April 30, 1998 (or May 2, 1998 to the extent applicable to Power Ten) (giving PRO FORMA effect to the Acquisition) in the case of the initial Borrowing Base Certificate, (B) as of the last Business Day of the preceding fiscal month in the case of each subsequent monthly Borrowing Base Certificates and (C) as of the last Business Day of the most recently ended fiscal month for which information is available for each Credit Party (including any Person (or assets) acquired as part of such Permitted Acquisition) in the case of each Borrowing Base Certificate delivered in connection with a Permitted Acquisition, in each case certified by the Chief Financial Officer of the Borrower. -45- (k) OTHER INFORMATION. From time to time, such other information or documents (financial or otherwise) with respect to Holdings or any of its Subsidiaries as the Agent or any Bank may reasonably request. 8.02 BOOKS, RECORDS, INSPECTIONS, AUDITS AND ANNUAL MEETINGS. (a) Holdings will, and will cause each of its Subsidiaries to, keep proper books of record and accounts in which full, true and correct entries in conformity with generally accepted accounting principles and all requirements of law shall be made of all dealings and transactions in relation to its business and activities. Holdings will, and will cause each of its Subsidiaries to, permit officers and designated representatives of the Agent or any Bank to visit and inspect, under guidance of officers of Holdings or such Subsidiary, any of the properties of Holdings or such Subsidiary, and to examine the books of account of Holdings or such Subsidiary and discuss the affairs, finances and accounts of Holdings or such Subsidiary with, and be advised as to the same by, its and their officers and independent accountants, all upon reasonable prior notice and at such reasonable times and intervals and to such reasonable extent as the Agent or such Bank may reasonably request. In addition, Holdings will, and will cause each of its Subsidiaries to, permit upon reasonable prior notice to Holdings or the Borrower the Agent to conduct, at Holdings' and the Borrower's expense, an audit of the inventories and accounts receivable of the Borrower and its Subsidiaries at such times (but no more frequently than once a year unless an Event of Default shall have occurred and be continuing) as the Agent shall reasonably require. (b) At a date to be mutually agreed upon between the Agent and Holdings occurring on or prior to the 120th day after the close of each fiscal year of Holdings, Holdings shall, at the request of the Agent, hold a meeting with all of the Banks at which meeting shall be reviewed the financial results of Holdings and its Subsidiaries for the previous fiscal year and the budgets presented for the current fiscal year of Holdings. 8.03 MAINTENANCE OF PROPERTY; INSURANCE. (a) Holdings will, and will cause each of its Subsidiaries to, (i) keep all property necessary to the business of Holdings and its Subsidiaries in reasonably good working order and condition, ordinary wear and tear excepted, (ii) maintain insurance on all such property in at least such amounts and against at least such risks as is consistent and in accordance with industry practice for companies similarly situated owning similar properties in the same general areas in which Holdings or any of its Subsidiaries operates, PROVIDED that Holdings and its Subsidiaries may implement programs of self insurance (other than with respect to casualty insurance) in the ordinary course of business and in accordance with the industry standards for similarly situated companies so long as reserves are maintained in accordance with generally accepted accounting principles for the liabilities associated therewith, and (iii) furnish to the Agent, upon written request, full information as to the insurance carried. (b) Holdings will, and will cause each of its Subsidiaries (other than Elgar FSC so long as Elgar FSC is not a Subsidiary Guarantor) to, at all times keep its property insured in favor of the Collateral Agent, and all policies or certificates (or certified copies thereof) with respect to such insurance (and any other insurance maintained by Holdings and/or such Subsidiaries) (i) shall name the Collateral Agent as loss payee as to casualty insurance and as an additional insured in the case of casualty and liability insurance, (ii) shall state that such insurance policies shall not be cancelled without at least 30 days' prior written notice thereof by the respective insurer to the -46- Collateral Agent (or such shorter period of time as a particular insurance company policy generally provides), (iii) shall provide that the respective insurers irrevocably waive any and all rights of subrogation with respect to the Collateral Agent and the Secured Creditors, (iv) shall contain the standard non-contributing mortgage clause endorsement in favor of the Collateral Agent with respect to hazard or liability insurance, (v) shall, except in the case of public liability insurance, provide that any losses shall be payable notwithstanding any neglect act of Holdings or any of its Subsidiaries and (vi) shall be deposited with the Collateral Agent. (c) If Holdings or any of its Subsidiaries shall fail to insure its property in accordance with this Section 8.03, or if Holdings or any of its Subsidiaries shall fail to so name and deposit all policies or certificates with respect thereto, the Collateral Agent shall have the right (but shall be under no obligation), upon 10 days prior notice to the Borrower (although no such notice shall be required to the extent same is not permitted to be given under applicable law), to procure such insurance and Holdings and the Borrower agree to reimburse the Collateral Agent for all reasonable costs and expenses of procuring such insurance. 8.04 CORPORATE FRANCHISES. Holdings will, and will cause each of its Subsidiaries to, do or cause to be done, all things necessary to preserve and keep in full force and effect its existence and its material rights, franchises, licenses and patents; PROVIDED, HOWEVER, that nothing in this Section 8.04 shall prevent (i) sales of assets and other transactions by Holdings or any of its Subsidiaries in accordance with Section 9.02, (ii) the withdrawal by Holdings or any of its Subsidiaries of its qualification as a foreign corporation in any jurisdiction where such withdrawal could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole or (iii) any termination of any such rights, franchises, licenses or patents that is determined by any senior officer or the Board of Directors of the Borrower to be in the best interest of the Credit Parties and not otherwise disadvantageous in any material respect to either the business of the Credit Parties or the interests of the Banks. 8.05 COMPLIANCE WITH STATUTES, ETC. Holdings will, and will cause each of its Subsidiaries to, comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls), except such noncompliances as could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole. 8.06 COMPLIANCE WITH ENVIRONMENTAL LAWS. (a) Holdings will comply, and will cause each of its Subsidiaries to comply, with all Environmental Laws applicable to the ownership or use of its Real Property now or hereafter owned, leased or operated by Holdings or any of its Subsidiaries, except such noncompliances as could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole, and will promptly pay or cause to be paid all costs and expenses incurred in connection with such compliance, and will keep or cause to be kept all such Real Property free and clear of -47- any Liens imposed pursuant to such Environmental Laws. Neither Holdings nor any of its Subsidiaries will generate, use, treat, store, Release or dispose of, or permit the generation, use, treatment, storage, Release or disposal of Hazardous Materials on any Real Property now or hereafter owned, leased or operated by Holdings or any of its Subsidiaries, or transport or permit the transportation of Hazardous Materials to or from any such Real Property, except for Hazardous Materials generated, used, treated, stored, Released or disposed of at any such Real Properties in compliance in all material respects with all applicable Environmental Laws and reasonably required in connection with the operation, use and maintenance of the business or operations of Holdings or any of its Subsidiaries. (b) At any time that any Credit Party gives notice to the Banks pursuant to Section 8.01(i) or upon the exercise of any of the remedies pursuant to the last paragraph of Section 10, then at the reasonable written request of the Agent or the Required Banks, Holdings and the Borrower will provide, at the sole expense of Holdings and the Borrower, an environmental site assessment report concerning any Real Property owned, leased or operated by Holdings or any of its Subsidiaries, prepared by an environmental consulting firm reasonably approved by the Agent, indicating the presence or absence of Hazardous Materials and the potential cost of any removal or remedial action in connection with such Hazardous Materials on such Real Property. If Holdings or the Borrower fails to provide the same within 90 days after such request was made, the Agent may order the same, the cost of which shall be borne by Holdings and the Borrower, and Holdings and the Borrower shall grant and hereby grant to the Agent and the Banks and their agents access to such Real Property and specifically grants the Agent and the Banks an irrevocable non-exclusive license, subject to the rights of tenants, to undertake such an assessment at any reasonable time upon reasonable notice to Holdings, all at the sole and reasonable expense of Holdings and the Borrower. 8.07 ERISA. As soon as possible and, in any event, within ten (10) days after Holdings, any Subsidiary of Holdings or any ERISA Affiliate knows or has reason to know of the occurrence of any of the following, Holdings will deliver to each of the Banks a certificate of the Chief Financial Officer of Holdings or the Borrower setting forth the full details as to such occurrence and the action, if any, that Holdings, such Subsidiary or such ERISA Affiliate is required or proposes to take, together with any notices required or proposed to be given to or filed with or by Holdings, any Subsidiary, any ERISA Affiliate, the PBGC, a Plan participant or the Plan administrator with respect thereto: that a Reportable Event has occurred (except to the extent that Holdings has previously delivered to the Banks a certificate and notices (if any) concerning such event pursuant to the next clause hereof); that a contributing sponsor (as defined in Section 4001(a)(13) of ERISA) of a Plan subject to Title IV of ERISA is subject to the advance reporting requirement of PBGC Regulation Section 4043.61 (without regard to subparagraph (b)(1) thereof), and an event described in subsection .62, .63, .64, .65, .66, .67 or .68 of PBGC Regulation Section 4043 is reasonably expected to occur with respect to such Plan within the following 30 days; that an accumulated funding deficiency, within the meaning of Section 412 of the Code or Section 302 of ERISA, has been incurred or an application may be or has been made for a waiver or modification of the minimum funding standard (including any required installment payments) or an extension of any amortization period under Section 412 of the Code or Section 303 or 304 of ERISA with respect to a Plan; that any contribution required to be made with respect to a Plan has not been timely made; that a Plan has been or may be -48- terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA; that a Plan has an Unfunded Current Liability; that proceedings may be or have been instituted to terminate or appoint a trustee to administer a Plan which is subject to Title IV of ERISA; that a proceeding has been instituted pursuant to Section 515 of ERISA to collect a delinquent contribution to a Plan; that Holdings, any Subsidiary of Holdings or any ERISA Affiliate will or may incur any liability (including any indirect, contingent, or secondary liability) to or on account of the termination of or withdrawal from a Plan under Section 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or with respect to a Plan under Section 401(a)(29), 4971, 4975 or 4980 of the Code or Section 409, 502(i) or 502(l) of ERISA or with respect to a group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) under Section 4980B of the Code; or that Holdings or any Subsidiary of Holdings may incur any material liability pursuant to any employee welfare benefit plan (as defined in Section 3(1) of ERISA) that provides benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or any Plan. Holdings will deliver or make available to each of the Banks (i) a complete copy of the annual report (on Internal Revenue Service Form 5500-series) of each Plan (including, to the extent required, the related financial and actuarial statements and opinions and other supporting statements, certifications, schedules and information) required to be filed with the Internal Revenue Service and (ii) copies of any records, documents or other information that must be furnished to the PBGC with respect to any Plan pursuant to Section 4010 of ERISA. In addition to any certificates or notices delivered to the Banks pursuant to the first sentence hereof, copies of annual reports and any records, documents or other information required to be furnished to the PBGC, and any material notices received by Holdings, any Subsidiary of Holdings or any ERISA Affiliate with respect to any Plan shall be delivered or made available to the Banks no later than ten (10) days after the date such annual report has been filed with the Internal Revenue Service or such records, documents and/or information has been furnished to the PBGC or such notice has been received by Holdings, any Subsidiary or any ERISA Affiliate, as applicable. 8.08 END OF FISCAL YEARS; FISCAL QUARTERS. Holdings will cause (i) each of its, and each of its Subsidiaries', fiscal years to end on the Saturday closest to March 31 of each year and (ii) each of its, and each of its Subsidiaries', fiscal quarters to end on the Saturday 13, or occasionally 14, weeks after the fiscal year or the immediately preceding fiscal quarter, as appropriate, PROVIDED, HOWEVER, that Holdings and its Subsidiaries may adopt a fiscal year that ends on December 31 of each year with the prior approval of the Agent, which approval shall not be unreasonably withheld. 8.09 PERFORMANCE OF OBLIGATIONS. Holdings will, and will cause each of its Subsidiaries to, perform all of its obligations under the terms of each mortgage, indenture, security agreement, loan agreement or credit agreement and each other material agreement, contract or instrument by which it is bound, except such non-performances as could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole. 8.10 PAYMENT OF TAXES. Holdings will pay and discharge, and will cause each of its Subsidiaries to pay and discharge, all federal, state and other material taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any -49- properties belonging to it, prior to the date on which penalties attach thereto, and all material lawful claims for sums that have become due and payable which, if unpaid, might become a Lien not otherwise permitted under Section 9.01(i); PROVIDED, that neither Holdings nor any of its Subsidiaries shall be required to pay any such tax, assessment, charge, levy or claim which is being contested in good faith and by proper proceedings if it has maintained adequate reserves with respect thereto in accordance with generally accepted accounting principles. 8.11 ADDITIONAL SECURITY; FURTHER ASSURANCES. (a) Holdings will, and will cause each of its Subsidiaries to, within five days after the acquisition by Holdings or any such Subsidiary of any Real Property with a fair market value (net of the principal amount of any Indebtedness secured by such Real Property) of $2,000,000 or more (each a "Mortgaged Property"), give notice thereof to the Agent and thereafter deliver to the Collateral Agent a mortgage or deed of trust (each, a "Mortgage") securing the Obligations of Holdings or such Subsidiary, as the case may be, in form and substance reasonably satisfactory to the Agent, each of which Mortgages shall constitute valid and enforceable Mortgages on the respective Mortgaged Properties subject to no other Liens except for Permitted Liens. Each Mortgage or instruments related thereto shall have been duly recorded or filed in such manner and in such places as are required by law to establish, perfect, preserve and protect the Liens in favor of the Collateral Agent pursuant to such Mortgage and all taxes, fees and other charges payable in connection therewith shall have been paid in full. (b) Holdings will, and will cause each of its Subsidiaries to, at the expense of Holdings and the Borrower, make, execute, endorse, acknowledge, file and/or deliver to the Collateral Agent from time to time such confirmatory or additional conveyances, financing statements, real property surveys and environmental reports on new Mortgaged Properties as the Collateral Agent may reasonably require. Furthermore, Holdings and the Borrower will cause to be delivered to the Collateral Agent such opinions of counsel, title insurance and other related documents as may be reasonably requested by the Agent to assure itself that this Section 8.11 has been complied with. (c) If the Agent or the Required Banks reasonably determine that they are required by law or regulation to have appraisals prepared in respect of new Mortgaged Properties, the Borrower will provide, at its own expense, to the Agent appraisals which satisfy the applicable requirements of the Real Estate Appraisal Reform Amendments of the Financial Institution Reform, Recovery and Enforcement Act of 1989, as amended, and which otherwise shall be in form and substance reasonably satisfactory to the Agent. (d) Holdings and the Borrower agree that each action required above by this Section 8.11 (other than the giving of the notice referred to in clause (a) above) shall be completed no later than 90 days after such action is either requested to be taken by the Agent or required to be taken by Holdings and/or its Subsidiaries pursuant to the terms of this Section 8.11; PROVIDED that, in no event will Holdings or any of its Subsidiaries be required to take any action, other than using commercially reasonable efforts, to obtain consents from third parties with respect to its compliance with this Section 8.11. -50- 8.12 CONTRIBUTIONS. Holdings will contribute as a common equity contribution to the capital of the Borrower upon its receipt thereof, any cash proceeds received by Holdings on or after the Restatement Effective Date from any asset sale, any incurrence of Indebtedness, any Recovery Event, any sale or issuance of its equity, any cash capital contributions received by Holdings or any tax refunds received by Holdings. 8.13 PREFERRED STOCK DIVIDENDS. Except to the extent permitted by Section 9.03(iii), Holdings will pay all dividends on the Series A Preferred Stock, the Series B Preferred Stock and all other Qualified Preferred Stock of Holdings through the issuance of additional shares of Series A Preferred Stock, Series B Preferred Stock or other Qualified Preferred Stock, as the case may be, rather than in cash. 8.14 INTEREST RATE PROTECTION. No later than 90 days following the Restatement Effective Date, the Borrower will enter into, and shall for two years thereafter (or, if earlier, until at least 50% of the initial aggregate principal amount of Term Loans have been repaid or prepaid) maintain, Interest Rate Protection Agreements acceptable to the Agent establishing a fixed or maximum interest rate acceptable to the Agent for an aggregate amount equal to at least 50% of the aggregate principal amount of all Term Loans then outstanding. SECTION 9. NEGATIVE COVENANTS. Each of Holdings and the Borrower hereby covenants and agrees that on and after the Restatement Effective Date and until the Total Commitment and all Letters of Credit have terminated and the Loans, Notes and Unpaid Drawings, together with interest, Fees and all other Obligations (other than any indemnities described in Section 13.13 which are not then due and payable) incurred hereunder and thereunder, are paid in full: 9.01 LIENS. Holdings will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon or with respect to any property or assets (real or personal, tangible or intangible) of Holdings or any of its Subsidiaries, whether now owned or hereafter acquired, or sell any such property or assets subject to an understanding or agreement, contingent or otherwise, to repurchase such property or assets (including sales of accounts receivable with recourse to Holdings or any of its Subsidiaries), or assign any right to receive income or permit the filing of any financing statement under the UCC or any other similar notice of Lien under any similar recording or notice statute; PROVIDED that the provisions of this Section 9.01 shall not prevent the creation, incurrence, assumption or existence of the following (Liens described below are herein referred to as "Permitted Liens"): (i) Liens for taxes, assessments or governmental charges or levies not yet due or Liens for taxes, assessments or governmental charges or levies being contested in good faith and by appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles; (ii) Liens in respect of property or assets of the Borrower or any of its Subsidiaries imposed by law, which were incurred in the ordinary course of business and do not secure Indebtedness for borrowed money, such as carriers', warehousemen's, materialmen's and mechanics' liens and other similar Liens arising in the ordinary course -51- of business, and (x) which do not in the aggregate materially detract from the value of the Borrower's or such Subsidiary's property or assets or materially impair the use thereof in the operation of the business of the Borrower or such Subsidiary or (y) which are not yet due or which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or assets subject to any such Lien; (iii) Liens in existence on the Restatement Effective Date which are listed, and the property subject thereto described, in Schedule VIII, but only to the respective date, if any, set forth in such Schedule VIII for the removal, replacement and termination of any such Liens, plus renewals, replacements, refinancings and extensions of such Liens to the extent set forth on Schedule VIII, PROVIDED that (x) the aggregate principal amount of the Indebtedness, if any, secured by such Liens does not increase from that amount outstanding at the time of any such renewal, replacement, refinancing or extension and (y) any such renewal, replacement, refinancing or extension does not encumber any additional assets or properties of Holdings or any of its Subsidiaries; (iv) Permitted Encumbrances; (v) Liens created pursuant to the Security Documents; (vi) leases or subleases granted to other Persons not materially interfering with the conduct of the business of Holdings or any of its Subsidiaries; (vii) Liens upon assets of the Borrower or any of its Subsidiaries subject to Capitalized Lease Obligations to the extent such Capitalized Lease Obligations are permitted by Section 9.04(iv), PROVIDED that (x) such Liens only serve to secure the payment of Indebtedness arising under such Capitalized Lease Obligation or any extension, renewal, refinancing or replacement thereof for the same or a lesser amount to the extent then permitted by Section 9.04(iv) and (y) the Lien encumbering the asset giving rise to the Capitalized Lease Obligation does not encumber any other asset of the Borrower or any Subsidiary of the Borrower; (viii) Liens placed upon equipment, machinery and/or Real Property (including any improvements, accessions, proceeds, products and ancillary property relating to any of the foregoing property) acquired after the Restatement Effective Date and used in the ordinary course of business of the Borrower or any of its Subsidiaries at the time of the acquisition thereof by the Borrower or any such Subsidiary or within 90 days thereafter to secure Indebtedness incurred to pay all or a portion of the purchase price, construction costs or improvements costs thereof or to secure Indebtedness incurred solely for the purpose of financing (or, to the extent permitted above, refinancing) the acquisition, construction or improvement of any such equipment, machinery and/or Real Property or extensions, renewals, refinancings or replacements of any of the foregoing for the same or a lesser amount, PROVIDED that (x) the aggregate outstanding principal amount of all Indebtedness secured by Liens permitted by this clause (viii) shall not at any time exceed that amount permitted by Section 9.04(iv) and (y) in all events, the Lien encumbering the -52- equipment, machinery and/or Real Property so acquired, constructed or improved (and any such related property (including any such ancillary property)) does not encumber any other asset of the Borrower or such Subsidiary; (ix) easements, rights-of-way, restrictions (including building, zoning and similar restrictions), utility agreements, covenants, reservations, encroachments and other similar charges or encumbrances, and minor title deficiencies, in each case not securing Indebtedness and not materially interfering with the conduct of the business of Holdings or any of its Subsidiaries; (x) Liens arising from precautionary UCC financing statement filings regarding operating leases or with respect to any inventory held on consignment in the ordinary course of business; (xi) Liens arising out of the existence of judgments or awards not giving rise to an Event of Default under Section 10.09; (xii) statutory and common law landlords' liens under leases to which Holdings or any of its Subsidiaries is a party; (xiii) Liens (other than Liens imposed under ERISA) incurred in the ordinary course of business in connection with workers compensation claims, unemployment insurance and social security benefits and Liens securing the performance of bids, tenders, leases and contracts in the ordinary course of business, statutory obligations, surety bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money); (xiv) Liens on property or assets acquired pursuant to a Permitted Acquisition, or on property or assets of a Subsidiary of the Borrower in existence at the time such Subsidiary is acquired pursuant to a Permitted Acquisition, PROVIDED that (x) any Indebtedness that is secured by such Liens is permitted to exist under Section 9.04(vii), and (y) such Liens are not incurred in connection with, or in contemplation or anticipation of, such Permitted Acquisition and do not attach to any other asset of the Borrower or any of its Subsidiaries; and (xv) other Liens incidental to the conduct of the business or the ownership of the assets of the Borrower or any Subsidiary that (a) were not incurred in connection with borrowed money, (b) do not encumber any Collateral and do not in the aggregate materially detract from the value of the assets subject thereto or materially impair the use thereof in the operation of such business and (c) do not secure obligations in excess of $100,000 in the aggregate for all such Liens. In connection with the granting of Liens of the type described in clauses (vii) and (viii) of this Section 9.01 by the Borrower or any of its Subsidiaries, the Agent and the Collateral Agent shall be authorized to take any actions deemed appropriate by it in connection therewith (including, without limitation, by executing appropriate lien releases or lien subordination agreements in favor -53- of the holder or holders of such Liens, in either case solely with respect to the item or items of equipment or other assets subject to such Liens). 9.02 CONSOLIDATION, MERGER, PURCHASE OR SALE OF ASSETS, ETC. Holdings will not, and will not permit any of its Subsidiaries to, wind up, liquidate or dissolve its affairs or enter into any transaction of merger or consolidation, or convey, sell, lease or otherwise dispose of all or any part of its property or assets, or enter into any sale-leaseback transactions, or purchase or otherwise acquire (in one or a series of related transactions) all or any part of the property or assets (other than purchases or other acquisitions of inventory, materials, supplies and equipment in the ordinary course of business) of any Person (or agree to do any of the foregoing at any future time), except that the following transactions (and agreements related thereto) shall be permitted: (i) Capital Expenditures by the Borrower and its Subsidiaries shall be permitted (although any Capital Expenditures constituting a Permitted Acquisition shall be governed by clause (xii) of this Section 9.02); (ii) each of the Borrower and its Subsidiaries may make sales of inventory in the ordinary course of business; (iii) each of the Borrower and its Subsidiaries may sell uneconomic, obsolete or worn-out equipment, materials or other assets in the ordinary course of business, provided that the aggregate amount of the proceeds received from all assets sold pursuant to this clause (iii) shall not exceed $500,000 in any fiscal year of the Borrower; (iv) each of the Borrower and its Subsidiaries may sell assets (other than the capital stock of any Subsidiary Guarantor unless all of the capital stock of such Subsidiary Guarantor is sold), so long as (u) no Default or Event of Default then exists or would result therefrom, (w) each such sale is in an arm's-length transaction and the Borrower or the respective Subsidiary receives at least fair market value (as determined in good faith by the Borrower or such Subsidiary, as the case may be), (x) the total consideration received by the Borrower or such Subsidiary is at least 80% cash, which cash is paid at the time of the closing of such sale, PROVIDED that the amount of any liabilities (as shown on the Borrower's or such Subsidiary's most recent balance sheet) of the Borrower or any Subsidiary (other than liabilities that are by their terms subordinated to the Obligations) that are assumed by the transferee of any such assets shall be deemed to be cash for purposes of this clause (x), (y) the Net Sale Proceeds therefrom are applied and/or reinvested as (and to the extent) required by Section 4.02(e) and (z) the aggregate amount of the proceeds received from all assets sold pursuant to this clause (iv) (including, for this purpose, the amount of any assumed liabilities referred to in clause (x) above) shall not exceed $1,000,000 in any fiscal year of the Borrower; (v) Investments may be made to the extent permitted by Section 9.05; -54- (vi) each of the Borrower and its Subsidiaries may lease (as lessee) real or personal property (so long as any such lease does not create a Capitalized Lease Obligation except to the extent permitted by Section 9.04(iv); (vii) each of the Borrower and its Subsidiaries may sell or discount, in each case without recourse and in the ordinary course of business, accounts receivable arising in the ordinary course of business, but only in connection with the compromise or collection thereof; (viii) the Acquisition and all payments required to be made by the Acquisition Documents (as in effect on the Restatement Effective Date) shall be permitted in accordance with the terms of the Acquisition Documents; (ix) each of the Borrower and its Subsidiaries may grant leases or subleases to other Persons not materially interfering with the conduct of the business of the Borrower or any of its Subsidiaries; (x) any Subsidiary of the Borrower (x) may be merged, consolidated or liquidated with or into the Borrower so long as the Borrower is the surviving corporation of such merger, consolidation or liquidation and (y) may transfer all or any portion of its assets to the Borrower; (xi) any Subsidiary of the Borrower (x) may be merged, consolidated or liquidated with or into any other Subsidiary of the Borrower so long as (i) in the case of any such merger, consolidation or liquidation involving a Subsidiary Guarantor, the Subsidiary Guarantor is the surviving corporation of such merger, consolidation or liquidation and (ii) in addition to the requirements or preceding clause (i), in the case of any such merger, consolidation or liquidation involving a Wholly-Owned Subsidiary of the Borrower, the Wholly-Owned Subsidiary is the surviving corporation of such merger, consolidation or liquidation, and (y) may transfer all or any portion of its assets to any Subsidiary Guarantor; (xii) each of the Borrower and the Subsidiary Guarantors may acquire all or substantially all of the assets of any Person (or all or substantially all of the assets of a product line or division of any Person) or 100% of the capital stock of any Person (any such acquisition permitted by this clause (xii), a "Permitted Acquisition"), so long as (i) no Default or Event of Default then exists or would result therefrom, (ii) each of the representations and warranties contained in Section 7 shall be true and correct in all material respects both before and after giving effect to such Permitted Acquisition, (iii) any Liens or Indebtedness assumed or issued in connection with such acquisition are otherwise permitted under Section 9.01 or 9.04, as the case may be, (iv) the only consideration paid by the Borrower or any Subsidiary Guarantor in connection with any Permitted Acquisition consists solely of cash, common stock of Holdings and/or Qualified Preferred Stock of Holdings, (v) at least 10 Business Days prior to the consummation of any Permitted Acquisition, the Borrower shall have delivered to the Agent and each of the Banks a certificate of the Borrower's Chief Financial Officer certifying (and showing the -55- calculations therefor in reasonable detail) that Holding's and its Subsidiaries would have been in compliance with the financial covenants set forth in Sections 9.07, 9.08 and 9.09 for the Test Period then most recently ended prior to the date of the consummation of such Permitted Acquisition, in each case with such financial covenants to be determined on a PRO FORMA basis as if such Permitted Acquisition had been consummated on the first day of such Test Period (and assuming that any Indebtedness incurred, issued or assumed in connection therewith had been incurred, issued or assumed on the first day of, and had remained outstanding throughout, such Test Period), (vi) the sum of the aggregate consideration paid in connection with all Permitted Acquisitions effected after the Restatement Effective Date (including, without limitation, any earn-out, non-compete or deferred compensation arrangements (in each case as determined in good faith by the Board of Directors of Holdings), the aggregate principal amount of any Indebtedness assumed or issued in connection therewith and the fair market value of any capital stock of Holdings issued in connection therewith (as determined in good faith by the Board of Directors of Holdings)) does not exceed $5,000,000 and (vii) the Total Unutilized Available Revolving Loan Commitment after giving effect to any Permitted Acquisition is at least $5,000,000 and the Borrowing Base at such time, giving pro forma effect to such Permitted Acquisition (based on the Borrowing Base Certificate then being delivered), would permit the Borrower to incur at least $5,000,000 of additional Revolving Loans; (xiii) each of the Borrower and its Subsidiaries may, in the ordinary course of business, license, as licensor or licensee, patents, trademarks, copyrights and know-how to third Persons and to one another, so long as any such license by the Borrower or its Subsidiaries in its capacity as licensor does not prohibit the granting of a Lien by the Borrower or any of its Subsidiaries pursuant to the Security Agreement in such license or in the intellectual property covered thereby; (xiv) each of Holdings and its Subsidiaries may sell Cash Equivalents permitted to be held by them pursuant to Section 9.05(ii) so long as each such sale is for cash and at fair market value (as determined in good faith by Holdings or such Subsidiary, as the case may be); (xv) each of Holdings and its Subsidiaries may pay Dividends to the extent permitted by Section 9.03; (xvi) Recovery Events shall be permitted; (xvii) each of the Borrower and its Subsidiaries may enter into sale and leaseback transactions with respect to their equipment and Real Property acquired after the Restatement Effective Date, so long as (u) no Default or Event of Default then exists or would result therefrom, (v) each such sale and leaseback transaction is in an arm's-length transaction and the Borrower or the respective Subsidiary receives at least fair market value (as determined in good faith by the Borrower or such Subsidiary, as the case may be), (w) the total consideration received by the Borrower or such Subsidiary is cash and is paid at the time of the closing of such sale, (x) the Net Sale Proceeds therefrom are applied and/or reinvested as (and to the extent) required by Section 3.03(c), (y) -56- the aggregate amount of proceeds received from all sale and leaseback transactions pursuant to this clause (xvii) shall not exceed $500,000 in any fiscal year of the Borrower and (z) to the extent that any such sale and leaseback transaction results in a Capitalized Lease Obligation, such Capitalized Lease Obligation is permitted under Section 9.04(iv); and (xviii) so long as no Default or Event of Default then exists or would result therefrom, the Holdings Merger shall be permitted pursuant to documentation in form and substance reasonably satisfactory to the Agent and the Borrower will give the Agent prompt written notice and evidence of the occurrence thereof. To the extent the Required Banks waive the provisions of this Section 9.02 with respect to the sale of any Collateral, or any Collateral is sold as permitted by this Section 9.02 (other than to Holdings or a Subsidiary thereof), such Collateral shall be sold free and clear of the Liens created by the Security Documents, and the Agent and the Collateral Agent shall be authorized to take any actions deemed appropriate in order to effect the release of such Collateral from the Liens created by the Security Documents. 9.03 DIVIDENDS. Holdings will not, and will not permit any of its Subsidiaries to, authorize, declare or pay any Dividends with respect to Holdings or any of its Subsidiaries, except that: (i) any Subsidiary of Holdings may pay cash Dividends to Holdings or to any Wholly-Owned Subsidiary of Holdings; (ii) so long as no Default or Event of Default then exists or would result therefrom, Holdings may repurchase outstanding shares of its common stock (or options to purchase such common stock) following the death, disability or termination of employment of directors, officers or employees of Holdings or any of its Subsidiaries, provided that the aggregate amount of Dividends paid by Holdings pursuant to this clause (ii) in any fiscal year of Holdings shall not exceed the sum of (1) $250,000, (2) the cash proceeds received by Holdings after the Restatement Effective Date from the sale of its common stock or options to purchase such common stock in each case to directors, officers or employees of Holdings and its Subsidiaries that occurs in such fiscal year and (3) amounts referred to in preceding clauses (1) and (2) that remain unused from the immediately preceding fiscal year; and (iii) Holdings may pay dividends on the Series A Preferred Stock, the Series B Preferred Stock and any other Qualified Preferred Stock of Holdings, in each case solely through the issuance of additional shares of the respective class of such Preferred Stock in accordance with the terms of the respective certificates of designation therefor as in effect on the Restatement Effective Date (in the case of the Series A Preferred Stock and the Series B Preferred Stock) or on the date of issuance of any other Qualified Preferred Stock (although nothing in this Section 9.03(iii) shall prevent Holdings from accruing (as opposed to declaring and paying) dividends on the Series B Preferred Stock in accordance with the terms of the certificate of designation therefor as in effect on the Restatement Effective Date), PROVIDED, HOWEVER, from and after April 30, 2001, Holdings may pay -57- regular quarterly cash dividends on the Series A Preferred Stock only (in the amount no greater than that provided for in the certificate of designation for the Series A Preferred Stock as in effect on the Restatement Effective Date), out of funds legally available therefor, but only in respect of those shares of Series A Preferred Stock issued and outstanding on February 3, 1998 and on any shares of Series A Preferred Stock issued in payment of dividends made or subsequently issued in payment of dividends thereon in respect of such shares of Series A Preferred Stock outstanding on February 3, 1998, in each case so long as no Default or Event of Default then exists or would result therefrom and the payment of such cash dividend is permitted at such time pursuant to clause 5(ii) of the second paragraph of Section 4.10 of the Senior Note Indenture (as in effect on the Restatement Effective Date). 9.04 INDEBTEDNESS. Holdings will not, and will not permit any of its Subsidiaries to, contract, create, incur, assume or suffer to exist any Indebtedness, except: (i) Indebtedness incurred pursuant to this Agreement and the other Credit Documents; (ii) Existing Indebtedness outstanding on the Restatement Effective Date and listed on Schedule VI, without giving effect to any subsequent extension, renewal or refinancing thereof except to the extent set forth on Schedule VI, provided that the aggregate principal amount of the Indebtedness to be extended, renewed or refinanced does not increase from that amount outstanding at the time of any such extension, renewal or refinancing; (iii) Indebtedness under Interest Rate Protection Agreements entered into with respect to other Indebtedness permitted under this Section 9.04; (iv) Indebtedness of the Borrower and its Subsidiaries subject to Liens permitted under Section 9.01(viii) or evidenced by Capitalized Lease Obligations or any extension, renewal, refinancing or replacement thereof for the same or a lesser amount, PROVIDED that in no event shall the sum of the aggregate principal amount of all Capitalized Lease Obligations plus the aggregate principal amount of all Indebtedness secured by Liens permitted by Section 9.01(viii) (including any such extensions, renewals, refinancings or replacements of the foregoing) exceed at any time outstanding the sum of (I) $5,000,000 plus (II) an amount, not to exceed $1,500,000, to the extent that such amount has been incurred under clause (xii) of this Section 9.04; (v) intercompany Indebtedness among Holdings and its Subsidiaries to the extent permitted by Section 9.05(ix); (vi) Indebtedness of Holdings, the Borrower and the Subsidiary Guarantors under the Senior Notes and the other Senior Note Documents in an aggregate principal amount not to exceed $90,000,000 (as reduced by any repayments of principal amount thereof); -58- (vii) Indebtedness of a Subsidiary of the Borrower acquired pursuant to a Permitted Acquisition (or Indebtedness assumed at the time of a Permitted Acquisition of an asset securing such Indebtedness) or any extension, renewal, refinancing or replacement thereof for the same or lesser amount, provided that (x) such Indebtedness was not incurred in connection with, or in anticipation or contemplation of, such Permitted Acquisition, (y) such Indebtedness does not constitute debt for borrowed money (other than debt for borrowed money incurred in connection with industrial revenue or industrial development or similar bond financings), it being understood and agreed that Capitalized Lease Obligations and purchase money Indebtedness shall not constitute debt for borrowed money for purposes of this clause (y), and (z) at the time of such Permitted Acquisition, such Indebtedness does not exceed 10% of the total value of the assets of the Subsidiary so acquired, or of the asset so acquired, as the case may be; (viii) guaranties by the Borrower and the Subsidiary Guarantors of each other's Indebtedness to the extent that such Indebtedness is otherwise permitted under this Section 9.04; (ix) Indebtedness of the Borrower and its Subsidiaries consisting of any guarantees, indemnities or obligations in respect of purchase price adjustments in connection with the acquisition or disposition of assets; (x) 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 so long as such Indebtedness is extinguished within two Business Days of the incurrence thereof; (xi) Indebtedness in respect of Other Hedging Agreements to the extent permitted by Section 9.05(xii); and (xii) additional Indebtedness incurred by Holdings and its Subsidiaries in an aggregate principal amount not to exceed $6,500,000 at any one time outstanding, of which no more than $1,500,000 may be outstanding at any time as additional secured Indebtedness under clause (iv) of this Section 9.04 and with all other Indebtedness incurred under this clause (xii) to be unsecured. 9.05 ADVANCES, INVESTMENTS AND LOANS. Holdings will not, and will not permit any of its Subsidiaries to, directly or indirectly, lend money or credit or make advances to any Person, or purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any other Person, or purchase or own a futures contract or otherwise become liable for the purchase or sale of currency or other commodities at a future date in the nature of a futures contract, or hold any cash or Cash Equivalents (each of the foregoing an "Investment" and, collectively, "Investments"), except that the following shall be permitted: (i) the Borrower and its Subsidiaries may acquire and hold accounts receivables owing to any of them, if created or acquired in the ordinary course of business -59- and payable or dischargeable in accordance with customary trade terms of the Borrower or such Subsidiary; (ii) Holdings and its Subsidiaries may acquire and hold cash and Cash Equivalents, provided that Holdings shall not be permitted to hold more than $500,000 of cash and/or Cash Equivalents in the aggregate for more than ten consecutive Business Days; (iii) Holdings and its Subsidiaries may hold the Investments held by them on the Restatement Effective Date and described on Schedule IX, provided that any additional Investments made with respect thereto shall be permitted only if independently justified under the other provisions of this Section 9.05; (iv) the Borrower and its Subsidiaries may acquire and own Investments (including, without limitation, debt obligations) received in connection with the bankruptcy or reorganization of suppliers and customers and in good faith settlement of delinquent obligations of, and other disputes with, customers and suppliers arising in the ordinary course of business; (v) the Borrower and its Subsidiaries may (A) make loans and advances in the ordinary course of business to their respective officers and employees so long as the aggregate principal amount thereof at any time outstanding (determined without regard to any write-downs or write-offs of such loans and advances) shall not exceed $250,000 and (B) make advances to their employees for moving, relocation and travel expenses, drawing accounts and similar expenditures in the ordinary course of business so long as any such advances made pursuant to this clause (B) are ultimately expected to be treated as an expense which reduces Consolidated Net Income in accordance with generally accepted accounting principles; (vi) Holdings may acquire and hold obligations of one or more officers or other employees of Holdings or any of its Subsidiaries in connection with such officers' or employees' acquisition of shares of common stock of Holdings so long as no cash is paid by Holdings or any of its Subsidiaries to such officers or employees in connection with the acquisition of any such obligations; (vii) the Borrower may enter into Interest Protection Agreements to the extent permitted by Section 9.04(iii); (viii) (x) Holdings may make cash common equity contributions to the capital of the Borrower and (y) the Borrower and the Subsidiary Guarantors may make cash common equity contributions to the capital of their respective Subsidiaries which are Subsidiary Guarantors; (ix) Holdings, the Borrower and the Subsidiary Guarantors may make intercompany loans and advances between or among one another (collectively, "Intercompany Loans"), so long as no such Intercompany Loan shall be evidenced by a -60- promissory note or other instrument except an Intercompany Note that is pledged to the Collateral Agent pursuant to the Pledge Agreement; (x) the Borrower and its Subsidiaries may acquire and hold non-cash consideration issued by the purchaser of assets in connection with a sale of such assets to the extent permitted by Section 9.02(iv); (xi) Permitted Acquisitions shall be permitted in accordance with Section 9.02(xii); (xii) the Borrower and its Subsidiaries may enter into Other Hedging Agreements in the ordinary course of business providing protection against fluctuations in currency values in connection with the Borrower's or any of its Subsidiaries' operations so long as management of the Borrower or such Subsidiary, as the case may be, has determined in good faith that the entering into of such Other Hedging Agreements are bona fide hedging activities and are not for speculative purposes; (xiii) the Acquisition shall be permitted; and (xiv) the Borrower and its Subsidiaries may make investments not otherwise permitted by clauses (i) through (xiii) of this Section 9.05 in an aggregate amount not to exceed $1,000,000. 9.06 TRANSACTIONS WITH AFFILIATES. Holdings will not, and will not permit any of its Subsidiaries to, enter into any transaction or series of related transactions, whether or not in the ordinary course of business, with any Affiliate of Holdings or any of its Subsidiaries, other than on terms and conditions substantially as favorable to Holdings or such Subsidiary as would reasonably be obtained by Holdings or such Subsidiary at that time in a comparable arm's-length transaction with a Person other than an Affiliate, except that the following in any event shall be permitted: (i) Dividends may be paid to the extent provided in Section 9.03; (ii) loans may be made and other transactions may be entered into by Holdings and its Subsidiaries to the extent permitted by Sections 9.02, 9.03, 9.04 and 9.05; (iii) customary fees may be paid to directors of Holdings and its Subsidiaries; (iv) so long as no Default or Event of Default then exists or would result therefrom, Holdings or the Borrower may pay management fees to Lehman and its Affiliates semi-annually in advance pursuant to, and in accordance with, the terms of the Lehman Management Agreement (as in effect on the Restatement Effective Date) in an aggregate amount for all such Persons not to exceed $250,000 in any semi-annual period; (v) Holdings or the Borrower may reimburse Lehman and its Affiliates for their reasonable out-of-pocket expenses incurred in connection with their performing management services to Holding and its Subsidiaries pursuant to, and in accordance with, -61- the terms of the Lehman Management Agreement (as in effect on the Restatement Effective Date); (vi) Holdings or the Borrower may pay a transaction fee to Lehman and its Affiliates on the Restatement Effective Date in the amount of $425,000 plus their reasonable out-of-pocket expenses incurred in connection with the Transaction; (vii) Holdings and its Subsidiaries may enter into, and may make payments under, employment agreements, employee benefit plans, indemnification provisions and other similar compensatory arrangements with officers and directors of Holdings and its Subsidiaries in the ordinary course of business; (viii) the Borrower and the Subsidiary Guarantors may engage in any transaction among themselves to the extent otherwise expressly permitted under this Agreement; and (ix) Holdings and its Subsidiaries may enter into those agreements listed on Schedule XII (and any amendment or modification thereof otherwise permitted by Section 9.10) and perform their obligations thereunder to the extent such performance is otherwise permitted under this Agreement. 9.07 CONSOLIDATED FIXED CHARGE COVERAGE RATIO. Holdings will not permit the Consolidated Fixed Charge Coverage Ratio for any Test Period ending on the last day of a fiscal quarter set forth below to be less than the ratio set forth opposite such fiscal quarter below:
Fiscal Quarter Ending Closest To Ratio ----------------- ----- June 30, 1998 1.25:1.00 September 30, 1998 1.25:1.00 December 31, 1998 1.25:1.00 March 31, 1999 1.40:1.00 June 30, 1999 1.40:1.00 September 30, 1999 1.40:1.00 December 31, 1999 1.40:1.00 March 31, 2000 1.50:1.00 June 30, 2000 1.50:1.00 September 30, 2000 1.50:1.00 December 31, 2000 1.50:1.00 March 31, 2001 1.70:1.00 June 30, 2001 1.70:1.00 September 30, 2001 1.70:1.00 December 31, 2001 1.70:1.00 March 31, 2002 and the last day of each -62- fiscal quarter thereafter 1.75:1.00
9.08 MAXIMUM LEVERAGE RATIO. Holdings will not permit the Leverage Ratio at any time during a period set forth below to be greater than the ratio set forth opposite such period below:
Period Ratio ------ ----- Restatement Effective Date through and including the day immediately preceding the last day of Holdings' fiscal quarter ending closest to June 30, 1999 7.00:1.00 The last day of Holdings' fiscal quarter ending closest to June 30, 1999 through and including the date immediately preceding the last day of Holdings' fiscal quarter ending closest to September 30, 1999 6.75:1.00 The last day of Holdings' fiscal quarter ending closest to September 30, 1999 through and including the day immediately preceding the last day of Holdings' fiscal quarter ending closest to December 31, 1999 6.00:1.00 The last day of Holdings' fiscal quarter ending closest to December 31, 1999 through and including the day immediately preceding the last day of Holdings' fiscal quarter ending closest to March 31, 2000 5.50:1.00 The last day of Holdings' fiscal quarter ending closest to March 31, 2000 through and including the day immediately preceding the last day of Holdings' fiscal quarter ending closest to June 30, 2000 5.25:1.00 The last day of Holdings' fiscal quarter ending closest to June 30, 2000 through and including the day immediately preceding the last day of Holdings' fiscal quarter ending closest to June 30, 2001 5.00:1.00 Thereafter 4.50:1.00
-63 9.09 MINIMUM CONSOLIDATED EBITDA. Holdings will not permit Consolidated EBITDA for any Test Period ending on the last day of a fiscal quarter set forth below to be less than the amount set forth opposite such fiscal quarter below:
Fiscal Quarter Ending Closest To Amount ----------------- ------ June 30, 1998 $15,000,000 September 30, 1998 $14,800,000 December 31, 1998 $14,800,000 March 31, 1999 $14,800,000 June 30, 1999 $15,200,000 September 30, 1999 $17,000,000 December 31, 1999 $18,500,000 March 31, 2000 $19,000,000 June 30, 2000 $19,500,000 September 30, 2000 $19,500,000 December 31, 2000 $20,000,000 March 31, 2001 $20,000,000 June 30, 2001 $21,000,000 September 30, 2001 $22,000,000 December 31, 2001 $23,000,000 March 31, 2002 $23,000,000 June 30, 2002 $23,000,000 September 30, 2002 $23,000,000 December 31, 2002 $23,000,000
9.10 LIMITATION ON PAYMENTS OF CERTAIN INDEBTEDNESS; MODIFICATIONS OF CERTAIN INDEBTEDNESS; MODIFICATIONS OF CERTIFICATE OF INCORPORATION, BY-LAWS AND CERTAIN OTHER AGREEMENTS; ETC. Holdings will not, and will not permit any of its Subsidiaries to, (i) make (or give any notice in respect of) any voluntary or optional payment or prepayment on or redemption or acquisition for value of, or any prepayment or redemption as a result of any asset sale, change of control or similar event of (including in each case, without limitation, by way of depositing with the trustee with respect thereto or any other Person money or securities before due for the purpose of paying when due) the Senior Notes, (ii) amend or modify, or permit the amendment or modification of, any provision of the Senior Note Documents, (iii) amend, modify or change its certificate of incorporation (including, without limitation, by the filing or modification of any certificate of designation) or by-laws (or the equivalent organizational documents) or any agreement entered into by it with respect to its capital stock (including any Shareholders' Agreement), or enter into any new agreement with respect to its capital stock, unless such amendment, modification, change or other action contemplated by this clause (iii) would not violate the terms of this Agreement and could not reasonably be expected to be adverse to the interests of the Banks in any material respect, or (iv) amend, modify or change any provision of (x) the Lehman Management Agreement other than any amendments, modifications or changes which could not reasonably be expected to be adverse to the interests of the Banks in any material respect (it being understood and agreed, however, that no amendments, modifications or changes -64 may be made to the monetary terms of the Lehman Management Agreement) or (y) any Tax Sharing Agreement or enter into any new Tax Sharing Agreement without the prior written consent of the Agent in the case of this clause (y). 9.11 LIMITATION ON CERTAIN RESTRICTIONS ON SUBSIDIARIES. Holdings will not, and will not permit the Borrower or any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any such Subsidiary to (a) pay dividends or make any other distributions on its capital stock or any other interest or participation in its profits owned by the Borrower or any Subsidiary of the Borrower, or pay any Indebtedness owed to the Borrower or any Subsidiary of the Borrower, (b) make loans or advances to the Borrower or any Subsidiary of the Borrower or (c) transfer any of its properties or assets to the Borrower or any Subsidiary of the Borrower, except for such encumbrances or restrictions existing under or by reason of (i) applicable law, (ii) this Agreement and the other Credit Documents, (iii) the Senior Note Documents, (iv) customary provisions restricting subletting or assignment of any lease or sublease governing a leasehold interest of the Borrower or any Subsidiary of the Borrower, (v) customary provisions restricting assignment of any licensing agreement or other contract entered into by the Borrower or any Subsidiary of the Borrower in the ordinary course of business, (vi) restrictions on the transfer of any asset subject to a Lien permitted by Sections 9.01(iii), (iv), (vi), (vii), (viii), (x), (xiii), (xiv) and (xv) and (vii) restrictions under any contracts for the sale of (or the granting of an option to buy) assets, including, without limitation, any restriction with respect to a 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 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 contract (or such option) and such sale (or the granting of such option assuming same is exercised) is otherwise permitted under Section 9.02. 9.12 LIMITATION ON ISSUANCE OF CAPITAL STOCK. (a) Holdings will not, and will not permit any of its Subsidiaries to, issue (i) any preferred stock other than the Series A Preferred and other Qualified Preferred Stock of Holdings or (ii) any redeemable common stock (other than common stock that is redeemable at the sole option of Holdings or such Subsidiary). (b) Holdings will not permit any of its Subsidiaries to issue any capital stock (including by way of sales of treasury stock) or any options or warrants to purchase, or securities convertible into, capital stock, except (i) for transfers and replacements of then outstanding shares of capital stock, (ii) for stock splits, stock dividends and issuances which do not decrease the percentage ownership of Holdings or any of its Subsidiaries in any class of the capital stock of such Subsidiary, (iii) to qualify directors to the extent required by applicable law or (iv) for issuances by newly created or acquired Subsidiaries in accordance with the terms of this Agreement. 9.13 BUSINESS. (a) Holdings and its Subsidiaries will not engage in any business other than the businesses engaged in by the Borrower and its Subsidiaries as of the Restatement Effective Date and businesses similar, reasonably related or complementary thereto. -65- (b) Notwithstanding the foregoing, Holdings will not engage in any business and will not own any significant assets or have any material liabilities (other than Indebtedness permitted to be incurred by it under Section 9.04) other than its ownership of the capital stock of the Borrower, and having those liabilities which it is responsible for under this Agreement and the other Documents to which it is a party, PROVIDED that Holdings may engage in those activities that are incidental to (w) the maintenance of its corporate existence in compliance with applicable law, (x) legal, tax and accounting matters in connection with any of the foregoing activities, (y) the entering into, and performing its obligations under, this Agreement and the other Documents to which it is a party, other agreements and instruments in effect on the Restatement Effective Date to which it is a party or any amendments or other modifications thereof not otherwise prohibited hereby so long as any such amendments or other modifications do not increase, in any material respect, the obligations or liabilities of Holdings or (z) the raising of capital in the form of equity (including any initial public offering) or Indebtedness. (c) Notwithstanding the foregoing, Elgar FSC will not engage in any business and will not own any significant assets or have any material liabilities other than in connection with its engaging as a foreign sales corporation for the Borrower's business, PROVIDED that Elgar FSC also may engage in those activities that are incidental to (x) the maintenance of its corporate existence in compliance with applicable law, (y) legal, tax and accounting matters in connection with any of the foregoing activities or (z) the entering into, and performing its obligations under, any agreements and instruments in effect on the Restatement Effective Date to which it is a party or any amendments or other modifications thereof or any new similar agreements that are not otherwise prohibited by this Section so long as any such amendments, modifications or new agreements do not increase, in any material respect, the obligations or liabilities of Elgar FSC. 9.14 LIMITATION ON CREATION OF SUBSIDIARIES. Notwithstanding anything to the contrary contained in this Agreement, Holdings will not, and will not permit any of its Subsidiaries to, establish, create or acquire after the Restatement Effective Date any Subsidiary, PROVIDED that the Borrower and its Wholly-Owned Subsidiaries shall be permitted to establish, create or, to the extent permitted by this Agreement, acquire Wholly-Owned Subsidiaries so long as (i) the capital stock or other equity interests of each such new Wholly-Owned Subsidiary is pledged pursuant to, and to the extent required by, the Pledge Agreement and the certificates representing such stock or other equity interests, together with stock or other powers duly executed in blank, are delivered to the Collateral Agent for the benefit of the Secured Creditors, (ii) each such new Wholly-Owned Subsidiary executes and delivers to the Agent a counterpart of the Subsidiaries Guaranty, the Pledge Agreement and the Security Agreement, and (iii) each such new Wholly-Owned Subsidiary takes all actions required pursuant to Section 8.11. In addition, each new Wholly-Owned Subsidiary shall execute and deliver, or cause to be executed and delivered, to the Agent all other relevant documentation of the type described in Sections 5.03, 5.04, 5.05, 5.10, 5.11, 5.12 and 5.14 as such new Wholly-Owned Subsidiary would have had to deliver if such new Wholly-Owned Subsidiary were a Credit Party on the Restatement Effective Date. 9.15 ADDITIONAL RESTRICTION ON THE INCURRENCE OF CERTAIN INDEBTEDNESS. Notwithstanding anything to the contrary contained in this Agreement (including in Section 9.04), so long as any Senior Notes remain outstanding, neither Holdings nor any of its Subsidiaries shall incur any Indebtedness either (x) under clause (xii) of Section 9.04 or (y) in reliance on the basket -66- provided under clause (xiv) of the definition of "Permitted Indebtedness" under (and as defined in) the Senior Note Indenture other than Indebtedness incurred under this Agreement and the other Credit Documents; PROVIDED, HOWEVER, at such time as the sum of all outstanding Term Loans and the Total Revolving Loan Commitment as then in effect (or, if the Total Revolving Loan Commitment has been terminated, the sum of all outstanding Revolving Loans, Swingline Loans and Letter of Credit Outstandings) is less than the sum of (i) $25,000,000 plus (ii) to the extent that the certificate described below is delivered, the amount of Indebtedness in excess of $15,000,000 which the Borrower would be permitted to incur solely in reliance on sub-clause (y) of clause (ii) of the definition of "Permitted Indebtedness" in Senior Note Indenture (and with the amount such excess Indebtedness to be determined based upon a certificate of the Borrower's Chief Financial Officer (which certificate shall be updated as provided in the definition of Initial Blocked Amount and on each date on which the Borrower desires to incur any other Indebtedness either under Section 9.04(xii) of this Agreement or in reliance on clause (xiv) of the definition of "Permitted Indebtedness" under (and as defined in) the Senior Note Indenture, Indebtedness in an aggregate amount not to exceed such deficiency may be incurred under Section 9.04(xii) of this Agreement and in reliance on clause (xiv) of such definition of "Permitted Indebtedness". SECTION 10. EVENTS OF DEFAULT. Upon the occurrence of any of the following specified events (each an "Event of Default"): 10.01 PAYMENTS. The Borrower shall (i) default in the payment when due of any principal of any Loan or any Note or (ii) default, and such default shall continue unremedied for three or more Business Days, in the payment when due of any interest on any Loan or Note, any Unpaid Drawing or any Fees or any other amounts owing hereunder or thereunder; or 10.02 REPRESENTATIONS, ETC. Any representation, warranty or statement made (or deemed made) by any Credit Party herein or in any other Credit Document or in any certificate delivered to the Agent or any Bank pursuant hereto or thereto shall prove to be untrue in any material respect on the date as of which made or deemed made; or 10.03 COVENANTS. Any Credit Party shall (i) default in the due performance or observance by it of any term, covenant or agreement contained in Section 8.01(g)(i), 8.08, 8.13 or Section 9 or (ii) default in the due performance or observance by it of any other term, covenant or agreement contained in this Agreement or any other Credit Document (other than those set forth in Sections 10.01 and 10.02) and such default shall continue unremedied for a period of 30 days after written notice thereof to the defaulting party by the Agent or the Required Banks; or 10.04 DEFAULT UNDER OTHER AGREEMENTS. (i) Holdings or any of its Subsidiaries shall (x) default in any payment of any Indebtedness (other than the Obligations) beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created or (y) default in the observance or performance of any agreement or condition relating to any Indebtedness (other than the Obligations) or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause (determined without regard to whether any notice is required), any such Indebtedness to become -67- due prior to its stated maturity, or (ii) any Indebtedness (other than the Obligations) of Holdings or any of its Subsidiaries shall be declared to be (or shall become) due and payable, or required to be prepaid other than by a regularly scheduled required prepayment (or as a result of any sale of an asset securing such Indebtedness in accordance with the terms thereof), prior to the stated maturity thereof, PROVIDED that it shall not be a Default or an Event of Default under this Section 10.04 unless the aggregate principal amount of all Indebtedness as described in preceding clauses (i) and (ii) is at least $3,000,000; or 10.05 BANKRUPTCY, ETC. Holdings or any of its Subsidiaries shall commence a voluntary case concerning itself under Title 11 of the United States Code entitled "Bankruptcy," as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced against Holdings or any of its Subsidiaries, and the petition is not controverted within 10 days, or is not dismissed within 60 days, after commencement of the case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of Holdings or any of its Subsidiaries, or Holdings or any of its Subsidiaries commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to Holdings or any of its Subsidiaries, or there is commenced against Holdings or any of its Subsidiaries any such proceeding which remains undismissed for a period of 60 days, or Holdings or any of its Subsidiaries is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or Holdings or any of its Subsidiaries suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of 60 days; or Holdings or any of its Subsidiaries makes a general assignment for the benefit of creditors; or any corporate action is taken by Holdings or any of its Subsidiaries for the purpose of effecting any of the foregoing; or 10.06 ERISA. (a) Any Plan shall fail to satisfy the minimum funding standard required for any plan year or part thereof under Section 412 of the Code or Section 302 of ERISA or a waiver of such standard or extension of any amortization period is sought or granted under Section 412 of the Code or Section 303 or 304 of ERISA, a Reportable Event shall have occurred, a contributing sponsor (as defined in Section 4001(a)(13) of ERISA) of a Plan subject to Title IV of ERISA shall be subject to the advance reporting requirement of PBGC Regulation Section 4043.61 (without regard to subparagraph (b)(1) thereof) and an event described in subsection .62, .63, .64, .65, .66, .67 or .68 of PBGC Regulation Section 4043 shall be reasonably expected to occur with respect to such Plan within the following 30 days, any Plan which is subject to Title IV of ERISA shall have had or is likely to have a trustee appointed to administer such Plan, any Plan which is subject to Title IV of ERISA is, shall have been or is likely to be terminated or to be the subject of termination proceedings under ERISA, any Plan shall have an Unfunded Current Liability, a contribution required to be made with respect to a Plan has not been timely made, Holdings or any Subsidiary of Holdings or any ERISA Affiliate has incurred or is likely to incur any liability to or on account of a Plan under Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971 or 4975 of the Code or on account of a group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) under Section 4980B of the Code, or Holdings or any Subsidiary of Holdings has incurred or is likely to incur liabilities pursuant to one or more employee welfare -68- benefit plans (as defined in Section 3(1) of ERISA) that provide benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or Plans; (b) there shall result from any such event or events the imposition of a lien, the granting of a security interest, or a liability or a material risk of incurring a liability; and (c) such lien, security interest or liability, individually, and/or in the aggregate, in the reasonable opinion of the Required Banks, has had, or could reasonably be expected to have, a material adverse effect on the business, operations, properties, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole; or 10.07 SECURITY DOCUMENTS. At any time after the execution and delivery thereof, any of the Security Documents shall cease to be in full force and effect, or shall cease to give the Collateral Agent for the benefit of the Secured Creditors the Liens, rights, powers and privileges purported to be created thereby (including, without limitation, to the extent required thereby, a perfected security interest in, and Lien on, all of the Collateral (other than an immaterial portion of the Security Agreement Collateral), in favor of the Collateral Agent, superior to and prior to the rights of all third Persons (except as permitted by Section 9.01), and subject to no other Liens (except as permitted by Section 9.01); or 10.08 GUARANTIES. At any time after the execution and delivery thereof, any Guaranty or any provision thereof shall cease to be in full force or effect as to any Guarantor, or any Guarantor or any Person acting by or on behalf of such Guarantor shall deny or disaffirm such Guarantor's obligations under its Guaranty or any Guarantor shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to its Guaranty, PROVIDED that if the default constitutes a failure to perform or comply with any provision, covenant or agreement contained in Section 8 of this Agreement (other than Section 8.01(g)(i) or 8.08), such default shall continue unremedied for a period of at least 30 days after notice to the defaulting Guarantor by the Agent or the Required Banks; or 10.09 JUDGMENTS. One or more judgments or decrees shall be entered against Holdings or any Subsidiary of Holdings involving in the aggregate for Holdings and its Subsidiaries a liability (not paid or fully covered by a reputable and solvent insurance company) and such judgments and decrees either shall be final and non-appealable or shall not be vacated, discharged or stayed or bonded pending appeal for any period of 30 consecutive days, and the aggregate amount of all such judgments equals or exceeds $2,500,000 or any order or writ of attachment or similar process shall have been issued with respect to property of Holdings or any of its Subsidiaries with a value of a $2,500,000 or more in the aggregate for Holdings and its Subsidiaries; or 10.10 CHANGE OF CONTROL. A Change of Control shall occur; or 10.11 CAPITAL CALL AGREEMENT. (a) The Capital Call Agreement or any provision thereof shall cease to be in full force and effect, or JFLEI, any Credit Party or any Person acting by or on behalf of JFLEI or any such Credit Party shall deny or disaffirm its obligations under the Capital Call Agreement or JFLEI, any Credit Party or any Person acting on or behalf of JFLEI or any such Credit Party shall default in the due performance or observance of any term, covenant or -69- agreement on its part to be performed or observed pursuant to the Capital Call Agreement or a Capital Call Event of Default under, and as defined in, the Capital Call Agreement shall occur; or (b) Any representation, warranty or statement made (or deemed made) by JFLEI in the Capital Call Agreement shall prove to be untrue in any material respect on the date as of which made or deemed made; then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, the Agent, upon the written request of the Required Banks, shall by written notice to the Borrower, take any or all of the following actions, without prejudice to the rights of any Agent, any Bank or the holder of any Note to enforce its claims against any Credit Party (PROVIDED, that, if an Event of Default specified in Section 10.05 shall occur with respect to the Borrower, the result which would occur upon the giving of written notice by the Agent as specified in clauses (i) and (ii) below shall occur automatically without the giving of any such notice): (i) declare the Total Commitment terminated, whereupon all Commitments of each Bank shall forthwith terminate immediately and any Commitment Commission shall forthwith become due and payable without any other notice of any kind; (ii) declare the principal of and any accrued interest in respect of all Loans and the Notes and all Obligations owing hereunder and thereunder to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each Credit Party; (iii) terminate any Letter of Credit which may be terminated in accordance with its terms; (iv) direct the Borrower to pay (and the Borrower agrees that upon receipt of such notice, or upon the occurrence of an Event of Default specified in Section 10.05 with respect to the Borrower, it will pay) to the Collateral Agent at the Payment Office such additional amount of cash or Cash Equivalents, to be held as security by the Collateral Agent, as is equal to the aggregate Stated Amount of all Letters of Credit issued for the account of the Borrower and then outstanding; (v) enforce, as Collateral Agent, all of the Liens and security interests created pursuant to the Security Documents; and (vi) apply any cash collateral held by the Agent pursuant to Section 4.02 to the repayment of the Obligations. SECTION 11. DEFINITIONS AND ACCOUNTING TERMS. 11.01 DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Acquisition" shall mean the acquisition by the Borrower of all of the outstanding capital stock of Power Ten pursuant to the Acquisition Agreement. "Acquisition Agreement" shall mean the Stock Purchase Agreement, dated as of May 5, 1998, among Joseph A. Varroza, Jr., Vincent S. Mutascio and the Borrower. "Acquisition Documents" shall mean the Acquisition Agreement and all other agreements and documents relating to the Acquisition. -70- "Adjusted Consolidated Working Capital" shall mean, at any time, Consolidated Current Assets (but excluding therefrom all cash and Cash Equivalents) less Consolidated Current Liabilities at such time. "Affected Eurodollar Loans" shall have the meaning provided in Section 4.02(i). "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling (including, but not limited to, all directors and officers of such Person), controlled by, or under direct or indirect common control with, such Person. A Person shall be deemed to control another Person if such Person possesses, directly or indirectly, the power (i) to vote 5% or more of the securities having ordinary voting power for the election of directors of such corporation or (ii) to direct or cause the direction of the management and policies of such other Person, whether through the ownership of voting securities, by contract or otherwise. "Agent" shall mean BTCo, in its capacity as Agent for the Banks hereunder, and shall include any successor to the Agent appointed pursuant to Section 12.09. "Agreement" shall mean this Credit Agreement, as modified, supplemented, amended, restated (including any amendment and restatement hereof), extended, renewed, refinanced or replaced from time to time. "Applicable Base Rate Margin" shall mean from and after any Start Date to and including the corresponding End Date, the respective percentage per annum set forth in clause (A) or (B) below if, but only if, as of the Test Date for such Start Date the applicable condition set forth in clause (A) or (B), as the case may be, is met: (A) 1.75% if, but only if, as of the Test Date, for such Start Date, the Leverage Ratio for the Test Period ended on such Test Date shall be greater than or equal to 6.00:1.00; and (B) 1.50% if, but only if, as of the Test Date for such Start Date, the Leverage Ratio for the Test Period ended on such Test Date shall be less than 6.00:1.00. Notwithstanding anything to the contrary above in this definition, (x) the Applicable Base Rate Margin shall be 1.75% for the period from and including the Restatement Effective Date through but not including the first Start Date after the Restatement Effective Date and (i) the Applicable Base Rate Margin shall be 1.75% at all times when a Default or an Event of Default shall exist. "Applicable Commitment Commission Percentage" shall mean .500%. "Applicable Eurodollar Rate Margin" shall mean from and after any Start Date to and including the corresponding End Date, the respective percentage per annum set forth in clause (A) or (B) below if, but only if, as of the Test Date for such Start Date the applicable condition set forth in clause (A) or (B) below, as the case may be, is met: -71- (A) 2.75% if, but only if, as of the Test Date for such Start Date, the Leverage Ratio for the Test Period ended on such Test Date shall be greater than or equal to 6.00:1.00; and (B) 2.50% if, but only if, as of the Test Date for such Start Date, the Leverage Ratio for the Test Period ended on such Test Date shall be less than 6.00:1.00. Notwithstanding anything to the contrary above in this definition, (x) the Applicable Eurodollar Rate Margin shall be 2.75% for the period from and including the Restatement Effective Date through but not including the first Start Date after the Restatement Effective Date and (i) the Applicable Eurodollar Rate Margin shall be 2.75% at all times when a Default or an Event of Default shall exist. "Applicable Excess Cash Flow Percentage" shall mean (i) in respect of each Excess Cash Payment Period occurring prior to the repayment of $7,500,000 in aggregate principal amount of Term Loans, 75% and (ii) in respect of each Excess Cash Payment Period occurring thereafter, 50%. "Applicable Margin Period" shall mean each period which shall commence on a date on which the financial statements are delivered pursuant to Section 8.01(b) or (c), as the case may be, and which shall end on the earlier of (i) the date of the actual delivery of the next financial statements pursuant to Section 8.01(b) or (c), as the case may be, and (ii) the latest date on which the next financial statements are required to be delivered pursuant to Section 8.01(b) or (c), as the case may be, provided that the first Applicable Margin Period shall commence with the delivery of Holdings' financial statements for the Test Period ending closest to June 30, 1999. "Asset Sale" shall mean any sale, transfer or other disposition by Holdings or any of its Subsidiaries to any Person (including by-way-of redemption by such Person) other than to Holdings or a Wholly-Owned Subsidiary of Holdings of any asset (including, without limitation, any capital stock or other securities of, or equity interests in, another Person) other than sales of assets pursuant to Sections 9.02 (ii), (iii), (vii), (ix), (x), (xi), (xiii), (xiv), (xv) and (xvi). "Assignment and Assumption Agreement" shall mean an Assignment and Assumption Agreement substantially in the form of Exhibit M (appropriately completed). "Available Revolving Loan Commitment" for any Bank shall mean, at any time, such Bank's Revolving Loan Commitment as then in effect less such Banks' RL Percentage of the amount of the Blocked Commitment, if any, at such time. "Bank" shall mean each financial institution listed on Schedule I, as well as any Person which becomes a "Bank" hereunder pursuant to Section 1.13 or 13.04(b). "Bank Default" shall mean (i) the refusal (which has not been retracted) or the failure of a Bank to make available its portion of any Borrowing (including any Mandatory Borrowing) or to fund its portion of any unreimbursed payment under Section 2.04(d) or (ii) a Bank having notified in writing the Borrower and/or the Agent that such Bank does not intend to comply with its obligations under Section 1.01(a), 1.01(b), 1.01(d) or 2, in the case of either -72- clause (i) or (ii) as a result of any takeover or control (including, without limitation, as a result of the occurrence of any event of the type described in Section 10.05 with respect to such Bank) of such Bank by any regulatory authority or agency. "Bankruptcy Code" shall have the meaning provided in Section 10.05. "Base Rate" shall mean, at any time, the higher of (i) the Prime Lending Rate and (ii) 1/2 of 1% in excess of the Federal Funds Rate. "Base Rate Loan" shall mean (i) each Swingline Loan and (ii) each other Loan designated or deemed designated as such by the Borrower at the time of the incurrence thereof or conversion thereto. "Blocked Commitment" shall mean (i) for the period from and including the Restatement Effective Date and until such time as the sum of (I) the aggregate outstanding principal amount of all Term Loans plus (II) the Total Revolving Loan Commitment as then in effect is less than $25,000,000, an amount equal to the Initial Blocked Amount at such time and (ii) for the period thereafter, an amount equal to the remainder of (x) the Initial Blocked Amount at such time less (y) the sum of (I) the aggregate principal amount of all Term Loans repaid during such period plus (II) the aggregate amount of reductions to the Total Revolving Loan Commitment effected during such period pursuant to Section 3.02(a); provided that the Blocked Commitment shall be reduced to 0 at such time as all Senior Notes have been repaid in full. "Borrower" shall have the meaning provided in the first paragraph of this Agreement. "Borrowing" shall mean the borrowing of one Type of Loan of a single Tranche from all the Banks having Commitments of the respective Tranche (or from the Swingline Bank in the case of Swingline Loans) on a given date (or resulting from a conversion or conversions on such date) having in the case of Eurodollar Loans the same Interest Period, PROVIDED that Base Rate Loans incurred pursuant to Section 1.10(b) shall be considered part of the related Borrowing of Eurodollar Loans. "Borrowing Base" shall mean, as at any date on which the amount thereof is being determined, an amount equal to the sum of 85% of Eligible Receivables and 60% of Eligible Inventory, each as determined from the Borrowing Base Certificate most recently delivered pursuant to Section 8.01(j). "Borrowing Base Certificate" shall have the meaning provided in Section 8.01(j). "BTCo" shall mean Bankers Trust Company, in its individual capacity, and any successor corporation thereto by merger, consolidation or otherwise. "Business Day" shall mean (i) for all purposes other than as covered by clause (ii) below, any day except Saturday, Sunday and any day which shall be in New York City, New York, a legal holiday or a day on which banking institutions are authorized or required by law or other government action to close and (ii) with respect to all notices and determinations in -73- connection with, and payments of principal and interest on, Eurodollar Loans, any day which is a Business Day described in clause (i) above and which is also a day for trading by and between banks in the New York interbank Eurodollar market. "Capital Call Agreement" shall have the meaning provided in Section 5.13. "Capital Expenditures" shall mean, with respect to any Person, all expenditures by such Person which should be capitalized in accordance with generally accepted accounting principles and, without duplication, the amount of Capitalized Lease Obligations incurred by such Person. "Capitalized Lease Obligations" shall mean, with respect to any Person, all rental obligations of such Person which, under generally accepted accounting principles, are or will be required to be capitalized on the books of such Person, in each case taken at the amount thereof accounted for as indebtedness in accordance with such principles. "Cash Equivalents" shall mean, as to any Person, (i) securities issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (PROVIDED that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than one year from the date of acquisition, (ii) marketable direct obligations issued by any state of the United States 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 Ratings Services ("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' acceptance maturing within one year from the date of acquisition thereof issued by any bank organized under the laws of the United States 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 $500,000,000. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as the same may be amended from time to time, 42 U.S.C. Section 9601 ET SEQ. "Change of Control" shall mean (i) Lehman, JFLEI, the other members of JFL-EEC on the Restatement Effective Date and their respective Affiliates shall cease to own, collectively, on a fully diluted basis in the aggregate at least 51% of the economic and voting interest in Holdings' capital stock (or, from and after the consummation of the Holdings Merger, the Borrower's capital stock), (ii) prior to the consummation of the Holdings Merger, Holdings shall cease to own 100% of the economic and voting interest in the Borrower's capital stock or (iii) a "change of control" or similar event shall occur under, and as defined in, the Senior Note -74- Documents, the Series A Preferred Stock, the Series B Preferred Stock or any other issue of Qualified Preferred Stock. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to the Code are to the Code, as in effect at the date of this Agreement and any subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor. "Collateral" shall mean all property (whether real or personal) with respect to which any security interests have been granted (or purported to be granted) pursuant to any Security Document, including, without limitation, all Pledge Agreement Collateral, all Security Agreement Collateral, the Mortgaged Properties and all cash and Cash Equivalents delivered as collateral pursuant to Section 4.02 or 10. "Collateral Agent" shall mean the Agent acting as collateral agent for the Secured Creditors pursuant to the Security Documents. "Collective Bargaining Agreements" shall have the meaning provided in Section 5.05. "Commitment" shall mean any of the commitments of any Bank, I.E., whether the Term Loan Commitment or the Revolving Loan Commitment. "Commitment Commission" shall have the meaning provided in Section 3.01(a). "Consolidated Current Assets" shall mean, at any time, the consolidated current assets of Holdings and its Subsidiaries at such time. "Consolidated Current Liabilities" shall mean, at any time, the consolidated current liabilities of Holdings and its Subsidiaries at such time, but excluding the current portion of any Indebtedness under this Agreement and the current portion of any other long-term Indebtedness which would otherwise be included therein. "Consolidated EBIT" shall mean, for any period, Consolidated Net Income for such period before consolidated interest expense of Holdings and its Subsidiaries and provision for taxes for such period. "Consolidated EBITDA" shall mean, for any period, Consolidated EBIT for such period, adjusted by (x) adding thereto (i) the amount of all amortization, depreciation and other non-cash expenses or non-cash charges that were deducted in arriving at Consolidated EBIT for such period (including amortization of goodwill, the non-cash costs of agreements evidencing Interest Rate Protection Agreements, Other Hedging Agreements, license agreements and non-competition agreements, and the non-cash amortization of Capitalized Lease Obligations, management fees and organization costs), but excluding, however, any non-cash expenses or non-cash charges associated with any asset write-downs, and (ii) unrealized non-cash gains and losses from hedging, foreign currency or commodities translations and transactions that were deducted in arriving at Consolidated EBIT for such period and (y) subtracting therefrom any cash expenses, -75- cash charges or cash payments arising from any non-cash expenses, non-cash charges or unrealized non-cash gains or losses that were deducted in arriving at Consolidated EBIT in a previous period. In addition to the foregoing, for purposes of determining compliance with Section 9.08 for Test Periods on or after the Test Period ending closest to March 31, 1999, Consolidated EBITDA for the fiscal quarter ending closest to March 31, 1999 shall be adjusted by adding thereto the amount of any capital contributions made to Holdings pursuant to the Capital Call Agreement in an aggregate amount not to exceed $4,000,000. "Consolidated Fixed Charge Coverage Ratio" shall mean, for any period, the ratio of (x) the remainder of (I) Consolidated EBITDA for such period minus (II) the amount of all Capital Expenditures made by Holdings and its Subsidiaries for such period (other than Capital Expenditures (i) financed with Asset Sale proceeds, equity proceeds, insurance proceeds or Indebtedness (excluding any Revolving Loans or Swingline Loans) and (ii) constituting Permitted Acquisitions) to (y) Consolidated Interest Expense for such period. "Consolidated Indebtedness" shall mean, at any time, the principal amount of all Indebtedness of Holdings and its Subsidiaries at such time as determined on a consolidated basis. "Consolidated Interest Expense" shall mean, for any period, the sum of (i) the total consolidated interest expense of Holdings and its Subsidiaries for such period (calculated without regard to any limitations on the payment thereof) plus, without duplication, that portion of Capitalized Lease Obligations of Holdings and its Subsidiaries representing the interest factor for such period plus (ii) the product of (A) the amount of all cash dividend payments made on the Series A Preferred Stock or any other class of Qualified Preferred Stock during such period and (B) a fraction, the numerator of which is one and the denominator of which is one minus the current effective consolidated federal, state and local income tax rate of Holdings expressed as a decimal (it being understood that, for purposes of determining whether a cash dividend may be paid on the Series A Preferred Stock pursuant to Section 9.03(iii), the amount of such cash dividend shall be treated as having been paid on the first day of the respective period to the extent that such cash dividend is not otherwise included in determining Consolidated Interest Expense for such period), PROVIDED that (x) the amortization or write-off of debt issuance costs, commissions, fees and expenses and (y) the amortization of original issue discount shall (in each case) be excluded from Consolidated Interest Expense to the extent same would otherwise have been included therein. "Consolidated Net Income" shall mean, for any period, the net income (or loss) of Holdings and its Subsidiaries for such period, determined on a consolidated basis (after any deduction for minority interests), PROVIDED that in determining Consolidated Net Income, (i) the net income of any other Person which is not a Subsidiary of Holdings or is accounted for by Holdings by the equity method of accounting shall be included only to the extent of the payment of cash dividends or distributions by such other Person to Holdings or a Subsidiary thereof during such period, (ii) the net income (or loss) of any other Person acquired by such specified Person or a Subsidiary of such Person in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iii) gains or losses from Asset Sales or other sales of assets (in each case) outside the ordinary course of business or abandonment or reserves relating thereto shall be excluded, (iv) items classified as extraordinary gains or extraordinary losses shall be -76- excluded, (v) the net income of any Subsidiary of the Borrower shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of its income is not at the time permitted by operation of the terms of its charter or any agreement, instrument or law applicable to such Subsidiary, (vi) the fees, expenses and other costs incurred in connection with the Recapitalization, the Acquisition and the related financing transactions in such period shall be excluded and (vii) there shall be added back to Consolidated Net Income in such period, to the extent that same reduced Consolidated Net Income in such period, any dividends paid on the Series A Preferred Stock and the Series B Preferred Stock; PROVIDED, HOWEVER, that Consolidated Net Income shall be deemed to include any increase during such period to consolidated shareholder's equity of Holdings attributable to tax benefits from net operating losses and the exercise of stock options that are not otherwise included in Consolidated Net Income for such period. "Contingent Obligation" shall mean, as to any Person, any obligation of such Person as a result of such Person being a general partner of the other Person, unless the underlying obligation is expressly made non-recourse as to such general partner, and any obligation of such Person guaranteeing or intended to guarantee any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (x) for the purchase or payment of any such primary obligation or (y) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof; PROVIDED, HOWEVER, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. "Credit Documents" shall mean this Agreement and, after the execution and delivery thereof pursuant to the terms of this Agreement, each Note, the Subsidiaries Guaranty, each Security Document and the Capital Call Agreement. "Credit Event" shall mean (i) the occurrence of the Restatement Effective Date and (ii) the making of any Loan or the issuance of any Letter of Credit. "Credit Party" shall mean Holdings, the Borrower and each Subsidiary Guarantor. "Default" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. -77- "Defaulting Bank" shall mean any Bank with respect to which a Bank Default is in effect. "Dividend" shall mean, with respect to any Person, that such Person has declared or paid a dividend or returned any equity capital to its stockholders or other equity holders or authorized or made any other distribution, payment or delivery of property (other than common stock of such Person) or cash to its stockholders or other equity holders in their capacity as stockholders or as other equity holders, or redeemed, retired, purchased or otherwise acquired, directly or indirectly, for a consideration any shares of any class of its capital stock or any other equity interests outstanding on or after the Restatement Effective Date (or any options or warrants issued by such Person with respect to its capital stock or other equity interests), or set aside any funds for any of the foregoing purposes, or shall have permitted any of its Subsidiaries to purchase or otherwise acquire for a consideration any shares of any class of the capital stock or any other equity interests of such Person outstanding on or after the Restatement Effective Date (or any options or warrants issued by such Person with respect to its capital stock or other equity interests). Without limiting the foregoing, "Dividends" with respect to any Person shall also include all cash payments made or required to be made by such Person with respect to any stock appreciation rights, plans, equity incentive or achievement plans or any similar plans or setting aside of any funds for the foregoing purposes. "Documents" shall mean and include (i) the Credit Documents, (ii) the Acquisition Documents, (iii) the Equity Financing Documents and (iv) the Senior Note Documents. "Dollars" and the sign "$" shall each mean freely transferable lawful money of the United States. "Drawing" shall have the meaning provided in Section 2.05(b). "Elgar FSC" shall mean Elgar FSC Corporation, a business incorporated under the Companies Act of Barbados. "Eligible Inventory" shall mean the gross dollar value (valued at the lower of cost or market value) of the inventory of the Borrower and the Subsidiary Guarantors which conforms to the representations and warranties contained in the Security Agreement (including by the Collateral Agent having a first priority perfected security interest therein subject only to Permitted Liens) and which at all times continue to be acceptable to the Collateral Agent in its reasonable judgment, less (i) any supplies (other than raw materials), spare parts, goods returned or rejected (except to the extent that such returned or rejected goods continue to conform to the representations and warranties contained in the Security Agreement and continue to be acceptable to the Collateral Agent in its reasonable judgment) by customers and goods to be returned to suppliers, (ii) any advance payments made by customers with respect to inventory of the Borrower and the Subsidiary Guarantors, (iii) reserves required by the Collateral Agent in its reasonable judgment and (iv) any inventory held on consignment. "Eligible Receivables" shall mean the total face amount of the receivables of the Borrower and the Subsidiary Guarantors which conform to the representations and warranties -78- contained in the Security Agreement (including by the Collateral Agent having a first priority perfected security interest therein subject only to Permitted Liens) and at all times continue to be acceptable to the Collateral Agent in its reasonable judgment, less any returns, discounts, claims, credit and allowances of any nature (whether issued, owing, granted or outstanding) and less reserves booked or made by the Borrower or any Subsidiary Guarantor for any other matter affecting the creditworthiness of account debtors owing the receivables and excluding (i) bill and hold (deferred shipment) transactions, (ii) contracts or sales to any Affiliate of Holdings or any of its Subsidiaries, (iii) all receivables to the extent that same have not been paid in full within 60 days of the due date thereof or which have been disputed by the account debtor and (iv) governmental sales, provided that governmental sales shall be included (x) to the extent that the Borrower or the respective Subsidiary Guarantor has taken all action required to be taken by the Federal Assignment of Claims Act to grant to the Collateral Agent a valid, enforceable and perfected security interest in the respective receivable and (y) to the extent not already included pursuant to preceding (x), in an amount not to exceed $1,500,000 at any one time. "Eligible Transferee" shall mean and include a commercial bank, financial institution, any fund that invests in loans or any other "accredited investor" (as defined in Regulation D of the Securities Act). "Employment Agreements" shall have the meaning provided in Section 5.05. "End Date" shall mean, for any Applicable Margin Period, the last day of such Applicable Margin Period. "Environmental Claims" shall mean any and all administrative, regulatory or judicial actions, suits, demands, demand letters, directives, claims, liens, notices of noncompliance or violation, investigations or proceedings relating in any way to any Environmental Law or any permit issued, or any approval given, under any such Environmental Law (hereafter, "Claims"), including, without limitation, (a) any and all Claims by governmental or regulatory authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and (b) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief in connection with alleged injury or threat of injury to health, safety or the environment due to the presence of Hazardous Materials. "Environmental Law" shall mean any Federal, state, foreign or local statute, law, rule, regulation, ordinance, code, guideline, written policy and rule of common law now or hereafter in effect and in each case as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to the environment, employee health and safety or Hazardous Materials, including, without limitation, CERCLA; RCRA; the Federal Water Pollution Control Act, 33 U.S.C. Section 1251 ET SEQ.; the Toxic Substances Control Act, 15 U.S.C. Section 2601 ET SEQ.; the Clean Air Act, 42 U.S.C. Section 7401 ET SEQ.; the Safe Drinking Water Act, 42 U.S.C. Section 3803 ET SEQ.; the Oil Pollution Act of 1990, 33 U.S.C. Section 2701 ET SEQ.; the Emergency Planning and the Community Right-to-Know Act of 1986, 42 U.S.C. Section 11001 ET SEQ.; the Hazardous Material Transportation Act, 49 U.S.C. Section 1801 ET SEQ. and -79- the Occupational Safety and Health Act, 29 U.S.C. Section 651 ET SEQ.; and any state and local or foreign counterparts or equivalents, in each case as amended from time to time. "Equity Financing" shall mean the issuance by Holdings of shares of Qualified Preferred Stock to JFL-EEC and other shareholders and warrantholders of Holdings pursuant to the Equity Financing Documents and as part of the Transaction. "Equity Financing Documents" shall mean each of the documents and agreements entered into in connection with the consummation of the Equity Financing. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA, as in effect at the date of this Agreement and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) which together with Holdings or a Subsidiary of Holdings would be deemed to be a "single employer" (i) within the meaning of Section 414(b), (c), (m) or (o) of the Code or (ii) as a result of Holdings or a Subsidiary of Holdings being or having been a general partner of such person. "Eurodollar Loan" shall mean each Loan (other than a Swingline Loan) designated as such by the Borrower at the time of the incurrence thereof or conversion thereto. "Eurodollar Rate" shall mean (a) the offered quotation to first-class banks in the New York interbank Eurodollar market by BTCo for Dollar deposits of amounts in immediately available funds comparable to the outstanding principal amount of the Eurodollar Loan of BTCo with maturities comparable to the Interest Period applicable to such Eurodollar Loan commencing two Business Days thereafter as of 11:00 A.M. (New York time) on the date which is two Business Days prior to the commencement of such Interest Period, divided (and rounded upward to the nearest 1/16 of 1%) by (b) a percentage equal to 100% minus the then stated maximum rate of all reserve requirements (including, without limitation, any marginal, emergency, supplemental, special or other reserves required by applicable law) applicable to any member bank of the Federal Reserve System in respect of Eurocurrency funding or liabilities as defined in Regulation D (or any successor category of liabilities under Regulation D). "Event of Default" shall have the meaning provided in Section 10. "Excess Cash Flow" shall mean, for any period, the remainder of (a) the sum of (i) Consolidated Net Income for such period, (ii) to the extent deducted in determining Consolidated Net Income for such period, (A) depreciation and amortization, (B) deferred taxes, and (C) other non-cash charges (exclusive of items reflected in Adjusted Consolidated Working Capital) and (iii) the decrease, if any, in Adjusted Consolidated Working Capital from the first day to the last day of such period, minus (b) the sum of (i) the amount of all Capital Expenditures made by Holdings and its Subsidiaries during such period (other than Capital Expenditures to the extent financed with Asset Sale proceeds, equity proceeds, insurance proceeds or Indebtedness (other -80- than with Revolving Loans or Swingline Loans)), (ii) the aggregate amount of permanent principal payments of Indebtedness for borrowed money of Holdings and its Subsidiaries during such period (other than repayments of Loans, PROVIDED that repayments of Loans shall be deducted in determining Excess Cash Flow if such repayments were (x) required as a result of a Scheduled Repayment under Section 4.02(b) or (y) made as a voluntary prepayment with internally generated funds (but in the case of a voluntary prepayment of Revolving Loans or Swingline Loans, only to the extent accompanied by a voluntary reduction to the Total Revolving Loan Commitment)), (iii) the increase, if any, in Adjusted Consolidated Working Capital from the first day to the last day of such period, (iv) to the extent included in determining Consolidated Net Income for such period, non-cash gains (exclusive of items reflected in Adjusted Consolidated Working Capital) during such period, (v) the amount of cash actually paid by Holding or its Subsidiaries in connection with losses or costs referred to in clauses (iii), (iv) and (vi) of the definition of "Consolidated Net Income" during such period, (vii) the amount of all cash expenditures paid in connection with Permitted Acquisitions consummated during such period (other than expenditures to the extent financed with equity proceeds (including capital contributions), Asset Sale proceeds or Indebtedness (excluding Revolving Loans), and (viii) the amount of any cash dividends paid on the Series A Preferred Stock during such period, but only to the extent permitted to be paid pursuant to Section 9.03(iii). "Excess Cash Payment Date" shall mean the date occurring 90 days after the last day of each fiscal year of Holdings (beginning with its fiscal year ending April 3, 1999). "Excess Cash Payment Period" shall mean, with respect to the repayment required on each Excess Cash Payment Date, the immediately preceding fiscal year of Holdings (or, in the case of Holdings' fiscal year ending closest to March 31, 1999, the period from June 29, 1998 through and including the end of such fiscal year). "Existing Banks" shall mean each of the lenders party to the Existing Credit Agreement on the Restatement Effective Date (and immediately prior thereto). "Existing Credit Agreement" shall have the meaning provided in the first WHEREAS clause of this Agreement. "Existing Indebtedness" shall have the meaning provided in Section 7.22. "Existing Indebtedness Agreements" shall have the meaning provided in Section 5.05. "Existing Letter of Credit" shall have the meaning provided in section 2.01(c) "Existing Revolving Loan" shall mean each "Revolving Loan" under, and as defined in, the Existing Credit Agreement. "Facing Fee" shall have the meaning provided in Section 3.01(c). "Federal Funds Rate" shall mean, for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal Funds -81- transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal Funds brokers of recognized standing selected by the Agent. "Fees" shall mean all amounts payable pursuant to or referred to in Section 3.01. "Final Maturity Date" shall mean February 3, 2003. "Guaranteed Creditors" shall mean and include each of the Agent, the Collateral Agent, the Issuing Bank, the Banks and each party (other than any Credit Party) party to an Interest Rate Protection Agreement or Other Hedging Agreement to the extent such party constitutes a Secured Creditor under the Security Documents. "Guaranteed Obligations" shall mean (i) the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of the principal and interest on each Note issued by, and Loans made to, the Borrower under this Agreement and all reimbursement obligations and Unpaid Drawings with respect to Letters of Credit, together with all the other obligations (including obligations which, but for the automatic stay under Section 362(a) of the Bankruptcy Code, would become due) and liabilities (including, without limitation, indemnities, fees and interest thereon) of the Borrower to the Banks, the Agent, the Issuing Bank and the Collateral Agent now existing or hereafter incurred under, arising out of or in connection with this Agreement or any other Credit Document and the due performance and compliance by the Borrower with all the terms, conditions and agreements contained in the Credit Documents and (ii) the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations (including obligations which, but for the automatic stay under Section 362(a) of the Bankruptcy Code, would become due) of the Borrower owing under any Interest Rate Protection Agreement or Other Hedging Agreement entered into by the Borrower with any Bank or any affiliate thereof (even if such Bank subsequently ceases to be a Bank under this Agreement for any reason) so long as such Bank or affiliate participates in such Interest Rate Protection Agreement or Other Hedging Agreement, and their subsequent assigns, if any, whether now in existence or hereafter arising, and the due performance and compliance with all terms, conditions and agreements contained therein. "Guarantor" shall mean Holdings and each Subsidiary Guarantor. "Guaranty" shall mean the Holdings Guaranty and the Subsidiaries Guaranty. "Hazardous Materials" shall mean (a) any petroleum or petroleum products, radioactive materials, asbestos in any form that is friable, urea formaldehyde foam insulation, transformers or other equipment that contain dielectric fluid containing levels of polychlorinated biphenyls, and radon gas; (b) any chemicals, materials or substances defined as or included in the definition of "hazardous substances," "hazardous waste," "hazardous materials," "extremely hazardous substances," "restricted hazardous waste," "toxic substances," "toxic pollutants," "contaminants," or "pollutants," or words of similar import, under any applicable Environmental -82- Law; and (c) any other chemical, material or substance, the Release of which is prohibited, limited or regulated by any governmental authority. "Holdings" shall have the meaning provided in the first paragraph of this Agreement. "Holdings Guaranty" shall mean the guaranty of Holdings pursuant to Section 14. "Holdings Merger" shall mean the merger of Holdings with and into the Borrower, with the Borrower being the surviving corporation of such merger. "Indebtedness" shall mean, as to any Person, without duplication, (i) all indebtedness (including principal, interest, fees and charges) of such Person for borrowed money or for the deferred purchase price of property or services, (ii) the maximum amount available to be drawn under all letters of credit issued for the account of such Person and all unpaid drawings in respect of such letters of credit, (iii) all Indebtedness of the types described in clause (i), (ii), (iv), (v), (vi) or (vii) of this definition secured by any Lien on any property owned by such Person, whether or not such Indebtedness has been assumed by such Person (PROVIDED, that, if the Person has not assumed or otherwise become liable in respect of such Indebtedness, such Indebtedness shall be deemed to be in an amount equal to the fair market value of the property to which such Lien relates as determined in good faith by such Person), (iv) the aggregate amount required to be capitalized under leases under which such Person is the lessee, (v) all obligations of such person to pay a specified purchase price for goods or services, whether or not delivered or accepted, I.E., take-or-pay and similar obligations, (vi) all Contingent Obligations of such Person and (vii) all obligations under any Interest Rate Protection Agreement, any Other Hedging Agreement or under any similar type of agreement. Notwithstanding the foregoing, Indebtedness shall not include trade payables and accrued expenses incurred by any Person in accordance with customary practices and in the ordinary course of business of such Person. "Initial Blocked Amount" shall mean, at any time, the lesser of (x) $5,000,000 and (y) the difference between $5,000,000 and that amount in excess of $15,000,000 which the Borrower would be permitted to incur under this Agreement at such time solely in reliance on sub-clause (y) of clause (ii) of the definition of "Permitted Indebtedness" in the Senior Note Indenture, provided that preceding clause (y) shall only be available to be used by the Borrower to the extent that the Borrower has delivered a certificate of its Chief Financial Officer (which certificate shall be updated upon the occurrence of each Credit Event) certifying (and demonstrating in reasonable detail) the amount of the "Borrowing Base" at such time calculated in accordance with the terms of the Senior Note Indenture. "Intercompany Loan" shall have the meaning provided in Section 9.05(ix). "Intercompany Note" shall mean a promissory note, in the form of Exhibit N, evidencing Intercompany Loans. -83- "Interest Determination Date" shall mean, with respect to any Eurodollar Loan, the second Business Day prior to the commencement of any Interest Period relating to such Eurodollar Loan. "Interest Period" shall have the meaning provided in Section 1.09. "Interest Rate Protection Agreement" shall mean any interest rate swap agreement, interest rate cap agreement, interest collar agreement, interest rate hedging agreement or other similar agreement or arrangement. "Investments" shall have the meaning provided in Section 9.05. "Issuing Bank" shall mean BTCo. "JFL-EEC" shall mean JFL-EEC LLC, a Delaware limited liability company and an Affiliate of Lehman. "JFLEI" shall mean J.F. Lehman Equity Investors L.P, a Delaware limited partnership and an Affiliate of Lehman. "L/C Supportable Obligations" shall mean (i) obligations of the Borrower or any of its Subsidiaries with respect to workers compensation, surety bonds and other similar statutory obligations, (ii) obligations that may be classified as "accounts payable" in accordance with generally accepted accounting principles and (iii) such other obligations of the Borrower or any of its Subsidiaries as are reasonably acceptable to the Issuing Bank and otherwise permitted to exist pursuant to the terms of this Agreement. "Leaseholds" of any Person shall mean all the right, title and interest of such Person as lessee or licensee in, to and under leases or licenses of land, improvements and/or fixtures. "Lehman" shall mean J.F. Lehman & Company, Inc., a private investment firm. "Lehman Management Agreement" shall mean the Management Agreement, dated as of February 3, 1998, among Holdings, the Borrower and Lehman. "Letter of Credit" shall have the meaning provided in Section 2.01(a). "Letter of Credit Fee" shall have the meaning provided in Section 3.01(b). "Letter of Credit Outstandings" shall mean, at any time, the sum of (i) the aggregate Stated Amount of all outstanding Letters of Credit and (ii) the amount of all Unpaid Drawings. "Letter of Credit Request" shall have the meaning provided in Section 2.03(a). "Leverage Ratio" shall mean, at any time, the ratio of Consolidated Indebtedness at such time to Consolidated EBITDA for the Test Period then most recently ended. -84- "Lien" shall mean any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), preference, priority or other security agreement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing or similar statement or notice filed under the UCC or any other similar recording or notice statute, and any lease having substantially the same effect as any of the foregoing). "Loan" shall mean each Term Loan, each Revolving Loan and each Swingline Loan. "Management Agreements" shall have the meaning provided in Section 5.05. "Mandatory Borrowing" shall have the meaning provided in Section 1.01(d). "Margin Stock" shall have the meaning provided in Regulation U. "Maximum Swingline Amount" shall mean $1,000,000. "Minimum Borrowing Amount" shall mean (i) for Term Loans, $1,000,000, (ii) for Revolving Loans, $500,000 and (iii) for Swingline Loans, $100,000. "Moody's" shall have the meaning provided in the definition of "Cash Equivalents". "Mortgage" shall have the meaning provided in Section 8.11. "Mortgaged Property" shall have the meaning provided in Section 8.11. "Net Debt Proceeds" shall mean, with respect to any incurrence of Indebtedness for borrowed money, the cash proceeds (net of underwriting discounts and commissions and other reasonable costs associated therewith) received by the respective Person from the respective incurrence of such Indebtedness for borrowed money. "Net Equity Proceeds" shall mean, with respect to each issuance or sale of any equity by any Person or any capital contribution to such Person, the cash proceeds (net of underwriting discounts and commissions and other reasonable costs associated therewith) received by such Person from the respective sale or issuance of its equity or from the respective capital contribution. "Net Insurance Proceeds" shall mean, with respect to any Recovery Event, the cash proceeds (net of reasonable costs and taxes incurred in connection with such Recovery Event) received by the respective Person in connection with the respective Recovery Event. "Net Sale Proceeds" shall mean, for any Asset Sale, the gross cash proceeds (including any cash received by way of deferred payment pursuant to a promissory note, receivable or otherwise, but only as and when received) received from such sale of assets, net of the reasonable costs of such sale (including fees and commissions, payments of unassumed -85- liabilities relating to the assets sold and required payments of any Indebtedness (other than Indebtedness secured pursuant to the Security Documents) which is secured by the respective assets which were sold), and the incremental taxes paid or payable as a result of such Asset Sale and any reasonable reserves established in connection therewith as determined in good faith by the Borrower. "Non-Compete Agreements" shall have the meaning provided in Section 5.05. "Non-Defaulting Bank" shall mean and include each Bank other than a Defaulting Bank. "Note" shall mean each Term Note, each Revolving Note and the Swingline Note. "Notice of Borrowing" shall have the meaning provided in Section 1.03(a). "Notice of Conversion" shall have the meaning provided in Section 1.06. "Notice Office" shall mean the office of the Agent located at One Bankers Trust Plaza, 130 Liberty Street, New York, New York 10006, Attention: Shannon Farrell or such other office as the Agent may hereafter designate in writing as such to the other parties hereto. "Obligations" shall mean all amounts owing to the Agent, the Collateral Agent, the Issuing Bank or any Bank pursuant to the terms of this Agreement or any other Credit Document. "Other Hedging Agreement" shall mean any foreign exchange contracts, currency swap agreements, commodity agreements or other similar agreements or arrangements designed to protect against the fluctuations in currency values. "Participant" shall have the meaning provided in Section 2.04(a). "Payment Office" shall mean the office of the Agent located at One Bankers Trust Plaza, 130 Liberty Street, New York, New York 10006, or such other office as the Agent may hereafter designate in writing as such to the other parties hereto. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto. "Permitted Acquisition" shall have the meaning provided in Section 9.02(xii). "Permitted Encumbrance" shall mean, with respect to any Mortgaged Property, such exceptions to title as are set forth in the mortgage policy delivered with respect thereto, all of which exceptions must be reasonably acceptable to the Agent in its reasonable discretion. "Permitted Liens" shall have the meaning provided in Section 9.01. "Person" shall mean any individual, partnership, joint venture, firm, corporation, association, limited liability company, trust or other enterprise or any government or political subdivision or any agency, department or instrumentality thereof. -86- "Plan" shall mean any pension plan as defined in Section 3(2) of ERISA, which is maintained or contributed to by (or to which there is an obligation to contribute of) Holdings or a Subsidiary of Holdings or an ERISA Affiliate, and each such plan for the five year period immediately following the latest date on which the Holdings, or a Subsidiary of Holdings or an ERISA Affiliate maintained, contributed to or had an obligation to contribute to such plan. "Pledge Agreement" shall have the meaning provided in Section 5.10. "Pledge Agreement Collateral" shall mean all "Collateral" as defined in the Pledge Agreement. "Pledged Securities" shall mean all "Pledged Securities" as defined in the Pledge Agreement. "Power Ten" shall mean Power Ten, a California corporation. "Prime Lending Rate" shall mean the rate which BTCo announces from time to time as its prime lending rate, the Prime Lending Rate to change when and as such prime lending rate changes. The Prime Lending Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. BTCo may make commercial loans or other loans at rates of interest at, above or below the Prime Lending Rate. "Projections" shall mean the projections prepared by the Borrower in connection with the Transaction, dated May 20, 1998 and furnished to the Banks prior to the Restatement Effective Date. "Qualified Preferred Stock" shall mean (x) the shares of Series A Preferred Stock issued on February 3, 1998 and any in-kind dividends paid thereon after February 3, 1998 in accordance with the terms of this Agreement, (y) the shares of Series B Preferred Stock issued on May 29, 1998 and any in-kind dividends paid thereon after May 29, 1998 in accordance with the terms of this Agreement and (z) any other class of preferred stock of Holdings so long as the terms of any such preferred stock (i) do not contain any mandatory put, redemption, repayment, sinking fund or other similar provision occurring before May 29, 2004 (other than as a result of a change of control provision that is at least as favorable to Holdings and the Banks as the change of control provision contained in the Series A Preferred Stock), (ii) do not require the cash payment of dividends to the extent that same would not otherwise be permitted under this Agreement, (iii) do not contain any covenants (other than covenants of the type (but no more restrictive in any material respect) as those covenants set forth in the Series A Preferred Stock), (iv) do not grant the holders thereof any voting rights except for (x) voting rights required to be granted to such holders under applicable law and (y) limited customary voting rights on fundamental matters such as mergers, consolidations, sales of all or substantially all of the assets of Holdings, or liquidations involving Holdings, and (v) are otherwise reasonably satisfactory to the Agent. "Quarterly Payment Date" shall mean the last Business Day of each September, December, March and June occurring after the Restatement Effective Date. -87- "RCRA" shall mean the Resource Conservation and Recovery Act, as the same may be amended from time to time, 42 U.S.C. Section 6901 ET SEQ. "Real Property" of any Person shall mean all the right, title and interest of such Person in and to land, improvements and fixtures, including Leaseholds. "Recapitalization" shall have the meaning provided in the Existing Credit Agreement (I.E., the initial recapitalization of Holdings by affiliates of Lehman). "Recovery Event" shall mean the receipt by Holdings or any of its Subsidiaries of any cash insurance proceeds or condemnation awards payable (i) by reason of theft, loss, physical destruction, damage, taking or any other similar event with respect to any property or assets of Holdings or any of its Subsidiaries and (ii) under any policy of insurance required to be maintained under Section 8.03. "Register" shall have the meaning provided in Section 13.15. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing reserve requirements. "Regulation T" shall mean Regulation T of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof. "Regulation U" shall mean Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof. "Regulation X" shall mean Regulation X of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof. "Release" shall mean the disposing, discharging, injecting, spilling, pumping, leaking, leaching, dumping, emitting, escaping, emptying, pouring or migrating, into or upon any land or water or air, or otherwise entering into the environment. "Replaced Bank" shall have the meaning provided in Section 1.13. "Replacement Assets" shall have the meaning provided in Section 4.02(e). "Replacement Bank" shall have the meaning provided in Section 1.13. "Reportable Event" shall mean an event described in Section 4043(c) of ERISA with respect to a Plan that is subject to Title IV of ERISA other than those events as to which the 30-day notice period is waived under subsection .22, .23, .25, .27 or .28 of PBGC Regulation Section 4043. "Required Banks" shall mean Non-Defaulting Banks the sum of whose outstanding Term Loans and Revolving Loan Commitments (or after the termination thereof, outstanding -88- Revolving Loans and RL Percentages of outstanding Swingline Loans and Letter of Credit Outstandings) represent an amount greater than 50% of the sum of all outstanding Term Loans of Non-Defaulting Banks and the Total Revolving Loan Commitment less the Revolving Loan Commitments of all Defaulting Banks (or after the termination thereof, the sum of the then total outstanding Revolving Loans of Non-Defaulting Banks and the aggregate RL Percentages of all Non-Defaulting Banks of the total outstanding Swingline Loans and Letter of Credit Outstandings Swingline Loans at such time). "Restatement Effective Date" shall have the meaning provided in Section 13.10. "Revolving Loan" shall mean each revolving loan converted pursuant to Section 1.01(b)(I) and each revolving loan made pursuant to Section 1.01(b)(II). "Revolving Loan Commitment" shall mean, for each Bank, the amount set forth opposite such Bank's name in Schedule I directly below the column entitled "Revolving Loan Commitment," as same may be (x) reduced from time to time pursuant to Sections 3.02, 3.03 and/or 10 or (y) adjusted from time to time as a result of assignments to or from such Bank pursuant to Section 1.13 or 13.04(b). "Revolving Note" shall have the meaning provided in Section 1.05(a). "RL Percentage" of any Bank at any time shall mean a fraction (expressed as a percentage) the numerator of which is the Revolving Loan Commitment of such Bank at such time and the denominator of which is the Total Revolving Loan Commitment at such time, PROVIDED that if the RL Percentage of any Bank is to be determined after the Total Revolving Loan Commitment has been terminated, then the RL Percentages of the Banks shall be determined immediately prior (and without giving effect) to such termination. "S&P" shall have the meaning provided in the definition of "Cash Equivalents". "Scheduled Repayment" shall have the meaning provided in Section 4.02(b). "SEC" shall have the meaning provided in Section 8.01(h). "Section 4.04(b)(ii) Certificate" shall have the meaning provided in Section 4.04(b)(ii). "Secured Creditors" shall have the meaning assigned that term in the respective Security Documents. "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Securities Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Security Agreement" shall have the meaning provided in Section 5.11. -89- "Security Agreement Collateral" shall mean all "Collateral" as defined in the Security Agreement. "Security Document" shall mean and include each of the Security Agreement, the Pledge Agreement and, after the execution and delivery thereof, each Mortgage. "Senior Note Documents" shall mean the Senior Note Indenture, the Senior Notes and each other document or agreement relating to the issuance of the Senior Notes. "Senior Note Indenture" shall mean the Indenture, dated as of February 3, 1998 between Holdings and United States Trust Company, as Trustee. "Senior Note Offering Memorandum" shall mean the Offering Memorandum, dated January 30, 1998, prepared in connection with the issuance of the Senior Notes. "Senior Notes" shall mean Holdings' 9-7/8% Senior Notes due 2008. "Series A Preferred Stock" shall mean Holdings' Series A 10% Cumulative Redeemable Preferred Stock as constituted on February 3, 1998. "Series B Preferred Stock" shall mean Holdings' Series B 6% Cumulative Convertible Preferred Stock as constituted on May 29, 1998. "Shareholders' Agreements" shall have the meaning provided in Section 5.05. "Standby Letter of Credit" shall have the meaning provided in Section 2.01(a). "Start Date" shall mean, with respect to any Applicable Margin Period, the first day of such Applicable Margin Period. "Stated Amount" of each Letter of Credit shall mean, at any time, the maximum amount available to be drawn thereunder (in each case determined without regard to whether any conditions to drawing could then be met). "Subsidiaries Guaranty" shall have the meaning provided in Section 5.12. "Subsidiary" shall mean, as to any Person, (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person and/or one or more Subsidiaries of such Person and (ii) any partnership, limited liability company, association, joint venture or other entity in which such Person and/or one or more Subsidiaries of such Person has more than a 50% equity interest at the time. "Subsidiary Guarantor" shall mean each Subsidiary of the Borrower other than Elgar FSC so long as Elgar FSC complies with Section 9.13(c). -90- "Supermajority Banks" shall mean those Non-Defaulting Banks which would constitute the Required Banks under, and as defined in, this Agreement, if (x) all outstanding Obligations in respect of the Revolving Loan Commitment were repaid in full and the Total Revolving Loan Commitment were terminated and (y) the percentage "50%" contained therein were changed to "66 2/3%". "Swingline Bank" shall mean BTCo. "Swingline Expiry Date" shall mean that date which is five Business Days prior to the Final Maturity Date. "Swingline Loan" shall have the meaning provided in Section 1.01(c). "Swingline Note" shall have the meaning provided in Section 1.05(a). "Syndication Date" shall mean that date upon which the Agent determines (and notifies the Borrower) that the primary syndication (and resultant addition of Persons as Banks pursuant to Section 13.04(b)) has been completed. "Tax Benefit" shall have the meaning provided in Section 4.04(c). "Tax Sharing Agreements" shall have the meaning provided in Section 5.05. "Taxes" shall have the meaning provided in Section 4.04(a). "Term Loan" shall have the meaning provided in Section 1.01(a). "Term Loan Commitment" shall mean, for each Bank, the amount set forth opposite such Bank's name in Schedule I directly below the column entitled "Term Loan Commitment," as same may be terminated pursuant to Sections 3.03 and/or 10. "Term Note" shall have the meaning provided in Section 1.05(a). "Test Date" shall mean, with respect to any Start Date, the last day of the most recent fiscal quarter of Holdings ended immediately prior to such Start Date. "Test Period" shall mean, each period of four consecutive fiscal quarters of Holdings then last ended (in each case taken as one accounting period). For purposes of determining compliance with Sections 9.07, 9.08 and 9.09 for any portion of a Test Period ended prior to the Restatement Effective Date, the following shall apply: (i) Consolidated EBITDA, Consolidated Interest Expense and Capital Expenditures of Holdings and its Subsidiaries for Holdings' fiscal quarter ended closest to June 30, 1997 shall be $3,463,000, $2,540,000 and $350,000, respectively; (ii) Consolidated EBITDA, Consolidated Interest Expense and Capital Expenditures of Holdings and its Subsidiaries for Holdings' fiscal -91- quarter ended closest to September 30, 1997 shall be $4,865,000, $2,540,000 and $350,000, respectively; (iii) Consolidated EBITDA, Consolidated Interest Expense and Capital Expenditures of Holdings and its Subsidiaries for Holdings' fiscal quarter ended closest to December 31, 1997 shall be $5,306,000, $2,540,000 and $350,000, respectively; (iv) Consolidated EBITDA, Consolidated Interest Expense and Capital Expenditures of Holdings and its Subsidiaries for Holdings' fiscal quarter ended closest to March 31, 1998 shall be $3,643,000, $2,540,00 and $350,000, respectively; and (v) Consolidated EBITDA, Consolidated Interest and Capital Expenditures of Holdings and its Subsidiaries for the period from March 29, 1998 through, but not including, the Restatement Effective Date, shall be determined on a PRO FORMA basis as if the Acquisition and the related financing had occurred on March 29, 1998. The respective amounts set forth in clauses (i), (ii) and (iii) above represent the PRO FORMA numbers as if the Recapitalization, the Acquisition and the related financing transactions had occurred on the first day of Holdings' fiscal quarter ended closest to June 30, 1997. "Total Available Revolving Loan Commitment" shall mean, at any time, the Total Revolving Loan Commitment less the Blocked Commitment, if any, at such time. "Total Commitment" shall mean, at any time, the sum of the Commitments of each of the Banks. "Total Revolving Loan Commitment" shall mean, at any time, the sum of the Revolving Loan Commitments of each of the Banks. "Total Term Loan Commitment" shall mean, at any time, the sum of the Term Loan Commitments of each of the Banks. "Total Unutilized Available Revolving Loan Commitment" shall mean, at any time, an amount equal to the remainder of (x) the Total Unutilized Revolving Loan Commitment at such time less (y) the Blocked Commitment, if any, at such time. "Total Unutilized Revolving Loan Commitment" shall mean, at any time, an amount equal to the remainder of (x) the Total Revolving Loan Commitment then in effect less (y) the sum of the aggregate principal amount of all Revolving Loans and Swingline Loans then outstanding plus the then aggregate amount of all Letter of Credit Outstandings. "Trade Letter of Credit" shall have the meaning provided in Section 2.01(a). -92- "Tranche" shall mean the respective facility and commitments utilized in making Loans hereunder, with there being three separate Tranches, I.E., Term Loans, Revolving Loans and Swingline Loans. "Transaction" shall mean, collectively, (i) the consummation of the Acquisition and the other transactions contemplated by the Acquisition Documents, (ii) the consummation of the Equity Financing, (iii) the entering into of the Credit Documents and (iv) the payment of fees and expenses in connection with the foregoing. "Type" shall mean the type of Loan determined with regard to the interest option applicable thereto, I.E., whether a Base Rate Loan or a Eurodollar Loan. "UCC" shall mean the Uniform Commercial Code as from time to time in effect in the relevant jurisdiction. "Unfunded Current Liability" of any Plan shall mean the amount, if any, by which the actuarial present value of the accumulated plan benefits under the Plan as of the close of its most recent plan year, determined in accordance with actuarial assumptions at such time consistent with Statement of Financial Accounting Standards No. 87, exceeds the market value of the assets allocable thereto. "United States" and "U.S." shall each mean the United States of America. "Unpaid Drawing" shall have the meaning provided for in Section 2.05(a). "Unutilized Revolving Loan Commitment" shall mean, with respect to any Bank at any time, such Bank's Revolving Loan Commitment at such time less the sum of (i) the aggregate outstanding principal amount of all Revolving Loans made by such Bank at such time and (ii) such Bank's RL Percentage of the Letter of Credit Outstandings at such time. "Wholly-Owned Subsidiary" shall mean, as to any Person, (i) any corporation 100% of whose capital stock (other than director's qualifying shares) is at the time owned by such Person and/or one or more Wholly-Owned Subsidiaries of such Person and (ii) any partnership, limited liability company, association, joint venture or other entity in which such Person and/or one or more Wholly-Owned Subsidiaries of such Person has a 100% equity interest at such time. SECTION 12. THE AGENT. 12.01 APPOINTMENT. The Banks hereby irrevocably designate BTCo as Agent (for purposes of this Section 12, the term "Agent" also shall include BTCo in its capacity as Collateral Agent pursuant to the Security Documents) to act as specified herein and in the other Credit Documents. Each Bank hereby irrevocably authorizes, and each holder of any Note by the acceptance of such Note shall be deemed irrevocably to authorize, the Agent to take such action on their behalf under the provisions of this Agreement, the other Credit Documents and any other instruments and agreements referred to herein or therein and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. -93- The Agent may perform any of its duties hereunder by or through its officers, directors, agents, employees or affiliates. 12.02 NATURE OF DUTIES. The Agent shall not have any duties or responsibilities except those expressly set forth in this Agreement and in the other Credit Documents. Neither the Agent nor any of its officers, directors, agents, employees or affiliates shall be liable for any action taken or omitted by them hereunder or under any other Credit Document or in connection herewith or therewith, unless caused by its or their gross negligence or willful misconduct. The duties of the Agent shall be mechanical and administrative in nature; the Agent shall not have by reason of this Agreement or any other Credit Document a fiduciary relationship in respect of any Bank or the holder of any Note; and nothing in this Agreement or any other Credit Document, expressed or implied, is intended to or shall be so construed as to impose upon the Agent any obligations in respect of this Agreement or any other Credit Document except as expressly set forth herein or therein. 12.03 LACK OF RELIANCE ON THE AGENT. Independently and without reliance upon the Agent, each Bank and the holder of each Note, to the extent it deems appropriate, has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of Holdings and its Subsidiaries in connection with the making and the continuance of the Loans and the taking or not taking of any action in connection herewith and (ii) its own appraisal of the creditworthiness of Holdings and its Subsidiaries and, except as expressly provided in this Agreement, the Agent shall not have any duty or responsibility, either initially or on a continuing basis, to provide any Bank or the holder of any Note with any credit or other information with respect thereto, whether coming into its possession before the making of the Loans or at any time or times thereafter. The Agent shall not be responsible to any Bank or the holder of any Note for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability, perfection, collectability, priority or sufficiency of this Agreement or any other Credit Document or the financial condition of Holdings or any of its Subsidiaries or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or any other Credit Document, or the financial condition of Holdings or any of its Subsidiaries or the existence or possible existence of any Default or Event of Default. 12.04 CERTAIN RIGHTS OF THE AGENT. If the Agent shall request instructions from the Required Banks with respect to any act or action (including failure to act) in connection with this Agreement or any other Credit Document, the Agent shall be entitled to refrain from such act or taking such action unless and until the Agent shall have received instructions from the Required Banks; and the Agent shall not incur liability to any Bank by reason of so refraining. Without limiting the foregoing, no Bank or the holder of any Note shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting hereunder or under any other Credit Document in accordance with the instructions of the Required Banks. 12.05 RELIANCE. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cablegram, radiogram, order or other document or telephone message signed, -94- sent or made by any Person that the Agent believed to be the proper Person, and, with respect to all legal matters pertaining to this Agreement and any other Credit Document and its duties hereunder and thereunder, upon advice of counsel selected by the Agent. 12.06 INDEMNIFICATION. To the extent the Agent is not reimbursed and indemnified by the Credit Parties, the Banks will reimburse and indemnify the Agent in proportion to their respective "percentage" as used in determining the Required Banks (determined as if there were no Defaulting Banks) for and against any and all liabilities, obligations, losses, damages, penalties, claims, actions, judgments, costs, expenses or disbursements of whatsoever kind or nature which may be imposed on, asserted against or incurred by the Agent in performing its duties hereunder or under any other Credit Document or in any way relating to or arising out of this Agreement or any other Credit Document; PROVIDED that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent resulting from the Agent's gross negligence or willful misconduct (as finally determined by a court of competent jurisdiction. 12.07 THE AGENT IN ITS INDIVIDUAL CAPACITY. With respect to its obligation to make Loans, or issue or participate in Letters of Credit, under this Agreement, the Agent shall have the rights and powers specified herein for a "Bank" and may exercise the same rights and powers as though it were not performing the duties specified herein; and the term "Banks," "Required Banks," "Supermajority Banks", "holders of Notes" or any similar terms shall, unless the context clearly otherwise indicates, include the Agent in its respective individual capacities. The Agent and its affiliates may accept deposits from, lend money to, and generally engage in any kind of banking, investment banking, trust or other business with, or provide debt financing, equity capital or other services (including financial advisory services) to, any Credit Party or any Affiliate of any Credit Party (or any Person engaged in a similar business with any Credit Party or any Affiliate thereof) as if they were not performing the duties specified herein, and may accept fees and other consideration from any Credit Party or any Affiliate of any Credit Party for services in connection with this Agreement and otherwise without having to account for the same to the Banks. 12.08 HOLDERS. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment, transfer or endorsement thereof, as the case may be, shall have been filed with the Agent. Any request, authority or consent of any Person who, at the time of making such request or giving such authority or consent, is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee, assignee or indorsee, as the case may be, of such Note or of any Note or Notes issued in exchange therefor. 12.09 RESIGNATION BY THE AGENT. (a) The Agent may resign from the performance of all its respective functions and duties hereunder and/or under the other Credit Documents at any time by giving 15 Business Days' prior written notice to the Borrower and the Banks. Such resignation shall take effect upon the appointment of a successor Agent pursuant to clauses (b) and (c) below or as otherwise provided below. -95- (b) Upon any such notice of resignation by the Agent, the Required Banks shall appoint a successor Agent hereunder or thereunder who shall be a commercial bank or trust company reasonably acceptable to the Borrower. (c) If a successor Agent shall not have been so appointed within such 15 Business Day period, the Agent with the consent of the Borrower (which consent shall not be unreasonably withheld or delayed), shall then appoint a successor Agent who shall serve as Agent hereunder or thereunder until such time, if any, as the Required Banks appoint a successor Agent as provided above. (d) If no successor Agent has been appointed pursuant to clause (b) or (c) above by the 20th Business Day after the date such notice of resignation was given by the Agent, the Agent's resignation shall become effective and the Required Banks shall thereafter perform all the duties of the Agent hereunder and/or under any other Credit Document until such time, if any, as the Required Banks appoint a successor Agent as provided above. SECTION 13. MISCELLANEOUS. 13.01 PAYMENT OF EXPENSES, ETC. The Borrower shall: (i) whether or not the transactions herein contemplated are consummated, pay all reasonable out-of-pocket costs and expenses of the Agent (including, without limitation, the reasonable fees and disbursements of White & Case LLP and of the Agent's local counsel and consultants) in connection with the preparation, execution and delivery of this Agreement and the other Credit Documents and the documents and instruments referred to herein and therein and any amendment, waiver or consent relating hereto or thereto, of the Agent in connection with its syndication efforts with respect to this Agreement and of the Agent and, after the occurrence of an Event of Default, each of the Banks in connection with the enforcement of this Agreement and the other Credit Documents and the documents and instruments referred to herein and therein or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or pursuant to any insolvency or bankruptcy proceedings (including, without limitation, in each case the reasonable fees and disbursements of counsel for the Agent and, after the occurrence of an Event of Default, for each of the Banks); (ii) pay and hold each of the Banks harmless from and against any and all present and future stamp, excise and other similar documentary taxes with respect to the foregoing matters and save each of the Banks harmless from and against any and all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to such Bank) to pay such taxes; and (iii) indemnify the Agent and each Bank, and each of their respective officers, directors, employees, representatives and agents from and hold each of them harmless against any and all liabilities, obligations (including removal or remedial actions), losses, damages, penalties, claims, actions, judgments, suits, costs, expenses and disbursements (including reasonable attorneys' and consultants' fees and disbursements) incurred by, imposed on or assessed against any of them as a result of, or arising out of, or in any way related to, or by reason of, (a) any investigation, litigation or other proceeding (whether or not the Agent or any Bank is a party thereto and whether or not such investigation, litigation or other proceeding is brought by or on behalf of any Credit Party) related to the entering into and/or performance of this Agreement or any other Credit Document or the use of any Letter of Credit or the proceeds of any Loans hereunder or the consummation of the -96- Transaction or any other transactions contemplated herein or in any other Credit Document or the exercise of any of their rights or remedies provided herein or in the other Credit Documents, or (b) the actual or alleged presence of Hazardous Materials in the air, surface water or groundwater or on the surface or subsurface of any Real Property owned or at any time operated by Holdings or any of its Subsidiaries, the generation, storage, transportation, handling or disposal of Hazardous Materials by Holdings or any of its Subsidiaries at any location, whether or not owned or operated by Holdings or any of its Subsidiaries, the non-compliance of any Real Property with any Environmental Law (including applicable permits thereunder) applicable to any Real Property, or any Environmental Claim asserted against Holdings, any of its Subsidiaries or any Real Property owned or at any time operated by Holdings or any of its Subsidiaries, including, in each case, without limitation, the reasonable fees and disbursements of counsel and other consultants incurred in connection with any such investigation, litigation or other proceeding (but excluding, in each case, any losses, liabilities, claims, damages or expenses to the extent incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified (as finally determined by a court of competent jurisdiction). To the extent that the undertaking to indemnify, pay or hold harmless the Agent or any Bank set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Borrower shall make the maximum contribution to the payment and satisfaction of each of the indemnified liabilities which is permissible under applicable law. 13.02 RIGHT OF SETOFF. (a) In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence and during the continuance of an Event of Default, the Agent and each Bank is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to any Credit Party or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any other Indebtedness at any time held or owing by the Agent or such Bank (including, without limitation, by branches and agencies of such Bank wherever located) to or for the credit or the account of any Credit Party against and on account of the Obligations and liabilities of the Credit Parties to the Agent or such Bank under this Agreement or under any of the other Credit Documents, including, without limitation, all interests in Obligations purchased by such Bank pursuant to Section 13.06(b), and all other claims of any nature or description arising out of or connected with this Agreement or any other Credit Document, irrespective of whether or not the Agent or such Bank shall have made any demand hereunder and although said Obligations, liabilities or claims, or any of them, shall be contingent or unmatured. (b) NOTWITHSTANDING THE FOREGOING SUBSECTION (a), AT ANY TIME THAT THE LOANS OR ANY OTHER OBLIGATION SHALL BE SECURED BY REAL PROPERTY LOCATED IN CALIFORNIA, NO BANK SHALL EXERCISE A RIGHT OF SETOFF, BANKER'S LIEN OR COUNTERCLAIM OR TAKE ANY COURT OR ADMINISTRATIVE ACTION OR INSTITUTE ANY PROCEEDING TO ENFORCE ANY PROVISION OF THIS AGREEMENT OR ANY NOTE THAT IS NOT TAKEN BY THE REQUIRED BANKS OR APPROVED IN WRITING BY THE AGENT OR THE REQUIRED BANKS IF SUCH SETOFF OR ACTION OR PROCEEDING WOULD OR MIGHT (PURSUANT TO SECTIONS 580a, 580b, 580d AND 726 OF THE CALIFORNIA CODE OF CIVIL PROCEDURE OR SECTION 2924 OF THE CALIFORNIA CIVIL CODE, IF -97- APPLICABLE, OR OTHERWISE) AFFECT OR IMPAIR THE VALIDITY, PRIORITY OR ENFORCEABILITY OF THE LIENS GRANTED TO THE COLLATERAL AGENT PURSUANT TO THE SECURITY DOCUMENTS OR THE ENFORCEABILITY OF THE NOTES AND OTHER OBLIGATIONS HEREUNDER, AND ANY ATTEMPTED EXERCISE BY ANY BANK OF ANY SUCH RIGHT WITHOUT OBTAINING SUCH CONSENT OF THE REQUIRED BANKS SHALL BE NULL AND VOID. THIS SUBSECTION (b) SHALL BE SOLELY FOR THE BENEFIT OF EACH OF THE BANKS HEREUNDER AND MAY BE AMENDED, MODIFIED OR WAIVED IN ANY RESPECT BY THE REQUIRED BANKS WITHOUT THE REQUIREMENT OF PRIOR NOTICE TO OR CONSENT BY ANY CREDIT PARTY AND DOES NOT CONSTITUTE A WAIVER OF ANY RIGHTS AGAINST ANY CREDIT PARTY OR AGAINST ANY COLLATERAL. 13.03 NOTICES. Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, telecopier or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered: if to any Credit Party, at the address specified opposite its signature below or in the other relevant Credit Documents; if to the Bank, at its address specified on Schedule II; and if to the Agent, at the Notice Office; or, as to any Credit Party or the Agent, at such other address as shall be designated by such party in a written notice to the other parties hereto and, as to each Bank, at such other address as shall be designated by such Bank in a written notice to the Borrower and the Agent. All such notices and communications shall, when mailed, telegraphed, telexed, telecopied, or cabled or sent by overnight courier, be effective when deposited in the mails, delivered to the telegraph company, cable company or overnight courier, as the case may be, or sent by telex or telecopier, except that notices and communications to the Agent and the Borrower shall not be effective until received by the Agent or the Borrower, as the case may be. 13.04 BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS. (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto; PROVIDED, HOWEVER, the Borrower may not assign or transfer any of its rights, obligations or interest hereunder without the prior written consent of the Banks and, PROVIDED FURTHER, that, although any Bank may transfer, assign or grant participations in its rights hereunder, such Bank shall remain a "Bank" for all purposes hereunder (and may not transfer or assign all or any portion of its Commitments hereunder except as provided in Sections 1.13 and 13.04(b)) and the transferee, assignee or participant, as the case may be, shall not constitute a "Bank" hereunder and, PROVIDED FURTHER, that no Bank shall transfer or grant any participation under which the participant shall have rights to approve any amendment to or waiver of this Agreement or any other Credit Document except to the extent such amendment or waiver would (i) extend the final scheduled maturity of any Loan, Note or Letter of Credit (unless such Letter of Credit is not extended beyond the Final Maturity Date) in which such participant is participating, or reduce the rate or extend the time of payment of interest or Fees thereon (except in connection with a waiver of applicability of any post-default increase in interest rates) (it being understood that any amendment or modification to the financial definitions in this Agreement or to Section 13.07(a) shall not constitute a reduction in the rate of interest or Fees for the purposes of this clause (i)) or reduce the principal amount thereof, or increase the amount of the participant's participation over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default or of a mandatory reduction in the Total Commitment, shall not -98- constitute a change in the terms of such participation, and that an increase in any Commitment or Loan shall be permitted without the consent of any participant if the participant's participation is not increased as a result thereof), (ii) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement or (iii) release all or substantially all of the Collateral under all of the Security Documents (except as expressly provided in the Credit Documents) supporting the Loans hereunder in which such participant is participating. In the case of any such participation, the participant shall not have any rights under this Agreement or any of the other Credit Documents (the participant's rights against such Bank in respect of such participation to be those set forth in the agreement executed by such Bank in favor of the participant relating thereto) and all amounts payable by the Borrower hereunder shall be determined as if such Bank had not sold such participation. (b) Notwithstanding the foregoing, any Bank (or any Bank together with one or more other Banks) may (x) assign all or a portion of its Commitments and related outstanding Obligations (or, if the Commitments with respect to the relevant Tranche have terminated, outstanding Obligations) hereunder to (i) its parent company and/or any affiliate of such Bank which is at least 50% owned by such Bank or its parent company or to one or more Banks or (ii) in the case of any Bank that is a fund that invests in loans, any other fund that invests in loans and is managed or advised by the same investment advisor of such Bank or by an Affiliate of such investment advisor or (y) assign all, or if less than all, a portion equal to at least $5,000,000 in the aggregate for the assigning Bank or assigning Banks, of such Commitments and related outstanding Obligations (or, if the Commitments with respect to the relevant Tranche have terminated, outstanding Obligations) hereunder to one or more Eligible Transferees (treating any fund that invests in loans and any other fund that invests in loans and is managed by the same investment advisor of such fund or by an Affiliate of such investment advisor as a single Eligible Transferee), each of which assignees shall become a party to this Agreement as a Bank by execution of an Assignment and Assumption Agreement, PROVIDED that, (i) at such time Schedule I shall be deemed modified to reflect the Commitments and/or outstanding Loans, as the case may be, of such new Bank and of the existing Banks, (ii) upon the surrender of the relevant Notes by the assigning Bank (or, upon such assigning Bank's indemnifying the Borrower for any lost Note pursuant to a customary indemnification agreement) new Notes will be issued, at the Borrower's expense, to such new Bank and to the assigning Bank upon the request of such new Bank or assigning Bank, such new Notes to be in conformity with the requirements of Section 1.05 (with appropriate modifications) to the extent needed to reflect the revised Commitments and/or outstanding Loans, as the case may be, (iii) the consent of the Agent shall be required in connection with any assignment to an Eligible Transferee pursuant to clause (y) above (which consent shall not be unreasonably withheld or delayed), (iv) the Agent shall receive at the time of each such assignment, from the assigning or assignee Bank, the payment of a non-refundable assignment fee of $3,500 and (v) no such transfer or assignment will be effective until recorded by the Agent on the Register pursuant to Section 13.15. To the extent of any assignment pursuant to this Section 13.04(b), the assigning Bank shall be relieved of its obligations hereunder with respect to its assigned Commitments and outstanding Loans. (c) Nothing in this Agreement shall prevent or prohibit any Bank from pledging its Loans and Notes hereunder to a Federal Reserve Bank in support of borrowings made by such Bank from such Federal Reserve Bank and, with the consent of the Agent, any Bank which is a -99- fund may pledge all or any portion of its Loans and Notes to its trustee in support of its obligations to its trustee. No pledge pursuant to this clause (c) shall release the transferor Bank from any of its obligations hereunder. 13.05 NO WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of the Agent, the Collateral Agent, the Issuing Bank or any Bank in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between the Borrower or any other Credit Party and the Agent, the Collateral Agent, the Issuing Bank or any Bank shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights, powers and remedies herein or in any other Credit Document expressly provided are cumulative and not exclusive of any rights, powers or remedies which the Agent, the Collateral Agent, the Issuing Bank or any Bank would otherwise have. No notice to or demand on any Credit Party in any case shall entitle any Credit Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Agent, the Collateral Agent, the Issuing Bank or any Bank to any other or further action in any circumstances without notice or demand. 13.06 PAYMENTS PRO RATA. (a) Except as otherwise provided in this Agreement, the Agent agrees that promptly after its receipt of each payment from or on behalf of the Borrower in respect of any Obligations hereunder, it shall distribute such payment to the Banks (other than any Bank that has consented in writing to waive its PRO RATA share of any such payment) PRO RATA based upon their respective shares, if any, of the Obligations with respect to which such payment was received. (b) Each of the Banks agrees that, if it should receive any amount hereunder (whether by voluntary payment, by realization upon security, by the exercise of the right of setoff or banker's lien, by counterclaim or cross action, by the enforcement of any right under the Credit Documents, or otherwise), which is applicable to the payment of the principal of, or interest on, the Loans, Unpaid Drawings, Commitment Commission or Letter of Credit Fees, of a sum which with respect to the related sum or sums received by other Banks is in a greater proportion than the total of such Obligation then owed and due to such Bank bears to the total of such Obligation then owed and due to all of the Banks immediately prior to such receipt, then such Bank receiving such excess payment shall purchase for cash without recourse or warranty from the other Banks an interest in the Obligations of the respective Credit Party to such Banks in such amount as shall result in a proportional participation by all the Banks in such amount; PROVIDED that if all or any portion of such excess amount is thereafter recovered from such Bank, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. (c) Notwithstanding anything to the contrary contained herein, the provisions of the preceding Sections 13.06(a) and (b) shall be subject to the express provisions of this Agreement which require, or permit, differing payments to be made to Non-Defaulting Banks as opposed to Defaulting Banks. 13.07 CALCULATIONS; COMPUTATIONS; ACCOUNTING TERMS. (a) The financial statements to be furnished to the Banks pursuant hereto shall be made and prepared in accordance -100- with generally accepted accounting principles in the United States consistently applied throughout the periods involved (except as set forth in the notes thereto or as otherwise disclosed in writing by the Borrower to the Banks); PROVIDED that, except as otherwise specifically provided herein, all computations of Excess Cash Flow, the Applicable Base Rate Margin and the Applicable Eurodollar Margin, and all computations and all definitions used in determining compliance with Sections 9.07 through 9.09, inclusive, shall utilize accounting principles and policies in conformity with those used to prepare the historical financial statements of the Borrower referred to in Section 7.05(a). (b) All computations of interest, Commitment Commission and other Fees hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day; except that in the case of Letter of Credit Fees, the last day shall be included) occurring in the period for which such interest, Commitment Commission or Fees are payable. 13.08 GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER OF JURY TRIAL. (a) THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL, EXCEPT AS OTHERWISE PROVIDED IN THE MORTGAGES, BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT, EACH OF HOLDINGS AND THE BORROWER HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. EACH OF HOLDINGS AND THE BORROWER HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH COURTS LACK PERSONAL JURISDICTION OVER SUCH CREDIT PARTY, AND AGREES NOT TO PLEAD OR CLAIM, IN ANY LEGAL ACTION PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENTS BROUGHT IN ANY OF THE AFOREMENTIONED COURTS, THAT SUCH COURTS LACK PERSONAL JURISDICTION OVER SUCH CREDIT PARTY. EACH OF HOLDINGS AND THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH CREDIT PARTY AT ITS ADDRESS SET FORTH OPPOSITE ITS SIGNATURE BELOW, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. EACH OF HOLDINGS AND THE BORROWER HEREBY IRREVOCABLY WAIVES ANY OBJECTION TO SUCH SERVICE OF PROCESS AND FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY ACTION OR PROCEEDING COMMENCED HEREUNDER OR UNDER ANY OTHER CREDIT DOCUMENT THAT SERVICE OF PROCESS WAS IN ANY WAY INVALID OR INEFFECTIVE. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE AGENT, ANY BANK OR THE HOLDER OF ANY NOTE TO SERVE PROCESS IN -101- ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST HOLDINGS OR THE BORROWER IN ANY OTHER JURISDICTION. (b) EACH OF HOLDINGS AND THE BORROWER HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (a) ABOVE AND HEREBY FURTHER IRREVOCABLY, TO THE EXTENT PERMITTED BY APPLICABLE LAW, WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. (c) EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 13.09 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with the Borrower and the Agent. 13.10 EFFECTIVENESS. This Agreement shall become effective on the date (the "Restatement Effective Date") on which (i) Holdings, the Borrower, the Agent and each of the Banks shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered the same to the Agent at the Notice Office or, in the case of the Banks, shall have given to the Agent telephonic (confirmed in writing), written or telex notice (actually received) at such office that the same has been signed and mailed to it and (ii) the conditions contained in Section 5 are met to the satisfaction of the Agent and the Required Banks. Unless the Agent has received actual notice from any Bank that the conditions described in clause (ii) of the preceding sentence have not been met to its satisfaction, upon the satisfaction of the condition described in clause (i) of the immediately preceding sentence and upon the Agent's good faith determination that the conditions described in clause (ii) of the immediately preceding sentence have been met, then the Restatement Effective Date shall have deemed to have occurred, regardless of any subsequent determination that one or more of the conditions thereto had not been met (although the occurrence of the Restatement Effective Date shall not release the Borrower or any other Credit Party from any liability for failure to satisfy one or more of the applicable conditions contained in Section 5). The Agent will give Holdings, the Borrower and each Bank prompt written notice of the occurrence of the Restatement Effective Date. -102- 13.11 HEADINGS DESCRIPTIVE. The headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 13.12 AMENDMENT OR WAIVER; ETC. (a) Neither this Agreement nor any other Credit Document nor any terms hereof or thereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the respective Credit Parties party thereto and the Required Banks, PROVIDED that no such change, waiver, discharge or termination shall, without the consent of each Bank (other than a Defaulting Bank) (with Obligations being directly affected in the case of following clause (i)), (i) extend the final scheduled maturity of any Loan or Note or extend the stated expiration date of any Letter of Credit beyond the Final Maturity Date, or reduce the rate or extend the time of payment of interest or Fees thereon or reduce the principal amount thereof (except to the extent repaid in cash) (it being understood that any amendment or modification to the financial definitions in this Agreement or to Section 13.07(a) shall not constitute a reduction in the rate of interest or Fees for the purposes of this clause (i)), (ii) release all or substantially all of the Collateral (except as expressly provided in the Credit Documents) under all the Security Documents, (iii) amend, modify or waive any provision of this Section 13.12 to the extent that any such amendment or modification would alter any of the voting provisions set forth in the other provisions of this Section 13.12, (iv) reduce the percentage specified in the definition of Required Banks (it being understood that, with the consent of the Required Banks, additional extensions of credit pursuant to this Agreement may be included in the determination of the Required Banks on substantially the same basis as the extensions of Term Loan Commitments and Revolving Loan Commitments are included on the Restatement Effective Date) or (v) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement; PROVIDED FURTHER, that no such change, waiver, discharge or termination shall (u) increase the Commitments of any Bank over the amount thereof then in effect without the consent of such Bank (it being understood that waivers or modifications of conditions precedent, covenants, Defaults or Events of Default or of a mandatory reduction in the Total Commitment shall not constitute an increase of the Commitment of any Bank, and that an increase in the available portion of the Commitment of any Bank shall not constitute an increase of the Commitment of such Bank), (v) without the consent of the Issuing Bank, amend, modify or waive any provision of Section 2 or alter its rights or obligations with respect to Letters of Credit, (w) without the consent of the Swingline Bank, alter the Swingline Bank's rights or obligations with respect to Swingline Loans, (x) without the consent of the Agent, amend, modify or waive any provision of Section 12 or any other provision as same relates to the rights or obligations of the Agent, (y) without the consent of the Collateral Agent, amend, modify or waive any provision relating to the rights or obligations of the Collateral Agent or (z) without the consent of the Supermajority Banks, reduce the amount of, or extend the date of, any Scheduled Repayment, or amend the definition of Supermajority Banks (it being understood that, with the consent of the Required Banks, additional extensions of credit pursuant to this Agreement may be included in the determination of the Supermajority Banks on substantially the same basis as the extensions of Term Loan Commitments and Revolving Loan Commitments are included on the Restatement Effective Date). (b) If, in connection with any proposed change, waiver, discharge or termination to any of the provisions of this Agreement as contemplated by clauses (i) through (v), inclusive, of -103- the first proviso to Section 13.12(a), the consent of the Required Banks is obtained but the consent of one or more of such other Banks whose consent is required is not obtained, then the Borrower shall have the right, so long as all non-consenting Banks whose individual consent is required are treated as described in either clauses (A) or (B) below, to either (A) replace each such non-consenting Bank or Banks with one or more Replacement Banks pursuant to Section 1.13 so long as at the time of such replacement, each such Replacement Bank consents to the proposed change, waiver, discharge or termination or (B) terminate such non-consenting Bank's Commitments and/or repay each Tranche of outstanding Loans of such Bank in accordance with Sections 3.02(b) and/or 4.01(b), PROVIDED that, unless the Commitments that are terminated, and Loans repaid, pursuant to preceding clause (B) are immediately replaced in full at such time through the addition of new Banks or the increase of the Commitments and/or outstanding Loans of existing Banks (who in each case must specifically consent thereto), then in the case of any action pursuant to preceding clause (B) the Required Banks (determined before giving effect to the proposed action) shall specifically consent thereto, PROVIDED FURTHER, that in any event the Borrower shall not have the right to replace a Bank, terminate its Commitments or repay its Loans solely as a result of the exercise of such Bank's rights (and the withholding of any required consent by such Bank) pursuant to the second proviso to Section 13.12(a). 13.13 SURVIVAL. All indemnities set forth herein including, without limitation, in Sections 1.10, 1.11, 2.06, 4.04, 12.06 and 13.01 shall survive the execution, delivery and termination of this Agreement and the Notes and the making and repayment of the Obligations. 13.14 DOMICILE OF LOANS. Each Bank may transfer and carry its Loans at, to or for the account of any office, Subsidiary or Affiliate of such Bank. Notwithstanding anything to the contrary contained herein, to the extent that a transfer of Loans pursuant to this Section 13.14 would, at the time of such transfer, result in increased costs under Section 1.10, 2.06 or 4.04 from those being charged by the respective Bank prior to such transfer, then the Borrower shall not be obligated to pay such increased costs (although the Borrower shall be obligated to pay any other increased costs of the type described above resulting from changes after the date of the respective transfer). 13.15 REGISTER. The Borrower hereby designates the Agent to serve as the Borrower's agent, solely for purposes of this Section 13.15, to maintain a register (the "Register") on which it will record the Commitments from time to time of each of the Banks, the Loans made by each of the Banks and each repayment in respect of the principal amount of the Loans of each Bank. Failure to make any such recordation, or any error in such recordation shall not affect the Borrower's obligations in respect of such Loans. With respect to any Bank, the transfer of the Commitments of such Bank and the rights to the principal of, and interest on, any Loan made pursuant to such Commitments shall not be effective until such transfer is recorded on the Register maintained by the Agent with respect to ownership of such Commitments and Loans and prior to such recordation all amounts owing to the transferor with respect to such Commitments and Loans shall remain owing to the transferor. The registration of assignment or transfer of all or part of any Commitments and Loans shall be recorded by the Agent on the Register only upon the acceptance by the Agent of a properly executed and delivered Assignment and Assumption Agreement pursuant to Section 13.04(b). Coincident with the delivery of such an Assignment and Assumption Agreement to the Agent for acceptance and registration of -104- assignment or transfer of all or part of a Loan, or as soon thereafter as practicable, the assigning or transferor Bank shall surrender the Note evidencing such Loan, and thereupon one or more new Notes in the same aggregate principal amount shall be issued to the assigning or transferor Bank and/or the new Bank. The Borrower agrees to indemnify the Agent from and against any and all losses, claims, damages and liabilities of whatsoever nature which may be imposed on, asserted against or incurred by the Agent in performing its duties under this Section 13.15. 13.16 CONFIDENTIALITY. (a) Subject to the provisions of clause (b) of this Section 13.16, the Agent, the Collateral Agent and each Bank agrees that it will use its reasonable efforts not to disclose without the prior consent of the Borrower (other than to its employees, auditors, advisors or counsel or to another Bank if the Bank or such Bank's holding or parent company in its sole discretion determines that any such party should have access to such information, provided such Persons shall be subject to the provisions of this Section 13.16 to the same extent as such Bank) any information with respect to Holdings or any of its Subsidiaries which is now or in the future furnished pursuant to this Agreement or any other Credit Document and which is designated by the Borrower to the Agent, the Collateral Agent and the Banks in writing as confidential, PROVIDED that the Agent, the Collateral Agent and any Bank may disclose any such information (i) as has become generally available to the public other than by virtue of a breach of this Section 13.16(a) by the Agent, the Collateral Agent or respective Bank, (ii) as may be required or appropriate in any report, statement or testimony submitted to any municipal, state or Federal regulatory body having or claiming to have jurisdiction over the Agent, the Collateral Agent or such Bank or to the Federal Reserve Board or the Federal Deposit Insurance Corporation or similar organizations (whether in the United States or elsewhere) or their successors, (iii) as may be required or appropriate in respect to any summons or subpoena or in connection with any litigation, (iv) in order to comply with any law, order, regulation or ruling applicable to the Agent, the Collateral Agent or such Bank, (v) in the case of any Bank, to the Agent or the Collateral Agent and (vi) to any prospective or actual transferee or participant in connection with any contemplated transfer or participation of any of the Notes or Commitments or any interest therein by such Bank, PROVIDED that such prospective transferee agrees to be bound by the confidentiality provisions contained in this Section 13.16. (b) Each of Holdings and the Borrower hereby acknowledges and agrees that the Agent and each Bank may share with any of its affiliates any information related to Holdings or any of its Subsidiaries (including, without limitation, any nonpublic customer information regarding the creditworthiness of Holdings and its Subsidiaries), provided such Persons shall be subject to the provisions of this Section 13.16 to the same extent as such Bank). 13.17 HOLDINGS MERGER. From and after the consummation of the Holdings Merger, the following provisions shall be applicable: (i) all references in this Agreement or in any other Credit Document to "Holdings and its Subsidiaries", "Holdings or any of its Subsidiaries", "Holdings or any Subsidiary of Holdings" and similar references shall instead be references to "the Borrower and its Subsidiaries", "the Borrower or any of its Subsidiaries", "the Borrower or any Subsidiary of the Borrower" and similar references, as to the context may require; -105- (ii) all references to "Holdings will", "Holding will not", "Holdings may" and similar references shall instead be references to "the Borrower will", "the Borrower will not", the Borrower may" and similar references, as the context may require; (iii) all financial reporting required to be made by Holdings shall instead be prepared and delivered by the comparable officer of the Borrower; (iv) all fiscal periods of Holdings shall instead relate to the respective fiscal periods of the Borrower; and (v) Sections 7.24(a), 8.12 and 9.13(b) and the proviso to Section 9.05(ii) shall no longer be applicable. SECTION 14. HOLDINGS GUARANTY. 14.01 GUARANTY. In order to induce the Agent, the Collateral Agent, the Issuing Bank and the Banks to enter into this Agreement and to extend credit hereunder, and to induce the other Guaranteed Creditors to enter into Interest Rate Protection Agreements or Other Hedging Agreements, and in recognition of the direct benefits to be received by Holdings from the proceeds of the Loans, the issuance of the Letters of Credit and the entering into of such Interest Rate Protection Agreements or Other Hedging Agreements, Holdings hereby agrees with the Guaranteed Creditors as follows: Holdings hereby unconditionally and irrevocably guarantees as primary obligor and not merely as surety the full and prompt payment when due, whether upon maturity, acceleration or otherwise, of any and all of the Guaranteed Obligations of the Borrower to the Guaranteed Creditors. If any or all of the Guaranteed Obligations of the Borrower to the Guaranteed Creditors becomes due and payable hereunder, Holdings unconditionally and irrevocably promises to pay such indebtedness to the Agent and/or the other Guaranteed Creditors, or order, on demand, together with any and all expenses which may be incurred by the Agent or the other Guaranteed Creditors in collecting any of the Guaranteed Obligations. If claim is ever made upon any Guaranteed Creditor for repayment or recovery of any amount or amounts received in payment or on account of any of the Guaranteed Obligations and any of the aforesaid payees repays all or part of said amount by reason of (i) any judgment, decree or order of any court or administrative body having jurisdiction over such payee or any of its property or (ii) any settlement or compromise of any such claim effected by such payee with any such claimant (including the Borrower), then and in such event Holdings agrees that any such judgment, decree, order, settlement or compromise shall be binding upon Holdings, notwithstanding any revocation of this Guaranty or other instrument evidencing any liability of the Borrower, and Holdings shall be and remain liable to the aforesaid payees hereunder for the amount so repaid or recovered to the same extent as if such amount had never originally been received by any such payee. 14.02 BANKRUPTCY. Additionally, Holdings unconditionally and irrevocably guarantees the payment of any and all of the Guaranteed Obligations of the Borrower to the Guaranteed Creditors whether or not due or payable by the Borrower upon the occurrence of any of the events specified in Section 10.05, and irrevocably and unconditionally promises to pay such indebtedness to the Guaranteed Creditors, or order, on demand, in lawful money of the United States. -106- 14.03 NATURE OF LIABILITY. The liability of Holdings hereunder is exclusive and independent of any security for or other guaranty of the Guaranteed Obligations of the Borrower whether executed by Holdings, any other guarantor or by any other party, and the liability of Holdings hereunder is not affected or impaired by (a) any direction as to application of payment by the Borrower or by any other party, or (b) any other continuing or other guaranty, undertaking or maximum liability of a guarantor or of any other party as to the Guaranteed Obligations of the Borrower, or (c) any payment on or in reduction of any such other guaranty or undertaking, or (d) any dissolution, termination or increase, decrease or change in personnel by the Borrower, or (e) any payment made to any Guaranteed Creditor on the Guaranteed Obligations which any such Guaranteed Creditor repays to the Borrower pursuant to court order in any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceeding, and Holdings waives any right to the deferral or modification of its obligations hereunder by reason of any such proceeding. 14.04 INDEPENDENT OBLIGATION. The obligations of Holdings hereunder are independent of the obligations of any other guarantor, any other party or the Borrower, and a separate action or actions may be brought and prosecuted against Holdings whether or not action is brought against any other guarantor, any other party or the Borrower and whether or not any other guarantor, any other party or the Borrower be joined in any such action or actions. Holdings waives, to the fullest extent permitted by law, the benefit of any statute of limitations affecting its liability hereunder or the enforcement thereof. Any payment by the Borrower or other circumstance which operates to toll any statute of limitations as to the Borrower shall operate to toll the statute of limitations as to Holdings. 14.05 AUTHORIZATION. Holdings authorizes the Guaranteed Creditors without notice or demand (except as shall be required by applicable statute and cannot be waived), and without affecting or impairing its liability hereunder, from time to time to: (a) change the manner, place or terms of payment of, and/or change or extend the time of payment of, renew, increase, accelerate or alter, any of the Guaranteed Obligations (including any increase or decrease in the rate of interest or fees thereon), any security therefor, or any liability incurred directly or indirectly in respect thereof, and the Guaranty herein made shall apply to the Guaranteed Obligations as so changed, extended, renewed or altered; (b) take and hold security for the payment of the Guaranteed Obligations and sell, exchange, release, impair, surrender, realize upon or otherwise deal with in any manner and in any order any property by whomsoever at any time pledged or mortgaged to secure, or howsoever securing, the Guaranteed Obligations or any liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset thereagainst; (c) exercise or refrain from exercising any rights against the Borrower, any other Credit Party or others or otherwise act or refrain from acting; (d) release or substitute any one or more endorsers, guarantors, the Borrower, other Credit Parties or other obligors; -107- (e) settle or compromise any of the Guaranteed Obligations, any security therefor or any liability (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and may subordinate the payment of all or any part thereof to the payment of any liability (whether due or not) of the Borrower to its creditors other than the Guaranteed Creditors; (f) apply any sums by whomsoever paid or howsoever realized to any liability or liabilities of the Borrower to the Guaranteed Creditors regardless of what liability or liabilities of the Borrower remain unpaid; (g) consent to or waive any breach of, or any act, omission or default under, this Agreement, any other Credit Document or any of the instruments or agreements referred to herein or therein, or otherwise amend, modify or supplement this Agreement, any other Credit Document or any of such other instruments or agreements; and/or (h) take any other action which would, under otherwise applicable principles of common law, give rise to a legal or equitable discharge of Holdings from its liabilities under this Guaranty. 14.06 RELIANCE. It is not necessary for any Guaranteed Creditor to inquire into the capacity or powers of Holdings or any of its Subsidiaries or the officers, directors, partners or agents acting or purporting to act on their behalf, and any Guaranteed Obligations made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. 14.07 SUBORDINATION. Any indebtedness of the Borrower now or hereafter owing to Holdings is hereby subordinated to the Guaranteed Obligations of the Borrower owing to the Guaranteed Creditors; and if the Agent so requests at a time when an Event of Default exists, all such indebtedness of the Borrower to Holdings shall be collected, enforced and received by Holdings for the benefit of the Guaranteed Creditors and be paid over to the Agent on behalf of the Guaranteed Creditors on account of the Guaranteed Obligations of the Borrower to the Guaranteed Creditors, but without affecting or impairing in any manner the liability of Holdings under the other provisions of this Guaranty. Nothing herein shall prevent the Borrower from making any payment with respect to any such indebtedness to Holdings unless an Event of Default then exists. Prior to the transfer by Holdings of any note or negotiable instrument evidencing any such indebtedness of the Borrower to Holdings, Holdings shall mark such note or negotiable instrument with a legend that the same is subject to this subordination. Without limiting the generality of the foregoing, Holdings hereby agrees with the Guaranteed Creditors that it will not exercise any right of subrogation which it may at any time otherwise have as a result of this Guaranty (whether contractual, under Section 509 of the Bankruptcy Code or otherwise) until all Guaranteed Obligations have been irrevocably paid in full in cash. 14.08 WAIVER. (a) Holdings waives any right (except as shall be required by applicable statute and cannot be waived) to require any Guaranteed Creditor to (i) proceed against the Borrower, any other guarantor or any other party, (ii) proceed against or exhaust any security held from the Borrower, any other guarantor or any other party or (iii) pursue any other remedy in any Guaranteed Creditor's power whatsoever. Holdings waives any defense based on or arising out of any defense of the Borrower, any other guarantor or any other party, other than -108- payment of the Guaranteed Obligations to the extent of such payment, based on or arising out of the disability of the Borrower, any other guarantor or any other party, or the validity, legality or unenforceability of the Guaranteed Obligations or any part thereof from any cause, or the cessation from any cause of the liability of the Borrower other than payment of the Guaranteed Obligations to the extent of such payment. The Guaranteed Creditors may, at their election, foreclose on any security held by the Agent, the Collateral Agent or any other Guaranteed Creditor by one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable (to the extent such sale is permitted by applicable law), or exercise any other right or remedy the Guaranteed Creditors may have against the Borrower or any other party, or any security, without affecting or impairing in any way the liability of Holdings hereunder except to the extent the Guaranteed Obligations have been paid. Holdings waives any defense arising out of any such election by the Guaranteed Creditors, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of Holdings against the Borrower or any other party or any security. (b) Holdings waives all presentments, demands for performance, protests and notices, including without limitation notices of nonperformance, notices of protest, notices of dishonor, notices of acceptance of this Guaranty, and notices of the existence, creation or incurring of new or additional Guaranteed Obligations. Holdings assumes all responsibility for being and keeping itself informed of the Borrower's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations and the nature, scope and extent of the risks which Holdings assumes and incurs hereunder, and agrees that the Agent and the Banks shall have no duty to advise Holdings of information known to them regarding such circumstances or risks. (c) Holdings hereby acknowledges and affirms that it understands that to the extent the Guaranteed Obligations are secured by Real Property located in California, Holdings shall be liable for the full amount of the liability hereunder notwithstanding the foreclosure on such Real Property by trustee sale or any other reason impairing Holdings' or any Guaranteed Creditor's right to proceed against the Borrower or any other guarantor of the Guaranteed Obligations. In accordance with Section 2856 of the California Civil Code, Holdings hereby waives: (i) all rights of subrogation, reimbursement, indemnification, and contribution and any other rights and defenses that are or may become available to Holdings by reason of Sections 2787 to 2855, inclusive, 2899 and 3433 of the California Civil Code; (ii) all rights and defenses that Holdings may have because the Guaranteed Obligations are secured by Real Property located in California. This means, among other things: (A) the Guaranteed Creditors may collect from Holdings without first foreclosing on any real or personal property collateral pledged by the Borrower or any other Credit Party; and (B) if the Guaranteed Creditors foreclose on any Real Property collateral pledged by the Borrower or any other Credit Party, (1) the amount of the Guaranteed Obligations may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price, and (2) the Guaranteed Creditors may collect from Holdings even if the Guaranteed Creditors, by -109- foreclosing on the Real Property collateral, have destroyed any right Holdings may have to collect from the Borrower. This is an unconditional and irrevocable waiver of any rights and defenses Holdings may have because the Guaranteed Obligations are secured by Real Property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d or 726 of the California Code of Civil Procedure; and (iii) all rights and defenses arising out of an election of remedies by the Guaranteed Creditors, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for the Guaranteed Obligations, has destroyed Holdings' rights of subrogation and reimbursement against the Borrower by the operation of Section 580d of the Code of Civil Procedure or otherwise. Holdings warrants and agrees that each of the waivers set forth above is made with full knowledge of its significance and consequences and that if any of such waivers are determined to be contrary to any applicable law or public policy, such waivers shall be effective only to the maximum extent permitted by law. 14.09 NATURE OF LIABILITY. It is the desire and intent of Holdings and the Guaranteed Creditors that this Guaranty shall be enforced against Holdings to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. If, however, and to the extent that, the obligations of Holdings under this Guaranty shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable state or federal law relating to fraudulent conveyances or transfers), then the amount of Holdings obligations under this Guaranty shall be deemed to be reduced and Holdings shall pay the maximum amount of the Guaranteed Obligations which would be permissible under applicable law. * * * -110- IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute and deliver this Agreement as of the date first above written. ADDRESS: c/o J.F. Lehman & Company, Inc. ELGAR HOLDINGS, INC. 450 Park Avenue, Sixth Floor New York, New York 10022 Attn:Donald Glickman By /s/ KEITH OSTER Telephone No.: (212) 634-0100 ------------------ Telecopier No.: (212) 634-1155 Title: and 9250 Brown Deer Road San Diego, California 92121 Attn: Chris Kelford Telephone No.: (619) 458-0204 Telecopier No.: (619) 458-0257 9250 Brown Deer Road ELGAR ELECTRONICS CORPORATION San Diego, California 92121 Attn: Chris Kelford Telephone No.: (619) 458-0204 By /s/ KEITH OSTER Telecopier No.: (619) 458-0257 ------------------ Title: and c/o J.F. Lehman & Company, Inc. 450 Park Avenue, Sixth Floor New York, New York 10022 Attn: Donald Glickman Telephone No.: (212) 634-0100 Telecopier No.: (212) 634-1155 BANKERS TRUST COMPANY, Individually and as Agent By /s/ ANDREW KEITH -------------------- Title: SCHEDULE 1 COMMITMENTS
Term Loan Revolving Loan Bank Commitment Commitment - ---- ---------- ---------- Bankers Trust Company $15,000,000 $15,000,000 ----------- ----------- TOTAL: $15,000,000 $15,000,000
EX-10.16 8 EXHIBIT 10.16 AMENDED AND RESTATED PLEDGE AGREEMENT AMENDED AND RESTATED PLEDGE AGREEMENT (as amended, modified or supplemented from time to time, this "Agreement"), dated as of February 3, 1998, and amended and restated as of May 29, 1998, made by each of the undersigned pledgors (each a "Pledgor" and, together with any other entity that becomes a pledgor hereunder pursuant to Section 24 hereof, the "Pledgors") to BANKERS TRUST COMPANY, as Collateral Agent (the "Pledgee"), for the benefit of the Secured Creditors (as defined below). Except as otherwise defined herein, capitalized terms used herein and defined in the Credit Agreement (as defined below) shall be used herein as therein defined. W I T N E S S E T H : WHEREAS, Elgar Holdings, Inc. ("Holdings"), Elgar Electronics Corporation (the "Borrower"), the lenders from time to time party thereto (the "Banks"), and Bankers Trust Company, as Agent (together with any successor agent, the "Agent"), have entered into an Amended and Restated Credit Agreement, dated as of February 3, 1998 and amended and restated as of May 29, 1998 (as amended, modified or supplemented from time to time, the "Credit Agreement"), providing for the making of Loans to, and the issuance of Letters of Credit for the account of, the Borrower as contemplated therein (the Banks, the Agent and the Pledgee are herein called the "Bank Creditors"); WHEREAS, the Borrower may at any time and from time to time enter into one or more Interest Rate Protection Agreements or Other Hedging Agreements with one or more Banks or any affiliate thereof (each such Bank or affiliate, even if the respective Bank subsequently ceases to be a Bank under the Credit Agreement for any reason, together with such Bank's or affiliate's successors and assigns, if any, collectively, the "Other Creditors," and together with the Bank Creditors, the "Secured Creditors"); WHEREAS, pursuant to the Subsidiaries Guaranty, each Subsidiary Guarantor has jointly and severally guarantied to the Secured Creditors the payment when due of all Guaranteed Obligations as described therein; WHEREAS, pursuant to the Holdings Guaranty, Holdings has guaranteed to the Secured Creditors the payment when due of all of the Guaranteed Obligations as described therein; WHEREAS, the Pledgee and the Pledgors (other than Power Ten) entered into the Pledge Agreement, dated as of February 3, 1998 (the "Original Pledge Agreement"), in connection with the Existing Credit Agreement; WHEREAS, it is a condition to the making of Loans to, and the issuance of Letters of Credit for the account of, the Borrower under the Credit Agreement that each Pledgor shall have executed and delivered to the Pledgee this Agreement; and WHEREAS, each Pledgor desires to enter into this Agreement in order to satisfy the condition described in the preceding paragraph and to amend and restate the Original Pledge Agreement in the form of this Agreement; NOW, THEREFORE, in consideration of the foregoing and other benefits accruing to each Pledgor, the receipt and sufficiency of which are hereby acknowledged, each Pledgor hereby makes the following representations and warranties to the Pledgee for the benefit of the Secured Creditors and hereby covenants and agrees with the Pledgee for the benefit of the Secured Creditors as follows: 1. SECURITY FOR OBLIGATIONS. This Agreement is made by each Pledgor for the benefit of the Secured Creditors to secure: (i) the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations and indebtedness (including, without limitation, indemnities, Fees and interest thereon) of such Pledgor to the Bank Creditors, whether now existing or hereafter incurred under, arising out of, or in connection with the Credit Agreement and the other Credit Documents to which such Pledgor is a party (including, in the case of each Guarantor, all such obligations and indebtedness of such Guarantor under its Guaranty) and the due performance and compliance by such Pledgor with all of the terms, conditions and agreements contained in the Credit Agreement and such other Credit Documents (all such obligations and liabilities under this clause (i), except to the extent consisting of obligations or indebtedness with respect to Interest Rate Protection Agreements or Other Hedging Agreements, being herein collectively called the "Credit Document Obligations"); (ii) the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations and liabilities owing by such Pledgor to the Other Creditors under, or with respect to (including by reason of such Pledgor's Guaranty), any Interest Rate Protection Agreement or Other Hedging Agreement, whether such Interest Rate Protection Agreement or Other Hedging Agreement is now in existence or hereafter arising, and the due performance and compliance by such Pledgor with all of the terms, conditions and agreements contained therein (all such obligations and liabilities described in this clause (ii) being herein collectively called the "Other Obligations"); (iii) any and all sums advanced by the Pledgee in order to preserve the Collateral (as hereinafter defined) or preserve its security interest in the Collateral; (iv) in the event of any proceeding for the collection or enforcement of any indebtedness, obligations or liabilities of such Pledgor referred to in clauses (i), (ii) and (iii) above, after an Event of Default (which term to mean and include any Event of Default under, and as defined in, the Credit Agreement or any payment default by the Borrower under any Interest Rate Protection Agreement or Other Hedging Agreement 2 and shall, in any event, include, without limitation, any payment default on any of the Obligations (as hereinafter defined)) shall have occurred and be continuing, the reasonable expenses of retaking, holding, preparing for sale or lease, selling or otherwise disposing of or realizing on the Collateral, or of any exercise by the Pledgee of its rights hereunder, together with reasonable attorneys' fees and court costs; and (v) all amounts paid by any Secured Creditor as to which such Secured Creditor has the right to reimbursement under Section 11 of this Agreement; all such obligations, liabilities, sums and expenses set forth in clauses (i) through (v) of this Section 1 being herein collectively called the "Obligations," it being acknowledged and agreed that the "Obligations" shall include extensions of credit of the types described above, whether outstanding on the date of this Agreement or extended from time to time after the date of this Agreement. 2. DEFINITION OF STOCK, NOTES, SECURITIES, PARTNERSHIP INTERESTS, ETC. (a) As used herein, (i) the term "Stock" shall mean all of the issued and outstanding shares of capital stock, and all warrants and options to purchase any such capital stock, of any corporation at any time owned by any Pledgor, provided that the term "Stock" shall not include more than 65% of the issued and outstanding capital stock of any Pledgor that is a foreign Subsidiary of the Borrower and also is not a Subsidiary Guarantor (including Elgar FSC), (ii) the term "Notes" shall mean any and all Intercompany Notes and all other promissory notes or other evidences of indebtedness from time to time issued to, or held by, any Pledgor and (iii) the term "Securities" shall mean all of the Stock and Notes. Each Pledgor represents and warrants, that on the date hereof, (A) the Stock held by such Pledgor consists of the number and type of shares of the stock of the corporations as described in Annex A hereto for such Pledgor, (B) such Stock constitutes that percentage of the issued and outstanding capital stock of the issuing corporation as is set forth in Annex A hereto, (C) the Notes held by such Pledgor consist of the promissory notes described in Annex B hereto for such Pledgor, (D) such Pledgor is the holder of record and sole beneficial owner of the Stock and the Notes held by such Pledgor and (E) such Pledgor owns no other Securities. (b) As used herein, the term "Partnership Interest" shall mean the entire partnership interests (whether general and/or limited partnership interests) at any time owned by each Pledgor in any Person (each a "Pledged Partnership"). Each Pledgor represents and warrants that, on the date hereof, (A) the Partnership Interests held by such Pledgor constitutes that percentage of the entire partnership interest of the respective Pledged Partnership as is set forth on Annex C hereto for such Pledgor and (B) such Pledgor owns no other Partnership Interests. Notwithstanding anything to the contrary contained in this Agreement, no Pledgor shall be required to pledge any Partnership Interest owned by such Pledgor in a Person that is not a Subsidiary of such Pledgor to the extent a pledge of such Partnership Interest would violate any provision of the partnership agreement pursuant to which such Partnership Interest is created. (c) All Stock at any time pledged or required to be pledged hereunder is hereinafter called the "Pledged Stock;" all Notes at any time pledged or required to be pledged 3 hereunder are hereinafter called the "Pledged Notes;" all Pledged Stock and Pledged Notes together are called the "Pledged Securities;" all Partnership Interests at any time pledged or required to be pledged hereunder are hereinafter called the "Pledged Partnership Interests", and the Pledged Securities and the Pledged Partnership Interests, together with all proceeds thereof, including any securities and moneys received and at the time held by the Pledgee hereunder, are hereinafter called the "Collateral." (d) Notwithstanding anything to the contrary contained in this Agreement (including certain of the representations and warranties in Section 16 hereof), no Pledgor shall be required to pledge any Notes hereunder with an outstanding principal amount of $50,000 or less, provided that no more than $100,000 in the aggregate of all such $50,000 or less Notes (including, for this purpose, any Instruments (as defined in the Security Agreement) not required to be delivered pursuant to the Security Agreement) shall be excluded from the delivery requirements under this Agreement. 3. PLEDGE OF SECURITIES, ETC. 3.1. PLEDGE. (a) To secure the Obligations of such Pledgor and for the purposes set forth in Section 1 hereof, each Pledgor hereby (i) grants to the Pledgee (and reconfirms its grant to the Pledgee under the Original Pledge Agreement of) a security interest in all of the Collateral owned by such Pledgor, (ii) pledges and deposits as security with the Pledgee, the Securities owned by such Pledgor on the date hereof, and delivers to the Pledgee certificates or instruments therefor, duly endorsed in blank by such Pledgor in the case of Notes and accompanied by undated stock powers duly executed in blank by such Pledgor (and accompanied by any transfer tax stamps required in connection with the pledge of such Securities) in the case of Stock, or such other instruments of transfer as are reasonably acceptable to the Pledgee, and without limitation of clause (i), grants to Pledgee a security interest in such Pledgor's Partnership Interests (and delivers any certificates or instruments evidencing such partnership interests, duly endorsed in blank) and all of such Pledgor's right, title and interest in each Pledged Partnership including, without limitation: (i) all of the capital thereof and its interest in all profits, losses, Partnership Assets (as defined below) and other distributions to which such Pledgor shall at any time be entitled in respect of any such Collateral; (ii) all other payments due or to become due to such Pledgor in respect of any such Collateral, whether under any partnership agreement or otherwise, whether as contractual obligations, damages, insurance proceeds or otherwise; (iii) all of its claims, rights, powers, privileges, authority, options, security interest, liens and remedies, if any, under any partnership or other agreement or at law or otherwise in respect of any such Collateral; (iv) all present and future claims, if any, of such Pledgor against any Pledged Partnership for moneys loaned or advanced, for services rendered or otherwise; 4 (v) all of such Pledgor's rights under any partnership agreement or at law to exercise and enforce every right, power, remedy, authority, option and privilege of such Pledgor relating to any Partnership Interest, including any power, if any, to terminate, cancel or modify any general or limited partnership agreement, to execute any instruments and to take any and all other action on behalf of and in the name of such Pledgor in respect of such Partnership Interest and any Pledged Partnership, to make determinations, to exercise any election (including, but not limited to, election of remedies) or option or to give or receive any notice, consent, amendment, waiver or approval, together with full power and authority to demand, receive, enforce, collect, or receipt for any of the foregoing or for any Partnership Asset, to enforce or execute any checks, or other instruments or orders, to file any claims and to take any action in connection with any of the foregoing; (vi) all other property hereafter delivered in substitution for or in addition to any of the foregoing, all certificates and instruments representing or evidencing such other property and all cash, securities, interest, dividends, distributions, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all thereof; and (vii) to the extent not otherwise included, all proceeds of any or all of the foregoing. (b) As used herein, the term "Partnership Assets" shall mean all assets, whether tangible or intangible and whether real, personal or mixed (including, without limitation, all partnership capital and interests in other partnerships), at any time owned by any Pledged Partnership or represented by any Partnership Interest. 3.2. SUBSEQUENTLY ACQUIRED SECURITIES AND/OR PARTNERSHIP INTERESTS. (a) If any Pledgor shall acquire (by purchase, stock dividend or otherwise) any additional Securities at any time or from time to time after the date hereof, such Pledgor will promptly thereafter deposit such Securities (or certificates or instruments representing such Securities) as security with the Pledgee and deliver to the Pledgee certificates or instruments therefor, duly endorsed in blank in the case of such Notes, and accompanied by undated stock powers duly executed in blank by such Pledgor (and accompanied by any transfer tax stamps required in connection with the pledge of such Securities) in the case of such Stock, or such other instruments of transfer as are reasonably acceptable to the Pledgee, and will promptly thereafter deliver to the Pledgee a certificate executed by a principal executive officer of such Pledgor describing such Securities and certifying that the same has been duly pledged with the Pledgee hereunder. (b) If any Pledgor shall acquire (by purchase, distribution or otherwise) any additional Partnership Interest at any time or from time to time after the date hereof, and, to the extent such Partnership Interest is certificated, such Pledgor shall forthwith deliver to the Pledgee certificates therefor, accompanied by such instruments of transfer as are acceptable to the Pledgee, and shall promptly thereafter deliver to the Pledgee a certificate executed by a principal executive officer of such Pledgor describing such Partnership Interest and certifying that the 5 same has been duly pledged with the Pledgee hereunder. 3.3. UNCERTIFICATED SECURITIES AND PARTNERSHIP INTERESTS. Notwithstanding anything to the contrary contained in Sections 3.1 and 3.2 hereof, if any Securities (whether now owned or hereafter acquired) or Partnership Interests are uncertificated securities, the relevant Pledgor shall promptly notify the Pledgee thereof, and shall promptly take all actions (to the extent not already taken) required to perfect the security interest of the Pledgee under applicable law (including, in any event, under the applicable provisions of the relevant UCC). Each Pledgor further agrees to take such actions as the Pledgee deems necessary or reasonably desirable to effect the foregoing and to permit the Pledgee to exercise any of its rights and remedies hereunder. 4. APPOINTMENT OF SUB-AGENTS; ENDORSEMENTS, ETC. If and to the extent necessary to enable the Pledgee to perfect its security interest in any of the Collateral or to exercise any of its remedies hereunder, the Pledgee shall have the right to appoint one or more sub-agents for the purpose of retaining physical possession of the Pledged Securities or Pledged Partnership Interests, which may be held (in the discretion of the Pledgee) in the name of the relevant Pledgor, endorsed or assigned in blank or in favor of the Pledgee or any nominee or nominees of the Pledgee or a sub-agent appointed by the Pledgee. 5. VOTING, ETC., WHILE NO EVENT OF DEFAULT. Unless and until there shall have occurred and be continuing an Event of Default, each Pledgor shall be entitled to exercise any and all (i) voting and other consensual rights pertaining to the Pledged Securities owned by it, and to give consents, waivers or ratifications in respect thereof, and (ii) voting, consent, administration, management and other rights and remedies under any partnership agreement or otherwise with respect to the Pledged Partnership Interests of such Pledgor; PROVIDED, that, in each case, no vote shall be cast or any consent, waiver or ratification given or any action taken or omitted to be taken which would violate or be inconsistent with any of the terms of this Agreement, the Credit Agreement, any other Credit Document or any Interest Rate Protection Agreement or Other Hedging Agreement (collectively, the "Secured Debt Agreements"), or which would have the effect of impairing the security interest of the Pledgee in the Collateral. All such rights of each Pledgor to vote and to give consents, waivers and ratifications shall cease in case an Event of Default has occurred and is continuing, and Section 7 hereof shall become applicable. 6. DIVIDENDS AND OTHER DISTRIBUTIONS. Unless and until there shall have occurred and be continuing an Event of Default, (i) all cash dividends and distributions payable in respect of the Pledged Stock and all payments in respect of the Pledged Notes shall be paid to the respective Pledgor and (ii) all cash distributions payable in respect of the Pledged Partnership Interests shall be paid to the respective Pledgor. The Pledgee shall be entitled to receive directly, and to retain as part of the Collateral: (i) all other or additional stock or other securities or partnership interests (other than cash) paid or distributed by way of dividend, distribution or otherwise in respect of the Collateral; 6 (ii) all other or additional stock or other securities or partnership interests paid or distributed in respect of the Collateral by way of merger, consolidation, conveyance of assets, liquidation, exchange of stock, stock-split, spin-off, split-up, reclassification, combination of shares or similar rearrangement; and (iii) all other property (other than cash) paid or distributed by way of dividend or distribution in respect of the Collateral. Nothing contained in this Section 6 shall limit or restrict in any way the Pledgee's right to receive proceeds of the Collateral in any form in accordance with Section 3 of this Agreement. All dividends, distributions or other payments which are received by any Pledgor contrary to the provisions of this Section 6 and Section 7 hereof shall be received in trust for the benefit of the Pledgee, shall be segregated from other property or funds of such Pledgor and shall be forthwith paid over to the Pledgee as Collateral in the same form as so received (with any necessary endorsement). 7. REMEDIES IN CASE OF DEFAULT OR EVENT OF DEFAULT. If there shall have occurred and be continuing an Event of Default, then and in every such case, the Pledgee shall be entitled to exercise all of the rights, powers and remedies (whether vested in it by this Agreement, any other Secured Debt Agreement or by law) for the protection and enforcement of its rights in respect of the Collateral, and the Pledgee shall be entitled to exercise all the rights and remedies of a secured party under the Uniform Commercial Code and also shall be entitled, without limitation, to exercise the following rights, which each Pledgor hereby agrees to be commercially reasonable: (a) to receive all amounts payable in respect of the Collateral otherwise payable under Section 6 hereof to the respective Pledgor; (b) to transfer all or any part of the Collateral into the Pledgee's name or the name of its nominee or nominees; (c) to accelerate any Pledged Note which may be accelerated in accordance with its terms, and take any other lawful action to collect upon any Pledged Note (including, without limitation, to make any demand for payment thereon); (d) to vote all or any part of the Pledged Stock or Pledged Partnership Interests (whether or not transferred into the name of the Pledgee) and give all consents, waivers and ratifications in respect of the Collateral and otherwise act with respect thereto as though it were the outright owner thereof (each Pledgor hereby irrevocably constituting and appointing the Pledgee the proxy and attorney-in-fact of such Pledgor, with full power of substitution to do so); and (e) at any time and from time to time to sell, assign and deliver, or grant options to purchase, all or any part of the Collateral, or any interest therein, at any public or private sale, without demand of performance, advertisement or notice of intention to sell or of the time or place of sale or adjournment thereof or to redeem or otherwise (all of which are hereby waived 7 by each Pledgor), for cash, on credit or for other property, for immediate or future delivery without any assumption of credit risk, and for such price or prices and on such terms as the Pledgee in its absolute discretion may determine, PROVIDED that at least 10 days' written notice of the time and place of any such sale shall be given to the respective Pledgor. The Pledgee shall not be obligated to make any such sale of Collateral regardless of whether any such notice of sale has theretofore been given. Each Pledgor hereby waives and releases to the fullest extent permitted by law any right or equity of redemption with respect to the Collateral, whether before or after sale hereunder, and all rights, if any, of marshalling the Collateral and any other security for the Obligations or otherwise. At any such sale, unless prohibited by applicable law, the Pledgee on behalf of the Secured Creditors may bid for and purchase all or any part of the Collateral so sold free from any such right or equity of redemption. Neither the Pledgee nor any other Secured Creditor shall be liable for failure to collect or realize upon any or all of the Collateral or for any delay in so doing nor shall any of them be under any obligation to take any action whatsoever with regard thereto. 8. REMEDIES, ETC., CUMULATIVE. Each and every right, power and remedy of the Pledgee provided for in this Agreement, or now or hereafter existing at law or in equity or by statute shall be cumulative and concurrent and shall be in addition to every other such right, power or remedy. The exercise or beginning of the exercise by the Pledgee or any other Secured Creditor of any one or more of the rights, powers or remedies provided for in this Agreement or in any other Secured Debt Agreement or now or hereafter existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by the Pledgee or any other Secured Creditor of all such other rights, powers or remedies, and no failure or delay on the part of the Pledgee or any other Secured Creditor to exercise any such right, power or remedy shall operate as a waiver thereof. No notice to or demand on any Pledgor in any case shall entitle it to any other or further notice or demand in similar or other circumstances or constitute a waiver of any of the rights of the Pledgee or any other Secured Creditor to any other or further action in any circumstances without notice or demand. The Secured Creditors (by their acceptance of the benefits of this Agreement) agree that this Agreement may be enforced only by the action of the Agent or the Pledgee, in each case acting upon the instructions of the Required Secured Creditors (as defined in the Security Agreement) and that no Secured Creditor, other than the Agent or the Pledgee, shall have any right individually to seek to enforce or to enforce this Agreement or to realize upon the security to be granted hereby, it being understood and agreed that such rights and remedies may be exercised by the Agent or the Pledgee or the holders of at least a majority of the outstanding Other Obligations, as the case may be, for the benefit of the Secured Creditors upon the terms of this Agreement. 9. APPLICATION OF PROCEEDS. (a) All moneys collected by the Pledgee upon any sale or other disposition of the Collateral pursuant to the terms of this Agreement, together with all other moneys received by the Pledgee hereunder, shall be applied in the manner provided in the Security Agreement. (b) It is understood and agreed that the Pledgors shall remain jointly and severally liable to the extent of any deficiency between the amount of the proceeds of the Collateral hereunder and the aggregate amount of the Obligations. 8 10. PURCHASERS OF COLLATERAL. Upon any sale of the Collateral by the Pledgee hereunder (whether by virtue of the power of sale herein granted, pursuant to judicial process or otherwise), the receipt of the Pledgee or the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Collateral so sold, and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Pledgee or such officer or be answerable in any way for the misapplication or nonapplication thereof. 11. INDEMNITY. Each Pledgor jointly and severally agrees (i) to indemnify and hold harmless the Pledgee in such capacity and each other Secured Creditor and their respective successors, assigns, employees, agents and servants (individually an "Indemnitee," and collectively the "Indemnitees") from and against any and all claims, demands, losses, judgments and liabilities (including liabilities for penalties) of whatsoever kind or nature, and (ii) to reimburse each Indemnitee for all costs and expenses, including reasonable attorneys' fees, in each case growing out of or resulting from this Agreement or the exercise by any Indemnitee of any right or remedy granted to it hereunder or under any other Secured Debt Agreement (but excluding any claims, demands, losses, judgments and liabilities or expenses to the extent incurred by reason of gross negligence or willful misconduct of such Indemnitee (as finally determined by a court of competent jurisdiction)). In no event shall the Pledgee be liable, in the absence of gross negligence or willful misconduct on its part (as finally determined by a court of competent jurisdiction), for any matter or thing in connection with this Agreement other than to account for monies actually received by it in accordance with the terms hereof. If and to the extent that the obligations of any Pledgor under this Section 11 are unenforceable for any reason, such Pledgor hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law. 12. PLEDGEE NOT BOUND. (a) Nothing herein shall be construed to make the Pledgee or any other Secured Creditor liable as a general partner or limited partner of any Pledged Partnership and the Pledgee or any other Secured Creditor by virtue of this Agreement or otherwise (except as referred to in the following sentence) shall not have any of the duties, obligations or liabilities of a general partner or limited partner of any Pledged Partnership. The parties hereto expressly agree that, unless the Pledgee shall become the absolute owner of a Pledged Partnership Interest pursuant hereto, this Agreement shall not be construed as creating a partnership or joint venture among the Pledgee, any other Secured Creditor and/or any Pledgor. (b) Except as provided in the last sentence of paragraph (a) of this Section, the Pledgee, by accepting this Agreement, did not intend to become a general partner or limited partner of any Pledged Partnership or otherwise be deemed to be a co-venturer with respect to any Pledgor or any Pledged Partnership either before or after an Event of Default shall have occurred. The Pledgee shall have only those powers set forth herein and shall assume none of the duties, obligations or liabilities of a general partner or limited partner of any Pledged Partnership or of any Pledgor. (c) The Pledgee shall not be obligated to perform or discharge any obligation of any Pledgor as a result of the security interest hereby effected. 9 (d) The acceptance by the Pledgee of this Agreement, with all the rights, powers, privileges and authority so created, shall not at any time or in any event obligate the Pledgee to appear in or defend any action or proceeding relating to the Collateral to which it is not a party, or to take any action hereunder or thereunder, or to expend any money or incur any expenses or perform or discharge any obligation, duty or liability under the Collateral. 13. FURTHER ASSURANCES; POWER-OF-ATTORNEY. (a) Each Pledgor agrees that it will join with the Pledgee in executing and, at such Pledgor's own expense, file and refile under the Uniform Commercial Code or other applicable law such financing statements, continuation statements and other documents in such offices as the Pledgee may reasonably deem necessary and wherever required by law in order to perfect and preserve the Pledgee's security interest in the Collateral and hereby authorizes the Pledgee to file financing statements and amendments thereto relative to all or any part of the Collateral without the signature of such Pledgor where permitted by law, and agrees to do such further acts and things and to execute and deliver to the Pledgee such additional conveyances, assignments, agreements and instruments as the Pledgee may reasonably require or deem necessary to carry into effect the purposes of this Agreement or to further assure and confirm unto the Pledgee its rights, powers and remedies hereunder. (b) Each Pledgor hereby appoints the Pledgee such Pledgor's attorney-in-fact, with full authority in the place and stead of such Pledgor and in the name of such Pledgor or otherwise, to act from time to time solely after the occurrence and during the continuance of an Event of Default in the Pledgee's reasonable discretion to take any action and to execute any instrument which the Pledgee may deem necessary or advisable to accomplish the purposes of this Agreement. 14. THE PLEDGEE AS AGENT. The Pledgee will hold in accordance with this Agreement all items of the Collateral at any time received under this Agreement. It is expressly understood and agreed by each Secured Creditor that by accepting the benefits of this Agreement each such Secured Creditor acknowledges and agrees that the obligations of the Pledgee as holder of the Collateral and interests therein and with respect to the disposition thereof, and otherwise under this Agreement, are only those expressly set forth in this Agreement. The Pledgee shall act hereunder on the terms and conditions set forth herein and in Section 12 of the Credit Agreement. 15. TRANSFER BY THE PLEDGORS. No Pledgor will sell or otherwise dispose of, grant any option with respect to, or mortgage, pledge or otherwise encumber any of the Collateral or any interest therein (except as may be permitted in accordance with the terms of the Credit Agreement). 16. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLEDGORS. Each Pledgor represents, warrants and covenants that (i) it is the legal, record and beneficial owner of all Pledged Securities and Pledged Partnership Interests pledged by it hereunder, subject to no Lien (except the Lien created by this Agreement and, in the case of Pledged Partnership Interests, other Permitted Liens); (ii) it has full power, authority and legal 10 right to pledge all the Pledged Securities and Pledged Partnership Interests pledged by it pursuant to this Agreement; (iii) this Agreement has been duly authorized, executed and delivered by such Pledgor and constitutes a legal, valid and binding obligation of such Pledgor enforceable in accordance with its terms except to the extent that the enforceability hereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law); (iv) except as have been obtained by the Pledgors as of the date hereof, no consent of any other party (including, without limitation, any stockholder, partner or creditor of such Pledgor or any of its Subsidiaries or any Pledged Partnership) and no consent, license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required to be obtained by such Pledgor in connection with the execution, delivery or performance of this Agreement, the validity or enforceability of this Agreement, the perfection or enforceability of the Pledgee's security interest in the Collateral or, except for compliance with or as may be required by applicable securities laws, the exercise by the Pledgee of any of its rights or remedies provided herein; (v) the execution, delivery and performance of this Agreement by such Pledgor will not violate any provision of any applicable law or regulation or of any order, judgment, writ, award or decree of any court, arbitrator or governmental authority, domestic or foreign, applicable to such Pledgor, or of the certificate of incorporation or by-laws (or equivalent organizational documents) of such Pledgor or of any securities issued by such Pledgor or any of its Subsidiaries, or of any mortgage, indenture, lease, deed of trust, loan agreement, credit agreement or other material contract, agreement or instrument or undertaking to which such Pledgor or any of its Subsidiaries is a party or which purports to be binding upon such Pledgor or any of its Subsidiaries or upon any of their respective assets and will not result in the creation or imposition of (or the obligation to create or impose) any lien or encumbrance on any of the assets of such Pledgor or any of its Subsidiaries except as contemplated by this Agreement; (vi) all the shares of Stock have been duly and validly issued, are fully paid and non-assessable and are subject to no options to purchase or similar rights; (vii) each of the Intercompany Notes constitutes, or when executed by the obligor thereof will constitute, the legal, valid and binding obligation of such obligor, enforceable in accordance with its terms except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law); (viii) the pledge, assignment and delivery to the Pledgee of the Securities (other than uncertificated securities) pursuant to this Agreement creates a valid and perfected first priority Lien in the Securities, and the proceeds thereof, subject to no other Lien or to any agreement purporting to grant to any third party a Lien on the property or assets of the Pledgor which would include the Securities; (ix) each such Pledged Partnership Interest has been validly acquired and is fully paid for (to the extent applicable) and is duly and validly pledged hereunder; (x) each general or limited partnership agreement delivered to the Pledgee is an original signed counterpart (or a copy thereof) of the complete and entire such partnership agreement in effect on the date hereof; (xi) each partnership agreement is the legal, valid and binding obligation of each Pledgor, enforceable in accordance with its terms; (xii) no Pledgor is in default in the payment of any portion of any mandatory capital contribution, if any, required to be made under any general or limited partnership agreement to which such Pledgor is a party, and no Pledgor is in violation of any other material provisions of any partnership 11 agreement to which such Pledgor is a party, or otherwise in default or violation thereunder; (xiii) no Pledged Partnership Interest is subject to any defense, offset or counterclaim, nor have any of the foregoing been asserted or alleged against such Pledgor by any Person with respect thereto; (xiv) the pledge and assignment of the Pledged Partnership Interests pursuant to this Agreement, together with the relevant filings or recordings under the UCC (which filings and recordings have been or will be made), creates a valid, perfected and continuing first priority security interest in such Partnership Interests and the proceeds thereof, subject to no prior lien or encumbrance or to any agreement purporting to grant to any third party a lien or encumbrance on the property or assets of such Pledgor which would include the Collateral; (xv) there are no currently effective financing statements under the UCC covering any property which is now or hereafter may be included in the Collateral and such Pledgor will not, without the prior written consent of the Pledgee, execute and, until the Termination Date (as hereinafter defined), there will not ever be on file in any public office any enforceable financing statement or statements covering any or all of the Collateral, except financing statements filed or to be filed in favor of the Pledgee as secured party; (xvi) each Pledgor shall give the Pledgee prompt notice of any written claim it receives relating to the Collateral; (xvii) each Pledgor shall deliver to the Pledgee a copy of each other demand, notice or document received by it which may adversely affect the Pledgee's interest in the Collateral promptly upon, but in any event within 10 days after, such Pledgor's receipt thereof; (xviii) a notice in the form set forth in Annex D attached hereto and by this reference made a part hereof (such notice the "Partnership Notice"), appropriately completed, notifying each Pledged Partnership of the existence of this Agreement and a certified copy of this Agreement have been delivered by each Pledgor to the relevant Pledged Partnership, and to the extent obtainable by commercially reasonable efforts, each such Pledgor has received and delivered to the Collateral Agent an acknowledgment in the form set forth in Annex E attached hereto (such acknowledgement, the "Partnership Acknowledgement"), duly executed by the relevant Pledged Partnership; and (xix) the chief executive office of such Pledgor is set forth on Annex F hereto or such other office as such Pledgor may establish in accordance with the terms of the Security Agreement. Each Pledgor covenants and agrees that it will defend the Pledgee's right, title and security interest in and to the Collateral against the claims and demands of all persons whomsoever; and such Pledgor covenants and agrees that it will have like title to and right to pledge any other property at any time hereafter pledged to the Pledgee as Collateral hereunder and will likewise defend the right thereto and security interest therein of the Pledgee and the other Secured Creditors. 17. PLEDGORS' OBLIGATIONS ABSOLUTE, ETC. The obligations of each Pledgor under this Agreement shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever (other than for the indefeasible payment in full in cash of all Obligations), including, without limitation: (i) any renewal, extension, amendment or modification of or addition or supplement to or deletion from any Secured Debt Agreement or any other instrument or agreement referred to therein, or any assignment or transfer of any thereof; (ii) any waiver, consent, extension, indulgence or other action or inaction under or in respect of any such agreement or instrument including, without limitation, this Agreement; (iii) any furnishing of any additional security to the Pledgee or its assignee or any acceptance thereof or any release of any security by the Pledgee or its assignee; 12 (iv) any limitation on any party's liability or obligations under any such instrument or agreement or any invalidity or unenforceability, in whole or in part, of any such instrument or agreement or any term thereof; or (v) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to any Pledgor or any Subsidiary of any Pledgor, or any action taken with respect to this Agreement by any trustee or receiver, or by any court, in any such proceeding, whether or not such Pledgor shall have notice or knowledge of any of the foregoing. 18. REGISTRATION, ETC. (a) If there shall have occurred and be continuing an Event of Default then, and in every such case, upon receipt by any Pledgor from the Pledgee of a written request or requests that such Pledgor cause any registration, qualification or compliance under any Federal or state securities law or laws to be effected with respect to all or any part of the Pledged Stock of the Borrower, such Pledgor as soon as practicable and at its expense will cause such registration to be effected (and be kept effective) and will cause such qualification and compliance to be declared effected (and be kept effective) as may be so requested and as would permit or facilitate the sale and distribution of such Pledged Stock, including, without limitation, registration under the Securities Act of 1933, as then in effect (or any similar statute then in effect), appropriate qualifications under applicable blue sky or other state securities laws and appropriate compliance with any other government requirements, PROVIDED, that the Pledgee shall furnish to such Pledgor such information regarding the Pledgee as such Pledgor may reasonably request in writing and as shall be required in connection with any such registration, qualification or compliance. Such Pledgor will cause the Pledgee to be kept advised in writing as to the progress of each such registration, qualification or compliance and as to the completion thereof, will furnish to the Pledgee such number of prospectuses, offering circulars or other documents incident thereto as the Pledgee from time to time may reasonably request, and will indemnify the Pledgee, each other Secured Creditor and all others participating in the distribution of such Pledged Stock against all claims, losses, damages and liabilities caused by any untrue statement (or alleged untrue statement) of a material fact contained therein (or in any related registration statement, notification or the like) or by any omission (or alleged omission) to state therein (or in any related registration statement, notification or the like) a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same may have been caused by an untrue statement or omission based upon information furnished in writing to such Pledgor by the Pledgee or such other Secured Creditor expressly for use therein. (b) If at any time when the Pledgee shall determine to exercise its right to sell all or any part of the Pledged Securities or Pledged Partnership Interests pursuant to Section 7 hereof, and such Pledged Securities or Pledged Partnership Interests or the part thereof to be sold shall not, for any reason whatsoever, be effectively registered under the Securities Act of 1933, as then in effect, the Pledgee may, in its sole and absolute discretion, sell such Pledged Securities or Pledged Partnership Interests, as the case may be, or part thereof by private sale in such manner and under such circumstances as the Pledgee may deem necessary or advisable in order that such sale may legally be effected without such registration. Without limiting the generality of the foregoing, in any such event the Pledgee, in its sole and absolute discretion (i) may proceed to make such private sale notwithstanding that a registration statement for the purpose of 13 registering such Pledged Securities or Pledged Partnership Interests or part thereof shall have been filed under such Securities Act, (ii) may approach and negotiate with a single possible purchaser to effect such sale, and (iii) may restrict such sale to a purchaser who will represent and agree that such purchaser is purchasing for its own account, for investment, and not with a view to the distribution or sale of such Pledged Securities or Pledged Partnership Interests or part thereof. In the event of any such sale, the Pledgee shall incur no responsibility or liability for selling all or any part of the Pledged Securities or Pledged Partnership Interests at a price which the Pledgee, in its sole and absolute discretion, in good faith deems reasonable under the circumstances, notwithstanding the possibility that a substantially higher price might be realized if the sale were deferred until after registration as aforesaid. 19. TERMINATION; RELEASE. (a) After the Termination Date (as defined below), this Agreement and the security interest created hereby shall terminate (provided that all indemnities set forth herein including, without limitation, in Section 11 hereof shall survive any such termination), and the Pledgee, at the request and expense of any Pledgor, will execute and deliver to such Pledgor a proper instrument or instruments acknowledging the satisfaction and termination of this Agreement, and will duly assign, transfer and deliver to such Pledgor (without recourse and without any representation or warranty) such of the Collateral as has not theretofore been sold or otherwise applied or released pursuant to this Agreement, together with any moneys at the time held by the Pledgee or any of its sub-agents hereunder. As used in this Agreement, "Termination Date" shall mean the date upon which the Total Commitment and all Interest Rate Protection Agreements or Other Hedging Agreements have been terminated, all Loans have been repaid in full, all Letters of Credit have been terminated and all Obligations then owing have been paid in full. (b) In the event that any part of the Collateral is sold in connection with a sale permitted by Section 9.02 of the Credit Agreement (other than a sale to any Pledgor or any Subsidiary thereof) or is otherwise released at the direction of the Required Secured Creditors and the proceeds of such sale or sales or from such release are applied in accordance with the provisions of the Credit Agreement, to the extent required to be so applied, the Pledgee, at the request and expense of any Pledgor, will duly assign, transfer and deliver to such Pledgor (without recourse and without any representation or warranty) such of the Collateral (and releases therefor) as is then being (or has been) so sold or released and has not theretofore been released pursuant to this Agreement. (c) At any time that a Pledgor desires that the Pledgee assign, transfer and deliver Collateral (and releases therefor) as provided in Section 19(a) or (b) hereof, it shall deliver to the Pledgee a certificate signed by a principal executive officer of such Pledgor stating that the release of the respective Collateral is permitted pursuant to such Section 19(a) or (b). (d) The Pledgee shall have no liability whatsoever to any other Secured Creditor as the result of any release of Collateral by it in accordance with this Section 19. 20. NOTICES, ETC. All such notices and communications hereunder shall be sent or delivered by mail, telegraph, telex, telecopy, cable or overnight courier service and all 14 such notices and communications shall, when mailed, telegraphed, telexed, telecopied, or cabled or sent by overnight courier, be effective when delivered, or sent by telex or telecopier and shall be effective upon receipt. All notices and other communications shall be in writing and addressed as follows: (a) if to any Pledgor, at the address set forth opposite such Pledgor's signature below; (b) if to the Pledgee, at: Bankers Trust Company One Bankers Trust Plaza 130 Liberty Street New York, New York 10006 Attention: Andrew Keith Telephone No.: (212) 250-8617 Telecopier No.: (212) 250-7218 (c) if to any Bank Creditor, either (x) to the Agent, at the address of the Agent specified in the Credit Agreement or (y) at such address as such Bank Creditor shall have specified in the Credit Agreement; (d) if to any Other Creditor at such address as such Other Creditor shall have specified in writing to the Pledgors and the Pledgee; or at such other address as shall have been furnished in writing by any Person described above to the party required to give notice hereunder. 21. WAIVER; AMENDMENT. None of the terms and conditions of this Agreement may be changed, waived, modified or varied in any manner whatsoever unless in writing duly signed by each Pledgor directly affected thereby and the Pledgee (with the written consent of the Required Secured Creditors); PROVIDED, that any change, waiver, modification or variance affecting the rights and benefits of a single Class (as defined below) of Secured Creditors (and not all Secured Creditors in a like or similar manner) shall also require the written consent of the Requisite Creditors (as defined below) of such affected Class. For the purpose of this Agreement, the term "Class" shall mean each class of Secured Creditors, I.E., whether (i) the Bank Creditors as holders of the Credit Document Obligations or (ii) the Other Creditors as the holders of the Other Obligations. For the purpose of this Agreement, the term "Requisite Creditors" of any Class shall mean each of (i) with respect to the Credit Document Obligations, the Required Banks and (ii) with respect to the Other Obligations, the holders of at least a majority amount of all obligations outstanding from time to time under the Interest Rate Protection Agreements or Other Hedging Agreements. 22. MISCELLANEOUS. This Agreement shall be binding upon the parties 15 hereto and their respective successors and assigns and shall inure to the benefit of and be enforceable by each of the parties hereto and its successors and assigns, provided that no Pledger may assign any of its rights or obligations under this Agreement without the prior consent of the Collateral Agent. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE INTERNAL LAW OF THE STATE OF NEW YORK. The headings in this Agreement are for purposes of reference only and shall not limit or define the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which shall constitute one instrument. In the event that any provision of this Agreement shall prove to be invalid or unenforceable, such provision shall be deemed to be severable from the other provisions of this Agreement which shall remain binding on all parties hereto. 23. RECOURSE. This Agreement is made with full recourse to the Pledgors and pursuant to and upon all the representations, warranties, covenants and agreements on the part of the Pledgors contained herein and in the other Secured Debt Agreements and otherwise in writing in connection herewith or therewith. 24. ADDITIONAL PLEDGORS. It is understood and agreed that any Subsidiary of Holdings that is required to execute a counterpart of this Agreement after the date hereof pursuant to the Credit Agreement shall automatically become a Pledgor hereunder by executing a counterpart hereof and delivering the same to the Pledgee, at which time the Annexes to this Agreement shall be approximately modified to reflect the Collateral then owned by such additional Pledgor. 25. MISCELLANEOUS. Notwithstanding anything to the contrary contained herein or in the Credit Agreement, each Pledgor hereby covenants and agrees that with respect to any Pledged Partnership Interest pledged by it hereunder, such Pledgor will deliver to the respective Pledged Partnerships (with copies to the Pledgee) a Partnership Notice (appropriately completed) and such Pledgor will deliver to the Pledgee a Partnership Acknowledgement signed by the respective Pledged Partnerships, in each case within 15 days following the date any such Pledged Partnership Interests are pledged hereunder. * * * * 16 IN WITNESS WHEREOF, each Pledgor and the Pledgee have caused this Agreement to be executed by their duly elected officers duly authorized as of the date first above written. ADDRESS: c/o J.F. Lehman & Company, Inc. ELGAR HOLDINGS, INC., 450 Park Avenue as a Pledgor New York, New York 10022 Attn: Donald Glickman Telephone No.: (212) 634-0100 By /s/ KEITH OSTER Telecopier No.: (212) 634-1155 ------------------------- and Title: 9250 Brown Deer Road San Diego, California 92121 Attn: Chris Kelford Telephone No.: (619) 458-0204 Telecopier No.: (619) 458-0257 9250 Brown Deer Road ELGAR ELECTRONICS CORPORATION, San Diego, California 92121 as a Pledgor Attn: Chris Kelford Telephone No.: (619) 458-0204 Telecopier No.: (619) 458-0257 By /s/ KEITH OSTER and ------------------------- c/o J.F. Lehman & Company, Inc. Title: 450 Park Avenue New York, New York 10022 Attn: Donald Glickman Telephone No.: (212) 634-0100 Telecopier No.: (212) 634-1155 120 Knowles Drive POWER TEN, Los Gatos, California 95030 as a Pledgor Attn: Telephone No.: Telecopier No.: By /s/ KEITH OSTER and ------------------------- c/o J.F. Lehman & Company, Inc. Title: 450 Park Avenue New York, New York 10022 Attn: Donald Glickman Telephone No.: (212) 634-0100 Telecopier No.: (212) 634-1155 17 Accepted and Agreed to: BANKERS TRUST COMPANY, as Pledgee, Collateral Agent By /s/ ANDREW KEITH --------------------------- Title: 18 EX-10.17 9 EXHIBIT 10.17 AMENDED AND RESTATED SECURITY AGREEMENT AMENDED AND RESTATED SECURITY AGREEMENT, dated as of February 3, 1998 and amended and restated as of May 29, 1998, made by each of the undersigned assignors (each an "Assignor" and, together with any other entity that becomes an assignor hereunder pursuant to Section 10.13 hereof, the "Assignors") in favor of Bankers Trust Company, as Collateral Agent (the "Collateral Agent"), for the benefit of the Secured Creditors (as defined below). Except as otherwise defined herein, capitalized terms used herein and defined in the Credit Agreement (as defined below) shall be used herein as so defined. W I T N E S S E T H : WHEREAS, Elgar Holdings, Inc. ("Holdings"), Elgar Electronics Corporation (the "Borrower"), the lenders from time to time party thereto (the "Banks"), and Bankers Trust Company, as Agent (together with any successor agent, the "Agent"), have entered into a Credit Agreement, dated as of February 3, 1998 and amended and restated May 29, 1998, providing for the making of Loans to, and the issuance of Letters of Credit for the account of, the Borrower as contemplated therein (as amended, modified or supplemented from time to time, the "Credit Agreement") (the Banks, the Agent and the Collateral Agent are herein called the "Bank Creditors"); WHEREAS, the Borrower may at any time and from time to time enter into one or more Interest Rate Protection Agreements or Other Hedging Agreements with one or more Banks or any affiliate thereof (each such Bank or affiliate, even if the respective Bank subsequently ceases to be a Bank under the Credit Agreement for any reason, together with such Bank's or affiliate's successors and assigns, if any, collectively, the "Other Creditors," and together with the Bank Creditors, are herein called the "Secured Creditors"); WHEREAS, pursuant to the Holdings Guaranty, Holdings has guaranteed to the Secured Creditors the payment when due of all of the Guaranteed Obligations as described therein; WHEREAS, pursuant to the Subsidiaries Guaranty, each Subsidiary Guarantor has jointly and severally guarantied to the Secured Creditors the payment when due of all Guaranteed Obligations as described therein; WHEREAS, the Collateral Agent and the Assignors (other than Power Ten) entered into the Security Agreement, dated as of February 3, 1998 (the "Original Security Agreement"), in connection with the Existing Credit Agreement; WHEREAS, it is a condition precedent to the making of Loans to, and the issuance of Letters of Credit for the account of, the Borrower under the Credit Agreement that each Assignor shall have executed and delivered to the Collateral Agent this Agreement; and 1 WHEREAS, each Assignor will obtain benefits from the incurrence of Loans to, and the issuance of Letters of Credit for the account of, the Borrower under the Credit Agreement and the entering into by the Borrower of Interest Rate Protection Agreements or Other Hedging Agreements and, accordingly, each Assignor desires to enter into this Agreement in order to satisfy the condition described in the preceding paragraph and to amend and restate the Original Security Agreement in the form of this Agreement; NOW, THEREFORE, in consideration of the benefits accruing to each Assignor, the receipt and sufficiency of which are hereby acknowledged, each Assignor hereby makes the following representations and warranties to the Collateral Agent for the benefit of the Secured Creditors and hereby covenants and agrees with the Collateral Agent for the benefit of the Secured Creditors as follows: ARTICLE 1 SECURITY INTERESTS 1.1. GRANT OF SECURITY INTERESTS. (a) As security for the prompt and complete payment and performance when due of all of its Obligations, each Assignor does hereby assign and transfer unto the Collateral Agent, and does hereby pledge and grant to the Collateral Agent for the benefit of the Secured Creditors (and does hereby reconfirm its assignment, transfer, pledge and grant to the Collateral Agent under the Original Security Agreement of), a continuing security interest in, all of the right, title and interest of such Assignor in, to and under all of the following, whether now existing or hereafter from time to time acquired: (i) each and every Receivable, (ii) all Contracts, together with all Contract Rights arising thereunder, (iii) all Inventory, (iv) all Equipment, (v) all Marks, together with the registrations and right to all renewals thereof, and the goodwill of the business of such Assignor symbolized by the Marks, (vi) all Patents and Copyrights, (vii) all computer programs of such Assignor and all intellectual property rights therein and all other proprietary information of such Assignor, including, but not limited to, Trade Secrets Rights, (viii) all other Goods, General Intangibles, Permits, Chattel Paper, Documents, Instruments, Investment Property (except to the extent pledged under the Pledge Agreement) and other assets (including cash), (ix) the Cash Collateral Account and all monies, securities, instruments and other investments deposited or required to be deposited in such Cash Collateral Account, (x) all other bank, demand, time savings, passbook, certificates of deposit and similar accounts maintained by such Assignor and all monies, securities, instruments and other investments deposited or required to be deposited in any of the foregoing accounts, and (xi) all Proceeds and products of any and all of the foregoing (all of the above, collectively, the "Collateral"). Notwithstanding anything to the contrary contained in this Agreement (including Section 3.6 hereof or certain of the representations and warranties contained herein), no Assignor shall be required to deliver any Instrument hereunder with an outstanding principal amount of $50,000 or less, provided that no more than $100,000 in the aggregate of all such $50,000 or less Instruments (including, for this purpose, any Pledged Notes (as defined in the Pledge Agreement) not required to be delivered pursuant to the Pledge Agreement) shall be excluded from the 2 delivery requirements under this Agreement. (b) The security interest of the Collateral Agent under this Agreement extends to all Collateral of the kind which is the subject of this Agreement which any Assignor may acquire at any time during the term of this Agreement. 1.2. POWER OF ATTORNEY. Each Assignor hereby constitutes and appoints the Collateral Agent its true and lawful attorney, irrevocably, with full power after the occurrence of and during the continuance of an Event of Default (in the name of such Assignor or otherwise) to act, require, demand, receive, compound and give acquittance for any and all moneys and claims for moneys due or to become due to such Assignor under or arising out of the Collateral, to endorse any checks or other instruments or orders in connection therewith and to file any claims or take any action or institute any proceedings which the Collateral Agent may deem to be necessary or advisable to protect the interests of the Secured Creditors, which appointment as attorney is coupled with an interest. ARTICLE II GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS Each Assignor represents, warrants and covenants, which representations, warranties and covenants shall survive execution and delivery of this Agreement, as follows: 2.1. NECESSARY FILINGS. All filings, registrations and recordings necessary or appropriate to create, preserve and perfect the security interest granted by such Assignor to the Collateral Agent hereby in respect of the Collateral have been executed by the appropriate Assignors and delivered to the Collateral Agent for filing in the appropriate filing office or filing offices in order to create a perfected security interest therein prior to the rights of all other Persons therein and subject to no other Liens (in each case other than Permitted Liens) and is entitled to all the rights, priorities and benefits afforded by the Uniform Commercial Code or other relevant law as enacted in any relevant jurisdiction to perfected security interests, in each case to the extent that the Collateral consists of the type of property in which a security interest may be perfected by filing a financing statement under the Uniform Commercial Code as enacted in any relevant jurisdiction or in the United States Patent and Trademark Office or in the United States Copyright Office. 2.2. NO LIENS. Such Assignor is, and as to Collateral acquired by it from time to time after the date hereof such Assignor will be, the owner of all Collateral free from any Lien, security interest, encumbrance or other right, title or interest of any Person (other than Permitted Liens), and such Assignor shall defend the Collateral against all claims and demands of all Persons at any time claiming the same or any interest therein adverse to the Collateral Agent. 2.3. OTHER FINANCING STATEMENTS. As of the date hereof, there is no financing statement (or similar statement or instrument of registration under the law of any jurisdiction) covering or purporting to cover any interest of any kind in the Collateral (other than financing statements filed in respect of Permitted Liens), and so long as the Termination Date has not 3 occurred, such Assignor will not execute or authorize to be filed in any public office any financing statement (or similar statement or instrument of registration under the law of any jurisdiction) or statements relating to the Collateral, except financing statements filed or to be filed in respect of and covering the security interests granted hereby by such Assignor or in connection with Permitted Liens. 2.4. CHIEF EXECUTIVE OFFICE; RECORDS. The chief executive office of such Assignor is located at the address indicated on Annex A hereto for such Assignor. Such Assignor will not move its chief executive office except to such new location as such Assignor may establish in accordance with the last sentence of this Section 2.4. The originals of all documents evidencing all Receivables and Contract Rights of such Assignor and the only original books of account and records of such Assignor relating thereto are, and will continue to be, kept at such chief executive office, at one or more of the other locations set forth on Annex A hereto or at such new locations as such Assignor may establish in accordance with the last sentence of this Section 2.4. All Receivables and Contract Rights of such Assignor are, and will continue to be, maintained at, and controlled and directed (including, without limitation, for general accounting purposes) from, the office locations described above or such new location established in accordance with the last sentence of this Section 2.4. No Assignor shall establish new locations for such offices until (i) it shall have given to the Collateral Agent not less than 15 days' prior written notice of its intention to do so, clearly describing such new location and providing such other information in connection therewith as the Collateral Agent may reasonably request, or (ii) with respect to such new location, it shall have taken all action reasonably satisfactory to the Collateral Agent to maintain the security interest of the Collateral Agent in the Collateral intended to be granted hereby at all times fully perfected and in full force and effect. 2.5. LOCATION OF INVENTORY AND EQUIPMENT. All Inventory and Equipment held on the date hereof by each Assignor is located at one of the locations shown on Annex B hereto for such Assignor. Each Assignor agrees that all Inventory and Equipment now held or subsequently acquired by it shall be kept at (or shall be in transport to) any one of the locations shown on Annex B hereto, or such new location as such Assignor may establish in accordance with the last sentence of this Section 2.5. Any Assignor may establish a new location for Inventory and Equipment only if (i) it shall have given to the Collateral Agent not less than 15 days' prior written notice of its intention so to do, clearly describing such new location and providing such other information in connection therewith as the Collateral Agent may request, and (ii) with respect to such new location, it shall have taken all action reasonably satisfactory to the Collateral Agent to maintain the security interest of the Collateral Agent in the Collateral intended to be granted hereby at all times fully perfected and in full force and effect. 2.6. RECOURSE. This Agreement is made with full recourse to each Assignor (including, without limitation, with full recourse to all assets of such Assignor) and pursuant to and upon all the warranties, representations, covenants and agreements on the part of such Assignor contained herein, in the other Secured Debt Agreements and otherwise in writing in connection herewith or therewith. 2.7. TRADE NAMES; CHANGE OF NAME. No Assignor has or operates in any 4 jurisdiction under, or in the preceding five years has had or has operated in any jurisdiction under, any trade names, fictitious names or other names except its legal name and such other trade or fictitious names as are listed on Annex C hereto for such Assignor. No Assignor shall change its legal name or assume or operate in any jurisdiction under any trade, fictitious or other name except those names listed on Annex C hereto for such Assignor and new names established in accordance with the last sentence of this Section 2.7. No Assignor shall assume or operate in any jurisdiction under any new trade, fictitious or other name until (i) it shall have given to the Collateral Agent not less than 15 days' prior written notice of its intention so to do, clearly describing such new name and the jurisdictions in which such new name shall be used and providing such other information in connection therewith as the Collateral Agent may reasonably request, and (ii) with respect to such new name, it shall have taken all action reasonably requested by the Collateral Agent to maintain the security interest of the Collateral Agent in the Collateral intended to be granted hereby at all times fully perfected and in full force and effect. ARTICLE III SPECIAL PROVISIONS CONCERNING RECEIVABLES; CONTRACT RIGHTS; INSTRUMENTS; CHATTEL PAPER 3.1. ADDITIONAL REPRESENTATIONS AND WARRANTIES. As of the time when each of its Receivables arises, each Assignor shall be deemed to have represented and warranted that such Receivable, and all records, papers and documents relating thereto (if any) are what they purport to be, and such Receivable will evidence true and valid obligations of the account debtor named therein. 3.2. MAINTENANCE OF RECORDS. Each Assignor will keep and maintain at its own cost and expense accurate records of its Receivables and Contracts, including, but not limited to, originals of all documentation (including each Contract) with respect thereto, records of all payments received, all credits granted thereon, all merchandise returned and all other dealings therewith, and such Assignor will make the same available on such Assignor's premises to the Collateral Agent for inspection, at such Assignor's own cost and expense, at any and all reasonable times upon two days prior notice to such Assignor. Upon the occurrence and during the continuance of an Event of Default and at the request of the Collateral Agent, such Assignor shall, at its own cost and expense, deliver all tangible evidence of its Receivables and Contract Rights (including, without limitation, all documents evidencing the Receivables and all Contracts) and such books and records to the Collateral Agent or to its representatives (copies of which evidence and books and records may be retained by such Assignor). Upon the occurrence and during the continuance of an Event of Default and if the Collateral Agent so directs, such Assignor shall legend, in form and manner reasonably satisfactory to the Collateral Agent, the Receivables and the Contracts, as well as books, records and documents (if any) of such Assignor evidencing or pertaining to such Receivables and Contracts with an appropriate reference to the fact that such Receivables and Contracts have been assigned to the Collateral Agent and that the Collateral Agent has a security interest therein. 3.3. DIRECTION TO ACCOUNT DEBTORS; CONTRACTING PARTIES; ETC. Upon the occurrence 5 and during the continuance of an Event of Default, and if the Collateral Agent so directs any Assignor, such Assignor agrees (x) to cause all payments on account of the Receivables and Contracts to be made directly to the Cash Collateral Account, (y) that the Collateral Agent may, at its option, directly notify the obligors with respect to any Receivables and/or under any Contracts to make payments with respect thereto as provided in the preceding clause (x), and (z) that the Collateral Agent may enforce collection of any such Receivables and Contracts and may adjust, settle or compromise the amount of payment thereof, in the same manner and to the same extent as such Assignor. Without notice to or assent by any Assignor, the Collateral Agent may apply any or all amounts then in, or thereafter deposited in, the Cash Collateral Account which application shall be effected in the manner provided in Section 7.4 of this Agreement. The costs and expenses (including reasonable attorneys' fees) of collection, whether incurred by an Assignor or the Collateral Agent, shall be borne by the relevant Assignor. The Collateral Agent shall deliver a copy of each notice referred to in the preceding clause (y) to the relevant Assignor, PROVIDED, that the failure by the Collateral Agent to so notify such Assignor shall not affect the effectiveness of such notice or the other rights of the Collateral Agent created by this Section 3.3. 3.4. MODIFICATION OF TERMS; ETC. Except in accordance with such Assignor's ordinary course of business and consistent with reasonable business judgment, no Assignor shall rescind or cancel any indebtedness evidenced by any Receivable or under any Contract, or modify any term thereof or make any adjustment with respect thereto, or extend or renew the same, or compromise or settle any material dispute, claim, suit or legal proceeding relating thereto, or sell any Receivable or Contract, or interest therein, without the prior written consent of the Collateral Agent (which consent shall not be unreasonably withheld). Each Assignor will duly fulfill all obligations on its part to be fulfilled under or in connection with the Receivables and Contracts and will do nothing to impair the rights of the Collateral Agent in the Receivables or Contracts. 3.5. COLLECTION. Each Assignor shall endeavor in accordance with reasonable business practices to cause to be collected from the account debtor named in each of its Receivables or obligor under any Contract, as and when due (including, without limitation, amounts which are delinquent, such amounts, if desirable in such Assignor's reasonable business judgment, to be collected in accordance with generally accepted lawful collection procedures) any and all amounts owing under or on account of such Receivable or Contract, and apply forthwith upon receipt thereof all such amounts as are so collected to the outstanding balance of such Receivable or under such Contract, except that, prior to the occurrence of an Event of Default, any Assignor may allow in the ordinary course of business as adjustments to amounts owing under its Receivables and Contracts (i) an extension or renewal of the time or times of payment, or settlement for less than the total unpaid balance, which such Assignor finds appropriate in accordance with reasonable business judgment and (ii) a refund or credit due as a result of returned or damaged merchandise or improperly performed services or for other reasons which such Assignor finds appropriate in accordance with reasonable business judgment. The reasonable costs and expenses (including, without limitation, reasonable attorneys' fees) of collection, whether incurred by an Assignor or the Collateral Agent, shall be borne by the relevant Assignor. 6 3.6. INSTRUMENTS. Subject to the final paragraph of Section 1.1(a) hereof, if any Assignor owns or acquires any Instrument constituting Collateral, such Assignor will within 10 Business Days notify the Collateral Agent thereof, and upon request by the Collateral Agent will promptly deliver such Instrument to the Collateral Agent appropriately endorsed to the order of the Collateral Agent as further security hereunder. 3.7. ASSIGNORS REMAIN LIABLE UNDER RECEIVABLES. Anything herein to the contrary notwithstanding, the Assignors shall remain liable under each of the Receivables to observe and perform all of the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise to such Receivables. Neither the Collateral Agent nor any other Secured Creditor shall have any obligation or liability under any Receivable (or any agreement giving rise thereto) by reason of or arising out of this Agreement or the receipt by the Collateral Agent or any other Secured Creditor of any payment relating to such Receivable pursuant hereto, nor shall the Collateral Agent or any other Secured Creditor be obligated in any manner to perform any of the obligations of any Assignor under or pursuant to any Receivable (or any agreement giving rise thereto), to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by them or as to the sufficiency of any performance by any party under any Receivable (or any agreement giving rise thereto), to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to them or to which they may be entitled at any time or times. 3.8. ASSIGNORS REMAIN LIABLE UNDER CONTRACTS. Anything herein to the contrary notwithstanding, the Assignors shall remain liable under each of the Contracts to observe and perform all of the conditions and obligations to be observed and performed by them thereunder, all in accordance with and pursuant to the terms and provisions of each Contract. Neither the Collateral Agent nor any other Secured Creditor shall have any obligation or liability under any Contract by reason of or arising out of this Agreement or the receipt by the Collateral Agent or any other Secured Creditor of any payment relating to such contract pursuant hereto, nor shall the Collateral Agent or any other Secured Creditor be obligated in any manner to perform any of the obligations of any Assignor under or pursuant to any Contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any performance by any party under any Contract, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to them or to which they may be entitled at any time or times. 3.9. FURTHER ACTIONS. Each Assignor will, at its own expense, make, execute, endorse, acknowledge, file and/or deliver to the Collateral Agent from time to time such vouchers, invoices, schedules, confirmatory assignments, conveyances, financing statements, transfer endorsements, certificates, reports and other assurances or instruments and take such further steps relating to its Receivables, Contracts, Instruments and other property or rights covered by the security interest hereby granted, as the Collateral Agent may reasonably require, provided that, so long as no Event of Default then exists and is continuing, the foregoing shall be limited to such steps as may be required to perfect such security interest (i) by the filing of UCC financing statements, (ii) by the filing of appropriate assignments in the United States Patent and 7 Trademark Office or in the United States Copyright Office or (iii) by possession by the Collateral Agent of such Collateral. ARTICLE IV SPECIAL PROVISIONS CONCERNING TRADEMARKS 4.1. ADDITIONAL REPRESENTATIONS AND WARRANTIES. Each Assignor represents and warrants that it is the true and lawful owner of or otherwise has the right to use the registered Marks listed in Annex D hereto for such Assignor and that said listed Marks include all United States marks and applications for United States marks registered in the United States Patent and Trademark Office that such Assignor owns or uses in connection with its business as of the date hereof. Each Assignor represents and warrants that it owns, is licensed to use or otherwise has the right to use, all material Marks that it uses. Each Assignor further warrants that it has no knowledge of any third-party claim that any aspect of such Assignor's present or contemplated business operations infringes or will infringe any trademark, service mark or trade name except for any such infringements which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole. Each Assignor represents and warrants that it is the true and lawful owner of or otherwise has the right to use all U.S. trademark registrations and applications listed in Annex D hereto and that said registrations are valid, subsisting, have not been cancelled and that such Assignor is not aware of any material third-party claim that any of said registrations is invalid or unenforceable, or is not aware that there is any reason that any of said registrations is invalid or unenforceable. Each Assignor hereby grants to the Collateral Agent an absolute power of attorney to sign, upon the occurrence and during the continuance of an Event of Default, any document which may be required by the United States Patent and Trademark Office in order to effect an absolute assignment of all right, title and interest in each Mark, and record the same. 4.2. LICENSES AND ASSIGNMENTS. Except as otherwise permitted by the Secured Debt Agreements, each Assignor hereby agrees not to divest itself of any right under any Mark absent prior written approval of the Collateral Agent. 4.3. INFRINGEMENTS. Each Assignor agrees, promptly upon learning thereof, to notify the Collateral Agent in writing of the name and address of, and to furnish such pertinent information that may be available with respect to, any party who such Assignor believes is infringing or diluting or otherwise violating in any material respect any of such Assignor's rights in and to any material Mark, or with respect to any party claiming that such Assignor's use of any material Mark violates in any material respect any property right of that party. Each Assignor further agrees, unless otherwise agreed by the Collateral Agent, to prosecute any Person infringing any material Mark in accordance with reasonable business practices. 4.4. PRESERVATION OF MARKS. Each Assignor agrees to use its material Marks in interstate commerce during the time in which this Agreement is in effect and to take all such other actions as are necessary to preserve such Marks as trademarks or service marks under the 8 laws of the United States. 4.5. MAINTENANCE OF REGISTRATION. Each Assignor shall, at its own expense, diligently process all documents required to maintain trademark registrations, including but not limited to affidavits of use and applications for renewals of registration in the United States Patent and Trademark Office for all of its registered material Marks, and shall pay all fees and disbursements in connection therewith and shall not abandon any such filing of affidavit of use or any such application of renewal prior to the exhaustion of all administrative and judicial remedies without prior written consent of the Collateral Agent. 4.6. FUTURE REGISTERED MARKS. If any Mark registration is issued hereafter to any Assignor as a result of any application now or hereafter pending before the United States Patent and Trademark Office, within 30 days of receipt of such certificate, such Assignor shall deliver to the Collateral Agent a copy of such certificate, and an assignment for security in such Mark, to the Collateral Agent and at the expense of such Assignor, confirming the assignment for security in such Mark to the Collateral Agent hereunder, the form of such security to be substantially the same as the form hereof or in such other form as may be reasonably satisfactory to the Collateral Agent. 4.7. REMEDIES. If an Event of Default shall occur and be continuing, the Collateral Agent may, by written notice to the relevant Assignor, take any or all of the following actions: (i) declare the entire right, title and interest of such Assignor in and to each of the Marks, together with all trademark rights and rights of protection to the same, vested in the Collateral Agent for the benefit of the Secured Creditors, in which event such rights, title and interest shall immediately vest, in the Collateral Agent for the benefit of the Secured Creditors, and the Collateral Agent shall be entitled to exercise the power of attorney referred to in Section 4.1 hereof to execute, cause to be acknowledged and notarized and record said absolute assignment with the applicable agency; (ii) take and use or sell the Marks and the goodwill of such Assignor's business symbolized by the Marks and the right to carry on the business and use the assets of such Assignor in connection with which the Marks have been used; and (iii) direct such Assignor to refrain, in which event such Assignor shall refrain, from using the Marks in any manner whatsoever, directly or indirectly, and such Assignor shall execute such further documents that the Collateral Agent may reasonably request to further confirm this and to transfer ownership of the Marks and registrations and any pending trademark application in the United States Patent and Trademark Office to the Collateral Agent. ARTICLE V SPECIAL PROVISIONS CONCERNING PATENTS,COPYRIGHTS AND TRADE SECRETS 5.1. ADDITIONAL REPRESENTATIONS AND WARRANTIES. Each Assignor represents and warrants that it is the true and lawful owner of all rights in (i) all United States trade secrets and proprietary information necessary to operate the business of the Assignor (the "Trade Secret Rights"), (ii) the Patents listed in Annex E hereto for such Assignor and that said Patents include all the United States patents and applications for United States patents that such Assignor owns 9 as of the date hereof and (iii) the Copyrights listed in Annex F hereto for such Assignor and that said Copyrights constitute all the United States copyrights registered with the United States Copyright Office and applications to United States copyrights that such Assignor owns as of the date hereof. Each Assignor further warrants that it has no knowledge of any third-party claim that any aspect of such Assignor's present or contemplated business operations infringes or will infringe any patent or such Assignor has misappropriated any trade secret or proprietary information except for any such infringements which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole. Each Assignor hereby grants to the Collateral Agent an absolute power of attorney to sign, upon the occurrence and during the continuance of any Event of Default, any document which may be required by the United States Patent and Trademark Office in order to effect an absolute assignment of all right, title and interest in each Patent, and to record the same. 5.2. LICENSES AND ASSIGNMENTS. Except as otherwise permitted by the Secured Debt Agreements, each Assignor hereby agrees not to divest itself of any right under any Patent or Copyright acquired after the date hereof absent prior written approval of the Collateral Agent. 5.3. INFRINGEMENTS. Each Assignor agrees, promptly upon learning thereof, to furnish the Collateral Agent in writing with all pertinent information available to such Assignor with respect to any infringement, contributing infringement or active inducement to infringe in any material Patent or material Copyright or to any claim that the practice of any material Patent or use of any material Copyright violates any property right of a third party, or with respect to any misappropriation of any material Trade Secret Right or any claim that practice of any material Trade Secret Right violates any property right of a third party. Each Assignor further agrees, absent direction of the Collateral Agent to the contrary, diligently to prosecute any Person infringing any material Patent or material Copyright or any Person misappropriating any material Trade Secret Right in accordance with such Assignor's reasonable business judgment. 5.4. MAINTENANCE OF PATENTS OR COPYRIGHT. At its own expense, each Assignor shall make timely payment of all post-issuance fees required pursuant to 35 U.S.C. Section 41 to maintain in force its rights under each material Patent or material Copyright, absent prior written consent of the Collateral Agent. 5.5. PROSECUTION OF PATENT APPLICATIONS. At its own expense, each Assignor shall diligently prosecute all applications for (i) material United States Patents listed in Annex E hereto and (ii) material Copyrights listed on Annex F hereto, in each case for such Assignor and shall not abandon any such application prior to exhaustion of all administrative and judicial remedies, absent written consent of the Collateral Agent. 5.6. OTHER PATENTS AND COPYRIGHTS. Within 30 days of the acquisition or issuance of a United States Patent, registration of a Copyright, or acquisition of a registered Copyright, or of filing of an application for a United States Patent or Copyright, the relevant Assignor shall deliver to the Collateral Agent a copy of said Copyright or certificate or registration of, or application therefor, said Patents, as the case may be, with an assignment for security as to such 10 Patent or Copyright, as the case may be, to the Collateral Agent and at the expense of such Assignor, confirming the assignment for security, the form of such assignment for security to be substantially the same as the form hereof or in such other form as may be reasonably satisfactory to the Collateral Agent. 5.7. REMEDIES. If an Event of Default shall occur and be continuing, the Collateral Agent may by written notice to the relevant Assignor, take any or all of the following actions: (i) declare the entire right, title, and interest of such Assignor in each of the Patents and Copyrights vested in the Collateral Agent for the benefit of the Secured Creditors, in which event such right, title, and interest shall immediately vest in the Collateral Agent for the benefit of the Secured Creditors, in which case the Collateral Agent shall be entitled to exercise the power of attorney referred to in Section 5.1 hereof to execute, cause to be acknowledged and notarized and to record said absolute assignment with the applicable agency; (ii) take and practice or sell the Patents and Copyrights; and (iii) direct such Assignor to refrain, in which event such Assignor shall refrain, from practicing the Patents and using the Copyrights directly or indirectly, and such Assignor shall execute such further documents as the Collateral Agent may reasonably request further to confirm this and to transfer ownership of the Patents and Copyrights to the Collateral Agent for the benefit of the Secured Creditors. ARTICLE VI PROVISIONS CONCERNING ALL COLLATERAL 6.1. PROTECTION OF COLLATERAL AGENT'S SECURITY. Each Assignor will do nothing to impair the rights of the Collateral Agent in the Collateral except as expressly permitted in the Credit Agreement. Each Assignor will at all times keep its Inventory and Equipment insured in favor of the Collateral Agent, at such Assignor's own expense to the extent and in the manner provided in the Credit Agreement. Except to the extent otherwise permitted to be retained by such Assignor or applied by such Assignor pursuant to the terms of the Credit Agreement, the Collateral Agent shall, at the time any proceeds of such insurance are distributed to the Secured Creditors, apply such proceeds in accordance with Section 7.4 hereof. Each Assignor assumes all liability and responsibility in connection with the Collateral acquired by it and the liability of such Assignor to pay the Obligations shall in no way be affected or diminished by reason of the fact that such Collateral may be lost, destroyed, stolen, damaged or for any reason whatsoever unavailable to such Assignor. 6.2. WAREHOUSE RECEIPTS NON-NEGOTIABLE. Each Assignor agrees that if any warehouse receipt or receipt in the nature of a warehouse receipt is issued with respect to any of its Inventory, such Assignor shall request that such warehouse receipt or receipt in the nature thereof shall not be "negotiable" (as such term is used in Section 7-104 of the Uniform Commercial Code as in effect in any relevant jurisdiction or under other relevant law). 6.3. FINANCING STATEMENTS. Each Assignor agrees to execute and deliver to the Collateral Agent such financing statements, in form reasonably acceptable to the Collateral Agent, as the Collateral Agent may from time to time reasonably request or as are necessary or 11 desirable in the opinion of the Collateral Agent to establish and maintain a valid, enforceable, first-priority perfected security interest in the Collateral as provided herein (subject to Permitted Liens) and the other rights and security contemplated hereby all in accordance with the UCC as enacted in any and all relevant jurisdictions or any other relevant law. Each Assignor will pay any applicable filing fees, recordation taxes and related expenses relating to its Collateral. Each Assignor hereby authorizes the Collateral Agent to file any such financing statements without the signature of such Assignor where permitted by law. ARTICLE VII REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT 7.1. REMEDIES; OBTAINING THE COLLATERAL UPON DEFAULT. Each Assignor agrees that, if any Event of Default shall have occurred and be continuing, then and in every such case, the Collateral Agent, in addition to any rights now or hereafter existing under applicable law, shall have all rights as a secured creditor under any UCC, and such additional rights and remedies to which a secured creditor is entitled under the laws in effect, in all relevant jurisdictions and may: (i) personally, or by agents or attorneys, immediately take possession of the Collateral or any part thereof, from such Assignor or any other Person who then has possession of any part thereof with or without notice or process of law, and for that purpose may enter upon such Assignor's premises where any of the Collateral is located and remove the same and use in connection with such removal any and all services, supplies, aids and other facilities of such Assignor; (ii) instruct the obligor or obligors on any agreement, instrument or other obligation (including, without limitation, the Receivables and the Contracts) constituting the Collateral to make any payment required by the terms of such agreement, instrument or other obligation directly to the Collateral Agent and may exercise any and all remedies of such Assignor in respect of such Collateral; (iii) withdraw all monies, securities and instruments in the Cash Collateral Account for application to the Obligations in accordance with Section 7.4 hereof; (iv) sell, assign or otherwise liquidate any or all of the Collateral or any part thereof in accordance with Section 7.2 hereof, or direct the relevant Assignor to sell, assign or otherwise liquidate any or all of the Collateral or any part thereof, and, in each case, take possession of the proceeds of any such sale or liquidation; (v) take possession of the Collateral or any part thereof, by directing the relevant Assignor in writing to deliver the same to the Collateral Agent at any place or places reasonably designated by the Collateral Agent, in which event such Assignor shall at its own expense: (x) forthwith cause the same to be moved to the place or places so reasonably designated by the Collateral Agent and there delivered to the Collateral Agent; 12 (y) store and keep any Collateral so delivered to the Collateral Agent at such place or places pending further action by the Collateral Agent as provided in Section 7.2 hereof; and (z) while the Collateral shall be so stored and kept, provide such guards and maintenance services as shall be necessary to protect the same and to preserve and maintain them in good condition; and (vi) license or sublicense, whether on an exclusive or nonexclusive basis, any Marks, Patents or Copyrights included in the Collateral for such term and on such conditions and in such manner as the Collateral Agent shall in its sole judgment determine; it being understood that each Assignor's obligation so to deliver the Collateral is of the essence of this Agreement and that, accordingly, upon application to a court of equity having jurisdiction, the Collateral Agent shall be entitled to a decree requiring specific performance by such Assignor of said obligation. By accepting the benefits of this Agreement, the Secured Creditors agree that this Agreement may be enforced only by the action of the Agent or the Collateral Agent acting upon the instructions of the Required Secured Creditors and that no other Secured Creditor shall have any right individually to seek to enforce this Agreement or to realize upon the security to be granted hereby, it being understood and agreed that such rights and remedies may be exercised by the Collateral Agent for the benefit of the Secured Creditors upon the terms of this Agreement and the Credit Agreement. 7.2. REMEDIES; DISPOSITION OF THE COLLATERAL. If any Event of Default shall have occurred and be continuing, then any Collateral repossessed by the Collateral Agent under or pursuant to Section 7.1 hereof and any other Collateral whether or not so repossessed by the Collateral Agent, may be sold, assigned, leased or otherwise disposed of under one or more contracts or as an entirety, and without the necessity of gathering at the place of sale the property to be sold, and in general in such manner, at such time or times, at such place or places and on such terms as the Collateral Agent may, in compliance with any mandatory requirements of applicable law, determine to be commercially reasonable. Any of the Collateral may be sold, leased or otherwise disposed of, in the condition in which the same existed when taken by the Collateral Agent or after any overhaul or repair at the expense of the relevant Assignor which the Collateral Agent shall determine to be commercially reasonable. Any such disposition that shall be a private sale or other private proceedings permitted by such requirements shall be made upon not less than 10 days' prior written notice to the relevant Assignor specifying the time at which such disposition is to be made and the intended sale price or other consideration therefor, and shall be subject, for the 10 days after the giving of such notice, to the right of the relevant Assignor or any nominee of such Assignor to acquire the Collateral involved at a price or for such other consideration at least equal to the intended sale price or other consideration so specified. Any such disposition which shall be a public sale permitted by such requirements shall be made upon not less than 10 days' prior written notice to the relevant Assignor specifying the time and place of such sale and, in the absence of applicable requirements of law, shall be by public auction (which may, at the Collateral Agent's option, be subject to reserve), after publication of notice of such auction (where required by applicable law) not less than 10 days 13 prior thereto. The Collateral Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the sale may be so adjourned. To the extent permitted by any such requirement of law, the Collateral Agent may bid for and become the purchaser of the Collateral or any item thereof, offered for sale in accordance with this Section without accountability to the relevant Assignor. If, under mandatory requirements of applicable law, the Collateral Agent shall be required to make disposition of the Collateral within a period of time which does not permit the giving of notice to the relevant Assignor as hereinabove specified, the Collateral Agent need give such Assignor only such notice of disposition as shall be reasonably practicable in view of such mandatory requirements of applicable law. Each Assignor agrees to do or cause to be done all such other acts and things as may be reasonably necessary to make such sale or sales of all or any portion of the Collateral valid and binding and in compliance with any and all applicable laws, regulations, orders, writs, injunctions, decrees or awards of any and all courts, arbitrators or governmental instrumentalities, domestic or foreign, having jurisdiction over any such sale or sales, all at such Assignor's expense. 7.3. WAIVER OF CLAIMS. Except as otherwise provided in this Agreement, EACH ASSIGNOR HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, NOTICE AND JUDICIAL HEARING IN CONNECTION WITH THE COLLATERAL AGENT'S TAKING POSSESSION OR THE COLLATERAL AGENT'S DISPOSITION OF ANY OF THE COLLATERAL, INCLUDING, WITHOUT LIMITATION, ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT REMEDY OR REMEDIES, and each Assignor hereby further waives, to the extent permitted by law: (i) all damages occasioned by such taking of possession except any damages which are the direct result of the Collateral Agent's gross negligence or willful misconduct; (ii) all other requirements as to the time, place and terms of sale or other requirements with respect to the enforcement of the Collateral Agent's rights hereunder; and (iii) all rights of redemption, appraisement, valuation, stay, extension or moratorium now or hereafter in force under any applicable law in order to prevent or delay the enforcement of this Agreement or the absolute sale of the Collateral or any portion thereof, and each Assignor, for itself and all who may claim under it, insofar as it or they now or hereafter lawfully may, hereby waives the benefit of all such laws. Any sale of, or the grant of options to purchase, or any other realization upon, any Collateral shall operate to divest all right, title, interest, claim and demand, either at law or in equity, of the relevant Assignor therein and thereto, and shall be a perpetual bar both at law and in equity against such Assignor and against any and all Persons claiming or attempting to claim the Collateral so sold, optioned or realized upon, or any part thereof, from, through and under such Assignor. 7.4. APPLICATION OF PROCEEDS. (a) All moneys collected by the Collateral Agent (or, to the extent the Pledge Agreement, any Mortgage or any Additional Security Document 14 require proceeds of collateral under such Security Document to be applied in accordance with the provisions of this Agreement, the Pledgee or Mortgagee under such other Security Document) upon any sale or other disposition of the Collateral, together with all other moneys received by the Collateral Agent hereunder, shall be applied as follows. (i) first, to the payment of all amounts owing the Collateral Agent of the type described in clauses (iii) and (iv) of the definition of "Obligations"; (ii) second, to the extent proceeds remain after the application pursuant to the preceding clause (i), an amount equal to the outstanding Primary Obligations shall be paid to the Secured Creditors as provided in Section 7.4(e) hereof, with each Secured Creditor receiving an amount equal to such outstanding Primary Obligations or, if the proceeds are insufficient to pay in full all such Primary Obligations, its Pro Rata Share (as defined below) of the amount remaining to be distributed; (iii) third, to the extent proceeds remain after the application pursuant to the preceding clauses (i) and (ii), an amount equal to the outstanding Secondary Obligations shall be paid to the Secured Creditors as provided in Section 7.4(e) hereof, with each Secured Creditor receiving an amount equal to its outstanding Secondary Obligations or, if the proceeds are insufficient to pay in full all such Secondary Obligations, its Pro Rata Share of the amount remaining to be distributed; and (iv) fourth, to the extent proceeds remain after the application pursuant to the preceding clauses (i) through (iii), inclusive, and following the termination of this Agreement pursuant to Section 10.8(a) hereof, to the relevant Assignor or to whomever may be lawfully entitled to receive such surplus. (b) For purposes of this Agreement (x) "Pro Rata Share" shall mean, when calculating a Secured Creditor's portion of any distribution or amount, that amount (expressed as a percentage) equal to a fraction the numerator of which is the then unpaid amount of such Secured Creditor's Primary Obligations or Secondary Obligations, as the case may be, and the denominator of which is the then outstanding amount of all Primary Obligations or Secondary Obligations, as the case may be, (y) "Primary Obligations" shall mean (i) in the case of the Credit Document Obligations, all principal of, and interest on, all Loans, all Unpaid Drawings and all Fees and (ii) in the case of the Other Obligations, all amounts due under such Interest Rate Protection Agreements or Other Hedging Agreements (other than indemnities, fees (including, without limitation, attorneys' fees) and similar obligations and liabilities) and (z) "Secondary Obligations" shall mean all Obligations other than Primary Obligations. (c) When payments to Secured Creditors are based upon their respective Pro Rata Shares, the amounts received by such Secured Creditors hereunder shall be applied (for purposes of making determinations under this Section 7.4 only) (i) first, to their Primary Obligations and (ii) second, to their Secondary Obligations. If any payment to any Secured Creditor of its Pro Rata Share of any distribution would result in overpayment to such Secured Creditor, such excess amount shall instead be distributed in respect of the unpaid Primary Obligations or Secondary Obligations, as the case may be, of the other Secured Creditors, with 15 each Secured Creditor whose Primary Obligations or Secondary Obligations, as the case may be, have not been paid in full to receive an amount equal to such excess amount multiplied by a fraction the numerator of which is the unpaid Primary Obligations or Secondary Obligations, as the case may be, of such Secured Creditor and the denominator of which is the unpaid Primary Obligations or Secondary Obligations, as the case may be, of all Secured Creditors entitled to such distribution. (d) Each of the Secured Creditors, by their acceptance of the benefits hereof, agrees and acknowledges that if the Bank Creditors are to receive a distribution on account of undrawn amounts with respect to Letters of Credit issued under the Credit Agreement (which shall only occur after all outstanding Loans and Unpaid Drawings with respect to such Letters of Credit have been paid in full), such amounts shall be paid to the Agent under the Credit Agreement and held by it, for the equal and ratable benefit of the Bank Creditors, as cash security for the repayment of Obligations owing to the Bank Creditors as such. If any amounts are held as cash security pursuant to the immediately preceding sentence, then upon the termination of all outstanding Letters of Credit, and after the application of all such cash security to the repayment of all Obligations owing to the Bank Creditors after giving effect to the termination of all such Letters of Credit, if there remains any excess cash, such excess cash shall be returned by the Agent to the Collateral Agent for distribution in accordance with Section 7.4(a) hereof. (e) All payments required to be made hereunder shall be made (x) if to the Bank Creditors, to the Agent under the Credit Agreement for the account of the Bank Creditors, and (y) if to the Other Creditors, to the trustee, paying agent or other similar representative (each a "Representative") for the Other Creditors or, in the absence of such a Representative, directly to the Other Creditors. (f) For purposes of applying payments received in accordance with this Section 7.4, the Collateral Agent shall be entitled to rely upon (i) the Agent under the Credit Agreement and (ii) the Representative for the Other Creditors or, in the absence of such a Representative, upon the Other Creditors for a determination (which the Agent, each Representative for any Other Creditors and the Secured Creditors agree (or shall agree) to provide upon request of the Collateral Agent) of the outstanding Primary Obligations and Secondary Obligations owed to the Bank Creditors or the Other Creditors, as the case may be. Unless it has actual knowledge (including by way of written notice from a Bank Creditor or an Other Creditor) to the contrary, the Agent and each Representative, in furnishing information pursuant to the preceding sentence, and the Collateral Agent, in acting hereunder, shall be entitled to assume that no Secondary Obligations are outstanding. Unless it has actual knowledge (including by way of written notice from an Other Creditor) to the contrary, the Collateral Agent, in acting hereunder, shall be entitled to assume that no Interest Rate Protection Agreements or Other Hedging Agreements are in existence. (g) It is understood that the Assignors shall remain jointly and severally liable to the extent of any deficiency between the amount of the proceeds of the Collateral and the aggregate amount of the Obligations. 16 7.5. REMEDIES CUMULATIVE. Each and every right, power and remedy hereby specifically given to the Collateral Agent shall be in addition to every other right, power and remedy specifically given under this Agreement, under the other Secured Debt Agreements or now or hereafter existing at law, in equity or by statute and each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time or simultaneously and as often and in such order as may be deemed expedient by the Collateral Agent. All such rights, powers and remedies shall be cumulative and the exercise or the beginning of the exercise of one shall not be deemed a waiver of the right to exercise any other or others. No delay or omission of the Collateral Agent in the exercise of any such right, power or remedy and no renewal or extension of any of the Obligations shall impair any such right, power or remedy or shall be construed to be a waiver of any Default or Event of Default or an acquiescence therein. No notice to or demand on any Assignor in any case shall entitle it to any other or further notice or demand in similar or other circumstances or constitute a waiver of any of the rights of the Collateral Agent to any other or further action in any circumstances without notice or demand. In the event that the Collateral Agent shall bring any suit to enforce any of its rights hereunder and shall be entitled to judgment, then in such suit the Collateral Agent may recover reasonable expenses, including reasonable attorneys' fees, and the amounts thereof shall be included in such judgment. 7.6. DISCONTINUANCE OF PROCEEDINGS. In case the Collateral Agent shall have instituted any proceeding to enforce any right, power or remedy under this Agreement by foreclosure, sale, entry or otherwise, and such proceeding shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Collateral Agent, then and in every such case the relevant Assignor, the Collateral Agent and each holder of any of the Obligations shall be restored to their former positions and rights hereunder with respect to the Collateral subject to the security interest created under this Agreement, and all rights, remedies and powers of the Collateral Agent shall continue as if no such proceeding had been instituted. ARTICLE VIII INDEMNITY 8.1. INDEMNITY. (a) Each Assignor jointly and severally agrees to indemnify, reimburse and hold the Collateral Agent, each other Secured Creditor and their respective successors, permitted assigns, employees, agents and servants (hereinafter in this Section 8.1 referred to individually as "Indemnitee," and collectively as "Indemnitees") harmless from any and all liabilities, obligations, damages, injuries, penalties, claims, demands, actions, suits, judgments and any and all costs, expenses or disbursements (including reasonable attorneys' fees and expenses) (for the purposes of this Section 8.1 the foregoing are collectively called "expenses") of whatsoever kind and nature imposed on, asserted against or incurred by any of the Indemnitees in any way relating to or arising out of this Agreement, any other Secured Debt Agreement or any other document executed in connection herewith or therewith or in any other way connected with the administration of the transactions contemplated hereby or thereby or the enforcement of any of the terms of, or the preservation of any rights under any thereof, or in any way relating to or arising out of the manufacture, ownership, ordering, purchase, delivery, 17 performance, control, acceptance, lease, financing, possession, operation, condition, sale, return or other disposition, or use of the Collateral (including, without limitation, latent or other defects, whether or not discoverable), the violation of the laws of any country, state or other governmental body or unit, any tort (including, without limitation, claims arising or imposed under the doctrine of strict liability, or for or on account of injury to or the death of any Person (including any Indemnitee), or property damage), or contract claim; provided that no Indemnitee shall be indemnified pursuant to this Section 8.1(a) for losses, damages or liabilities to the extent caused by the gross negligence or wilful misconduct of such Indemnitee (as finally determined by a court of competent jurisdiction). Each Assignor agrees that upon written notice by any Indemnitee of the assertion of such a liability, obligation, damage, injury, penalty, claim, demand, action, suit or judgment, the relevant Assignor shall assume full responsibility for the defense thereof. Each Indemnitee agrees to use its best efforts to promptly notify the relevant Assignor of any such assertion of which such Indemnitee has knowledge. (b) Without limiting the application of Section 8.1(a) hereof, each Assignor agrees, jointly and severally, to pay, or reimburse the Collateral Agent for any and all reasonable fees, costs and expenses of whatever kind or nature incurred in connection with the creation, preservation or protection of the Collateral Agent's Liens on, and security interest in, the Collateral, including, without limitation, all fees and taxes in connection with the recording or filing of instruments and documents in public offices, payment or discharge of any taxes or Liens upon or in respect of the Collateral, premiums for insurance with respect to the Collateral and all other fees, costs and expenses in connection with protecting, maintaining or preserving the Collateral and the Collateral Agent's interest therein, whether through judicial proceedings or otherwise, or in defending or prosecuting any actions, suits or proceedings arising out of or relating to the Collateral. (c) Without limiting the application of Section 8.1(a) or (b) hereof, each Assignor agrees, jointly and severally, to pay, indemnify and hold each Indemnitee harmless from and against any loss, costs, damages and expenses which such Indemnitee may suffer, expend or incur in consequence of or growing out of any misrepresentation by any Assignor in this Agreement, in any other Secured Debt Agreement or in any writing contemplated by or made or delivered pursuant to or in connection with this Agreement or any other Secured Debt Agreement. (d) If and to the extent that the obligations of any Assignor under this Section 8.1 are unenforceable for any reason, such Assignor hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations that is permissible under applicable law. 8.2. INDEMNITY OBLIGATIONS SECURED BY COLLATERAL; SURVIVAL. Any amounts paid by any Indemnitee as to which such Indemnitee has the right to reimbursement shall constitute Obligations secured by the Collateral. The indemnity obligations of each Assignor contained in this Article VIII shall continue in full force and effect notwithstanding the full payment of all of the other Obligations and notwithstanding the full payment of all the Notes issued under the Credit Agreement, the termination of all Interest Rate Protection Agreements or Other Hedging 18 Agreements and all Letters of Credit and the payment of all other Obligations and notwithstanding the discharge thereof. ARTICLE IX DEFINITIONS The following terms shall have the meanings herein specified. Such definitions shall be equally applicable to the singular and plural forms of the terms defined. "Agent" shall have the meaning provided in the recitals of this Agreement. "Agreement" shall mean this Amended and Restated Security Agreement as the same may be modified, supplemented or amended from time to time in accordance with its terms. "Assignor" shall have the meaning provided in the first paragraph of this Agreement. "Bank Creditors" shall have the meaning provided in the recitals of this Agreement. "Banks" shall have the meaning provided in the recitals of this Agreement. "Borrower" shall have the meaning provided in the recitals of this Agreement. "Cash Collateral Account" shall mean a cash collateral account maintained with, and in the sole dominion and control of, the Collateral Agent for the benefit of the Secured Creditors. "Chattel Paper" shall have the meaning provided in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Class" shall have the meaning provided in Section 10.2 of this Agreement. "Collateral" shall have the meaning provided in Section 1.1(a) of this Agreement. "Collateral Agent" shall have the meaning provided in the first paragraph of this Agreement. "Contract Rights" shall mean all rights of any Assignor under each Contract, including, without limitation, (i) any and all rights to receive and demand payments under any or all Contracts, (ii) any and all rights to receive and compel performance under any or all Contracts and (iii) any and all other rights, interests and claims now existing or in the future arising in connection with any or all Contracts. "Contracts" shall mean all contracts between any Assignor and one or more 19 additional parties (including, without limitation, any Interest Rate Protection Agreements or Other Hedging Agreements and any partnership agreements), but excluding any contract to the extent that the terms thereof prohibit (after giving effect to any approvals or waivers) the assignment of, or granting a security interest in, such contract (it being understood and agreed, however, that notwithstanding the foregoing, all rights to payment for money due or to become due pursuant to any such excluded contract shall be subject to the security interests created by this Agreement). "Copyrights" shall mean any copyright owned by any Assignor, including any registrations of any copyrights, in the United States Copyright Office or any foreign equivalent office, as well as any application for a copyright registration now or hereafter made with the United States Copyright Office or any foreign equivalent office by any Assignor. "Credit Agreement" shall have the meaning provided in the recitals of this Agreement. "Credit Document Obligations" shall have the meaning provided in the definition of "Obligations" in this Article IX. "Default" shall mean any event which, with notice or lapse of time, or both, would constitute an Event of Default. "Documents" shall have the meaning provided in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Equipment" shall mean any "equipment," as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York, now or hereafter owned by any Assignor and, in any event, shall include, but shall not be limited to, all machinery, equipment, furnishings, fixtures and vehicles now or hereafter owned by any Assignor and any and all additions, substitutions and replacements of any of the foregoing, wherever located, together with all attachments, components, parts, equipment and accessories installed thereon or affixed thereto. "Event of Default" shall mean any Event of Default under, and as defined in, the Credit Agreement and shall in any event include, without limitation, any payment default on any of the Other Obligations after the expiration of any applicable grace period. "General Intangibles" shall have the meaning provided in the Uniform Commercial Code as in effect on the date hereof in the State of New York, provided that, in the case of General Intangibles which are Permits, the assignment thereof shall be limited as specified in the definition of Permits. "Goods" shall have the meaning provided in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Indemnitee" shall have the meaning provided in Section 8.1 of this Agreement. 20 "Instrument" shall have the meaning provided in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Inventory" shall mean merchandise, inventory and goods, and all additions, substitutions and replacements thereof, wherever located, together with all goods, supplies, incidentals, packaging materials, labels, materials and any other items used or usable in manufacturing, processing, packaging or shipping same, in all stages of production -- from raw materials through work- in-process to finished goods -- and all products and proceeds of whatever sort and wherever located and any portion thereof which may be returned, rejected, reclaimed or repossessed by the Collateral Agent from any Assignor's customers, and shall specifically include all "inventory" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York, now or hereafter owned by any Assignor. "Investment Property" shall have the meaning provided in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Liens" shall mean any security interest, mortgage, pledge, lien, claim, charge, encumbrance, title retention agreement, lessor's interest in a financing lease or analogous instrument, in, of, or on any Assignor's property. "Marks" shall mean all right, title and interest in and to any trademarks, service marks and trade names now held or hereafter acquired by any Assignor, including any registration of any trademarks and service marks in the United States Patent and Trademark Office or in any equivalent foreign office and any trade dress including logos and/or designs used by any Assignor. "Obligations" shall mean (i) the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations and indebtedness (including, without limitation, indemnities, Fees and interest thereon) of each Assignor to the Bank Creditors, whether now existing or hereafter incurred under, arising out of, or in connection with the Credit Agreement and the other Credit Documents to which such Assignor is a party (including, in the case of each Guarantor, all such obligations and indebtedness of such Guarantor under its Guaranty) and the due performance and compliance by such Assignor with all of the terms, conditions and agreements contained in the Credit Agreement and such other Credit Documents (all such obligations and liabilities under this clause (i), except to the extent consisting of obligations or indebtedness with respect to Interest Rate Protection Agreements or Other Hedging Agreements, being herein collectively called the "Credit Document Obligations"); (ii) the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations and liabilities owing by such Assignor to the Other Creditors under, or with respect to (including by reason of any Guaranty to which such Assignor is a party), any Interest Rate Protection Agreement or Other Hedging Agreement, whether such Interest Rate Protection Agreement or Other Hedging Agreement is now in existence or hereafter arising, and the due performance and compliance by such Assignor with all of the terms, conditions and agreements contained therein (all such obligations and liabilities described in this clause (ii) being herein collectively called the "Other Obligations"); (iii) any and all sums 21 reasonably advanced by the Assignee in order to preserve the Collateral or preserve its security interest in the Collateral; (iv) in the event of any proceeding for the collection or enforcement of any indebtedness, obligations or liabilities of such Assignor referred to in clauses (i) and (ii) above, after an Event of Default shall have occurred and be continuing, the reasonable expenses of retaking, holding, preparing for sale or lease, selling or otherwise disposing of or realizing on the Collateral, or of any exercise by the Assignee of its rights hereunder, together with reasonable attorneys' fees and court costs; and (v) all amounts paid by any Indemnitee as to which such Indemnitee has the right to reimbursement under Section 8.1 of this Agreement; all such obligations, liabilities, sums and expenses set forth in clauses (i) through (v) of this Article IX being herein collectively called the "Obligations," it being acknowledged and agreed that the "Obligations" shall include extensions of credit of the types described above, whether outstanding on the date of this Agreement or extended from time to time after the date of this Agreement. "Original Security Agreement" shall have the meaning provided in the recitals of this Agreement. "Other Creditors" shall have the meaning provided in the recitals of this Agreement. "Other Obligations" shall have the meaning provided in the definition of "Obligations" in this Article IX. "Patents" shall mean any patent to which any Assignor now or hereafter has title and any divisions or continuations thereof, as well as any application for a patent now or hereafter made by any Assignor. "Permits" shall mean, to the extent permitted to be assigned by the terms thereof or by applicable law, all licenses, permits, rights, orders, variances, franchises or authorizations of or from any governmental authority or agency. "Primary Obligations" shall have the meaning provided in Section 7.4(b) of this Agreement. "Pro Rata Share" shall have the meaning provided in Section 7.4(b) of this Agreement. "Proceeds" shall have the meaning provided in the Uniform Commercial Code as in effect in the State of New York on the date hereof or under other relevant law and, in any event, shall include, but not be limited to, (i) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to the Collateral Agent or any Assignor from time to time with respect to any of the Collateral, (ii) any and all payments (in any form whatsoever) made or due and payable to any Assignor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental authority (or any person acting under color of governmental authority) and (iii) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral. 22 "Receivables" shall mean any "account" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York, now or hereafter owned by any Assignor and, in any event, shall include, but shall not be limited to, all of such Assignor's rights to payment for goods sold or leased or services performed by such Assignor, whether now in existence or arising from time to time hereafter, including, without limitation, rights evidenced by an account, note, contract, security agreement, chattel paper, or other evidence of indebtedness or security, together with (a) all security pledged, assigned, hypothecated or granted to or held by such Assignor to secure the foregoing, (b) all of any Assignor's right, title and interest in and to any goods, the sale of which gave rise thereto, (c) all guarantees, endorsements and indemnifications on, or of, any of the foregoing, (d) all powers of attorney for the execution of any evidence of indebtedness or security or other writing in connection therewith, (e) all books, records, ledger cards, and invoices relating thereto, (f) all evidences of the filing of financing statements and other statements and the registration of other instruments in connection therewith and amendments thereto, notices to other creditors or secured parties, and certificates from filing or other registration officers, (g) all credit information, reports and memoranda relating thereto and (h) all other writings related in any way to the foregoing. "Representative" shall have the meaning provided in Section 7.4(e) of this Agreement. "Required Secured Creditors" shall mean (i) the Required Banks (or, to the extent required by Section 13.12 of the Credit Agreement, each of the Banks) under the Credit Agreement so long as any Credit Document Obligations remain outstanding and (ii) in any situation not covered by the preceding clause (i), the holders of a majority of the outstanding principal amount of the Other Obligations. "Requisite Creditors" shall have the meaning provided in Section 10.2 of this Agreement. "Secondary Obligations" shall have the meaning provided in Section 7.4(b) of this Agreement. "Secured Creditors" shall have the meaning provided in the recitals of this Agreement. "Secured Debt Agreements" shall mean and include this Agreement, the other Credit Documents and the Interest Rate Protection Agreements and Other Hedging Agreements. "Termination Date" shall have the meaning provided in Section 10.8 of this Agreement. "Trade Secret Rights" shall have the meaning provided in Section 5.1 of this Agreement. "UCC" shall mean the Uniform Commercial Code as in effect from time to time 23 in the relevant jurisdiction. ARTICLE X MISCELLANEOUS 10.1. NOTICES. Except as otherwise specified herein, all notices, requests, demands or other communications to or upon the respective parties hereto shall be deemed to have been duly given or made when delivered to the party to which such notice, request, demand or other communication is required or permitted to be given or made under this Agreement, addressed as follows: (a) if to any Assignor, at the address set forth opposite such Assignor's signature below; (b) if to the Collateral Agent, at: Bankers Trust Company One Bankers Trust Plaza 130 Liberty Street New York, New York 10006 Attention: Andrew Keith Tel. No.: (212) 250-8617 Fax. No.: (212) 250-7218; (c) if to any Bank Creditor, at such address as such Bank Creditor shall have specified in the Credit Agreement; (d) if to any Other Creditor, at such address as such Other Creditor shall have specified in writing to each Assignor and the Collateral Agent; or at such other address as shall have been furnished in writing by any Person described above to the party required to give notice hereunder. 10.2. WAIVER; AMENDMENT. None of the terms and conditions of this Agreement may be changed, waived, modified or varied in any manner whatsoever unless in writing duly signed by each Assignor directly effected thereby and the Collateral Agent (with the written consent of the Required Secured Creditors); PROVIDED, HOWEVER, that any change, waiver, modification or variance affecting the rights and benefits of a single Class of Secured Creditors (and not all Secured Creditors in a like or similar manner) shall require the written consent of the Requisite Creditors of such affected Class. For the purpose of this Agreement, the term "Class" shall mean each class of Secured Creditors, I.E., whether (x) the Bank Creditors as holders of the Credit Document Obligations or (y) the Other Creditors as the holders of the Other Obligations. For the purpose of this Agreement, the term "Requisite Creditors" of any Class shall mean each of (x) with respect to the Credit Document Obligations, the Required Banks and (y) with respect to the Other Obligations, the holders of at least a majority amount of all obligations outstanding 24 from time to time under the respective Interest Rate Protection Agreements or Other Hedging Agreements. 10.3. OBLIGATIONS ABSOLUTE. The obligations of each Assignor hereunder shall remain in full force and effect without regard to, and shall not be impaired by, (a) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or the like of such Assignor; (b) any exercise or non-exercise, or any waiver of, any right, remedy, power or privilege under or in respect of this Agreement or any other Secured Debt Agreement; or (c) any amendment to or modification of any Secured Debt Agreement or any security for any of the Obligations; whether or not such Assignor shall have notice or knowledge of any of the foregoing. 10.4. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon each Assignor and its successors and assigns (although no Assignor may assign its rights and obligations hereunder except in accordance with the provisions of the Secured Debt Agreements) and shall inure to the benefit of the Collateral Agent and the other Secured Creditors and their respective successors and assigns. All agreements, statements, representations and warranties made by each Assignor herein or in any certificate or other instrument delivered by such Assignor or on its behalf under this Agreement shall be considered to have been relied upon by the Secured Creditors and shall survive the execution and delivery of this Agreement and the other Secured Debt Agreements regardless of any investigation made by the Secured Creditors or on their behalf. 10.5. HEADINGS DESCRIPTIVE. The headings of the several sections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 10.6. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 10.7. ASSIGNOR'S DUTIES. It is expressly agreed, anything herein contained to the contrary notwithstanding, that each Assignor shall remain liable to perform all of the obligations, if any, assumed by it with respect to the Collateral and the Collateral Agent shall not have any obligations or liabilities with respect to any Collateral by reason of or arising out of this Agreement, nor shall the Collateral Agent be required or obligated in any manner to perform or fulfill any of the obligations of any Assignor under or with respect to any Collateral. 10.8. TERMINATION; RELEASE. (a) After the Termination Date, this Agreement shall terminate (provided that all indemnities set forth herein including, without limitation, in Section 8.1 hereof shall survive such termination) and the Collateral Agent, at the request and expense of the respective Assignor, will promptly execute and deliver to such Assignor a proper instrument or instruments (including Uniform Commercial Code termination statements on form UCC-3) acknowledging the satisfaction and termination of this Agreement, and will duly assign, transfer and deliver to such Assignor (without recourse and without any representation or 25 warranty) such of the Collateral as may be in the possession of the Collateral Agent and as has not theretofore been sold or otherwise applied or released pursuant to this Agreement. As used in this Agreement, "Termination Date" shall mean the date upon which the Total Commitment and all Interest Rate Protection Agreements or Other Hedging Agreements have been terminated, all Loans have been repaid in full, all Letters of Credit have been terminated and all Obligations then owing have been paid in full. (b) In the event that any part of the Collateral is sold in connection with a sale permitted by Section 9.02 of the Credit Agreement (other than a sale to any Assignor or a Subsidiary thereof) or otherwise released at the direction of the Required Secured Creditors or any Equipment is financed as permitted by Sections 9.01(vii) and (viii) of the Credit Agreement (to the extent that the lender thereof does not permit the Collateral Agent to retain a junior Lien on such Equipment), such Collateral will be sold or financed, as the case may be, free and clear of the Liens created by this Agreement (and such Collateral shall automatically be released from the Liens created by this Agreement) and the Collateral Agent, at the request and expense of the relevant Assignor, will duly assign, transfer and deliver to such Assignor (without recourse and without any representation or warranty) such of the Collateral as is then being (or has been) so sold or released and as may be in the possession of the Collateral Agent and has not theretofore been released pursuant to this Agreement. (c) At any time that an Assignor desires that the Collateral Agent take any action to acknowledge or give effect to any release of Collateral pursuant to the foregoing Section 10.8(a) or (b), such Assignor shall deliver to the Collateral Agent a certificate signed by a principal executive officer of such Assignor stating that the release of the respective Collateral is permitted pursuant to Section 10.8(a) or (b). 10.9. COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with each Assignor and the Collateral Agent. 10.10. SEVERABILITY. 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. 10.11. THE COLLATERAL AGENT. The Collateral Agent will hold in accordance with this Agreement all items of the Collateral at any time received under this Agreement. It is expressly understood and agreed that the obligations of the Collateral Agent as holder of the Collateral and interests therein and with respect to the disposition thereof, and otherwise under this Agreement, are only those expressly set forth in this Agreement and in Section 12 of the Credit Agreement. The Collateral Agent shall act hereunder and thereunder on the terms and conditions set forth herein and in Section 12 of the Credit Agreement. 26 10.12. BENEFIT OF AGREEMENT. This Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of and be enforceable by each of the parties hereto and its successors and assigns. 10.13. ADDITIONAL ASSIGNORS. It is understood and agreed that any Subsidiary of Holdings that is required to execute a counterpart of this Agreement after the date hereof pursuant to the Credit Agreement shall automatically become an Assignor hereunder by executing a counterpart hereof and delivering the same to the Collateral Agent, at which time the Annexes to this Agreement will be appropriately modified to reflect the Collateral then owned by such additional Assignor. * * * IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. ADDRESS: c/o J.F. Lehman & Company, Inc. ELGAR HOLDINGS, INC., 450 Park Avenue as an Assignor New York, New York 10022 Attn: Donald Glickman Telephone No.: (212) 634-0100 By:/s/ KEITH OSTER Telecopier No.: (212) 634-1155 ------------------------- Title: and 9250 Brown Deer Road San Diego, California 92121 Attn: Chris Kelford Telephone No.: (619) 458-0204 Telecopier No.: (619) 458-0257 9250 Brown Deer Road ELGAR ELECTRONICS CORPORATION, San Diego, California 92121 as an Assignor Attn: Chris Kelford Telephone No.: (619) 458-0204 Telecopier No.: (619) 458-0257 By:/s/ KEITH OSTER -------------------------- Title: 27 and c/o J.F. Lehman & Company, Inc. 450 Park Avenue New York, New York 10022 Attn: Donald Glickman Telephone No.: (212) 634-0100 Telecopier No.: (212) 634-1155 120 Knowles Drive POWER TEN, Los Gatos, California 95030 as an Assignor Attn: Telephone No.: Telecopier No.: By: /s/ KEITH OSTER ------------------------- Title: and c/o J.F. Lehman & Company, Inc. 450 Park Avenue New York, New York 10022 Attn: Donald Glickman Telephone No.: (212) 634-0100 Telecopier No.: (212) 634-1155 Accepted and Agreed to: BANKERS TRUST COMPANY, as Collateral Agent By /s/ ANDREW KEITH -------------------------- Title: 28 EX-10.18 10 EXHIBIT 10.18 SUBSIDIARIES GUARANTY SUBSIDIARIES GUARANTY, dated as of May 29, 1998 (as amended, modified or supplemented from time to time, this "Guaranty"), made by each of the undersigned guarantors (each a "Guarantor," and together with any other entity that becomes a guarantor hereunder pursuant to Section 26 hereof, the "Guarantors"). Except as otherwise defined herein, capitalized terms used herein and defined in the Credit Agreement (as defined below) shall be used herein as therein defined. W I T N E S S E T H : WHEREAS, Elgar Holdings, Inc., Elgar Electronics Corporation (the "Borrower"), the lenders from time to time party thereto (the "Banks"), and Bankers Trust Company, as Agent (together with any successor agent, the "Agent"), have entered into an Amended and Restated Credit Agreement, dated as of February 3, 1998 and amended and restated as of May 29, 1998, providing for the making of Loans to, and the issuance of Letters of Credit for the account of, the Borrower as contemplated therein (as amended, modified as supplemented from time to time, the "Credit Agreement") (the Banks, the Collateral Agent and the Agent are herein called the "Bank Creditors"); WHEREAS, the Borrower may at any time and from time to time enter into one or more Interest Rate Protection Agreements or Other Hedging Agreements with one or more Banks or any affiliate thereof (each such Bank or affiliate, even if the respective Bank subsequently ceases to be a Bank under the Credit Agreement for any reason, together with such Bank's or affiliate's successors and assigns, if any, collectively, the "Other Creditors," and together with the Bank Creditors, the "Secured Creditors"); WHEREAS, each Guarantor is a direct or indirect Subsidiary of the Borrower; WHEREAS, it is a condition to the making of Loans to, and the issuance of Letters of Credit for the account of, the Borrower under the Credit Agreement that each Guarantor shall have executed and delivered this Guaranty; and WHEREAS, each Guarantor will obtain benefits from the incurrence of Loans to, and the issuance of Letters of Credit for the account of, the Borrower under the Credit Agreement and the entering into by the Borrower of Interest Rate Protection Agreements or Other Hedging Agreements and, accordingly, desires to execute this Guaranty in order to satisfy the conditions described in the preceding paragraph; NOW, THEREFORE, in consideration of the foregoing and other benefits accruing to each Guarantor, the receipt and sufficiency of which are hereby acknowledged, each Guarantor hereby makes the following representations and warranties to the Secured Creditors and hereby covenants and agrees with each Secured Creditor as follows: 1. Each Guarantor, jointly and severally, irrevocably, absolutely and unconditionally guarantees: (i) to the Bank Creditors the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of (x) the principal of and interest on the Notes issued by, and the Loans made to, the Borrower under the Credit Agreement, and all reimbursement obligations and Unpaid Drawings with respect to Letters of Credit issued under the Credit Agreement and (y) all other obligations (including obligations which, but for the automatic stay under Section 362(a) of the Bankruptcy Code, would become due), liabilities and indebtedness owing by the Borrower to the Bank Creditors under the Credit Agreement or any other Credit Document to which the Borrower is a party (including, without limitation, indemnities, Fees and interest thereon), whether now existing or hereafter incurred under, arising out of or in connection with the Credit Agreement or any such other Credit Document and the due performance and compliance by the Borrower with all of the terms, conditions and agreements contained in the Credit Agreement and such other Credit Documents (all such principal, interest, liabilities, indebtedness and obligations being herein collectively called the "Credit Document Obligations"); and (ii) to each Other Creditor the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations (including obligations which, but for the automatic stay under Section 362(a) of the Bankruptcy Code, would become due), liabilities and indebtedness owing by the Borrower under any Interest Rate Protection Agreement or Other Hedging Agreement, whether now in existence or hereafter arising, and the due performance and compliance by the Borrower with all of the terms, conditions and agreements contained in the Interest Rate Protection Agreements or Other Hedging Agreements (all such obligations, liabilities and indebtedness being herein collectively called the "Other Obligations," and together with the Credit Document Obligations, the "Guaranteed Obligations"). Each Guarantor understands, agrees and confirms that the Secured Creditors may enforce this Guaranty up to the full amount of the Guaranteed Obligations against such Guarantor without proceeding against any other Guarantor, the Borrower, against any security for the Guaranteed Obligations, or under any other guaranty covering all or a portion of the Guaranteed Obligations. 2. Additionally, each Guarantor, jointly and severally, unconditionally, absolutely and irrevocably, guarantees the payment of any and all Guaranteed Obligations whether or not due or payable by the Borrower upon the occurrence in respect of the Borrower of any of the events specified in Section 10.05 of the Credit Agreement, and unconditionally, absolutely and irrevocably, jointly and severally, promises to pay such Guaranteed Obligations to the Secured Creditors, or order, on demand, in legal tender of the United States. This Guaranty shall constitute a guaranty of payment, and not of collection. 3. The liability of each Guarantor hereunder is primary, absolute and unconditional and is exclusive and independent of any security for or other guaranty of the indebtedness of the Borrower whether executed by such Guarantor, any other Guarantor, any other guarantor or by any other party, and the liability of each Guarantor hereunder shall not be affected or impaired by any circumstance or occurrence whatsoever, including, without limitation: (a) any direction as to application of payment by the Borrower or by any other party, (b) any other continuing or other guaranty, undertaking or maximum liability of a guarantor or of any other party as to the Guaranteed Obligations, (c) any payment on or in reduction of any such 2 other guaranty or undertaking (other than a payment in full in cash of all Guaranteed Obligations), (d) any dissolution, termination or increase, decrease or change in personnel by the Borrower, (e) any payment made to any Secured Creditor on the indebtedness which any Secured Creditor repays the Borrower pursuant to court order in any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceeding, and each Guarantor waives any right to the deferral or modification of its obligations hereunder by reason of any such proceeding, (f) any action or inaction by the Secured Creditors as contemplated in Section 6 hereof or (g) any invalidity, irregularity or unenforceability of all or any part of the Guaranteed Obligations or of any security therefor. 4. The obligations of each Guarantor hereunder are independent of the obligations of any other Guarantor, any other guarantor or the Borrower, and a separate action or actions may be brought and prosecuted against each Guarantor whether or not action is brought against any other Guarantor, any other guarantor or the Borrower and whether or not any other Guarantor, any other guarantor or the Borrower be joined in any such action or actions. Each Guarantor waives, to the fullest extent permitted by law, the benefits of any statute of limitations affecting its liability hereunder or the enforcement thereof. Any payment by the Borrower or other circumstance which operates to toll any statute of limitations as to the Borrower shall operate to toll the statute of limitations as to each Guarantor. 5. Each Guarantor hereby waives notice of acceptance of this Guaranty and notice of any liability to which it may apply, and waives promptness, diligence, presentment, demand of payment, protest, notice of dishonor or nonpayment of any such liabilities, suit or taking of other action by the Agent or any other Secured Creditor against, and any other notice to, any party liable thereon (including such Guarantor, any other Guarantor, any other guarantor, the Borrower). 6. Any Secured Creditor may at any time and from time to time without the consent of, or notice to, any Guarantor, without incurring responsibility to such Guarantor, without impairing or releasing the obligations of such Guarantor hereunder, upon or without any terms or conditions and in whole or in part: (a) change the manner, place or terms of payment of, and/or change or extend the time of payment of, renew, alter or increase, any of the Guaranteed Obligations (including any increase or decrease in the rate of interest thereon), any security therefor, or any liability incurred directly or indirectly in respect thereof, and the guaranty herein made shall apply to the Guaranteed Obligations as so changed, extended, renewed or altered; (b) take and hold security for the payment of the Guaranteed Obligations and sell, exchange, release, surrender, impair, realize upon or otherwise deal with in any manner and in any order any property by whomsoever at any time pledged or mortgaged to secure, or howsoever securing, the Guaranteed Obligations or any liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset thereagainst; 3 (c) exercise or refrain from exercising any rights against the Borrower, any other Credit Party, any Subsidiary thereof or otherwise act or refrain from acting; (d) release or substitute any one or more endorsers, Guarantors, other guarantors, the Borrower or other obligors; (e) settle or compromise any of the Guaranteed Obligations, any security therefor or any liability (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and may subordinate the payment of all or any part thereof to the payment of any liability (whether due or not) of the Borrower to creditors of the Borrower other than the Secured Creditors; (f) apply any sums by whomsoever paid or howsoever realized to any liability or liabilities of the Borrower to the Secured Creditors regardless of what liabilities of the Borrower remain unpaid; (g) consent to or waive any breach of, or any act, omission or default under, any of the Interest Rate Protection Agreements or Other Hedging Agreements, the Credit Documents or any of the instruments or agreements referred to therein, or otherwise amend, modify or supplement any of the Interest Rate Protection Agreements or Other Hedging Agreements, the Credit Documents or any of such other instruments or agreements; (h) act or fail to act in any manner referred to in this Guaranty which may deprive such Guarantor of its right to subrogation against the Borrower to recover full indemnity for any payments made pursuant to this Guaranty; and/or (i) take any other action which would, under otherwise applicable principles of common law, give rise to a legal or equitable discharge of such Guarantor from its liabilities under this Guaranty. 7. This Guaranty is a continuing one and all liabilities to which it applies or may apply under the terms hereof shall be conclusively presumed to have been created in reliance hereon. No failure or delay on the part of any Secured Creditor in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein expressly specified are cumulative and not exclusive of any rights or remedies which any Secured Creditor would otherwise have. No notice to or demand on any Guarantor in any case shall entitle such Guarantor to any other further notice or demand in similar or other circumstances or constitute a waiver of the rights of any Secured Creditor to any other or further action in any circumstances without notice or demand. It is not necessary for any Secured Creditor to inquire into the capacity or powers of the Borrower or the officers, directors, partners or agents acting or purporting to act on its behalf, and any indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. 4 8. Any indebtedness of the Borrower now or hereafter held by any Guarantor is hereby subordinated to the indebtedness of the Borrower or to the Secured Creditors, and if the Agent or the Collateral Agent so requests, after the occurrence and during the continuance of an Event of Default, such indebtedness of the Borrower to any Guarantor shall be collected, enforced and received by such Guarantor as trustee for the Secured Creditors and be paid over to the Secured Creditors on account of the indebtedness of the Borrower to the Secured Creditors, but without affecting or impairing in any manner the liability of such Guarantor under the other provisions of this Guaranty. Without limiting the generality of the foregoing, each Guarantor hereby agrees with the Secured Creditors that it will not exercise any right of subrogation which it may at any time otherwise have as a result of this Guaranty (whether contractual, under Section 509 of the Bankruptcy Code or otherwise) until all Guaranteed Obligations have been irrevocably paid in full in cash. 9. (a) Each Guarantor waives any right (except as shall be required by applicable law and cannot be waived) to require the Secured Creditors to: (i) proceed against the Borrower, any other Guarantor, any other guarantor of the Guaranteed Obligations or any other party; (ii) proceed against or exhaust any security held from the Borrower, any other Guarantor, any other guarantor of the Guaranteed Obligations or any other party; or (iii) pursue any other remedy in the Secured Creditors' power whatsoever. Each Guarantor waives any defense based on or arising out of any defense of the Borrower, any other Guarantor, any other guarantor of the Guaranteed Obligations or any other party other than payment of the Guaranteed Obligations (but only to the extent of such payment), including, without limitation, any defense based on or arising out of the disability of the Borrower, any other Guarantor, any other guarantor of the Guaranteed Obligations or any other party, or the unenforceability of the Guaranteed Obligations or any part thereof from any cause, or the cessation from any cause of the liability of the Borrower other than payment of the Guaranteed Obligations. The Secured Creditors may, at their election, foreclose on any security held by the Agent, the Collateral Agent or the other Secured Creditors by one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, or exercise any other right or remedy the Secured Creditors may have against the Borrower or any other party, or any security, without affecting or impairing in any way the liability of any Guarantor hereunder except to the extent the Guaranteed Obligations have been paid in full in cash. Each Guarantor waives any defense arising out of any such election by the Secured Creditors, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of such Guarantor against the Borrower or any other party or any security. (b) Each Guarantor waives all presentments, demands for performance, protests and notices, including, without limitation, notices of nonperformance, notices of protest, notices of dishonor, notices of acceptance of this Guaranty, and notices of the existence, creation or incurring of new or additional indebtedness. Each Guarantor assumes all responsibility for being and keeping itself informed of the Borrower's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations and the nature, scope and extent of the risks which such Guarantor assumes and incurs hereunder, and agrees that the Secured Creditors shall have no duty to advise any Guarantor of information known to them regarding such circumstances or risks. 5 (c) Each Guarantor hereby acknowledges and affirms that it understands that to the extent the Guaranteed Obligations are secured by Real Property located in the State of California, such Guarantor shall be liable for the full amount of its liability hereunder notwithstanding foreclosure on such Real Property by trustee sale or any other reason impairing such Guarantor's or any Secured Creditors' right to proceed against the Borrower or any other guarantor of the Guaranteed Obligations. In accordance with Section 2856 of the California Civil Code, each Guarantor hereby waives: (i) all rights of subrogation, reimbursement, indemnification, and contribution and any other rights and defenses that are or may become available to such Guarantor by reason of Sections 2787 to 2855, inclusive, 2899 and 3433 of the California Civil Code; (ii) all rights and defenses that such Guarantor may have because the Guaranteed Obligations are secured by Real Property located in the State of California. This means, among other things: (A) the Secured Creditors may collect from such Guarantors without first foreclosing on any real or personal property collateral pledged by the Borrower or any other Credit Party; and (B) if the Secured Creditors foreclose on any Real Property collateral pledged by the Borrower or any other Credit Party, (1) the amount of the Guaranteed Obligations may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price, and (2) the Secured Creditors may collect from such Guarantor even if the Secured Creditors, by foreclosing on the Real Property collateral, have destroyed any right such Guarantor may have to collect from the Borrower. This is an unconditional and irrevocable waiver of any rights and defenses such Guarantor may have because the Guaranteed Obligations are secured by Real Property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d or 726 of the California Code of Civil Procedure; and (iii) all rights and defenses arising out of an election of remedies by the Secured Creditors, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for the Guaranteed Obligations, has destroyed such Guarantor's rights of subrogation and reimbursement against the Borrower by the operation of Section 580d of California the Code of Civil Procedure or otherwise. Each Guarantor warrants and agrees that each of the waivers set forth above is made with full knowledge of its significance and consequences and that if any of such waivers are determined to be contrary to any applicable law or public policy, such waivers shall be effective only to the maximum extent permitted by law. 10. The Secured Creditors agree that this Guaranty may be enforced only by the action of the Agent or the Collateral Agent and that no other Secured Creditors shall have any right individually to seek to enforce or to enforce this Guaranty or to realize upon the security to be granted by the Security Documents, it being understood and agreed that such rights and remedies may be exercised by the Agent or the Collateral Agent or, after all the Credit Document Obligations have been paid in full, by the holders of at least a majority of the outstanding Other 6 Obligations, as the case may be, for the benefit of the Secured Creditors upon the terms of this Guaranty and the Security Documents. The Secured Creditors further agree that this Guaranty may not be enforced against any director, officer, employee, partner or stockholder of any Guarantor (except to the extent such partner or stockholder is also a Guarantor hereunder). 11. In order to induce the Banks to make Loans to, and issue Letters of Credit for the account of, the Borrower pursuant to the Credit Agreement, and in order to induce the Other Creditors to execute, deliver and perform the Interest Rate Protection Agreements or Other Hedging Agreements, each Guarantor represents, warrants and covenants that: (a) Such Guarantor (i) is a duly organized and validly existing corporation in good standing under the laws of the jurisdiction of its organization, (ii) has the corporate power and authority to own its property and assets and to transact the business in which it is engaged and presently proposes to engage and (iii) is duly qualified and is authorized to do business and is in good standing in each jurisdiction where the conduct of its business requires such qualification except for failures to be so qualified which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole. (b) Such Guarantor has the corporate power and authority to execute, deliver and perform the terms and provisions of this Guaranty and each other Document to which it is a party and has taken all necessary corporate action to authorize the execution, delivery and performance by it of this Guaranty and each such other Document. Such Guarantor has duly executed and delivered this Guaranty and each other Document to which it is a party, and this Guaranty and each such other Document constitutes the legal, valid and binding obligation of such Guarantor enforceable in accordance with its terms, except to the extent that the enforceability hereof or thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law). (c) Neither the execution, delivery or performance by such Guarantor of this Guaranty or any other Document to which it is a party, nor compliance by it with the terms and provisions hereof and thereof, will (i) contravene any provision of any applicable law, statute, rule or regulation or any applicable order, writ, injunction or decree of any court or governmental instrumentality, (ii) conflict with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien (except pursuant to the Security Documents) upon any of the property or assets of such Guarantor or any of its Subsidiaries pursuant to the terms of any indenture, mortgage, deed of trust, loan agreement, credit agreement, or any other material agreement, contract or instrument to which such Guarantor or any of its Subsidiaries is a party or by which it or any of its property or assets is bound or to which it may be subject or (iii) violate any provision of the certificate of incorporation or by-laws (or equivalent organizational documents) of such Guarantor or any of its Subsidiaries. 7 (d) No order, consent, approval, license, authorization or validation of, or filing, recording or registration with (except as have been obtained or made), or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required for, (i) the execution, delivery and performance of this Guaranty by such Guarantor or any other Document to which such Guarantor is a party or (ii) the legality, validity, binding effect or enforceability of this Guaranty or any other Document to which such Guarantor is a party. (e) There are no actions, suits or proceedings pending or threatened (i) with respect to this Guaranty or any other Document to which such Guarantor is a party or (ii) with respect to such Guarantor that could reasonably be expected to materially and adversely affect (a) the business, operations, property, assets, liabilities or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole or (b) the rights or remedies of the Secured Creditors hereunder or under the other Credit Documents to which such Guarantor is a party or the ability of such Guarantor to perform its respective obligations to the Secured Creditors hereunder and under the other Credit Documents to which it is a party. 12. Each Guarantor covenants and agrees that on and after the Restatement Effective Date and until the termination of the Total Commitment and all Interest Rate Protection Agreements and Other Hedging Agreements and when no Note or Letter of Credit remains outstanding and all Guaranteed Obligations have been paid in full, such Guarantor will comply, and will cause each of its Subsidiaries to comply, with all of the applicable provisions, covenants and agreements contained in Sections 8 and 9 of the Credit Agreement, and will take, or will refrain from taking, as the case may be, all actions that are necessary to be taken or not taken so that it is not in violation of any provision, covenant or agreement contained in Section 8 or 9 of the Credit Agreement, and so that no Default or Event of Default, is caused by the actions of such Guarantor or any of its Subsidiaries. 13. The Guarantors hereby jointly and severally agree to pay all reasonable out-of-pocket costs and expenses of each Secured Creditor in connection with the enforcement of this Guaranty and of the Agent in connection with any amendment, waiver or consent relating hereto (including in each case, without limitation, the reasonable fees and disbursements of counsel employed by each Secured Creditor). 14. This Guaranty shall be binding upon each Guarantor and its successors and assigns and shall inure to the benefit of the Secured Creditors and their successors and assigns. 15. Neither this Guaranty nor any provision hereof may be changed, waived, discharged or terminated except with the written consent of each Guarantor directly affected thereby and with the written consent of the Required Secured Creditors (as defined in the Security Agreement); PROVIDED, that any change, waiver, modification or variance affecting the rights and benefits of a single Class (as defined below) of Secured Creditors (and not all Secured Creditors in a like or similar manner) shall also require the written consent of the Requisite Creditors (as defined below) of such Class of Secured Creditors (it being understood that the addition or release of any Guarantor hereunder shall not constitute a change, waiver, discharge or 8 termination affecting any Guarantor other than the Guarantor so added or released). For the purpose of this Guaranty, the term "Class" shall mean each class of Secured Creditors, I.E., whether (x) the Bank Creditors as holders of the Credit Document Obligations or (y) the Other Creditors as the holders of the Other Obligations. For the purpose of this Guaranty, the term "Requisite Creditors" of any Class shall mean (x) with respect to the Credit Document Obligations, the Required Banks and (y) with respect to the Other Obligations, the holders of at least a majority amount of all obligations outstanding from time to time under the Interest Rate Protection or Other Hedging Agreements. 16. Each Guarantor acknowledges that an executed (or conformed) copy of each of the Credit Documents and Interest Rate Protection Agreements or Other Hedging Agreements has been made available to its principal executive officers and such officers are familiar with the contents thereof. 17. In addition to any rights now or hereafter granted under applicable law (including, without limitation, Section 151 of the New York Debtor and Secured Creditor Law) and not by way of limitation of any such rights, upon the occurrence and during the continuance of an Event of Default (such term to mean and include any "Event of Default" as defined in the Credit Agreement or any payment default under any Interest Rate Protection Agreement or Other Hedging Agreement continuing after any applicable grace period), each Secured Creditor is hereby authorized, at any time or from time to time, without notice to any Guarantor or to any other Person, any such notice being expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any other indebtedness at any time held or owing by such Secured Creditor to or for the credit or the account of such Guarantor, against and on account of the obligations and liabilities of such Guarantor to such Secured Creditor under this Guaranty, irrespective of whether or not such Secured Creditor shall have made any demand hereunder and although said obligations, liabilities, deposits or claims, or any of them, shall be contingent or unmatured. Notwithstanding anything to the contrary contained in this Section 17, no Secured Creditor shall exercise any such right of set-off without the prior consent of the Agent or the Required Secured Creditors so long as the Guaranteed Obligations shall be secured by any Real Property located in the State of California, it being understood and agreed, however, that this sentence is for the sole benefit of the Secured Creditors and may be amended, modified or waived in any respect by the Required Secured Creditors without the requirements of prior notice to or consent by any Credit Party and does not constitute a waiver of any rights against any Credit Party or against any Collateral. 18. All notices, requests, demands or other communications pursuant hereto shall be deemed to have been duly given or made when delivered to the Person to which such notice, request, demand or other communication is required or permitted to be given or made under this Guaranty, addressed to such party at (i) in the case of any Bank Creditor, as provided in the Credit Agreement, (ii) in the case of any Guarantor, at the address set forth opposite such Guarantor's signature below and (iii) in the case of any Other Creditor, at such address as such Other Creditor shall have specified in writing to the Guarantors; or in any case at such other address as any of the Persons listed above may hereafter notify the others in writing. 9 19. If claim is ever made upon any Secured Creditor for repayment or recovery of any amount or amounts received in payment or on account of any of the Guaranteed Obligations and any of the aforesaid payees repays all or part of said amount by reason of (i) any judgment, decree or order of any court or administrative body having jurisdiction over such payee or any of its property or (ii) any settlement or compromise of any such claim effected by such payee with any such claimant (including the Borrower) then and in such event each Guarantor agrees that any such judgment, decree, order, settlement or compromise shall be binding upon such Guarantor, notwithstanding any revocation hereof or other instrument evidencing any liability of the Borrower, and such Guarantor shall be and remain liable to the aforesaid payees hereunder for the amount so repaid or recovered to the same extent as if such amount had never originally been received by any such payee. 20. (a) THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF THE SECURED CREDITORS AND OF THE UNDERSIGNED HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK. Any legal action or proceeding with respect to this Guaranty or any other Credit Document to which any Guarantor is a party may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Guaranty, each Guarantor hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each Guarantor hereby further irrevocably waives any claim that any such court lacks personal jurisdiction over such Guarantor, and agrees not to plead or claim in any legal action or proceeding with respect to this Guaranty or any other Credit Document to which such Guarantor is a party brought in any of the aforesaid courts that any such court lacks personal jurisdiction over such Guarantor. Each Guarantor further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such Guarantor at its address set forth opposite its signature below, such service to become effective 30 days after such mailing. Each Guarantor hereby irrevocably waives any objection to such service of process and further irrevocably waives and agrees not to plead or claim in any action or proceeding commenced hereunder or under any other Credit Document to which such Guarantor is a party that such service of process was in any way invalid or ineffective. Nothing herein shall affect the right of any of the Secured Creditors to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against each Guarantor in any other jurisdiction. (b) Each Guarantor hereby irrevocably waives (to the fullest extent permitted by applicable law) any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Guaranty or any other Credit Document to which such Guarantor is a party brought in the courts referred to in clause (a) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that such action or proceeding brought in any such court has been brought in an inconvenient forum. 10 (c) EACH GUARANTOR AND EACH SECURED CREDITOR (BY ITS ACCEPTANCE OF THE BENEFITS OF THIS GUARANTY) HEREBY IRREVOCABLY WAIVES ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS GUARANTY, THE OTHER CREDIT DOCUMENTS TO WHICH SUCH GUARANTOR IS A PARTY OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 21. In the event that all of the capital stock of one or more Guarantors is sold or otherwise disposed of or liquidated in compliance with the requirements of Section 9.02 of the Credit Agreement (or such sale or other disposition has been approved in writing by the Required Secured Creditors) and the proceeds of such sale, disposition or liquidation are applied in accordance with the provisions of the Credit Agreement, to the extent applicable, such Guarantor shall upon consummation of such sale or other disposition (except to the extent that such sale or disposition is to the Borrower or another Subsidiary thereof) be released from this Guaranty automatically and without further action and this Guaranty shall, as to each such Guarantor or Guarantors, terminate, and have no further force or effect (it being understood and agreed that the sale of one or more Persons that own, directly or indirectly, all of the capital stock of any Guarantor shall be deemed to be a sale of such Guarantor for the purposes of this Section 21). 22. At any time a payment in respect of the Guaranteed Obligations is made under this Guaranty, the right of contribution of each Guarantor against each other Guarantor shall be determined as provided in the immediately following sentence, with the right of contribution of each Guarantor to be revised and restated as of each date on which a payment (a "Relevant Payment") is made on the Guaranteed Obligations under this Guaranty. At any time that a Relevant Payment is made by a Guarantor that results in the aggregate payments made by such Guarantor in respect of the Guaranteed Obligations to and including the date of the Relevant Payment exceeding such Guarantor's Contribution Percentage (as defined below) of the aggregate payments made by all Guarantors in respect of the Guaranteed Obligations to and including the date of the Relevant Payment (such excess, the "Aggregate Excess Amount"), each such Guarantor shall have a right of contribution against each other Guarantor who has made payments, in respect of the Guaranteed Obligations to and including the date of the Relevant Payment, in an aggregate amount less than such other Guarantor's Contribution Percentage of the aggregate payments made to and including the date of the Relevant Payment by all Guarantors in respect of the Guaranteed Obligations (the aggregate amount of such deficit, the "Aggregate Deficit Amount") in an amount equal to (x) a fraction the numerator of which is the Aggregate Excess Amount of such Guarantor and the denominator of which is the Aggregate Excess Amount of all Guarantors multiplied by (y) the Aggregate Deficit Amount of such other Guarantor. A Guarantor's right of contribution pursuant to the preceding sentences shall arise at the time of each computation, subject to adjustment to the time of any subsequent computation; PROVIDED, that no Guarantor may take any action to enforce such right until the Guaranteed Obligations have been irrevocably paid in full in cash, it being expressly recognized and agreed by all parties hereto that any Guarantor's right of contribution arising pursuant to this Section 22 against any other Guarantor shall be expressly junior and subordinate to such other Guarantor's obligations and liabilities in respect of the Guaranteed Obligations and any other obligations owing under this Guaranty. As used in this Section 22: (i) each Guarantor's "Contribution 11 Percentage" shall mean the percentage obtained by dividing (x) the Adjusted Net Worth (as defined below) of such Guarantor by (y) the aggregate Adjusted Net Worth of all Guarantors; (ii) the "Adjusted Net Worth" of each Guarantor shall mean the greater of (x) the Net Worth (as defined below) of such Guarantor and (y) zero; and (iii) the "Net Worth" of each Guarantor shall mean the amount by which the fair salable value of such Guarantor's assets on the date of any Relevant Payment exceeds its existing debts and other liabilities (including contingent liabilities, but without giving effect to any Guaranteed Obligations arising under this Guaranty) on such date. All parties hereto recognize and agree that, except for any right of contribution arising pursuant to this Section 22, each Guarantor who makes any payment in respect of the Guaranteed Obligations shall have no right of contribution or subrogation against any other Guarantor in respect of such payment until all of the Guaranteed Obligations have been irrevocably paid in full in cash. Each of the Guarantors recognizes and acknowledges that the rights to contribution arising hereunder shall constitute an asset in favor of the party entitled to such contribution. In this connection, each Guarantor has the right to waive its contribution right against any Guarantor to the extent that after giving effect to such waiver such Guarantor would remain solvent, in the determination of the Required Banks. 23. Each Guarantor and each Secured Creditor (by its acceptance of the benefits of this Guaranty) hereby confirms that it is its intention that this Guaranty not constitute fraudulent transfer or conveyance for purposes of the Bankruptcy Code, the Uniform Fraudulent Conveyance Act of any similar Federal or state law. To effectuate the foregoing intention, each Guarantor and each Secured Creditor (by its acceptance of the benefits of this Guaranty) hereby irrevocably agrees that the Guaranteed Obligations guaranteed by such Guarantor shall be limited to such amount as will, after giving effect to such maximum amount and all other (contingent or otherwise) liabilities of such Guarantor that are relevant under such laws, and after giving effect to any rights to contribution pursuant to any agreement providing for an equitable contribution among such Guarantor and the other Guarantors, result in the Guaranteed Obligations of such Guarantor in respect of such maximum amount not constituting a fraudulent transfer or conveyance. 24. This Guaranty may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with the Guarantors and the Agent. 25. All payments made by any Guarantor hereunder will be made without setoff, counterclaim or other defense and on the same basis as payments are made by the Borrower under Sections 4.03 and 4.04 of the Credit Agreement. 26. It is understood and agreed that any Subsidiary of Holdings that is required to execute a counterpart of this Guaranty after the date hereof pursuant to the Credit Agreement shall automatically become a Guarantor hereunder by executing a counterpart hereof and delivering the same to the Agent. 12 IN WITNESS WHEREOF, each Guarantor has caused this Guaranty to be executed and delivered as of the date first above written. Address: POWER TEN, 120 Knowles Drive as a Guarantor Los Gatos, California 95030 Attn: By: /s/ KEITH OSTER Telephone No.: ------------------------- Telecopier No.: Title: and c/o J.F. Lehman & Company, Inc. 450 Park Avenue New York, New York 10022 Attn: Donald Glickman Telephone No.: (212) 634-0100 Telecopier No.: (212) 634-1155 Accepted and Agreed to: BANKERS TRUST COMPANY, as Agent By /s/ ANDREW KEITH ---------------------------- Title: 13 EX-10.19 11 EXHIBIT 10.19 CAPITAL CALL AGREEMENT CAPITAL CALL AGREEMENT (as amended, supplemented or modified from time to time, this "Agreement"), dated as of May 29, 1998, made by and among J.F. Lehman Equity Investors L.P. ("JFLEI"), Elgar Holdings, Inc. ("Holdings"), Elgar Electronics Corporation (the "Borrower"), and Bankers Trust Company, as Agent (the "Agent") for the benefit of the various lenders (the "Banks") from time to time party to the Credit Agreement referred to below. Except as otherwise defined herein, all capitalized terms used herein and defined in the Credit Agreement are used herein as therein defined. W I T N E S S E T H : WHEREAS, Holdings, the Borrower, the Banks and the Agent have entered into an Amended and Restated Credit Agreement, dated as of February 3, 1998 and amended and restated as of May 29, 1998 (as amended, modified or supplemented from time to time, the "Credit Agreement"); WHEREAS, on the date hereof, JFLEI owns approximately ___% of the economic interest and voting interest in Holdings' capital stock, and Holdings owns 100% of the economic and voting interest in the Borrower's capital stock; WHEREAS, it is a condition precedent to the making of Loans to, and the issuance of Letters of Credit for the account of, the Borrower under the Credit Agreement that JFLEI, Holdings and the Borrower shall have executed and delivered this Agreement; and WHEREAS, JFLEI, Holdings and the Borrower will obtain benefits as a result of the making of Loans to, and the issuance of Letters of Credit for the account of, the Borrower under the Credit Agreement and, accordingly, desire to execute and deliver this Agreement in order to satisfy the condition described in the preceding paragraph; NOW, THEREFORE, it is agreed: 1. CERTAIN DEFINED TERMS. As used herein, the following terms shall have the following meanings: "Agent" shall have the meaning provided in the first paragraph of this Agreement. "Agreement" shall have the meaning provided in the first paragraph of this Agreement. "Banks" shall have the meaning provided in the first paragraph of this Agreement. "Borrower" shall have the meaning provided in the first paragraph of this Agreement. "Capital Call Amount" shall mean (i) in the case of a Capital Call Event of the type described in clause (i) or (ii) of the definition thereof, $4,000,000 or (ii) in the case of a Capital Call Event of the type described in clause (iii) of the definition thereof, an amount equal to the lesser of (A) $4,000,000 and (B) that amount necessary to be added back to Consolidated EBITDA to result in Holdings' bearing in compliance with Section 9.08 for the Test Period ending closest to March 31, 1999. "Capital Call Event" shall mean the first to occur of (i) an Event of Default under Section 10.01 of the Credit Agreement, (ii) an Event of Default under Section 10.05 of the Credit Agreement, and (iii) an Event of Default under Section 10.03 of the Credit Agreement as a result of Holdings' failure to be in compliance with Section 9.08 of the Credit Agreement in respect of the Test Period ending closest to March 31, 1999 (determined, for purposes of this definition, without giving effect to the last sentence contained in the definition of "Consolidated EBIDTA" in the Credit Agreement); it being understood and agreed, however, that if Holdings is in compliance with Section 9.08 of the Credit Agreement for the Test Period ending closest to March 31, 1999 (without giving effect to the contribution of the Capital Call Amount), then a Capital Call Event shall not thereafter occur and this Agreement shall be terminated in accordance with Section 15 hereof. "Credit Agreement" shall have the meaning provided in the first recital of this Agreement. "Holdings" shall have the meaning provided in the first paragraph of this Agreement. "Investment" shall mean a capital contribution to Holdings by JFLEI. "Proportionate Share" of each Bank at any time shall mean a fraction (x) the numerator of which is the sum of (I) the aggregate principal amount of all Loans made by such Bank and then outstanding plus (II) the amount (if any) of such Bank's participation at such time in outstanding Swingline Loans and Letter of Credit Outstandings and (y) the denominator of which is the sum of (I) the aggregate principal amount of all Loans then outstanding plus (II) the aggregate amount of all Letter of Credit Outstandings at such time. 2. REQUIRED CONTRIBUTIONS TO HOLDINGS; ETC. (a) JFLEI hereby absolutely, irrevocably and unconditionally agrees that on the date any Capital Call Event shall have occurred, JFLEI will immediately make an Investment in Holdings in an amount equal to the applicable Capital Call Amount; PROVIDED that to the extent such Capital Call Event arises because of an Event of Default under Section 10.05 of the Credit Agreement or if any such Investment in Holdings cannot be made by any reason whatsoever, then (in either case) JFLEI's Investment shall instead be made by means of the purchase by JFLEI from each of the Banks of a subordinated participation in such Banks' outstanding Loans (and, to the extent provided below, such Banks' participations in outstanding Swingline Loans and Letter of Credit Outstandings), PRO RATA among the Banks based on their respective Proportionate Shares at such time, with such participations to be evidenced by a subordinated participation agreement in form and substance reasonably satisfactory to the Agent. In the event that participations are purchased by JFLEI as -2- provided in this Section 2, then (i) the Total Unutilized Revolving Loan Commitment pursuant to the Credit Agreement shall immediately terminate as provided therein and (ii) the participations purchased from each Bank shall be allocated ratably to the outstanding Loans and participations in Swingline Loans and Letter of Credit Outstandings of the various Banks, although each Bank with a Revolving Loan Commitment shall instead allocate any amounts received in respect of Swingline Loans or Letter of Credit Outstandings first to Revolving Loans, with any excess above the amount of outstanding Revolving Loans to be held by the Agent as cash collateral for the participations purchased in outstanding Swingline Loans and Letter of Credit Outstandings; PROVIDED, FURTHER, that to the extent the respective Swingline Loans are repaid by the Borrower or the Letter of Credit Outstandings are reduced or repaid without requiring the funding by the respective Bank participating in same (and thereby eliminating the need to use the collateral for the purchased participation therein), any excess funds on deposit with the Agent as a result of the purchase of participations in such contingent obligations shall be reallocated (at the time and to the extent the Agent determines that excess amounts are then held by it) to purchase participations as otherwise required by the immediately preceding sentence. (b) Holdings hereby irrevocably agrees that, immediately upon receipt thereof, it will contribute the total Capital Call Amount received by it pursuant to clause (a) of this Section 2 to the capital of the Borrower. (c) The Borrower hereby acknowledges, confirms and agrees that immediately upon receipt of the Capital Call Amount it shall apply such amounts as a mandatory repayment of Loans in accordance with the provisions of Sections 4.02(h) and (i) of the Credit Agreement. 3. PAYMENTS. All payments required to be made pursuant to this Agreement shall be made in Dollars and in immediately available funds, and shall be made on the same basis as provided in Sections 4.03 and 4.04 of the Credit Agreement. 4. OBLIGATIONS INDEPENDENT. The obligations of JFLEI hereunder are independent of the obligations of any Guarantor, the Borrower or any other party, and a separate action or actions may brought and prosecuted against JFLEI whether or not an action is brought against any Guarantor, the Borrower or any other party and whether or not any Guarantor, the Borrower or any other party shall be joined in any such action or actions. JFLEI waives, to the fullest extent permitted by law, the benefit of statute of limitations affecting its liability hereunder or the enforcement hereof. 5. CERTAIN WAIVERS BY JFLEI. JFLEI hereby waives notice of acceptance of this Agreement and notice of any liability to which it may apply, and waives presentment, demand of payment, protest, notice of dishonor, or nonpayment of any such liability, suit or taking of other action by Holdings, the Borrower, the Agent or any Bank against, and any other notice to, JFLEI or any other party liable thereon. 6. ACTIONS RELATING TO OBLIGATIONS UNDER CREDIT AGREEMENT. The Agent or the Banks (or any of the Banks) may (except as shall be required by applicable statute and cannot be waived) at any time and from time to time without the consent of, or notice to, JFLEI, without incurring responsibility to JFLEI, without impairing or releasing the obligations of JFLEI -3- hereunder, upon or without any terms or conditions and in whole or in part: (a) change the manner, place or terms of payment of, and/or change or extend the time of payment of, renew, alter or increase any of the Obligations, any security therefor, or any liability incurred directly or indirectly in respect thereof; (b) take and hold security for the payment of the Obligations and sell, exchange, release, impair, surrender, realize upon or otherwise deal with in any manner and in any order any property by whomsoever at any time pledged or mortgaged to secure, or howsoever securing, the Obligations or any liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset thereagainst; (c) exercise or refrain from exercising any rights against the Borrower, any other Credit Party or others or otherwise act or refrain from acting; (d) settle or compromise any of the Obligations, any security therefor or any liability (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and may subordinate the payment of all or any part thereof to the payment of any liability (whether due or not) of the Borrower to creditors of the Borrower other than the Secured Creditors; (e) except as otherwise expressly provided herein, apply any sums by whomsoever paid or howsoever realized to any liability or liabilities of the Borrower to the Agent or the Banks regardless of what liability or liabilities of JFLEI or the Borrower remain unpaid; (f) release or substitute any one or more endorsers, guarantors, Credit Parties or other obligors; (g) consent to or waive any breach of, or any act, omission or default under, any of the Credit Documents or any of the instruments or agreements referred to therein, or otherwise amend, modify or supplement any of the Credit Documents or any of such other instruments or agreements; (h) act or fail to act in any manner referred to in this Agreement which may deprive such JFLEI of any right to subrogation against the Borrower to recover any payments made pursuant to this Agreement; (i) pursue its rights and remedies under this Agreement and/or under any guaranty of all or any part of the Obligations in whatever order, or collectively, and the Agent and the Banks shall be entitled to JFLEI's performance hereunder, notwithstanding any action taken (or not taken) by the Agent and the Banks to enforce any of its rights or remedies against JFLEI or any other Person, for all or any part of the Obligations or any payment received under this Agreement or any other such guaranty; and/or (j) take any other action which would, under otherwise applicable principles of -4- common law, give rise to a legal or equitable discharge of JFLEI from its liabilities under this Agreement. 7. INVALIDITY, ETC., OF OBLIGATIONS. No invalidity, irregularity or unenforceability of all or any of the Loans and/or any of the other Obligations or of any security therefor shall affect, impair or be a defense to this Agreement, and the obligations of JFLEI hereunder shall be absolute and unconditional notwithstanding the occurrence of any event or the existence of any circumstance, including, without limitation, any bankruptcy or insolvency proceeding with respect to JFLEI, Holdings or any of its Subsidiaries or any event or circumstance which would constitute a legal or equitable discharge, except payment in full in cash of all Obligations in accordance with the Credit Agreement. 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. In order to induce the Banks to enter into the Credit Agreement, JFLEI makes the following representations, warranties and agreements: (i) JFLEI is a duly organized and validly existing limited partnership in good standing under the laws of the State of Delaware and has the power and authority to own its property and assets and to transact the business in which it is engaged and presently proposes to engage. (ii) JFLEI has the power and authority to execute, deliver and perform the terms and provisions of this Agreement and has taken all necessary action to authorize the execution, delivery and performance by it of this Agreement. JFLEI has duly executed and delivered this Agreement, and this Agreement constitutes its legal, valid and binding obligation enforceable against it in accordance with its terms, except to the extent that the enforceability hereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law). (iii) Neither the execution, delivery or performance by JFLEI of this Agreement, nor compliance by it with the terms and provisions hereof, nor the consummation of the transactions contemplated herein, (x) will contravene any provision of any applicable law, statute, rule or regulation or any applicable order, writ, injunction or decree of any court or governmental instrumentality, (y) will conflict with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of JFLEI pursuant to the terms of any indenture, mortgage, deed of trust, credit agreement, loan agreement or any other material agreement, contract or instrument to which JFLEI is a party or by which it or any of its property or assets is bound or to which it may be subject or (z) will violate any provision of any of the organizational documents of JFLEI. (iv) No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with, (x) the execution, delivery and performance of this Agreement or (y) the legality, validity, -5- binding effect or enforceability of this Agreement. (v) There are no actions, suits or proceedings pending or, to the knowledge of JFLEI, threatened (x) with respect to this Agreement or (y) that could reasonably be expected to (I) materially and adversely effect the business, operations, property, assets, liabilities or condition (financial or otherwise) of JFLEI or (II) have a material adverse effect on the rights or remedies of the Banks or the Agent hereunder or on the ability of JFLEI to perform its obligations to the Banks or the Agent hereunder. (vi) JFLEI is in compliance with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property. (vii) JFLEI or the general partner thereof has the right to call cash capital contributions from the partners of JFLEI in amounts, and at times, sufficient to fund in a timely manner all obligations of JFLEI under this Agreement. 9. MAINTAIN ABILITY TO FUND OBLIGATIONS. Each of JFLEI and the general partner thereof agrees to take all action as may be necessary so that, at all time prior to the satisfaction and release of all obligations of JFLEI under this Agreement pursuant to Section 15 hereof, JFLEI and/or the general partner thereof shall have the right to call cash capital contributions from the partners of JFLEI in amounts, and at times, sufficient to fund in a timely manner all obligations of JFLEI under this Agreement. 10. CAPITAL CALL EVENT OF DEFAULT. The following shall constitute a "Capital Call Event of Default": JFLEI shall commence a voluntary case concerning itself under Title 11 of the United States Code entitled "Bankruptcy," as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced against JFLEI, and the petition is not controverted within 10 days, or is not dismissed within 60 days, after commencement of the case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of JFLEI, or JFLEI commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to JFLEI, or there is commenced against JFLEI any such proceeding which remains undismissed for a period of 60 days, or JFLEI is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or JFLEI suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of 60 days; or JFLEI makes a general assignment for the benefit of creditors; or any corporate action is taken by JFLEI for the purpose of effecting any of the foregoing. 11. WAIVERS OF FAILURES; DELAYS; ETC. No failure or delay on the part of the Agent, any Bank, JFLEI, Holdings, the Borrower or any other Credit Party in exercising any right, power or privilege hereunder and no course of dealing between JFLEI, the Agent, any -6- Bank, Holdings, the Borrower or any other Credit Party shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights, powers and remedies herein expressly provided are cumulative and not exclusive of any rights, powers or remedies which the Agent or any Bank would otherwise have. No notice to or demand on JFLEI in any case shall entitle JFLEI to any other further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Agent or any Bank to any other or further action in any circumstances without notice or demand. 12. BENEFIT OF AGREEMENT. This Agreement shall be binding upon JFLEI, Holdings and the Borrower, and their successors and assigns (including, without limitation, any executors or administrators) and shall inure to the benefit of the Agent and the Banks and their successors and assigns. Each of JFLEI, Holdings and the Borrower acknowledges and agrees that this Agreement is made for the benefit of the Agent and the Banks and that the Agent and/or the Banks may enforce all of the obligations of JFLEI, Holdings and the Borrower hereunder directly against them. Neither JFLEI, Holdings nor the Borrower may assign any of its rights or obligations hereunder without the consent of the Required Banks. 13. AMENDMENTS; WAIVERS. Neither this Agreement nor any provision hereof may be changed, modified, amended or waived except with the written consent of JFLEI, Holdings, the Borrower and the Agent (acting with the consent of the Required Banks). 14. NOTICES. All notices and other communication hereunder shall be made at the addresses, in the manner and with the effect provided in Section 13.03 of the Credit Agreement, provided that, for this purpose, the address of JFLEI shall be the address specified opposite its signature below. 15. TERMINATION OF AGREEMENT. This Agreement shall terminate and be of no further force and effect (except to the extent any party's obligations, if any, arising prior to such time hereunder have not theretofore been fulfilled) upon the earliest of (i) the date on which the Agent gives written notice to JFLEI, Holdings and the Borrower that their obligations under this Agreement have been fulfilled or terminated and (ii) the date on which all Commitments and Letters of Credit under the Credit Agreement have been terminated and all Obligations under the Credit Agreement have been repaid in full in cash in accordance with the requirements of the Credit Agreement. 16. GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER OF JURY TRIAL. (a) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF JFLEI, HOLDINGS, THE BORROWER, THE AGENT AND THE BANKS HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF JFLEI, -7- HOLDINGS AND THE BORROWER HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS WITH RESPECT TO ANY SUCH ACTION OR PROCEEDING. EACH OF JFLEI, HOLDINGS AND THE BORROWER HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH COURTS LACK JURISDICTION OVER SUCH PERSON, AND AGREES NOT TO PLEAD OR CLAIM, IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT BROUGHT IN ANY OF THE AFORESAID COURTS, THAT ANY SUCH COURT LACKS JURISDICTION OVER SUCH PERSON. EACH OF JFLEI, HOLDINGS, AND THE BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH PERSON, AT ITS ADDRESS FOR NOTICES PURSUANT TO SECTION 13.03 OF THE CREDIT AGREEMENT OR AS SET FORTH OPPOSITE ITS SIGNATURE BELOW, AS THE CASE MAY BE, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. EACH OF JFLEI, HOLDINGS AND THE BORROWER HEREBY IRREVOCABLY WAIVES ANY OBJECTION TO SUCH SERVICE OF PROCESS AND FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY ACTION OR PROCEEDING COMMENCED HEREUNDER THAT SERVICE OF PROCESS WAS IN ANY WAY INVALID OR INEFFECTIVE. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE AGENT, ANY BANK OR THE HOLDER OF ANY NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST JFLEI, HOLDINGS OR THE BORROWER IN ANY OTHER JURISDICTION. (c) EACH OF JFLEI, HOLDINGS AND THE BORROWER HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (B) ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH OF JFLEI, HOLDINGS AND THE BORROWER FURTHER IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY IN ANY COURT OR JURISDICTION, INCLUDING, WITHOUT LIMITATION, THOSE REFERRED TO IN CLAUSE (B) ABOVE, IN RESPECT OF ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT. 17. COSTS OF ENFORCEMENT; INDEMNITY. (a) JFLEI hereby agrees to pay all out-of-pocket costs and expenses of each of the Agent and each Bank in connection with the enforcement of this Agreement and JFLEI agrees to pay all out-of-pocket costs and expenses of the Agent in connection with any amendment, waiver or consent relating hereto (including, without limitation, in each case, the reasonable fees and disbursements of counsel employed by the Agent and each Bank, as the case may be). -8- (b) JFLEI hereby agrees to indemnify and hold the Agent and each Bank free and harmless from and against all loss, cost, damage, and expense, by reason of the inaccuracy costs, which it shall at any time have actually sustained by reason of the inaccuracy or breach of any of the foregoing representations, warranties and covenants. 18. COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with JFLEI, Holdings, the Borrower and the Agent. 19. HEADINGS DESCRIPTIVE. The headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed and delivered as of the date first above written. Addresses: 450 Park Avenue J.F. LEHMAN EQUITY INVESTORS I, L.P. Sixth Floor New York, New York 10022 By: J.F.L. Investors, L.L.C., Telephone: (212) 634-0100 its general partner Telecopier: (212) 634-1155 Attention: Donald Glickman By: /s/ DONALD GLICKMAN ---------------------------------- Name: Title: A Managing Member Accepted and Agreed to: BANKERS TRUST COMPANY, as Agent for the Banks By: /s/ ANDREW KEITH ---------------------------- Name: Title: -9- EX-10.20 12 EXHIBIT 10.20 FORM OF TERM NOTE $__________ New York, New York ________ __, ____ FOR VALUE RECEIVED, ELGAR ELECTRONICS CORPORATION (the "Borrower"), a California corporation, hereby promises to pay to or its registered assigns (the "Bank"), in lawful money of the United States of America in immediately available funds, at the office of Bankers Trust Company (the "Agent") located at One Bankers Trust Plaza, 130 Liberty Street, New York, New York 10006 on the Final Maturity Date (as defined in the Agreement referred to below) the principal sum of _____________ DOLLARS ($________) or, if less, the unpaid principal amount of all Term Loans (as defined in the Agreement) made by the Bank pursuant to the Agreement. The Borrower promises also to pay interest on the unpaid principal amount hereof in like money at said office from the date hereof until paid at the rates and at the times provided in Section 1.08 of the Agreement. This Note is one of the Term Notes referred to in the Amended and Restated Credit Agreement, dated as of February 3, 1998 and amended and restated as of May 29, 1998, among Elgar Holdings, Inc., the Borrower, the lenders from time to time party thereto (including the Bank), and the Agent (as amended, modified or supplemented from time to time, the "Agreement") and is entitled to the benefits thereof and of the other Credit Documents (as defined in the Agreement). This Note is secured by the Security Documents (as defined in the Agreement) and is entitled to the benefits of the Guaranties (as defined in the Agreement). This Note is subject to voluntary prepayment and mandatory repayment prior to the Final Maturity Date, in whole or in part, as provided in the Agreement. In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may become or be declared to be due and payable in the manner and with the effect provided in the Agreement. The Borrower hereby waives presentment, demand, protest or notice of any kind in connection with this Note. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. ELGAR ELECTRONICS CORPORATION By --------------------------------- Name: Title: EX-10.21 13 EXHIBIT 10.21 FORM OF REVOLVING NOTE $__________ New York, New York ________ __, ____ FOR VALUE RECEIVED, ELGAR ELECTRONICS CORPORATION (the "Borrower"), a California corporation, hereby promises to pay to or its registered assigns (the "Bank"), in lawful money of the United States of America in immediately available funds, at the office of Bankers Trust Company (the "Agent") located at One Bankers Trust Plaza, 130 Liberty Street, New York, New York 10006 on the Final Maturity Date (as defined in the Agreement referred to below) the principal sum of _____________ DOLLARS ($________) or, if less, the unpaid principal amount of all Revolving Loans (as defined in the Agreement) made by the Bank pursuant to the Agreement. The Borrower promises also to pay interest on the unpaid principal amount hereof in like money at said office from the date hereof until paid at the rates and at the times provided in Section 1.08 of the Agreement. This Note is one of the Revolving Notes referred to in the Amended and Restated Credit Agreement, dated as of February 3, 1998 and amended and restated as of May 29, 1998, among Elgar Holdings, Inc., the Borrower, the lenders from time to time party thereto (including the Bank), and the Agent (as amended, modified or supplemented from time to time, the "Agreement") and is entitled to the benefits thereof and of the other Credit Documents (as defined in the Agreement). This Note is secured by the Security Documents (as defined in the Agreement) and is entitled to the benefits of the Guaranties (as defined in the Agreement). This Note is subject to voluntary prepayment and mandatory repayment prior to the Final Maturity Date, in whole or in part, as provided in the Agreement. In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may become or be declared to be due and payable in the manner and with the effect provided in the Agreement. The Borrower hereby waives presentment, demand, protest or notice of any kind in connection with this Note. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. ELGAR ELECTRONICS CORPORATION By ------------------------------- Name: Title: EX-10.22 14 EXHIBIT 10.22 FORM OF SWINGLINE NOTE $1,000,000 New York, New York ____________ __,____ FOR VALUE RECEIVED, ELGAR ELECTRONICS CORPORATION (the "Borrower"), a California corporation, hereby promises to pay to BANKERS TRUST COMPANY or its registered assigns (the "Bank"), in lawful money of the United States of America in immediately available funds, at the office of Bankers Trust Company (the "Agent") located at One Bankers Trust Plaza, 130 Liberty Street, New York, New York 10006 on the Swingline Expiry Date (as defined in the Agreement referred to below) the principal sum of ONE MILLION DOLLARS ($1,000,000) or, if less, the unpaid principal amount of all Swingline Loans (as defined in the Agreement) made by the Bank pursuant to the Agreement. The Borrower promises also to pay interest on the unpaid principal amount hereof in like money at said office from the date hereof until paid at the rates and at the times provided in Section 1.08 of the Agreement. This Note is the Swingline Note referred to in the Amended and Restated Credit Agreement, dated as of February 3, 1998 and amended and restated as of May 29, 1998, among Elgar Holdings, Inc., the Borrower, the lenders from time to time party thereto (including the Bank), and the Agent (as amended, modified or supplemented from time to time, the "Agreement") and is entitled to the benefits thereof and of the other Credit Documents (as defined in the Agreement). This Note is secured by the Security Documents (as defined in the Agreement) and is entitled to the benefits of the Guaranties (as defined in the Agreement). This Note is subject to voluntary prepayment and mandatory repayment prior to the Swingline Expiry Date, in whole or in part, as provided in the Agreement. In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may become or be declared to be due and payable in the manner and with the effect provided in the Agreement. The Borrower hereby waives presentment, demand, protest or notice of any kind in connection with this Note. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. ELGAR ELECTRONICS CORPORATION By ---------------------------- Name: Title: EX-12.1 15 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 (1)........................................ 0.52x 0.88x 0.59x 2.97x 3.52x --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ (1) In fiscal 1994, 1995 and 1996, earnings were insufficient to cover fixed charges by approximately $1,338,000, $358,000 and $1,460,000, respectively. EX-23.2 16 EXHIBIT 23.2 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. We also hereby consent to the use in this registration statement of our report dated June 25, 1998, relating to the financial statements of Power Ten included herein and to all references to our Firm included in this registration statement. /s/ ARTHUR ANDERSEN LLP San Diego, California July 10, 1998 EX-27.2 17 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY AUDITED FINANCIAL INFORMATION EXTRACTED FROM THE SELECTED HISTORICAL FINANCIAL DATA OF POWER TEN AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH AUDITED FINANCIAL STATEMENTS. 0001062458 POWER TEN 1,000 YEAR APR-04-1998 MAR-29-1997 APR-04-1998 1,240 0 844 0 1,052 3,267 536 435 3,409 1,278 350 0 0 141 1,640 3,409 10,076 10,076 5,482 9,524 0 0 39 547 223 324 0 0 0 324 0 0
EX-99.1 18 EXHIBIT 99.1 LETTER OF TRANSMITTAL ELGAR HOLDINGS, INC. OFFER TO EXCHANGE 9-7/8% SENIOR NOTES DUE 2008 FOR ANY AND ALL OUTSTANDING 9-7/8% SENIOR NOTES DUE 2008 PURSUANT TO THE PROSPECTUS, DATED JULY __, 1998. - ------------------------------------------------------------------------------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON , 1998 UNLESS EXTENDED (THE "EXPIRATION DATE"). - ------------------------------------------------------------------------------- MAIL DELIVERY TO: United States Trust Company of New York, N.A., EXCHANGE AGENT By Mail: United States Trust Company of New York P.O. Box 844, Cooper Station New York, NY 10276-0841 Attention: Corporate Trust Services By Hand: By Overnight Delivery: United States Trust Company of New United States Trust Company of New York York 111 Broadway, Lower Level 770 Broadway, 13th Floor New York, NY 10006 New York, NY 10003 Attention: Corporate Trust Services Attention: Corporate Trust Services - ------------------------------------------------------------------------------- DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. - ------------------------------------------------------------------------------- NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY The undersigned acknowledges that he or she has received and reviewed the Prospectus, dated July __, 1998 (the "Prospectus"), of Elgar Holdings, Inc., a Delaware corporation (the "Company"), and this Letter of Transmittal (the "Letter"), which together constitute the Company's offer (the "Exchange Offer") to exchange an aggregate principal amount of up to $90,000,000 of its 9-7/8% Senior Notes due 2008 (the "New Notes") of the Company for a like principal amount of the issued and outstanding 9-7/8% Senior Notes due 2008 (the "Old Notes") of the Company from the holders (the "Holders") thereof. Capitalized terms used but not defined herein have the meanings given to them in the Exchange Offer. For each Old Note accepted for exchange, the Holder of such Old Note will receive a New Note having a principal amount equal to that of the surrendered Old Note. No interest will be payable on the Old Notes on the date of the exchange for the New Notes and Old Notes accepted for exchange will cease to accrue interest from and after the consummation of the Exchange Offer; therefore no interest will be paid thereon to the Holders at such time. Each New Note will bear interest at 9-7/8% per annum and will be payable in cash semiannually in arrears on each February 1 and August 1, commencing on August 1, 1998. Holders of Old Notes accepted for exchange will be deemed to have waived the right to receive any other payment of interest on the Old Notes. The Company reserves the right, at any time or from time to time, to extend the Exchange Offer at its discretion, in which event the term "Expiration Date" shall mean the latest time and date to which the Exchange Offer is extended. The Company shall notify the Holders of the Old Notes of any extension by means of a press release or other public announcement prior to 9:00 A.M., New York City time, on the next business day after the previously scheduled Expiration Date. This Letter is to be completed by a Holder of Old Notes either if certificates are to be forwarded herewith or if a tender of certificates for Old Notes, if available, is to be made by book-entry transfer to the account maintained by the Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedures set forth in "The Exchange Offer--Procedures for Tendering Old Notes" section of the Prospectus. Holders of Old Notes whose certificates are not immediately available, or who are unable to deliver their certificates or confirmation of the book-entry tender of their Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility (a "Book-Entry Confirmation") and all other documents required by this Letter to the Exchange Agent on or prior to the Expiration Date, may tender their Old Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. See Instruction 1. Delivery of documents to the Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent. The undersigned has completed the appropriate boxes below and signed this Letter to indicate the action the undersigned desires to take with respect to the Exchange Offer. List below the Old Notes to which this Letter relates. If the space provided below is inadequate, the certificate numbers and principal amount of Old Notes should be listed on a separate signed schedule affixed hereto.
- ------------------------------------------------------------------------------- DESCRIPTION OF OLD NOTES - ------------------------------------------------------------------------------- Name and address of Registered Certificate Principal Amount Holder as it appears on the 9-7/8% Number(s) of Old of Old Notes Senior Notes due 2008 Notes Transmitted* Transmitted** - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
* Need not be completed if Old Notes are being tendered by book-entry transfer. ** Unless otherwise indicated in this column, a Holder will be deemed to have tendered ALL of the Old Notes represented by the Old Notes indicated in column 2. See Instruction 2. Old Notes tendered hereby must be in denominations of principal amount of $1,000 and any integral multiple thereof. See Instruction 1. - ------------------------------------------------------------------------------- / / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING: Name of Tendering Institution ______________________________________________ Account Number ______________ Transaction Code Number______________ - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- / / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s) ____________________________________________ Window Ticket Number (if any) ______________________________________________ Date of Execution of Notice of Guaranteed Delivery _________________________ Name of Institution which guaranteed delivery ______________________________ - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING: Account Number ______________ Transaction Code Number______________ - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- / / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. NAME: __________________________________________________________________ ADDRESS: __________________________________________________________________ __________________________________________________________________ - ------------------------------------------------------------------------------- PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to the Company the aggregate principal amount of Old Notes indicated above. Subject to, and effective upon, the acceptance for exchange of the Old Notes tendered hereby, the undersigned hereby sells, assigns and transfers to, or upon the order of, the Company all right, title and interest in and to such Old Notes as are being tendered hereby. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Old Notes tendered hereby and that the Company will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim when the same are accepted by the Company. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent as its agent and attorney-in-fact with full power of substitution, for purposes of delivering this Letter and the Old Notes to the Company. The Power of Attorney granted in this paragraph shall be deemed irrevocable from and after the Expiration Date and coupled with an interest. The undersigned hereby further represents that any New Notes acquired in exchange for Old Notes tendered hereby will have been acquired in the ordinary course of business of the person receiving such New Notes, whether or not such person is the undersigned, that neither the Holder of such Old Notes nor any such other person is participating, intends to participate or has an arrangement or understanding with any person to participate in the distribution of such New Notes and that neither the Holder of such Old Notes nor any such other person is an "affiliate," of the Company, as defined in Rule 405 under the Securities Act of 1933, as amended (the "Securities Act"). The undersigned also acknowledges that this Exchange Offer is being made in reliance on an interpretation by the staff of the Securities and Exchange Commission (the "SEC") set forth in no-action letters to third parties, based on which the Company believes that the New Notes issued in exchange for the Old Notes pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by any Holder thereof (other than any such Holder 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 New Notes are acquired in the ordinary course of such Holder's business and such Holder has no arrangement with any person to participate in the distribution of such New Notes. If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of New Notes. If the undersigned is a broker-dealer that will receive New Notes for in exchange for Old Notes, it represents that the Old Notes to be exchanged for New Notes were acquired by it as a result of market-making activities or other trading activities, and acknowledges that it will deliver a prospectus in connection with any resale of such New Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned acknowledges that in reliance on an interpretation by the staff of the SEC, a broker-dealer may fulfill his prospectus delivery requirements with respect to the New Notes (other than a resale of an unsold allotment from the original sale of the Old Notes) with the Prospectus which constitutes part of this Exchange Offer. The undersigned will, upon request, execute and deliver any additional documents deemed by the Company to be necessary or desirable to complete the sale, assignment and transfer of the Old Notes tendered hereby. All authority conferred or agreed to be conferred in this Letter and every obligation of the undersigned hereunder shall be binding upon the successors, assigns, heirs, executors, administrators, trustees in bankruptcy and legal representatives of the undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. This tender may be withdrawn only in accordance with the procedures set forth in "The Exchange Offer -- Withdrawal Rights" section of the Prospectus. Unless otherwise indicated herein in the box entitled "Special Issuance Instructions" below, please deliver the New Notes (and, if applicable, substitute certificates representing Old Notes for any Old Notes not exchanged) in the name of the undersigned or, in the case of a book-entry delivery of Old Notes, please credit the account indicated above maintained at the Book-Entry Transfer Facility. Similarly, unless otherwise indicated under the box entitled "Special Delivery Instructions" below, please send the New Notes (and, if applicable, substitute certificates representing Old Notes for any Old Notes not exchanged) to the undersigned at the address shown above in the box entitled "Description of Old Notes." - ------------------------------------------------------------------------------- THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES" ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AS SET FORTH IN SUCH BOX ABOVE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 3 AND 4) To be completed ONLY if certificates for Old Notes not exchanged and/or New Notes are to be issued in the name of and sent to someone other than the person or persons whose signature(s) appear(s) on this Letter above, or if Old Notes delivered by book-entry transfer which are not accepted for exchange are to be returned by credit to an account maintained at the Book-Entry Transfer Facility other than the account indicated above. Issue: New Notes and/or Old Notes to: Name(s): ............................. (PLEASE TYPE OR PRINT) ............................. (PLEASE TYPE OR PRINT) Address: .............................. ............................. Employer Identification # or Social Security Number: ............................. / / Credit unexchanged Old Notes delivered by book-entry transfer to the Book-Entry Transfer Facility account set forth below. _______________________ _______________ ____________ ____________ _ (Book-Entry Transfer Facility Account Number, if applicable) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 3 AND 4) To be completed ONLY if certificates for Old Notes not exchanged and/or New Notes are to be sent to someone other than the person or persons whose signature(s) appear(s) on this Letter above or to such person or persons at an address other than shown in the box entitled "Description of Old Notes" on this Letter above. Mail: New Notes and/or Old Notes to: Name(s): ............................. (PLEASE TYPE OR PRINT) ............................. (PLEASE TYPE OR PRINT) Address: ............................. ............................. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE CERTIFICATES FOR OLD NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. - ------------------------------------------------------------------------------- PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING ANY BOX ABOVE. - ------------------------------------------------------------------------------- PLEASE SIGN HERE (TO BE COMPLETED BY ALL TENDERING HOLDERS) Dated: ................................ ..................................... ............... SIGNATURE(S) OF OWNER DATE Area code and Telephone Number .............................. If a Holder is tendering any Old Notes, this Letter must be signed by the registered Holder(s) as the name(s) appear(s) on the certificate(s) for the Old Notes or by any person(s) authorized to become registered Holder(s) by endorsements and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, officer or other person acting in a fiduciary or representative capacity, please set forth full title. See Instruction 3. Name(s): ................................ ................................ (PLEASE TYPE OR PRINT) Capacity: ................................ Address: ................................ ................................ (INCLUDING ZIP CODE) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SIGNATURE GUARANTEE (IF REQUIRED BY INSTRUCTION 3) Signature(s) Guaranteed by an Eligible Institution: ............................................ (AUTHORIZED SIGNATURE) ...................................................... (TITLE) ...................................................... (NAME AND FIRM) Dated: ................................................. - ------------------------------------------------------------------------------- INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER OF 9-7/8% SENIOR NOTES DUE 2008 FOR ANY AND ALL OUTSTANDING 9-7/8% SENIOR NOTES DUE 2008 OF ELGAR HOLDINGS, INC. 1. DELIVERY OF THIS LETTER AND NOTES; GUARANTEED DELIVERY PROCEDURES: This letter is to be completed by noteholders either if certificates are to be forwarded herewith or if tenders are to be made pursuant to the procedures for delivery by book-entry transfer set forth in "The Exchange Offer--Procedures for Tendering Old Notes" section of the Prospectus. Certificates for all physically tendered Old Notes, or Book-Entry Confirmation, as the case may be, as well as a properly completed and duly executed letter (or manually signed facsimile hereof) and any other documents required by this Letter, must be received by the Exchange Agent at the address set forth herein on or prior to the Expiration Date, or the tendering Holder must comply with the guaranteed delivery procedures set forth below. Old Notes tendered hereby must be in denominations of principal amount of $1,000 and any integral multiple thereof. Noteholders whose certificates for Old Notes are not immediately available or who cannot deliver their certificates and all other required documents to the Exchange Agent on or prior to the Expiration Date, or who cannot complete the procedure for book-entry transfer on a timely basis, may tender their Old Notes pursuant to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. Pursuant to such procedures, (i) such tender must be made by or through an Eligible Institution and a Notice of Guaranteed Delivery must be signed by such Holder, (ii) on or prior to the Expiration Date, the Exchange Agent must receive from the Holder and the Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery), substantially in the form provided by the Company, setting forth the name and address of the Holder of Old Notes, the certificate number or numbers of the tendered Old Notes, and the principal amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that within four (4) 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) the certificates for all physically tendered Old Notes, in proper form for transfer, or Book-Entry Confirmation, as the case may be, and all other documents required by this Letter, must be received by the Exchange Agent within four (4) business days after the Expiration Date. The method of delivery of this Letter, the Old Notes and all other required documents is at the election and risk of the tendering Holders, but the delivery will be deemed made only when actually received or confirmed by the Exchange Agent. 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 that the Holder use an overnight or hand delivery service. In all cases, it is suggested that the mailing be made sufficiently in advance of the Expiration Date to permit delivery to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer" section of the Prospectus. 2. PARTIAL TENDERS (NOT APPLICABLE TO NOTEHOLDERS WHO TENDER BY BOOK-ENTRY TRANSFER): If less than all of the Old Notes evidenced by a submitted certificate are to be tendered, the tendering Holder(s) should fill in the aggregate principal amount of Old Notes to be tendered in the box above entitled "Description of Old Notes--Principal Amount of Old Notes Transmitted." Holders whose Old Notes are not tendered or are tendered but not accepted in the Exchange Offer will continue to hold such Old Notes and will be entitled to all the rights and preferences and subject to the limitations applicable thereto under the Indenture. Following consummation of the Exchange Offer, the Holders will continue to be subject to the existing restrictions upon transfer thereof and the Company will have no further obligation to such Holders to provide for the registration under the Securities Act of the Old Notes held by them. ALL OF THE OLD NOTES DELIVERED TO THE EXCHANGE AGENT WILL BE DEEMED TO HAVE BEEN TENDERED UNLESS OTHERWISE INDICATED. 3. SIGNATURES ON THIS LETTER; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF SIGNATURES: If this Letter is signed by the registered Holder of the Old Notes tendered hereby, the signature must correspond exactly with the name as written on the face of the certificates without any change whatsoever. If any tendered Old Notes are owned of record by two or more joint owners, all such owners must sign this Letter. If any tendered Old Notes are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter as there are different registrations of certificates. When this Letter is signed by the registered Holder or Holders of the Old Notes specified herein and tendered hereby, no endorsements of certificates or separate bond powers are required. If, however, the New Notes are to be issued, or any untendered Old Notes are to be reissued, to a person other than the registered Holder, then endorsements of any certificates transmitted hereby or separate bond powers are required. Signatures on such certificate(s) must be guaranteed by an Eligible Institution. If this Letter is signed by a person other than the registered Holder or Holders of any certificate(s) specified herein, such certificate(s) must be endorsed or accompanied by appropriate bond powers, in either case signed exactly as the name or names of the registered Holder or Holders appear(s) on the certificate(s) and signatures on such certificate(s) must be guaranteed by an Eligible Institution. If this Letter or any certificates or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be submitted. ENDORSEMENTS ON CERTIFICATES FOR OLD NOTES OR SIGNATURES ON BOND POWERS REQUIRED BY THIS INSTRUCTION 3 MUST BE GUARANTEED BY A FIRM WHICH IS A MEMBER OF A REGISTERED NATIONAL SECURITIES EXCHANGE OR A MEMBER OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. OR BY A COMMERCIAL BANK OR TRUST COMPANY HAVING AN OFFICE OR CORRESPONDENT IN THE UNITED STATES (AN "ELIGIBLE INSTITUTION"). SIGNATURES ON THIS LETTER NEED NOT BE GUARANTEED BY AN ELIGIBLE INSTITUTION, PROVIDED THE OLD NOTES ARE TENDERED: (I) BY A REGISTERED HOLDER OF OLD NOTES (WHICH TERM, FOR PURPOSES OF THE EXCHANGE OFFER, INCLUDES ANY PARTICIPANT IN THE BOOK-ENTRY TRANSFER FACILITY SYSTEM WHOSE NAME APPEARS ON A SECURITY POSITION LISTING AS THE HOLDER OF SUCH OLD NOTES) TENDERED WHO HAS NOT COMPLETED THE BOX ENTITLED "SPECIAL ISSUANCE INSTRUCTIONS" OR "SPECIAL DELIVERY INSTRUCTIONS," ON THIS LETTER, OR (II) FOR THE ACCOUNT OF AN ELIGIBLE INSTITUTION. 4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS: Tendering Holders of Old Notes should indicate in the applicable box the name and address to which New Notes issued pursuant to the Exchange Offer and/or Old Notes not exchanged are to be sent, if different from the name or address of the person signing this Letter. In the case of issuance in a different name, the employer identification or social security number of the person named must also be indicated. Noteholders tendering Old Notes by book-entry transfer may request that Old Notes not exchanged be credited to such account maintained at the Book-Entry Transfer Facility as such noteholder may designate hereon. If no such instructions are given, such Old Notes not exchanged will be returned to the name or address of the person signing this Letter. 5. TRANSFER TAXES: The Company will pay all transfer taxes, if any, applicable to the transfer of Old Notes to it or its order pursuant to the Exchange Offer. If however, certificates representing New Notes and/or Old Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered Holder of the Old Notes tendered hereby, or if tendered Old Notes are registered in the name of any person other than the person signing this Letter, or if a transfer tax is imposed for any reason other than the transfer of Old Notes to the Company or its order pursuant to the Exchange Offer, the amount of any such transfer taxes (whether imposed on the registered Holder or any other persons) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted herewith, the amount of such transfer taxes will be billed directly to such tendering Holder. EXCEPT AS PROVIDED IN THIS INSTRUCTION 5, IT WILL NOT BE NECESSARY FOR TRANSFER TAX STAMPS TO BE AFFIXED TO THE OLD NOTES SPECIFIED IN THIS LETTER. 6. WAIVER OF CONDITIONS: The Company reserves the absolute right to waive satisfaction of any or all conditions enumerated in the Prospectus. 7. NO CONDITIONAL TENDERS: No alternative, conditional, irregular or contingent tenders will be accepted. All tendering Holders of Old Notes, by execution of this Letter, shall waive any right to receive notice of the acceptance of their Old Notes for exchange. Neither the Company, the Exchange Agent nor any other person is obligated to give notice of any defect or irregularity with respect to any tender of Old Notes nor shall any of them incur any liability for failure to give any such notice. 8. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES: Any Holder whose Old Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. 9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES: Questions relating to the procedure for tendering, as well as requests for additional copies of the Prospectus and this Letter, may be directed to the Exchange Agent, at the address indicated above. IMPORTANT TAX INFORMATION Under current Federal income tax law, any Holder whose tendered Old Notes are accepted for payment generally is required to provide the Exchange Agent (as agent for the payer) with his or her correct taxpayer identification number ("TIN") on Substitute Form W-9 below. If such Holder of Old Notes is an individual, the TIN is his or her social security number. If the Exchange Agent is not provided with the correct TIN, the Holder of Old Notes may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, payments that are made to such Holders of Old Notes with respect to New Notes may be subject to backup withholding. Certain Holders of Old Notes (including, among others, all corporations and certain foreign individuals) may not be subject to these backup withholding and reporting requirements. Exempt Holders of Old Notes should indicate their exempt status on Substitute Form W-9. In order for a foreign individual to qualify as an exempt recipient, that Holder of Old Notes must submit a properly completed Internal Revenue Service Form W-8, signed under penalties of perjury, attesting to his or her exempt status. Such statements can be obtained from the Exchange Agent. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute W-9 for additional instructions. If backup withholding applies, the Exchange Agent is required to withhold 31 percent of any such payments made to the Holder of Old Notes. Backup withholding is not an additional tax. Rather, the federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained. PURPOSE OF SUBSTITUTE FORM W-9 To prevent backup withholding on payments that are made to a Holder of Old Notes with respect to Old Notes exchanged pursuant to the Exchange Offer, each Holder of Old Notes is required to notify the Exchange Agent of his, her or its correct TIN by completing the Substitute Form W-9 below certifying the TIN provided on such form is correct (or that such Holder of Old Notes is awaiting a TIN) and that (1) such Holder of Old Notes has not been notified by the Internal Revenue Service that he, she or it is subject to backup withholding as a result of failure to report all interest or dividends or (2) the Internal Revenue Service has notified such Holder of Old Notes that he, she or it is no longer subject to backup withholding. WHAT NUMBER TO GIVE THE EXCHANGE AGENT The Holder of Old Notes is required to give the Exchange Agent the social security number or employer identification number of the record owner of the Old Notes. If the Old Notes are in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidelines on which number to report. - ------------------------------------------------------------------------------- PAYER'S NAME: UNITED STATES TRUST COMPANY OF NEW YORK, N.A. AS EXCHANGE AGENT - ------------------------------------------------------------------------------- SUBSTITUTE Part 1 - PLEASE PROVIDE YOUR TIN ______________________ IN THE BOX AT RIGHT AND CERTIFY Social Security Number FORM W-9 BY SIGNING AND DATING BELOW. OR ______________________ Employer Identification Number -------------------------------------------------------- DEPARTMENT OF THE Part 2: Certification - Under Part 3 - TREASURY penalties of perjury, I certify that: Awaiting TIN: INTERNAL REVENUE SERVICE (1) The number shown on this form is my current taxpayer identification number (or I am waiting for a number to be issued to me) and (2) I am not subject to backup withholding because: (a) I am exempt from backup withholding, (b) I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends or (c) the IRS has notified me that I am no longer subject to backup withholding. -------------------------------------------------------- PAYER'S REQUEST FOR Certificate Instructions - You must cross out Item (2) TAXPAYER above if you have been notified by the IRS that you are IDENTIFICATION currently subject to backup withholding because of NUMBER ("TIN") under-reporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS that you are no longer subject to backup withholding, do not cross out such Item (2) SIGNATURE:_________________________ DATE:____________ - ------------------------------------------------------------------------------- NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31 PERCENT OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER, PLEASE REVIEW THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE W-9" FOR ADDITIONAL DETAILS NOTE: YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9 - ------------------------------------------------------------------------------- CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Officer or (b) I intend to mail or deliver such an application in the near future. I understand that if I do not provide a taxpayer identification number within sixty (60) days, 31 percent of all reportable payments made to me thereafter will be withheld until I provide a number. SIGNATURE: _________________________________________ DATE: _______________ - ------------------------------------------------------------------------------- EX-99.2 19 EXHIBIT 99.2 NOTICE OF GUARANTEED DELIVERY OFFER FOR OUTSTANDING 9-7/8% SENIOR NOTES DUE 2008 IN EXCHANGE FOR 9-7/8% SENIOR NOTES DUE 2008 OF ELGAR HOLDINGS, INC. This form or one substantially equivalent to it must be used to exchange the Elgar Holdings, Inc. 9-7/8% Senior Notes Due 2008 (the "Old Notes") if certificates for the Old Notes are not immediately available or if time will not permit the Letter of Transmittal or other required documents to reach the United States Trust Company of New York, N.A. (the "Exchange Agent") prior to 5:00 p.m. New York time on ______ __, 1998, at which time the right to exchange the Old Notes terminates. This form must be delivered by hand, mail, telegram or facsimile transmission to the Exchange Agent as follows: MAIL DELIVERY TO: United States Trust Company of New York, N.A., EXCHANGE AGENT By Mail: United States Trust Company of New York P.O. Box 844, Cooper Station New York, NY 10276-0841 Attention: Corporate Trust Services BY HAND: BY OVERNIGHT DELIVERY: United States Trust Company United States Trust Company of New York of New York 111 Broadway, Lower Level 770 Broadway, 13th Floor New York, NY 10006 New York, NY 10003 Attention: Corporate Trust Attention: Corporate Trust Services Services - -------------------------------------------------------------------------------- DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN THOSE SHOWN ABOVE DOES NOT CONSTITUTE VALID DELIVERY. UNDER THE TERMS OF THIS DOCUMENT, THE OLD NOTES, A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL AND OTHER DOCUMENTS REQUIRED BY THE LETTER OF TRANSMITTAL MUST BE DELIVERED TO THE EXCHANGE AGENT WITHIN FOUR BUSINESS DAYS AFTER THE DATE OF DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. - -------------------------------------------------------------------------------- Ladies and Gentlemen: The undersigned hereby tenders the principal amount of Old Notes indicated below, upon the terms and subject to the conditions contained in the Registration Statement on Form S-4 filed by Elgar Holdings, Inc., a Delaware corporation, with the Securities and Exchange Commission (the "Registration Statement") and the accompanying Prospectus dated July __, 1998 included therein (the "Prospectus"), receipt of which is hereby acknowledged:
DESCRIPTION OF SECURITIES TENDERED - -------------------------------------------------------------------------------------- PLEASE FILL IN YOUR NAME(S) EXACTLY AS IT APPEARS ON YOUR NOTE(S) PLEASE FILL IN AND YOUR PRESENT ADDRESS NUMBERS AND AMOUNTS - -------------------------------------------------------------------------------------- NAME(S): NOTE PRINCIPAL NUMBER(S) AMOUNT ------------------------------------ ------------------------------------ ------------------------------------ ADDRESS(ES): ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------ TOTALS - -------------------------------------------------------------------------------------- SIGNATURES (ALL REGISTERED HOLDERS MUST SIGN): ADDRESS: --------------------------------------- ------------------------------------ --------------------------------------- ------------------------------------ (Please Type or Print) Area Code and Daytime Telephone Number: ( ) - ------------------------------------
2 THE FOLLOWING GUARANTEE MUST BE COMPLETED GUARANTEE The undersigned, a member firm of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office, branch or agency in the United States, hereby guarantees to deliver to the Exchange Agent at the address set forth above, Old Note certificates surrendered for exchange hereby in proper form for transfer, together with a properly completed and duly executed Letter of Transmittal and any other documents required by the Letter of Transmittal, within four (4) business days after the date of delivery of this Notice of Guaranteed Delivery. Dated: , 199 Name of Firm: ------------------- -- -------------------------- Sign Here: ----------------------------- (Authorized Signature) Name: ---------------------------------- (Please type or print) ---------------------------------- (Area code and Telephone Number) Address: ------------------------------- ------------------------------- ------------------------------- (Zip code) NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY. OLD NOTES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL. -----END PRIVACY-ENHANCED MESSAGE-----