<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
For the quarterly period ended April 3, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------- -------------
COMMISSION FILE NUMBER 1-333-55797
---------------
ELGAR HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0373329
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9250 BROWN DEER ROAD
SAN DIEGO, CALIFORNIA 92121
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 450-0085
---------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
----- -----
As of May 17, 1999, the number of shares outstanding of the
Registrant's Common Stock was 2,300,000.
<PAGE>
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
PART I FINANCIAL INFORMATION NUMBER
- ------ --------------------- ------
<S> <C>
Item 1 Consolidated Financial Statements
Consolidated Statements of Operations for the three months ended
March 28, 1998 (unaudited) and the three months ended April 3,
1999 (unaudited).................................................. 3
Consolidated Balance Sheets as of March 28, 1998 and
April 3, 1999 (unaudited)......................................... 4
Consolidated Statements of Cash Flows for the three months ended
March 28, 1998 (unaudited) and the three months ended April 3,
1999 (unaudited).................................................. 5
Notes to Consolidated Financial Statements (unaudited).................. 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 12
Item 3 Quantitative and Qualitative Disclosures About Market Risks............. 15
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K.................................... 17
</TABLE>
2
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------
MARCH 28, 1998 APRIL 3, 1999
-------------- -------------
<S> <C> <C>
Net sales..................................... $15,881 $14,993
Cost of sales................................. 8,619 8,589
------- -------
Gross profit.............................. 7,262 6,404
Selling, general and administrative expense... 2,652 2,644
Research and development and engineering
expenses................................... 1,795 1,497
Amortization expense.......................... 328 606
------- -------
Operating income.......................... 2,487 1,657
Interest expense, net......................... 2,245 2,689
------- -------
Income (loss) before income tax provision
(benefit).................................. 242 (1,032)
Income tax provision (benefit)................ 39 (175)
------- -------
Net income (loss)......................... $ 203 $ (857)
======= =======
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS
3
<PAGE>
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 28, 1998 APRIL 3, 1999
(UNAUDITED)
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ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 2,666 $ 3,243
Accounts receivable, net of allowance for doubtful accounts of $197 and
$234 as of March 28, 1998 and April 3, 1999, respectively................ 6,453 6,213
Inventories................................................................. 8,305 8,423
Deferred tax assets......................................................... 1,098 796
Prepaids and other.......................................................... 373 983
-------- --------
Total current assets.................................................... 18,895 19,658
PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated depreciation and
amortization of $1,643 and $2,565 as of March 28, 1998 and April 3, 1999,
respectively............................................................... 2,952 2,459
INTANGIBLE ASSETS, net of accumulated amortization of $2,711 and $5,700
as of March 28, 1998 and April 3, 1999, respectively....................... 22,412 36,791
DEFERRED TAX ASSETS, net of current portion................................... 653 653
-------- --------
$ 44,912 $ 59,561
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................................................ $ 3,068 $ 2,062
Accrued liabilities......................................................... 4,801 4,602
Current portion of long-term debt........................................... -- --
Current portion of capital lease obligations................................ 17 14
-------- --------
Total current liabilities............................................... 7,886 6,678
CAPITAL LEASE OBLIGATIONS, net of current portion............................. 19 5
LONG-TERM DEBT, net of current portion........................................ 90,000 100,000
-------- --------
Total liabilities....................................................... 97,905 106,683
-------- --------
SERIES A 10% CUMULATIVE REDEEMABLE PREFERRED STOCK,
no par value, 20,000 shares authorized; 10,000 shares
issued and outstanding..................................................... 8,478 9,721
-------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Series B 6% Cumulative Convertible Preferred Stock, no par value, 0 and
5,000 shares authorized, issued and outstanding on March 28, 1998
and April 3, 1999, respectively.......................................... -- 5,000
Series C 6% Cumulative Convertible Preferred Stock, no par value,
0 and 4,000 shares authorized, issued and outstanding on March 28, 1998
and April 3, 1999, respectively.......................................... -- 4,000
Common Stock, $.01 par value, 5,000,000 shares authorized; 2,300,000 shares
issued and outstanding................................................... 23 23
Additional paid-in capital.................................................. (67,926) (68,558)
Retained earnings........................................................... 6,432 2,692
-------- --------
(61,471) (56,843)
-------- --------
$ 44,912 $ 59,561
======== ========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS
4
<PAGE>
ELGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------------
MARCH 28, 1998 APRIL 3, 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................................... $ 203 $ (857)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Amortization of intangibles....................................... 329 606
Amortization of deferred loan costs............................... 83 184
Write-off of deferred loan costs.................................. 665 --
Depreciation and amortization on property, plant and equipment.... 276 293
(Gain) loss on sale of property, plant and equipment.............. (12) 27
(Increases) decreases in assets:
Accounts receivable............................................ 1,111 (1,045)
Inventories.................................................... (56) 672
Prepaids and other............................................. (160) 373
Deferred tax assets............................................ (119) --
Increases (decreases) in liabilities:
Accounts payable............................................... 101 (1,102)
Accrued liabilities............................................ 146 (8)
Income taxes payable........................................... (943) --
Interest payable............................................... 1,303 (2,222)
------- --------
Net cash provided by (used in) operating activities................... 2,927 (3,079)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............................ (295) (180)
Proceeds from sale of property, plant and equipment................... 10 --
------- --------
Net cash used in investing activities................................. (285) (180)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance ......................................... 19,014 --
Proceeds from preferred stock/warrant issuance........................ 10,000 4,000
Issuance of Senior Notes ............................................. 90,000 --
Proceeds from bank borrowings......................................... 580 --
Repayments on debt ................................................... (11,789) (4,000)
Payments under capital leases......................................... (8) (5)
Deferred financing costs ............................................. (5,414) --
Recapitalization consideration........................................ (102,617) --
------- --------
Net cash used in financing activities................................. (234) (5)
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... 2,408 (3,264)
CASH AND CASH EQUIVALENTS, beginning of period.......................... 258 6,507
------- --------
CASH AND CASH EQUIVALENTS, end of period................................ $ 2,666 $ 3,243
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................................ $ 289 $ 4,736
Cash paid for income taxes............................................ 1,225 (596)
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Series A preferred stock dividend-in-kind............................. $ 150 $ 275
Series B and Series C preferred stock dividend accrual................ $ -- $ 82
Accretion of discount on Series A preferred stock..................... $ 28 $ 42
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS
5
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY OPERATIONS
Elgar Holdings, Inc., a Delaware corporation (the "Company"),
manufactures and sells programmable power supply units through its wholly owned
subsidiary, Elgar Electronics Corporation ("Elgar"), to commercial and defense
entities as well as to governmental agencies. The Company's primary sales are
within the United States and Europe.
On February 3, 1998, the Company consummated a recapitalization (the
"Recapitalization") in which 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 retained
approximately 15% of the common equity of the Company while new investors
acquired the balance of the equity interests in the Company.
On May 29, 1998, Elgar acquired all of the issued and outstanding
shares of common stock of Power Ten, which specializes in developing and
manufacturing high-quality, high-power DC power supplies. In connection with the
acquisition, which was accounted for as a purchase, Elgar entered into
non-compete agreements with the two former stockholders of Power Ten, one of
whom is currently a member of Power Ten's management team. The acquisition was
financed by the issuance of 5,000 shares of Series B Convertible Preferred Stock
and borrowings under the Company's credit facility (the "Credit Facility") with
Bankers Trust Company, as agent ("Bankers Trust").
Unaudited condensed pro forma net sales and net income (loss) for
the three month periods ended March 28, 1998 and April 3, 1999, assuming the
Recapitalization and the Power Ten acquisition occurred on December 28, 1997,
and also assuming a 40% statutory tax rate, are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------
MARCH 28, 1998 APRIL 3, 1999
-------------- -------------
<S> <C> <C>
Net sales........................... $ 18,545 $ 14,993
Net income (loss)................... $ 210 $ (857)
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION/BASIS OF PRESENTATION
The accompanying consolidated financial statements as of and for the
three months ended April 3, 1999 include the accounts of the Company and its
wholly owned subsidiary, Elgar, and the accounts of Elgar's wholly owned
subsidiary, Power Ten. All significant intercompany accounts and transactions
have been eliminated. The accompanying financial statements as of and for the
three months ended March 28, 1998 include only the accounts of Elgar. These
financial statements have been prepared in accordance with generally accepted
accounting principles and with the instructions to Form 10-Q. These financial
statements have not been examined by independent public accountants, but include
all adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of financial condition,
results of operations and cash flows for such periods.
INTERIM ACCOUNTING PERIODS
6
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company operates and reports financial results on a fiscal year of
52 or 53 weeks ending the Saturday closest to December 31. As disclosed in its
Current Report on Form 8-K filed on March 26, 1999, the Company recently changed
its fiscal year end from the Saturday closest to March 31 to the Saturday
closest to December 31. Interim periods include 13 or 14 weeks ending the last
Saturday closest to the end of the quarter. Results of operations for the three
months ended April 3, 1999 are not necessarily indicative of the results to be
expected for the Company's fiscal year ending January 1, 2000.
CASH EQUIVALENTS
Cash equivalents at March 28, 1998 and April 3, 1999 consist of cash
held in a money market account.
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):
<TABLE>
<CAPTION>
MARCH 28, 1998 APRIL 3, 1999
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<S> <C> <C>
Raw materials............................... $3,745 $3,868
Work-in-process............................. 3,677 2,461
Finished goods.............................. 883 2,094
------ ------
Total.................................. $8,305 $8,423
====== ======
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are 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.
INTANGIBLE ASSETS
Intangible assets represent (i) the excess of purchase price over net
book value of assets acquired in connection with acquisitions, (ii) deferred
financing costs incurred in connection with the Recapitalization and the Power
Ten acquisition and (iii) agreements not to compete relating to the Power Ten
acquisition. 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.
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
7
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
payable in the current year.
REVENUE RECOGNITION
The Company recognizes revenue when goods are shipped to the customer,
net of sales returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
In the quarter ended April 3, 1999, sales to two customers accounted
for approximately 25% and 20% of the Company's net sales. In the quarter ended
March 28, 1998, sales to three customers accounted for approximately 23%, 19%
and 11% of the Company's net sales. No other customers individually represented
more than 10% of net sales in the quarter ended April 3, 1999 or March 28, 1998.
The Company performs ongoing credit evaluation of its customers' financial
condition, and maintains reserves for potential credit losses.
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. The Company adopted SFAS No. 130 on March
29, 1998. The Company had no elements of comprehensive income during the three
months ended April 3, 1999. The Company adopted SFAS No. 131 on January 3, 1999.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and for Hedging Activities." SFAS No. 133 requires that all
derivatives be recorded on the balance sheet as an asset or liability measured
at its fair value with changes in fair value recognized currently in earnings
unless hedge accounting criteria are met. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999; however, a company may implement the
provisions of SFAS No. 133 as of the beginning of any fiscal quarter after June
16, 1998. The Company has not yet determined what impact, if any, the adoption
of SFAS No. 133 will have on the Company's consolidated financial statements,
results of operations or related disclosures thereto. The Company intends to
adopt SFAS No. 133 on January 2, 2000.
8
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LONG-TERM DEBT, CREDIT FACILITY AND CAPITAL CALL AGREEMENT
SENIOR NOTES
In connection with the Recapitalization, 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 9.875% Senior Notes due February
1, 2008 and entered into the Credit Facility. Interest on the Senior Notes is
payable semi-annually on each February 1 and August 1.
CREDIT FACILITY
In connection with the Recapitalization, Elgar, as borrower, and the
Company, as guarantor, entered into a credit agreement (the "Credit Agreement")
with Bankers Trust, as agent, which provided for a $15 million revolving credit
facility (the "Revolving Facility") that matures on February 3, 2003. On May 29,
1998, in connection with the acquisition of Power Ten, the Credit Agreement was
amended and restated to, among other things, increase the available borrowings
to $30 million by adding a $15 million term facility (the "Term Facility") to
the existing $15 million Revolving Facility. Elgar used all of the proceeds from
the Term Facility to finance a portion of the purchase price for Power Ten.
Loans under the Credit Agreement are secured by substantially all of the
Company's assets (including a pledge of the capital stock of Elgar and Power
Ten) and guaranteed by the Company and Power Ten. No amounts were outstanding
under the Revolving Facility as of March 28, 1998 and April 3, 1999,
respectively.
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.
On February 12, 1999, the Company and Elgar entered into a First
Amendment and Waiver to the Credit Agreement pursuant to which, among other
things, available borrowings under the Revolving Facility were reduced from $15
million to $5 million, certain financial covenants were amended, and the Company
and Elgar received a waiver for past noncompliance with the covenants referred
to in the prior paragraph. The Company was in compliance with the covenants
contained in the Credit Agreement, as amended, for the quarter ended April 3,
1999.
CAPITAL CALL AGREEMENT
In connection with amending the Credit Agreement on May 29, 1998, the
Company, Elgar and the Company's majority shareholder entered into a capital
call agreement with Bankers Trust (the "Capital Call Agreement"). On February
12, 1999, in connection with entering into the First Amendment and Waiver to the
Credit Agreement, the majority shareholder agreed to make a capital contribution
to the Company by no later than March 31, 1999 in the amount of $4.0 million.
This contribution was made on March 31, 1999, at which time the Company
transferred the funds to Elgar for purposes of repaying outstanding indebtedness
under the Credit Agreement. See Note 4 below. In addition, on February 12, 1999,
the majority shareholder entered into an Amended and Restated Capital Call
Agreement with Bankers Trust pursuant to which, among other things, the majority
shareholder agreed to contribute up to an additional
9
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$5.0 million of capital to the Company upon the occurrence of certain events,
including the Company's failure to comply with certain financial covenants
contained in the Amended and Restated Capital Call Agreement. The Company was
in compliance with such covenants for the quarter ended April 3, 1999.
4. PREFERRED STOCK
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 (the "Series A Preferred Stock"), for cash proceeds
of $10.0 million. In connection with such issuance, the Company also issued to
the purchasers of the Series A Preferred Stock 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 and April 3, 1999.
Dividends are payable to the holders of the Series A Preferred Stock
at the annual rate per share of 10% times the sum of $1,000 and accrued but
unpaid dividends. Dividends are payable at the rate per share of 0.10 shares
of Series A 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
are fully cumulative and accrue on a quarterly basis.
CONVERTIBLE PREFERRED STOCK
In connection with the acquisition of Power Ten, the Company issued
5,000 shares of Series B 6% Cumulative Convertible Preferred Stock (the "Series
B Preferred Stock") for cash proceeds of $5.0 million. The offering, which was
made in compliance with the subscription rights contained in the Company's
Shareholders Agreement, was completed on May 29, 1998.
In connection with entering into the First Amendment and Waiver to the
Credit Agreement, the Company's majority shareholder agreed to make a capital
contribution to the Company by no later than March 31, 1999 in the amount of
$4.0 million. In order to effectuate the contribution, the Company issued 4,000
shares of Series C 6% Cumulative Convertible Preferred Stock (the "Series C
Preferred Stock") for cash proceeds of $4.0 million. The offering, which was
made in compliance with the subscription rights contained in the Company's
Shareholders Agreement, was completed on March 31, 1999.
Dividends are payable to the holders of the Series B Preferred Stock
and Series C Preferred Stock at the annual rate per share of 6% times the sum of
$1,000 and accrued but unpaid dividends. Such dividends are payable
semi-annually on April 30 and October 31 of each year, commencing October 31,
1998, when and if declared by the Board of Directors out of funds legally
available therefor. During the quarter ended April 3, 1999, the Company accrued
$77,108 of dividends on the Series B Preferred Stock and $4,667 of dividends on
the Series C Preferred Stock.
The Series B Preferred Stock and Series C Preferred Stock, which rank
on a parity with each other, rank junior to the Series A Preferred Stock.
10
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. COMMON STOCK
On February 3, 1998, immediately prior to the Recapitalization, the
Company effected (i) an increase in the number of shares authorized from 1,000
to 9,340,000 shares and (ii) a 9,340 to 1 stock split of the common stock
distributed in the form of a stock dividend. 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 then
reduced to 5,000,000 shares.
At March 28, 1998 and April 3, 1999, 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 Series A
Preferred Stock. The exercise price and number of warrant shares are both
subject to adjustment in certain events.
6. INTEREST RATE SWAP
On June 22, 1998, the Company entered into an interest rate swap
agreement with a bank with a notional amount of $7.5 million. Under the swap
agreement, the Company is required to pay a fixed rate of 5.83% on each March
24, June 24, September 24 and December 24, commencing on September 24, 1998. The
swap agreement terminates on June 25, 2001. The Company will receive a floating
rate based on the three-month London Interbank Offering Rate (LIBOR) on the same
dates as described above. In connection with the swap agreement, the Company has
included $0 and $10,875 in interest expense in its consolidated statements of
operations for the three months ended March 28, 1998 and April 3, 1999,
respectively.
7. STOCK OPTION PLAN
The Elgar Holdings, Inc. 1998 Stock Option Plan, as amended on March
24, 1999 (the "Option Plan"), provides for the issuance of up to 489,763
shares of common stock pursuant to awards granted under the Option Plan (as
of January 2, 1999, prior to the amendment, 265,374 shares of common stock
were authorized for issuance under the Option Plan). As of April 3, 1999,
there were options outstanding to purchase 468,500 shares of common stock
(though issuances of options to purchase 168,500 shares of common stock are
subject to receipt of a waiver by the requisite percentage of the Company's
stockholders of a subscription right contained in the Shareholders
Agreement). All options have been granted at fair market value on the date of
grant. Options vest ratably over four years and generally expire on the tenth
anniversary of the date of grant.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Unaudited Consolidated Financial Statements and Notes thereto of the Company
included elsewhere herein.
This Report 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. The words
"anticipates," "believes," "estimates," "expects," "plans," "intends" and
similar expressions, as they relate to the Company or its management, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company, with respect to future events and are subject to
certain risks, uncertainties and assumptions, that could cause actual results to
differ materially from those expressed in any forward-looking statement,
including, without limitation: competition from other manufacturers in the
Company's industry, loss of key employees and/or general economic conditions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated or expected. The
Company does not intend to update these forward-looking statements.
RESULTS OF OPERATIONS
The following table sets forth certain income statement information for
the Company as a percentage of net sales for the three months ended March 28,
1998 and April 3, 1999, with the results of Power Ten included from its date of
acquisition on May 29, 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
MARCH 28, 1998 APRIL 3, 1999
----------------- ----------------
<S> <C> <C>
Net sales............................... 100.0% 100.0%
Cost of sales........................... 54.3 57.3
----- -----
Gross profit........................ 45.7 42.7
Selling, general and administrative
expense.............................. 16.7 17.6
Research and development and
engineering expenses................. 11.3 10.0
Amortization expense.................... 2.0 4.0
----- -----
Operating income.................... 15.7% 11.1%
----- -----
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED APRIL 3, 1999 TO THE THREE MONTHS ENDED
MARCH 28, 1998
NET SALES. Net sales for the quarter ended April 3, 1999 were $15.0
million, a decrease of $0.9 million, or 5.7%, from net sales of $15.9 million
for the quarter ended March 28, 1998. This decrease was due to a decrease in
sales of programmable DC products (primarily attributable to decreased sales to
Racal Instruments, Inc. ("Racal"), as discussed in the following paragraph),
partially offset by an increase in sales of Space Systems products and the
inclusion of the results of Power Ten.
Racal is a systems integrator for test and measurement equipment which
provides certain automatic test equipment ("ATE") systems utilizing Elgar's
programmable power supplies to manufacturers, including a leading semiconductor
manufacturer. In the second quarter of calendar year 1998, Racal notified the
Company that the leading semiconductor manufacturer had decided to cease orders
for Elgar's current AT-8000 DC power supplies until the "next generation"
technology was available. Elgar's prototype power
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supplies for this next-generation technology were delivered to the end-user
in August 1998. The Company commenced delivering pre-production power
supplies to the end-user in the second quarter of 1999, and anticipates
receiving production orders from the end-user in the latter part of calendar
1999 or early 2000. Racal accounted for approximately $3.6 million, or 22.6%,
of the Company's total net sales in the quarter ended March 28, 1998, the
substantial majority of which was attributable to the semiconductor
manufacturer. The Company did not record any sales to Racal in the quarter
ended April 3, 1999.
A major customer of Space Systems products recently requested that the
Company upgrade one of its satellite testing systems. Since this upgrade will
require additional engineering efforts on the part of the Company and testing on
the part of the customer, deliveries of additional systems to the customer are
expected to be delayed. These delays are expected to adversely affect the
Company's net sales at the end of calendar 1999 and the beginning of calendar
2000.
GROSS PROFIT. Gross profit for the quarter ended April 3, 1999 was $6.4
million, a decrease of $0.9 million, or 12.3%, from gross profit of $7.3 million
for the quarter ended March 28, 1998. As a percentage of net sales, gross profit
decreased from 45.7% for the quarter ended March 28, 1998 to 42.7% for the
quarter ended April 3, 1999. The decrease in gross profit was primarily
attributable to unfavorable product mix and lower sales volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses were $2.6 million for the quarter ended April
3, 1999, a decrease of $0.1 million, or 3.7%, from SG&A expenses of $2.7 million
for the quarter ended March 28, 1998. SG&A expenses increased as a percentage of
net sales from 16.7% for the quarter ended March 28, 1998 to 17.6% for the
quarter ended April 3, 1999. The increase in SG&A as a percentage of net sales
was primarily due to lower sales.
RESEARCH AND DEVELOPMENT AND ENGINEERING EXPENSES. Research and
development and engineering expenses were $1.5 million for the quarter ended
April 3, 1999, a decrease of $0.3 million, or 16.7%, from research and
development and engineering expenses of $1.8 million for the quarter ended March
28, 1998. As a percentage of net sales, research and development and engineering
expense decreased from 11.3% for the quarter ended March 28, 1998 to 10.0% for
the quarter ended April 3, 1999. The decrease was due to lower labor and
software purchases in the quarter ended April 3, 1999 versus the quarter ended
March 28, 1998.
AMORTIZATION EXPENSE. Amortization expense increased to $0.6 million
for the quarter ended April 3, 1999 from $0.3 million for the quarter ended
March 28, 1998. This increase was due to three months of amortization expense
incurred in connection with the Company's acquisition of Power Ten.
OPERATING INCOME. Operating income was $1.7 million for the quarter
ended April 3, 1999, a decrease of $0.8 million, or 32.0%, from operating income
of $2.5 million for the quarter ended March 28, 1998. Operating income decreased
as a percentage of net sales from 15.7% for the quarter ended March 28, 1998 to
11.1% for the quarter ended April 3, 1999, due to the factors discussed above.
INCOME TAXES. Income taxes for the three months ended April 3, 1999
contained a tax benefit of $175,000, compared to a tax provision of $39,000 for
the three months ended March 28, 1998. The Company's effective tax rate was
17.0% for the three months ended April 3, 1999 and 16.1% for the three months
ended March 28, 1998. The effective tax rate differs from the statutory tax rate
of 40.0%, primarily due to the non-deductibility of goodwill for tax purposes
and realization of research and development tax credits utilized by the Company.
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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 used by operating activities for the three months ended April
3, 1999 was $3.1 million, a decrease of $6.0 million from cash flow of $2.9
million provided by operating activities for the three months ended March 28,
1998. This decrease was attributable to a decrease in net income of $1.1
million, a $3.5 million increase in interest payable on the Senior Notes in the
quarter ended April 3, 1999 as compared to the quarter ended March 28, 1998, an
increase of $2.2 million in accounts receivable and a decrease of $1.2 million
in accounts payable, offset by a $0.9 million increase in income tax payable, a
$0.8 million decrease in inventory, and a $0.3 million decrease in intangibles.
SOURCES OF CAPITAL. 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 Company's credit facility, will be adequate to meet its
anticipated requirements for the foreseeable future for working capital,
interest payments, payments under the Company's term credit facility and capital
expenditures. The Company's future operating performance will be subject to
future economic conditions and to financial, business and other factors, many of
which may be beyond the Company's control.
CAPITAL REQUIREMENTS. The Company's capital expenditures were $180,000
in the three months ended April 3, 1999 compared to $295,000 in the three months
ended March 28, 1998.
YEAR 2000
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 significant operating systems, software
applications and hardware used in its operations. The Company has also made
contact with its major suppliers in order to determine their state of readiness.
The Company's operating systems and business software updates have been
installed and tested, and personal computer hardware and software
upgrades/replacements have been converted. Other items such as the phone switch,
bank capabilities, outside insurance carriers and the outside payroll system are
being evaluated for conversion before the end of June 1999. Management expects
that the cost to become year 2000 compliant, including conversion of its
business software and upgrades of its personal computer hardware and software,
will total approximately $80,000 ($38,000 of which has been incurred to date).
Compliance status from key suppliers is being evaluated to determine whether the
Company will need to switch sources to ensure ongoing product/service
availability. This evaluation/conversion is expected to be completed by
September 1999. A contingency plan is being developed, notwithstanding that the
risk on remaining items is considered low.
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Management believes that its most significant exposure on the year 2000
issue is from suppliers that experience problems. Along those lines, management
is both obtaining year 2000 compliance certificates from significant suppliers
and meeting with key suppliers to assess compliance status. Should any of the
areas being addressed not provide adequate results, management will evaluate
alternate suppliers for raw material requirements.
Based on the steps taken to date, management does not expect that the
year 2000 issue will materially affect the Company's operations due to problems
encountered by its suppliers, customers or end-users for its products, although
no assurances can be given as to this.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has only limited involvement in derivative financial
instruments and does not hold or issue them for trading purposes. Certain
amounts borrowed under the Company's Credit Facility are at variable interest
rates and the Company is thus subject to market risk resulting from interest
rate fluctuations. The Company enters into interest rate swaps in part to
alter interest rate exposures. Interest rate swaps allow the Company to raise
long-term borrowings at floating rates and effectively swap them into fixed
rates that are lower than those available to the Company if fixed-rate
borrowings were made directly. Under interest rate swaps, the Company agrees
with another party to exchange, at specified intervals, the difference
between fixed-rate and floating-rate amounts calculated by reference to an
agreed notional principal amount. See Note 6 to the Company's Consolidated
Financial Statements included elsewhere in this report. As of April 3, 1999,
all but $2,500,000 of the Company's long-term bank debt was covered by this
swap arrangement. Thus, the Company's exposure with respect to upward
movements in interest rates is with respect this portion of its bank debt.
In addition, the Company is exposed to market risks related to
fluctuations in interest rates on the Senior Notes. For fixed rate debt such as
the Senior Notes, changes in interest rates generally affect the fair value of
the debt instrument. The Company does not have an obligation to repay the Senior
Notes prior to maturity in February 2008 and, as a result, interest-rate risk
and changes in fair value should not have a significant impact on the Company.
The tables below provide information as of April 3, 1999 about the
Company's derivative instruments and other financial instruments that are
sensitive to changes in interest rates.
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<TABLE>
<S> <C>
LONG TERM BANK DEBT (VARIABLE RATE)
Principal amount $10,000,000(1)
Variable interest rate 7.75%(2)
Maturity--tranche June 30, 1999
Maturity--loan February 3, 2002
Remaining principal payments:
1999 $0
2000 $1,250,000
2001 $3,750,000
2002 $4,000,000
2003 $1,000,000
</TABLE>
- ----------------
(1) $7,500,000 of this amount is covered by the interest-rate swap arrangement
described below.
(2) Renewals are based on the Eurodollar Rate plus 2.75%.
<TABLE>
<S> <C>
INTEREST RATE SWAP ARRANGEMENT (FIXED RATE)
Parties The Company (fixed rate payor) and
Bankers Trust Company
(floating rate payor)
Notional amount $7,500,000
Fixed interest rate 5.83% (1)
Floating interest rate 5.6875% for the current period (2)
Swap interest $10,875 (3)
Commencement date June 24, 1998
Maturity date June 25, 2001
</TABLE>
- ----------------
(1) As the fixed interest rate payor, the Company is required to pay a fixed
rate of 5.83% per annum on the $7,500,000 notional amount, payable
quarterly on each March 24, June 24, September 24 and December 24 (with
the first such payment made on September 24, 1998).
(2) As the floating rate payor, Bankers Trust Company is required to pay a
floating rate of interest on the $7,500,000 notional amount, based on the
three-month London Interbank Offering Rate (LIBOR), payable quarterly on
each March 24, June 24, September 24 and December 24 (with the first such
payment made on September 24, 1998).
(3) In connection with the swap agreement, the Company recorded $10,875 of
interest expense for its fiscal quarter ended April 3, 1999.
<TABLE>
<S> <C>
SENIOR NOTES (FIXED RATE)
Principal amount outstanding $90,000,000
Fixed interest rate 9.875%
Maturity date February 1, 2008
</TABLE>
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
EXHIBIT NO. DESCRIPTION
3.1 Certificate of Designations for the Series C 6%
Cumulative Convertible Preferred Stock of Elgar
Holdings, Inc.
10.1 First Amendment and Waiver, dated as of
February 12, 1999, among Elgar Holdings, Inc.,
Elgar Electronics Corporation, the lenders
party to the Credit Agreement and Bankers Trust
Company, as Agent
10.2 Second Amendment, dated as of March 24, 1999,
among Elgar Holdings, Inc., Elgar Electronics
Corporation, the lenders party to the Credit
Agreement and Bankers Trust Company, as Agent
10.3 Amended and Restated Capital Call Agreement,
dated as of May 29, 1998 and amended and
restated as of February 12, 1999, among J.F.
Lehman Equity Investors L.P., Elgar Holdings,
Inc., Elgar Electronics Corporation and Bankers
Trust Company, as Agent
10.4 Elgar Holdings, Inc. 1998 Stock Option Plan, as
Amended and Restated on March 24, 1999
27 Financial Data Schedule
(b) A Form 8-K was filed on March 26, 1999.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ELGAR HOLDINGS, INC.
Dated: May 17, 1999 By: /s/ CHRISTOPHER W. KELFORD
--------------------------------------------
Christopher W. Kelford
Vice President--Finance, Chief Financial
Officer, Treasurer and Assistant Secretary
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<PAGE>
EXHIBIT 3.1
CERTIFICATE OF DESIGNATION OF
PREFERENCES AND RELATIVE PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF
SERIES C 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
ELGAR HOLDINGS, INC.
(Pursuant to Section 151(g) of the General Corporation Law of the State of
Delaware)
Elgar Holdings, Inc., a corporation organized and existing under the
laws of the State of Delaware (hereinafter the "Company"), DOES HEREBY
CERTIFY THAT, pursuant to authority conferred upon the Board of Directors of
the Company (the "Board of Directors") by the certificate of incorporation of
the Company, as amended, the Board of Directors unanimously adopted the
following resolutions on March 24, 1999 authorizing the issuance of the
Series C 6% Cumulative Convertible Preferred Stock of the Company, which
resolutions are still in full force and effect and are not in conflict with
any provisions of the certificate of incorporation or bylaws of the Company:
RESOLVED, that pursuant to the authority presently granted to and vested
in the Board of Directors of this Company under the provisions of the
Certificate of Incorporation of the Company and pursuant to the provisions of
Section 151(g) of the General Corporation Law of the State of Delaware, this
Board of Directors hereby creates a series of Preferred Stock to consist of
4,000 shares, and hereby fixes the powers, preferences, relative
participating, voting, optional and other special rights, and the
qualifications, limitations and restrictions thereof, as follows:
1. DESIGNATION AND AMOUNT. The shares of such series of Preferred
Stock shall be designated as "Series C 6% Cumulative Convertible Preferred
Stock" (the "Series C Preferred Stock"), and the number of shares
constituting such series shall be 4,000. The initial liquidation preference
of the Series C Preferred Stock shall be $1,000 per share (the "Stated
Liquidation Value").
2. RANK. The Series C Preferred Stock shall, with respect to rights
on bankruptcy, liquidation, winding up, dissolution and dividends, rank (i)
junior to the Series A 10% Cumulative Redeemable Preferred Stock of the
Company (the "Series A Preferred Stock"), (ii) on a parity with the Series B
6% Cumulative Convertible Preferred Stock (the "Series B Preferred Stock")
and (iii) senior to the Company's Common Stock, par value $0.01 per share
(the "Common Stock"), and to all other classes and series of stock of the
Company now or hereafter authorized, issued or outstanding, other than any
class or series of stock of the Company expressly designated as being on a
parity with ("Parity Securities") or senior to the Series C Preferred Stock.
Such other classes or series of stock of the Company not expressly designated
as being on a parity with or senior to the Series C Preferred Stock are
referred to hereafter as "Junior Securities." The rights of holders of
shares of the Series C Preferred Stock are subordinate to the rights of the
Company's general creditors, including the holders of the Company's 9-7/8%
Senior Notes due 2008 (the "Senior Notes").
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3. DIVIDENDS.
(a) The holders of shares of the Series C Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors, out
of funds legally available therefor, dividends payable semi-annually in
arrears on March 31 and September 30 of each year (each such date, a
"Dividend Payment Date"), except that if any Dividend Payment Date is not a
Business Day (as defined below), then such semi-annual dividend shall be
payable on the next succeeding Business Day and such next succeeding Business
Day will be the Dividend Payment Date. Dividends shall be payable to holders
of the Series C Preferred Stock at the annual rate of 6% times the sum of (i)
the Stated Liquidation Value and (ii) accrued but unpaid dividends as of the
immediately preceding Dividend Payment Date, compounded semi-annually.
Dividends shall be payable in cash only to holders of record at the close of
business on the date specified by the Board of Directors at the time such
dividend is declared (the "Record Date"). Any such Record Date shall be not
less than 10 days and not more than 60 days prior to the relevant Dividend
Payment Date. All dividends paid with respect to shares of the Series C
Preferred Stock shall be paid pro rata to the holders entitled thereto.
(b) Dividends on the Series C Preferred Stock shall accrue and be
cumulative on a semi-annual basis (whether or not declared and whether or not
funds are legally available for the payment thereof) from the Issue Date (as
defined below). The semi-annual dividend period shall be computed on the
basis of a 360-day year of twelve 30-day months.
(c) So long as any shares of the Series C Preferred Stock are
outstanding, the Company shall not, without the prior consent of the holders
of at least fifty-one percent (51%) of the shares of outstanding Series C
Preferred Stock, (i) make any payment on account of, or set apart for payment
money for a sinking or other similar fund for, the purchase, redemption or
retirement of, any Junior Securities (other than dividends or distributions
payable in additional shares of Junior Securities to holders of Junior
Securities); (ii) permit any corporation or other entity directly or
indirectly controlled by the Company to purchase or redeem any Junior
Securities; (iii) declare, pay or set apart for payment, or permit any
corporation or other entity directly or indirectly controlled by the Company
to declare, pay or set apart for payment, any dividend or make any
distribution or payment on any Junior Securities or Parity Securities,
whether directly or indirectly and whether in cash, obligations or shares of
the Company or other property (other than dividends or distributions payable
in additional shares of Junior Securities to holders of Junior Securities);
or (iv) make any payment on account of, or set apart for payment money for a
sinking or other similar fund for, the purchase, redemption or retirement of,
any Parity Securities, whether directly or indirectly, and whether in cash,
obligations, shares of the Company or other property (other than payments
solely of Junior Securities), and shall not permit any corporation or other
entity directly or indirectly controlled by the Company to purchase or redeem
any Parity Securities, unless prior to or at the time of such payment or
setting apart for payment, the Company shall have repurchased, redeemed or
retired shares of the Series C Preferred Stock on a pro rata basis, in
proportion to the respective Liquidation Preferences (as defined in the
Certificate of Incorporation or applicable Certificate of Designation) of the
Series C Preferred Stock and the Parity Securities as to which such sinking
fund or similar fund payment, or such purchase, redemption or retirement, is
being effected.
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<PAGE>
(d) Notwithstanding anything contained herein to the contrary, no
dividends on shares of Series C Preferred Stock shall be authorized or
declared by the Board of Directors of the Company or paid or set apart for
payment by the Company at such time as the terms and provisions of any
agreement of the Company, including any agreement relating to its
indebtedness, prohibits such authorization, declaration, payment or setting
apart for payment or provides that such authorization, declaration, payment
or setting apart for payment would constitute a breach thereof or a default
thereunder, or to the extent such declaration or payment shall be restricted
or prohibited by law.
4. LIQUIDATION PREFERENCE.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, the holders of
shares of Series C Preferred Stock then outstanding shall be entitled to be
paid out of the assets of the Company available for distribution to its
stockholders an amount in cash equal to 100% of the Stated Liquidation Value
for each share outstanding, plus an amount in cash equal to all accrued but
unpaid dividends thereon (whether or not declared) as provided in Section
3(b) above, without interest, to the date of liquidation, dissolution or
winding up (such amount the "Liquidation Preference"), before any payment
shall be made or any assets distributed to the holders of any of the Junior
Securities. If the assets of the Company are not sufficient to pay in full
the Liquidation Preference payable to the holders of outstanding shares of
the Series C Preferred Stock and any Parity Securities, then the holders of
all such shares shall share ratably in such distribution of assets in
accordance with the amount which would be payable on such distribution if the
amounts to which the holders of outstanding shares of Series C Preferred
Stock and the holders of outstanding shares of such Parity Securities are
entitled were paid in full.
(b) For the purposes of this Section 4, neither the voluntary sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or
other consideration) of all or substantially all of the property or assets of
the Company nor the consolidation or merger of the Company with any one or
more other corporations shall be deemed to be a voluntary or involuntary
liquidation, dissolution or winding up of the Company, unless such voluntary
sale, conveyance, exchange or transfer shall be in connection with a plan of
liquidation, dissolution or winding up of the Company.
5. REDEMPTION.
(a) OPTIONAL REDEMPTION. The Company may, at its option, redeem at any
time, out of funds legally available therefor, in the manner provided in
Section 6 hereof, all or any portion of the shares of the Series C Preferred
Stock, at a redemption price per share equal to 100% of the Liquidation
Preference thereof on the date of redemption, including dividends accrued
through the Dividend Payment Date immediately preceding the redemption date,
though not including any dividends for any period after such Dividend Payment
Date; PROVIDED, HOWEVER, that any such optional redemption by the Company
shall be on a pro rata basis and for whole shares of the Series C Preferred
Stock; PROVIDED, FURTHER, HOWEVER, that the Company may redeem fractional
shares of Series C Preferred Stock pursuant to this Section 5(a) in the event
that after
3
<PAGE>
such redemption a holder of Series C Preferred Stock would be left with less
than one full share of Series C Preferred Stock.
(b) REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change
of Control (as defined below), the Series C 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 C Preferred Stock upon a Change of Control until
it has repurchased or redeemed (x) such of the $90,000,000 original principal
amount of Senior Notes then outstanding as the Company is required to
repurchase in connection with a change of control pursuant to the terms of
the Indenture, dated as of February 3, 1998, between the Company and United
States Trust Company, relating to the Senior Notes and (y) such of the shares
of Series A Preferred Stock then outstanding as the Company is required to
repurchase pursuant to the Certificate of Designation relating thereto;
PROVIDED, FURTHER, that any such redemption (and the Company's obligations
with respect thereto) shall be subject in all respects to the applicable
restrictions contained in the 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, a wholly owned subsidiary of the
Company, and Bankers Trust Company, as agent, as such agreement may be
amended or supplemented. Subject to the foregoing provisos, the Company
shall redeem, out of funds legally available therefor, the number of shares
specified in the holders' notices of election to redeem pursuant to Section
6(b) hereof on the date fixed for redemption.
6. PROCEDURE FOR REDEMPTION.
(a) In the event that the Company shall redeem shares of Series C
Preferred Stock pursuant to Section 5(a) hereof, notice of such redemption
shall be mailed by first-class mail, postage prepaid, and mailed not less
than 30 days nor more than 60 days prior to the redemption date to the
holders of record of the shares to be redeemed at their respective addresses
as they shall appear in the records of the Company; PROVIDED, HOWEVER, that
failure to give such notice or any defect therein or in the mailing thereof
shall not affect the validity of the proceeding for the redemption of any
shares so to be redeemed except as to the holder to whom the Company has
failed to give such notice or except as to the holder to whom notice was
defective. Each such notice shall state: (i) the redemption date; (ii) the
number of shares of Series C Preferred Stock to be redeemed and, if less than
all the shares held by such holders are to be redeemed, the number of such
shares to be redeemed from such holders; (iii) the redemption price and form
of consideration; (iv) the place or places where certificates for such shares
are to be surrendered for payment of the redemption price; and (v) that
dividends on the shares to be redeemed will cease to accrue on such
redemption date. Any redemption of less than all the shares of Series C
Preferred Stock pursuant to Section 5(a) shall be made on a pro rata basis to
all holders of Series C Preferred Stock.
(b) If a Change of Control should occur, then, subject to Section 5(b)
above, within 30 days of the occurrence of such Change of Control, the
Company shall give written notice by
4
<PAGE>
first-class mail, postage prepaid, to each holder of Series C Preferred Stock
at its address as it appears in the records of the Company, which notice
shall set forth (in addition to the information required by the next
succeeding paragraph): (i) each holder's right to require the Company to
redeem shares of Series C Preferred Stock held by such holder as a result of
such Change of Control; (ii) the redemption price; (iii) the redemption date
(which date shall be no earlier than 30 days and no later than 60 days from
the date the notice in respect of such Change of Control is mailed); (iv) the
procedures to be followed by such holder in exercising its right of
redemption, including the place or places where certificates for such shares
are to be surrendered for payment of the redemption price; and (v) that
dividends on the shares to be redeemed will cease to accrue on the redemption
date. In the event a holder of shares of Series C Preferred Stock shall
elect to require the Company to redeem any or all of such shares of Series C
Preferred Stock, such holder shall deliver, within 20 days of the mailing to
it of the Company's notice described in this Section 6(b), a written notice
stating such holder's election and specifying the number of shares to be
redeemed pursuant to Section 5(b) hereof.
(c) Notice by the Company having been mailed as provided in Section
6(a) hereof, or notice of election having been mailed by the holders as
provided in Section 6(b) hereof, and provided that on or before the
applicable redemption date funds necessary for such redemption shall have
been set aside by the Company, separate and apart from its other funds, in
trust for the pro rata benefit of the holders of the shares of Series C
Preferred Stock so called for or entitled to redemption, so as to be and to
continue to be available therefor, then, from and after the redemption date,
dividends on the shares of Series C Preferred Stock so called for or entitled
to redemption shall cease to accrue, and said shares shall no longer be
deemed to be outstanding and shall not have the status of shares of Series C
Preferred Stock, and all rights of the holders thereof as stockholders of the
Company (except the right to receive the applicable redemption price and any
accrued and unpaid dividends from the Company to the date of redemption)
shall cease, unless the Company defaults in the payment of the redemption
price, in which case all rights of the holders of Series C Preferred Stock
shall continue until the redemption price is paid. Upon surrender of the
certificates for any shares so redeemed (properly endorsed or assigned for
transfer, if the Board of Directors of the Company shall so require and a
notice by the Company shall so state), such shares shall be redeemed by the
Company at the applicable redemption price as aforesaid. In case fewer than
all the shares represented by any such certificate are redeemed, a new
certificate or certificates shall be issued representing the unredeemed
shares without cost to the holder thereof. Any funds set aside in trust for
the holders of Series C Preferred Stock pursuant to this Section 6(c) which
remain unclaimed on the second anniversary of the applicable redemption date
shall be released or repaid to the Company, after which the holders of shares
called for redemption shall be entitled to receive payment of the redemption
price only from the Compan.
7. REACQUIRED SHARES. Shares of Series C Preferred Stock that have
been issued and reacquired in any manner, including shares reacquired by
redemption or shares converted into Common Stock pursuant to Section 9 below,
shall (upon compliance with any applicable provisions of the laws of the
State of Delaware) have the status of authorized and unissued shares of the
class of Preferred Stock undesignated as to series and may be redesignated
and reissued as part of any series of Preferred Stock other than the Series C
Preferred Stock.
5
<PAGE>
8. VOTING RIGHTS. Except as specifically provided in this Section 8
and except for any additional voting rights provided by law, the holders of
Series C Preferred Stock shall have no voting rights. The Certificate of
Incorporation of the Company shall not be amended in any manner that would
adversely alter or change the powers, preferences or special rights of the
Series C Preferred Stock as set forth herein without the affirmative vote of
the holders of at least fifty-one percent (51%) of the outstanding shares of
Series C Preferred Stock.
9. CONVERSION RIGHTS. The rights of the holders of shares of Series C
Preferred Stock to convert such shares into shares of Common Stock (the
"Conversion Rights"), and the terms and conditions of such conversion, shall
be as follows:
(a) RIGHT TO CONVERT.
(i) At any time following a Triggering Event (as defined below),
each holder of shares of the Series C Preferred Stock shall have the right
and option to convert all, but not less than all, of such shares into that
number of fully paid and nonassessable shares of Common Stock determined in
accordance with the provisions of this Section 9. In order to convert shares
of the Series C Preferred Stock into shares of Common Stock, the holder
thereof shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Company or to the transfer agent for the
Series C Preferred Stock or the Common Stock, together with written notice to
the Company stating that he, she or it elects to convert the same and setting
forth the name or names in which he, she or it wishes the certificate or
certificates for Common Stock to be issued (the "Conversion Notice"). In the
event of a redemption of the Series C Preferred Stock pursuant to Section 5
above, any holder that does not timely deliver such Conversion Notice and
surrender such certificate or certificates prior to the date of redemption
specified in any notice delivered pursuant to Section 6 above shall be deemed
to have waived his, her or its right to conversion, and such shares shall be
subject to the Company's right of redemption pursuant to Section 5 above.
(ii) The Company shall, as soon as practicable after the
surrender of the certificate or certificates evidencing shares of Series C
Preferred Stock for conversion at the office of the Company or the transfer
agent for the Series C Preferred Stock or the Common Stock, issue to each
holder of such shares, or such holder's nominee or nominees, a certificate or
certificates evidencing the number of shares of Common Stock to which such
holder shall be entitled. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of
the shares of Series C Preferred Stock to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the recordholder or holders
of such shares of Common Stock at such date and shall, with respect to such
shares, have only those rights of a holder of Common Stock of the Company.
(b) CONVERSION OF PREFERRED STOCK. Each share of Series C Preferred
Stock shall be convertible into the number of shares of Common Stock which
results from dividing the Stated Liquidation Value (without any adjustment
for the accrued but unpaid dividends thereon) by the Conversion Price per
share in effect at the time of conversion; PROVIDED, HOWEVER, that any
fractional number of shares of Common Stock shall be rounded up to the next
whole share. Upon
6
<PAGE>
conversion of the Series C Preferred Stock, holders of shares of Series C
Preferred Stock shall not be entitled to receive any accrued but unpaid
dividends as of the conversion date.
(c) CONVERSION PRICE. The conversion price of each share of Series C
Preferred Stock shall initially be $1.50, which the Board of Directors of the
Company has determined to be equal to or greater than the fair market value
of the Common Stock on the Issue Date (the "Conversion Price"), and shall be
subject to adjustment from time to time as provided herein.
(d) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If outstanding
shares of the Common Stock of the Company shall be subdivided into a greater
number of shares, or a dividend in Common Stock or other securities of the
Company convertible into or exchangeable for Common Stock (in which latter
event the number of shares of Common Stock issuable upon the conversion or
exchange of such securities shall be deemed to have been distributed), shall
be paid in respect of the Common Stock of the Company, the Conversion Price
for each share of Series C Preferred Stock in effect immediately prior to
such subdivision or at the record date of such dividend shall, simultaneously
with the effectiveness of such subdivision or immediately after the record
date of such dividend, be proportionately reduced, and conversely, if
outstanding shares of the Common Stock of the Company shall be combined into
a smaller number of shares, the Conversion Price for each share of Series C
Preferred Stock in effect immediately prior to such combination shall
simultaneously with the effectiveness of such combination, be proportionately
increased. Notwithstanding the foregoing, no adjustment of the Conversion
Price for the Series C Preferred Stock shall be required unless such
adjustment would require an increase or decrease of at least 1% in such
price; PROVIDED, HOWEVER, that any adjustments which by reason of this
subparagraph (d) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
subparagraph (9)(d) shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be. Any adjustment to the
Conversion Price under this Section 9(d) shall become effective at the close
of business on the date the subdivision, dividend or combination referred to
herein becomes effective.
(e) REORGANIZATIONS, MERGERS AND CONSOLIDATIONS. In the event of any
capital reorganization, or the consolidation or merger of the Company with or
into another entity (collectively referred to hereinafter as
"Reorganizations"), unless the Company exercises its right to redeem the
Series C Preferred Stock pursuant to Section 5(a) above, the holders of the
Series C Preferred Stock shall thereafter be entitled to receive upon
conversion of the Series C Preferred Stock the kind and number of shares of
Common Stock or other securities or property (including cash) of the Company
(or other corporation resulting from such consolidation or surviving such
merger or to which such properties and assets shall have been sold or
otherwise transferred), that the holders would have been entitled to receive
had such holders converted their Series C Preferred Stock into shares of
Common Stock immediately prior to such Reorganization. In addition, upon the
occurrence of such a Reorganization, appropriate adjustment shall be made in
the application of the provisions set forth herein with respect to the rights
and interests thereafter of the holders of the Series C Preferred Stock, to
the end that the provisions set forth herein (including the specified changes
and other adjustments to the Conversion Price) shall thereafter be
applicable, as nearly as reasonably may be, in relation to any shares, other
securities or property thereafter receivable upon conversion of the Series C
Preferred Stock. The provisions of this Section 9(e) shall similarly apply
to successive Reorganizations. Any agreement entered into by
7
<PAGE>
the Company relating to any Reorganization shall make appropriate provision
for the conversions described herein.
(f) CONVERSION PRICE ADJUSTMENT CERTIFICATE. Whenever the Conversion
Price is adjusted as herein provided, the Company shall promptly file with
the Secretary or transfer agent an officer's certificate setting forth the
Conversion Price after such adjustment and setting forth a brief statement of
the facts requiring such adjustment, which certificate shall be conclusive
evidence of the correctness of such adjustment absent manifest error.
Promptly after delivery of such certificate, the Company shall prepare a
notice of such adjustment of the Conversion Price setting forth the adjusted
Conversion Price and the effective date of such adjustment and shall mail
such notice of such adjustment of the Conversion Price to the holder of each
share of Series C Preferred Stock at such holder's last address as shown on
the stock records of the Company.
(g) TRIGGERING EVENTS. A Triggering Event shall mean (i) a Change of
Control, (ii) an initial public offering of any class of equity securities of
the Company pursuant to the Securities Act of 1933, as amended, (iii) the
delivery of a notice of redemption pursuant to Section 6(a) above and (iv)
the fifth anniversary of the Issue Date.
10. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of Series C Preferred Stock, such numbers of its shares of Common
Stock as shall from time to time be sufficient to effect a conversion of all
outstanding shares of the Series C Preferred Stock, and if at any time the
number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all the outstanding shares of the
Series C Preferred Stock, the Company shall promptly seek such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purpose. In the event of the consolidation or
merger of the Company with another corporation where the Company is not the
surviving corporation, effective provisions shall be made in the articles or
certificate of incorporation, merger or consolidation, or otherwise of the
surviving corporation so that such corporation will at all times reserve and
keep available a sufficient number of shares of Common Stock or other
securities or property to provide for the conversion of the Series C
Preferred Stock in accordance with the provisions of this Section 10.
11. NOTICES. All notices referred to herein, except as otherwise
expressly provided, shall be made by registered or certified mail, return
receipt requested, postage prepaid and shall be deemed to have been given
when so mailed to the holder at the address for such holder maintained by the
Company.
12. REMEDIES. Any holder of Series C Preferred Stock may proceed to
protect and enforce his, her or its rights and the rights of other holders by
any available remedy by proceeding at law or in equity to protect and enforce
any such rights, whether for the specific enforcement of any provision in
this Certificate of Designation or in aid of the exercise of any power
granted herein, or to enforce any other proper remedy.
8
<PAGE>
13. DEFINITIONS. For the purposes of this Certificate of Designation,
the following terms shall have the meanings indicated:
"Affiliate" shall mean, with respect to any specified person, (a) any
other person directly or indirectly controlling or controlled by or under
direct or indirect common control with such specified person or (b) any other
person that owns, directly or indirectly, 10% or more of such specified
person's capital stock or any executive officer or director of any such
specified person or other person or, with respect to any natural person, any
person having a relationship with such person by blood, marriage or adoption
not more remote than first cousin. For the purposes of this definition,
"control," when used with respect to any specified person, means the power to
direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Beneficial Owner" shall have the meaning ascribed to such term or the
term "beneficial ownership" in Rule 13d-3 and Rule 13d-5 under the Securities
Exchange Act of 1934, as amended, except that a person shall be deemed have
"beneficial ownership" of all securities that such person has the right to
acquire, whether such right is currently exercisable or is exercisable only
upon the occurrence of a subsequent condition.
"Business Day" shall mean any day other than a Saturday, Sunday or a day
on which banking institutions in New York, New York are authorized or
obligated by law or executive order to close.
"Change of Control" shall mean such time after the Issue Date as either:
(i) prior to the initial public offering by the Company of any class
of its Common Stock, the consummation of any transaction the result of which
is that the Principals and their Related Parties become the Beneficial
Owners, in the aggregate, of less than 50% of the Common Stock of the
Company;
(ii) after the initial public offering by the Company of any class of
its Common Stock, any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act), other than the Principals and their Related Parties,
becomes, directly or indirectly, the Beneficial Owner, by way of merger,
consolidation or otherwise, of 51% or more of the Common Stock of the Company
and such person is or becomes, directly or indirectly, the Beneficial Owner
of a greater percentage of the voting power of the Common Stock of the
Company, calculated on a fully diluted basis, than the percentage
Beneficially Owned by the Principals and their Related Parties; or
(iii) the Company (A) effects the sale, lease or transfer of all or
substantially all of the assets of the Company to any person or group, or (B)
any wholly-owned subsidiary of the Company effects the sale, lease or
transfer of all or substantially all of the assets of such subsidiary to any
person or group, if such assets constitute substantially all of the assets of
the Company and its subsidiaries, taken as a whole.
"Junior Securities" shall have the meaning set forth in Section 2 hereof.
9
<PAGE>
"Issue Date" shall mean the first date on which shares of Series C
Preferred Stock are issued.
"Liquidation Preference" shall have the meaning set forth in Section 4
hereof.
"Parity Securities" shall have the meaning set forth in Section 2 hereof.
"Person" shall mean any individual, firm, corporation or other entity,
and shall include any successor (by merger or otherwise) of such entity.
"Principals" shall mean (i) J.F. Lehman & Company ("Lehman"), (ii) each
Affiliate of Lehman as of the Issue Date, (iii) J.F. Lehman Equity Investors
I., L.P., (iv) JFL-EEC LLC and (v) each officer or employee (including their
respective immediate family members) of Lehman as of the Issue Date.
"Related Party" shall mean with respect to any Principal (A) any
controlling stockholder or 80% (or more) owned subsidiary of such Principal or
(B) any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding an 80% or more
controlling interest of which consist of such Principal and/or such other
Persons referred to in the immediately preceding clause (A).
10
<PAGE>
IN WITNESS WHEREOF, Elgar Holdings, Inc. has caused this Certificate to
be executed by its Secretary this 24th day of March, 1999.
ELGAR HOLDINGS, INC.
By: /s/Keith Oster
-----------------------------------
Keith Oster, Secretary
11
<PAGE>
EXHIBIT 10.1
FIRST AMENDMENT AND WAIVER
FIRST AMENDMENT AND WAIVER (this "Amendment"), dated as of February
12, 1999, among ELGAR HOLDINGS, INC. ("Holdings"), ELGAR ELECTRONICS
CORPORATION (the "Borrower"), the lenders party to the Credit Agreement
referred to below (the "Banks"), and BANKERS TRUST COMPANY, as Agent (the
"Agent"), and solely for purposes of Sections 14 and 15 of this Amendment,
J.F. LEHMAN EQUITY INVESTORS I, L.P. ("JFLEI"). All capitalized terms used
herein and not otherwise defined herein shall have the respective meanings
provided such terms in the Credit Agreement referred to below.
W I T N E S S E T H:
WHEREAS, Holdings, the Borrower, the Banks and the Agent are
parties to a Credit Agreement, dated as of February 3, 1998 and amended and
restated as of May 29, 1998 (as amended, modified or supplemented to, but not
including, the date hereof, the "Credit Agreement");
WHEREAS, JFLEI, Holdings, the Borrower and the Agent have entered
into the Capital Call Agreement;
WHEREAS, the parties hereto wish to amend and/or waive certain
provisions of the Credit Agreement as herein provided and amend and restate
in its entirety the Capital Call Agreement as herein provided; and
WHEREAS, subject to the terms and conditions of this Amendment, the
parties hereto agree as follows;
NOW, THEREFORE, it is agreed:
1. Holdings, the Borrower, the Banks and the Agent hereby
acknowledge and agree that on the First Amendment Effective Date (as defined
below), the Total Revolving Loan Commitment shall be permanently reduced from
$15,000,000 to $5,000,000 (as such amount may be further reduced from time to
time in accordance with the terms of the Credit Agreement). In connection
therewith, Schedule I of the Credit Agreement is hereby amended by deleting
the amount "$15,000,000" appearing each place under the "Revolving Loan
Commitment" column appearing therein and inserting in lieu thereof the amount
"$5,000,000".
2. Section 4.02(c) of the Credit Agreement is hereby amended by
inserting the following text at the end of the final parenthetical appearing
therein:
"and 100% of any cash equity contributions paid to Holdings as
contemplated by Section 10.12 shall be applied as provided in Sections
4.02(h) and (i)".
<PAGE>
3. Section 4.02(h) of the Credit Agreement is hereby amended by
(i) inserting "(A)" immediately after the words "PROVIDED, HOWEVER,"
appearing therein and (ii) inserting the following language at the end of
such proviso:
" and (B) that any amount invested in Holdings as contemplated by
Section 10.12 shall be applied to reduce the then remaining Scheduled
Repayments in direct order of maturity".
4. Section 8.01(f) of the Credit Agreement is hereby amended by
(i) inserting "(A)" immediately after the words "to establish" appearing
therein and (ii) inserting the following language at the end thereof:
", and (B) the Consolidated EBITDA for the four consecutive fiscal
quarters of Holdings ended on the last day of such fiscal quarter or
year, as the case may be".
5. Section 9.02 of the Credit Agreement is hereby amended by
inserting the words "with the prior written consent of the Required Banks,"
immediately before the first word of clause (xii) thereof.
6. Section 9.04 of the Credit Agreement is hereby amended by
inserting the words "with the prior written consent of the Required Banks,"
immediately before the first word of clause (xii) thereof.
7. Section 9.05 of the Credit Agreement is hereby amended by
inserting the words "with the prior written consent of the Required Banks,"
immediately before the first word of clause (xiv) thereof.
8. Section 9.07 of the Credit Agreement is hereby amended by
deleting the table appearing therein in its entirety and inserting the
following new table in lieu thereof:
<TABLE>
<CAPTION>
"Fiscal Quarter
Ending Closest To Ratio
----------------- ---------
<S> <C>
June 30, 2000 0.95:1:00
September 30, 2000 1.10:1:00
December 31, 2000 1.20:1:00
March 31, 2001 1.40:1.00
June 30, 2001 1.50:1.00
September 30, 2001 1.60:1.00
December 31, 2001 1.70:1.00
March 31, 2002 1.70:1.00
and the last day of each
fiscal quarter thereafter 1:75:1.00".
</TABLE>
9. Section 9.08 of the Credit Agreement is hereby amended by
deleting the table appearing therein in its entirety and inserting the
following new table in lieu thereof:
-2-
<PAGE>
<TABLE>
<CAPTION>
"Period Ratio
------- ---------
<S> <C>
The last day of Holdings fiscal quarter ending closest to 6:85:1.00
March 31, 2001 through and including the day immediately
preceding the last day of Holdings' fiscal quarter ending
closest to June 30, 2001
The last day of Holdings fiscal quarter ending closest to 6.70:1.00
June 30, 2001 through and including the day immediately
preceding the last day of Holdings' fiscal quarter ending
closest to September 30, 2001
The last day of Holdings fiscal quarter ending closest to 6.50:1.00
September 30, 2001 through and including the day
immediately preceding the last day of Holdings' fiscal
quarter ending closest to December 31, 2001
The last day of Holdings fiscal quarter ending closest to 6.25:1.00
December 31, 2001 through and including the day immediately
preceding the last day of Holdings' fiscal quarter ending
closest to March 31, 2002
The last day of Holdings fiscal quarter ending closest to 6.00:1.00
March 31, 2002 through and including the day immediately
preceding the last day of Holdings' fiscal quarter ending
closest to June 30, 2002
The last day of Holdings fiscal quarter ending closest to 5.70:1.00
June 30, 2002 through and including the day immediately
preceding the last day of Holdings' fiscal quarter ending
closest to September 30, 2002
The last day of Holdings fiscal quarter ending closest to 5.45:1.00
September 30, 2002 through and including the day
immediately preceding the last day of Holdings' fiscal
quarter ending closest to December 31, 2002
The last day of Holdings fiscal quarter ending closest to 5.25:1.00".
December 31, 2002 and thereafter
</TABLE>
-3-
<PAGE>
10. Section 9.09 of the Credit Agreement is hereby amended by
deleting the table appearing therein in its entirety and inserting the
following new table in lieu thereof:
<TABLE>
<CAPTION>
"Fiscal Quarter
Ending Closest To Amount
----------------- ----------
<S> <C>
March 31, 1999 $2,540,000
June 30, 1999 $1,118,000
September 30, 1999 $1,892,000
December 31, 1999 $2,210,000
March 31, 2000 $3,875,000
June 30, 2000 $10,321,000
September 30, 2000 $11,559,000
December 31, 2000 $12,989,000
March 31, 2001 $15,095,000
June 30, 2001 $15,250,000
September 30, 2001 $15,500,000
December 31, 2001 $16,000,000
March 31, 2002 $16,500,000
June 30, 2002 $17,000,000
September 30, 2002 $17,250,000
December 31, 2002 $17,500,000".
</TABLE>
11. Section 10 of the Credit Agreement is hereby amended by (i)
inserting the word "or" immediately after Section 10.11(b) thereof and (ii)
inserting the following new Section 10.12 immediately after such Section
10.11:
"10.12 ADDITIONAL EQUITY CONTRIBUTIONS. Holdings shall not have
received at least $4,000,000 of new cash equity contributions from JFLEI by
March 31, 1999;".
12. Section 11.01 of the Credit Agreement is hereby amended as
follows:
(i) by deleting the definition of "Blocked Commitment" appearing
therein an d inserting the following new definition of "Blocked Commitment"
in lieu thereof:
"'Blocked Commitment' shall mean $5,000,000; provided that the Blocked
Commitment shall be reduced to 0 on the date on which the new equity
contributions are made to Holdings as contemplated by Section 10.12
and all of the proceeds therefrom are applied to repay outstanding
Term Loans in accordance with Section 4.02(c).";
(ii) by deleting the last sentence appearing in the definition of
"Consolidated EBITDA";
(iii) deleting the definition of "Initial Blocked Amount" appearing
therein; and
-4-
<PAGE>
(iv) deleting the definition of "Test Period" appearing therein and
inserting the following new definition of "Test Period" in lieu thereof:
"'Test Period' shall mean each period of four consecutive fiscal
quarters of Holdings then last ended (taken as one accounting period);
PROVIDED, HOWEVER, (i) for purposes of determining compliance with
Section 9.09 for any period ending on or prior to Holdings' fiscal
quarter ending closest to March 31, 2000, the term "Test Period" shall
mean the fiscal quarter of Holdings then last ended and (ii) for
purposes of determining the Applicable Base Rate Margin, the
Applicable Eurodollar Rate Margin and compliance with clause (iii) of
the definition of Capital Call Event (as defined in the Capital Call
Agreement) in respect of the Test Period ending closest to March 31,
1999, Consolidated EBITDA shall be determined on a PRO FORMA basis as
if the Acquisition and the related financing had occurred on March 29,
1998."
13. The Banks hereby waive any Event of Default that has arisen
under the Credit Agreement solely as a result of the failure of Holdings to
comply with (i) Section 9.08 of the Credit Agreement at any time on or prior
to February 12, 1999 and (ii) Sections 9.07 and 9.09 of the Credit Agreement
for the Test Period ended on the last day of Holdings' fiscal quarter ended
closest to December 31, 1998.
14. JFLEI hereby irrevocably agrees for the benefit of the Banks
that it will make the capital contributions to Holdings as contemplated by
Section 10.12 of the Credit Agreement so that no Default or Event of Default
will arise thereunder.
15. JFLEI, Holdings, the Borrower, the Banks and the Agent hereby
agree that the existing Capital Call Agreement (Exhibit J to the Credit
Agreement) shall be replaced in its entirety by the amended and restated
Capital Call Agreement in the form of Annex I attached hereto and that all
references in the Credit Agreement to the "Capital Call Agreement" shall mean
and be a reference to the Capital Call Agreement in the form of Annex I
attached hereto.
16. This Amendment shall become effective on the date (the "First
Amendment Effective Date") when (i) each of JFLEI, Holdings, the Borrower and
the Required Banks shall have signed a counterpart hereof (whether the same
or different counterparts) and shall have delivered (including by way of
facsimile transmission) the same to the Agent at the Notice Office and (ii)
JFLEI, Holdings, the Borrower and the Agent shall have signed a counterpart
of the Capital Call Agreement in the form of Annex I attached hereto (whether
the same or different counterparts) and shall have delivered (including by
way of facsimile transmission) the same to the Agent at the Notice Office.
17. In order to induce the Banks to enter into this Amendment,
each of Holdings and the Borrower hereby represents and warrants that no
Default or Event of Default exists on the First Amendment Effective Date,
after giving effect to this Amendment.
18. This Amendment may be executed in any number of counterparts
and by the different parties hereto on separate counterparts, each of which
counterparts when executed
-5-
<PAGE>
and delivered shall be an original, but all of which shall together
constitute one and the same instrument. A complete set of counterparts shall
be delivered to the Borrower and the Agent.
19. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF
THE STATE OF NEW YORK.
20. From and after the First Amendment Effective Date, all
references in the Credit Agreement and each of the other Credit Documents to
the Credit Agreement and the Capital Call Agreement shall be deemed to be
references to the Credit Agreement and the Capital Call Agreement as modified
hereby.
21. This Amendment is limited as specified and shall not
constitute a modification, acceptance or waiver of any other provision of the
Credit Agreement or any other Credit Document (other than the Capital Call
Agreement).
* * *
-6-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the
date first above written.
ELGAR HOLDINGS, INC.
By: /s/ Christopher W. Kelford
-----------------------------------
Chief Financial Officer
ELGAR ELECTRONICS CORPORATION
By: /s/ Christopher W. Kelford
-----------------------------------
Chief Financial Officer
J.F. LEHMAN EQUITY INVESTORS I, L.P.
(solely for purposes of Sections 14 and 15 of this
Amendment)
By: J.F.L. Investors, L.L.C., its general partner
By: /s/ Donald Glickman
-----------------------------------
Title:
BANKERS TRUST COMPANY,
Individually and as Agent
By: /s/ G. Andrew Keith
-----------------------------------
Vice President
<PAGE>
EXHIBIT 10.2
SECOND AMENDMENT
SECOND AMENDMENT (this "Amendment"), dated as of March 24, 1999,
among ELGAR HOLDINGS, INC. ("Holdings"), ELGAR ELECTRONICS CORPORATION (the
"Borrower"), the lenders party to the Credit Agreement referred to below (the
"Banks"), and BANKERS TRUST COMPANY, as Agent (the "Agent"). All capitalized
terms used herein and not otherwise defined herein shall have the respective
meanings provided such terms in the Credit Agreement referred to below.
W I T N E S S E T H:
WHEREAS, Holdings, the Borrower, the Banks and the Agent are
parties to a Credit Agreement, dated as of February 3, 1998 and amended and
restated as of May 29, 1998 (as amended, modified or supplemented to, but not
including, the date hereof, the "Credit Agreement");
WHEREAS, the parties hereto wish to amend certain provisions of the
Credit Agreement as herein provided; and
WHEREAS, subject to the terms and conditions of this Amendment, the
parties hereto agree as follows;
NOW, THEREFORE, it is agreed:
1. Section 8.08 of the Credit Agreement is hereby amended by
deleting such Section in its entirety and inserting the following new Section
8.08 in lieu thereof :
"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 December 31 and (ii) each of its, and each of
its Subsidiaries', fiscal quarters to end on the Saturday closest to
the last day of each March, June, September and December."
2. Section 11.01 of the Credit Agreement is hereby amended by (i)
deleting the date "April 3, 1999" appearing in the definition of "Excess Cash
Payment Date" and inserting in lieu thereof the text "the Saturday closest to
December 31, 1998" and (ii) deleting the date "March 31, 1999" appearing in
the definition of "Excess Cash Payment Period" and inserting in lieu thereof
the text "the Saturday closest to December 31, 1998".
3. This Amendment shall become effective on the date (the "Second
Amendment Effective Date") when each of Holdings, the Borrower and the
Required Banks shall have signed a counterpart hereof (whether the same or
different counterparts) and shall have delivered (including by way of
facsimile transmission) the same to the Agent at the Notice Office.
<PAGE>
4. In order to induce the Banks to enter into this Amendment,
each of Holdings and the Borrower hereby represents and warrants that no
Default or Event of Default exists on the Second Amendment Effective Date,
both before and after giving effect to this Amendment.
5. This Amendment may be executed in any number of counterparts
and by the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of
which shall together constitute one and the same instrument. A complete set
of counterparts shall be delivered to the Borrower and the Agent.
6. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF
THE STATE OF NEW YORK.
7. From and after the Second Amendment Effective Date, all
references in the Credit Agreement and each of the other Credit Documents to
the Credit Agreement shall be deemed to be references to the Credit Agreement
as modified hereby.
8. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
* * *
2
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the
date first above written.
ELGAR HOLDINGS, INC.
By: /s/ Christopher W. Kelford
----------------------------------------
Chief Financial Officer
ELGAR ELECTRONICS CORPORATION
By: /s/ Christopher W. Kelford
----------------------------------------
Chief Financial Officer
BANKERS TRUST COMPANY,
Individually and as Agent
By: /s/ Patricia Hogan
----------------------------------------
Principal
3
<PAGE>
EXHIBIT 10.3
AMENDED AND RESTATED CAPITAL CALL AGREEMENT
AMENDED AND RESTATED CAPITAL CALL AGREEMENT (as amended,
supplemented or modified from time to time, this "Agreement"), dated as of
May 29, 1998, and amended and restated as of February 12, 1999, 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 a substantial 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, JFLEI, Holdings, the Borrower and the Agent entered into
the Capital Call Agreement, dated as of May 29, 1998 (the "Original Capital
Call Agreement"), in connection with the Credit Agreement;
WHEREAS, it is a condition precedent to the effectiveness of the
First Amendment and Waiver, dated as of February 12, 1999, to the Credit
Agreement that JFLEI, Holdings and the Borrower shall have executed and
delivered this Agreement;
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 and to amend and restate the
Original Capital Call Agreement; and
WHEREAS, JFLEI, Holdings and the Borrower also will obtain benefits
as a result of the effectiveness of the First Amendment and Waiver referred
to above and, accordingly, desire to execute and deliver this Agreement in
order to satisfy the condition described in the second preceding paragraph
and to amend and restate the Original Capital Call Agreement;
NOW, THEREFORE, it is agreed:
<PAGE>
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 $5,000,000.
"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) the failure of
Holdings to achieve at least $8,500,000 of Consolidated EBITDA for any Test
Period (I.E., any period of four consecutive fiscal quarters of Holdings)
ending after the date 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 cash equity capital contribution to
Holdings by JFLEI.
"Original Capital Call Agreement" shall have the meaning provided
in the third recital of this Agreement.
"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, as soon as practicable,
but in any event within 45 days thereafter, make an Investment in Holdings
in an amount equal to the 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'
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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 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.
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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 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
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(j) take any other action which would, under otherwise applicable
principles of 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 First Amendment and Waiver to 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,
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(x) the execution, delivery and performance of this Agreement or (y) the
legality, validity, 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
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or privilege hereunder and no course of dealing between JFLEI, the Agent, any
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 earlier 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
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AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF JFLEI, 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).
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(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.
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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., its general
partner
Telephone: (212) 634-0100
Telecopier: (212) 634-1155 By: /s/ Donald Glickman
Attention: Donald Glickman ---------------------------------------
Title:
ELGAR HOLDINGS, INC.
By: /s/ Christopher W. Kelford
---------------------------------------
Chief Financial Officer
ELGAR ELECTRONICS CORPORATION
By: /s/ Christopher W. Kelford
---------------------------------------
Chief Financial Officer
Accepted and Agreed to:
BANKERS TRUST COMPANY,
as Agent for the Banks
By: /s/ G. Andrew Keith
-------------------------
Vice President
<PAGE>
EXHIBIT 10.4
ELGAR HOLDINGS, INC.
1998 Stock Option Plan
Amended and Restated
as of
March 24, 1999
1. PURPOSE. This Stock Option Plan (the "Plan") is intended as an incentive
to encourage stock ownership by officers and directors and executive and
professional employees of Elgar Holdings, Inc. (the "Company") and its Parent
and Subsidiary corporations so that they may acquire or increase their
equity interest in the success of the Company and its Parents and
Subsidiaries, and to encourage them to remain in the service of the Company
or of its Parents or Subsidiaries. Each option granted under this Plan will
be designated as either an "Incentive Stock Option" or a "Nonqualified Stock
Option." It is intended that each option designated as an Incentive Stock
Option granted under this Plan will qualify as an incentive stock option
within the meaning of Section 422(b) of the Code.
2. DEFINITIONS
2.1 "Board of Directors" means the board of directors of the Company.
2.2 "Change in Control" shall mean the happening of any of the following:
2.2.1 any person who is not a stockholder of the Company or of any
Parent on the date of adoption of this Plan (or group of such persons acting
in concert) acquires, during any period of twelve consecutive calendar
months, stock of the Company or of a Parent representing a majority of the
voting power of all stock of the Company or any Parent having the right to
vote for the election of directors;
2.2.2 the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than (i) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than eighty percent (80%) of the combined voting power
of the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation or (ii) a merger or
consolidation effected to implement a Recapitalization of the Company;
2.2.3 the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets or any
transaction having a similar effect; or
2.2.4 if the Company enters into an agreement with an unrelated party
for the sale of all or substantially all of the assets or outstanding stock
of a Subsidiary (or a transaction having a similar effect), or any other
event occurs by reason of which a Subsidiary ceases to be a Subsidiary of
<PAGE>
the Company, a Change in Control shall be deemed to have occurred with
respect to those Employees who are then employed by such Subsidiary.
2.3 "Change in Control Date" shall mean the earliest date on which one
of the events described in the definition of "Change in Control" occurs, as
determined by the Board of Directors, in its sole discretion, provided that,
if Section 2.2.4 of the definition of "Change of Control" applies, the Change
in Control Date shall be deemed to be the date of the agreement, provided
that the transaction does close.
2.4 "Change in Control Price" shall mean the highest fair market
value, or the highest price paid or offered in any bona fide transaction
related to a Change in Control of the Company, at any time during the sixty
(60) days preceding the Change in Control Date.
2.5 "Code" means the Internal Revenue Code of 1986, as amended.
2.6 "Company" means Elgar Holdings, Inc., a Delaware corporation.
2.7 "Employee" means any bona fide full or part time common law
employee of the Company or of any Parent or Subsidiary of the Company.
2.8 "Incentive Stock Option" means an Option granted pursuant to this
Plan intended to qualify and designated as an incentive stock option within
the meaning of Section 422 of the Code.
2.9 "Nonqualified Stock Option" means any Option granted pursuant to
this Plan other than an Incentive Stock Option.
2.10 "Option" or "Stock Option" means any stock option granted pursuant
to this Plan.
2.11 "Optionee" means any individual to whom an Option is granted
pursuant to this Plan.
2.12 "Parent" means, at the time of granting any Option, any
corporation (other than the Company) in an unbroken chain of corporations
ending with the Company if each of the corporations other than the Company
owns stock possessing fifty percent (50%) or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
2.13 "Plan" means the Elgar Holdings, Inc. 1998 Stock Option Plan.
2.14 "Recapitalization" means any reorganization, merger or other
subdivision, consolidation, recapitalization, reclassification, stock split,
combination of shares, issuance of warrants, stock dividend or similar event
with respect to or affecting the common stock of the Company, par value one
cent ($.01) per share.
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2.15 "Stock Option Committee" means the committee appointed to
administer the Plan pursuant to Article 7 herein, if such committee is
appointed.
2.16 "Subsidiary" means, at the time of granting any Option, any
corporation (other than the Company) in an unbroken chain of corporations
beginning with the Company if each of the corporations other than the last
corporation in the unbroken chain owns stock possessing fifty percent (50%)
or more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.
2.17 "Ten Percent Shareholder" means any person who owns (or is
considered by reason of Section 425(d) of the Code to own) stock possessing
more than ten percent (10%) of the total combined voting power of all classes
of stock of the Company or of any Parent or Subsidiary of the Company.
3. ELIGIBILITY. The persons who shall be eligible to receive Options shall
be such officers, directors and executive and professional employees of the
Company or its Parent or Subsidiary corporations as the Board of Directors
shall select from time to time. An Optionee may hold more than one Option,
but only on the terms and subject to the restrictions hereafter set forth.
4. STOCK. The stock subject to the Options shall be shares of the Company's
authorized but unissued or reacquired common stock, par value one cent ($.01)
per share, hereafter sometimes called Stock. The aggregate number of shares
which may be issued under Options shall not exceed four hundred eighty nine
thousand seven hundred and sixty three (489,763) shares of Stock. The
limitation established by the preceding sentence shall be subject to
adjustment as provided in Section 5.12 of the Plan. If any outstanding
Option for any reason expires or is terminated, the shares of Stock allocable
to the unexercised portion of such Option may again be subjected to an Option
under the Plan.
5. TERMS AND CONDITIONS
5.1 Option Agreement. Stock Options granted pursuant to the Plan shall
be authorized by the Board of Directors and shall be evidenced by agreements
in such form as the Board of Directors shall from time to time approve, which
agreements shall comply with and be subject to the terms and conditions set
forth in this Article 5. The agreements shall not impose upon the Company or
its Parents or Subsidiaries any obligation to retain the Optionee in their
employ for any period.
5.2 Number of Shares. Each Option shall state the number of shares of
Stock to which it pertains.
5.3 Option Price. Each Option shall state the option price, which in
the case of an Incentive Stock Option shall be not less than (i) one hundred
percent (100%) of the fair market value of the shares of Stock on the date of
the granting of the Option if the Optionee is not a Ten Percent Shareholder,
or (ii) one hundred ten percent (110%) of the fair market value of the shares
of Stock on the date of the granting of the Option if the Optionee is a Ten
Percent Shareholder. The fair market value of the shares of Stock shall be
determined pursuant to Section 7.2.
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<PAGE>
5.4 Medium and Time of Payment. The option price shall be payable upon
the exercise of the Option and may be paid in cash or by good check. At the
sole option of the Company, if approved by the Board of Directors, a portion
of the purchase price may be paid by delivery of shares of Stock previously
owned by the Optionee, duly endorsed for transfer to the Company, with a fair
market value (as determined by the Board of Directors) on the date of
delivery equal to the option price, or by delivery of a recourse promissory
note bearing interest at such rate, on such other terms and in form and with
security satisfactory to the Company, or any combination of the foregoing
approved by the Board of Directors. Exercise of an Option shall not be
effective until the Company has received written notice of exercise,
specifying the number of whole and fractional shares of Stock to be
purchased, accompanied by payment in full of the aggregate option price of
the number of shares purchased.
5.5 Term of Options. Each Option, by its terms, shall not be
exercisable after the expiration of ten years from the date the Option is
granted, provided, however, that any Incentive Stock Option granted to a Ten
Percent Shareholder, by its terms, shall not be exercisable after the
expiration of five years from the date the Option is granted. Any Option may
provide that it will expire within a shorter period than the maximum
permitted hereby.
5.6 Installments. Each Option shall be exercisable on such dates and in
such amounts (subject to the other provisions hereof) as shall be determined
by the Board of Directors. It is not required that each Option have the same
installment provisions. In its sole discretion, the Board of Directors may
accelerate the exercise date of part or all of any Option.
5.7 Transferability. Each Option, by its terms, shall not be
transferable by the individual to whom granted otherwise than by will or the
laws of descent and distribution, and shall be exercisable, during the
Optionee's lifetime, only by the Optionee.
5.8 Limits on Exercise. Each Option shall be subject to the requirement
that, if at any time the Board of Directors, in its discretion, shall
determine that the listing, registration, or qualification of the shares
subject to such Option upon any securities exchange or under any state or
federal law, or the consent or approval of any government regulatory body, is
necessary or desirable as a condition of, or in connection with, the granting
of such Option, or the issue or purchase of shares thereunder, such Option
may not be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free
of any conditions not acceptable to the Board of Directors.
5.9 Limit on Options. An Option shall not be an Incentive Stock Option
to the extent that the aggregate fair market value of stock with respect to
which such Option is exercisable for the first time by any individual during
any calendar year (taking into account all Incentive Stock Options
simultaneously or previously granted under all stock option plans of the
Company and its Parents and Subsidiaries) exceeds One Hundred Thousand
Dollars ($100,000).
5.10 Termination of Employment. Each Option by its terms shall not be
exercisable after thirty (30) days after the termination of employment of
the individual to whom the Option was granted, unless such termination was a
result of the death or disability of the employee, and
4
<PAGE>
may provide that it shall not be exercisable after the date of termination of
employment of the individual to whom the Option was granted.
5.11 Expiration of Plan. No Option shall be granted under this Plan more
than ten years from the date on which this Plan was adopted or approved by
the stockholders of the Company, whichever is earlier. No Option granted
under this Plan shall be valid unless the Plan is approved by the
stockholders of the Company within twelve (12) months before or after its
adoption by the Board of Directors.
5.12 Recapitalization. Upon any Recapitalization, the Board of Directors
shall make an appropriate and equitable adjustment in the number and kind of
securities with respect to which rights may be granted under this Plan and
the price at which such securities may be purchased, and an appropriate and
equitable adjustment in the number and kind of securities that may be
purchased under each outstanding Option and the price at which shares may be
purchased under each such Option.
The grant of an Option pursuant to the Plan shall not affect in any way
the right or power of the Company to make or authorize any adjustments,
recapitalizations, reorganizations, or other changes in the Company's capital
structure or business, any merger or consolidation, any issuance of bonds,
debentures, preferred shares or common shares, the dissolution or liquidation
of the Company, any sale or transfer of all or any part of the Company's
assets or business, or any other act, whether or not similar to the events
described above.
5.13 Rights as a Stockholder. An Optionee or a transferee of an Option
shall have no rights as a stockholder with respect to any shares covered by
the Option until the date of the issuance of a stock certificate for such
shares. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the date
such stock certificate is issued, except as provided in Section 5.12 hereof.
5.14 Modification, Extension and Renewal of Options. Subject to the
terms and conditions and within the limitations of the Plan, the Board of
Directors may modify, extend or renew outstanding Options granted under the
Plan, or accept the surrender of outstanding Options (to the extent not
theretofore exercised) and authorize the granting of new Options in
substitution therefor (to the extent not theretofore exercised).
Notwithstanding the foregoing, no modification of an Option shall, without
the consent of the Optionee, alter or impair any rights or obligations under
any Option theretofore granted under the Plan.
5.15 Investment Purpose. Each Option under the Plan shall be granted on
the condition that the purchases of stock thereunder shall be for investment
purposes, and not with a view to resale or distribution unless the stock
subject to such Option is registered under the Securities Act of 1933, as
amended, and any applicable state securities laws, or a resale of such stock
without such registration would otherwise be permissible. Each person
exercising an Option must represent that such condition is fulfilled, unless
in the opinion of counsel for the Company such condition is not required
under the Securities Act of 1933 or any other applicable law, regulation, or
rule of any governmental agency.
5
<PAGE>
5.16 Withholding Taxes. Whenever under the Plan shares are to be issued
or cash is to be paid in satisfaction of Options, the Company shall have the
right to require the recipient to remit to the Company an amount sufficient
to satisfy federal, state and local withholding tax requirements prior to the
delivery of any certificate or certificates for such shares or payment of
such cash.
5.17 Termination of Options. Each Option, by its terms, shall reserve to
the Company the right to terminate the Option, in connection with a Change in
Control for a payment in cash equal to the difference between the exercise
price for the shares of Stock subject to the Option and the Change in Control
Price of such Stock.
5.18 Other Provisions. The Option agreements authorized under the Plan
shall contain such other provisions, including, without limitation, such
rights of redemption, purchase and first refusal, and such other restrictions
upon the exercise of Options or the transfer of the Stock issued upon
exercise, as the Board of Directors of the Company shall deem advisable. Any
Incentive Stock Option agreement shall contain such limitations and
restrictions upon the exercise of the Option as shall be necessary in order
that such Option will be an "Incentive Stock Option" as defined in Section
422 of the Code.
6. EXERCISE OF OPTIONS
6.1 Stock Transfer Books. Notwithstanding any other provision of this
Plan or of any Option, no stock shall be issued by the Company while its
stock transfer books are closed.
6.2 Securities Laws. Notwithstanding any other provision of this Plan
or of any Option, no Option shall be exercisable, and no stock shall be
issued upon the exercise of any Option, if such exercise or such issuance of
stock would result in any violation of law or the imposition on the Company
of a requirement that it commence filing periodic reports under the
Securities Exchange Act of 1934 or any similar provision of law.
7. ADMINISTRATION
7.1 Administration by Board of Directors . The Plan shall be
administered by the Board of Directors. The interpretation and construction
by the Board of Directors of any provisions of the Plan or of any Option
granted under it shall be final. The Board of Directors shall have the
authority to appoint a Stock Option Committee to assume the duties and
responsibilities of administering the Plan. The Stock Option Committee, if
such be established by the Board of Directors, shall be composed of no less
than three (3) persons (who shall be members of the Board of Directors), each
of whom shall be a "disinterested person" as defined herein, and such Stock
Option Committee shall have the same power, authority and rights in the
administration of the Plan as the Board of Directors. No director shall be
liable for any action or determination made in good faith with respect to
the Plan or any Option granted under it.
The Board of Directors shall determine from time to time the persons who
shall receive Options hereunder; provided, however, Options may be granted
hereunder only to persons who, at the
6
<PAGE>
time of the grant thereof, are officers, directors or key employees of the
Company and its Parents and Subsidiaries, except as otherwise provided in
this Plan; provided, further, that any decision to award Options hereunder to
any person or the determination of the maximum number of shares of Stock (as
hereinafter defined) which may be subject to Options granted to any such
director, employee or officer shall be made by either (i) the Board of
Directors, all of the directors of which and all of the directors acting in
such matter shall be disinterested persons as defined herein, or (ii) the
Stock Option Committee appointed by the Board of Directors pursuant to this
section. For purposes of this Plan, "disinterested person" shall mean a
director who is not, during the one year prior to service as an administrator
of the Pl
7.2 Determination of Fair Market Value. For the purpose of granting
Incentive Stock Options, the Board of Directors shall determine the fair
market value of the Stock of the Company as follows:
7.2.1 If the Company's Stock is traded on any recognized stock
exchange or exchanges, such fair market value shall be deemed to be the
highest closing price of the Stock on such stock exchange or exchanges on the
day the Option is granted or if no sale of the Company's Stock shall have
been made on any stock exchange on that day, on the next preceding day on
which there was a sale of such stock.
7.2.2 During such time as the Stock is not listed on an established
exchange, but is actively traded on the over-the-counter market, the fair
market value per share shall be the mean between dealer "bid" and "ask"
prices of the Stock in the over-the-counter market on the day the Option is
granted, as reported by the National Association of Securities Dealers, Inc.
7.2.3 During such time as the Company's Stock is neither listed on
any recognized exchange nor actively traded over-the-counter, the fair market
value shall be determined in good faith by the Board of Directors. In making
such determination, the Board of Directors may (but shall not be required to)
rely on the opinions of one or more qualified, independent appraisers.
7.3 Indemnification. In addition to such other rights of
indemnification as they may have as directors or as members of the Stock
Option Committee, the members of the Board of Directors shall be indemnified
by the Company against the reasonable expenses, including attorneys' fees
actually and necessarily incurred in connection with the defense of any
action, suit or proceeding, or in connection with any appeal therein, to
which they or any of them may be a party by reason of any action taken or
failure to act under or in connection with the Plan or any Option granted
hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected
by the Company) or paid by them in satisfaction of a judgment in any such
action, suit or proceeding, except in relation to matters as to which it
shall be adjudged in such action, suit or proceeding that such Board or Stock
Option Committee member is liable for negligence or misconduct in the
performance of his duties; provided that within sixty (60) days after
7
<PAGE>
institution of any such action, suit or proceeding a Board or Stock Option
Committee member shall in writing offer the Company the opportunity, at its
own expense, to handle and defend the same.
8. AMENDMENT AND TERMINATION
8.1 Amendment. The Board of Directors of the Company may, insofar as
permitted by law, from time to time, with respect to any shares at the time
not subject to Options, suspend or discontinue the Plan or revise or amend it
in any respect whatsoever except that, without approval of the stockholders,
no such revision or amendment shall change the number of shares subject to
the Plan, change the designation of the class of employees eligible to
receive Options or decrease the price at which Incentive Stock Options may be
granted, materially increase the benefits accruing to participants under the
Plan, materially increase the number of securities which may be issued under
the Plan, or materially modify the requirements as to eligibility for
participation in the Plan.
9. MISCELLANEOUS
9.1 Governing Law. This Plan shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
9.2 Construction. In the event any parts of this Plan are found to be
void, the remaining provisions of this Plan shall nevertheless be binding
with the same effect as though the void parts were deleted.
9.3 Application of Funds. The proceeds received by the Company from the
sale of Stock pursuant to Options will be used for general corporate purposes.
9.4 No Obligation to Exercise Option. The grant of an Option shall
impose no obligation upon the Optionee to exercise such Option.
9.5 Approval of Stockholders. The Plan shall take effect immediately
upon adoption by the Board of Directors. However, if this Plan is not
approved by the stockholders of the Company within the period beginning
twelve (12) months before and ending twelve (12) months after the date the
Plan is adopted by the Board of Directors, no Options granted hereunder shall
constitute Incentive Stock Options.
8
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