<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1998
REGISTRATION NO. 333-55797
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ELGAR HOLDINGS, INC.
(Exact name of each registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3699 51-0373329
(State of Incorporation (Primary standard industrial (I.R.S. employer
or organization) classification code number) identification
number)
</TABLE>
9250 BROWN DEER ROAD
SAN DIEGO, CALIFORNIA 92121
(619) 450-0085
(Address, including zip code, and telephone number, including
area code, of registrants' principal executive offices)
and the Notes Guarantors:
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<CAPTION>
CALIFORNIA ELGAR ELECTRONICS CORPORATION 33-0198753
<S> <C> <C>
CALIFORNIA POWER TEN 94-2783211
</TABLE>
KENNETH R. KILPATRICK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ELGAR HOLDINGS, INC.
ELGAR ELECTRONICS CORPORATION
9250 BROWN DEER ROAD
SAN DIEGO, CALIFORNIA 92121
(619) 450-0085
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With a copy to:
KENNETH M. DORAN, ESQ.
GIBSON, DUNN & CRUTCHER LLP
333 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90071
(213) 229-7000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 23, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
[LOGO]
ELGAR HOLDINGS, INC.
OFFER TO EXCHANGE ALL OUTSTANDING
9 7/8% SENIOR NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
(GUARANTEED BY ELGAR ELECTRONICS CORPORATION)
($90,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR 9 7/8% SENIOR NOTES DUE 2008
(GUARANTEED BY ELGAR ELECTRONICS CORPORATION)
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON , 1998 (AS SUCH DATE MAY BE EXTENDED, THE "EXPIRATION
DATE").
Elgar Holdings, Inc., a Delaware corporation (the "Company" or "EHI"),
hereby offers upon the terms and subject to the conditions set forth in this
Prospectus (as the same may be amended or supplemented from time to time, the
"Prospectus") and the accompanying letter of transmittal relating to the Old
Notes (as defined) (the "Letter of Transmittal," which together with the
Prospectus constitute the "Exchange Offer"), to exchange $1,000 principal amount
of its 9 7/8% Senior Notes due 2008 (the "New Notes") for each $1,000 in
principal amount of its outstanding 9 7/8% Senior Notes due 2008 (the "Old
Notes") (the Old Notes and the New Notes are collectively referred to herein as
the "Notes"). An aggregate principal amount of $90,000,000 of Old Notes is
outstanding. See "The Exchange Offer."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, starting on the Expiration Date and
ending on the close of business 180 days after the Expiration Date, it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution."
The Company will accept for exchange any and all Old Notes validly tendered
prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders of Old
Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of the Old Notes being tendered for exchange. However, the
Exchange Offer is subject to the terms and provisions of the Registration Rights
Agreement, dated as of February 3, 1998 (the "Registration Rights Agreement"),
among the Company, Elgar Electronics Corporation, a California corporation and
wholly owned subsidiary of the Company ("Elgar") and BT Alex. Brown Incorporated
(the "Initial Purchaser"). The Old Notes may be tendered only in multiples of
$1,000. See "The Exchange Offer."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 18 HEREIN FOR A DISCUSSION OF CERTAIN
RISKS THAT SHOULD BE CONSIDERED BY HOLDERS IN EVALUATING THE EXCHANGE OFFER.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
The date of this Prospectus is , 1998
<PAGE>
The Old Notes were issued in a transaction (the "Prior Offering") pursuant
to which the Company issued an aggregate of $90,000,000 principal amount of the
Old Notes to the Initial Purchaser on February 3, 1998 (the "Closing Date")
pursuant to a Purchase Agreement, dated January 30, 1998 (the "Purchase
Agreement"), among the Company, Elgar and the Initial Purchaser. The Initial
Purchaser subsequently resold the Old Notes in reliance on Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"). The Company, Elgar
and the Initial Purchaser also entered into the Registration Rights Agreement
pursuant to which the Company granted certain registration rights for the
benefit for the holders of the Old Notes. The Exchange Offer is intended to
satisfy certain of the Company's obligations under the Registration Rights
Agreement with respect to the Old Notes. See "The Exchange Offer--Purpose and
Effect."
The Old Notes were, and the New Notes will be, issued under the Indenture,
dated as of February 3, 1998, between the Company and United States Trust
Company of New York, as trustee (the "Trustee"), as supplemented by the First
Supplemental Indenture thereto, dated as of February 3, 1998, by and among the
Company, Elgar and the Trustee (the "Indenture"), and the New Notes and the Old
Notes will constitute a single series of debt securities under the Indenture.
The terms of the New Notes are identical in all material respects to the terms
of the Old Notes except that (i) the New Notes will have been registered under
the Securities Act and thus will not bear restrictive legends restricting their
transfer pursuant to the Securities Act and will not be entitled to registration
rights, (ii) holders of New Notes will not be entitled to Additional Interest
(as defined) for the Company's failure to register the Old Notes or New Notes
under the Registration Rights Agreement and (iii) holders of New Notes will not
be, and upon the consummation of the Exchange Offer, holders of Old Notes will
no longer be, entitled to certain rights under the Registration Rights Agreement
intended for the holders of unregistered securities. The Exchange Offer shall be
deemed consummated upon the occurrence of the delivery by the Company to United
States Trust Company of New York, as registrar of the Old Notes (in such
capacity, the "Registrar") under the Indenture, of New Notes in the same
aggregate principal amount as the aggregate principal amount of Old Notes that
are validly tendered by holders thereof pursuant to the Exchange Offer. See "The
Exchange Offer--Termination of Certain Rights," "--Procedures for Tendering Old
Notes" and "Description of Notes." In the event that the Exchange Offer is
consummated, any Old Notes which remain outstanding after consummation of the
Exchange Offer and the New Notes issued in the Exchange Offer will vote together
as a single class for purposes of determining whether holders of the requisite
percentage in outstanding principal amount of Notes have taken certain actions
or exercised certain rights under the Indenture.
The New Notes will bear interest at a rate of 9 7/8% per annum. Interest on
the New Notes is payable semiannually, commencing August 1, 1998, on February 1
and August 1 of each year (each, an "Interest Payment Date"), and shall accrue
from February 3, 1998 or from the most recent Interest Payment Date with respect
to the Old Notes to which interest was paid or duly provided for. The New Notes
will mature on February 1, 2008. See "Description of Notes."
The New Notes will not be redeemable at the Company's option prior to
February 1, 2003. Thereafter, the New Notes will be redeemable by the Company at
the redemption prices and subject to the conditions set forth in "Description of
Notes--Redemption--Optional Redemption." Notwithstanding the foregoing, at any
time on or before February 1, 2001, the Company may redeem up to 35% in
aggregate principal amount of the sum of (i) the initial aggregate principal
amount of the Notes and (ii) the initial principal amount of any Additional
Notes (as defined herein), on one or more occasions, with the net cash proceeds
of one or more Public Equity Offerings (as defined herein) at a redemption price
of 109.875% of the principal amount thereof, plus accrued and unpaid interest
and Additional Interest (as defined herein), if any, thereon to the redemption
date, PROVIDED THAT at least 65% of the sum of (i) the initial aggregate
principal amount of the Notes and (ii) the initial aggregate principal amount of
any Additional Notes remain outstanding immediately after redemption. See
"Description of Notes--Redemption--Optional Redemption." Upon the occurrence of
a Change of Control (as defined herein), (i) the Company will be
ii
<PAGE>
required to make an offer to repurchase all outstanding Notes at 101% of the
principal amount thereof, plus accrued and unpaid interest thereon, if any, and
Additional Interest, if any, to the date of repurchase and (ii) prior to
February 1, 2003, the Company will have the option to redeem the Notes, in whole
or in part, at a redemption price equal to the principal amount thereof, plus
accrued and unpaid interest, if any, and Additional Interest, if any, to the
redemption date plus the Applicable Premium (as defined herein). See
"Description of Notes--Redemption--Optional Redemption Upon Change of Control."
Depending upon the circumstances prevailing at the time of such a Change of
Control, there is a risk that the Company may be unable to satisfy such
obligations. See "Risk Factors--Potential Inability to Fund Change of Control
Offer."
The New Notes will be general unsecured obligations of EHI, senior to all
existing and future subordinated indebtedness of EHI and PARI PASSU in right of
payment with all other existing and future unsubordinated indebtedness of EHI,
including Elgar's indebtedness under the New Credit Facility (as defined herein)
which EHI has unconditionally guaranteed. However, EHI's obligations under the
New Credit Facility are secured by substantially all of its assets. Accordingly,
such secured indebtedness will effectively rank senior to the Notes to the
extent of such assets. As of June 30, 1998, the Company had $15 million of
secured indebtedness outstanding which effectively ranked senior to the Notes.
As of the same date, the Company did not have any indebtedness or other
securities which rank PARI PASSU with the Notes (other than trade payables and
other similar obligations), nor did it have any indebtedness or securities which
are subordinate to the Notes (other than equity securities which the Company has
issued). The Indenture restricts, but does not prohibit, the Company from
incurring indebtedness. See "Description of Notes--Ranking." See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The New Notes will be unconditionally guaranteed (the "Note Guarantees") by
Elgar and its wholly owned subsidiary, Power Ten, a California corporation
("Power Ten," and with Elgar, the "Subsidiary Guarantors"), on an unsecured,
senior subordinated basis. The Note Guarantees will rank senior to all of the
Subsidiary Guarantors' existing and future subordinated indebtedness and PARI
PASSU with all of their other unsubordinated indebtedness. The Subsidiary
Guarantors' obligations under the New Credit Facility, however, are secured by
substantially all of their assets. Accordingly, such secured indebtedness will
rank prior to the Note Guarantees with respect to such assets. The Indenture
restricts, but does not prohibit, the Company from incurring secured
indebtedness. As of the date of this Prospectus, Elgar was the only significant
subsidiary of the Company, and Power Ten was the only significant subsidiary of
Elgar. See "Description of Notes--Note Guarantees."
Based on existing interpretations of the Securities Act by the staff of the
Securities and Exchange Commission (the "Commission") set forth in "no-action"
letters issued to third parties in other transactions, the Company believes that
New Notes issued pursuant to the Exchange Offer to any holder of Old Notes in
exchange for Old Notes may be offered for resale, resold and otherwise
transferred by such holder (other than a broker-dealer who purchased Old Notes
directly from the Company for resale pursuant to Rule 144A under the Securities
Act or any other available exemption under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such holder is not an affiliate of the Company, is
acquiring the New Notes in the ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the New Notes. Holders wishing to accept the
Exchange Offer must represent to the Company, as required by the Registration
Rights Agreement, that such conditions have been met. In addition, if such
holder is not a broker-dealer, it must represent that it is not engaged in, and
does not intend to engage in, a distribution of the New Notes. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "The Exchange Offer--Resales of the New
Notes." For a period of 180 days from the Expiration Date, the Company will make
this Prospectus, as it may be
iii
<PAGE>
amended or supplemented from time to time, available to any broker-dealer for
use in connection with any such resale.
There has previously been only a limited secondary market, and no public
market, for the Old Notes. The Old Notes are eligible for trading in the Private
Offering, Resales and Trading through Automatic Linkages ("PORTAL") market. In
addition, the Initial Purchaser has advised the Company that it currently
intends to make a market in the New Notes; however, the Initial Purchaser is not
obligated to do so and any market-making activities may be discontinued by the
Initial Purchaser at any time. Therefore, there can be no assurance that an
active market for the New Notes will develop. If such a trading market develops
for the New Notes, future trading prices will depend on many factors, including,
among other things, prevailing interest rates, the Company's results of
operations and the market for similar securities. Depending on such factors, the
New Notes may trade at a discount from their face value. See "Risk Factors--Lack
of Public Market."
The Old Notes were issued originally in global form (the "Global Old Note").
The Global Old Note was deposited with, or on behalf of, The Depository Trust
Company (the "DTC") and registered in the name of Cede & Co., as nominee of the
DTC (such nominee being referred to herein as the "Global Note Holder"). The use
of the Global Old Note to represent certain of the Old Notes permits the DTC's
participants, and anyone holding a beneficial interest in an Old Note registered
in the name of such a participant, to transfer interests in the Old Notes
electronically in accordance with the DTC's established procedures without the
need to transfer a physical certificate. New Notes issued in exchange for the
Global Old Note will also be issued initially as a note in global form (the
"Global New Note," and, together with the Global Old Note, the "Global Notes")
and deposited with, or on behalf of, the DTC. After the initial issuance of the
Global New Note, New Notes in certificated form will be issued in exchange for a
holder's proportionate interest in the Global New Note only as set forth in the
Indenture. See "Book-Entry; Delivery and Form."
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the same rights and will be subject to
the same limitations applicable thereto under the Indenture (except for those
rights which terminate upon consummation of the Exchange Offer). Following
consummation of the Exchange Offer, the Holders of Old Notes will continue to be
subject to the existing restrictions upon transfer thereof and the Company will
have no further obligation to such Holders (other than to certain Holders under
certain limited circumstances) to provide for registration under the Securities
Act of the Old Notes held by them. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a Holder's ability to sell untendered Old Notes
could be adversely affected. See "Risk Factors--Consequences of Failure to
Exchange" and "The Exchange Offer--Consequences of Failure to Exchange Old
Notes."
This Prospectus, together with the Letter of Transmittal, is being sent to
all registered Holders of Old Notes as of July 27, 1998.
The Company will not receive any proceeds from this Exchange Offer. Pursuant
to the Registration Rights Agreement, the Company will bear certain registration
expenses.
iv
<PAGE>
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
The information included in this Prospectus contains certain forward-looking
statements and information relating to the Company that are based on the beliefs
of management as well as assumptions made by and information currently available
to management. Such forward-looking statements are principally contained in the
sections "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" and
include, without limitation, the Company's expectation and estimates as to its
business operations, including the introduction of new products, future
financial performance and growth in net sales, earnings and cash flows from
operations. In addition, in those and other portions of this Prospectus, certain
such forward-looking statements can be identified by the use of forward-looking
terminology such as "anticipates," believes," "estimates," "expects," "plans,"
"intends," "may," "will," "should," "seeks," "approximately," "pro forma" or the
negative thereof or other variations thereof or comparable terminology, or by
discussions of strategy, plans or intentions. Such forward-looking statements
are necessarily dependent upon assumptions, data or methods that may be
incorrect or imprecise and they may be incapable of being realized. In addition,
such forward-looking statements reflect the current views of the Company, with
respect to future events and are subject to certain risks, uncertainties and
assumptions, including the risk factors described in this Prospectus. In
addition to factors that may be described elsewhere in this Prospectus, the
Company specifically wishes to advise readers that the factors listed under the
caption "Risk Factors" could cause actual results to differ materially from
those expressed in any forward-looking statement. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect (including the assumptions used in connection with the preparation of
the Unaudited Pro Forma Consolidated Statement of Operations), actual results
may vary materially from those described herein as anticipated, believed,
estimated or expected. Readers are cautioned not to place undue reliance on
forward-looking statements, as they reflect management's analysis only. The
Company does not intend to update these forward-looking statements.
------------------------
SmartWave-TM- and GUPS-TM- are trademarks of, and ELGAR and SORENSEN are
trade names used by, Elgar Electronics Corporation. All other trademarks and
trade names appearing in this Prospectus are the property of their respective
holders.
------------------------
The principal executive offices of the Company and Elgar are located at 9250
Brown Deer Road, San Diego, California 92121, and their telephone number is
(619) 450-0085. The principal executive offices of Power Ten are located at 120
Knowles Drive, Los Gatos, California 95030, and its phone number is (408)
871-1700.
v
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TABLE OF CONTENTS
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PAGE
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Available Information..................................................... 1
Prospectus Summary........................................................ 2
Risk Factors.............................................................. 18
The Recapitalization...................................................... 24
Use of Proceeds........................................................... 25
The Exchange Offer........................................................ 26
Capitalization............................................................ 34
Selected Historical Consolidated Financial Data........................... 35
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 37
Business.................................................................. 42
Management................................................................ 53
Security Ownership of Certain Beneficial Owners and Management............ 58
Certain Relationships and Related Transactions............................ 59
Description of Notes...................................................... 62
Description of New Credit Facility........................................ 91
Description of Preferred Stock and Warrants............................... 93
Book-Entry; Delivery and Form............................................. 99
Plan of Distribution...................................................... 100
Legal Matters............................................................. 101
Experts................................................................... 101
Index to Financial Statements............................................. F-1
</TABLE>
vi
<PAGE>
AVAILABLE INFORMATION
The Company has filed a registration statement on Form S-4 (together with
any amendments thereto, the "Registration Statement") with the Commission under
the Securities Act with respect to the New Notes. This Prospectus, which
constitutes a part of the Registration Statement, omits certain information
contained in the Registration Statement and reference is made to the
Registration Statement and the exhibits and schedules thereto for further
information with respect to the Company and the New Notes offered hereby. This
Prospectus contains summaries of the material terms and provisions of certain
documents and in each instance reference is made to the copy of such document
filed as an exhibit to the Registration Statement.
The Company is not currently subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company
has agreed that, at all times from and after the earlier of (i) the date of
commencement of an Exchange Offer and (ii) the date 210 days after the Closing
Date, in either case, whether or not the Company is then required to file
reports with the Commission, the Company will file with the Commission (to the
extent accepted by the Commission) all such annual reports, quarterly reports
and other documents that the Company would be required to file if it were
subject to Sections 13(a) or 15(d) under the Exchange Act. The Company will also
be required (a) to supply to the Trustee and each holder of Notes, or supply to
the Trustee for forwarding to each such holder, without cost to such holder,
copies of such reports and other documents within 15 days after the date on
which the Company files such reports and documents with the Commission or the
date on which the Company would be required to file such reports and documents
if the Company were so required and (b) if filing such reports and documents
with the Commission is not accepted by the Commission or is prohibited under the
Exchange Act, to supply at the Company's cost copies of such reports and
documents to any prospective holder of Notes promptly upon written request.
The Registration Statement (including the exhibits and schedules thereto)
and the periodic reports and other information filed by the Company with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference
facilities in New York, New York and Chicago, Illinois, at prescribed rates.
Such information may also be accessed electronically by means of the
Commission's homepage on the Internet at http://www.sec.gov., which contains
reports, proxy and information statements and other information regarding
registrants, including the Company, that file electronically with the
Commission.
1
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA, INCLUDING
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, INCLUDED ELSEWHERE IN
THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" SHALL
REFER TO ELGAR HOLDINGS, INC. ("EHI") AND ITS WHOLLY OWNED SUBSIDIARY, ELGAR
ELECTRONICS CORPORATION ("ELGAR").
THE COMPANY
The Company is a leader in the design and manufacture of programmable power
equipment and systems used to test electronic equipment during development,
manufacture and operation. With one of the most recognized brand names and
broadest product offerings in a fragmented industry, the Company is one of the
largest manufacturers of programmable power equipment in the United States. The
Company's products are an integral component of overall systems' testing
conducted by a broad range of manufacturers and end-users of electronic
equipment to ensure product quality and performance. Power testing is a critical
procedure in a multitude of applications, including satellites, weapons systems
and medical equipment, which demand zero-fault tolerance. Over the period from
fiscal 1993 through the Company's fiscal year ended March 28, 1998 ("Fiscal
1998"), the Company's net sales grew at a compounded annual growth rate in
excess of 22.2% principally due to significant growth in the market for
programmable power equipment driven by the proliferation of increasingly
sophisticated electronic components in a wide range of applications,
particularly in telecommunications and computers.
The Company's products are used in a broad range of testing applications,
including semiconductor test equipment, computers and peripherals, satellite
ground testing, weapons systems, avionics, communications systems, medical
equipment and consumer electronics. Through Racal Instruments, Inc. ("Racal"), a
leading automatic test equipment ("ATE") systems integrator, Elgar is the sole
source supplier of programmable power supplies employed in testing
microprocessors for a leading semiconductor manufacturer. In addition, the
Company currently supplies virtually every major U.S. satellite manufacturer,
including Hughes Space & Communications ("Hughes"), Loral Aerospace Corporation
and Lockheed Martin Corporation, with fully integrated systems for
mission-critical satellite power testing throughout the manufacturing process
and just prior to launch. In addition, the Company is the sole supplier of the
programmable power subsystem included in the U.S. Navy's Consolidated Automated
Support System ("CASS") Program, a high-priority program to automate all test
equipment for the Naval Air Systems Command. The Company also provides
programmable power supplies to a wide range of customers in other industries,
including Siemens Medical Systems for medical treatment equipment, Halliburton
Company for oil exploration and The Boeing Company for aircraft avionics
testing.
Elgar's current management team has significantly increased net sales by
successfully penetrating new markets, increased operating margins through a
number of operating improvements and repositioned the Company as a leading
supplier to rapidly growing markets. As a result of these initiatives, net sales
have increased from $25.3 million in fiscal 1993 to $62.5 million for Fiscal
1998, and operating income as a percentage of net sales has improved from (1.6)%
to 20.1% over the same period. Management has succeeded in repositioning Elgar
from being predominantly a supplier of programmable power equipment to the U.S.
military into a well-diversified supplier of such products both to commercial
and military customers, with approximately 76.3% of its net sales derived from
commercial applications in Fiscal 1998. The Company's growth over the last
several years has reflected changes in the overall market for programmable power
equipment. According to PRIME DATA, which publishes an annual review of the test
and measurement market, the test and measurement market has changed
significantly in the 1990s and is now driven by commercial applications instead
of military/aerospace applications. Communications applications, particularly
wireless technologies, have grown rapidly over the past five years and are
expected to be one of the driving forces behind future test instrument sales
growth. Furthermore, the continued proliferation of microprocessors and the
increasing use of electronics in a wide range of applications are also fueling
demand for test equipment. In addition, the stabilization of defense spending is
expected to
2
<PAGE>
again make the military a growth area for test and measurement equipment.
Satellite production is increasing significantly in response to growing demand
for wireless commercial communications, intelligence/defense and scientific
uses. Management believes demand for its satellite ground test systems will be
heavily influenced by this trend as new satellite production bays are built and
test systems developed in-house are replaced by more versatile and
cost-effective systems from outside suppliers.
COMPETITIVE STRENGTHS
The Company attributes its success in each of its principal markets and its
significant opportunities for continued growth and profitability to its ability
to provide products and services that are superior in meeting the requirements
of its customers. Management believes that Elgar has several competitive
advantages, including:
PARTNERING RELATIONSHIPS WITH MAJOR CUSTOMERS. The Company's engineering
staff often works directly with customers and potential customers to develop
customized or modified products that meet customer requirements. This
practice has enabled the Company to develop new markets for its products and
to generate significant repeat business from its customers. For example, the
Company has collaborated with Hughes to develop a fully integrated,
comprehensive satellite test system. In addition, the Company presently
enjoys sole-source supplier relationships with Racal for systems supplied to
a leading semiconductor manufacturer and Lockheed Martin under its U.S. Navy
CASS contract. As a direct result of its strong customer relationships, over
88% of Elgar's net sales in Fiscal 1998 was derived from customers which had
purchased its products in the Company's fiscal year ended March 29, 1997
("Fiscal 1997").
STRONG POSITION IN KEY GROWTH MARKETS. Most of Elgar's competitors are
either small businesses, which do not match Elgar's array of product
offerings, or noncore subsidiaries of much larger parent corporations, which
tend to be less focused on this market than the Company. As a result of its
position within the fragmented market, management believes the Company
should continue to achieve revenue and profit growth which exceed the
industry average.
INDUSTRY LEADING PRODUCT TECHNOLOGY AND ENGINEERING
CAPABILITIES. Management believes the Company has one of the largest and
most qualified engineering teams dedicated to the development of
programmable power supply equipment and systems in the industry, providing
it with significant new product development capabilities. Elgar continues to
invest heavily in engineering, having increased the size of its engineering
staff from 39 in fiscal 1993 to its current level of 77, while engineering
expense as a percentage of net sales decreased from 11.9% in fiscal 1993 to
10.0% in Fiscal 1998. As a result of these efforts, Elgar has distinguished
itself in the marketplace by offering products integrating digital and
hardware technologies which provide customers with versatile and easy-to-use
programmable power supplies. The Company's leadership in the most
technologically sophisticated segments of its market, solar array simulators
and semiconductor testing, is a result of its strong technical and
engineering capabilities.
HIGHLY COMPETITIVE COST STRUCTURE. Management believes that its cost
structure is very competitive. Through continuous process improvements,
purchase-material cost reductions, selective outsourcing of subassemblies
and rigid operating cost controls, management increased the Company's gross
profit margin from 34.4% in fiscal 1993 to 47.3% for Fiscal 1998, while
reducing operating expenses from 35.9% to 27.2% of net sales over those
periods. Through the efficient use of facilities and equipment, management
has been able to control capital expenditures to approximately $1.0 million
per year.
SUPERIOR BRAND NAME RECOGNITION AND SALES ORGANIZATION. The Company's Elgar
and Sorensen brand names have been recognized leaders in their markets for
over 30 years and, as a result, are among the
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most well-known names in the industry. In addition to its 25-person in-house
sales and marketing team, the Company relies on a global network of over 50
exclusive sales representative organizations to distribute its products. The
Company has long-standing relationships with most of its representatives,
averaging over 10 years in duration. Management believes the Company's sales
network includes most of the industry's "Tier 1" representatives. These
representatives, which are essentially extensions of the Company's sales and
marketing team, work closely with the Company to identify new business
opportunities, while providing superior service to the Company's customers.
ENTREPRENEURIAL MANAGEMENT TEAM. Since its arrival at Elgar in fiscal 1992,
the Company's senior management team has significantly increased revenues by
successfully penetrating new markets, increasing profitability through a
number of operating improvements and repositioning the Company as a leading
supplier to its growing markets. Management has also demonstrated the
ability to execute, restructure and integrate an important, strategic
acquisition as well as lead a major shift in business focus by transitioning
from being predominantly a military supplier of power test products in the
early 1990s to deriving approximately 76.3% of net sales from commercial
users in Fiscal 1998. On a fully diluted basis at the time of the
Recapitalization, management owned approximately 9.4% of EHI's common stock
(the "Common Stock"). In addition, management expects to receive incentive
stock options for up to an additional 10.0% of the Common Stock.
BUSINESS STRATEGY
The Company's business strategy is focused on continuing its leadership and
growth in its principal target markets and thereby increasing market share and
maximizing revenues and profitability. The Company's growth strategy includes
the following key initiatives:
- CUSTOMER FOCUSED NEW PRODUCT DEVELOPMENT. The Company intends to continue
focusing development resources toward new products which better meet the
increasingly complex requirements of its existing customers. As an example
of its commitment to new product development, the Company has four new
programmable power supply products under development expected to be
released in fiscal 1999 and 2000 along with four product-line extensions
slated for introduction in fiscal 1999. All four new products slated for
introduction by fiscal 2000 are programmable DC products, two of which are
for benchtop applications and two of which are ATE lines. The four new
product-line extensions slated for introduction in fiscal 1999 consist of
three programmable AC products and one high-power programmable DC product.
See "Business--Principal Markets and Products." The Company designed and
developed each of these new products and product-line extensions based on
significant input from its customers. Customer-focused development
substantially increases the probability of a rapid return on product
development expense and helps further solidify the Company's key customer
relationships.
- INCREASE PENETRATION OF KEY GROWTH MARKETS. While Elgar has a strong
position in satellite and semiconductor power test equipment, additional
revenue opportunities exist in these markets. Management is leveraging its
established relationships with U.S. and European satellite manufacturers to
supply all their power test equipment needs by offering a lower cost and
more versatile alternative to in-house developed systems. In addition, as
semiconductors become more complex and their production process more
demanding, management believes semiconductor manufacturers will require
more sophisticated and versatile automatic test equipment.
- EXPAND PRESENCE IN THE OEM MARKET. Although programmable power supplies
have historically been used primarily for test and evaluation purposes, the
increased sophistication of certain electronic equipment has created a need
for derivatives of Elgar's products for sale as components in original
equipment manufacturer ("OEM") products. Elgar's OEM sales were only
approximately 2.6% of its total net sales for Fiscal 1998.
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- CONTINUED IMPROVEMENTS IN COSTS AND MANUFACTURING PROCESSES. The Company
is continually introducing measures to increase its profitability and
maintain a competitive advantage. Management is focusing on reducing
material handling costs, further reducing inventory and improving
manufacturing cycle times through initiatives such as adopting a "just in
time" inventory system, integrating work cells on the production floor,
utilizing cross-functional teams in the early stages of product development
and continually seeking to improve quality control measures. Management
believes it can significantly enhance the Company's already strong
competitive position by improving product availability.
RECENT DEVELOPMENTS
ACQUISITION OF POWER TEN
On May 29, 1998, Elgar acquired all of the outstanding capital stock of
Power Ten, a California corporation ("Power Ten"), for $17,800,000 in cash,
subject to a post-closing working capital adjustment (the "Power Ten
Acquisition"). Power Ten specializes in developing and manufacturing
high-quality, high-power DC power supplies. Headquartered in Los Gatos,
California, Power Ten is a leader in the design and promotion of highly
engineered switching-regulator supplies marketed under the Power Ten brand name
to both semiconductor manufacturers and OEMs of production test equipment. For
the latest twelve months ended April 4, 1998, Power Ten generated approximately
$10.1 million of revenues, $552,000 of operating income and $2.5 million of
earnings before interest, taxes, depreciation and amortization and certain
non-recurring expenses ("Adjusted EBITDA"). Although management believes
Adjusted EBITDA is one indicator of a company's ability to service debt,
Adjusted EBITDA should not be considered as an alternative to net income or to
cash flows from operating activities (each as determined in accordance with
generally accepted accounting principles) in determining a company's operating
performance or liquidity.
Management believes the acquisition of Power Ten represents a strategic fit
for Elgar's core programmable power supplies business. Power Ten is expected to
add significant depth to Elgar's existing product offerings, OEM distribution
channels and product development capabilities. In particular, management
believes that Power Ten's high-power DC power supplies can be marketed
effectively under the Sorensen brand name to Elgar's existing test and
measurement customers, thus providing incremental revenues to the consolidated
company. In addition, while approximately 25% of Power Ten's revenues in its
fiscal year ended September 30, 1997 were generated from international sales,
management believes it can improve Power Ten's European presence by utilizing
Elgar's existing European distribution channels.
Elgar funded the purchase price and certain transaction expenses through (i)
a $15.0 million term loan under the New Credit Facility (as defined below) and
(ii) the issuance by EHI of $5,000,000 in aggregate stated liquidation value of
its Series B 6% Cumulative Convertible Preferred Stock (the "Convertible
Preferred Stock"). See "Description of the New Credit Facility" and "Description
of Preferred Stock and Warrants--Convertible Preferred Stock."
AMENDMENT AND RESTATEMENT OF EXISTING CREDIT FACILITY
Concurrently with the consummation of the Recapitalization, Elgar and EHI
entered into a Credit Agreement (the "Credit Agreement") with Bankers Trust
Company, as agent (the "Agent") for the other lending institutions party thereto
(the "Banks"). The Credit Agreement provided Elgar with a $15.0 million
revolving credit facility (the "Revolving Facility") and was guaranteed by EHI
and each subsidiary of Elgar. In connection with the Power Ten Acquisition,
Elgar, EHI, the Agent and the Banks amended and restated the Credit Agreement as
of May 29, 1998 (the "New Credit Agreement") to, among other things, increase
the available borrowings thereunder to $30.0 million by including a $15.0
million term loan facility (the "Term Facility") and reconfirming the Revolving
Facility (the Revolving Facility and Term Facility will be collectively referred
to herein as the "New Credit Facility"). The proceeds of the Term Facility were
used to finance a portion of the Power Ten Acquisition. Indebtedness under the
New Credit
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Facility is (i) secured by a first priority security interest in substantially
all of the assets of EHI, Elgar and Power Ten (including, without limitation,
accounts receivable, inventory, machinery, equipment, contracts and contract
rights, trademarks, copyrights, patents, license agreements and general
intangibles), (ii) guaranteed by EHI and Power Ten on a senior basis and (iii)
secured by a pledge of all of the outstanding capital stock of Elgar and Power
Ten. The New Credit Facility matures on February 3, 2003. See "Description of
New Credit Facility."
SUMMARY OF THE RECAPITALIZATION
THE INVESTORS
J.F. Lehman & Company ("Lehman") was established in 1992 by John F. Lehman,
Donald Glickman and George Sawyer (the "Managing Principals") to acquire niche
manufacturing and service companies operating in the electronics, engineering,
aerospace and defense industries. The Managing Principals have significant
operating and investing experience in these industries and have a proven track
record in employing this focused investment strategy.
In 1993, Lehman purchased Sperry Marine Inc., a recognized world leader in
the design and manufacture of advanced electronic maritime instruments and
sensors, from Tenneco Inc. After working closely for over two years with
Sperry's management to reposition the company and improve its profitability,
Lehman sold Sperry to Litton Industries. Similarly, in 1992, Lehman sponsored
the acquisition of Astra Holdings Corporation, a leading manufacturer of
electronic and electromechanical devices and subsystems for military and
commercial uses, which it later sold to Alliant Techsystems in 1993. More
recently, in August 1997, Lehman led the recapitalization of Burke Industries,
Inc., a leading manufacturer of engineered elastomeric products for the
aerospace, heavy-duty truck and commercial building markets.
In each of its investments, Lehman has taken an active, hands-on approach
toward portfolio company oversight. Lehman provides the Company with additional
strategic opportunities utilizing the strong operating experience in the
aerospace and electronics industries that its general and limited partners
possess. In addition to the Managing Principals, Lehman's other partners
include: Mr. Oliver C. Boileau, Jr., former President of Boeing Aerospace,
General Dynamics and Northrop; Mr. Thomas G. Pownall, former Chairman and Chief
Executive Officer of Martin Marietta; Sir Christopher Lewinton, Chairman of TI
Group plc and Dowty Aerospace; Mr. William Paul, former Executive Vice President
of United Technologies Corporation and President of Sikorsky Aircraft and Space
Systems; and General P.X. Kelley, former Commandant of the United States Marine
Corps. See "Management."
THE RECAPITALIZATION
The Company entered into an Agreement and Plan of Merger, dated as of
January 2, 1998 (the "Recapitalization Agreement"), among JFL-EEC LLC, a
Delaware limited liability company and an affiliate of Lehman ("JFL-EEC"),
JFL-EEC Merger Sub Co., a Delaware corporation and wholly owned subsidiary of
JFL-EEC ("MergerCo"), Carlyle-EEC Holdings, Inc. (which entity post-merger is
Elgar Holdings, Inc.), a Delaware corporation and former wholly owned subsidiary
of Carlyle-EEC Acquisition Partners, L.P. (the "Carlyle Partnership"), a
Delaware limited partnership and an affiliate of The Carlyle Group, and TC
Group, L.L.C., a Delaware limited liability company and the initial Holder
Representative thereunder (as defined therein), pursuant to which the Company
was recapitalized (the "Recapitalization") by means of a merger of MergerCo into
the Company (the "Merger"), with the Company as the surviving corporation. In
exploring strategic alternatives for their investment in Elgar, the Company's
former controlling stockholders decided to sell the Company to its current
stockholders, and the Merger and the Recapitalization were the means for
transferring ownership of the Company. In connection with the Merger, which was
accounted for as a recapitalization, the partners from the Carlyle Partnership
received approximately $102.3 million in cash and retained approximately 15.0%
of the fully diluted Common Stock (collectively, the "Recapitalization
Consideration"). As part of their participation in the
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Carlyle Partnership (which was liquidated upon consummation of the
Recapitalization), (i) members of the Company's management retained 9.4% of the
fully diluted Common Stock (the "Management Continuing Shareholders"), and (ii)
the other partners from the Carlyle Partnership retained 5.6% of the fully
diluted Common Stock (the "Non-Management Continuing Shareholders" and,
collectively with the Management Continuing Shareholders, the "Continuing
Shareholders"). The Recapitalization was financed with approximately $19.0
million of new cash equity from JFL-EEC (the "Lehman Investment"), $10.0 million
from the issuance of Series A 10% Cumulative Redeemable Preferred Stock (the
"Redeemable Preferred Stock") and $90.0 million from the Prior Offering. Upon
consummation of the Recapitalization, the fully diluted Common Stock was owned
71.7% by JFL-EEC, 15.0% by the Continuing Shareholders and 13.3% by the holders
of the Redeemable Preferred Stock (through exercisable warrants). See "The
Recapitalization," "Use of Proceeds," "Description of New Credit Facility" and
"Description of Preferred Stock and Warrants."
The following table sets forth the sources and uses of funds in connection
with the Recapitalization:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
--------------------
<S> <C>
SOURCES OF FUNDS:
Issuance of Old Notes..................................................... $ 90,000
Lehman Investment......................................................... 19,014
Issuance of Redeemable Preferred Stock and Warrants....................... 10,000
Continuing Shares(1)...................................................... 3,986
Working Capital........................................................... 632
--------
$ 123,632
--------
--------
USES OF FUNDS:
Aggregate Recapitalization Consideration(2)............................... $ 107,273
Repayment of Old Credit Facility and Term Debt............................ 10,859
Approximate Transaction Expenses.......................................... 5,500
--------
$ 123,632
--------
--------
</TABLE>
- ------------------------------
(1) Represents the Continuing Shareholders' share of the fully diluted Common
Stock at the time of the Recapitalization, of which 9.4% is held by the
Management Continuing Shareholders and 5.6% by the Non-Management Continuing
Shareholders.
(2) Consists of approximately $103.3 million in cash and approximately $4.0
million aggregate value of Continuing Shares. Includes a $632 post-closing
working capital adjustment pursuant to the Recapitalization Agreement.
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THE PRIOR OFFERING
The outstanding $90.0 million principal amount of Old Notes were sold by the
Company to the Initial Purchaser on the Closing Date pursuant to the Purchase
Agreement. The Initial Purchaser subsequently resold the Old Notes in reliance
on Rule 144A under the Securities Act. The Company and the Initial Purchaser
also entered into the Registration Rights Agreement pursuant to which the
Company granted certain registration rights for the benefit of the holders of
the Old Notes. The Exchange Offer is intended to satisfy certain of the
Company's obligations under the Registration Rights Agreement with respect to
the Old Notes. See "The Exchange Offer Purpose and Effect."
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer................ The Company is offering upon the terms and subject to
the conditions set forth herein and in the accompanying
letter of transmittal (the "Letter of Transmittal") to
exchange $1,000 in principal amount of its 9 7/8% Senior
Notes due 2008 (the "New Notes," with the Old Notes and
the New Notes collectively referred to herein as the
"Notes") for each $1,000 in principal amount of the
outstanding Old Notes (the "Exchange Offer"). As of the
date of this Prospectus, $90.0 million in aggregate
principal amount of the Old Notes is outstanding. See
"The Exchange Offer Terms of the Exchange Offer."
Expiration Date................... 5:00 p.m., New York City time, on , 1998 as
the same may be extended. See "The Exchange
Offer--Expiration Date; Extensions; Amendments."
Conditions of the Exchange The Exchange Offer is not conditioned upon any minimum
Offer........................... principal amount of Old Notes being tendered for
exchange. The only condition to the Exchange Offer is
the declaration by the Commission of the effectiveness
of the Registration Statement of which this Prospectus
constitutes a part. See "The Exchange Offer--Conditions
of the Exchange Offer."
Termination of Certain Rights..... Pursuant to the Registration Rights Agreement and the
Old Notes, holders of Old Notes (i) have rights to
receive Additional Interest and (ii) have certain rights
intended for the holders of unregistered securities.
"Additional Interest" means additional interest of 0.35%
per annum per $1,000 principal amount of Old Notes
during the first 90-day period immediately following the
occurrence of a Registration Default (as defined),
increased by an additional 0.35% per annum per $1,000
principal amount of Old Notes during the second 90-day
period following a Registration Default, pursuant to the
terms of the Registration Rights Agreement. Holders of
New Notes will not be, and upon consummation of the
Exchange Offer, holders of Old Notes will no longer be,
entitled to (i) the right to receive Additional Interest
or (ii) certain other rights under the Registration
Rights Agreement intended for holders of unregistered
securities. See "The Exchange Offer--Termination of
Certain Rights" and "--Procedures for Tendering Old
Notes."
</TABLE>
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<TABLE>
<S> <C>
Accrued Interest.................. The New Notes will bear interest at a rate equal to
9 7/8% per annum. Interest shall accrue from February 3,
1998 or from the most recent Interest Payment Date with
respect to the Old Notes to which interest was paid or
duly provided for. See "Description of Notes--Principal,
Maturity and Interest."
Procedures for Tendering
Old Notes....................... Unless a tender of Old Notes is effected pursuant to the
procedures for book-entry transfer as provided herein,
each holder desiring to accept the Exchange Offer must
complete and sign the Letter of Transmittal, have the
signature thereon guaranteed if required by the Letter
of Transmittal, and mail or deliver the Letter of
Transmittal, together with the Old Notes or a Notice of
Guaranteed Delivery and any other required documents
(such as evidence of authority to act, if the Letter of
Transmittal is signed by someone acting in a fiduciary
or representative capacity), to the Exchange Agent (as
defined) at the address set forth on the back cover page
of this Prospectus prior to 5:00 p.m., New York City
time, on the Expiration Date. Any Beneficial Owner (as
defined) of the Old Notes whose Old Notes are registered
in the name of a nominee, such as a broker, dealer,
commercial bank or trust company and who wishes to
tender Old Notes in the Exchange Offer, should instruct
such entity or person to promptly tender on such
Beneficial Owner's behalf. See "The Exchange
Offer--Procedures for Tendering Old Notes."
Guaranteed Delivery Procedures.... Holders of Old Notes who wish to tender their Old Notes
and (i) whose Old Notes are not immediately available or
(ii) who cannot deliver their Old Notes or any other
documents required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date (or complete
the procedure for book-entry transfer on a timely basis)
may tender their Old Notes according to the guaranteed
delivery procedures set forth in the Letter of
Transmittal. See "The Exchange Offer Guaranteed Delivery
Procedures."
Acceptance of Old Notes and
Delivery of New Notes........... Upon effectiveness of the Registration Statement (of
which this Prospectus constitutes a part) and
consummation of the Exchange Offer, the Company will
accept any and all Old Notes that are properly tendered
in the Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be delivered
promptly after acceptance of the Old Notes. See "The
Exchange Offer--Acceptance of Old Notes for Exchange;
Delivery of New Notes."
Withdrawal Rights................. Tenders of Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration
Date. See "The Exchange Offer--Withdrawal Rights."
</TABLE>
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<TABLE>
<S> <C>
The Exchange Agent................ United States Trust Company of New York is the exchange
agent (in such capacity, the "Exchange Agent"). The
address and telephone number of the Exchange Agent are
set forth in "The Exchange Offer--The Exchange Agent;
Assistance."
Fees and Expenses................. All expenses incident to the Company's consummation of
the Exchange Offer and compliance with the Registration
Rights Agreement will be borne by the Company. The
Company will also pay certain transfer taxes applicable
to the Exchange Offer. See "The Exchange Offer--Fees and
Expenses."
Resales of the New Notes.......... Based on existing interpretations by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer to a holder in
exchange for Old Notes may be offered for resale, resold
and otherwise transferred by a holder (other than (i) a
broker-dealer who purchased the Old Notes directly from
the Company for resale pursuant to Rule 144A under the
Securities Act or any other available exemption under
the Securities Act or (ii) a person that is an affiliate
of the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the
registration and prospectus delivery provisions of the
Securities Act, provided that such holder is acquiring
the New Notes in the ordinary course of business and is
not participating, and has no arrangement or
understanding with any person to participate, in a
distribution of the New Notes. Each broker-dealer that
receives New Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such
broker as a result of market-making or other trading
activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such New
Notes. See "The Exchange Offer--Resales of the New
Notes" and "Plan of Distribution."
Effect of Not Tendering Old Notes
for Exchange.................... Old Notes that are not tendered or that are not properly
tendered will, following the expiration of the Exchange
Offer, continue to be subject to the existing
restrictions upon transfer thereof. The Company will
have no further obligations to provide for the
registration under the Securities Act of such Old Notes
and such Old Notes will, following the expiration of the
Exchange Offer, bear interest at the same rate as the
New Notes.
Certain Federal Income Tax
Consequences.................... The Company believes that the exchange pursuant to the
Exchange Offer will not be a taxable event for federal
income tax purposes. See "Certain Federal Income Tax
Consequences of the Exchange Offer."
</TABLE>
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DESCRIPTION OF NEW NOTES
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the New Notes
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, (ii) holders of the New Notes will not
be entitled to Additional Interest and (iii) holders of the New Notes will not
be, and upon consummation of the Exchange Offer, holders of the Old Notes will
no longer be, entitled to certain rights under the Registration Rights Agreement
intended for the holders of unregistered securities, except in limited
circumstances. The Exchange Offer shall be deemed consummated upon the
occurrence of the delivery by the Company to the Registrar under the Indenture
of the New Notes in the same aggregate principal amount as the aggregate
principal amount of Old Notes that are validly tendered by holders thereof
pursuant to the Exchange Offer. See "The Exchange Offer--Termination of Certain
Rights" and "Procedures for Tendering Old Note" and "Description of Notes."
<TABLE>
<S> <C>
Securities Offered................ $90,000,000 aggregate principal amount of 9 7/8% Senior
Subordinated Notes due 2008.
Maturity Date..................... February 1, 2008.
Interest Payment Dates............ February 1 and August 1, commencing August 1, 1998
Ranking........................... The Notes are senior unsecured obligations of EHI,
senior to all of its existing and future subordinated
indebtedness and PARI PASSU in right of payment with all
of its existing and future unsubordinated indebtedness.
However, indebtedness under the New Credit Facility is
secured by substantially all of the assets of EHI and
the Subsidiary Guarantors and will effectively rank
senior to the Notes and the Note Guarantees to the
extent of such assets. As of March 28, 1998, the Company
had no secured indebtedness outstanding which
effectively ranked senior to the Notes. The Indenture
restricts, but does not prohibit, the Company from
incurring indebtedness. See "Description of Notes."
Optional Redemption............... On or after February 1, 2003, EHI may redeem the Notes,
in whole or in part, at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, to the
date of redemption. Notwithstanding the foregoing, at
any time on or before February 1, 2001, EHI may redeem
up to 35% of the sum of (i) the initial aggregate
principal amount of the Notes issued in the Prior
Offering and (ii) the respective initial aggregate
principal amount of Notes issued under the Indenture
after the Issue Date, on one or more occasions, with the
net cash proceeds of one or more Public Equity Offerings
(as defined herein) at a redemption price of 109.875% of
the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of redemption, provided
that at least 65% of the sum of (i) the initial
aggregate principal amount of Notes issued in the
Offering and (ii) the respective initial aggregate
principal amount of any Notes issued under the Indenture
after the Issue Date remain outstanding immediately
after redemption. See "Description of
Notes--Redemption--Optional Redemption Upon Public
Equity Offerings."
</TABLE>
11
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<TABLE>
<S> <C>
Guarantees........................ The Notes are guaranteed by the Subsidiary Guarantors.
The Note Guarantees are general unsecured obligation of
the Subsidiary Guarantors and rank senior to all
existing and future subordinated indebtedness of the
Subsidiary Guarantors and PARI PASSU with all other
unsubordinated indebtedness of the Subsidiary
Guarantors, including indebtedness under the New Credit
Facility. However, indebtedness under the New Credit
Facility is secured by substantially all of the assets
of the Subsidiary Guarantors and effectively ranks
senior to the Note Guarantees to the extent of such
assets. The Indenture restricts, but does not prohibit,
the Company from incurring secured indebtedness. See
"Description of Notes--Note Guarantees."
Change of Control................. Upon a Change of Control (as defined herein), (i) EHI is
required to make an offer to repurchase all outstanding
Notes at 101% of the principal amount thereof plus
accrued and unpaid interest thereon, if any, to the date
of repurchase or (ii) prior to February 1, 2003, EHI
will have the option to redeem the Notes, in whole or in
part, at a redemption price equal to the principal
amount thereof, plus accrued and unpaid interest, if
any, to the redemption date plus the Applicable Premium.
See "Description of Notes--Redemption--Optional
Redemption, Optional Redemption Upon Change of Control."
Certain Covenants................. The Indenture restricts, among other things, the
Company's ability to incur additional indebtedness, pay
dividends or make certain other restricted payments,
incur liens, apply net proceeds from certain asset
sales, merge or consolidate with any other person, sell,
assign, transfer, lease, convey or otherwise dispose of
substantially all of its assets or enter into certain
transactions with affiliates. See "Description of
Notes--Certain Covenants."
Use of Proceeds................... The proceeds of the Prior Offering and of other
financing transactions described herein were used to pay
the Recapitalization Consideration, to repay certain
existing indebtedness of the Company and to pay fees and
expenses of the Recapitalization, including the Prior
Offering, and for general corporate purposes. See "The
Recapitalization."
Absence of a Public Market for the
New Notes....................... The New Notes are a new issue of securities with no
established market. Accordingly, there can be no
assurance as to the development or liquidity of any
market for the New Notes. The Initial Purchaser has
advised the Company that it currently intends to make a
market in the New Notes. However, the Initial Purchaser
is not obligated to do so, and any market-making with
respect to the New Notes may be discontinued at any time
without notice. The Company does not intend to apply for
listing of the New Notes on a securities exchange.
</TABLE>
RISK FACTORS
For a discussion of certain matters that should be considered by prospective
investors in connection with the Exchange Offer, see "Risk Factors."
12
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data below as of and for the fiscal years
ended April 3, 1996, March 29, 1997 and March 28, 1998 have been derived from
the Consolidated Financial Statements of Carlyle-EEC Holdings, Inc. (which
changed its name from Carlyle-EEC Holdings, Inc. to Elgar Holdings, Inc. in
connection with the Recapitalization on February 3, 1998 and is referred to
herein as "EHI" or the "Company") and Elgar Electronics Corporation (in this
context, the "Predecessor"), which have been audited by Arthur Andersen LLP,
independent public accountants, and are included elsewhere in this Prospectus.
The unaudited pro forma combined operating data for the fiscal year ended March
28, 1998 assumes that both the Recapitalization and the Power Ten Acquisition
occurred on March 30, 1997. This pro forma information is not necessarily
indicative of the results that would have occurred had the Recapitalization and
the Power Ten Acquisition been completed on March 30, 1997 or the Company's or
Power Ten's actual or future results or financial position. The information
presented below is qualified in its entirety by, and should be read in
conjunction with, "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements of the Company and Power Ten and the
notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED COMBINED
----------------------------------- PRO FORMA
APRIL 3, MARCH 29, MARCH 28, FISCAL YEAR
1996(1) 1997 1998 ENDED
--------- ----------- ----------- MARCH 28,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
OPERATING DATA:
Net sales........................................................................ $ 42,309 $ 45,578 $ 62,496 $ 72,572
Cost of sales.................................................................... 26,468 26,973 32,944 38,426
--------- ----------- ----------- -----------
Gross profit..................................................................... 15,841 18,605 29,552 34,146
Selling, general and administrative expense...................................... 7,406 7,770 9,434 10,905
Research and development and engineering expenses(2)............................. 4,168 3,973 6,242 6,831
Amortization expense(3).......................................................... 2,149 1,314 1,314 2,412
--------- ----------- ----------- -----------
Operating income................................................................. 2,118 5,548 12,562 13,998
Interest expense, net(4)......................................................... 3,578 1,839 3,341 10,670
--------- ----------- ----------- -----------
Income (loss) before income tax provision........................................ (1,460) 3,709 9,221 3,328
Income tax provision (5)......................................................... 176 1,872 4,448 2,534
--------- ----------- ----------- -----------
Net income (loss)................................................................ $ (1,636) $ 1,837 $ 4,773 $ 794
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
BALANCE SHEET DATA:
Total assets..................................................................... $ 37,891 $ 36,597 $ 44,912 $ 48,321
Total debt....................................................................... 19,676 15,216 90,000 105,350
OTHER DATA:
Operating cash flows............................................................. $ 2,192 $ 5,312 $ 7,462 $ 10,491
Investing cash flows............................................................. $ (611) $ (14,593) $ (1,218) $ (1,273)
Financing cash flows............................................................. $ (442) $ 9,499 $ (4,269) $ (4,394)
Adjusted EBITDA(6)............................................................... $ 5,052 $ 7,668 $ 15,118 $ 17,352
Adjusted EBITDA margin(6)........................................................ 11.9% 16.8% 24.2% 23.9%
Depreciation..................................................................... $ 785 $ 806 $ 883 $ 942
Capital expenditures............................................................. $ 611 $ 621 $ 1,228 $ 1,318
</TABLE>
- ----------------------------------
(1) The operating data for the fiscal year ended April 3, 1996 presents the
results of operations of the Predecessor for the 12-month period immediately
preceding the acquisition of Elgar by Carlyle-EEC Holdings, Inc.
(2) In Fiscal 1998, selling, general and administrative expenses include
approximately $359 of nonrecurring expenditures relating to the
Recapitalization. The combined pro forma fiscal year ended March 28, 1998
excludes nonrecurring expenses of $2,202 ($359 relating to the
Recapitalization and $1,843 relating to compensation to the principal
stockholders of Power Ten).
(3) Amortization expense of the Predecessor represents the amortization of
goodwill associated with a prior acquisition of Elgar in 1989 and Elgar's
acquisition of Sorensen in 1994. Amortization expense of the Company
represents the amortization of goodwill associated with the acquisition of
Elgar by Carlyle-EEC Holdings, Inc. on April 3, 1996. See Notes 1 and 2 to
Consolidated Financial Statements. Amortization expense for the combined pro
forma fiscal year ended March 28, 1998 includes additional amortization
expense of $1,098 representing the excess of purchase price over net assets
acquired of approximately $16 million which is expected to be recorded in
connection with the Power Ten Acquisition and amortized over 15 years.
(4) Interest expense for the combined pro forma fiscal year ended March 28, 1998
includes $1,275 of interest on the $15.0 million Term Facility obtained in
connection with the Power Ten Acquisition assuming an interest rate of 8.5%,
offset by $39 of interest expense on debt of Power Ten not expected to be
assumed.
(5) Reflects changes to income tax provision arising from the pro forma
adjustments described in Notes (2), (3) and (4) above on the Company's
combined pro forma results of operations for the fiscal year ended March 28,
1998 at a 40.0% statutory tax rate.
(6) Adjusted EBITDA is the sum of income (loss) before income taxes, interest,
depreciation, amortization and certain non-recurring expenses. Adjusted
EBITDA is presented because the Company believes that it is a widely
accepted financial indicator of a company's ability to service indebtedness.
However, Adjusted EBITDA should not be considered as an alternative to net
income or to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) and should not be
construed as an indication of a company's operating performance or as a
measure of liquidity. In Fiscal 1998 and combined pro forma Fiscal 1998,
Adjusted EBITDA excludes the nonrecurring expenditures described in note (2)
above.
13
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data of EHI as of and for the
fiscal year ended March 28, 1998 give effect to the Recapitalization as if it
had occurred on March 30, 1997, with respect to the Unaudited Pro Forma Combined
Statement of Income. The unaudited pro forma financial data for EHI and Power
Ten together for the fiscal year ended March 28, 1998, for EHI, and April 4,
1998, for Power Ten, have been further adjusted to give effect to the Power Ten
Acquisition and the Prior Offering and the application of the funds therefrom as
if they had occurred on March 30, 1997, with respect to the Unaudited Pro Forma
Combined Statement of Income, and March 28, 1998, with respect to the Unaudited
Pro Forma Consolidated Balance Sheet.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED MARCH 28, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ELGAR
HOLDINGS,
INC. ELGAR POWER TEN PRO FORMA
HISTORICAL PRO FORMA HOLDINGS, HISTORICAL POWER TEN
FISCAL YEAR RECAPITALIZATION INC. FISCAL YEAR ACQUISITION COMBINED
ENDED 1998 ADJUSTMENTS PRO FORMA ENDED 1998 ADJUSTMENTS PRO FORMA
------------- ---------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................... $ 62,496 $ -- $ 62,496 $ 10,076 $ -- $ 72,572
Cost of sales................ 32,944 -- 32,944 5,482 -- 38,426
------------- ------- ------------- ----------- ----------- -----------
Gross profit................. 29,552 -- 29,552 4,594 -- 34,146
Selling, general and
administrative expenses.... 9,434 (139) (1) 9,295 3,453 (1,843)(4) 10,905
Research and development and
engineering expenses....... 6,242 -- 6,242 589 -- 6,831
Amortization of
intangibles................ 1,314 -- 1,314 -- 1,098(5) 2,412
------------- ------- ------------- ----------- ----------- -----------
Operating income............. 12,562 139 12,701 552 745 13,998
Interest expense, net........ 3,341 6,088(2) 9,429 5 1,236(6) 10,670
------------- ------- ------------- ----------- ----------- -----------
Income before provision
(benefit) for income
taxes...................... 9,221 (5,949) 3,272 547 (491) 3,328
Provision (benefit) for
income taxes............... 4,448 (2,380)(3) 2,068 223 243(3) 2,534
------------- ------- ------------- ----------- ----------- -----------
Net income................... $ 4,773 $ (3,569) $ 1,204 $ 324 $ (734) $ 794
------------- ------- ------------- ----------- ----------- -----------
------------- ------- ------------- ----------- ----------- -----------
Adjusted EBITDA.............. $ 14,759 $ 139 $ 14,898 $ 611 $ 1,843 $ 17,352
</TABLE>
The accompanying notes to the unaudited pro forma combined statement of income
are an integral part of this statement.
14
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
The unaudited pro forma combined financial data have been derived from the
application of pro forma adjustments to both EHI's and Power Ten's historical
financial statements for the periods noted.
(1) The pro forma adjustment to selling, general and administrative expenses
reflects elimination of annual management fees of approximately $280 payable
to two former affiliates and the exclusion of approximately $359 for EHI of
nonrecurring expenditures relating to the Recapitalization. In connection
with the Recapitalization, the Company entered into a Management Agreement
with Lehman whereby the Company pays Lehman an annual management fee equal
to $500, which amount is also reflected in the pro forma Recapitalization
adjustment.
(2) The pro forma adjustment to interest expense, net, reflects the following:
<TABLE>
<CAPTION>
YEAR ENDED
MAR. 28, 1998
-------------
<S> <C>
Interest expense on the Senior Notes...................................................... $ 8,888
Amortization of debt issuance costs (10 years)............................................ 541
Less historical net interest of existing debt refinanced.................................. (2,500)
Less deferred debt issuance costs written-off in connection with the Recapitalization..... (841)
-------------
Incremental Recapitalization interest expense............................................. $ 6,088
-------------
-------------
</TABLE>
(3) The pro forma adjustment to income tax provision reflects the tax effect of
the pro forma adjustments at a 40.0% statutory tax rate.
(4) Selling, general and administrative expense reflects $1,843 of nonrecurring
expenditures relating to compensation to the principal stockholders of Power
Ten.
(5) Adjustment to amortization expense reflects additional amortization expense
of $1,098 calculated on a straight line basis over 15 years of the excess of
purchase price over net assets acquired in the Power Ten Acquisition.
(6) Adjustment to interest expense, net, reflects $1,275 of additional interest
expense on the Term Facility obtained in connection with the Power Ten
Acquisition assuming an interest rate of 8.5%, offset by $39 of interest
expense on debt of Power Ten not expected to be assumed.
15
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 28, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ELGAR
HOLDINGS, INC. POWER TEN PRO FORMA COMBINED
AT MAR 28, 1998 AT APR 4, 1998 ADJUSTMENTS PRO FORMA
--------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents...................... $ 2,666 $ 1,240 $ 1,535(1) $ 5,441
Accounts Receivable............................ 6,453 844 7,297
Inventories.................................... 8,305 1,052 9,357
Deferred Tax Asset............................. 1,098 101 1,199
Prepaids and Other............................. 373 30 403
--------------- ------ -----------
Total Current Assets......................... 18,895 3,267 23,697
Property, Plant and Equipment, net............... 2,952 101 3,053
Other Assets..................................... -- 41 41
Intangible Assets................................ 22,412(2) -- 16,684 )(3 39,096
Deferred Tax Assets.............................. 653 -- 653
--------------- ------ -----------
$ 44,912 $ 3,409 $ 66,540
--------------- ------ -----------
--------------- ------ -----------
Current Liabilities:
Accounts Payable............................... $ 3,068 $ 372 $ 3,440
Accrued Liabilities............................ 4,801 906 5,707
Current Portion of Long-Term Debt.............. -- -- 1,500(4) 1,500
Current Portion of Capital Lease............... 17 -- 17
--------------- ------ ----------- -----------
Total Current Liabilities.................... 7,886 1,278 10,664
--------------- ------ -----------
Capital Lease Obligations........................ 19 -- 19
Long Term Debt, net of current portion........... 90,000 350 13,500(4) 103,850
--------------- ------ -----------
Total Liabilities............................ 97,905 1,628 114,533
--------------- ------ -----------
Series A Redeemable Preferred Stock.............. 8,478(5) -- 8,478
--------------- ------ -----------
Stockholders' Equity:
Series B Convertible Preferred Stock........... -- -- 5,000(6) 5,000
Common Stock................................... 23 141 (141)(7) 23
Additional Paid-in Capital..................... (67,926) -- (67,926)
Retained Earnings.............................. 6,432 1,640 (1,640)(7) 6,432
--------------- ------ -----------
Total Stockholders' Equity................... (61,471) 1,781 (56,471)
--------------- ------ -----------
$ 44,912 $ 3,409 $ 66,540
--------------- ------ -----------
--------------- ------ -----------
</TABLE>
16
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
The unaudited pro forma consolidated financial data has been derived from
the application of pro forma adjustments to both EHI's and Power Ten's
historical financial statements for the period noted.
(1) Reflects net cash received in connection with the funds raised to finance
the Power Ten Acquisition.
(2) Includes $1,425 of amounts paid to Lehman in connection with the
Recapitalization and the Power Ten Acquisition.
(3) Reflects the excess of purchase price over net assets acquired, non-compete
agreements and deferred financing costs recorded in connection with the
Power Ten Acquisition.
(4) The pro forma adjustment to current and long-term obligations reflects the
amounts borrowed under the $15,000 Term Facility. All of the proceeds from
the Term Facility were used to finance the Power Ten Acquisition.
(5) Net of $1,700 attributed to the value of the warrants. Dividends on the
redeemable preferred stock are cumulative, accrue quarterly at the rate of
10% per annum and are paid in-kind through January 31, 2001. Also includes
$150 of dividends accrued from February 3, 1998 through March 28, 1998 and
$28 of accretion of discount on Preferred Stock. See "Description of
Preferred Stock and Warrants."
(6) The Series B Convertible Preferred Stock was issued in connection with the
Power Ten Acquisition. See "Description of Preferred Stock and
Warrants--Convertible Preferred Stock."
(7) Reflects the elimination of Power Ten stockholders' equity balances.
17
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, holders
of Notes should consider carefully the following Risk Factors affecting the
business of the Company, as well as the other information set forth elsewhere in
this Prospectus.
SIGNIFICANT LEVERAGE AND DEBT SERVICE
In connection with consummating the Recapitalization, the Company incurred
significant outstanding indebtedness and, as a result, became highly leveraged.
See "Capitalization." In addition, subject to the limitations set forth in the
Indenture and the New Credit Agreement, the Company may incur additional
indebtedness, including up to $30.0 million under the New Credit Facility. See
"Description of New Credit Facility." As of June 30, 1998, the Company had $15
million of secured indebtedness outstanding which effectively ranked senior to
the Notes. Other than the $90 million aggregate principal amount of Notes
outstanding and $15 million of indebtedness under the New Credit Facility, the
Company does not have any other long-term indebtedness. The degree to which the
Company is leveraged could have important consequences to the holders of the
Notes, including (i) the Company's vulnerability to adverse general economic and
industry conditions, (ii) the Company's ability to obtain additional financing
for future capital expenditures, general corporate or other purposes may be
limited and (iii) the dedication of a substantial portion of cash flow from the
Company's operations to the payment of principal and interest on indebtedness,
thereby reducing the funds available for the Company's operations and future
business opportunities.
The Company's ability to make scheduled payments on the principal of, or
interest on, or to refinance, its indebtedness will depend on its future
operating performance and cash flow, which are subject to prevailing economic
conditions, prevailing interest rate levels, and financial, competitive,
business and other factors, many of which are beyond its control, as well as the
availability of borrowings under the New Credit Facility or successor
facilities. The Company's estimated debt service obligations are $11.7 million
for fiscal 1999 and $12.5 million for fiscal 2000. Based upon the current and
anticipated level of operations, the Company believes that its cash flow from
operations, together with amounts available under the New Credit Facility and
the Company's other sources of liquidity, will be adequate to meet its
anticipated cash requirements through fiscal 2000 for working capital, capital
expenditures, interest payments and principal payments. EHI must rely on
dividends and other payments from Elgar to generate the funds necessary to meet
its obligations, including the payment of principal of and interest on the
Notes. Elgar's ability to make such payments may be restricted by, among other
things, applicable state corporate laws and other laws and regulations. Based on
Elgar's historic cash flow, the Company believes it will have sufficient cash
flow to satisfy its debt service obligations through fiscal 2000. See
"Description of Notes" and "Description of New Credit Facility." There can be no
assurance that the Company's business will continue to generate cash flow at or
above current levels. If the Company is unable to generate sufficient cash flow
from its operations in the future to service its indebtedness, EHI may be
required to refinance all or a portion of its existing indebtedness, including
the Notes, or to obtain additional financing. There can be no assurance that any
such refinancing would be possible or that any additional financing could be
obtained. The inability to obtain refinancing or additional financing could have
a material adverse effect on the Company. Finally, in order to pay the principal
balance of the Notes due at maturity, EHI may have to obtain alternative
financing.
RANKING OF NOTES; ASSET ENCUMBRANCE
The Notes and Note Guarantees are senior unsecured obligations and rank PARI
PASSU in right of payment with all other existing and future unsubordinated
obligations of EHI and the Subsidiary Guarantors, respectively. Indebtedness
under the New Credit Facility is (i) secured by a first priority security
interest in substantially all of the assets of EHI, Elgar and Power Ten
(including, without limitation, accounts receivable, inventory, machinery,
equipment, contracts and contract rights, trademarks, copyrights, patents,
license agreements and general intangibles), (ii) guaranteed by EHI and Power
18
<PAGE>
Ten on a senior basis and (iii) secured by a pledge of all of the outstanding
capital stock of Elgar and Power Ten. Accordingly, the Notes and the Note
Guarantees are effectively subordinated to all secured indebtedness (including
indebtedness under the New Credit Facility) to the extent of the collateral.
Upon an event of default under any such secured indebtedness, the lenders could
elect to declare all amounts outstanding, together with accrued and unpaid
interest thereon, to be immediately due and payable. If EHI or the Subsidiary
Guarantors were unable to repay those amounts, the lenders could proceed against
the collateral granted them to secure that indebtedness. There can be no
assurance that the assets of EHI or the Subsidiary Guarantors would be
sufficient to repay in full any such secured indebtedness. EHI must rely on
dividends and other payments from the Subsidiary Guarantors to generate the
funds necessary to meet EHI's obligations, including the payment of principal
and interest on the Notes. EHI's ability to make such payments may be restricted
by, among other things, applicable state corporate laws and other laws and
regulations. See "Description of Notes" and "Description of New Credit
Facility."
RESTRICTIVE COVENANTS
The New Credit Facility and the Indenture contain numerous restrictive
covenants which limit the discretion of management with respect to certain
business matters. These covenants place significant restrictions on, among other
things, the Company's ability to incur additional indebtedness, to create liens
or other encumbrances, to pay dividends or make other restricted payments, to
make investments, loans and guarantees and to sell or otherwise dispose of a
substantial portion of assets to, or merge or consolidate with, another entity.
The New Credit Facility also contains a number of financial covenants that
require the Company to meet certain financial ratios and tests and provide that
a "change of control" will constitute an event of default. See "Description of
Notes--Certain Covenants" and "Description of New Credit Facility." A failure to
comply with the obligations contained in the New Credit Facility or the
Indenture, if not cured or waived, could permit acceleration of the related
indebtedness and acceleration of indebtedness under other instruments that
contain cross-acceleration or cross-default provisions. In the case of an event
of default under the New Credit Facility, the lenders under the New Credit
Facility would be entitled to exercise the remedies available to a secured
lender under applicable law, including the sale of the collateral to satisfy the
debt. If EHI were obligated to repay all or a significant portion of its
indebtedness, there can be no assurance that EHI would have sufficient cash to
do so or that EHI could successfully refinance such indebtedness. Other
indebtedness of the Company that may be incurred in the future may contain
financial or other covenants more restrictive than those applicable to the New
Credit Facility or the Notes.
IMPORTANCE OF KEY CUSTOMERS
Certain customers are material to the business and operations of the
Company. In Fiscal 1998, (i) Racal, a systems integrator for test and
measurement equipment which provides certain ATE systems utilizing the Company's
programmable power supplies to manufacturers, including a leading semiconductor
manufacturer, accounted for approximately $17.7 million, or 28.3%, of the
Company's total net sales and (ii) Lockheed Martin, through various of its
operating units, accounted for approximately $11.5 million, or 18.4%, of total
net sales during Fiscal 1998. During Fiscal 1998, the Company's top five
customers accounted for approximately $36.2 million of net sales, representing
57.9% of the Company's total net sales. The Company was recently notified by
Racal that the leading semiconductor manufacturer referred to above has decided
to cease orders for Elgar's current AT-8000 DC power supplies until anticipated
"next generation" technology is available in early 1999. As a result, management
expects that revenues from Racal will be significantly lower in fiscal 1999 than
they were in Fiscal 1998. The Company's prospects will continue to depend on the
success of Racal, Lockheed Martin and its other significant customers. Although
the Company believes that it has strong, long-standing relationships with these
customers and that such relationships are mutually beneficial, the loss of any
significant customer, or a significant reduction in the Company's business with
any of them, as with the anticipated decrease in revenues from Racal in fiscal
1999, could have a material adverse effect on the Company and its business,
results of operations and financial condition.
19
<PAGE>
COMPETITION
The Company experiences significant competition in the programmable power
test equipment markets. Although the Company does not presently experience
significant competition from third-party suppliers in the Solar Array Simulator
market, but rather competes against in-house systems produced by spacecraft and
satellite manufacturers, the Company may experience significant third-party
competition in this market as others attempt to enter this growing field. The
Company has not yet experienced competition in its role as the sole source
supplier of the programmable power subsystem to the CASS Program. Some of the
Company's competitors (through parent corporations) are significantly larger and
have greater financial resources than the Company, as these competitors are
divisions or subsidiaries of large, diversified companies and have access to the
financial resources of their parent companies. The Company believes that the
principal competitive factors affecting the market for its products include
vendor and product reputation, product performance, price, architecture,
functionality and features, ease of implementation and use, availability and
deliverability of product and quality of customer support. The Company believes
that it has competed effectively to date in all of its markets. There can be no
assurance, however, that the Company will be able to compete successfully
against current and future competitors, and the failure to do so could have a
material adverse effect upon the Company's business, operating results and
financial condition. See "Business--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's operations are largely dependent on the efforts of its senior
management. While the Company has entered into employment agreements with its
key personnel in connection with the Recapitalization, there can be no assurance
that the Company will be able to retain such persons. Additionally, in order to
successfully manage its growth strategy, the Company must continue to attract
qualified personnel. The Company does not maintain "key man" life insurance
policies on any of its employees. If certain of the current key personnel should
cease to be employed by the Company for any reason, or if the Company should be
unable to continue to attract and retain qualified management personnel, the
Company's business, financial condition and results of operations could suffer a
material adverse effect. See "Management."
CONTROL BY INVESTORS
As of March 28, 1998, JFL-EEC beneficially owned shares of Common Stock
representing approximately 71.7% of the voting interest in EHI, on a fully
diluted basis (without giving effect to the issuance or conversion of the
Convertible Preferred Stock), and has the right to designate seven of the nine
directors of EHI. Accordingly, JFL-EEC has the power to elect a majority of
EHI's board of directors, appoint new management and approve any action
requiring the approval of the holders of EHI's Common Stock, including adopting
amendments to the Certificate of Incorporation and approving mergers or sales of
substantially all of EHI's assets. The directors elected by JFL-EEC have the
authority to make decisions affecting EHI's capital structure, including the
issuance of additional indebtedness and the declaration of dividends. See
"Management," "Certain Relationships and Related Transactions" and "Security
Ownership of Certain Beneficial Owners and Management."
GOVERNMENT PROCUREMENT POLICIES
Approximately 39.4% and 23.7% of the Company's net sales in Fiscal 1997 and
Fiscal 1998, respectively, were made pursuant to contracts between the United
States government, on the one hand, and the Company or a customer of the
Company, on the other hand. Contracts with the United States government are
subject to cancellation for default or for convenience by the government if
deemed in its best interests. Contracts which are terminated for convenience
generally provide for payments to a contractor for its costs and a proportionate
share of profit for work accomplished through the date of termination. Contracts
which are terminated for default generally provide that the government pay only
for the work it has accepted, can require the contractor to pay the difference
between the original contract
20
<PAGE>
price and the cost to reprocure the contract items net of the value of the work
accepted from the original contractor, and can hold a contractor liable for
damages. In addition, based on audits conducted by the government with respect
to its contracts, profits may be renegotiated with respect to certain programs
and contracts, as has recently occurred with respect to certain aspects of the
Company's CASS Program. In the last five years, the Company has experienced only
one cancellation of a contract at the government's convenience (in 1993). At no
time has the Company experienced a government cancellation by default. There can
be no assurance that any current or prospective contract on which the Company is
a primary contractor or any such contract on which the Company is a
subcontractor or supplier will not be terminated for default or for convenience
by the government or that any such cancellation will not result in the Company
realizing a loss or failing to realize the expected profit on any such contract.
POTENTIAL INABILITY TO FUND CHANGE OF CONTROL OFFER
Upon a Change in Control (as defined in the Indenture), unless an
irrevocable notice of redemption for all of the Notes is given in accordance
with the provisions of "Description of Notes--Redemption-- Optional Redemption
Upon a Change of Control," each holder will have the right to require EHI to
repurchase all or any part of such holder's Notes at 101% of the principal
amount thereof, plus accrued and unpaid interest thereon to the date of
repurchase. See "Description of Notes--Redemption--Change of Control." However,
there can be no assurance that sufficient funds will be available to EHI at the
time of the Change of Control to make any required repurchases of Notes
tendered. Moreover, restrictions in the New Credit Facility prohibit EHI from
making such required repurchases; therefore, any such repurchases would
constitute an event of default under the New Credit Facility absent a waiver. In
addition, the holders of the Redeemable Preferred Stock may also require EHI to
repurchase their shares of Redeemable Preferred Stock upon a Change of Control
(as defined in the Certificate of Designations for the Redeemable Preferred
Stock), which would also constitute a default under the New Credit Facility,
absent a waiver. Notwithstanding these provisions, EHI could enter into certain
transactions, including certain recapitalizations, that would not constitute a
Change of Control but would increase the amount of debt outstanding at such
time.
ENVIRONMENTAL MATTERS
The Company is subject to various evolving federal, state and local
environmental laws and regulations governing, among other things, emissions to
air, discharge to waters and the generation, handling, storage, transportation,
treatment and disposal of hazardous and non-hazardous substances and wastes.
These laws and regulations provide for substantial fees and sanctions for
violations and, in many cases, could require the Company to remediate a site to
meet applicable legal requirements. In connection with the Recapitalization,
Lehman conducted certain investigations (including reviewing Phase I
environmental reports prepared in 1996 with respect to two of the Company's four
facilities) of the Company's operations and its compliance with applicable
environmental laws. The Phase I environmental reports did not reveal any
material environmental issues at the Company's facilities, but did reveal minor
compliance issues which were promptly remedied. Pursuant to the Recapitalization
Agreement, the Company is indemnified from an escrow account, subject to certain
limitations as to survival and amount, against certain potential environmental
liabilities. Indemnification for the benefit of the Company under the
Recapitalization Agreement (including for environmental claims) must exceed
$500,000 in the aggregate and is limited to $7,000,000 in the aggregate. See
"The Recapitalization."
FRAUDULENT CONVEYANCE AND PREFERENCE CONSIDERATIONS
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent conveyance law, if, among other things, EHI or a
Subsidiary Guarantor, at the time it incurred the indebtedness evidenced by the
Notes or its Note Guarantee, as the case may be, (i)(a) was or is insolvent or
rendered insolvent by reason of such occurrence or (b) was or is engaged in a
business or transaction of which the assets remaining with EHI or the Subsidiary
Guarantors were unreasonably small or constitute
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<PAGE>
unreasonably small capital or (c) intended or intends to incur, or believed,
believes or should have believed that it would incur, debts beyond its ability
to repay such debts as they mature AND (ii) EHI or the Subsidiary Guarantors
received or receives less than reasonably equivalent value or fair consideration
for the incurrence of such indebtedness, the Notes and the Note Guarantees could
be invalidated or subordinated to all other debts of EHI or the Subsidiary
Guarantors, as the case may be. The Notes or Note Guarantees could also be
invalidated or subordinated if it were found that EHI or the Subsidiary
Guarantors, as the case may be, incurred indebtedness in connection with the
Notes or its Note Guarantee with the intent of hindering, delaying or defrauding
current or future creditors of EHI or the Subsidiary Guarantors, as the case may
be. In addition, the payment of interest and principal by EHI pursuant to the
Notes or the payment of amounts by the Subsidiary Guarantors pursuant to the
Note Guarantees could be voided and required to be returned to the person making
such payment, or to a fund for the benefit of the creditors of EHI or the
Subsidiary Guarantors, as the case may be.
The measures of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, EHI or a Subsidiary Guarantor would be considered
insolvent if (i) the sum of its debts, including contingent liabilities, were
greater than the sum of all of its assets at a fair valuation or if the present
fair saleable value of its assets were less than the amount that would be
required to pay its probable liability on its existing debts, including
contingent liabilities, as they become absolute and mature or (ii) it could not
pay its debts as they become due.
Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings were initiated by or against EHI
or a Subsidiary Guarantor within 90 days after any payment by EHI or such
Subsidiary Guarantor with respect to the Notes or the Note Guarantee,
respectively, or after the issuance of such Note Guarantee, or if EHI or such
Subsidiary Guarantor anticipated becoming insolvent at the time of such payment
or issuance, all or a portion of such payment or such Note Guarantee could be
avoided as a preferential transfer, and the recipient of any such payment could
be required to return such payment.
To the extent a Note Guarantee were voided as a fraudulent conveyance or
held unenforceable for any other reason, holders of Notes would cease to have
any claim in respect of such Subsidiary Guarantor and would be creditors solely
of EHI. In such event, the claims of holders of Notes against such Subsidiary
Guarantor would be subject to the prior payment of all liabilities and preferred
stock claims of the Subsidiary Guarantor. There can be no assurance that, after
providing for all prior claims and preferred stock interests, if any, there
would be sufficient assets to satisfy the claims of holders of Notes relating to
any voided portions of the Note Guarantee. Currently, EHI's only significant
subsidiary is Elgar, and Elgar's only significant subsidiary is Power Ten.
On the basis of its historical financial information and recent operating
history as discussed in "Prospectus Summary," "Unaudited Pro Forma Consolidated
Statement of Operations" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Company believes that, after giving
effect to the indebtedness incurred in connection with the Recapitalization, it
will not be insolvent, will not have unreasonably small assets or capital for
the businesses in which it is engaged and will not incur debts beyond its
ability to pay such debts as they mature. There can be no assurance, however, as
to what standard a court would apply in making such determinations.
RISKS RELATING TO POWER TEN AND OTHER ACQUISITIONS
Under the Stock Purchase Agreement pursuant to which the Company acquired
all of the outstanding capital stock of Power Ten, certain of the
representations and warranties and related indemnity obligations of the selling
stockholders will survive the closing date for a limited time. There can be no
assurances that (i) Power Ten will perform up to the expectations of the
Company, (ii) the Company will not encounter unanticipated problems or
liabilities with respect to the operations of Power Ten or (iii) the Company
will be able to integrate efficiently the operations of Power Ten. From time to
time, the Company may acquire
22
<PAGE>
the assets or capital stock of other complementary businesses. Any such
acquisitions will entail the risks set forth above.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The New Notes are a new issue of securities, have no established trading
market and may be widely distributed. The Company does not intend to list the
New Notes on any national securities exchange or to seek the admission thereof
to trading in the Nasdaq National Market System. The Company has been advised by
the Initial Purchaser that it currently intends to make a market in the New
Notes. However, the Initial Purchaser is not obligated to do so and may
discontinue such market-making at any time without notice. In addition, such
market-making activity will be subject to the limitations imposed by the
Securities Act and the Exchange Act, and may be limited during the Exchange
Offer. See "Plan of Distribution." Accordingly, there can be no assurance that
an active public or other market will develop for the New Notes or as to the
liquidity of or the trading for the New Notes. If a trading market does not
develop or is not maintained, holders of the New Notes may experience difficulty
in reselling the New Notes or may be unable to sell them at all. If a public
trading market develops for the New Notes, future trading prices of the New
Notes will depend on many factors, including, among other things, prevailing
interest rates, the Company's results of operations and the market for similar
securities. Depending on prevailing interest rates, the market for similar
securities and other facts, including the financial condition of the Company,
the New Notes may trade at a discount from their principal amount.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange for New Notes pursuant to the
Exchange Offer will continue to be subject to the restrictions on transfer of
such Old Notes as set forth in the legend thereon as a consequence of the
issuance of the Old Notes pursuant to exemptions from, or in transactions not
subject to, the registration requirements of the Securities Act and applicable
state securities laws. In general, the Old Notes may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register the Old Notes under the Securities Act. New Notes issued pursuant to
the Exchange Offer may be offered for resale, resold or otherwise transferred by
Holders thereof (other than any such holder which is an "affiliate" of the
Company or any Guarantor within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act provided that such New Notes are in the ordinary course of
such holders' business and such holders have no arrangement with any person to
participate in the distribution of such notes. Each broker-dealer that receives
New Notes for its own account pursuant to the Exchange Offer must acknowledge
that it will deliver a Prospectus in connection with any resale of such New
Notes. The Letter of Transmittal states that, by so acknowledging and delivering
a Prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the effective date of this Prospectus, it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution." However, to comply with the securities
laws of certain jurisdictions, if applicable, the New Notes may not be offered
or sold unless they have been registered or qualified for sale in such
jurisdictions or an exemption from registration or qualification is available
and is complied with. To the extent that Old Notes are tendered and accepted in
the Exchange Offer, the trading market for untendered and tendered but
unaccepted Old Notes will be adversely affected.
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<PAGE>
THE RECAPITALIZATION
Pursuant to the Recapitalization Agreement, MergerCo merged with and into
EHI with EHI surviving the Merger. The Merger, together with the related
transactions described below are collectively referred to as the
"Recapitalization." All fully diluted ownership percentages indicated below
exclude the dilution attributable to the Convertible Preferred Stock issued in
connection with the Power Ten Acquisition.
Pursuant to the terms of the Recapitalization Agreement:
- All outstanding shares of EHI's Common Stock, other than those shares
retained by the Continuing Shareholders, were canceled and the holders
thereof received their PRO RATA cash portion of the Recapitalization
Consideration in exchange for such shares.
- The Continuing Shareholders retained approximately 15.0% of the Common
Stock on a fully diluted basis.
- EHI made certain customary representations, warranties and covenants to
Lehman and its affiliates in connection with the Merger. EHI, as successor
to MergerCo, is entitled to indemnification (capped at certain levels) for
any losses brought about by a breach of these representations, warranties
or covenants, the payment for which will be made from an escrow account
established pursuant to the Recapitalization Agreement. With certain
exceptions, this indemnity will expire on June 30, 1999.
The Merger was financed through a series of related transactions:
- JFL-EEC made a capital contribution in the amount of approximately $19.0
million to MergerCo and received shares of common stock of MergerCo in
consideration thereof, which, on a fully diluted basis, now represent a
71.7% equity interest in EHI.
- In consideration of $10.0 million, MergerCo issued 10,000 shares of
Redeemable Preferred Stock, together with the Warrants to purchase an
aggregate of 13.3% of the fully diluted common stock of MergerCo, to the
purchasers thereof. Upon consummation of the Merger, the Redeemable
Preferred Stock became Redeemable Preferred Stock of EHI and the Warrants
became Warrants to purchase 13.3% of the Common Stock on a fully diluted
basis. See "Description of Preferred Stock and Warrants."
- The Old Notes were issued by MergerCo immediately prior to the Merger. By
operation of law, the Old Notes became the obligations of EHI upon
consummation of the Merger.
Immediately following consummation of the Recapitalization, on a fully
diluted basis, (i) JFL-EEC owned 71.7% of the Common Stock, (ii) the Continuing
Shareholders owned 15.0% of the Common Stock and (iii) the holders of the
Warrants have the right to purchase 13.3% of the Common Stock.
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<PAGE>
USE OF PROCEEDS
The gross proceeds to the Company from the Offering were $90.0 million
before deducting commissions and expenses of the Offering. The Company used the
proceeds from the issuance of the Old Notes, the Lehman Investment and the
issuance of the Redeemable Preferred Stock and Warrants (i) to pay the
Continuing Shareholders the cash portion of the Recapitalization Consideration,
(ii) to repay certain existing indebtedness of the Company, (iii) to pay certain
expenses of the Recapitalization and (iv) for general corporate purposes.
The following table sets forth the sources and uses of funds in connection
with the Recapitalization:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
SOURCES OF FUNDS:
Issuance of Old Notes..................................................... $ 90,000
Lehman Investment......................................................... 19,014
Issuance of Redeemable Preferred Stock and Warrants....................... 10,000
Continuing Shares(1)...................................................... 3,986
Working Capital........................................................... 632
--------
$ 123,632
--------
--------
USES OF FUNDS:
Aggregate Recapitalization Consideration(2)............................... $ 107,273
Repayment of Old Credit Facility and Term Debt............................ 10,859
Approximate Transaction Expenses.......................................... 5,500
--------
$ 123,632
--------
--------
</TABLE>
- ------------------------------
(1) Represents the Continuing Shareholders' share of the fully diluted Common
Stock at the time of the Recapitalization, of which 9.4% is held by the
Management Continuing Shareholders and 5.6% by the Non-Management Continuing
Shareholders.
(2) Consists of approximately $103.3 million in cash and approximately $4.0
million aggregate value of Continuing Shares. Includes a $632 post-closing
working capital adjustment pursuant to the Recapitalization Agreement.
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<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes were sold by the Company to the Initial Purchaser on February
3, 1998 pursuant to the Purchase Agreement. The Initial Purchaser subsequently
resold the Old Notes in reliance on Rule 144A under the Securities Act. The
Company and the Initial Purchaser entered into the Registration Rights
Agreement, pursuant to which the Company agreed, for the benefit of the Holders
of the Old Notes, at the expense of the Company, to (i) file on or prior to the
120th calendar day following the Closing Date a registration statement (the
"Exchange Offer Registration Statement") with the Commission, (ii) use its best
efforts to cause the Exchange Offer Registration Statement to be declared
effective under the Securities Act on or prior to the 180th calendar day
following the Closing Date and (iii) use its best efforts to consummate the
Exchange Offer on or prior to the 210th calendar day following the Closing Date.
The Company will keep the Exchange Offer open for not less than 20 business days
(or longer if required by applicable law) after the date notice of the Exchange
Offer is mailed to the Holders of the Old Notes. The Exchange Offer is intended
to satisfy the Company's exchange offer obligations under the Registration
Rights Agreement.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Following the expiration of the Exchange Offer, holders of Old Notes not
tendered, or not properly tendered, will not have any further registration
rights and such Old Notes will continue to be subject to the existing
restrictions on transfer thereof. Accordingly, the liquidity of the market for a
holder's Old Notes could be adversely affected upon expiration of the Exchange
Offer if such holder elects to not participate in the Exchange Offer.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange $1,000
in principal amount of the New Notes for each $1,000 in principal amount of the
outstanding Old Notes. The Company will accept for exchange any and all Old
Notes that are validly tendered on or prior to 5:00 p.m., New York City time, on
the Expiration Date. Tenders of Old Notes may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is subject to the terms and provisions of
the Registration Rights Agreement. See "Conditions of the Exchange Offer."
Old Notes may be tendered only in multiples of $1,000. Subject to the
foregoing, holders of Old Notes may tender less than the aggregate principal
amount represented by the Old Notes held by them, provided that they
appropriately indicate this fact on the Letter of Transmittal accompanying the
tendered Old Notes (or so indicate pursuant to the procedures for book-entry
transfer).
As of the date of this Prospectus, $90.0 million in aggregate principal
amount of the Old Notes is outstanding of the maximum of $150.0 million of Notes
authorized for issuance under the Indenture. Solely for reasons of
administration (and for no other purpose), the Company has fixed the close of
business on July 27, 1998 as the record date (the "Record Date") for purposes of
determining the persons to whom this Prospectus and the Letter of Transmittal
will be mailed initially. Only a holder of the Old Notes (or such holder's legal
representative or attorney-in-fact) may participate in the Exchange Offer. There
will be no fixed record date for determining holders of the Old Notes entitled
to participate in the Exchange Offer. The Company believes that, as of the date
of this Prospectus, no such holder is an affiliate (as defined in Rule 405 under
the Securities Act) of the Company.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act
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<PAGE>
as agent for the tendering holders of Old Notes and for the purposes of
receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Expiration Date shall be , 1998 at 5:00 p.m., New York City
time, unless the Company, in its sole discretion, extends the Exchange Offer, in
which case the Expiration Date shall be the latest date and time to which the
Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any of the
conditions set forth below under "Conditions of the Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent and (iv) to
amend the terms of the Exchange Offer in any manner. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendments by means of a prospectus
supplement that will be distributed to the registered holders of the Old Notes.
CONDITIONS OF THE EXCHANGE OFFER
The Exchange Offer is not conditioned upon any minimum principal amount of
the Old Notes being tendered for exchange. However, the Exchange Offer is
conditioned upon the declaration by the Commission of the effectiveness of the
Registration Statement of which this Prospectus constitutes a part.
TERMINATION OF CERTAIN RIGHTS
Pursuant to the Registration Rights Agreement, the Company agreed, at its
own expense, to (i) file on or prior to the 120th calendar day following the
Closing Date the Exchange Offer Registration Statement with the Commission with
respect to a registered offer to exchange the Old Notes for the New Notes to be
issued under the Indenture in the same aggregate principal amount as and with
the terms that will be identical in all respects to the Old Notes (except that
the New Notes will not contain terms that will be identical in all respects to
Additional Interest, transfer restrictions and registration rights), (ii) use
its best efforts to cause the Exchange Offer Registration Statement to be
declared effective under the Securities Act on or prior to the 180th calendar
day following the Closing Date and (iii) use its best effort to consummate the
Exchange Offer on or prior to the 210th calendar day following the Closing Date.
The Company has agreed to keep the Exchange Offer open for not less than 20
business days (or longer if required by applicable law) after the date notice of
the Exchange Offer is mailed to the Holders of the Old Notes.
In the event that changes in the law or applicable interpretations of the
staff of the Commission do not permit the Company to effect the Exchange Offer,
or if for any reason the Exchange Offer is not consummated within 210 days of
the Closing Date or in certain other circumstances, the Registration Rights
Agreement provides that the Company will, at its own expense, (i) as promptly as
practicable, and in any event on or prior to 90 days after such filing
obligation arises, file with the Commission a shelf registration statement (the
"Shelf Registration Statement") covering resales of the Old Notes, (ii) use its
best efforts to cause the Shelf Registration Statement to be declared effective
under the Securities Act on
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<PAGE>
or prior to 45 days after such filing occurs and (iii) keep effective the Shelf
Registration Statement until two years after its effective date (or such shorter
period that will terminate when all the Old Notes covered thereby (i) have been
sold pursuant thereto or (ii) are distributed to the public pursuant to Rule 144
under the Securities Act or are saleable pursuant to Rule 144(k) under the
Securities Act).
The Registration Rights Agreement provides that, subject to certain
exceptions, in the event of a Registration Default (as defined below), holders
of Old Notes are entitled to receive Additional Interest, with respect to the
first 90-day period immediately following the occurrence of such Registration
Default, at a rate of 0.35% per annum per $1,000 principal amount of Old Notes
held by such holders, increasing by an additional 0.35% per annum per $1,000
principal amount of Old Notes with respect to each subsequent 90-day period
until all Registration Defaults have been cured, up to a maximum of Additional
Interest of 1.5% per annum per $1,000 principal amount of Old Notes. A
"Registration Default" with respect to the Exchange Offer shall occur if: (i)
the Company fails to file any of the Registration Statements required by the
Registration Rights Agreement on or before the date specified for such filing,
(ii) any of such Registration Statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date") or (iii) (A) the Company fails to exchange all New
Notes for all Old Notes validly tendered and not withdrawn in accordance with
the terms of the Exchange Offer on or prior to the 30th day after the date on
which the Exchange Offer Registration Statement was declared effective or (B) if
applicable, the Shelf Registration Statement is declared effective but
thereafter ceases to be effective or usable in connection with resales of Notes
during the periods specified in the Registration Rights Agreement. Holders of
New Notes will not be, and upon consummation of the Exchange Offer, holders of
Old Notes will no longer be, entitled to (i) the right to receive Additional
Interest or (ii) certain other rights under the Registration Rights Agreement
intended for holders of Old Notes. The Exchange Offer shall be deemed
consummated upon the occurrence of the delivery by the Company to the Registrar
under the Indenture of New Notes in the same aggregate principal amount as the
aggregate principal amount of Old Notes that are validly tendered by holders
thereof pursuant to the Exchange Offer.
ACCRUED INTEREST
The New Notes will bear interest at a rate equal to 9 7/8% per annum, which
interest shall accrue from February 3, 1998 or from the most recent Interest
Payment Date with respect to the Old Notes to which interest was paid or duly
provided for. See "Description of Notes--Principal, Maturity and Interest."
PROCEDURES FOR TENDERING OLD NOTES
The tender of a holder's Old Notes as set forth below and the acceptance
thereof by the Company will constitute a binding agreement between the tendering
holder and the Company upon the terms and subject to the conditions set forth in
this Prospectus and in the accompanying Letter of Transmittal. Except as set
forth below, a holder who wishes to tender Old Notes for exchange pursuant to
the Exchange Offer must transmit such Old Notes, together with a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal, to the Exchange Agent at the address set
forth on the back cover page of this Prospectus prior to 5:00 p.m., New York
City time, on the Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS
OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF
THE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY
MAIL, IT IS RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR HAND DELIVERY
SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY
DELIVERY.
Any financial institution that is a participant in the DTC's Book-Entry
Transfer Facility system may make book-entry delivery of the Old Notes by
causing the DTC to transfer such Old Notes into the
28
<PAGE>
Exchange Agent's account in accordance with the DTC's procedures for such
transfer. In connection with a book-entry transfer, a Letter of Transmittal need
not be transmitted to the Exchange Agent, provided that the book-entry transfer
procedure must be complied with prior to 5:00 p.m., New York City time, on the
Expiration Date.
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant hereto are tendered (i) by a registered holder of the Old Notes who has
not completed either the box entitled "Special Exchange Instructions" or the box
entitled "Special Delivery Instructions" in the Letter of Transmittal, or (ii)
by an Eligible Institution (as defined). In the event that a signature on a
Letter of Transmittal or a notice of withdrawal, as the case may be, is required
to be guaranteed, such guarantee must be by a firm which is a member of a
registered national securities exchange or the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or otherwise be an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(collectively, "Eligible Institutions"). If the Letter of Transmittal is signed
by a person other than the registered holder of the Old Notes, the Old Notes
surrendered for exchange must either (i) be endorsed by the registered holder,
with the signature thereon guaranteed by an Eligible Institution or (ii) be
accompanied by a bond power, in satisfactory form as determined by the Company
in its sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an Eligible Institution. The term "registered
holder" as used herein with respect to the Old Notes means any person in whose
name the Old Notes are registered on the books of the Registrar.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
Old Notes not properly tendered and to reject any Old Notes the Company's
acceptance of which might, in the judgment of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer
(including the Letter of Transmittal and the instructions thereto) by the
Company shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes for exchange must be
cured within such period of time as the Company shall determine. The Company
will use reasonable efforts to give notification of defects or irregularities
with respect to tenders of Old Notes for exchange but shall not incur any
liability for failure to give such notification. Tenders of the Old Notes will
not be deemed to have been made until such irregularities have been cured or
waived.
If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing and, unless waived by the
Company, proper evidence satisfactory to the Company, in its sole discretion, of
such person's authority to so act must be submitted.
Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old Notes
are registered in the name of a broker, dealer, commercial bank, trust company
or other nominee and who wishes to tender Old Notes in the Exchange Offer should
contact such registered holder promptly and instruct such registered holder to
tender on such Beneficial Owner's behalf. If such Beneficial Owner wishes to
tender directly, such Beneficial Owner must, prior to completing and executing
the Letter of Transmittal and tendering Old Notes, make appropriate arrangements
to register ownership of the Old Notes in such Beneficial Owner's name.
Beneficial Owners should be aware that the transfer of registered ownership may
take considerable time.
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<PAGE>
By tendering, each registered holder will represent to the Company that,
among other things (i) the New Notes to be acquired in connection with the
Exchange Offer by the holder and each Beneficial Owner of the Old Notes are
being acquired by the holder and each Beneficial Owner in the ordinary course of
business of the holder and each Beneficial Owner, (ii) the holder and each
Beneficial Owner are not participating, do not intend to participate, and have
no arrangement or understanding with any person to participate, in the
distribution of the New Notes, (iii) the holder and each Beneficial Owner
acknowledge and agree that any person participating in the Exchange Offer for
the purpose of distributing the New Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the New Notes acquired by such person and cannot
rely on the position of the staff of the Commission set forth in no-action
letters that are discussed herein under "Resales of New Notes," (iv) that if the
holder is a broker-dealer that acquired Old Notes as a result of market-making
or other trading activities, it will deliver a Prospectus in connection with any
resale of New Notes acquired in the Exchange Offer, (v) the holder and each
Beneficial Owner understand that a secondary resale transaction described in
clause (iii) above should be covered by an effective registration statement
containing the selling security holder information required by Item 507 of
Regulation S-K of the Commission and (vi) neither the holder nor any Beneficial
Owner is an "affiliate," as defined under Rule 405 of the Securities Act, of the
Company except as otherwise disclosed to the Company in writing. In connection
with a book-entry transfer, each participant will confirm that it makes the
representations and warranties contained in the Letter of Transmittal.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes or any other
documents required by the Letter of Transmittal to the Exchange Agent prior to
the Expiration Date (or complete the procedure for book-entry transfer on a
timely basis) may tender their Old Notes according to the guaranteed delivery
procedures set forth in the Letter of Transmittal. Pursuant to such procedures:
(i) such tender must be made by or through an Eligible Institution and a Notice
of Guaranteed Delivery (as defined in the Letter of Transmittal) must be signed
by such Holder, (ii) on or prior to the Expiration Date, the Exchange Agent must
have received from the Holder and the Eligible Institution a properly completed
and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail
or hand delivery) setting forth the name and address of the Holder, the
certificate number or numbers of the tendered Old Notes, and the principal
amount of tendered Old Notes, stating that the tender is being made thereby and
guaranteeing that, within four business days after the date of delivery of the
Notice of Guaranteed Delivery, the tendered Old Notes, a duly executed Letter of
Transmittal and any other required documents will be deposited by the Eligible
Institution with the Exchange Agent and (iii) such properly completed and
executed documents required by the Letter of Transmittal and the tendered Old
Notes in proper form for transfer (or confirmation of a book-entry transfer of
such Old Notes into the Exchange Agent's account at the DTC) must be received by
the Exchange Agent within four business days after the Expiration Date. Any
Holder who wishes to tender Old Notes pursuant to the guaranteed delivery
procedures described above must ensure that the Exchange Agent receives the
Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old
Notes prior to 5:00 p.m., New York City time, on the Expiration Date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions to the Exchange Offer, the
Company will accept any and all Old Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer will be delivered promptly
after acceptance of the Old Notes. For purposes of the Exchange Offer, the
Company shall be deemed to have accepted validly tendered Old Notes, when, as,
and if the Company has given oral or written notice thereof to the Exchange
Agent.
30
<PAGE>
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents (or of confirmation of a
book-entry transfer of such Old Notes into the Exchange Agent's account at the
DTC); PROVIDED, HOWEVER, that the Company reserves the absolute right to waive
any defects or irregularities in the tender or conditions of the Exchange Offer.
If any tendered Old Notes are not accepted for any reason, such unaccepted Old
Notes will be returned without expense to the tendering Holder thereof as
promptly as practicable after the expiration or termination of the Exchange
Offer.
WITHDRAWAL RIGHTS
Tenders of the Old Notes may be withdrawn by delivery of a written notice to
the Exchange Agent, at its address set forth on the back cover page of this
Prospectus, at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes, as applicable), (iii) be signed
by the Holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by a bond power in the name of the
person withdrawing the tender, in satisfactory form as determined by the Company
in its sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an Eligible Institution together with the other
documents required upon transfer by the Indenture and (iv) specify the name in
which such Old Notes are to be re-registered, if different from the Depositor,
pursuant to such documents of transfer. Any questions as to the validity, form
and eligibility (including time of receipt) of such notices will be determined
by the Company, in its sole discretion. The Old Notes so withdrawn will be
deemed not to have been validly tendered for exchange for purposes of the
Exchange Offer. Any Old Notes which have been tendered for exchange but which
are withdrawn will be returned to the Holder thereof without cost to such Holder
as soon as practicable after withdrawal. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "The Exchange
Offer--Procedures for Tendering Old Notes" at any time on or prior to the
Expiration Date.
THE EXCHANGE AGENT; ASSISTANCE
United States Trust Company of New York is the Exchange Agent. All tendered
Old Notes, executed Letters of Transmittal and other related documents should be
directed to the Exchange Agent. Questions and requests for assistance and
requests for additional copies of the Prospectus, the Letter of Transmittal and
other related documents should be addressed to the Exchange Agent as follows:
BY REGISTERED OR CERTIFIED MAIL:
UNITED STATES TRUST COMPANY OF NEW YORK
P.O. BOX 844
COOPER STATION
NEW YORK, NY 10276-0844
ATTN: CORPORATE TRUST SERVICES
BY FACSIMILE:
(212) 780-0592
ATTENTION: CUSTOMER SERVICE
CONFIRM BY TELEPHONE: (800) 548-6565
31
<PAGE>
BY OVERNIGHT COURIER:
UNITED STATES TRUST COMPANY OF NEW YORK
770 BROADWAY, 13TH FLOOR
NEW YORK, NEW YORK 10003
ATTN: CORPORATE TRUST SERVICES
BY HAND:
UNITED STATES TRUST COMPANY OF NEW YORK
111 BROADWAY
LOWER LEVEL
NEW YORK, NEW YORK 10006
ATTN: CORPORATE TRUST SERVICES
CONFIRM BY TELEPHONE (800) 548-6565
FEES AND EXPENSES
All expenses incident to the Company's consummation of the Exchange Offer
and compliance with the Registration Rights Agreement will be borne by the
Company, including, without limitation: (i) all registration and filing fees
(including, without limitation, fees and expenses of compliance with state
securities or Blue Sky laws), (ii) printing expenses (including, without
limitation, expenses of printing certificates for the New Notes in a form
eligible for deposit with the DTC and of printing Prospectuses), (iii)
messenger, telephone and delivery expenses, (iv) fees and disbursements of
counsel for the Company, (v) fees and disbursements of independent certified
public accountants, (vi) rating agency fees, (vii) internal expenses of the
Company (including, without limitation, all salaries and expenses of officers
and employees of the Company performing legal or accounting duties) and (viii)
fees and expenses incurred in connection with the listing of the New Notes on a
securities exchange, if any.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss will be recognized by the Company for accounting
purposes. The expenses of the Exchange Offer will be amortized over the term of
the New Notes.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion reflects the opinion of Gibson, Dunn, & Crutcher
LLP, counsel to the Company, as to material federal income tax consequences
expected to result from the Exchange Offer. An opinion of counsel is not binding
on the Internal Revenue Service ("IRS") or the courts, and there can be no
assurances that the IRS will not take, and that a court would not sustain, a
position contrary to that
32
<PAGE>
described below. Moreover, the following discussion is for general information
only and does not constitute comprehensive tax advice to any particular Holder
of Old Notes. The summary is based on the current provisions of the Internal
Revenue Code of 1986, as amended, and applicable Treasury regulations, judicial
authority and administrative pronouncements. The tax consequences described
below could be modified by future changes in the relevant law, which could have
retroactive effect. Each Holder of Old Notes should consult its own tax adviser
as to these and any other federal income tax consequences of the Exchange Offer
as well as any tax consequences to it under foreign, state, local or other law.
In the opinion of Gibson, Dunn & Crutcher LLP, exchanges of Old Notes for
Notes pursuant to the Exchange Offer will be treated as a modification of the
Old Notes that does not constitute a material change in their terms, and the
Company intends to treat the exchanges in that manner. Under that approach, a
Note is treated as a continuation of the corresponding Old Note. An exchanging
Holder's holding period for a Note would include such Holder's holding period
for the Old Note. Such Holder would not recognize any gain or loss, and such
Holder's basis in the Note would be the same as such Holder's basis in the Old
Note. The Exchange Offer will result in no federal income tax consequences to a
non-exchanging Holder.
RESALES OF THE NEW NOTES
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer to a holder in exchange for Old
Notes may be offered for resale, resold and otherwise transferred by such holder
(other than (i) a broker-dealer who purchased Old Notes directly from the
Company for resale pursuant to Rule 144A under the Securities Act or any other
available exemption under the Securities Act or (ii) a person that is an
affiliate of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such holder is acquiring the New Notes in
the ordinary course of business and is not participating, and has no arrangement
or understanding with any person to participate, in the distribution of the New
Notes. The Company has not requested or obtained an interpretive letter from the
Commission staff with respect to this Exchange Offer, and the Company and the
holders are not entitled to rely on interpretive advice provided by the staff to
other persons, which advice was based on the facts and conditions represented in
such letters. However, the Exchange Offer is being conducted in a manner
intended to be consistent with the facts and conditions represented in such
letters. If any holder acquires New Notes in the Exchange Offer for the purpose
of distributing or participating in a distribution of the New Notes, such holder
cannot rely on the position of the staff of the Commission enunciated in MORGAN
STANLEY & CO. INCORPORATED (available June 5, 1991) and EXXON CAPITAL HOLDINGS
CORPORATION (available April 13, 1989), or interpreted in the Commission's
letter to SHEARMAN AND STERLING (available July 2, 1993), or similar no-action
or interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction, unless an exemption from registration is otherwise
available. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making or other trading activities, must acknowledge that
it will deliver a Prospectus in connection with any resale of such New Notes.
See "Plan of Distribution."
It is expected that the New Notes will be freely transferable by the holders
thereof, subject to the limitations described in the immediately preceding
paragraph. Sales of New Notes acquired in the Exchange Offer by holders who are
"affiliates" of the Company within the meaning of the Securities Act will be
subject to certain limitations on resale under Rule 144 of the Securities Act.
Such persons will only be entitled to sell New Notes in compliance with the
volume limitations set forth in Rule 144, and sales of New Notes by affiliates
will be subject to certain Rule 144 requirements as to the manner of sale,
notice and the availability of current public information regarding the Company.
The foregoing is a summary only of Rule 144 as it may apply to affiliates of the
Company. Any such persons must consult their own legal counsel for advice as to
any restrictions that might apply to the resale of their Notes.
33
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 28, 1998, the capitalization of
the Company on (i) a historical basis and (ii) a pro forma basis giving effect
to the Power Ten Acquisition. The Old Notes surrendered in exchange for the New
Notes will be retired and canceled and cannot be reissued. Accordingly, issuance
of the New Notes will not result in any increase or decrease in the indebtedness
of the Company. As such, no effect has been given to the Exchange Offer in the
table below. This table should be read in conjunction with "The
Recapitalization," "Description of Notes," "Description of New Credit Facility,"
"Description of Preferred Stock and Warrants" and the Consolidated Financial
Statements of the Company and Power Ten and the notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 28, 1998
-----------------------
HISTORICAL PRO FORMA
---------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt:
New Credit Facility(1)................................................. $ -- $ 15,000
9 7/8% Senior Notes due 2008........................................... 90,000 90,000
---------- -----------
Total debt........................................................... 90,000 105,000
Series A Redeemable Preferred Stock(2)................................... 8,478 8,478
Stockholders' equity:
Series B Convertible Preferred Stock(3)................................ -- 5,000
Common Stock........................................................... 23 23
Additional Paid-in-Capital............................................. (67,926) (67,926)
Retained Earnings...................................................... 6,432 6,432
---------- -----------
Total Stockholders' Deficit.......................................... (61,471) (56,471)
---------- -----------
Total Capitalization............................................... $ 37,007 $ 57,007
---------- -----------
---------- -----------
</TABLE>
- ------------------------------
(1) The New Credit Facility contains a $15.0 million Revolving Facility and a
$15.0 million Term Facility. All of the proceeds from the Term Facility were
used to finance a portion of the Power Ten Acquisition.
(2) Net of $1,700 attributed to the value of the Warrants. Dividends on the
Redeemable Preferred Stock are cumulative, accrue quarterly at the rate of
10% per annum and are paid in-kind through January 31, 2001. Includes $150
of dividends accrued from February 3, 1998 through March 28, 1998 and $28 of
accretion of discount on Preferred Stock. See "Description of Preferred
Stock and Warrants."
(3) The Series B Convertible Preferred Stock was issued in connection with the
Power Ten Acquisition. See "Description of Preferred Stock and
Warrants--Convertible Preferred Stock."
34
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
ELGAR HOLDINGS, INC.:
The selected consolidated financial data below for the fiscal years ended
April 3, 1996, March 29, 1997 and March 28, 1998 and as of March 29, 1997 and
March 28, 1998 have been derived from the Consolidated Financial Statements of
the Company which have been audited by Arthur Andersen LLP, independent public
accountants, and are included elsewhere in this Prospectus. The Company changed
its fiscal year from the Saturday closest to September 30 to the Saturday
closest to March 31 after the completion of its fiscal year ended September 30,
1995. As a result, the data presented below for the fiscal years ended September
30, 1995 and April 3, 1996 contain an overlap of six months (from March 31, 1995
to September 30, 1995). The six-month overlap includes $20,220,000 of net sales
and $207,000 of net income. The selected financial data as of and for the fiscal
years ended October 1, 1994 and September 30, 1995 have been derived from the
Predecessor's Unaudited Consolidated Financial Statements for those periods,
which unaudited financial statements are not included elsewhere herein. The
unaudited Consolidated Financial Statements for each of the periods referred to
above include, in the opinion of management, all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the results
for the unaudited periods. The information presented below is qualified in its
entirety by, and should be read in conjunction with, "Selected Historical
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of the Company and related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR(1) THE COMPANY
--------------------------------- ----------------------
FISCAL YEAR ENDED FISCAL YEAR ENDED
--------------------------------- ----------------------
OCT. 1, SEPT. 30, APR. 3, MAR. 29, MAR. 28,
1994 1995 1996 1997 1998
---------- ---------- --------- ---------- ----------
(UNAUDITED) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales.............................................. $ 31,480 $ 42,880 $ 42,309 $ 45,578 $ 62,496
Cost of sales.......................................... 19,896 27,313 26,468 26,973 32,944
---------- ---------- --------- ---------- ----------
Gross profit........................................... 11,584 15,567 15,841 18,605 29,552
Selling, general and administrative expense(2)......... 4,972 6,707 7,406 7,770 9,434
Research and development and engineering expenses...... 3,163 4,052 4,168 3,973 6,242
Amortization expense(3)................................ 2,051 2,149 2,149 1,314 1,314
---------- ---------- --------- ---------- ----------
Operating income....................................... 1,398 2,659 2,118 5,548 12,562
Interest expense, net.................................. 2,736 3,017 3,578 1,839 3,341
---------- ---------- --------- ---------- ----------
Income (loss) before income tax provision (benefit).... (1,338) (358) (1,460) 3,709 9,221
Income tax provision (benefit)......................... 285 716 176 1,872 4,448
---------- ---------- --------- ---------- ----------
Net income (loss)...................................... $ (1,623) $ (1,074) $ (1,636) $ 1,837 $ 4,773
---------- ---------- --------- ---------- ----------
---------- ---------- --------- ---------- ----------
BALANCE SHEET DATA:(4)
Total assets........................................... $ 38,310 $ 38,992 $ 37,891 $ 36,597 $ 44,912
Total debt............................................. 47,431 49,326 19,676 15,216 90,000
Stockholders' equity (deficit)......................... (13,485) (14,557) 14,000 15,837 (61,471)
OTHER DATA:
Operating cash flows................................... $ 2,192 $ 5,312 $ 7,462
Investing cash flows................................... $ (611) $ (14,593) $ (1,218)
Financing cash flows................................... $ (442) $ 9,499 $ (4,269)
Adjusted EBITDA(5)..................................... $ 3,987 $ 5,495 $ 5,052 $ 7,668 $ 15,118
Adjusted EBITDA margin(5).............................. 12.7% 12.8% 11.9% 16.8% 24.2%
Depreciation........................................... 538 687 785 806 883
Capital expenditures................................... 1,155 780 611 621 1,228
Ratio of earnings to combined fixed charges and
preferred stock dividends(6)......................... 2.97x 3.52x
</TABLE>
- ------------------------------
(1) Presents certain data of the Predecessor prior to the acquisition of Elgar
by Carlyle-EEC Holdings, Inc. on April 3, 1996.
35
<PAGE>
(2) In Fiscal 1998, selling, general and administrative expenses include
approximately $359 of nonrecurring expenditures relating to the
Recapitalization.
(3) Amortization expense of the Predecessor represents the amortization of
goodwill associated with a prior acquisition of Elgar in
1989 and Elgar's acquisition of Sorensen in 1994. Amortization expense of
the Company represents the amortization of goodwill associated with the
acquisition of Elgar by Carlyle-EEC Holdings, Inc. on April 3, 1996. See
Notes 1 and 2 to Consolidated Financial Statements.
(4) Balance sheet data as of April 3, 1996 reflects the allocation of the
purchase price associated with the acquisition of Elgar by Carlyle-EEC
Holdings, Inc. on April 3, 1996.
(5) EBITDA is the sum of income (loss) before income taxes, interest,
depreciation and amortization expense. EBITDA is presented because the
Company believes that it is a widely accepted financial indicator of a
company's ability to service indebtedness. However, EBITDA should not be
considered as an alternative to net income or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of a company's
operating performance or as a measure of liquidity. In fiscal 1998, EBITDA
excludes the nonrecurring expenditures described in note (2) above.
(6) In calculating the ratio of earnings to combined fixed charges and preferred
stock dividends, earnings consist of income (loss) before income tax
provision (benefit), plus fixed charges. Fixed charges consist of interest
incurred (which includes amortization of deferred financing costs) whether
expensed or capitalized and a portion of rental expense which management
believes is a reasonable approximation of an interest factor. In fiscal
1994, 1995 and 1996, earnings were insufficient to cover fixed charges by
approximately $1,338,000, $358,000 and $1,460,000, respectively.
POWER TEN
The selected financial data below for Power Ten as of and for the fiscal
year ended April 4, 1998 have been derived from the audited financial statements
of Power Ten and are included elsewhere in this Prospectus. The information
presented below is qualified in its entirety by, and should be read in
conjunction with, the Financial Statements of Power Ten and related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
APRIL 4, 1998
----------------
(IN THOUSANDS)
<S> <C>
OPERATING DATA:
Net sales................................................................... $ 10,076
Cost of sales............................................................... 5,482
-------
Gross profit................................................................ 4,594
Selling, general and administrative expense(1).............................. 3,453
Research and development and engineering expenses........................... 589
-------
Operating income............................................................ 552
Interest expense, net....................................................... 5
-------
Income before income tax provision.......................................... 547
Income tax provision........................................................ 223
-------
Net income.................................................................. $ 324
-------
-------
BALANCE SHEET DATA:
Total assets................................................................ $ 3,409
Total debt.................................................................. 1,628
Stockholders' equity........................................................ 1,781
OTHER DATA:
Operating cash flows........................................................ $ 1,047
Investing cash flows........................................................ $ (55)
Financing cash flows........................................................ $ (125)
Adjusted EBITDA(2).......................................................... $ 2,454
Adjusted EBITDA margin(2)................................................... 24.4%
Depreciation................................................................ $ 59
Capital expenditures........................................................ $ 90
</TABLE>
- ------------------------------
(1) Selling, general and administrative expense includes $1,843 of nonrecurring
expenditures relating to compensation to the principal stockholders of Power
Ten.
(2) Adjusted EBITDA is the sum of income before income taxes, interest,
depreciation and amortization and certain non-recurring expenses. Adjusted
EBITDA is presented because the Company believes that it is a widely
accepted financial indicator of a company's ability to service indebtedness.
However, Adjusted EBITDA should not be considered as an alternative to net
income or to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) and should not be
construed as an indication of a company's operating performance or as a
measure of liquidity. Adjusted EBITDA for the fiscal year ended April 4,
1998 excludes the nonrecurring expenditures described in Note (1) above.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis should be read in conjunction with
"Selected Historical Consolidated Financial Data" and the audited Consolidated
Financial Statements of the Company and the notes thereto included elsewhere in
this Prospectus.
Management views the Company's business in five principal markets, which are
(i) programmable DC power, which is a type of programmable power supply used to
test products that require direct current ("DC") inputs, such as printed circuit
boards, semiconductors, medical equipment, telecommunications equipment,
avionics and numerous other types of electronic products, (ii) Solar Array
Simulators ("SAS"), which are used for extensive testing of satellite systems
throughout the manufacturing process and just prior to launch, (iii) the CASS
Program for the U.S. Navy (for which the Company provides programmable AC and
DC, fixed DC and power conditioning products, as discussed in this paragraph),
(iv) programmable AC power, which is a type of programmable power supply used to
test alternating current ("AC") products such as avionics, computers, DC power
supplies, appliances and many other types of electronic products and (v) other
products and services, which include power conditioning and uninterruptible
power supply ("UPS") products (which supply back-up power principally to
military computer and communications systems and oil exploration companies for
data logging applications), and customer service, which provides repair service
and spare parts to each of the markets listed above.
Founded in 1965, Elgar initially focused on providing solid state line
conditioning and frequency changers to the AC power test and measurement market.
In 1987, Elgar was selected as a sole source supplier to Lockheed Martin
(formerly GE Aerospace) for The Consolidated Automated Support System ("CASS")
Program for the U.S. Navy. In the early 1990's, Elgar's current management team
concluded that the large and diverse DC market was the most appropriate market
to target in order to expand Elgar's commercial business. In an effort to enter
the DC market quickly and efficiently, in 1994 Elgar acquired the Sorensen
Division from a subsidiary of Raytheon Corporation for approximately $4 million.
A market leader with a strong brand name, one of the broadest DC product lines
on the market and a well-established customer base, Sorensen complemented the
Company's leading position in the programmable AC market and provided the
Company with one of the most comprehensive high-end product lines for both the
AC and DC markets.
For Fiscal 1998, the Company's net sales were derived (i) 52.2% from
programmable DC power, (ii) 13.5% from Solar Array Simulators, (iii) 14.2% from
the CASS Program, (iv) 11.3% from programmable AC power and (v) 8.8% from other
products and services.
The Company's revenues and EBITDA are subject to downturns in the U.S. and
world economies which could have an effect on markets for computers and other
electronic and telecommunications equipment in particular. Other factors that
may have an influence on the Company's operating results include the timing of
the receipt of major orders from major customers, product mix, competitive
pricing pressures, and the Company's ability to design, manufacture and
introduce new products on a cost effective and timely basis.
The Company was recently notified by Racal that a significant end-user for
Elgar's current AT-8000 DC power supplies has decided to cease orders for such
product until anticipated "next generation" technology is available in early
1999. As a result, management expects that revenues from Racal will be
significantly lower in fiscal 1999 than they were in fiscal 1998. See "Risk
Factors--Importance of Key Customers."
37
<PAGE>
RESULTS OF OPERATIONS
The data and discussion contained herein do not include the pro forma
results of Power Ten. The following table sets forth certain income statement
information and other data for the Company as a percentage of net sales for the
periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------
APRIL 3, MARCH 29, MARCH 28,
1996(1) 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 62.6 59.2 52.7
----- ----- -----
Gross profit................................................ 37.4 40.8 47.3
Selling, general and administrative expenses(2)............. 17.5 17.0 15.1
Research and development and engineering expenses........... 9.9 8.7 10.0
Amortization expense........................................ 5.0 2.9 2.1
----- ----- -----
Operating income............................................ 5.0% 12.2% 20.1%
----- ----- -----
----- ----- -----
OTHER DATA:
Adjusted EBITDA %(3)........................................ 11.9% 16.8% 24.2%
</TABLE>
- ------------------------------
(1) Presents certain Results of Operations of the Predecessor prior to the
acquisition of Elgar by Carlyle-EEC Holdings, Inc. on April 3, 1996.
(2) In Fiscal 1998, selling, general and administrative expenses include
approximately $359 of nonrecurring expenditures relating to the
Recapitalization.
(3) Fiscal 1998 EBITDA excludes nonrecurring expenditures described in note (2)
above.
FISCAL YEAR ENDED MARCH 28, 1998 VERSUS FISCAL YEAR ENDED MARCH 29, 1997
NET SALES. Net sales in Fiscal 1998 were $62.5 million, an increase of
$16.9 million, or 37.1%, from net sales of $45.6 million in Fiscal 1997. This
increase was primarily attributable to a $13.6 million increase in sales from
the DC product line and a $3.3 million increase in SAS sales. The increase in
sales from Fiscal 1997 to Fiscal 1998 was due to volume increases.
GROSS PROFIT. Gross profit in Fiscal 1998 was $29.6 million, an increase of
$11.0 million, or 59.1%, from gross profit of $18.6 million in Fiscal 1997. The
increase in gross profit was primarily attributable to an increase in net sales,
as discussed above, and to a lesser extent, to an increase in the gross profit
percentage. An increase in the gross profit percentage from 40.8% to 47.3% was
primarily due to a more favorable mix of business, improved manufacturing
efficiencies and lower material costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses were $9.4 million in Fiscal 1998, an increase
of $1.6 million, or 20.5%, from SG&A expenses of $7.8 million in Fiscal 1997.
SG&A expenses decreased as a percentage of net sales from 17.0% in Fiscal 1997
to 15.1% in Fiscal 1998. The increase in dollars was primarily due to higher
sales volume, which generated an additional $0.6 million in commissions and
merit increases for employees, along with $0.4 million of nonrecurring
expenditures incurred in connection with the Recapitalization.
RESEARCH AND DEVELOPMENT AND ENGINEERING EXPENSES. Research and development
and engineering expenses in Fiscal 1998 were $6.2 million, an increase of $2.2
million, or 55.0%, from research and development and engineering expenses of
$4.0 million in Fiscal 1997. Research and development and engineering expenses
increased as a percentage of net sales from 8.7% to 10.0%. The increase was due
to an increase in engineering personnel of six employees and a $0.5 million
increase in fees paid to consultants primarily to support SAS development.
38
<PAGE>
AMORTIZATION EXPENSE. Amortization expense was $1.3 million in each of
Fiscal 1997 and Fiscal 1998. Amortization expense is comprised of the
amortization of goodwill associated with the April 1996 acquisition of Elgar by
Carlyle-EEC Holdings, Inc.
OPERATING INCOME. Operating income was $12.6 million in Fiscal 1998, an
increase of $7.1 million, or 129.1%, from operating income of $5.5 million in
Fiscal 1997. Operating income increased as a percentage of net sales from 12.2%
in Fiscal 1997 to 20.1% in Fiscal 1998. The increase was due to the factors set
forth above.
FISCAL YEAR ENDED MARCH 29, 1997 VERSUS FISCAL YEAR ENDED APRIL 3, 1996
NET SALES. Net sales in Fiscal 1997 were $45.6 million, an increase of $3.3
million, or 7.8%, from net sales of $42.3 million in the fiscal year ended April
3, 1996 ("Fiscal 1996"). The increase was primarily attributable to (i) a $2.7
million increase in SAS sales due to increased penetration of the European
market, follow-on business from existing programs and customer-funded research
and development, and (ii) an increase in DC sales of $1.9 million, both of which
were offset by a decrease of $2.1 million in CASS sales in accordance with the
Navy's implementation plan for test systems under the CASS Program.
GROSS PROFIT. Gross profit in Fiscal 1997 was $18.6 million, the increase
of $2.8 million from gross profit of $15.8 million in Fiscal 1996. The increase
in gross profit was primarily attributable to an increase in gross profit
percentage and an increase in net sales, as discussed above. An increase in the
gross profit percentage from 37.4% to 40.8% was primarily due to a higher-margin
mix of products and improved manufacturing efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses were $7.8
million in Fiscal 1997, an increase of $0.4 million from SG&A expenses of $7.4
million in Fiscal 1996. SG&A expenses decreased as a percentage of net sales
from 17.5% to 17.0%. The increase in dollars was primarily due to increased
sales and the related increase in higher commissions, partially offset by lower
bonus compensation and fringe benefit expense.
RESEARCH AND DEVELOPMENT AND ENGINEERING EXPENSES. Research and development
and engineering expenses in Fiscal 1997 were $4.0 million, a decrease of $0.2
million from research and development and engineering expenses of $4.2 million
in Fiscal 1996. Research and development and engineering expenses decreased as a
percentage of net sales from 9.9% to 8.7%. The decrease in dollars was due to an
increase in customer-funded research and development that was charged to cost of
sales in Fiscal 1997.
AMORTIZATION EXPENSE. Amortization expense was $1.3 million in Fiscal 1997,
a decrease of $0.8 million from amortization expense of $2.1 million in Fiscal
1996. The decrease was due to a lower amount of goodwill being amortized in
Fiscal 1997 (associated with the April 1996 acquisition of Elgar by Carlyle-EEC
Holdings, Inc.) as compared to Fiscal 1996 (associated with the 1989 acquisition
of Elgar by Dobson Park Industries plc and the 1994 acquisition of Sorensen by
Elgar).
OPERATING INCOME. Operating income was $5.5 million in Fiscal 1997, an
increase of $3.4 million from operating income of $2.1 million in Fiscal 1996.
Operating income as a percentage of net sales increased from 5.0% to 12.2%. The
increase was due to the factors set forth above.
BACKLOG
The Company's estimated backlog at March 28, 1998 was approximately $22.0
million, all of which is expected to be shipped in fiscal 1999. At March 28,
1998, approximately 37.7% of backlog was comprised of orders for the CASS
Program and 35.0% of programmable DC orders, principally in connection with the
Company's semiconductor business through Racal. See "Risk Factors--Importance of
Key Customers" and "Business--Significant Customers." Backlog was $19.3 million
at March 29, 1997 and $15.7 million at April 3, 1996. The Company's backlog
consists of product orders for which a customer purchase order has
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been received and accepted and which is scheduled for shipment. Orders are
subject to rescheduling or cancellation by the customer, usually without
penalty. Backlog also consists of customer-funded research and development
payable under support contracts with the Company's customers and orders for
billable services. Because of possible changes in product delivery schedules,
cancellation of product orders and sales will sometimes reflect orders shipped
in the same month they are received, the Company's backlog at any particular
date is not necessarily indicative of actual sales for any succeeding period.
Moreover, the Company does not believe that backlog is necessarily indicative of
its future results of operations or prospects.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW. The Company's principal uses of cash are to finance working
capital, debt service and capital expenditures. Historically, the Company has
funded its activities principally from working capital and a line of credit.
Cash flow provided by operating activities for Fiscal 1998 was $7.5 million, an
increase of $2.2 million from cash flow of $5.3 million provided by operating
activities in Fiscal 1997. The $2.2 million improvement in cash flow provided by
operating activities was primarily attributable to a $2.9 million increase in
net income and a $1.9 million increase in accrued liabilities, offset by a $2.5
million increase in inventories and a $0.1 million increase in accounts
receivable.
CAPITAL REQUIREMENTS. Capital expenditures were $611,000, $621,000 and
$1,228,000 in each of Fiscal 1996, 1997 and 1998, respectively. The Fiscal 1998
increase of $607,000 over Fiscal 1997 spending was primarily attributable to
expenditures related to current facility expansion.
SOURCES OF CAPITAL. The New Credit Facility, which provides for a $15.0
million Revolving Facility and a $15.0 million Term Facility, matures on
February 3, 2003. Loans made pursuant to the Revolving Facility may be borrowed,
repaid and reborrowed from time to time until February 3, 2003, subject to the
satisfaction of certain conditions on the date of any such borrowing. Payments
under the Term Facility will be pursuant to an amortization schedule with a
final maturity date of February 3, 2003. Indebtedness under the New Credit
Facility bears interest at a floating rate equal to, at Elgar's option, the
Eurodollar Rate plus a margin of 2.75%, or the Base Rate plus a margin of 1.75%.
The margins are subject to reduction as set forth in the New Credit Agreement.
Indebtedness under the New Credit Facility is (i) secured by a first priority
security interest in substantially all of the assets of EHI, Elgar and Power Ten
(including, without limitation, accounts receivable, inventory, machinery,
equipment, contracts and contract rights, trademarks, copyrights, patents,
license agreements and general intangibles), (ii) guaranteed by EHI and Power
Ten on a senior basis and (iii) secured by a pledge of all of the outstanding
capital stock of Elgar and Power Ten. The New Credit Facility contains customary
covenants restricting the Company's ability to, among other things, incur
additional indebtedness, create liens or other encumbrances, pay dividends or
make other restricted payments, make investments, loans and guarantees or sell
or otherwise dispose of a substantial portion of assets to, or merge or
consolidate with, another entity. The New Credit Facility also contains a number
of financial covenants that require the Company to meet certain financial ratios
and tests and provide that a "change of control" will constitute an event of
default. For a more complete description of the New Credit Facility, see "Risk
Factors--Significant Leverage and Debt Service," "--Ranking of Notes; Asset
Encumbrance," "--Restrictive Covenants" and "Description of New Credit
Facility."
The Company anticipates that its principal uses of cash will be working
capital requirements, debt service requirements and capital expenditures. Based
upon current and anticipated levels of operations, management believes that its
cash flow from operations, together with amounts available under the New Credit
Facility, will be adequate to meet its anticipated requirements for the next 12
months and the foreseeable future for working capital, interest payments,
amortization of the Term Facility and capital expenditures. Management also
believes that these funds will provide it with sufficient liquidity and capital
resources for it to meet its current and future financial obligations, including
the payment of interest on the Notes, as well as to provide funds for working
capital, capital expenditures and other needs. No
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assurance can be given, however, that this will be the case. As a holding
company with no operations or assets other than its ownership of the capital
stock of Elgar, EHI must rely on dividends and other payments from Elgar to
generate the funds necessary to meet its obligations, including the payment of
principal of and interest on the Notes. Although the payment of dividends from
Power Ten to Elgar and from Elgar to EHI may be restricted by state corporate
laws, there are no contractual restrictions which prohibit Power Ten and Elgar
from making such upstream distributions. Depending upon its rate of growth and
profitability, the Company may require additional equity or debt financing to
meet its working capital requirements or capital equipment needs. There can be
no assurance that additional financing will be available when required, or if
available, will be on terms satisfactory to the Company. The Company's future
operating performance and ability to service or refinance the Notes and to
repay, extend or refinance indebtedness drawn under the New Credit Facility will
be subject to future economic conditions and to financial, business and other
factors, many of which may be beyond the Company's control.
POWER TEN ACQUISITION. On May 29, 1998, the Company acquired all of the
outstanding capital stock of Power Ten for $17,800,000, subject to certain
post-closing working capital adjustments. The Company financed the purchase
price and certain transaction expenses with $15 million of proceeds from the
Term Facility and the issuance of $5 million in aggregate liquidation value of
Convertible Preferred Stock.
INFLATION AND GENERAL ECONOMIC CONDITIONS
Although the Company cannot accurately anticipate the effect of inflation on
its operations, it does not believe that inflation has had, or is likely in the
foreseeable future to have, a material impact on its results of operations. The
Company does not have a significant number of fixed-price contracts where it
bears the risk of cost increases. The only contract with fixed prices beyond 12
months is the CASS Program which has options for 24 months of production
(representing $9.8 million of revenue to the Company for fiscal 2000 through
fiscal 2001). There is an escalation factor of 4.5% per year per option on a
cumulative basis.
The Company's operating results would be adversely affected by increases in
interest rates which would result in higher interest payments by the Company
under its variable rate credit facilities. The Company has not historically
entered into hedging transactions with respect to its variable rate debt other
than interest rate ceilings on its senior debt which expire on April 1, 1999.
YEAR 2000 COMPLIANCE
Many computer programs have been written using two digits rather than four
to define the applicable year. Computer programs with time-sensitive software
may recognize a date using "00" as the year 1900 rather the year 2000. This
"year 2000" issue could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
With a view to the year 2000 issue, the Company has undertaken a detailed
review of all of the operating systems, software applications and hardware used
in its operations. The Company anticipates completing all necessary software
updates by the end of calendar 1998, and all hardware updates by the middle of
calendar 1999, in order to be fully year-2000 compliant. Based on the foregoing,
management does not believe that the "year 2000" issue will materially affect
its operations. Additionally, the Company currently does not expect that the
year 2000 issue will materially affect its operations due to problems
encountered by its suppliers, customers or end-users for its products, although
no assurances can be given as to this.
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BUSINESS
RECENT DEVELOPMENTS
On May 29, 1998, Elgar acquired all of the outstanding capital stock of
Power Ten for $17,800,000 in cash, subject to a post-closing working capital
adjustment. Power Ten specializes in developing and manufacturing high-quality,
high-power DC power supplies. Headquartered in Los Gatos, California, Power Ten
is a leader in the design and promotion of highly engineered switching-regulator
supplies marketed under the Power Ten brand name to both leading semiconductor
manufacturers and OEMs of production test equipment. For the latest twelve
months ended April 4, 1998, Power Ten generated approximately $10.1 million of
revenues, $552,000 of operating income and $2.5 million of Adjusted EBITDA.
Management believes the acquisition of Power Ten represents a strategic fit
for Elgar's core programmable power supplies business. Power Ten is expected to
add significant depth to Elgar's existing product offerings, OEM distribution
channels and product development capabilities. In particular, management
believes that Power Ten's high-power DC power supplies can be marketed
effectively under the Sorensen brand name to Elgar's existing test and
measurement customers, thus providing incremental revenues to the consolidated
company. In addition, while approximately 25% of Power Ten's revenues in its
fiscal year ended September 30, 1997 were generated from international sales,
management believes it can improve Power Ten's European presence by utilizing
Elgar's existing European distribution channels.
OVERVIEW
The Company is a leader in the design and manufacture of programmable power
equipment and systems used to test electronic equipment during development,
manufacture and operation. With one of the most recognized brand names and
broadest product offerings in a fragmented industry, the Company is one of the
largest manufacturers of programmable power equipment in the United States. The
Company's products are an integral component of overall systems' testing
conducted by a broad range of manufacturers and end-users of electronic
equipment to ensure product quality and performance. Power testing is a critical
procedure in a multitude of applications, including satellites, weapons systems
and medical equipment, which demand zero-fault tolerance. Over the period from
fiscal 1993 through Fiscal 1998, the Company's net sales grew at a compounded
annual growth rate in excess of 22.2% principally due to significant growth in
the market for programmable power equipment driven by the proliferation of
increasingly sophisticated electronic components in a wide range of
applications, particularly in telecommunications and computers.
Management views the Company's business in five principal markets, which are
(i) programmable DC power, which is a type of programmable power supply used to
test products that require direct current ("DC") inputs, such as components,
printed circuit boards, semiconductors, medical equipment, telecommunications
equipment, avionics and numerous other types of electronic products, (ii) Solar
Array Simulators, which are used for extensive testing of satellite systems
throughout the manufacturing process and just prior to launch, (iii) the CASS
Program for the U.S. Navy (for which the Company provides programmable AC and
DC, fixed DC and power conditioning products), (iv) programmable AC power, which
is a type of programmable power supply used to test alternating current ("AC")
products such as avionics, computers, DC power supplies, appliances and many
other types of electronic products and (v) other, which consists of power
conditioning and uninterruptible power supply ("UPS") products, which supply
back-up power principally to military computer and communications systems and
oil exploration companies for data logging applications, and customer service,
which provides repair service and spare parts to each of the markets listed
above.
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BACKGROUND
Founded in 1965, Elgar initially focused on providing solid state line
conditioning and frequency changers to the AC power test and measurement market.
In 1987, Elgar was selected as a sole source supplier to Lockheed Martin
(formerly GE Aerospace) for the CASS Program for the U.S. Navy. In the early
1990's, Elgar's current management team concluded that the large and diverse DC
market was the most appropriate market to target in order to expand Elgar's
commercial business. In an effort to enter the DC market quickly and
efficiently, in 1994 Elgar acquired the Sorensen Division from a subsidiary of
Raytheon Corporation for approximately $4.0 million. A market leader with a
strong brand name, one of the broadest DC product lines on the market and a
well-established customer base, Sorensen complemented the Company's leading
position in the programmable AC market and provided the Company with one of the
most comprehensive high-end product lines for both the AC and DC markets.
Elgar was privately held from its founding until 1979, when it was purchased
by Onan Corp. In September 1986, Elgar's then-existing management team took the
Company private through a leveraged buyout. In 1989, Dobson Park Industries plc,
a publicly-traded, UK-based conglomerate, acquired Elgar. During the fall of
1995, Dobson Park was acquired by Harnischfeger Industries, Inc., which was
principally interested in Dobson Park's coal mining equipment business.
Determining Elgar's operations to be noncore to its strategy, in April 1996
Harnischfeger sold Elgar to management, The Carlyle Group and GFI Energy
Ventures LLC in a leveraged buyout.
INDUSTRY OVERVIEW
Test and measurement ("T&M") products are used to evaluate the design
parameters, specifications and operation of a variety of electronic equipment in
the commercial and military sectors at the development, manufacturing and/or
deployment stages. The T&M market is fragmented with numerous companies
operating in several specialized segments. Within the overall testing market,
the Company competes in numerous programmable power niches, including
programmable DC power, programmable AC power and satellite test systems.
According to a FROST & SULLIVAN study of world T&M equipment manufacturers,
growth in the T&M market has correlated with growth and advancements in the
electronics industry. The use of test and measurement equipment instrumentation
has increased significantly with the increased sophistication of electronic
equipment and the associated need for reliable performance and demanding
specifications.
Power supplies are critical in the production process for a number of
end-users that require versatile instruments to generate specified series of
power conditions to evaluate performance of components, subassemblies or
end-products under real world conditions. Power is conditioned and transformed
into either an alternating current ("AC"), which is similar to that coming from
an outlet, or direct current ("DC"), which is similar in form to the power
coming from a battery. Programmable AC power supplies provide power which is
converted to a form that changes voltage continuously and are used to test
devices that require AC power such as consumer appliances and avionics. The
output can be varied by computer program to determine susceptibility of a test
item to changes in voltage, frequency and phase. AC customers include the
military and appliance, computer and power supply manufacturers.
Programmable DC power supplies provide output with steady voltage and are
used to test or stress devices such as electronic printed circuit boards and
avionics that require DC input power. The output can be varied by computer
program to determine the susceptibility of test items to voltage and current.
The segment has a diverse customer base that includes component, printed circuit
board and computer manufactures as well as the military. Recently, OEMs have
begun to purchase and integrate DC power supplies into their products for
applications which include medical treatment equipment and semiconductor wafer
manufacture.
In the early 1990s, military applications traditionally dominated the market
as the defense industry required sophisticated testing for the deployment of
increasingly complex weapons systems. With
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decreased military requirements worldwide, market focus has shifted toward the
industrial and consumer electronic industries. Companies primarily supplying
equipment to the military and defense industry have begun to focus on a
different end-user base which include the telecommunications, transportation,
and satellite communication industries. In recent years, the computer and
telecommunications industries have been the primary markets driving growth.
Three primary factors have been driving market demand for power testing
supplies, which are: (i) the increased use of sophisticated electronics and
microprocessors in consumer related applications; (ii) robust demand in rapidly
growing emerging markets for electronics and electronic-related products; and
(iii) increased compliance requirements due to new international standards.
Technological changes have prompted many industries to begin using increasingly
complex electronic equipment in products ranging from automotive components to
florescent lighting, necessitating greater purchases of power supplies for
testing. Demand for test and measurement equipment has also grown significantly
as rapid growth in emerging market countries has lead to increased use of
electronics and electronic products within their economies. Additionally,
Japanese and European countries have generally been faster to adapt to
international standards with the consequence that U.S.-based firms have been
obligated to move in the same direction as their dependence on foreign sales
increases. Adoption of standardized requirements for electronics in the European
Community should provide future growth opportunities worldwide.
BUSINESS STRATEGY
The Company's business strategy is focused on continuing its leadership and
growth in its principal target markets and thereby increasing market share and
maximizing revenues and profitability. The Company's growth strategy includes
the following key initiatives:
- CUSTOMER FOCUSED NEW PRODUCT DEVELOPMENT. The Company intends to continue
focusing development resources toward new products which better meet the
increasingly complex requirements of its existing customers. As an example
of its commitment to new product development, the Company has four new
programmable power supply products under development expected to be
released in Fiscal 1999 and 2000 along with four product-line extensions
slated for introduction in fiscal 1999. All four new products slated for
introduction by fiscal 2000 are programmable DC products, two of which are
for benchtop applications and two of which are ATF lines. The four new
product-line extensions slated for introduction in fiscal 1999 consist of
three programmable AC products and one high-power programmable DC product.
See "Business--Principal Markets and products." The Company designed and
developed each of these new products and product-line extensions based on
significant input from its customers. Customer-focused development
substantially increases the probability of a rapid return on product
development expense and helps further solidify the Company's key customer
relationships.
- INCREASE PENETRATION OF KEY GROWTH MARKETS. While Elgar has a strong
position in satellite and semiconductor power test equipment, additional
revenue opportunities exist in these markets. Management is leveraging its
established relationships with U.S. and European satellite manufacturers
to supply all their power test equipment needs by offering a lower cost
and more versatile alternative to in-house developed systems. In addition,
as semiconductors become more complex and their production process more
demanding, management believes semiconductor manufacturers will require
more sophisticated and versatile automatic test equipment.
- EXPAND PRESENCE IN THE OEM MARKET. Although programmable power supplies
have historically been used primarily for test and evaluation purposes,
the increased sophistication of certain electronic equipment has created a
need for derivatives of Elgar's products for sale as components in OEM
products. Elgar's OEM sales were approximately 2.6% of its total net sales
for Fiscal 1998.
- CONTINUED IMPROVEMENTS IN COSTS AND MANUFACTURING PROCESSES. The Company
is continually introducing measures to increase its profitability and
maintain a competitive advantage. Management is
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focusing on reducing material handling costs, further reducing inventory
and improving manufacturing cycle times through initiatives such as
adopting a "just in time" inventory system, integrating work cells on the
production floor, utilizing cross-functional teams in the early stages of
product development and continually seeking to improve quality control
measures. Management believes it can significantly enhance the Company's
already strong competitive position by improving product availability.
PRINCIPAL MARKETS AND PRODUCTS
The Company's programmable power and related products are used in a broad
range of commercial and military applications (i) to test design parameters in
the development of new electronic equipment, (ii) to test specifications during
manufacturing of such equipment, (iii) to confirm the operation of electronic
equipment once field-deployed and (iv) for selected OEM applications. Elgar
capitalizes on its in-house digital engineering expertise to develop versatile
programmable equipment that is exceptionally flexible and adaptable in
generating specified series of power conditions. While the Company's products
have a life expectancy of at least 5-10 years, technological advances and
customers' continual need for more features drives growth in demand and
generates repeat sales to approximately 2,500 customers. The Company sells its
products in two forms: (i) as test equipment for integration into comprehensive
ATE systems, such as its semiconductor business through Racal; and (ii) as
integrated power test systems for more complex applications, such as its Solar
Array Simulators. In addition to its test and measurement business, Elgar also
manufactures and provides highly durable power supplies for various other
applications, and provides customer service for all of its products. The Company
categorizes its sales along five product lines, which are:
<TABLE>
<CAPTION>
NET SALES FOR THE
FISCAL YEAR
ENDED MARCH 28, 1998
-----------------------
PRODUCT LINE $(000S) % OF TOTAL
- ----------------------------------------------------------------------- --------- ------------
<S> <C> <C>
Programmable DC Power.................................................. $ 32,625 52.2%
Solar Array Simulators................................................. 8,424 13.5
CASS Program........................................................... 8,857 14.2
Programmable AC Power.................................................. 7,080 11.3
Other Products and Services............................................ 5,510 8.8
--------- -----
Total.............................................................. $ 62,496 100.0%
--------- -----
--------- -----
</TABLE>
PROGRAMMABLE DC POWER
The Company's programmable DC product line includes over 130 products which
are used by commercial companies and military programs for applications relating
to computer and communication equipment, semiconductor and product burn-in,
industrial process control and bench-top and research and development equipment.
Typical customers for the Company's programmable DC products include Racal,
Applied Materials, Inc., GenRad, Inc., Halliburton Company, Lucent Technologies
Inc., Teradyne Inc. and Veeco Instruments, Inc.
Elgar's programmable DC products generate a wide range of dynamic DC
voltages and currents, providing the electrical power to test any type of DC
electronic equipment from semiconductors to automobile electronics.
Manufacturers of such electronic equipment conduct tests during production and
prior to shipment to evaluate performance of the specific product or component
during all possible input power variations. In addition to use in testing
equipment, Elgar's programmable DC power products are also used by OEMs as power
sources within end products, as discussed elsewhere herein.
Through Racal, Elgar is the sole source supplier of programmable DC power
equipment to a leading semiconductor manufacturer for use in ATE systems to test
microprocessors. Since securing this business in Fiscal 1997, Elgar's revenue
from this relationship has increased from $3.2 million in Fiscal 1997 to
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$17.7 million in Fiscal 1998. See "Risk Factors--Importance of Key Customers"
and "Business--Significant Customers." The Company was recently notified by
Racal that the leading semiconductor manufacturer referred to above has decided
to cease orders for Elgar's current AT-8000 DC power supplies until anticipated
"next generation" technology is available in early 1999. As a result, management
expects that revenues from Racal will be significantly lower in fiscal 1999 than
they were in fiscal 1998. Elgar's prototype ATE for this next-generation
technology, which is one of the Company's four new products slated for
introduction by fiscal 2000 is expected to be delivered to the end-user in July
1998 with production scheduled to commence in early calendar 1999. Management
believes that as a result of industry growth and the brevity of product life
cycles in the semiconductor industry, which continually require new generations
of semiconductors and associated production and test equipment, this market
segment presents a significant opportunity for long-term growth.
Elgar is leveraging its expertise in test and measurement equipment to
develop derivative programmable DC power supplies by offering modified or
customized units for OEMs. To date, Elgar has provided programmable power
supplies to OEMs such as Siemens Medical Systems for medical devices, Applied
Materials and Veeco Instruments for semiconductor manufacturing equipment and
Cellular One for inclusion in telecommunications equipment. To expand this line
of business, management recently implemented a marketing plan to target other
potential customers. Management believes that as electronic content in
manufactured products continues to increase, Elgar's OEM business presents
significant opportunities for growth.
Some existing and potential customers do not require products with the
power, sophistication and range of features as those which Elgar produces.
Recognizing this, Elgar has secured a supply arrangement with Good Will
Corporation of Taiwan and Chroma ATE, Inc. of Taiwan to manufacture less
sophisticated, lower priced programmable DC product and AC product under the
ELGAR and SORENSEN brand names, which are then resold through Elgar's
distribution channels.
In addition to the Company's new programmable DC product being introduced
for Racal, the Company expects to introduce three additional new programmable DC
products by fiscal 2000. These products include two mid-power benchtop models
and one mid-power ATE product. The Company also intends in fiscal 1999 to
introduce a high-power programmable DC product-line extension.
SOLAR ARRAY SIMULATORS
Given the significant cost involved in building, launching and insuring
satellites, fully testing units prior to launch is absolutely critical. With the
flexibility to generate any possible power scenario that solar panels may
produce in space, the Company's fully integrated Solar Array Simulator ("SAS")
test system performs mission-critical power testing throughout the satellite
manufacturing process right up to launch. The SAS can be programmed to create
the output power forms associated with a wide variety of solar array operating
environments including direct solar illumination, spinning orbits, an eclipse,
aging of the satellite, the solar array and many other conditions.
Based on contracts awarded and the Company's understanding of its
competition, the Company believes it is one of the leading third-party source
for satellite ground power test systems in the United States and currently
supplies its Solar Array Simulator test system to all major U.S. and some
European satellite manufacturers. Historically, most satellite companies
produced their own test equipment. However, satellite manufacturers are looking
to reduce costs and shorten production times as competition in their industry
intensifies and the demand for satellite production increases. As a result,
satellite manufacturers are purchasing test equipment from third party
manufacturers who can provide more versatile equipment at a lower cost. As
third-party test systems continue to replace customers' in-house developed
systems, management believes that Elgar's SAS business potential is in its early
growth stages, as evidenced by the increase in revenues attributable to SAS of
$1.8 million in fiscal 1994 to $5.1 million in Fiscal 1997 and $8.4 million in
Fiscal 1998.
Elgar introduced its Solar Array Simulator in 1993 and in 1994 was awarded a
major contract to supply solar array simulators, battery simulators and
telemetry components to Lockheed Martin, a
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subcontractor to Iridium Inc., Motorola's venture to develop a network of
satellites to provide global mobile telephone service. Today, Elgar supplies
virtually every major U.S. satellite program, including Lockheed Martin's
Telstar 4, Stardust, MGS and A2100; Motorola's Iridium; Loral's Intelsat 7, MCI
and Tempo; TRW's EOS and SMTS; and Hughes' HS601, HS702 and Galaxy. In addition,
the Company has received European orders for SAS from Matra Marconi Space
(France) and Alcatel ETCA (Belgium).
As a result of the explosive growth in commercial demand for digital
communications, direct television and remote sensing technology, future
satellite production is forecast to far exceed current and historical levels.
Management expects demand for its SAS products to be impacted positively by (i)
expected growth in the number of satellite production bays and the retrofitting
of existing bays and (ii) a continuation in the trend of satellite manufacturers
utilizing third-parties for solar array simulators rather than more expensive
and less sophisticated in-house systems. The Company plans to further increase
its SAS business by selling complete ground power test systems to its customers,
such as a system recently shipped by Elgar to Hughes which included battery
simulators, programmable loads and ancillary telemetry, safety and other related
equipment.
CASS PROGRAM
The CASS Program is a long-term, high-priority U.S. Navy initiative designed
to replace the proliferation of customized ATE and related test program sets for
aircraft carriers, depots and test integration facilities in order to
significantly reduce operating costs. Through a state-of-the-art, computer-
controlled ATE station that tests avionics, the U.S. Navy has achieved its goal
of eliminating the proliferation of customized ATE and reducing testing costs.
Elgar's role in the CASS Program is to supply the entire power subsystem for the
ATE stations, which consists of three types of power supplies: (i) a power
conditioner, battery charger and batteries which together constitute an input
power conditioning system as well as battery back-up in case of power failure;
(ii) programmable AC and DC power supplies which provide the test stimulus for
avionics testing; and (iii) nonprogrammable DC power supplies which supply the
internal ATE station instruments with fixed supply voltages.
The Company is the sole source supplier of the power subsystem to Lockheed
Martin, the prime contractor for the CASS Program. Elgar has generated
approximately $9.0 million or more in CASS sales annually since fiscal 1993,
with $9.9 million and $8.9 million in Fiscal 1997 and Fiscal 1998, respectively.
Having delivered 465 systems to date, Elgar's current contract for the CASS
Program covers the delivery of 61 additional systems under a contract fully
funded through fiscal 1999. In addition, the Navy has the option of extending
the contract through 2001 for an additional 72 systems. The Navy estimates that
a total of 790 units will be required under the CASS Program by the year 2005.
The Navy is also considering an expansion of the CASS program to equip
non-carrier ships. Based on its success, Lockheed Martin is marketing CASS
aggressively to selected foreign militaries. If Lockheed Martin obtains any such
business, this would represent additional opportunities for revenue growth for
Elgar. Further, other branches of the military have initiated programs similar
to CASS, including the U.S. Army's Intermediate Forward Test Equipment and the
U.S. Air Force's deployable F-15 downsize program, both of which currently
utilize the Company's products.
AC POWER
Elgar's programmable AC products generate a wide range of dynamic AC
voltages, frequencies and currents, simulating all possible electrical power
waveforms. In addition to pure AC waveforms, Elgar's AC products are capable of
creating any distortion to the wave including noise, spikes, drop-outs and
shifts in time. Like Elgar's DC products, its AC products are used to test
electronic equipment such as consumer appliances, computers, DC power supplies
and avionics, with the tests subjecting the equipment to all possible power
variations to evaluate performance of the specific product or component.
Elgar's high-end AC product line is recognized in the AC market for superior
performance, reliability and durability. Elgar's leading AC product, the
SmartWave-TM-, is widely recognized in the industry as one of the most
technologically advanced AC products on the market. The AC power market, which
has been
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dominated by military spending in the past, is a small but steady and attractive
niche for the Company. Management believes that the Company has the largest
share of this AC power market. Elgar is currently an incumbent on virtually all
major U.S. government ATE contracts, a position that management believes should
afford it a high probability of winning contract renewals as well as provide it
with a strong track record that can be leveraged to win new business from both
military and commercial customers. Contracts with the United States government
(whether directly or indirectly) are subject to cancellation for default or
convenience by the government if deemed in its best interests. See "Risk
Factors--Government Procurement Policies." In addition, based on audits
conducted by the government with respect to its contracts, profits may be
renegotiated with respect to certain programs and contracts, as has recently
occurred with respect to certain aspects of the Company's CASS Program. In the
last five years, the Company has experienced only one cancellation of a contract
at the government's convenience (in 1993). At no time has the Company
experienced a government cancellation by default. As 23.7% of the Company's net
sales in 1997 were made directly or indirectly to the U.S. Government, a
significant portion of its business is subject to the government prerogatives
described above. In addition to providing AC power to the military markets,
significant commercial opportunities for AC power in the European Community have
arisen as well. The Company recently introduced an extension to its SmartWave
product to provide power testing in compliance with the new European (IEC)
testing standards for electricity and intends to introduce two additional
product-line extensions, including an integrated test system, in the third
quarter of fiscal 1999. Accordingly, the Company anticipates demand for AC power
supply products to increase as European and other electronics manufacturers are
forced to comply with the new standards.
OTHER PRODUCTS AND SERVICES
The Company's "other" product line is comprised of two components, which are
(i) power conditioning and uninterruptible power supply ("UPS") products and
(ii) customer service.
Elgar's power conditioning and UPS product line includes a range of
instruments which are capable of providing precise AC output power regardless of
the input power distortions or drop-outs. This type of product is used in
critical applications where electrical power fluctuations could have severe
consequences, such as with field-support for military operations and back-up for
data logging in oil exploration missions. Elgar's Global Uninterruptible Power
Supply (GUPS-TM-), its principal product in this line, is designed to handle any
input power from anywhere in the world, including aircraft power, and generates
a clean AC output even when the input power is lost.
Elgar's power conditioning business was originally a product offering to its
military customers. Today, Elgar's power conditioning products are sold largely
to the military for power support for computer applications in the field, to
utilities for control-room back-up power and to oil exploration companies for
field support for data logging applications. While approximately 42% of these
products are currently sold to the military, Elgar also supplies power
conditioning units to laboratories which calibrate other electronic equipment.
Elgar discontinued its higher power UPS lines in the late 1980s but maintained
its lower power, ruggedized UPS products. Due to their rugged construction and
relatively high price, Elgar's UPS products are usually not selected unless
customers such as the military or oil service companies have particular needs
for the level of reliability and durability offered by Elgar's products (such as
the U.S. military's use of such power supplies in the battle fields in Operation
Desert Storm).
Additionally, Elgar offers comprehensive customer service for all of its
product offerings through its in-house staff of eight customer service
technicians, two service administrators and one customer service engineer.
Elgar's customer service organization provides global repair and spare parts for
all products Elgar offers, and provides technical assistance to Elgar's
international distributors which are responsible for equipment repairs in their
territories and to customers who repair equipment in-house. Approximately 4% of
the Company's net sales in Fiscal 1998 was derived from customer service, with
45.2% of customer service revenues attributable to standard Elgar products,
38.4% attributable to spare parts and repairs of power conditioning and UPS
systems and 16.4% attributable to Sorensen products.
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RESEARCH AND DEVELOPMENT
At March 28, 1998, the Company's engineering department consisted of 77
people, 37 of whom are engineers. Twenty-eight of the engineers are actively
involved in new product development, with the remainder involved in support or
sustaining functions. The other 40 persons in the engineering organization
include technicians, designers and drafters. As evidence of its commitment to
new product development, the Company's research and development and engineering
expenses were $4.2 million, $4.0 million and $6.2 million in Fiscal 1996, Fiscal
1997 and Fiscal 1998, respectively, and historically have been approximately 10%
of net sales. Customer-funded research and development comprised $0.3 million,
$0.6 million and $0.3 million of the Company's overall research and development
incurred in Fiscal 1996, Fiscal 1997 and Fiscal 1998, respectively.
The development and introduction of new products has been and will continue
to be an essential part of management's growth strategy to increase market share
and expand into new markets. The current management team has had a clear record
of successful and profitable new product introductions, including the SmartWave
and the Solar Array Simulator products. These and other existing products are
considered superior in the marketplace due to their digital capabilities,
flexible format, superior engineering and long-term reliability. The Company's
in-house development efforts are focused on leveraging its strong engineering
capabilities to produce higher-end, more sophisticated products utilizing
digital technology. As a highly focused company, Elgar can target market needs
and new product areas with precision, giving it a substantial competitive
advantage over most of its competitors. Management, in conjunction with the
sales force and engineering department, has demonstrated a strong ability to
identify potential product areas and create technical solutions.
After conducting extensive market research and investing heavily in research
and development over the last two years, Elgar is preparing to introduce four
new programmable DC products and one new AC test system in fiscal 1999 which
management believes will be superior in function and quality to, and at or below
price points of, competitive products. In addition, over the next 12 to 24
months, management expects to introduce other new products and enhancements to
the existing Sorensen (programmable DC), SmartWave and Solar Array Simulator
product lines, as well as a new programmable controller that will provide a
platform for these new and additional future products.
COMPETITION
The principal competitive factors affecting the market for the Company's
products include vendor and product reputation, price, architecture,
functionality and features, product performance, ease of implementation, ease of
use and quality of customer support. The Company believes that it has competed
effectively to date in all of its markets. Management believes that while the AC
and DC markets are very competitive, the Company maintains an excellent
competitive position in each, with the leading market share in the global AC
market (approximately 15%) and the fourth largest market share in the global DC
market (approximately 12%). As reported in a recent PRIME DATA study,
Hewlett-Packard has the leading market share in the global DC market, with an
approximate 28% market share. Notwithstanding Hewlett-Packard's leading position
in the global DC market, the Company has competed favorably with Hewlett-Packard
in the past, such as with securing the Company's test and measurement
semiconductor business, and believes it will continue to do so in the future.
Both markets are relatively fragmented, and most competitors are either small
businesses or noncore subsidiaries of much larger parent corporations. The only
currently viable competition for Elgar's Solar Array Simulators is presented by
"in-house" engineering staffs of individual spacecraft and satellite
manufacturers. With respect to the CASS Program, the Company is currently the
sole source supplier of its product for the Program, and as such, does not face
any competition with respect to this portion of its business. See "Risk
Factors--Competition."
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SALES AND MARKETING
Elgar sells its products through sales representatives in the U.S. and
through distributors internationally. Elgar's sales organization includes 25
in-house employees (21 of whom are in sales and marketing, two in customer
service support, one in general and administrative and one outside consultant),
as well over 50 representative/distributor companies with more than 200
salespeople worldwide. Management believes that its sales network is one of its
major assets and a significant competitive advantage over the sales channels of
many if not all of its competitors. As an example of the effectiveness of the
Company's sales channel, a key element in the successful integration of Sorensen
was the sales force's ability to take on a new product line and launch immediate
sales. After the acquisition, Sorensen's then-declining test and measurement
sales went from $8.5 million in 1993 to $10.9 million in 1995 largely due to the
efforts of the Company's internal and representative sales personnel.
The Company's in-house sales force includes six sales managers who are each
responsible for working with customers and prospective customers to provide
existing or custom solutions to their needs. The Company's seven sales
engineers, who support the sales managers, representatives and customers, design
solutions according to customers' applications. In turn, these 13 sales
professionals are supported by an administrative staff of seven people. Elgar's
sales and marketing team also includes three marketing professionals who conduct
marketing research, create collateral material and training manuals, coordinate
the placement of advertising in appropriate trade journals and other
periodicals, as well as organize trade shows and perform general public
relations work. With a view towards increasing revenues from programmable power
products supplied for inclusion in OEM products, the Company has hired a sales
and marketing person dedicated to developing leads and securing orders from
other OEMs within industries which are potential customers for the Company's
products.
Elgar has strong relationships with the majority of its sales
representatives. In the U.S., management believes it has retained the services
of the top sales representative for the Company's products in each region of the
U.S. Internationally, management believes it is represented by top-tier
international distributors in the regions where it sells its products. Elgar's
sales representatives are essentially field extensions of the Elgar sales team,
helping to identify and pursue sales opportunities. As a result, the sales
force, including the representative network, has been instrumental in
identifying potential new product opportunities, thus helping to guide the
Company's research and development efforts to the most promising areas. In an
effort to maximize the effectiveness of its domestic sales network, Elgar has
established a Representative Board, comprised of the chief executives of five of
the Company's sales representative organizations, that meets with management on
a quarterly basis to discuss marketing strategy and execution of the marketing
plan. Elgar's sales representatives sell a variety of non-competing,
complementary test and measurement products from a number of manufacturers to
over 6,000 customers. Only two sales representatives accounted for 10% or more
of Elgar's Fiscal 1998 revenues. Though domestic sales account for approximately
94% of total net sales in Fiscal 1998, management sees potential markets in the
Asia-Pacific and European regions, as well as an eventual market in Latin
America.
FACILITIES AND MANUFACTURING OPERATIONS
Located in San Diego, California, Elgar leases four facilities in close
proximity totaling approximately 118,000 square feet, with lease terms expiring
no sooner than 2001, which are used for (i) the design and production of Elgar's
standard DC and AC products, production for the CASS Program and administrative
headquarters (87,300 sq. ft.), (ii) the design and production of most
Sorensen-brand products (14,600 sq. ft.), (iii) digital engineering and
accounting (7,100 sq. ft.) and (iv) manufacturing of magnetics and PDU, a power
conditioning product (9,100 sq. ft.). The Company believes that its facilities
are in good condition with substantial capacity available for increased
production of current product lines and new product introductions. As a result,
no substantial capital expenditures are expected to be required to accommodate
the projected revenue growth.
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Elgar's manufacturing facilities are organized and run efficiently with a
focus on quality, productivity and cost and inventory management, and its
manufacturing equipment is modern and allows for efficient and quality
production. The Company has also designed and constructed its own in-house test
stations to speed production. Operations management has identified four core
manufacturing competencies, and has redesigned the production floor to use work
cells and simplify material handling and assembly methodology based on these
competencies, which are (i) wire harness/heatsink assembly, (ii) magnetics
(transformer assembly), (iii) low-volume printed circuit board assembly and (iv)
final assembly and testing. The redesign has allowed maximum productivity and
leveraging of common processes across product lines, since the majority of
Elgar's products use the same basic components. Management has invested in
semi-automated test processes to reduce cycle times and labor costs and
established cross-functional teams to reduce procurement costs. These teams have
identified and implemented major product savings by selecting suppliers that
have process methodologies that support Elgar's mix and volume. These efforts
have enabled Elgar to reduce its average days inventory from 113 days in fiscal
1994 to 84 days in Fiscal 1998, and this efficiency has reduced the need for
sizable working capital investments. As part of its cost management program,
management has outsourced certain lower-end, high volume subassemblies of
transformers and printed circuit boards to two subcontract assembly plants in
nearby Tijuana and Tecate, Mexico. All subcontract subassemblies are subjected
to Elgar's inspection and test process as assurance that quality expectations
are met.
Management has also implemented a "red light" quality assurance system which
has improved quality, reduced rework and obviated the need for some final
testing processes. The basic strategy of the "red light" system is to empower
front-line workers to identify a problem as early as possible during the
production process and stop the entire effected production line until the
problem is corrected. A cross-functional team is immediately dispatched to
diagnose and solve the problem. Any affected components are sent back in the
cycle to be fixed, and production is not allowed to resume until the problem is
corrected. As a result of this system, warranty and rework expenses have been
reduced from 2.5% of revenues in fiscal 1992 to less than 0.7% of revenues in
Fiscal 1998. As a testament to its success in improving quality, Elgar was
awarded the "Salty Dog" reliability and maintainability award from the U.S. Navy
in 1994 and, in 1996, received Lockheed Martin's Certified Supplier Award for
"zero defects shipped."
SIGNIFICANT CUSTOMERS
Certain customers are material to the business and operations of the
Company. In Fiscal 1998, (i) Racal, a systems integrator for test and
measurement equipment which provides certain ATE systems utilizing the Company's
programmable power supplies to manufacturers, including a leading semiconductor
manufacturer, accounted for approximately $17.7 million, or 28.3%, of the
Company's total net sales and (ii) Lockheed Martin, through various of its
operating units, accounted for approximately $11.5 million, or 18.4%, of total
net sales during Fiscal 1998. During Fiscal 1998, the Company's top five
customers accounted for approximately $36.2 million of net sales, representing
57.9% of the Company's total net sales. The Company was recently notified by
Racal that the leading semiconductor manufacturer referred to above has decided
to cease orders for Elgar's current AT-8000 DC power supplies until anticipated
"next generation" technology is available in early 1999. As a result, management
expects that revenues from Racal will be significantly lower in fiscal 1999 than
they were in fiscal 1998. The Company's prospects will continue to depend on the
success of Racal, Lockheed Martin and its other significant customers. Although
the Company believes that it has strong, long-standing relationships with these
customers and that such relationships are mutually beneficial, the loss of any
significant customer, or a significant reduction in the Company's business with
any of them, as with the anticipated decrease in revenues from Racal in fiscal
1999, could have a material adverse effect on the Company and its business,
results of operations and financial condition.
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EMPLOYEES
At March 28, 1998, the Company had 425 full-time employees, including 98
manufacturing personnel, 77 engineering personnel, 32 administrative personnel,
21 sales and marketing personnel, eight customer service personnel and 189
personnel involved in direct labor. No attempts to unionize any of the Company's
employees have been made. The Company considers its relations with its employees
to be good.
INTELLECTUAL PROPERTY
The Company has trademarked its SmartWave and GUPS products and has been
operating under the ELGAR and SORENSEN trade names for over 30 years. In
addition to the protection offered by trademark laws and regulations, the
Company relies upon trade secret protection for its confidential and proprietary
information and technology.
ENVIRONMENTAL
The Company is subject to various evolving federal, state and local
environmental laws and regulations governing, among other things, emissions to
air, discharge to waters and the generation, handling, storage, transportation,
treatment and disposal of hazardous and non-hazardous substances and wastes.
These laws and regulations provide for substantial fees and sanctions for
violations and, in many cases, could require the Company to remediate a site to
meet applicable legal requirements. In connection with the Recapitalization,
Lehman conducted certain investigations (including reviewing Phase I
environmental reports prepared in 1996 with respect to two of the Company's four
facilities) of the Company's operations and its compliance with applicable
environmental laws. The Phase I environmental reports did not reveal any
material environmental issues at the Company's facilities, but did reveal minor
compliance issues which were promptly remedied. Pursuant to the Recapitalization
Agreement, certain Company stockholders have agreed, subject to certain
limitations as to survival and amount, to indemnify the Company against
environmental liabilities incurred prior to the consummation of the
Recapitalization. See "The Recapitalization." Indemnification for the benefit of
the Company under the Recapitalization Agreement (including for environmental
claims) must exceed $500,000 in the aggregate and is limited to $7,000,000 in
the aggregate. The Company is not aware of any material environmental conditions
affecting the properties it leases.
LEGAL PROCEEDINGS
The Company is routinely involved in legal proceedings related to the
ordinary course of its business. Management does not believe any such matters
will have a material adverse effect on the Company. The Company maintains
property, general liability and product liability insurance in amounts which it
believes are consistent with industry practices and adequate for its operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the name, age and position of the persons who
became executive officers and directors of each of the Company upon consummation
of the Recapitalization. Each director will hold office until the next annual
meeting of the stockholders or until his successor has been elected and
qualified. Officers will be elected by the Board of Directors and will serve at
the discretion of the Board.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- --------------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Kenneth R. Kilpatrick.................. 60 President and Chief Executive Officer, EHI and Elgar; Director,
EHI and Elgar
Samuel A. Lewis........................ 49 Vice President--Sales and Marketing, Elgar
Christopher W. Kelford................. 47 Vice President--Finance, Chief Financial Officer and Treasurer,
EHI and Elgar
Normand Precourt....................... 55 Vice President--Engineering, Elgar
Ronald Garrett......................... 64 Vice President--Operations, Elgar
Daniel E. Donati....................... 41 Vice President--Program Management, Elgar
Thomas Erickson........................ 55 Vice President--Human Resources, Elgar
John F. Lehman......................... 55 Director, EHI and Elgar
Donald Glickman........................ 65 Vice President, EHI and Elgar; Director, EHI and Elgar
George Sawyer.......................... 67 Director, EHI and Elgar
Thomas G. Pownall...................... 76 Director, EHI and Elgar
Keith Oster............................ 36 Secretary, EHI and Elgar; Director, EHI and Elgar
Joseph A. Stroud....................... 42 Director, EHI and Elgar
William Paul........................... 62 Director, EHI and Elgar
Bruce D. Gorchow....................... 40 Director, EHI and Elgar
Glenn A. Youngkin...................... 31 Director, EHI and Elgar
</TABLE>
KENNETH R. KILPATRICK, who is President and Chief Executive Officer of Elgar
and a Director of EHI and Elgar, has been with Elgar since July 1991 in his
current position. Mr. Kilpatrick was appointed President and Chief Executive
Officer of EHI in May 1998. Prior to joining Elgar, Mr. Kilpatrick was President
of Machine Industries, Inc., an aerospace parts manufacturer, from 1989 to 1991,
and with ACDC Electronics, a division of Emerson Electric Co. and a manufacturer
of fixed power supplies, from 1964 to 1989. After beginning as an Assistant
General Manager of ACDC Electronics in 1964, Mr. Kilpatrick was appointed
President of the company in 1972. Mr. Kilpatrick is active in all aspects of
Elgar's business.
SAMUEL A. LEWIS, Vice President--Sales and Marketing of Elgar, with 25 years
of experience in the test and measurement equipment industry, including 19 years
with Elgar, is responsible for leading Elgar's sales efforts. Mr. Lewis, who
began his career with Elgar in 1972, re-joined Elgar in January 1988 after
spending the prior six years as the North American Sales Manager for Wavetek
Corporation, a test and measurement company. At Wavetek, Mr. Lewis spearheaded
the creation of a central sales management organization, set up area sales
offices, and managed 18 representative organizations with 130 sales people.
Prior to beginning work with Wavetek in 1982, Mr. Lewis spent nine years with
Elgar in the positions of Customer Service Manager and National Sales Manager.
CHRISTOPHER W. KELFORD, Vice President--Finance, Chief Financial Officer and
Treasurer of Elgar and EHI, has been with Elgar since August 1990. Prior to
joining Elgar, Mr. Kelford spent 12 years with TRW LSI Products, Inc., a
semiconductor manufacturer, advancing from Finance Manager to Controller during
that time. Mr. Kelford had significant experience in modernizing information
infrastructures, overseeing foreign operations and managing the due diligence
phases of five merger and acquisition transactions.
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NORMAND PRECOURT, Vice President--Engineering of Elgar, has been with Elgar
since July 1990. Prior to that time, Mr. Precourt was with Cipher Data Products,
a computer peripherals company, advancing from Engineering Group Leader to Vice
President, Engineering Technology during that time.
RONALD GARRETT, Vice President--Operations of Elgar, joined Elgar in June
1992. Prior to that time, Mr. Garrett directed major "start up" operations at
Sequent Computer, Memorex and the Automated Test System Division of John Fluke
Manufacturing. In addition, Mr. Garrett gained extensive background in power
electronics while serving as the senior manufacturing executive at both ACDC
Electronics and the Qualidyne Division of Lambda Power Systems. Mr. Garrett is
recognized for turnaround conversion of factory job shops to production process
control operations.
DANIEL E. DONATI, Vice President--Program Management of Elgar, joined Elgar
in September 1991 and is responsible for overseeing Elgar's Space Systems and
CASS Program operations. Prior to that time, Mr. Donati spent over 12 years with
Aerojet Electronics Systems and Walt Disney where he gained valuable program
management, operations and engineering experience.
THOMAS ERICKSON, Vice President--Human Resources of Elgar, joined Elgar in
October 1983. Prior to that time, he spent seven years at Solar Turbines as its
Human Resources Manager.
JOHN F. LEHMAN, who is a Director of EHI and Elgar, is a Managing Principal
of Lehman. Prior to founding Lehman in 1990, Dr. Lehman was an investment banker
with PaineWebber, Inc. from 1988 to 1990, and served as a Managing Director in
Corporate Finance. Dr. Lehman served for six years as Secretary of the Navy, was
a member of the National Security Council Staff, served as a delegate to the
Mutual Balanced Force Reductions negotiations and was the Deputy Director of the
Arms Control and Disarmament Agency. Dr. Lehman served as Chairman of the Board
of Directors of Sperry Marine, Inc., and is a member of the Board of Directors
of Sedgwick Group plc, Ball Corporation, ISO Inc. and Burke Industries, Inc.,
and is currently Vice Chairman of the Princess Grace Foundation, a director of
OpiSail Foundation and a trustee of Spence School.
DONALD GLICKMAN, who is Vice President and a Director both EHI and Elgar, is
a Managing Principal of Lehman. From February 1998 to May 1998, Mr. Glickman was
President of EHI. For the past five years, Mr. Glickman has also been the
President of Donald Glickman Company, Inc., which together with Lehman, acquires
as principal significant corporations in aerospace, marine and defense
industries. Prior to forming Donald Glickman Company, Inc., Mr. Glickman was a
principal of the Peter J. Solomon Company, a Managing Director of Shearson
Lehman Brothers Merchant Banking Group and Senior Vice President and Regional
Head of The First National Bank of Chicago. Mr. Glickman served as an armored
calvary officer in the Seventh U.S. Army. Mr. Glickman is currently a director
of Cal-Tex Industries, Inc., Monro Muffler Brake, Inc. and Burke Industries,
Inc. and is a trustee of MassMutual Corporate Investors, MassMutual
Participation Investors and Wolf Trap Foundation for the Performing Arts.
GEORGE SAWYER, who is a Director of EHI and Elgar, has been affiliate with
Lehman for the past five years. From 1993 to 1995, Mr. Sawyer served as the
President and Chief Executive Officer of Sperry Marine, Inc. Prior to that time,
Mr. Sawyer held a number of prominent positions in private industry and in the
U.S. government, including serving as the President of John J. McMullen
Associates, the President and Chief Operating Officer of TRE Corporation, the
Vice President of International Operations for Bechtel Corporation and the
Assistant Secretary of the Navy for Shipbuilding and Logistics under Dr. Lehman.
Mr. Sawyer is currently a director of Burke Industries, Inc.
THOMAS G. POWNALL, who became a director of EHI and Elgar in July 1998, is a
member of the investment advisory board of Lehman. Mr. Pownall was Chairman of
the Board of Directors from 1983 until 1992 and Chief Executive Officer of
Martin Marietta Corporation from 1982 until his retirement in 1988. Mr. Pownall
joined Martin Marietta Corporation in 1963 as President of its Aerospace
Advanced Planning unit, became President of Aerospace Operations and, in
succession, Vice President and President and Chief Operating Office of the
corporation. Mr. Pownall is also a director of the Titan Corporation and Burke
Industries, Inc. and Director Emeritus of Sundstrand Corporation, serves as a
member of the
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advisory boards of Ferris, Baker Watts Incorporated and Sedgwich New York
Metropolitan and as a director of the U.S. Naval Academy Foundation and a
trustee of Salem-Teikyo University.
KEITH OSTER, who is Secretary and a Director of each of EHI and Elgar, is a
Principal of Lehman. Mr. Oster joined Lehman in 1992 and is principally
responsible for financial structuring and analysis. Prior to joining Lehman, Mr.
Oster was with the Carlyle Group, where he was responsible for analyzing
acquisition opportunities and arranging debt financing, and was a Senior
Financial Analyst with Prudential-Bache Capital Funding, working in the Mergers,
Acquisitions and Leveraged Buyout Department. Mr. Oster is currently a director
of Burke Industries, Inc.
JOSEPH A. STROUD, who is a Director of EHI and Elgar, is a Principal of
Lehman. Mr. Stroud joined Lehman in 1996 and is responsible for managing the
financial and operational aspects of portfolio company value-enhancement. Prior
to joining Lehman, Mr. Stroud was the Chief Financial Officer of Sperry Marine,
Inc. from 1993 until the company was purchased by Litton Industries, Inc. in
1996. From 1989 to 1993, Mr. Stroud was Chief Financial Officer of the Accudyne
and Kilgore Corporations.
WILLIAM PAUL is a Director of EHI and Elgar. Mr. Paul began his career with
United Technologies Corporation ("UTC") at its Sikorsky Aircraft division in
1955. Mr. Paul progressed through a succession of several technical and
managerial positions while at Sikorsky, including Vice President of Engineering
and Programs and Executive Vice President and Chief Operating Officer, and in
1983 was named President and Chief Executive Officer of Sikorsky Aircraft. In
1994, Mr. Paul was appointed as the Executive Vice President of UTC, Chairman of
UTC's international operations and became a member of UTC's management executive
committee. Mr. Paul retired from these positions in 1997 and remains a
consultant to UTC. Mr. Paul is a Fellow of the American Institute of Aeronautics
and a Fellow of the Royal Aeronautical Society.
BRUCE D. GORCHOW, who is a Director of EHI and Elgar, is a member of the
investment advisory board of Lehman. Since 1991, Mr. Gorchow has been Executive
Vice President and head of the Private Finance Group of PPM America, Inc. Mr.
Gorchow is also a Director of Global Imaging Systems, Inc., Leiner Health
Products, Inc., Tomah Products, Inc. and Burke Industries, Inc. and is an
investment director of several investment limited partnerships. Mr. Gorchow also
represents PPM America, Inc. on the boards of ten of its portfolio companies.
Prior to his position at PPM America, Mr. Gorchow was a Vice President at
Equitable Capital Management, Inc.
GLENN A. YOUNGKIN, who is a Director of EHI and Elgar, is a Vice President
of The Carlyle Group, where he has been employed since 1995. Prior to that time,
Mr. Youngkin was a consultant with McKinsey & Company, a global management
consulting firm, from 1994 to 1995. From 1990 to 1992, Mr. Youngkin worked in
the Natural Resources Group of CS First Boston where he structured and executed
merger and acquisition transactions and capital market financings. Mr. Youngkin
is currently a director of InSight Health Services Corp. and represents The
Carlyle Group on the boards of two of its portfolio companies.
CERTAIN RIGHTS OF HOLDERS OF REDEEMABLE PREFERRED STOCK
Under certain circumstances, the holders of the Series A Redeemable
Preferred Stock may have the right to elect a majority of EHI's directors. See
"Description of Preferred Stock and Warrants-- Redeemable Preferred
Stock--Voting Rights."
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Audit Committee of the Board of Directors is comprised
of Messrs. Pownall (Chairman), Sawyer, Paul and Oster. The Audit Committee makes
recommendations concerning the engagement of independent public accountants,
reviews with the independent public accountants the scope and results of the
audit engagement, approves professional services provided by the independent
public accountants, reviews the independence of the independent public
accountants, considers the range of audit and non-audit fees and reviews the
adequacy of the Company's internal accounting controls.
55
<PAGE>
HUMAN RESOURCES AND COMPENSATION COMMITTEE. The Human Resources and
Compensation Committee of the Board of Directors is comprised of Dr. Lehman
(Chairman) and Messrs. Glickman, Sawyer and Stroud. This committee makes
recommendations concerning the salaries and incentive compensation of employees
of and consultants to the Company.
THE STOCK OPTION COMMITTEE. The Stock Option Committee of the Board of
Directors is comprised of Dr. Lehman and Messrs. Glickman and Sawyer. This
committee will oversee the issuance of options under, and the administration of,
any stock option plans adopted by the Company.
THE EXECUTIVE COMMITTEE. The Executive Committee of the Board of Directors
is comprised of Dr. Lehman and Messrs. Glickman (Chairman), Pownall, Sawyer and
Kilpatrick. This committee has the ability to take action on behalf of the full
Board of Directors in certain circumstances.
COMPENSATION OF DIRECTORS
Other than Mr. Kilpatrick, directors receive a $15,000 annual retainer,
$1,500 for each board meeting attended and reimbursement of reasonable expenses
incurred in attending such meetings (the directors do not receive additional
fees for attending committee meetings). In addition, the Company will pay Lehman
certain fees for various management, consulting and financial planning services,
including assistance in strategic planning, providing market and financial
analyses, negotiating and structuring financing and exploring expansion
opportunities. See "Certain Relationships and Related Transactions."
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended April 3, 1996,
March 29, 1997 and March 28, 1998 the historical compensation for services to
the Company of the Chief Executive Officer and the four other most highly
compensated executive officers of the Company as of March 28, 1998
(collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION(1) -------------
SECURITIES ALL OTHER
------------------------ UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($)(2) OPTIONS ($)
- --------------------------------------------------- ----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Kenneth R. Kilpatrick.............................. 1998 182,879 102,900 -- --
President and Chief Executive Officer, EHI and 1997 175,491 47,260 -- --
Elgar 1996 165,975 112,220 -- --
Samuel A. Lewis.................................... 1998 115,521 40,400 -- --
Vice President--Sales and Marketing of Elgar 1997 110,165 18,505 -- --
1996 105,302 43,941 -- --
Christopher W. Kelford............................. 1998 106,150 37,200 -- --
Vice President--Finance, Chief Financial Officer 1997 101,024 16,854 -- --
and Treasurer of EHI and Elgar 1996 95,796 40,020 -- --
Normand Precourt................................... 1998 119,649 42,100 -- --
Vice President--Engineering of Elgar 1997 114,793 19,372 -- --
1996 110,294 46,001 -- --
Ronald Garrett..................................... 1998 104,423 44,200 -- --
Vice President--Operations of Elgar 1997 100,293 20,225 -- --
1996 95,662 48,024 -- --
</TABLE>
- ------------------------------
(1) Perquisites and other personal benefits paid in the periods presented for
the Named Executive Officers aggregated less than the lesser of (i) $50,000
and (ii) 10% of the total annual salary and bonus set forth in the columns
entitled "Salary" and "Bonus" for each Named Executive Officer and,
accordingly, are omitted from the table as permitted by the rules of the
Commission.
(2) Annual bonuses are indicated for the fiscal year in which they were earned
and accrued. Annual bonuses for any fiscal year are generally paid in the
following fiscal year.
56
<PAGE>
EMPLOYMENT AGREEMENTS
In connection with the Recapitalization, the Company entered into employment
agreements (each, an "Employment Agreement") with several key executives.
Generally, each Employment Agreement provides for the executive's continued
employment with the Company post-Recapitalization at an annual salary, bonus and
with such other employment-related benefits comparable to those received by such
executive immediately prior to the Recapitalization. Each Employment Agreement
may be terminated by either party upon 30 days' prior written notice. If an
executive is terminated without cause (as set forth in the agreements) or for no
reason at all, then the executive shall be entitled to payment of his annual
base salary for a period of one year following the date of such termination.
Each Employment Agreement contains provisions prohibiting the executive, during
the period of his employment with the Company and for two years thereafter, from
directly or indirectly engaging in competition with the Company. Each Employment
Agreement also contains provisions requiring the executive to maintain the
confidentiality of certain information related to the Company.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Common Stock as of March 28, 1998 by (i) each director, (ii) each of the
Named Executive Officers, (iii) all executive officers and directors as a group
and (iv) each person who is the beneficial owner of more than 5% of the
outstanding Common Stock. All fully diluted ownership percentages indicated
below exclude the dilution attributable to the Convertible Preferred Stock
issued in connection with the Power Ten Acquisition.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES
NAME OF INDIVIDUAL OR ENTITY(1) SHARES(2) OUTSTANDING(3)
- -------------------------------------------------------------------- ----------- --------------
<S> <C> <C>
JFL-EEC(4).......................................................... 1,901,400 71.7%
John F. Lehman(5)................................................... 1,901,400 71.7
Donald Glickman(5).................................................. 1,901,400 71.7
George Sawyer(5).................................................... 1,901,400 71.7
Keith Oster(5)...................................................... 1,901,400 71.7
Joseph Stroud(5).................................................... 1,901,400 71.7
Kenneth R. Kilpatrick............................................... 60,000 2.3
Samuel A. Lewis..................................................... 40,000 1.5
Christopher W. Kelford.............................................. 28,000 1.1
Normand Precourt.................................................... 25,000 *
Ronald Garrett...................................................... 12,000 *
Bruce D. Gorchow(6)................................................. -- --
William Paul(7)..................................................... -- --
Glenn A. Youngkin................................................... -- --
Jackson National Life Insurance Company(8).......................... 278,750 10.5
All directors and executive officers as a group(17 persons)......... 2,151,400 81.1
</TABLE>
- ------------------------------
* Less than 1%
(1) The address of JFL-EEC and Messrs. Lehman, Glickman, Sawyer, Oster and
Stroud is 2001 Jefferson Davis Highway, Suite 607, Arlington, Virginia
22202. The address of Mr. Gorchow and Jackson National Life Insurance
Company ("Jackson National") is 225 West Wacker Drive, Chicago, Illinois
60606. The address of Mr. Paul is 21 Springwood Drive, Trumbull, Connecticut
06611. The address of Mr. Youngkin is c/o The Carlyle Group, 1001
Pennsylvania Avenue, N.W., Suite 2205, Washington, D.C. 20004.
(2) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of a security, or the sole or shared power
to dispose, or direct the disposition of, a security.
(3) Computed based upon the total number of shares of Common Stock outstanding
and the number of shares of Common Stock underlying options or warrants held
by that person exercisable within 60 days of March 28, 1998. In accordance
with Rule 13(d)-3 of the Exchange Act, any Common Stock that will not be
outstanding within 60 days of March 28, 1998 that is subject to options or
warrants exercisable within 60 days of March 28, 1998 is deemed to be
outstanding for the purpose of computing the percentage of outstanding
shares of the Common Stock owned by the person holding such options or
warrants, but is not deemed to be outstanding for the purpose of computing
the percentage of outstanding shares of the Common Stock owned by any other
person.
(4) JFL-EEC is a Delaware limited liability company that is an affiliate of
Lehman. Through JFL-EEC, J.F. Lehman Equity Investors I, L.P. ("JFLEI"),
also an affiliate of Lehman, beneficially owns 62.2% of the Common Stock.
Each of Messrs. Lehman, Glickman, Sawyer, Oster and Stroud, either directly
(whether through ownership interest or position) or through one or more
intermediaries, may be deemed to control JFL-EEC, Lehman and JFLEI. Lehman
and JFLEI may be deemed to control the voting and disposition of the shares
of the Common Stock owned by JFL-EEC. Accordingly, for certain purposes,
Messrs. Lehman, Glickman, Sawyer, Oster and Stroud may be deemed to be
beneficial owners of the shares of Common Stock owned by JFL-EEC.
(5) Includes the shares beneficially owned by JFL-EEC, of which Messrs. Lehman,
Glickman, Sawyer, Oster and Stroud are affiliates.
(6) Mr. Gorchow is on the investment advisory board of Lehman and is an
executive officer of PPM America, Inc., the agent for Jackson National.
(7) Mr. Paul is a limited partner in an affiliate of JFLEI.
(8) All shares are obtainable upon the exercise of the Warrants. Some of the
Warrants are held by affiliates of Jackson National. See "The
Recapitalization" and "Description of Preferred Stock and Warrants." Jackson
National is a noncontrolling member of JFL-EEC.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT PARTICIPATION IN THE RECAPITALIZATION
COMMON STOCK. In connection with the Recapitalization, certain executive
officers of the Company and other members of management (41 individuals in the
aggregate) received Recapitalization Consideration comprising an aggregate of
approximately $9.2 million in cash and a 9.4% interest in the Common Stock on a
fully diluted basis (without giving effect to the Convertible Preferred Stock
issued in connection with the Power Ten Acquisition). See "The Recapitalization"
and "Security Ownership of Certain Beneficial Owners and Management."
MANAGEMENT AGREEMENT
Pursuant to the terms of a ten-year Management Agreement, dated the Closing
Date (the "Management Agreement"), among Lehman, EHI and Elgar, (i) upon
consummation of the Recapitalization, EHI paid to Lehman a transaction fee in
the amount of $1,000,000 and (ii) Elgar has agreed to pay Lehman an annual
management fee of $500,000 that commenced accruing on the Closing Date and is
payable in advance on a semi-annual basis thereafter. As consideration for
services rendered in connection with the Power Ten Acquisition, Elgar paid to
Lehman an acquisition fee of $425,000 pursuant to the Management Agreement.
SHAREHOLDERS AGREEMENT
In connection with the Recapitalization, the Company and JFL-EEC, the
Continuing Shareholders and, in their capacity as Warrantholders, Jackson
National, Indosuez Electronics Partners ("Indosuez") and Old Hickory Fund I,
L.L.C. ("Old Hickory") (collectively, the "Shareholders") entered into a
Shareholders Agreement (the "Shareholders Agreement"), the principal terms of
which are summarized below:
CERTAIN VOTING RIGHTS. Pursuant to the Shareholders Agreement, so long as
Jackson National holds in the aggregate Warrants and shares obtained upon
exercise of the Warrants representing at least seventy-five percent (75%) of the
Warrants initially issued to it, Jackson National shall have the right to
designate one Director. So long as the Common Stock held by the Non-Management
Continuing Shareholders constitutes in the aggregate at least five percent (5%)
of the issued and outstanding Common Stock, then the Non-Management Continuing
Shareholders shall have the right to designate one Director. Subject to the
rights of the holders of the Redeemable Preferred Stock to elect Directors upon
the occurrence of certain events pursuant to the Certificate of Designations
governing the Redeemable Preferred Stock, JFL-EEC is entitled to designate all
Directors of the Company not designated by Jackson National or the
Non-Management Continuing Shareholders.
RESTRICTIONS ON TRANSFER. The shares of the Common Stock held by each of
the parties to the Shareholders Agreement, and certain of their transferees, are
subject to restrictions on transfer. Shares of Common Stock may be transferred
only to certain related transferees, including, (i) in the case of individual
Shareholders, family members or their legal representatives or guardians, heirs
and legatees and trusts, partnerships and corporations the sole beneficiaries,
partners or shareholders, as the case may be, of which are family members, (ii)
in the case of partnership or limited liability company Shareholders, the
partners or members of such partnership or limited liability company, as the
case may be, (iii) in the case of corporate Shareholders, affiliates of such
corporation and (iv) transferees of shares sold in transactions complying with
the applicable provisions of the Right of First Offer or the Tag-Along or
Drag-Along Rights (as each term is defined below.)
RIGHTS OF FIRST OFFER. If any Shareholder desires to transfer any shares of
the Common Stock or Warrants (other than pursuant to certain permitted
transfers), all other Shareholders have a right of first offer (the "Right of
First Offer") to purchase the shares or warrants (the "Subject Shares") upon
such
59
<PAGE>
terms and subject to such conditions as are set forth in a notice (a "First
Offer Notice") sent by the selling Shareholder to such other Shareholders. If
the Shareholders elect to exercise their Rights of First Offer with respect to
less than all of the Subject Shares, EHI has a right to purchase all of the
Subject Shares that the Shareholders have not elected to purchase. If the
Shareholders receiving the First Offer Notice and EHI wish to exercise their
respective rights of first offer with respect to less than all of the Subject
Shares, the selling Shareholder may solicit offers to purchase all (but not less
than all) of the Subject Shares upon such terms and subject to such conditions
as are, in the aggregate, no less favorable to the selling Shareholder than
those set forth in the First Offer Notice.
SUBSCRIPTION OFFER WITH RESPECT TO PRIMARY ISSUANCES. The Shareholders
Agreement provides that EHI is not permitted to issue equity securities, or
securities convertible into equity securities, to any person unless EHI has
offered to issue to each of the other Shareholders, on a PRO RATA basis, an
opportunity to purchase such securities on the same terms, including price, and
subject to the same conditions as those applicable to such person.
TAG-ALONG RIGHTS. The Shareholders Agreement provides that, if the
Shareholders and EHI fail to exercise their respective rights of first refusal
with respect to all of the Subject Shares, the Shareholders have the right to
"tag along" (the "Tag-Along Right") upon the sale of the Common Stock by certain
Shareholders pursuant to a third-party offer.
DRAG-ALONG RIGHTS. The Shareholders Agreement provides that, subject to
certain conditions, if one or more Shareholders holding a majority of the Common
Stock (the "Majority Shareholders") propose to sell all of the Common Stock
owned by the Majority Shareholders, the Majority Shareholders have the right
(the "Drag-Along Right") to compel the other Shareholders to sell all of the
shares of Common Stock held by such other Shareholders upon the same terms and
subject to the same conditions as the terms and conditions applicable to the
sale by the Majority Shareholders.
REGISTERED OFFERINGS. The shares of Common Stock may be transferred in a
bona fide public offering for cash pursuant to an effective registration
statement (a "Registered Offering") without compliance with the provisions of
the Shareholders Agreement related to the Right of First Offer or the Tag-Along
or Drag-Along Rights.
LEGENDS. The shares of Common Stock subject to the Shareholders Agreement
bear a legend related to the Right of First Offer and the Tag-Along and
Drag-Along Rights, which legend will be removed when the shares of Common Stock
are, pursuant to the terms of the Shareholders Agreement, no longer subject to
the restrictions on transfer imposed by the Shareholders Agreement.
REGISTRATION RIGHTS. Pursuant to the terms of the Shareholders Registration
Rights Agreement, dated as of February 3, 1998, among the Company and the
Shareholders, JFL-EEC and certain other shareholders are entitled to one
"demand" and unlimited piggyback registration rights, subject to additional
customary rights and limitations.
TERM. The term of the Shareholders Agreement is 10 years from the Closing
Date, subject to earlier termination under certain conditions and upon certain
events.
REGISTRATION RIGHTS FOR WARRANTHOLDERS
The holders of the shares issuable upon exercise of the Warrants are
entitled to one "demand" registration right at any time on or after the later of
(i) the fifth anniversary of the Closing Date and (ii) the 181st day after
completion of EHI's initial public offering of its Common Stock, subject to
additional customary rights and limitations. In addition, holders of the shares
issuable upon exercise of the Warrants are entitled to unlimited "piggyback"
registration rights after the date of EHI's initial public offering of its
Common Stock, subject to customary rights and limitations. See "Description of
Preferred Stock and Warrants-Registration Rights for Warrant Shares."
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<PAGE>
INDEMNIFICATION OF OFFICERS AND DIRECTORS
EHI's Certificate of Incorporation contains provisions eliminating the
personal liability of directors for monetary damages for breaches of their duty
of care, except in certain prescribed circumstances. EHI's Bylaws also provide
that directors and officers will be indemnified to the fullest extent authorized
by Delaware law, as it now stands or may in the future be amended, against all
expenses and liabilities reasonably incurred in connection with service for or
on behalf of the Company. EHI's Bylaws provide that the rights of directors and
officers to indemnification is not exclusive of any other right now possessed or
hereinafter acquired under any statute, agreement or otherwise.
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<PAGE>
DESCRIPTION OF NOTES
Except as otherwise indicated below, the following summary applies to both
the Old Notes and the New Notes. As used herein, the term "Notes" shall mean the
Old Notes and the New Notes, unless otherwise indicated.
The form and terms of the New Notes are substantially identical to the form
and terms of the Old Notes, except that the New Notes (i) will be registered
under the Securities Act, (ii) will not provide for payment of Additional
Interest, which terminates upon consummation of the Exchange Offer and (iii)
will not bear any legends restricting transfer thereof. The New Notes will be
issued solely in exchange for an equal principal amount of Old Notes. As of the
date hereof, $90.0 million aggregate principal amount of Old Notes is
outstanding. See "The Exchange Offer."
GENERAL
The Old Notes were issued and the New Notes will be issued under the
Indenture. The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Trust Indenture Act of 1939, as amended (the "TIA"), and to
all of the provisions of the Indenture, including the definitions of certain
terms therein and those terms made a part of the Indenture by reference to the
TIA as in effect on the date of the Indenture. A copy of the Indenture is
available as set forth under "Additional Information." The definitions of
certain capitalized terms used in the following summary are set forth below
under "--Certain Definitions." For purposes of this section, references to the
"Company" initially are to JFL-EEC Merger Sub Co. and, following the merger of
JFL-EEC Merger Sub Co. with and into Carlyle-EEC Holdings, Inc., are to the
corporation surviving such merger, and in each case do not include the
Subsidiaries of Carlyle-EEC Holdings, Inc. or such surviving corporation.
The Notes will be senior unsecured obligations of the Company, ranking PARI
PASSU in right of payment with all other unsubordinated obligations of the
Company and senior in right of payment to all subordinated obligations of the
Company. The Notes will also be effectively subordinated to (i) all senior
secured Indebtedness of the Company and its Subsidiaries (including Indebtedness
under the New Credit Facility) to the extent of the value of the assets securing
such Indebtedness and (ii) all Indebtedness of the Company's Subsidiaries (other
than Restricted Subsidiaries that are parties to the Note Guarantees).
The Old Notes were issued, and the New Notes will be issued, in fully
registered form only, without coupons, in denominations of $1,000 and integral
multiples thereof. Initially, the Trustee will act as Paying Agent and Registrar
for the Notes. The Notes may be presented for registration or transfer and
exchange at the offices of the Registrar, which initially will be the Trustee's
corporate trust office. The Company may change any Paying Agent and Registrar
without notice to holders of the Notes (the "Holders"). The Company will pay
principal (and premium, if any) on the Notes at the Trustee's corporate office
in New York, New York. At the Company's option, interest may be paid at the
Trustee's corporate trust office or by check mailed to the registered address of
Holders. Any Notes that remain outstanding after the completion of the Exchange
Offer, together with the New Notes issued in connection with the Exchange Offer,
will be treated as a single class of securities under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $150.0 million, $90.0
million in aggregate principal amount of which was issued in the Prior Offering,
and will mature on February 1, 2008. Additional amounts may be issued from time
to time, subject to the limitations set forth under "--Certain Covenants--
Limitation on Additional Indebtedness." Interest on the Notes will accrue at the
rate of 9 7/8% per annum and will be payable semiannually in cash on each
February 1 and August 1, commencing on August 1, 1998, to the persons who are
registered Holders at the close of business on the January 15 and July 15
immediately preceding the applicable interest payment date. Interest on the
Notes will accrue from
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<PAGE>
the most recent date to which interest has been paid or, if no interest has been
paid, from and including the Issue Date
The Notes will not be entitled to the benefit of any mandatory sinking fund.
REDEMPTION
OPTIONAL REDEMPTION. The Notes will be redeemable, at the Company's option,
in whole at any time or in part from time to time, on and after February 1,
2003, upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
redeemed during the twelve-month period commencing on February 1 of the year set
forth below, plus, in each case, accrued and unpaid interest thereon, if any, to
the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2003............................................................................. 104.938%
2004............................................................................. 103.292%
2005............................................................................. 101.646%
2006 and thereafter.............................................................. 100.000%
</TABLE>
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from time
to time, on or prior to February 1, 2001, the Company may, at its option, use
the net cash proceeds of one or more Public Equity Offerings (as defined below)
to redeem up to 35% of the sum of (i) the initial aggregate principal amount of
Notes issued in the Prior Offering and (ii) the respective initial aggregate
principal amounts of Notes issued under the Indenture after the Issue Date, at a
redemption price equal to 109.875% of the principal amount thereof plus accrued
and unpaid interest thereon and Additional Interest, if any, to the date of
redemption; PROVIDED that at least 65% of the sum of (i) the initial aggregate
principal amount of Notes issued in the Prior Offering and (ii) the respective
initial aggregate principal amounts of Notes issued under the Indenture after
the Issue Date remains outstanding immediately after any such redemption. In
order to effect the foregoing redemption with the proceeds of any Public Equity
Offering, the Company shall make such redemption not more than 120 days after
the consummation of any such Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of the Company pursuant
to a registration statement filed with the Commission in accordance with the
Securities Act.
OPTIONAL REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change
of Control prior to February 1, 2003, the Notes will be redeemable, in whole or
in part, at the option of the Company, upon not less than 30 nor more than 60
days prior notice to each holder of Notes to be redeemed, at a redemption price
equal to the sum of (i) the then outstanding principal amount thereof plus (ii)
accrued and unpaid interest thereon and Additional Interest, if any, to the
redemption date plus (iii) the Applicable Premium. The following definitions are
used to determine the Applicable Premium:
"Applicable Premium" is defined, with respect to a Note, as the greater of
(i) 1% of the then outstanding principal amount of such Note and (ii) the excess
of (A) the present value of the remaining required interest and principal
payments due on such Note (exclusive of accrued and unpaid interest), computed
using a discount rate equal to the Treasury Rate plus 50 basis points, over (B)
the then outstanding principal amount of such Note.
"Treasury Rate" is defined as the yield to maturity at the time of
computation of United States Treasury securities with a constant maturity (as
complied and published in the most recent Federal Reserve Statistical Release
H.15(519) which has become publicly available at least two Business Days prior
to the date fixed for prepayment (or, if such Statistical Release is no longer
published, any publicly available
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<PAGE>
source of similar market data)) most nearly equal to the then remaining Weighted
Average Life to Maturity of the Notes; PROVIDED; HOWEVER, that if the Weighted
Average Life to Maturity of the Notes is not equal to the constant maturity of a
United States Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that if the Weighted
Average Life to Maturity of the Notes is less than one year, the weekly average
yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any time,
selection of such Notes for redemption will be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which such Notes are listed or, if such Notes are not then listed on a national
securities exchange, on a PRO RATA basis, by lot or by such method as the
Trustee shall deem fair and appropriate; provided, however, that no Notes of a
principal amount of $1,000 or less shall be redeemed in part; PROVIDED, FURTHER,
that if a partial redemption is made with the proceeds of a Public Equity
Offering, selection of the Notes or portions thereof for redemption shall be
made by the Trustee only on a PRO RATA basis or on as nearly a PRO RATA basis as
is practicable (subject to DTC procedures), unless such method is otherwise
prohibited. Notice of redemption shall be mailed by first-class mail at least 30
but not more than 60 days before the redemption date to each Holder of Notes to
be redeemed at its registered address. If any Note is to be redeemed in part
only, the notice of redemption that relates to such Note shall state the portion
of the principal amount thereof to be redeemed. A new Note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest will cease to accrue on Notes or portions thereof called for
redemption as long as the Company has deposited with the Paying Agent funds in
satisfaction of the applicable redemption price pursuant to the Indenture.
NOTE GUARANTEESS
Each Subsidiary Guarantor will unconditionally guarantee, on a senior
unsecured basis, jointly and severally, to each Holder and the Trustee, the full
and prompt performance of the Company's obligations under the Indenture and the
Notes, including the payment of principal of and interest on the Notes. The Note
Guaranteess will be effectively subordinated in right of payment to all existing
and future secured Indebtedness of the related Subsidiary Guarantor to the
extent of the value of the assets securing such Indebtedness.
The obligations of each Subsidiary Guarantor are limited to the maximum
amount which, after giving effect to all other contingent and fixed liabilities
of such Subsidiary Guarantor and after giving effect to any collections from or
payments made by or on behalf of any other Subsidiary Guarantor in respect of
the obligations of such other Subsidiary Guarantor under its Note Guarantee or
pursuant to its contribution obligations under the Indenture, will result in the
obligations of such Subsidiary Guarantor under the Note Guarantees not
constituting a fraudulent conveyance or fraudulent transfer under federal or
state law.
Each Subsidiary Guarantor that makes a payment or distribution under a Note
Guarantee shall be entitled to a contribution from each other Subsidiary
Guarantor in an amount PRO RATA, based on the net assets of each Subsidiary
Guarantor, determined in accordance with GAAP.
Each Subsidiary Guarantor may consolidate with or merge into or sell its
assets to the Company or another Subsidiary Guarantor that is a Restricted
Subsidiary of the Company, or with other Persons upon the terms and conditions
set forth in the Indenture. See "--Certain Covenants--Merger, Consolidation and
Sale of Assets." In the event all of the Capital Stock of a Subsidiary Guarantor
is (or all or substantially all of the assets of a Subsidiary Guarantor are)
sold by the Company and the sale complies
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<PAGE>
with the provisions set forth in "--Certain Covenants--Limitation on Asset
Sales," the Subsidiary Guarantor's Note Guarantee will be released. See
"--Certain Covenants--Limitation of Guarantees by Restricted Subsidiaries."
Separate financial statements of the Subsidiary Guarantors are not included
herein because such Subsidiary Guarantors are jointly and severally liable with
respect to the Company's obligations pursuant to the Notes, and the aggregate
net assets, earnings and equity of the Subsidiary Guarantors and the Company are
substantially equivalent to the net assets, earnings and equity of the Company
on a consolidated basis.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control,
unless irrevocable notice of redemption for all of the Notes is given within 30
days after the occurrence of such Change of Control in accordance with the
provisions of "--Redemption--Optional Redemption Upon a Change of Control," each
Holder will have the right to require that the Company purchase all or a portion
of such Holder's Notes pursuant to the offer described below (the "Change of
Control Offer"), at a purchase price equal to 101% of the principal amount
thereof plus accrued interest to the date of purchase. See "--Certain
Definitions--Change of Control."
Within 30 days following the date upon which the Change of Control occurred,
unless irrevocable notice of redemption for all of the Notes shall then have
been given in accordance with the provisions of "--Redemption--Optional
Redemption Upon a Change of Control," the Company must send, by first class
mail, a notice to each Holder, with a copy to the Trustee, which notice shall
govern the terms of the Change of Control Offer. Such notice shall state, among
other things, the purchase date, which must be no earlier than 30 days nor later
than 45 days from the date such notice is mailed, other than as may be required
by law (the "Change of Control Payment Date"). Holders electing to have a Note
purchased pursuant to a Change of Control Offer will be required to surrender
the Note, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Note completed, to the Paying Agent at the address specified in
the notice prior to the close of business on the third business day prior to the
Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third-party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company and
its Restricted Subsidiaries to incur additional Indebtedness, to grant liens on
their property, to make Restricted Payments and to make Asset Sales may also
make more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Notes, and
there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such redemption or repurchase. Such
restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout of
the Company or any of its Subsidiaries by the management of the Company. While
such restrictions cover a wide variety of arrangements which have traditionally
been used to effect highly leveraged transactions, the Indenture may not afford
the Holders of Notes protection in all circumstances from the adverse aspects of
a highly leveraged transaction, reorganization, restructuring, merger or similar
transaction.
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The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, or become liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (other than Permitted Indebtedness); PROVIDED, HOWEVER, that if no
Default or Event of Default shall have occurred and be continuing at the time of
or as a consequence of the incurrence of any such Indebtedness, the Company and
the Subsidiary Guarantors may incur Indebtedness (including, without limitation,
Acquired Indebtedness) if on the date of the incurrence of such Indebtedness,
after giving effect to the incurrence thereof, the Consolidated Fixed Charge
Coverage Ratio of the Company is greater than 2.0 to 1.0.
For the purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Indebtedness or is otherwise entitled to be incurred
pursuant to this covenant, the Company shall, in its sole discretion, classify
such item of Indebtedness in any manner that complies with this covenant and
such items of indebtedness will be treated as having been incurred pursuant to
only one of such clauses or pursuant to the first paragraph hereof. Accrual of
interest and the accretion of accreted value will not be deemed to be an
incurrence of Indebtedness for purposes of this covenant.
The Company will not incur any Indebtedness which by its terms (or by the
terms of any agreement governing such Indebtedness) is subordinated in right of
payment to any other Indebtedness of the Company unless such Indebtedness is
also by its terms (or by the terms of any agreement governing such Indebtedness)
made expressly subordinate in right of payment to the Notes pursuant to
subordination provisions that are substantively identical to the subordination
provisions of such Indebtedness (or such agreement) that are most favorable to
the holders of any other Indebtedness of the Company.
LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not cause
or permit any of its Restricted Subsidiaries to, directly or indirectly, (a)
declare or pay any dividend or make any distribution (other than dividends or
distributions payable in Qualified Equity Interests of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock, (c) make any principal payment on,
purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for
value, prior to any scheduled final maturity, scheduled repayment or scheduled
sinking fund payment, any Indebtedness of the Company that is subordinate or
junior in right of payment to the Notes (except the prepayment, purchase,
repurchase or other acquisition or retirement of Indebtedness in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of prepayment, purchase, repurchase
or other acquisition or retirement) or (d) make any Investment (other than
Permitted Investments) (each of the foregoing actions set forth in clauses (a),
(b) (c) and (d) being referred to as a "Restricted Payment"), if at the time of
such Restricted Payment or immediately after giving effect thereto, (i) a
Default or an Event of Default shall have occurred and be continuing or (ii) the
Company is not able to incur at least $1.00 of additional Indebtedness (other
than Permitted Indebtedness) in compliance with the "Limitation on Incurrence of
Additional Indebtedness" covenant or
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(iii) the aggregate amount of Restricted Payments (including such proposed
Restricted Payment) made subsequent to the Issue Date (the amount expended for
such purposes, if other than in cash, being the fair market value of such
property as determined in good faith by the Board of Directors of the Company)
shall exceed the sum of: (w) 50% of the cumulative Consolidated Net Income (or
if cumulative Consolidated Net Income shall be a loss, minus 100% of such loss)
of the Company from the first day of the Company's first fiscal quarter
commencing after the Issue Date to the last day of the Company's most recently
ended fiscal quarter for which internal financial statements are available at
the time of such proposed Restricted Payment (the "Reference Date") (treating
such period as a single accounting period); plus (x) 100% of the aggregate net
cash proceeds received by the Company from any Person (other than a Restricted
Subsidiary of the Company) from (i) the issuance and sale subsequent to the
Issue Date and on or prior to the Reference Date of Qualified Equity Interests
of the Company and (ii) Indebtedness or Disqualified Capital Stock that has been
converted into or exchanged for Qualified Equity Interests together with the
aggregate net cash proceeds received by the Company at the time of such
conversion or exchange; plus (y) without duplication of any amounts included in
clause (iii)(x) above, 100% of the aggregate net cash proceeds of any equity
contribution received by the Company from a holder of the Company's Capital
Stock; plus (z) an amount equal to the net reduction in Investment made pursuant
to this first paragraph of the "Limitation on Restricted Payments" covenant in
any Person resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of assets, in each case to
the Company or any Restricted Subsidiary (except to the extent any such payment
is included in the calculation of Consolidated Net Income), or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries
(determined and valued in each case as provided in the definition of
"Investments"), not to exceed the amount of Investments previously made by the
Company or any Restricted Subsidiary in such Person.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend or the
consummation of any purchase or redemption within 60 days after the date of
declaration of such dividend or the giving of any irrevocable notice in respect
of any such purchase or redemption if the dividend or purchase or redemption
would have been permitted on the date of declaration or the giving of such
irrevocable notice; (2) if no Default or Event of Default shall have occurred
and be continuing, the acquisition of any shares of Capital Stock of the
Company, either (i) solely in exchange for Qualified Equity Interests of the
Company or (ii) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Restricted Subsidiary of the Company)
of Qualified Equity Interests of the Company; (3) if no Default or Event of
Default shall have occurred and be continuing, the purchase, redemption,
defeasance or other acquisition or retirement for value of any Indebtedness of
the Company that is subordinate or junior in right of payment to the Notes
either (i) solely in exchange for Qualified Equity Interests of the Company, or
(ii) through the application of net proceeds of a substantially concurrent sale
for cash (other than to a Restricted Subsidiary of the Company) of (A) Qualified
Equity Interests of the Company or (B) Refinancing Indebtedness; (4) to the
extent constituting Restricted Payments, the Specified Affiliate Payments; (5)
(i) without limitation of the parenthetical in clause (a) of the preceding
paragraph, the payment of any regular quarterly dividends in respect of the
Redeemable Preferred Stock in the form of additional shares of Redeemable
Preferred Stock having the terms and conditions set forth in the Certificate of
Designations for the Redeemable Preferred Stock as in effect on the Issue Date;
and (ii) commencing January 31, 2001, the payment of regular quarterly cash
dividends (in the amount no greater than that provided for in the Certificate of
Designations for the Redeemable Preferred Stock as in effect on the Issue Date),
out of funds legally available therefor, on any of the shares of Redeemable
Preferred Stock issued and outstanding on the Issue Date and on any shares of
Redeemable Preferred Stock issued in payment of dividends made or subsequently
issued in payment of dividends thereon in respect of such shares of Redeemable
Preferred Stock outstanding on the Issue Date; PROVIDED that, at the time of and
immediately after giving effect to the payment of such cash dividend, the
Consolidated Fixed Charge Coverage Ratio, giving PRO FORMA effect to the payment
of such dividend as if it had occurred at the beginning of the four full fiscal
quarters immediately preceding the date on which the dividend is to be paid,
would have been equal to at least 2.0
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to 1.0 and (6) Restricted Payments in an aggregate amount not to exceed $2.5
million. In determining the aggregate amount of Restricted Payments made
subsequent to the Issue Date in accordance with clause (iii) of the immediately
preceding paragraph, amounts expended pursuant to clauses (1) without
duplication, (2)(ii), 3(ii)(A), (4) (to the extent provided in the definition of
"Specified Affiliate Payments"), (5)(ii) and (6) shall be included in such
calculation and all other Restricted Payments permitted pursuant to this
paragraph shall be excluded from such aggregate amount of Restricted Payments.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment complies with the Indenture and setting forth in reasonable detail the
basis upon which the required calculations were computed.
In making the computations required by this covenant, (i) the Company may
use audited financial statements for the portions of the relevant period for
which audited financial statements are available on the date of determination
and unaudited financial statements and other current financial data based on the
books and records of the Company for the remaining portion of such period and
(ii) the Company will be permitted to rely in good faith on the financial
statements and other financial data derived from its books and records that are
available on the date of determination. If the Company makes a Restricted
Payment that, at the time of the making of such Restricted Payment, would in the
good faith determination of the Company be permitted under the requirements of
the Indenture, such Restricted Payment will be deemed to have been made in
compliance with the Indenture notwithstanding any subsequent adjustments made in
good faith to the Company's financial statements affecting Consolidated Net
Income of the Company for any period.
LIMITATION ON ASSET SALES. The Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company
or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 75% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition; PROVIDED that the amount of (x) any liabilities
(as shown on the Company's or such Restricted Subsidiary's most recent balance
sheet), of the Company or any Restricted Subsidiary (other than liabilities that
are by their terms subordinated to the Notes or, in the case of liabilities of a
Restricted Subsidiary, any Note Guarantee of such Subsidiary) that are assumed
by the transferee of any such assets and (y) any securities, notes or other
obligations received by the Company or any such Restricted Subsidiary from such
transferee that are converted by the Company or such Restricted Subsidiary into
cash (to the extent of the cash received) within 180 days after receipt, shall
be deemed to be cash for purposes of this clause (ii); PROVIDED, further,
however, that this clause (ii) shall not apply to any sale of Capital Stock of
or other Investments in Unrestricted Subsidiaries and (iii) upon the
consummation of an Asset Sale, the Company shall apply, or cause such Restricted
Subsidiary to apply, the Net Cash Proceeds relating to such Asset Sale within
360 days of receipt thereof either (A) to prepay (and, in the case of any
Indebtedness under any revolving credit facility, including the New Credit
Facility, effect a permanent reduction in the availability under such revolving
credit facility) any Indebtedness, (B) to make an investment in properties and
assets that replace the properties and assets that were the subject of such
Asset Sale or in properties and assets that will be used in the business of the
Company and its Restricted Subsidiaries as existing on the Issue Date or in
businesses reasonably related thereto ("Replacement Assets"), or (C) a
combination of prepayment and investment permitted by the foregoing clauses
(iii)(A) and (iii)(B). On the 361st day after an Asset Sale or such earlier
date, if any, as the Board of Directors of the Company or of such Restricted
Subsidiary determines not to apply the Net Cash Proceeds relating to such Asset
Sale as set forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the next
preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such aggregate
amount of such Net Cash Proceeds which have not been applied on or before such
Net Proceeds Offer Trigger Date as permitted in clauses (iii)(A), (iii)(B) and
(iii)(C) of the next preceding sentence (each a "Net Proceeds Offer Amount")
shall
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be applied by the Company or such Restricted Subsidiary to make an offer to
purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer Payment
Date") not less than 30 nor more than 45 days following the applicable Net
Proceeds Offer Trigger Date, from all Holders on a PRO RATA basis, that amount
of Notes issued under the Indenture equal to the Net Proceeds Offer Amount at a
price equal to 100% of the principal amount of the Notes to be purchased, plus
accrued and unpaid interest thereon, if any, to the date of purchase; PROVIDED,
HOWEVER, that if at any time any non-cash consideration received by the Company
or any Restricted Subsidiary of the Company, as the case may be, in connection
with any Asset Sale is converted into or sold or otherwise disposed of for cash
(other than interest or dividends received with respect to any such non-cash
consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant. The Company may defer the Net Proceeds
Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to
or in excess of $10.0 million resulting from one or more Asset Sales (at which
time, the entire unutilized Net Proceeds Offer Amount, and not just the amount
in excess of $10.0 million, shall be applied as required pursuant to this
paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and its Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Notwithstanding the two immediately preceding paragraphs, the Company and
its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 75% of the
consideration for such Asset Sale constitutes Replacement Assets and (ii) such
Asset Sale is for fair market value; PROVIDED that any consideration not
constituting Replacement Assets received by the Company or any of its Restricted
Subsidiaries in connection with any Asset Sale permitted to be consummated under
this paragraph shall constitute Net Cash Proceeds subject to the provisions of
the two preceding paragraphs.
Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent Holders properly tender Notes in an amount
exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be
purchased on a PRO RATA basis (based on amounts tendered). A Net Proceeds Offer
shall remain open for a period of 20 business days or such longer period as may
be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any consensual encumbrance or restriction on
the ability of any Restricted Subsidiary of the Company to (a) pay dividends or
make any other distributions on or in respect of its Capital Stock; (b) make
loans or advances or to pay any Indebtedness or other obligation owed to the
Company or any other Restricted Subsidiary of the Company; or (c) transfer any
of its
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property or assets to the Company or any other Restricted Subsidiary of the
Company, except for such encumbrances or restrictions existing under or by
reason of: (1) the Indenture; (2) any security or pledge agreements, leases or
options (or similar agreements) containing customary restrictions on transfers
of the assets encumbered thereby or leased or subject to option or on the
transfer or subletting of the leasehold interest represented thereby; (3) any
instrument governing Acquired Indebtedness, which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any Person, other
than the Person or the properties or assets of the Person so acquired; (4)
agreements existing on the Issue Date to the extent and in the manner such
agreements are in effect on the Issue Date; (5) any contracts for the sale of
assets, including, without limitation, any restriction with respect to a
Restricted Subsidiary imposed pursuant to an agreement entered into for the sale
or disposition of all or substantially all of the Capital Stock or assets of
such Restricted Subsidiary, pending the closing of such sale or disposition,
PROVIDED that any such restriction relates solely to the assets that are the
subject of such agreement; (6) restrictions on cash or other deposits or net
worth imposed by leases entered into in the ordinary course of business; (7)
customary provisions in joint venture agreements and other similar agreements;
(8) the New Credit Facility; (9) any agreement or instrument governing Capital
Stock of any Person that is acquired; and (10) any encumbrances or restrictions
imposed by any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings of contracts, instruments
or obligations referred to in clauses (1) through (10), provided that such
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are, in the good faith judgment of the
Company, no more restrictive with respect to such dividend and other transfer
restrictions than those contained in the dividend or other transfer restrictions
prior to such amendment, modification, restatement, renewal, increase,
supplement, refunding, replacement or refinancing.
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will
not permit any of its Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary of the
Company) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company) to own any Preferred Stock of any
Restricted Subsidiary of the Company.
LIMITATION ON LIENS. The Company will not, and will not cause or permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or permit or suffer to exist any Liens of any kind against or upon any property
or assets of the Company or any of its Restricted Subsidiaries whether owned on
the Issue Date or acquired after the Issue Date, or any proceeds therefrom,
unless (i) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the Notes, the Notes are secured by
a Lien on such property, assets or proceeds that is senior in priority to such
Liens and (ii) in all other cases, the Notes are equally and ratably secured,
except in each case for (A) Liens existing as of the Issue Date to the extent
and in the manner such Liens are in effect on the Issue Date; (B) Liens of the
Company or a Restricted Subsidiary of the Company on assets of any Restricted
Subsidiary of the Company; (C) Liens securing Refinancing Indebtedness which is
incurred to Refinance any Indebtedness which has been secured by a Lien
permitted under the Indenture and which has been incurred in accordance with the
provisions of the Indenture; PROVIDED, HOWEVER, that such Liens do not extend to
or cover any property or assets of the Company or any of its Restricted
Subsidiaries not securing the Indebtedness so Refinanced; and (D) Permitted
Liens.
MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any Person (except that MergerCo may merge with and into EHI as contemplated by
the Recapitalization Agreement), or sell, assign, transfer, lease, convey or
otherwise dispose of (or cause or permit any Restricted Subsidiary of the
Company to sell, assign, transfer, lease, convey or otherwise dispose of) all or
substantially all of the Company's assets (determined on a consolidated basis
for the Company and the Company's Restricted Subsidiaries) to any Person unless:
(i) either (1) the Company shall be the surviving or continuing corporation or
(2) the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or the Person which
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acquires by sale, assignment, transfer, lease, conveyance or other disposition
the properties and assets of the Company and of the Company's Restricted
Subsidiaries substantially as an entirety (the "Surviving Entity") (x) shall be
a corporation organized and validly existing under the laws of the United States
or any State thereof or the District of Columbia and (y) shall expressly assume,
by supplemental indenture (in form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and punctual payment of the
principal of, and premium, if any, and interest on all of the Notes and the
performance of every covenant of the Notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed or observed; (ii)
immediately after giving effect to such transaction and the assumption
contemplated by clause (i)(2)(y) above (including giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction), the Company or such
Surviving Entity, as the case may be, shall be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"--Limitation on Incurrence of Additional Indebtedness" covenant; (iii)
immediately before and immediately after giving effect to such transaction and
the assumption contemplated by clause (i)(2)(y) above (including, without
limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred
or anticipated to be incurred and any Lien granted in connection with or in
respect of the transaction), no Default or Event of Default shall have occurred
or be continuing; and (iv) the Company or the Surviving Entity shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture comply with the
applicable provisions of the Indenture and that all conditions precedent in the
Indenture relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
Notwithstanding the foregoing clauses (ii), (iii) and (iv), (a) any
Restricted Subsidiary may consolidate with, merge into or transfer all or part
of its properties and assets to the Company, and (b) the Company may merge with
(i) Elgar Electronics Corporation at any time following the Issue Date, or (ii)
an Affiliate incorporated solely for the purpose of reincorporating the Company
in another jurisdiction.
The Indenture provides that upon any consolidation, combination or merger or
any transfer of all or substantially all of the assets of the Company in
accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Notes with the same effect as if such
surviving entity had been named as such.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under paragraph (b) below and (y) Affiliate Transactions
on terms that are no less favorable than those that might reasonably have been
obtained in a comparable transaction at such time on an arm's-length basis from
a Person that is not an Affiliate of the Company or such Restricted Subsidiary.
All Affiliate Transactions (and each series of related Affiliate Transactions
which are part of a common plan) involving aggregate payments or other property
with a fair market value in excess of $2.5 million shall be approved by the
Board of Directors of the Company or such Restricted Subsidiary, as the case may
be, such approval to be evidenced by a Board Resolution stating that such Board
of Directors has determined that such transaction complies with the foregoing
provisions. If
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the Company or any Restricted Subsidiary of the Company enters into an Affiliate
Transaction (or a series of related Affiliate Transactions related to a common
plan) that involves an aggregate fair market value of more than $7.5 million,
the Company or such Restricted Subsidiary, as the case may be, shall, prior to
the consummation thereof, obtain a favorable opinion as to the fairness of such
transaction or series of related transactions to the Company or the relevant
Restricted Subsidiary, as the case may be, from a financial point of view, from
an Independent Financial Advisor and file the same with the Trustee.
(b) The restrictions set forth in clause (a) above shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided for the benefit
of officers, directors, employees or consultants of the Company or any
Restricted Subsidiary of the Company as determined in good faith by the
Company's Board of Directors or senior management; (ii) transactions exclusively
between or among the Company and any of its Restricted Subsidiaries or
exclusively between or among such Restricted Subsidiaries, provided such
transactions are not otherwise prohibited by the Indenture; (iii) the
transactions and payments contemplated by any agreement as in effect as of the
Issue Date (including, without limitation, the Recapitalization Agreement and
the Management Agreement) or any amendment thereto or any replacement agreement
thereto so long as any such amendment or replacement agreement is not more
disadvantageous to the Holders in any material respect than the original
agreement as in effect on the Issue Date; (iv) the payment to the Principals or
their Related Parties and affiliates of annual management and advisory fees and
related expenses; PROVIDED that the amount of such fees shall not exceed
$500,000 per fiscal year; (v) loans and advances (or guarantees of third party
loans) to officers or employees of the Company or any of its Restricted
Subsidiaries in the ordinary course of business not to exceed $250,000 at any
time outstanding; (vi) the payment of fees and expenses related to the
Recapitalization; (vii) Permitted Investments and Restricted Payments permitted
by the Indenture and (viii) any employment agreement, collective bargaining
agreement, employee benefit plan, related trust agreement, indemnification
agreement, benefit plan or similar arrangement for the benefit of directors,
officers entered into in the ordinary course of business.
(c) In addition, the last sentence of paragraph (a) shall not apply to (i)
payments by the Company or any of its Restricted Subsidiaries to the Principals
or their Related Parties and Affiliates for any financial advisory, financing,
underwriting or placement services or in respect of other investment banking
activities, including in connection with acquisition or divestitures, which
payments are approved by the Board of Directors of the Company in good faith,
and (ii) Indebtedness permitted by paragraph (xiv) of the definition of
"Permitted Indebtedness."
LIMITATION OF GUARANTEES BY RESTRICTED SUBSIDIARIES. The Company will not
permit any of its domestic Restricted Subsidiaries, directly or indirectly, by
way of the pledge of any intercompany note or otherwise, to guarantee any
Indebtedness of the Company unless, in any such case, (a) such Restricted
Subsidiary executes and delivers a supplemental indenture to the Indenture
providing a Note Guarantee by such Restricted Subsidiary and (b) if any such
guarantee of such Restricted Subsidiary is provided in respect of Indebtedness
that is expressly subordinated to the Notes, the guarantee or other instrument
provided by such Restricted Subsidiary in respect of such subordinated
Indebtedness shall be subordinated to the Note Guarantee pursuant to
subordination provisions no less favorable to the Holders of the Notes than
those contained in the Indenture.
Notwithstanding the foregoing, any such Note Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged, without any further action required on
the part of the Trustee or any Holder, upon: (i) the unconditional release of
such Restricted Subsidiary from its liability in respect of the Indebtedness in
connection with which such Note Guarantee was executed and delivered pursuant to
the preceding paragraph; (ii) any sale or other disposition (by merger or
otherwise) to any Person which is not a Restricted Subsidiary of the Company of
all of the Company's Capital Stock in, or all or substantially all of the assets
of, such Restricted Subsidiary; PROVIDED that such sale or disposition of such
Capital Stock or assets is otherwise in compliance with the terms of the
Indenture, (iii) the designation of such Subsidiary as an Unrestricted
Subsidiary in accordance
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with the provisions of the Indenture or (iv) the sale or other disposition of
shares of Capital Stock of such Subsidiary to a Person other than the Company or
a Restricted Subsidiary such that such Subsidiary ceases to constitute a
Subsidiary of the Company, provided such disposition is otherwise in accordance
with the provisions of the Indenture.
CONDUCT OF BUSINESS. The Company and its Restricted Subsidiaries will not
engage in any businesses which are not the same, similar or reasonably related
or complementary to the businesses in which the Company and its Restricted
Subsidiaries are engaged on the Issue Date (as determined in good faith by the
Board of Directors of the Company).
REPORTS TO HOLDERS. The Indenture provides that the Company will deliver to
the Trustee within 15 days after the filing of the same with the Commission,
copies of the quarterly and annual reports and of the information, documents and
other reports, if any, which the Company is required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further
provides that, notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
will file with the Commission from and after the commencement of an Exchange
Offer or the effectiveness of the Shelf Registration Statement but in any event
not later than 210 days after the Issue Date, to the extent permitted, and
provide the Trustee and Holders with such annual reports and such information,
documents and other reports specified in Sections 13 and 15(d) of the Exchange
Act. The Company will also comply with the other provisions of TIA Section
314(a).
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes when the same becomes due and
payable and the default continues for a period of 30 days;
(ii) the failure to pay the principal on any Notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise (including
the failure to make a payment to purchase Notes tendered pursuant to a Change of
Control Offer or a Net Proceeds Offer);
(iii) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period of 60
days after written notice specifying the default (and demanding that such
default be remedied) is given to the Company by the Trustee or to the Company
and the Trustee by the Holders of at least 25% of the outstanding principal
amount of the Notes (except in the case of a default with respect to the
"Merger, Consolidation and Sale of Assets" covenant, which will constitute an
Event of Default with such notice requirement but without such passage of time
requirement);
(iv) the failure to pay at final maturity (giving effect to any applicable
grace periods and any extensions thereof) the principal amount of any
Indebtedness of the Company or any Restricted Subsidiary of the Company and such
failure continues for a period of 20 days or more, or the acceleration of the
final stated maturity of any such Indebtedness (which acceleration is not
rescinded, annulled or otherwise cured within 20 days of receipt by the Company
or such Restricted Subsidiary of notice of any such acceleration) if the
aggregate principal amount of such Indebtedness, together with the principal
amount of any other such Indebtedness in default for failure to pay principal at
final maturity or which has been accelerated, aggregates $5.0 million or more at
any time;
(v) one or more judgments in an aggregate amount in excess of $5.0 million
shall have been rendered against the Company or any of its Significant
Subsidiaries and such judgments remain undischarged, unpaid or unstayed for a
period of 60 days after such judgment or judgments become final and non-
appealable; or
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries.
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If an Event of Default (other than an Event of Default specified in clause
(vi) above relating to the Company) shall occur and be continuing, the Trustee
or the Holders of at least 25% in principal amount of outstanding Notes may
declare the principal of and accrued interest on all the Notes to be due and
payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same shall become immediately due and payable.
If an Event of Default specified in clause (vi) above relating to the Company
occurs and is continuing, then all unpaid principal of, and premium, if any, and
accrued and unpaid interest on all of the outstanding Notes shall IPSO FACTO
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of acceleration
with respect to the Notes as described in the preceding paragraph, the Holders
of a majority in principal amount of the Notes may rescind and cancel such
declaration and its consequences (i) if the rescission would not conflict with
any judgment or decree, (ii) if all existing Events of Default have been cured
or waived except nonpayment of principal or interest that has become due solely
because of the acceleration, (iii) to the extent the payment of such interest is
lawful, interest on overdue installments of interest and overdue principal,
which has become due otherwise than by such declaration of acceleration, has
been paid, (iv) if the Company has paid the Trustee its reasonable compensation
and reimbursed the Trustee for its expenses, disbursements and advances and (v)
in the event of the cure or waiver of an Event of Default of the type described
in clause (vi) of the description above of Events of Default, the Trustee shall
have received an officers' certificate and an opinion of counsel that such Event
of Default has been cured or waived. No such rescission shall affect any
subsequent Default or impair any right consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any Senior Officer obtaining actual
knowledge of any Default or Event of Default (provided that such officers shall
provide such certification at least annually whether or not they know of any
Default or Event of Default) that has occurred and, if applicable, describe such
Default or Event of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have the
obligations of the Company and the Subsidiary Guarantors discharged with respect
to the outstanding Notes ("Legal Defeasance"), the Indenture and the Note
Guaranteess. Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
Notes and cured all then existing Defaults and Events of Default, except for (i)
the rights of Holders to receive payments in respect of the principal of,
premium, if any, and interest on the Notes when such payments are due and of the
defeasance trust referred to below, (ii) the Company's obligations with respect
to the Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance of an office or
agency for payments, (iii) the rights, powers, trust, duties and immunities of
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the Trustee and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company and the
Subsidiary Guarantors released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
reorganization and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders cash in U.S. dollars, non-callable U.S. government obligations, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Notes on the stated date for
payment thereof or on the applicable redemption date, as the case may be; (ii)
in the case of Legal Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit (other than a Default or Event of Default resulting from
the borrowing of funds to be applied to such deposit and the grant of any Lien
securing such borrowing) or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
shall not result in a breach or violation of, or constitute a default under any
other material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders over any other creditors of the Company or with the
intent of defeating, hindering, delaying or defrauding any other creditors of
the Company or others; (vii) the Company shall have delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that all
conditions precedent provided for or relating to the Legal Defeasance or the
Covenant Defeasance have been complied with; (viii) the Company shall have
delivered to the Trustee an opinion of counsel to the effect that, subject to
customary assumptions and exclusions, after the 91st day following the deposit,
the trust funds will not be part of any "estate" formed by the bankruptcy or
reorganization of the Company or subject to the "automatic stay" under the
Bankruptcy Code or, in the case of Covenant Defeasance, will be subject to a
first priority Lien in favor of the Trustee for the benefit of the Holders; and
(ix) certain other customary conditions precedent are satisfied. Notwithstanding
the foregoing, the Opinion of Counsel required by clause (ii) above with respect
to a Legal Defeasance need not be delivered if all Notes not theretofore
delivered to the Trustee for cancellation (x) have become due and payable, (y)
will become due and payable on the maturity date within one year or (z) are to
be called for redemption within one year under arrangements satisfactory to the
Trustee for the giving of notice of redemption by the Trustee in the name, and
at the expense, of the Company.
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SATISFACTION AND DISCHARGE
The Indenture, the Notes and the Note Guarantees will be discharged and will
cease to be of further effect (except as to surviving rights or registration of
transfer or exchange of the Notes, as expressly provided for in the Indenture)
as to all outstanding Notes when (i) either (a) all the Notes theretofore
authenticated and delivered (except lost, stolen or destroyed Notes which have
been replaced or paid and Notes for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Company and thereafter
repaid to the Company or discharged from such trust) have been delivered to the
Trustee for cancellation or (b) all Notes not theretofore delivered to the
Trustee for cancellation have become due and payable and the Company has
irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company has paid all other sums payable under the Indenture by the Company;
and (iii) the Company has delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture for any of the following purposes: (1) to
evidence the succession of another person to the Company or any Subsidiary
Guarantor and the assumption by any such successor of the covenants of the
Company or any Subsidiary Guarantor in the Indenture and in the Notes; or (2) to
add to the covenants of the Company or any Subsidiary Guarantor for the benefit
of the Holders, or to surrender any right or power herein conferred upon the
Company or any Subsidiary Guarantor; or (3) to add additional Events of
Defaults; or (4) to provide for uncertificated Notes in addition to or in place
of the certificated Notes; or (5) to evidence and provide for the acceptance of
appointment under the Indenture by a successor Trustee; or (6) to secure the
Notes or any Note Guarantee; or (7) to cure any ambiguity, to correct or
supplement any provision in the Indenture that may be defective or inconsistent
with any other provisions in the Indenture, or to make any other provisions with
respect to matters or questions arising under the Indenture, provided that such
actions pursuant to this clause (7) do not adversely affect the interests of the
Holders in any material respect; or (8) to comply with any requirements of the
Commission in order to effect and maintain the qualification of the Indenture
under the TIA; or (9) to release any Subsidiary Guarantor from its Note
Guarantee in accordance with the provisions of the Indenture (including in
connection with a sale of all of the Capital Stock of such Subsidiary
Guarantor). In formulating its opinion on the matters in clause (7), the Trustee
will be entitled to rely on such evidence as it deems appropriate, including,
without limitation, solely on an opinion of counsel. Other modifications and
amendments of the Indenture may be made with the consent of the Holders of a
majority in principal amount of the then outstanding Notes issued under the
Indenture (including, without limitation, consents obtained in connection with a
purchase of, or tender offer or exchange offer for, Notes), except that, without
the consent of each Holder affected thereby, no amendment may: (i) reduce the
amount of Notes whose Holders must consent to an amendment; (ii) reduce the rate
of or change the time for payment of interest, including defaulted interest, on
any Notes; (iii) reduce the principal of or change the fixed maturity of any
Notes, or change the date on which any Notes may be subject to redemption or
repurchase, or reduce the redemption or repurchase price therefor; (iv) make any
Notes payable in money other than that stated in the Notes; (v) make any change
in provisions of the Indenture protecting the right of each Holder to receive
payment of principal of and interest on such Note on or after the due date
thereof or to bring suit to enforce such payment, or permitting Holders of a
majority in principal amount of Notes to waive Defaults or Events of Default;
(vi) modify or change any provision of the Indenture or the related
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definitions affecting the ranking of the Notes; or (vii) release any Subsidiary
Guarantor from any of its obligations under its Note Guarantee other than in
accordance with the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes are governed by, and construed
in accordance with, the laws of the State of New York but without giving effect
to applicable principles of conflicts of law to the extent that the application
of the law of another jurisdiction would be required thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; PROVIDED that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or at the time it merges or consolidates with the Company or any of
its Subsidiaries or assumed in connection with the acquisition of assets from
such Person and in each case not incurred by such Person in connection with, or
in anticipation or contemplation of, such Person becoming a Restricted
Subsidiary of the Company or such acquisition, merger or consolidation.
"AFFILIATE" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"ASSET ACQUISITION" means (a) an Investment by the Company or any
Restricted Subsidiary of the Company in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or any Restricted
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or (b) the acquisition by the Company or
any Restricted Subsidiary of the Company of the assets of any Person (other than
a Restricted Subsidiary of the Company) which constitute all or substantially
all of the assets of such Person or comprises any division or line of business
of such Person or any other properties or assets of such Person other than in
the ordinary course of business.
"ASSET SALE" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by
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the Company or any of its Restricted Subsidiaries (including any Sale and
Leaseback Transaction) to any Person other than the Company or a Restricted
Subsidiary of the Company of (a) any Capital Stock of any Restricted Subsidiary
of the Company; or (b) any other property or assets of the Company or any
Restricted Subsidiary of the Company other than in the ordinary course of
business; PROVIDED, HOWEVER, that Asset Sales shall not include (i) a
transaction or series of related transactions for which the Company or its
Restricted Subsidiaries receive aggregate consideration of less than $500,000,
(ii) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company and the Restricted Subsidiaries
of the Company (determined on a consolidated basis), or the consolidation or
merger of the Company with any other Person, in each case as permitted under
"--Merger, Consolidation and Sale of Assets," (iii) any disposition of property
of the Company or any of its Restricted Subsidiaries that, in the reasonable
judgment of the Company, has become uneconomic, obsolete or worn out, (iv) a
Restricted Payment or Permitted Investment that is permitted by the covenant
described above under the caption "--Certain Covenants-Limitation on Restricted
Payments" (including, without limitation, any formation of or contribution of
assets to a joint venture), (v) leases or subleases, in the ordinary course of
business, to third parties of real property owned in fee or leased by the
Company or its Subsidiaries, (vi) the sale of inventory in the ordinary course
of business, (vii) the sale of Cash Equivalents or (viii) the sale or discount,
in each case without recourse (other than recourse for a breach of a
representation or warranty) of accounts receivable arising in the ordinary
course of business, but only in connection with the compromise or collection
thereof.
"BOARD OF DIRECTORS" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"BOARD RESOLUTION" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"BORROWING BASE" means, as of any date, an amount equal to the sum of (a)
85% of the face amount of all accounts receivable owned by the Company and its
Restricted Subsidiaries as of such date that are not more than 90 days past due,
and (b) 60% of the book value of all inventory owned by the Company and its
Restricted Subsidiaries as of such date, all calculated on a consolidated basis
and in accordance with GAAP. To the extent that information is not available as
to the amount of accounts receivable or inventory as of a specific date, the
Company may utilize the most recent available information for the purpose of
calculating the Borrowing Base.
"CAPITALIZED LEASE OBLIGATION" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"CAPITAL STOCK" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (ii) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"CASH EQUIVALENTS" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time
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of acquisition, having a rating of at least A-1 from S&P or at least P-1 from
Moody's; (iv) certificates of deposit, Eurodollar deposits or bankers'
acceptances maturing within one year from the date of acquisition thereof issued
by any bank organized under the laws of the United States of America or any
state thereof or the District of Columbia or any U.S. branch of a foreign bank
or any foreign branch of a U.S. bank, in each case, having at the date of
acquisition thereof combined capital and surplus of not less than $250,000,000;
(v) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (i) above entered into
with any bank meeting the qualifications specified in clause (iv) above; and
(vi) investments in money market funds with assets at least equal to $500.0
million.
"CHANGE OF CONTROL" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group"), together with any Affiliates thereof (whether
or not otherwise in compliance with the provisions of the Indenture) other than
to a Subsidiary of the Company, the Principals and their Related Parties; (ii)
the liquidation or dissolution of the Company, other than in a transaction that
complies with the provisions described under "--Certain
Covenants--Consolidation, Merger and Sale of Assets"; (iii) any Person or Group
(other than the Principals and their Related Parties) shall become the owner,
directly or indirectly, beneficially or of record, of shares representing more
than 50% of the aggregate ordinary voting power represented by the issued and
outstanding Capital Stock of the Company; or (iv) the replacement of a majority
of the Board of Directors of the Company over a two-year period from the
directors who constituted the Board of Directors of the Company at the beginning
of such period, and such replacement shall not have been approved by a vote of
at least a majority of the Board of Directors of the Company then still in
office who either were members of such Board of Directors at the beginning of
such period or whose election as a member of such Board of Directors was
previously so approved.
"COMMON STOCK" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"CONSOLIDATED EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of (i) Consolidated Net Income and (ii) to the
extent Consolidated Net Income has been reduced thereby, (A) all income taxes of
such Person and its Restricted Subsidiaries accrued in accordance with GAAP for
such period, (B) Consolidated Fixed Charges and (C) Consolidated Non-cash
Charges LESS any non-cash items increasing Consolidated Net Income for such
period, all as determined on a consolidated basis for such Person and its
Restricted Subsidiaries in accordance with GAAP.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
such Person for the Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a PRO
FORMA basis for the period of such calculation to (i) the incurrence or
repayment of any Indebtedness of such Person or any of its Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (ii) any
asset
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sales, discontinuance of operations (as determined in accordance with GAAP) or
Asset Acquisitions (including, without limitation, any Asset Acquisition giving
rise to the need to make such calculation as a result of such Person or one of
its Restricted Subsidiaries (including any Person who becomes a Restricted
Subsidiary as a result of the Asset Acquisition) incurring, assuming or
otherwise being liable for Acquired Indebtedness and also including any
Consolidated EBITDA (including any PRO FORMA expense and cost reductions as
determined in accordance with Regulation S-X under the Exchange Act)
attributable to the assets which are the subject of the Asset Acquisition or
asset sale during the Four Quarter Period) occurring during the Four Quarter
Period or at any time subsequent to the last day of the Four Quarter Period and
on or prior to the Transaction Date, as if such asset sale, discontinuance or
Asset Acquisition (including the incurrence, assumption or liability for any
such Acquired Indebtedness) occurred on the first day of the Four Quarter
Period. If such Person or any of its Restricted Subsidiaries directly or
indirectly guarantees Indebtedness of a third Person, the preceding sentence
shall give effect to the incurrence of such guaranteed Indebtedness as if such
Person or any Restricted Subsidiary of such Person had directly incurred or
otherwise assumed such guaranteed Indebtedness. If since the beginning of such
period any Person (that subsequently became a Restricted Subsidiary or was
merged with or into the Company or any Restricted Subsidiary since the beginning
of such period) shall have made any Asset Acquisition or asset sale that would
have required adjustment pursuant to this definition, then the Consolidated
Fixed Charge Coverage Ratio shall be calculated giving PRO FORMA effect thereto
as if such Asset Acquisition or asset sale had occurred at the beginning of the
applicable Four Quarter Period. Furthermore, in calculating "Consolidated Fixed
Charges" for purposes of determining the denominator (but not the numerator) of
this "Consolidated Fixed Charge Coverage Ratio," (1) interest on outstanding
Indebtedness determined on a fluctuating basis as of the Transaction Date and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; and (2) notwithstanding clause
(1) above, interest on Indebtedness determined on a fluctuating basis, to the
extent such interest is covered by agreements relating to Interest Swap
Obligations, shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements and (3) if it bears, at the
option of the Company or the relevant Restricted Subsidiary of the Company, a
fixed or floating rate of interest, interest thereon will be computed by
applying, at the option of the Company, either the fixed or floating rate. For
purposes of this definition, whenever PRO FORMA effect is to be given to a
transaction, the PRO FORMA calculation shall be
made in good faith by the Chief Financial Officer of the Company and ratified by
the Board of Directors of the Company.
"CONSOLIDATED FIXED CHARGES" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of such Person (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local
income tax rate of such Person, expressed as a decimal, PROVIDED that
Consolidated Fixed Charges shall not include (x) gain or loss from
extinguishment of debt, including write off of debt issuance costs, commissions,
fees and expenses, (y) amortization of debt issuance costs, commissions, fees
and expenses, or (z) customary commitment, administrative and transaction fees
or charges.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (a) any amortization of debt discount and amortization or write-off
deferred financing costs, (b) the net costs under Interest Swap Obligations, (c)
all capitalized interest and (d) the interest portion of any deferred payment
obligation; and (ii) the interest component of Capitalized Lease Obligations
accrued by such Person and its Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP.
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"CONSOLIDATED NET INCOME" means, with respect to any Person, for any
period, the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; PROVIDED that there shall be excluded therefrom (a) after-tax gains
or losses from Asset Sales or other sales of assets outside the ordinary course
of business or abandonments or reserves relating thereto, (b) after-tax items
classified as extraordinary or nonrecurring gains or losses, (c) solely for
purposes of the covenant described under "--Certain Covenants--Limitation on
Restricted Payments," the net income or loss of any Person acquired in a
"pooling of interests" transaction accrued prior to the date it becomes a
Restricted Subsidiary of the referent Person or is merged or consolidated with
the referent Person or any Restricted Subsidiary of the referent Person, (d) the
net income or loss of any Restricted Subsidiary of the referent Person to the
extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is restricted by a contract, operation of
law or otherwise, except to the extent that such net income is actually paid to
the Company or a Restricted Subsidiary thereof by loans, advances, intercompany
transfers, principal payments or otherwise, (e) the net income of any Person,
other than a Restricted Subsidiary of the referent Person, except to the extent
of cash dividends or distributions paid to the referent Person or subject to
clause (d), to a Restricted Subsidiary of the referent Person by such Person,
(f) the fees, expenses and other costs incurred in connection with the
Recapitalization, including payments to management contemplated by the
Recapitalization Agreement; PROVIDED, HOWEVER, that Net Income shall be deemed
to include any increases during such period to consolidated shareholder's equity
of such Person attributable to tax benefits from net operating losses and the
exercise of stock options that are not otherwise included in Net Income for such
period.
"CONSOLIDATED NON-CASH CHARGES" means, with respect to any Person, for any
period, the (a) sum of (i) aggregate depreciation, amortization and other
non-cash expenses or charges of such Person and its Restricted Subsidiaries
reducing Consolidated Net Income of such Person and its Restricted Subsidiaries
for such period (including amortization of goodwill, the non-cash costs of
agreements evidencing Interest Swap Obligations, Currency Agreements, license
agreements, non-competition agreements, non-cash amortization of Capitalized
Lease Obligations or management fees, and organization costs), (ii) expenses and
charges related to any equity offering or incurrence of Indebtedness permitted
to be incurred by the Indenture (including any such expenses or charges relating
to the Recapitalization), (iii) the amount of any restructuring charge or
reserve, (iv) unrealized gains and losses from hedging, foreign currency or
commodities translations and transactions, and (v) the amount of any reduction
representing a minority interest in Subsidiary Guarantors, MINUS (b) any cash
payment with respect to which a charge or reserve referred to in clause (a) was
taken in a prior period, in each case, determined on a consolidated basis in
accordance with GAAP.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"DEFAULT" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof on or prior to the final
maturity date of the Notes; PROVIDED that (i) any Capital Stock that would not
constitute Disqualified Capital Stock but for provisions therein giving holders
thereof the right to cause the issuer thereof to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes will constitute Disqualified
Capital Stock if the "asset sale" or "change of control" provisions applicable
to such Capital Stock are no more favorable to the holders of such Capital Stock
than the
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provisions described under "--Change of Control" and (ii) the Redeemable
Preferred Stock shall not constitute Disqualified Capital Stock.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. For purposes of the
covenant described under "--Certain Covenants-Limitations on Asset Sales," fair
market value shall be determined by the Board of Directors of the Company acting
in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"INDEBTEDNESS" means with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money, (ii) all indebtedness of
such Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all Capitalized Lease Obligations of such Person, (iv) all obligations of
such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business), (v) all obligations for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction, (vi) guarantees and other contingent obligations in
respect of Indebtedness referred to in clauses (i) through (v) above and clause
(viii) below, (vii) all obligations of any other Person of the type referred to
in clauses (i) through (vi) above which are secured by any lien on any property
or asset of such Person, the amount of such obligation being deemed to be the
lesser of the fair market value of such property or asset or the amount of the
obligation so secured, (viii) all obligations under currency agreements and
interest swap agreements of such Person and (ix) all Disqualified Capital Stock
issued by such Person with the amount of Indebtedness represented by such
Disqualified Capital Stock being equal to the greater of its voluntary or
involuntary liquidation preference and its maximum fixed repurchase price, but
excluding accrued dividends, if any. For purposes hereof, the "maximum fixed
repurchase price" of any Disqualified Capital Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Disqualified Capital Stock as if such Disqualified Capital Stock were purchased
on any date on which Indebtedness shall be required to be determined pursuant to
the Indenture, and if such price is based upon, or measured by, the fair market
value of such Disqualified Capital Stock, such fair market value shall be
determined in good faith by the Board of Directors of the issuer of such
Disqualified Capital Stock. Subject to the directly preceding sentence, the
amount of any Indebtedness outstanding as of any date shall be (i) the accreted
value thereof, in the case of any Indebtedness that does not require current
payments of interests, and (ii) the principal amount thereof in the case of any
other Indebtedness. Notwithstanding the foregoing, (i) (a) Obligations of such
Persons other than principal, (b) any liability for federal, state or local
taxes or other taxes owed by such Person and (c) obligations with respect to
performance and surety bonds and completion guarantees in the ordinary course of
business will not be considered Indebtedness for purposes of this definition and
(ii) the accretion of original issue discount will not be considered the
incurrence of Indebtedness.
"INDEPENDENT FINANCIAL ADVISOR" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, own more than 5% of the
Capital Stock of the Company and (ii) which, in the judgment of the Board of
Directors of the Company, is otherwise independent and qualified to perform the
task for which it is to be engaged.
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"INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"INVESTMENT" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, debentures or other securities or evidences of Indebtedness issued by,
any other Person. "Investment" shall exclude extensions of trade credit by the
Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. For the purposes of the "Limitation on
Restricted Payments" covenant, (i) "Investment" shall include and be valued at
the fair market value of the net assets of any Restricted Subsidiary at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary and
shall exclude the fair market value of the net assets of and the fair market
value of Investments (other than common stock) in any Unrestricted Subsidiary at
the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary
and (ii) the amount of any Investment shall be the original cost of such
Investment plus the cost of all additional Investments by the Company or any of
its Restricted Subsidiaries, without any adjustments for increases or decreases
in value, or write-ups, write-downs or write-offs with respect to such
Investment, reduced by the payment of interest, dividends or distributions in
connection with such Investment or any other amounts or assets received in
respect of such Investment; PROVIDED that no such payment of dividends or
distributions or receipt of any such other amounts shall reduce the amount of
any Investment if such payment of dividends or distributions or receipt of any
such amounts would be included in Consolidated Net Income. If the Company or any
Restricted Subsidiary of the Company sells or otherwise disposes of any Common
Stock of any direct or indirect Restricted Subsidiary of the Company such that,
after giving effect to any such sale or disposition, the Company no longer owns,
directly or indirectly, 100% of the outstanding Common Stock of such Restricted
Subsidiary, the Company shall be deemed to have made an Investment on the date
of any such sale or disposition equal to the fair market value of the Common
Stock of such Restricted Subsidiary not sold or disposed of.
"ISSUE DATE" means February 3, 1998.
"LIEN" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement and any lease in the nature thereof).
"NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest or
dividends) received by the Company or any of its Restricted Subsidiaries from
such Asset Sale net of (a) reasonable out-of-pocket expenses and fees relating
to such Asset Sale (including, without limitation, legal, accounting and
investment banking fees and sales commissions), (b) taxes paid or payable, (c)
repayment of Indebtedness that is secured by the subject assets or required to
be repaid in connection with such Asset Sale, (d) appropriate amounts to be
provided by the Company or any Restricted Subsidiary, as the case may be, as a
reserve, in accordance with GAAP, against any liabilities associated with such
Asset Sale and retained by the Company or any Restricted Subsidiary, as the case
may be, after such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale and (e) amounts required to be paid to any person (other than
the Company or any
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Restricted Subsidiary) owning a beneficial interest (by way of Capital Stock of
the Person owning such assets or otherwise) in the assets that are subject to
the Asset Sale.
"NEW CREDIT FACILITY" means the Amended and Restated Credit Agreement, dated
as of February 3, 1998, as amended and restated as of May 29, 1998, among the
Company, Elgar Electronics Corporation, the lenders party thereto in their
capacities as lenders thereunder and Bankers Trust Company, as agent, together
with the related documents thereto (including, without limitation, any guarantee
agreements and security documents), in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring (including
increasing the amount of available borrowings thereunder or adding Restricted
Subsidiaries of the Company as additional borrowers or guarantors thereunder)
all or any portion of the Indebtedness under such agreement or any successor or
replacement agreement and whether by the same or any other agent, lender or
group of lenders.
"NOTE GUARANTEE" means the guarantee of the Obligations of the Company with
respect to the Notes by each Subsidiary Guarantor pursuant to the terms of the
Indenture.
"OBLIGATIONS" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, and other liabilities payable
under the documentation governing any Indebtedness.
"PERMITTED INDEBTEDNESS" means, without duplication, each of the following:
(i) Indebtedness under the Notes issued in the Offering and any Note
Guarantees;
(ii) Indebtedness incurred pursuant to the New Credit Facility and/or
one or more other credit facilities (including any guarantees of such
Indebtedness) in an aggregate principal amount at any time outstanding not
to exceed the greater of (x) $15 million, and (y) the amount of the
Borrowing Base; less, in the case of preceding clause (x), any amount
applied to the permanent reduction of such credit facilities pursuant to the
"Limitation on Asset Sales" covenant;
(iii) other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date;
(iv) Indebtedness in respect of Interest Swap Obligations of the Company
or any of its Restricted Subsidiaries; PROVIDED, HOWEVER, that such Interest
Swap Obligations are entered into to protect the Company and its Restricted
Subsidiaries from fluctuations in interest rates on Indebtedness incurred in
accordance with the Indenture to the extent the notional principal amount of
such Interest Swap Obligation does not exceed the principal amount of the
Indebtedness to which such Interest Swap Obligation relates;
(v) Indebtedness under Currency Agreements; PROVIDED that in the case of
Currency Agreements which relate to Indebtedness, such Currency Agreements
do not increase the Indebtedness of the Company and its Restricted
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(vi) Indebtedness of a Restricted Subsidiary of the Company to the
Company or to a Wholly Owned Restricted Subsidiary of the Company for so
long as such Indebtedness is held by the Company or a Wholly Owned
Restricted Subsidiary of the Company or the lenders or collateral agent
under the New Credit Facility; PROVIDED that if as of any date any Person
other than the Company, a Wholly Owned Restricted Subsidiary of the Company
or the lenders or collateral agent under the New Credit Facility owns or
holds any such Indebtedness, such date shall be deemed the incurrence of
Indebtedness;
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(vii) Indebtedness of the Company to a Wholly Owned Restricted Subsidiary
of the Company for so long as such Indebtedness is held by a Wholly Owned
Restricted Subsidiary of the Company or the lenders or collateral agent
under the New Credit Facility; PROVIDED that (a) any Indebtedness of the
Company to any Wholly Owned Restricted Subsidiary of the Company which is
not a Subsidiary Guarantor is unsecured and subordinated, pursuant to a
written agreement, to the Company's obligations under the Indenture and the
Notes and (b) if as of any date any Person other than a Wholly Owned
Restricted Subsidiary of the Company owns or holds any such Indebtedness,
such date shall be deemed the incurrence of Indebtedness;
(viii) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in
the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; PROVIDED, HOWEVER, that such Indebtedness is
extinguished within three business days of incurrence;
(ix) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, issued in the ordinary course of
business, including without limitation letters of credit in respect of
workers' compensation claims or self-insurance, or other Indebtedness with
respect to reimbursement type obligations regarding worker's compensation
claims; PROVIDED, HOWEVER that upon the drawing of such letters of credit or
other obligations, such obligations are reimbursed within 30 days following
such drawing;
(x) Indebtedness (A) represented by Capitalized Lease Obligations and
Purchase Money Indebtedness of the Company and its Restricted Subsidiaries
or (B) Indebtedness under purchase money mortgages or secured by purchase
money security interests, in the case of (A) or (B) incurred for the purpose
of leasing or financing or refinancing all or any part of the purchase price
or cost of construction or improvement of any property (real or personal) or
other assets that are used or useful in the business of the Company or such
Restricted Subsidiary (whether through the direct purchase of assets or the
Capital Stock of any Person owning such assets and whether such Indebtedness
is owed to the seller or Person carrying out such construction or
improvement or to any third party), so long as (x) such Indebtedness is not
secured by any property or assets of the Company or any Restricted
Subsidiary other than the property or assets so leased, acquired (directly
or indirectly), constructed or improved and (y) such Indebtedness is created
within 90 days of the acquisition or completion of construction or
improvement of the related property or asset, provided that the aggregate
principal amount of Indebtedness under clause (A) and (B) does not exceed
the greater of (a) $8.0 million or (b) 7.5% of Total Assets, and any
Refinancing of Indebtedness permitted under clause (A) or (B) the aggregate
amount of which does not exceed the greater of (a) $8.0 million or (b) 7.5%
of Total Assets;
(xi) Refinancing Indebtedness;
(xii) Indebtedness of the Company or any Restricted Subsidiary consisting
of guarantees, indemnities or obligations in respect of purchase price
adjustments in connection with the acquisition or disposition of assets,
including, without limitation, shares of Capital Stock;
(xiii) guarantees of Indebtedness otherwise permitted under the Indenture;
and
(xiv) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $10.0 million at
any one time outstanding (which amount may, but need not, be incurred in
whole or in part under the New Credit Facility).
"PERMITTED INVESTMENTS" means (i) Investments by the Company or any
Restricted Subsidiary of the Company in any Person that is or will become
immediately after such Investment a Restricted Subsidiary of the Company or that
will merge or consolidate into the Company or a Restricted Subsidiary of the
Company, (ii) Investments in the Company by any Restricted Subsidiary of the
Company; PROVIDED that any Indebtedness evidencing such Investment made by a
Restricted Subsidiary that is not a Subsidiary
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Guarantor is unsecured and subordinated, pursuant to a written agreement, to the
Company's obligations under the Notes and the Indenture; (iii) investments in
cash and Cash Equivalents; (iv) loans and advances to employees and officers of
the Company and its Restricted Subsidiaries in the ordinary course of business
for bona fide business purposes not in excess of $250,000 at any one time
outstanding; (v) Currency Agreements and Interest Swap Obligations entered into
in the ordinary course of the Company's or its Restricted Subsidiaries'
businesses and otherwise in compliance with the Indenture; (vi) Investments in
securities of trade creditors or customers received pursuant to any plan of
reorganization or similar arrangement upon the bankruptcy or insolvency of such
trade creditors or customers or otherwise in settlement of debts; (vii)
Investments made by the Company or its Restricted Subsidiaries as a result of
consideration received in connection with an Asset Sale or other disposition of
assets made in compliance with the "Limitation on Asset Sales" covenant; (viii)
Investments in existence on the Issue Date; (ix) any acquisition of assets
solely in exchange for the issuance of Qualified Equity Interests of the
Company; (x) commission, travel, payroll, entertainment, relocation and similar
advances to officers and employees made in the ordinary course of business; (xi)
guarantees of Indebtedness otherwise permitted under the Indenture; and (xii)
other Investments that do not exceed the greater of $5.0 million or 10% of Total
Assets in the aggregate at any time outstanding.
"PERMITTED LIENS" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries shall
have set aside on its books such reserves as may be required pursuant to
GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business in connection therewith, or to
secure the performance of tenders, statutory obligations, surety and appeal
bonds, bids, leases, government contracts, performance and return-of-money
bonds and other similar obligations (exclusive of obligations for the
payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default;
(v) easements, rights-of-way, zoning restrictions, eminent domain
proceedings and other similar charges or encumbrances in respect of real
property not interfering in any material respect with the ordinary conduct
of the business of the Company or any of its Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; PROVIDED that such Liens do not extend to any property or assets
which is not leased property subject to such Capitalized Lease Obligation;
(vii) purchase money Liens to finance the acquisition, construction or
improvement of property or assets of the Company or any Restricted
Subsidiary of the Company; PROVIDED, HOWEVER, that the related Indebtedness
shall not exceed the cost of the acquisition, construction or improvement of
such property or assets and shall not be secured by any property or assets
of the Company or any Restricted Subsidiary of the Company other than the
property and assets so acquired whether through the direct acquisition of
such property or assets or indirectly through the acquisition of the Capital
Stock of any Person owning such property or assets, constructed or improved,
and (B) the Lien securing such Indebtedness shall be created within 90 days
of such acquisition or completion of construction or improvement;
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(viii) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(ix) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xii) Liens securing Indebtedness under Currency Agreements;
(xiii) Liens securing Acquired Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant; PROVIDED
that (A) such Liens secured such Acquired Indebtedness at the time of and
prior to the incurrence of such Acquired Indebtedness by the Company or a
Restricted Subsidiary of the Company and were not granted in connection
with, or in anticipation of, the incurrence of such Acquired Indebtedness by
the Company or a Restricted Subsidiary of the Company and (B) such Liens do
not extend to or cover any property or assets of the Company or of any of
its Restricted Subsidiaries other than the property or assets that secured
the Acquired Indebtedness prior to the time such Indebtedness became
Acquired Indebtedness of the Company or a Restricted Subsidiary of the
Company;
(xiv) Liens on property or assets of the Company or any Restricted
Subsidiary securing Indebtedness under the New Credit Facility or one or
more other credit facilities in a principal amount not to exceed the sum of
(1) the principal amount of Indebtedness permitted by clause (ii) of the
definition of "Permitted Indebtedness" and (2) the principal amount of
Indebtedness permitted by clause (xiv) of the definition of "Permitted
Indebtedness" to the extent such Indebtedness is incurred under the New
Credit Facility;
(xv) Liens on property or assets of the Company or any Restricted
Subsidiary securing Indebtedness incurred under clause (xiv) of the
definition of "Permitted Indebtedness";
(xvi) Liens in favor of customs and revenues authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(xvii) Liens incurred in the ordinary course of business of the Company or
any Restricted Subsidiary of the Company with respect to obligations that do
not exceed $5.0 million at any one time outstanding and that (a) are not
incurred in connection with the borrowing of money or the obtaining of
advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the value
of the property or materially impair the use thereof in the operation of the
business of the Company or such Restricted Subsidiary;
(xviii) leases or subleases to third parties;
(xix) Liens in connection with workmen's compensation obligations and
general liability exposure of the Company and its Restricted Subsidiaries;
and
(xx) any extension, renewal or replacement, in whole or in part, of any
Lien described in the foregoing clauses (i) through (xix); provided that the
Lien so extended, renewed or replaced does not extend to any additional
property or assets.
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"PERSON" means an individual, partnership, corporation, unincorporated
organization, limited liability company, trust or joint venture, or a
governmental agency or political subdivision thereof.
"PREFERRED STOCK" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"PRINCIPALS" means (i) Lehman and each Affiliate of Lehman as of the Issue
Date, (ii) JFL-EEC, JFLEI and the other members of JFL-EEC on the Issue Date and
their Affiliates, (iii) each officer or employee of Lehman or any such member
referred to in clause (ii) as of the Issue Date and (iv) each of the foregoing's
family members, legal representatives or guardians, heirs and legatees and
trusts, partnerships and corporations the sole beneficiaries, partners or
shareholders, as the case may be, of which are family members.
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness of the Company and its
Restricted Subsidiaries incurred in the normal course of business for the
purpose of financing all or any part of the purchase price, or the cost of
installation, construction or improvement, of property or equipment.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Capital Stock.
"QUALIFIED EQUITY INTEREST" means any Qualified Capital Stock and all
warrants, options or other rights to acquire Qualified Capital Stock (but
excluding any debt security or Disqualified Capital Stock that is convertible
into or exchangeable for Qualified Capital Stock).
"REDEEMABLE PREFERRED STOCK" means the Series A Cumulative Redeemable
Preferred Stock of the Company, no par value.
"REFINANCE" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant (other than
pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (ix), (x) or (xiv) of
the definition of Permitted Indebtedness), in each case that does not (1) result
in an increase in the aggregate principal amount of Indebtedness of such Person
as of the date of such proposed Refinancing (plus the amount of any premium
required to be paid under the terms of the instrument governing such
Indebtedness and plus the amount of reasonable expenses incurred by the Company
in connection with such Refinancing) or (2) create Indebtedness with (A) a
Weighted Average Life to Maturity that is less than the Weighted Average Life to
Maturity of the Indebtedness being Refinanced or (B) a final maturity earlier
than the final maturity of the Indebtedness being Refinanced; PROVIDED that (x)
if such Indebtedness being Refinanced is Indebtedness of the Company, then such
Refinancing Indebtedness shall be Indebtedness solely of the Company and (y) if
such Indebtedness being Refinanced is subordinate or junior to the Notes, then
such Refinancing Indebtedness shall be subordinate to the Notes at least to the
same extent and in the same manner as the Indebtedness being Refinanced.
"RELATED PARTY" with respect to any Principal means (A) any controlling
stockholder or 80% (or more) owned Subsidiary of such Principal or (B) trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A).
"RESTRICTED SUBSIDIARY" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
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"SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"SENIOR OFFICER" means the Chief Executive Officer or the Chief Financial
Officer of the Company.
"SIGNIFICANT SUBSIDIARY," with respect to any Person, means any Restricted
Subsidiary of such Person that satisfies the criteria for a "significant
subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Exchange Act.
"SPECIFIED AFFILIATE PAYMENTS" means: (i) the repurchase, redemption or
other acquisition or retirement for value of any Capital Stock of the Company
held by any future, present or former employee, director, officer or consultant
of the Company (or any of its Restricted Subsidiaries) pursuant to any
management equity subscription agreement, stock option agreement, put agreement,
stockholder agreement or similar agreement that may be in effect from time to
time; PROVIDED that the aggregate price paid for all such repurchased, redeemed,
acquired or retired Capital Stock in any fiscal year shall not exceed the sum of
(a) $250,000, (b) the cash proceeds received by the Company after the Issue Date
from the sale of Qualified Capital Stock to employees, directors or officers of
the Company and its Subsidiaries that occurs in such fiscal year (to the extent
such proceeds do not provide the basis for any other Restricted Payment) and (c)
amounts referred to in clauses (a) through (b) that remain unused from the
immediately preceding fiscal year; (ii) repurchases of Capital Stock deemed to
occur upon exercise of stock options or warrants as a result of the payment of
all or a portion of the exercise price of such options or warrants with Capital
Stock; (iii) payments by the Company to members of management of the Company and
its Subsidiaries in connection with the Recapitalization to the extent disclosed
in this Prospectus; and (iv) any transaction or payment contemplated by any tax
sharing agreement or any other agreement as in effect on the Issue Date
(including, without limitation, the Recapitalization Agreement and the
Management Agreement) or any amendment thereto (so long as any such amendment is
not disadvantageous to the Holders in any material respect), including
distributions to effect the Recapitalization. Amounts referred to in clause (i),
but not other Specified Affiliate Payments, shall constitute Restricted Payments
for purposes of clause (iii) of the first paragraph of the covenant described
under "--Certain Covenants--Restricted Payments."
"STATED MATURITY" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable and, when used with respect to any other Indebtedness, means the
date specified in the instrument governing such Indebtedness as the fixed date
on which the principal of such Indebtedness or any installment of interest
thereon is due and payable.
"SUBSIDIARY," with respect to any Person, means (i) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors under ordinary circumstances shall at
the time be owned, directly or indirectly, by such Person or (ii) any other
Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"SUBSIDIARY GUARANTOR" means any Restricted Subsidiary that is a party to a
Note Guarantee pursuant to the terms of the Indenture.
"TOTAL ASSETS" means, at any time, the total consolidated assets of the
Company and its Restricted Subsidiaries at such time. For the purposes of
paragraph (x) of the definition of "Permitted Indebtedness" and paragraph (xii)
of the definition of "Permitted Investments," Total Assets shall be determined
giving, PRO FORMA effect to the lease, acquisition, construction or improvement
of the assets being leased, acquired,
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constructed or improved with the proceeds of the relevant Indebtedness or the
making of such Permitted Investment, as the case may be.
"UNRESTRICTED SUBSIDIARY" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may designate any Subsidiary (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary
owns any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; PROVIDED that (x) the Company certifies to the
Trustee that such designation complies with the "Limitation on Restricted
Payments" covenant and (y) each Subsidiary to be so designated and each of its
Subsidiaries has not at the time of designation, and does not thereafter,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable with respect to any Indebtedness pursuant to which the lender
has recourse to any of the assets of the Company or any of its Restricted
Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary only if (x) immediately after giving effect to
such designation, the Company is able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant and (y)
immediately before and immediately after giving effect to such designation, no
Default or Event of Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an officers' certificate certifying that such designation
complied with the foregoing provisions.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities (other
than in the case of a foreign Restricted Subsidiary, directors' qualifying
shares or an immaterial amount of shares required to be owned by other Persons
pursuant to applicable law) are owned by such Person or any Wholly Owned
Restricted Subsidiary of such Person.
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DESCRIPTION OF NEW CREDIT FACILITY
Concurrently with the consummation of the Recapitalization, Elgar and EHI
entered into the Credit Agreement with Bankers Trust Company, as Agent for the
Banks. The Credit Agreement provided Elgar with a $15.0 million Revolving
Facility and was guaranteed by EHI. In connection with the Power Ten
Acquisition, Elgar, EHI, the Agent and the Banks amended and restated the Credit
Agreement as of May 29, 1998 to, among other things, increase the available
borrowings thereunder to $30.0 million by including a $15.0 million Term
Facility and reconfirming the Revolving Facility. The proceeds of the Term
Facility were used to finance a portion of the Power Ten Acquisition. Loans made
pursuant to the Revolving Facility may be borrowed, repaid and reborrowed from
time to time until February 3, 2003, subject to the satisfaction of certain
conditions on the date of any such borrowing. Payments under the Term Facility
will be made pursuant to an amortization schedule with a final maturity date of
February 3, 2003. This information relating to the New Credit Facility is
qualified in its entirety by reference to the complete text of the documents
entered into in connection therewith which are filed as exhibits to the
Registration Statement of which this Prospectus forms a part. The following is a
description of the general terms of the New Credit Facility.
Indebtedness under the New Credit Facility bears interest at a floating rate
equal to, at Elgar's option, the Eurodollar Rate (as defined in the New Credit
Agreement) for one, two, three or six months, plus a margin of 2.75%, or the
Base Rate (defined as the higher of (i) the Prime Lending Rate and (ii) 0.5% in
excess of the Federal Funds Rate, as such terms are defined in the New Credit
Agreement), plus a margin of 1.75%. The margins are subject to a reduction of
0.25% if the Company has a leverage ratio less than 6.0 to 1 as set forth in the
New Credit Agreement. Interest based on the Eurodollar Rate is payable in
arrears at the earlier of the (a) end of the applicable interest period and (b)
three months after the commencement of the period. Interest based on the Base
Rate is payable quarterly in arrears. The New Credit Facility also provides for
the payment of customary closing, commitment and certain other fees,
reimbursement of expenses and indemnities.
Indebtedness under the New Credit Facility is (i) secured by a first
priority security interest in substantially all of the assets of EHI, Elgar and
Power Ten (including, without limitation, accounts receivable, inventory,
machinery, equipment, contracts and contract rights, trademarks, copyrights,
patents, license agreements and general intangibles), (ii) guaranteed by EHI and
Power Ten on a senior basis and (iii) secured by a pledge of all of the
outstanding capital stock of Elgar and Power Ten. In connection with the New
Credit Facility, JFLEI entered into a capital call agreement with the Agent (the
"Capital Call Agreement"). The Capital Call Agreement requires a contribution of
up to $4.0 million to be made to EHI by JFLEI upon the occurrence of certain
events, including payment defaults, bankruptcy and certain financial trigger
events.
The New Credit Agreement contains customary covenants of the Company,
including, without limitation, restrictions on (i) the incurrence of debt, (ii)
the sale of assets, (iii) mergers, acquisitions and other business combinations,
(iv) voluntary prepayment of other debt of the Company, (v) transactions with
affiliates, (vi) investments, as well as prohibitions on the payment of certain
dividends to, or, under certain circumstances, the repurchase or redemption of
stock from, shareholders and (vii) various financial covenants, including
covenants requiring the maintenance of fixed charge coverage, and maximum debt
to EBITDA ratios and minimum consolidated EBITDA.
The New Credit Agreement contains customary events of default under the New
Credit Facility, including the non-payment of principal or interest when due
under the notes issued in connection with the New Credit Facility or, subject to
applicable grace periods in certain circumstances, upon the non-fulfillment of
the covenants described above, certain changes in control of the ownership of
EHI or Elgar, cross-defaults to certain other indebtedness, certain events of
bankruptcy and insolvency, ERISA, judgment defaults and failure of any security
agreement or guarantee supporting the New Credit Agreement to be in full force
and effect. If any such event of default occurs, the Agent is entitled, on
behalf of the Banks,
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to take all actions permitted to be taken by a secured creditor under the
Uniform Commercial Code and to accelerate the amounts due under the New Credit
Facility and may require all such amounts outstanding thereunder to be
immediately paid in full.
Advances under the Revolving Facility are limited to the lesser of (a) $15.0
million and (b)(i) 85% of eligible accounts receivable plus (ii) 60% of eligible
inventory minus (iii) the aggregate amount of all undrawn letters of credit
issued under the Revolving Facility plus the aggregate amount of any
unreimbursed drawings under any outstanding letters of credit. The Revolving
Facility includes a subfacility for the issuance of letters of credit.
Advances under the Revolving Facility initially will be limited to an
aggregate of $10.0 million, which limit shall increase to $15.0 million (i) to
the extent the outstanding amount of the Term Loan is reduced below $15.0
million and (ii) to the extent Elgar's "Borrowing Base" (as defined in the
Indenture) exceeds $15.0 million.
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DESCRIPTION OF PREFERRED STOCK AND WARRANTS
In connection with the consummation of the Recapitalization, the Company
issued (i) 7,880 shares of Redeemable Preferred Stock to Jackson National, (ii)
2,000 shares of Redeemable Preferred Stock to Indosuez and (iii) 120 shares of
Redeemable Preferred Stock to Old Hickory, along with warrants (the "Warrants")
to purchase an aggregate of 13.3% of the Company's fully diluted Common Stock at
the time of the Recapitalization. In connection with the Power Ten Acquisition,
the Company issued 5,000 shares of its Series B 6% Cumulative Convertible
Preferred Stock (the "Convertible Preferred Stock") to certain existing
stockholders and warrantholders of the Company. The following is a description
of the general terms of the Redeemable Preferred Stock, Convertible Preferred
Stock and Warrants. This description is qualified in its entirety by reference
to the Certificates of Designation for the Redeemable Preferred Stock and
Convertible Preferred Stock and the form of Warrant Certificate for the Warrants
which are filed as exhibits to the Registration Statement of which this
Prospectus forms a part.
REDEEMABLE PREFERRED STOCK
RANKING. The Redeemable Preferred Stock ranks prior to the Common Stock
with respect to dividend rights and rights on liquidation, winding up or
dissolution of EHI, and to all other classes and series of equity securities of
EHI as may hereafter be issued, other than any class or series of equity
securities of EHI expressly designated as being on a parity with ("Parity
Securities") or senior to the Redeemable Preferred Stock. Such other classes or
series of equity securities of EHI not expressly designated as being on a parity
with or senior to the Redeemable Preferred Stock are referred to hereafter as
"Junior Securities." The rights of holders of shares of the Redeemable Preferred
Stock are subordinate to the rights of EHI's general creditors. EHI may not
create or issue other classes of stock ranking on a parity with or senior to the
Redeemable Preferred Stock unless it receives approval or consent of the holders
of at least a two-thirds of the Redeemable Preferred Stock. See "--Voting
Rights" below.
DIVIDEND RIGHTS. Dividends are payable to holders of Redeemable Preferred
Stock, out of funds legally available therefor, at the annual rate per share of
10% times the sum of (i) $1,000 and (ii) accrued but unpaid dividends as of the
immediately preceding Dividend Payment Date (as defined below). Dividends are
payable (A) at the annual rate per share of 0.10 shares of Redeemable Preferred
Stock per share of Redeemable Preferred Stock from the original issue date of
the Redeemable Preferred Stock (the "Issue Date") through January 31, 2001, and
(B) in cash on and after April 30, 2001.
Dividends on the Redeemable Preferred Stock are payable quarterly on each
January 31, April 30, July 31 and October 31 of each year (each a "Dividend
Payment Date"), commencing April 30, 1998. Dividends payable for any period less
than a full quarterly period shall be computed on the basis of a 360-day year
with equal months of 30 days. Dividends for the first dividend period will
accrue from the Issue Date. Dividends are fully cumulative and shall accrue on a
quarterly basis (whether or not declared) from the Issue Date. Dividends
declared will be payable to holders of record as they appear on EHI's stock
books at the close of business on such record dates, not exceeding 60 days nor
fewer than 10 days preceding the Dividend Payment Date therefor.
If the cash dividends payable on the Redeemable Preferred Stock shall have
been in arrears and unpaid for four or more successive Dividend Payment Dates,
then until the date on which all such dividends in arrears are paid in full,
dividends shall accrue and be payable to the holders of Redeemable Preferred
Stock at the annual rate of 12% times the sum of (i) $1,000 per share and (ii)
accrued but unpaid dividends thereon. Upon payment in full of all dividends in
arrears, cash dividends will thereafter be payable at the 10% annual rate set
forth above.
In addition, no dividends in any form shall be declared or paid or set apart
for payment on any Junior Securities or Parity Securities for any dividend
period unless full dividends on the Redeemable Preferred Stock for the then
current dividend period shall have been paid or declared and set aside. When
dividends on the Redeemable Preferred Stock are in arrears, dividends declared
upon shares of the Redeemable
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Preferred Stock and Parity Securities shall be declared PRO RATA based upon the
respective amounts that would have been paid on the Redeemable Preferred Stock
and the Parity Securities had dividends been paid in full. The payment of
dividends on the Redeemable Preferred Stock shall be subject in all respects to
the applicable restrictions contained in the Indenture and the New Credit
Agreement.
So long as any shares of the Redeemable Preferred Stock are outstanding, EHI
shall not, without the prior consent of the holders of two-thirds of the
outstanding shares of Redeemable Preferred Stock, (i) make any payment on
account of, or set apart for payment money for a sinking or other similar fund
for, the purchase, redemption or retirement of, any Junior Securities (other
than dividends or distributions payable in additional shares of Junior
Securities to holders of Junior Securities); (ii) permit any corporation or
other entity directly or indirectly controlled by EHI to purchase or redeem any
Junior Securities; (iii) declare, pay or set apart for payment, or permit any
corporation or other entity directly or indirectly controlled by EHI to declare,
pay or set apart for payment, any dividend or make any distribution or payment
on any Junior Securities or Parity Securities, whether directly or indirectly
and whether in cash, obligations or shares of EHI or other property (other than
dividends or distributions payable in additional shares of Junior Securities to
holders of Junior Securities); or (iv) make any payment on account of, or set
apart for payment money for a sinking or other similar fund for, the purchase,
redemption or retirement of, any Parity Securities, whether directly or
indirectly, and whether in cash, obligations, shares of EHI or other property
(other than payments solely of Junior Securities), and shall not permit any
corporation or other entity directly or indirectly controlled by EHI to purchase
or redeem any Parity Securities, unless prior to or at the time of such payment
or setting apart for payment, EHI shall have repurchased, redeemed or retired
shares of Redeemable Preferred Stock on a pro rata basis with the Parity
Securities as to which such sinking fund or similar fund payment, or such
purchase, redemption or retirement, is being effected.
LIQUIDATION PREFERENCE. Holders of shares of Redeemable Preferred Stock
shall be entitled to receive the stated liquidation value of $1,000 per share
($10.0 million in the aggregate based on 10,000 shares of Redeemable Preferred
Stock issued on the Issue Date), plus an amount per share equal to any dividends
accrued but unpaid, without interest (the "Liquidation Preference"), in the
event of any liquidation, dissolution or winding up of EHI, whether voluntary or
involuntary, out of or to the extent of the net assets of EHI legally available
for distribution, before any distributions are made with respect to any Common
Stock of EHI or any other Junior Securities. After payment of the full amount of
the Liquidation Preference, holders of shares of Redeemable Preferred Stock will
not be entitled to any further participation in any distribution of assets of
EHI.
Upon any such liquidation, dissolution or winding up of EHI, such
preferential amounts with respect to the Redeemable Preferred Stock and any
class or series ranking on a parity with the Redeemable Preferred Stock if not
paid in full shall be distributed PRO RATA in accordance with the aggregate
preferential amounts of the Redeemable Preferred Stock and such other classes or
series of stock.
OPTIONAL REDEMPTION. EHI may, at its option, redeem at any time, out of
funds legally available therefor, all or any portion of the shares (in whole
shares only) of the Redeemable Preferred Stock on a pro rata basis, at a
redemption price per share equal to 100% of the Liquidation Preference thereof
on the date of redemption.
MANDATORY REDEMPTION. On the date that is the one hundred and twenty-sixth
(126th) month anniversary of the Issue Date (which is August 3, 2008), EHI shall
redeem any and all outstanding shares of Redeemable Preferred Stock, out of
funds legally available therefor, at a redemption price per share equal to 100%
of the Liquidation Preference thereof on such date.
REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of
Control (as defined in the Certificate of Designations for the Redeemable
Preferred Stock), the Redeemable Preferred Stock shall be redeemable at the
option of the holders thereof, in whole or in part, at a redemption price per
share equal
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to 100% of the Liquidation Preference on the date of redemption provided,
however, that EHI will not be obligated to redeem any Redeemable Preferred Stock
upon a Change of Control prior to repurchase or redemption of such Notes then
outstanding as EHI is required to repurchase or has called for redemption in
connection with a Change of Control pursuant to the terms of the Indenture;
provided, further, that any such redemption (and EHI's obligations with respect
thereto) shall be subject in all respects to the applicable restrictions
contained in the New Credit Agreement.
RIGHTS TO ELECT DIRECTORS UPON CERTAIN EVENTS. If the cash dividends
payable on the Redeemable Preferred Stock shall have been in arrears and unpaid
for four or more successive Dividend Payment Dates, then the number of directors
constituting the Board of Directors shall, without further action, be increased
by the Dividend Arrears Number (as defined below) and, in addition to any other
rights to elect directors which the holders of Redeemable Preferred Stock may
have, the holders of all outstanding shares of Redeemable Preferred Stock,
voting separately as a class and to the exclusion of the holders of all other
classes and series of stock of EHI, shall be entitled to elect the directors of
EHI to fill such newly created directorships. If EHI shall fail to redeem shares
of Redeemable Preferred Stock in accordance with the mandatory redemption
provisions described above, then the number of directors constituting the Board
of Directors shall, without further action, be increased by the Control Number
(as defined below) and, in addition to any other rights to elect directors which
the holders of Redeemable Preferred Stock may have, the holders of all
outstanding shares of Redeemable Preferred Stock, voting separately as a class
and to the exclusion of the holders of all other classes and series of stock of
EHI, shall be entitled to elect the directors of EHI to fill such newly created
directorships.
"Dividend Arrears Number" shall mean such number of additional directors of
EHI which, when added to the number of directors otherwise nominated by the
holders of Redeemable Preferred Stock, shall result in the number of directors
elected by or at the direction of the holders of Redeemable Preferred Stock
constituting one-third of the members of the Board of Directors of EHI.
"Control Number" shall mean such number of additional directors of EHI
which, when added to the number of directors otherwise nominated and elected by
the holders of Redeemable Preferred Stock, shall result in the number of
directors nominated and elected by or at the direction of the holders of
Redeemable Preferred Stock constituting a majority of the members of the Board
of Directors of EHI.
Any additional directors elected by the Redeemable Preferred Stock pursuant
to the provisions described above shall remain in office until such time as (i)
all such dividends in arrears are paid in full or (ii) all shares of Redeemable
Preferred Stock shall have been redeemed pursuant to the mandatory redemption
provisions described above, as the case may be.
VOTING RIGHTS. The holders of shares of Redeemable Preferred Stock shall
not be entitled to any voting rights, except as required by applicable law and
except as set forth as follows. Without the consent of the holders of at least
eighty-five percent (85%) of the outstanding shares of Redeemable Preferred
Stock, EHI may not (i) amend its Certificate of Incorporation in any way that
would adversely alter or change the powers, preferences, special rights or
economics of the Redeemable Preferred Stock, (ii) create, authorize or issue any
shares of capital stock ranking senior to or on a parity with the Redeemable
Preferred Stock, (iii) create, authorize or issue any shares of capital stock
constituting Junior Securities, unless such Junior Securities are expressly
subordinate in right of payment to the Redeemable Preferred Stock and such
Junior Securities have no additional rights (directly or indirectly) upon EHI's
failure to redeem such shares or to pay or declare a dividend or make a
distribution with respect thereto, (iv) issue voting securities other than
pursuant to a registered public offering, with certain exceptions or (v) enter
into any agreement after the Issue Date which limits or otherwise adversely
affects EHI's ability to comply with its mandatory redemption obligations
described above, including, without limitation, any such agreement or plan
entered into with respect to (a) the sale of all or substantially all of the
assets of EHI, (b) the voluntary liquidation, dissolution or winding up of EHI
or (c) the consolidation or merger of EHI with any one or more other
corporations, other than a consolidation or merger in which shareholders of EHI
holding more than 50%
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<PAGE>
of the equity securities of EHI immediately prior to such transaction will hold
at least 50% of the equity securities of the surviving entity immediately after
the consummation of such transaction.
TRANSFER RESTRICTIONS. There are no restrictions on the transferability of
the Redeemable Preferred Stock, except as required by applicable securities
laws.
CONVERTIBLE PREFERRED STOCK
RANKING. The Convertible Preferred Stock shall, with respect to rights on
bankruptcy, liquidation, winding up, dissolution and dividends, rank (i) junior
to the Redeemable Preferred Stock and (ii) senior to the Company's Common Stock,
and to all other classes and series of stock of the Company now or hereafter
authorized, issued or outstanding, other than any class or series of stock of
the Company expressly designated as being on a parity with ("Parity Securities")
or senior to the Convertible Preferred Stock. Such other classes or series of
stock of the Company not expressly designated as being on a parity with or
senior to the Convertible Preferred Stock are referred to hereafter as "Junior
Securities." The rights of holders of shares of the Convertible Preferred Stock
are subordinate to the rights of the Company's general creditors, including the
holders of the Company's Senior Notes.
DIVIDEND RIGHTS. Dividends on the Convertible Preferred Stock, will accrue
at the annual rate per share of 6% times the sum of (i) $1,000 and (ii) accrued
but unpaid dividends as of the immediately preceding Dividend Payment Date (as
defined below), compounding semi-annually. The holders of shares of the
Convertible Preferred Stock will be entitled to receive, when, as and if
declared by the Board of Directors, out of funds legally available therefor,
dividends payable semi-annually in arrears on April 30 and October 31 of each
year (each such date, a "Dividend Payment Date"). Notwithstanding the foregoing,
no dividends on shares of Convertible Preferred Stock will be authorized,
declared, paid or set apart for payment at such time as, and to the extent that,
the terms and provisions of any agreement of the Company, including any
agreement relating to its indebtedness, prohibits such authorization,
declaration, payment or setting apart for payment. The declaration or payment of
dividends on the Convertible Preferred Stock (i) is restricted under the
Indenture and the New Credit Agreement.
In the event that the Company elects to redeem all or any portion of the
shares of the Convertible Preferred Stock or upon a redemption of the
Convertible Preferred Stock upon a Change of Control, the Company shall pay, out
of funds legally available therefor, all accrued but unpaid dividends to the
holders thereof. Dividends are also payable to holders of the Convertible
Preferred Stock, out of funds legally available therefor, if declared by the
Board of Directors of the Company.
So long as any shares of the Convertible Preferred Stock are outstanding,
the Company shall not, without the prior consent of the holders of at least
fifty-one percent (51%) of the shares of outstanding Convertible Preferred
Stock, (i) make any payment on account of, or set apart for payment money for a
sinking or other similar fund for, the purchase, redemption or retirement of,
any Junior Securities (other than dividends or distributions payable in
additional shares of Junior Securities to holders of Junior Securities); (ii)
permit any corporation or other entity directly or indirectly controlled by the
Company to purchase or redeem any Junior Securities; (iii) declare, pay or set
apart for payment, or permit any corporation or other entity directly or
indirectly controlled by the Company to declare, pay or set apart for payment,
any dividend or make any distribution or payment on any Junior Securities or
Parity Securities, whether directly or indirectly and whether in cash,
obligations or shares of the Company or other property (other than dividends or
distributions payable in additional shares of Junior Securities to holders of
Junior Securities); or (iv) make any payment on account of, or set apart for
payment money for a sinking or other similar fund for, the purchase, redemption
or retirement of, any Parity Securities, whether directly or indirectly, and
whether in cash, obligations, shares of the Company or other property (other
than payments solely of Junior Securities), and shall not permit any corporation
or other entity directly or indirectly controlled by the Company to purchase or
redeem any Parity Securities, unless prior to or at the time of such payment or
setting apart for payment, the Company shall have repurchased, redeemed or
retired
96
<PAGE>
shares of the Convertible Preferred Stock on a PRO RATA basis with the Parity
Securities as to which such sinking fund or similar fund payment, or such
purchase, redemption or retirement, is being effected.
LIQUIDATION PREFERENCE. Holders of shares of Convertible Preferred Stock
are entitled to receive the stated liquidation value of $1,000 per share
($5,000,000 in the aggregate based on 5,000 shares of Convertible Preferred
Stock to be issued on the date of issuance), plus an amount per share equal to
any dividends accrued but unpaid (whether or not declared by the Board of
Directors of the Company), without interest (the "Liquidation Preference"), in
the event of any liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, out of or to the extent of the net assets of the
Company legally available for distribution, before any distributions are made
with respect to any Common Stock of the Company or any other Junior Securities.
After payment of the full amount of the Liquidation Preference, holders of
shares of Convertible Preferred Stock will not be entitled to any further
participation in any distribution of assets of the Company.
CONVERSION. Each holder of shares of Convertible Preferred Stock will have
the right, at such holder's option at any time following a Triggering Event (as
defined below) to convert all or a portion of such shares into Common Stock of
the Company at the conversion price of $10.00 per share of Convertible Preferred
Stock, subject to adjustments pursuant to certain anti-dilution provisions from
time to time. A Triggering Event shall include (i) a Change of Control (as
defined in the New Certificate of Designation), (ii) an initial public offering
of any class of equity securities of the Company pursuant to the Securities Act
of 1933, as amended, (iii) the delivery of a notice from the Company to each
holder of the Convertible Preferred Stock that the Company intends to redeem the
Convertible Preferred Stock or (iv) the fifth anniversary of the date of
issuance. For purposes of such conversion, each share of Convertible Preferred
Stock will be valued at $1,000. Upon conversion of the Convertible Preferred
Stock, holders of shares of the Convertible Preferred Stock shall not be
entitled to receive any accrued but unpaid dividends.
OPTIONAL REDEMPTION. The Company may, at its option, redeem at any time,
out of funds legally available therefor, all or any portion of the shares (in
whole shares only) of the Convertible Preferred Stock on a PRO RATA basis, at a
redemption price per share equal to 100% of the Liquidation Preference thereof
on the date of redemption, including dividends accrued through the Dividend
Payment Date immediately preceding the redemption date, but not including any
dividends for any period after such Dividend Payment Date.
REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of
Control, the Convertible Preferred Stock shall be redeemable at the option of
the holders thereof, in whole or in part, at a redemption price per share equal
to 100% of the Liquidation Preference on the date of redemption, including
dividends accrued through the Dividend Payment Date immediately preceding the
redemption date though not including any dividends for any period after such
Dividend Payment Date; PROVIDED, HOWEVER, that the Company will not be obligated
to redeem, and will not redeem or call for redemption, any Series B Preferred
Stock upon a Change of Control until it has repurchased or redeemed (x) such of
the $90,000,000 original principal amount of Senior Notes then outstanding as
the Company is required to repurchase in connection with a change of control
pursuant to the terms of the Indenture and (y) such of the shares of Redeemable
Preferred Stock then outstanding as the Company is required to repurchase
pursuant to the Certificate of Designation relating thereto; PROVIDED, FURTHER,
that any such redemption (and the Company's obligations with respect thereto)
shall be subject in all respects to the applicable restrictions contained in the
New Credit Agreement.
VOTING RIGHTS. The holders of shares of Convertible Preferred Stock are not
entitled to any voting rights, except as required by applicable law and except
as set forth in the next sentence. Without the consent of the holders of at
least 51% of the outstanding shares of Convertible Preferred Stock, the Company
may not amend its Certificate of Incorporation in any way that would adversely
alter or change the powers, preferences or special rights of the Convertible
Preferred Stock.
97
<PAGE>
PIGGYBACK REGISTRATION RIGHTS. The holders of the Convertible Preferred
Stock are not entitled to any "demand" registration rights. However, the holders
of the Convertible Preferred Stock are entitled to unlimited "piggyback"
registration rights with respect to the shares of Common Stock of the Company
issuable upon conversion of the Convertible Preferred Stock after the date of
the Company's initial public offering of its Common Stock, subject to customary
rights and limitations.
TRANSFER RESTRICTIONS. There are no restrictions on the transferability of
the Convertible Preferred Stock, except as required by applicable securities
laws.
WARRANTS
The Warrants issued in connection with the Recapitalization entitle the
holders thereof to purchase up to an aggregate of 353,744 shares of Common Stock
(the "Warrant Shares"), or 13.3% of the outstanding Common Stock on a fully
diluted basis upon the completion of the Recapitalization. The Warrants are
immediately exercisable until the one hundred and twenty-sixth (126th) month
anniversary of the Issue Date (which is August 3, 2008) at an exercise price per
share equal to $5.00 per share, payable in cash or by tendering shares of
Redeemable Preferred Stock. The exercise price and number of Warrant Shares are
both subject to adjustment in certain events. The Warrants are transferable
separately from the Redeemable Preferred Stock. There are no restrictions on the
transferability of the Warrants, except as required by applicable securities
laws and as may be set forth in the Shareholders' Agreement.
Unless and until the Warrants are exercised, the Warrantholders have no
right to (i) vote on matters submitted to EHI's shareholders or (ii) receive
dividends; provided, however, that upon exercise of the Warrants, the exercise
price therefor shall be reduced by an amount equal to the dividends in respect
of the Common Stock that the holder of the Warrants would have received had the
Warrants been exercised on the Issue Date. The Warrantholders are not entitled
to share in the assets of EHI in the event of liquidation or dissolution of EHI
or the winding up of EHI's affairs; PROVIDED, HOWEVER, that the Warrantholders
are entitled to receive at least 30 days' prior written notice of any such
liquidation, dissolution or winding up of affairs and shall be afforded the
opportunity to exercise the Warrants prior to such liquidation, dissolution or
winding up of affairs.
REGISTRATION RIGHTS FOR WARRANT SHARES
The holders of the Warrant Shares are entitled to one "demand" registration
right at any time on or after the later of (i) the fifth anniversary of the
Issue Date and (ii) the 181st day after completion of the initial public
offering by EHI of its Common Stock, subject to additional customary rights and
limitations. In addition, the holders of the Warrant Shares are entitled to
unlimited "piggyback" registration rights after the date of EHI's initial public
offering of its Common Stock, subject to customary rights and limitations.
98
<PAGE>
BOOK-ENTRY; DELIVERY AND FORM
The New Notes (and the related Note Guarantees) initially will be issued in
the form of one or more permanent global certificates in definitive, fully
registered form (the "Global Notes"). The Global Notes will be deposited with,
or on behalf of, the DTC, and registered in the name of a nominee of DTC.
THE GLOBAL NOTES. EHI expects that pursuant to procedures established by
DTC (i) upon the issuance of the Global Notes, DTC or its custodian will credit,
on its internal system, the principal amount of Notes of the individual
beneficial interests represented by such Global Notes to the respective accounts
of persons who tender for exchange Old Notes for New Notes and (ii) ownership of
beneficial interests in the Global Notes will be shown on, and the transfer of
such ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants).
So long as DTC or its nominee is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Notes for all purposes
under the Indenture. No beneficial owner of an interest in the Global Notes will
be able to transfer that interest except in accordance with DTC's procedures.
Payments of the principal of, premium (if any) and interest on the Global
Notes will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of EHI, the Trustee or any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
EHI expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, and interest on the Global Notes, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Notes as
shown on the records of DTC or its nominee. EHI also expects that payments by
participants to owners of beneficial interests in the Global Notes held through
such participants will be governed by standing instructions and customary
practice, as is now the case with securities held for the accounts of customers
registered in the names of nominees for such customers. Such payments will be
the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of Notes in
registered form (the "Certificated Security") for any reason, including to sell
Notes to persons in states that require physical delivery of such Notes, or to
pledge such securities, such holder must transfer its interest in the Global
Notes, in accordance with the normal procedures of DTC and with the procedures
set forth in the Indenture.
DTC has advised EHI that it will take any action permitted to be taken by a
holder of Notes (including the presentation of Notes for exchange as described
below) only at the direction of one or more participants to whose account the
DTC interests in the Global Notes are credited and only in respect of such
portion of the aggregate principal amount of Notes as to which such participant
or participants has or have given such direction. However, if there is an Event
of Default under the Indenture, DTC will exchange the Global Notes for
Certificated Securities.
DTC has advised EHI as follows: DTC is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such
99
<PAGE>
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Notes among participants of DTC, it is
under no obligation to perform such procedures and such procedures may be
discontinued at any time. Neither EHI nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED SECURITIES. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Notes and a successor depositary is not
appointed by EHI within 90 days, Certificated Securities will be issued in
exchange for the Global Notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a Prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, starting on the Expiration Date
and ending on the close of business 180 days after the Expiration Date, it will
make this Prospectus, as amended or supplemented, available to any broker-dealer
for use in connection with any such resale. In addition, until October , 1998,
all dealers effecting transactions in the New Notes may be required to deliver a
Prospectus.
The Company will not receive any proceeds from any sales of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit of any such resale of New Notes and any
commissions or concessions received by such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
Prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Notes) other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
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LEGAL MATTERS
The legality of the New Notes will be passed upon for the Company by Gibson,
Dunn & Crutcher LLP, Los Angeles, California.
EXPERTS
The Consolidated Balance Sheets of Elgar Holdings, Inc. as of March 29, 1997
and March 28, 1998, and the related Consolidated Statements of Operations,
Stockholders' Equity (Deficit) and Cash Flows of Elgar Holdings, Inc. for each
of the fiscal years ended April 3, 1996, March 29, 1997 and March 28, 1998
included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said report.
The Balance Sheet of Power Ten as of April 4, 1998 and the related
Statements of Income, Stockholders' Equity and Cash Flows of Power Ten for the
fiscal year ended April 4, 1998 included in this Prospectus have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report.
101
<PAGE>
ELGAR HOLDINGS, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
ELGAR HOLDINGS, INC.
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets as of March 29, 1997 and March 28, 1998........................................ F-3
Consolidated Statements of Operations for the fiscal years ended April 3, 1996 (Predecessor Company), March
29, 1997 and March 28, 1998.............................................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the fiscal years ended April 3, 1996
(Predecessor Company), March 29, 1997 and March 28, 1998................................................. F-5
Consolidated Statements of Cash Flows for the fiscal years ended April 3, 1996 (Predecessor Company), March
29, 1997 and March 28, 1998.............................................................................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
POWER TEN
<CAPTION>
PAGE
---------
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants.............................................. F-18
Balance Sheet as of April 4, 1998.......................................................................... F-19
Statement of Income for the fiscal year ended April 4, 1998................................................ F-20
Statement of Stockholders' Equity for the fiscal year ended April 4, 1998.................................. F-21
Statement of Cash Flows for the fiscal year ended April 4, 1998............................................ F-22
Notes to Financial Statements.............................................................................. F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Elgar Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of ELGAR
HOLDINGS, INC. (a Delaware corporation) and subsidiary (the "Company"), as of
March 29, 1997 and March 28, 1998, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the two
years in the period ended March 28, 1998. We have also audited the statements of
operations, stockholders' deficit and cash flows for Elgar Electronics
Corporation (the "Predecessor") for the year ended April 3, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Elgar
Holdings, Inc. and subsidiary, as of March 29, 1997 and March 28, 1998, and the
results of their operations and their cash flows for each of the two years in
the period ended March 28, 1998, and also presents fairly, in all material
respects, the results of operations and cash flows of Elgar Electronics
Corporation for the year ended April 3, 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
April 3, 1996, the Company acquired all of the outstanding stock of Elgar
Electronics Corporation in a business combination accounted for as a purchase.
As a result of the acquisition, the consolidated financial information for the
period after the acquisition is presented on a different cost basis than that
for the period before the acquisition and, therefore, is not comparable.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to financial statement schedule is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. The schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states, in all material respects, the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
San Diego, California
May 1, 1998 (Except with respect to
the matter discussed in Note 11 as
to which the date is May 5, 1998)
F-2
<PAGE>
ELGAR HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 29, MARCH 28,
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................................ $ 691 $ 2,666
Accounts receivable, net of allowance for doubtful accounts of $189 and $197,
respectively........................................................................... 6,359 6,453
Inventories (Note 2)..................................................................... 5,829 8,305
Deferred tax assets (Note 7)............................................................. 992 1,098
Prepaids and other....................................................................... 55 373
----------- -----------
Total current assets................................................................... 13,926 18,895
PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated depreciation and amortization of
$795 and $1,643, respectively (Note 2)................................................... 2,612 2,952
INTANGIBLE ASSETS, net of accumulated amortization of $1,489 and $2,711, respectively (Note
2) 19,193 22,412
DEFERRED TAX ASSETS, net of current portion (Note 7)....................................... 866 653
----------- -----------
$ 36,597 $ 44,912
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable......................................................................... $ 2,612 $ 3,068
Accrued liabilities (Note 3)............................................................. 2,860 4,801
Current portion of long-term debt (Note 4)............................................... 1,739 --
Current portion of capital lease obligations (Note 8).................................... 37 17
----------- -----------
Total current liabilities.............................................................. 7,248 7,886
CAPITAL LEASE OBLIGATIONS, net of current portion (Note 8)................................. 35 19
LONG-TERM DEBT, net of current portion (Note 4)............................................ 13,477 90,000
----------- -----------
Total liabilities...................................................................... 20,760 97,905
----------- -----------
SERIES A 10% CUMULATIVE REDEEMABLE PREFERRED STOCK, no par value; 20,000 shares authorized;
10,000 shares issued and outstanding in 1998 (Note 5).................................... -- 8,478
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value, 9,340,000 and 5,000,000 shares authorized in 1997 and 1998,
respectively; 9,340,000 and 2,300,000 shares issued and outstanding in 1997 and 1998,
respectively........................................................................... 93 23
Additional paid-in capital............................................................... 13,907 (67,926)
Retained earnings........................................................................ 1,837 6,432
----------- -----------
15,837 (61,471)
----------- -----------
$ 36,597 $ 44,912
----------- -----------
----------- -----------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-3
<PAGE>
ELGAR HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
YEAR ENDED YEARS ENDED
----------- ------------------------
APRIL 3, MARCH 29, MARCH 28,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES.................................................................... $ 42,309 $ 45,578 $ 62,496
COST OF SALES................................................................ 26,468 26,973 32,944
----------- ----------- -----------
Gross profit........................................................... 15,841 18,605 29,552
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................................. 7,406 7,770 9,434
RESEARCH & DEVELOPMENT AND ENGINEERING EXPENSES.............................. 4,168 3,973 6,242
AMORTIZATION OF INTANGIBLES (Note 2)......................................... 2,149 1,314 1,314
----------- ----------- -----------
Operating income....................................................... 2,118 5,548 12,562
INTEREST EXPENSE, NET:....................................................... 3,578 1,839 3,341
----------- ----------- -----------
Income (loss) before provision for income taxes........................ (1,460) 3,709 9,221
PROVISION FOR INCOME TAXES (Note 7).......................................... 176 1,872 4,448
----------- ----------- -----------
Net income(loss)....................................................... $ (1,636) $ 1,837 $ 4,773
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE>
ELGAR HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY
BALANCE, April 2, 1995........................... 200 $ 12,733 $ -- $ (28,053) $ (15,320)
Net loss....................................... -- -- -- (1,636) (1,636)
----------- --------- ----------- ---------- -----------
BALANCE, April 3, 1996........................... 200 $ 12,733 $ -- $ 29,689 $ (16,956)
----------- --------- ----------- ---------- -----------
----------- --------- ----------- ---------- -----------
THE COMPANY
BALANCE, April 3, 1996........................... -- $ -- $ -- $ -- $ --
Issuance of stock.............................. 9,340,000 93 13,907 -- 14,000
Net income..................................... -- -- -- 1,837 1,837
----------- --------- ----------- ---------- -----------
BALANCE, March 29, 1997.......................... 9,340,000 93 13,907 1,837 15,837
Recapitalization of Company.................... (8,941,400) (89) (102,528) -- (102,617)
Common stock warrants issued on sale of
preferred stock.............................. -- -- 1,700 -- 1,700
Issuance of common stock....................... 1,901,400 19 18,995 -- 19,014
Preferred stock dividend in kind............... -- -- -- (150) (150)
Accretion of preferred stock discount.......... -- -- -- (28) (28)
Net income..................................... -- -- -- 4,773 4,773
----------- --------- ----------- ---------- -----------
BALANCE, March 28, 1998.......................... 2,300,000 $ 23 $ (67,926) $ 6,432 $ (61,471)
----------- --------- ----------- ---------- -----------
----------- --------- ----------- ---------- -----------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE>
ELGAR HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR ------------------------
-------------
YEARS ENDED
YEAR ENDED ------------------------
------------- MARCH 29, MARCH 28,
APRIL 3, 1996 1997 1998
------------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,636) $ 1,837 $ 4,773
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Amortization of intangibles............................................ 2,149 1,314 1,314
Amortization of deferred loan costs.................................... -- 175 83
Write-off of deferred loan costs....................................... -- -- 797
Depreciation and amortization on property, plant and equipment......... 785 806 883
Gain (loss) on sale of property, plant and equipment................... 10 (3) (4)
(Increases) decreases in assets:
Accounts receivable.................................................. 1,382 (1,751) (94)
Inventories.......................................................... (187) 1,308 (2,476)
Prepaids and other................................................... 35 5 (318)
Deferred tax assets.................................................. (141) 251 107
Increases (decreases) in liabilities:
Accounts payable..................................................... (755) 1,640 456
Accrued liabilities.................................................. 315 (270) 1,941
Income taxes payable................................................. 235 -- --
------------- ----------- -----------
Net cash provided by operating activities............................ 2,192 5,312 7,462
------------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Predecessor........................................... -- (14,000) --
Purchases of property, plant and equipment........................... (611) (621) (1,228)
Proceeds from sale of property, plant and equipment.................. -- 28 10
------------- ----------- -----------
Net cash used in investing activities................................ (611) (14,593) (1,218)
------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance............................................... -- 14,000 19,014
Proceeds from preferred stock/warrant issuance............................. -- -- 10,000
Issuance of senior notes................................................... -- -- 90,000
Proceeds from borrowings................................................... 3,488 1,301 580
Repayments on debt......................................................... (3,930) (5,761) (15,796)
Payments under capital leases.............................................. -- (41) (36)
Deferred financing costs................................................... -- -- (5,414)
Recapitalization consideration (Note 1).................................... -- -- (102,617)
------------- ----------- -----------
Net cash provided by (used in) financing activities.................. (442) 9,499 (4,269)
------------- ----------- -----------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS.......................... 1,139 218 1,975
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................... 1,071 473 691
------------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................................... $ 2,210 $ 691 $ 2,666
------------- ----------- -----------
------------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest..................................................... $ 869 $ 1,480 $ 1,140
------------- ----------- -----------
------------- ----------- -----------
Cash paid for income taxes................................................. $ 102 $ 1,638 $ 4,450
------------- ----------- -----------
------------- ----------- -----------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Preferred stock dividend-in-kind........................................... $ -- $ -- $ 150
------------- ----------- -----------
------------- ----------- -----------
Accretion of discount on preferred stock................................... $ -- $ -- $ 28
------------- ----------- -----------
------------- ----------- -----------
Elgar acquisition debt..................................................... $ -- $ 19,000 $ --
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INCORPORATION AND COMPANY OPERATIONS
Elgar Holdings, Inc., a Delaware corporation (the "Company") (formerly known
as Carlyle-EEC Holdings, Inc.), manufactures and sells programmable power supply
units through its subsidiary, Elgar Electronics Corporation, to commercial and
defense entities as well as to governmental agencies. The Company's primary
sales are within the United States and Europe.
The Company was incorporated on March 27, 1996 and had no operations from
that date to April 3, 1996. On April 3, 1996, the Company acquired all of the
outstanding common stock of Elgar Electronics Corporation, a California
corporation (the "Predecessor" or "Elgar") (the "Acquisition"). The Acquisition
was accounted for as a purchase and, accordingly, the purchase price of $33
million was allocated to the assets acquired and liabilities assumed at their
fair values. The excess of purchase price over the net assets acquired of
approximately $19.7 million was recorded as goodwill and is being amortized over
15 years on a straight line basis. The acquisition was funded with $14 million
in cash and the proceeds from $19 million in term debt, which was paid off in
connection with the Recapitalization (as defined below).
On January 2, 1998, the Company entered into an Agreement and Plan of Merger
(the "Recapitalization Agreement") pursuant to which the Company was
recapitalized (the "Recapitalization"). Pursuant to the Recapitalization
Agreement, all shares of the Company's common stock, other than those retained
by certain members of management and certain other shareholders (the "Continuing
Shareholders"), were converted into the right to receive cash based upon a
formula. The Continuing Shareholders agreed to retain approximately 15% of the
common equity of the Company. In order to finance the Recapitalization, the
Company (i) issued $90 million of senior notes in a debt offering, (ii) received
$19 million in cash from an investor group for common stock and (iii) received
$10 million in cash for the issuance of redeemable preferred stock. In
connection with the Recapitalization, the Company changed its name to Elgar
Holdings, Inc. Elgar, as borrower, and the Company, as guarantor, also entered
into a new $15 million revolving credit facility. Loans under the new facility
are secured by substantially all of the Company's assets and are guaranteed by
the Company and secured by a pledge of all the outstanding capital stock of
Elgar. The credit agreement governing the facility contains customary financial
covenants and defined events of default (see Note 4).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Elgar Electronics Corporation. All
significant intercompany accounts and transactions have been eliminated. The
accompanying financial statements of the Predecessor include only the accounts
of Elgar. The Company operates and reports financial results on a fiscal year of
52 or 53 weeks ending the Saturday closest to March 31. Accordingly, fiscal 1996
ended on April 3, 1996, fiscal 1997 ended on March 29, 1997 and fiscal 1998
ended on March 28, 1998, and they comprised 52.5, 51.5 and 52 weeks,
respectively.
CASH EQUIVALENTS
Cash equivalents in 1997 and 1998 consist of a money market account in a
financial institution.
F-7
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories, which include materials, direct labor and manufacturing
overhead, are stated at the lower of cost (first-in, first-out) or market and
are comprised of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 29, MARCH 28,
1997 1998
----------- -----------
<S> <C> <C>
Raw materials.......................................................... $ 2,848 $ 3,745
Work-in-process........................................................ 2,119 3,677
Finished goods......................................................... 862 883
----------- -----------
$ 5,829 $ 8,305
----------- -----------
----------- -----------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation of property,
plant and equipment is provided using the straight-line method over the
estimated useful lives of the related assets.
Property, plant and equipment and the related depreciable lives are as
follows (in thousands):
<TABLE>
<CAPTION>
MARCH 29, MARCH 28,
ASSET TYPE/DEPRECIABLE LIFE 1997 1998
- ----------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Machinery and equipment--4 - 6 years................................... $ 2,530 $ 2,964
Leasehold improvements--Lease term..................................... 421 739
Furniture and fixtures--4 years........................................ 277 384
Construction in progress............................................... 179 508
----------- -----------
3,407 4,595
Less: Accumulated depreciation and amortization........................ (795) (1,643)
----------- -----------
----------- -----------
$ 2,612 $ 2,952
----------- -----------
----------- -----------
</TABLE>
INTANGIBLE ASSETS
As of March 28, 1998, intangible assets represent the excess of purchase
price over net book value of assets acquired in connection with the April 3,
1996, acquisition of Elgar Electronics Corporation by the Company and certain
financing costs incurred in the Recapitalization. As of March 29, 1997,
intangible assets included certain financing costs incurred in connection with
the acquisition of the Predecessor that were written off in connection with the
Recapitalization. The components of intangible assets are being amortized on a
straight-line basis over their estimated useful lives ranging from 5 to 15
years.
The Company periodically re-evaluates the original assumptions and rationale
utilized in the establishment of the carrying value and estimated useful lives
of these assets. The criteria used for these evaluations include management's
estimate of the assets' continuing ability to generate income from operations
and positive cash flows in future periods as well as the strategic significance
of the intangible assets to the Company's business activity.
F-8
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which requires the use of the liability method in providing for income taxes.
Current income tax expense is the amount of income taxes expected to be payable
in the current year.
REVENUE RECOGNITION
The Company recognizes revenue when goods are shipped to the customer, net
of sales returns.
CUSTOMER-FUNDED RESEARCH AND DEVELOPMENT
The Company capitalizes certain costs associated with customer-funded
research and development. Revenue is recorded when earned under such projects
and costs incurred are charged to cost of sales. The amount of customer-funded
research and development was insignificant in fiscal 1996, fiscal 1997 and
fiscal 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform to the
current-year presentation.
CONCENTRATION OF CREDIT RISK
Sales to one customer accounted for approximately 37% of the Company's total
revenue for the fiscal year ended April 3, 1996, sales to two customers, in the
aggregate, accounted for approximately 39% and 47% of the Company's total
revenue for the fiscal years ended March 29, 1997 and March 28, 1998,
respectively. The Company performs ongoing credit evaluation of its customers'
financial condition. The Company maintains reserves for potential credit losses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of certain of the Company's financial instruments,
including accounts receivable, accounts payable and accrued liabilities,
approximates fair value due to their short term nature. Based on borrowing rates
currently available to the Company for credit arrangements with similar terms,
the carrying amount of balances under the credit facilities (Note 4) and capital
lease obligations approximate fair value.
F-9
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." SFAS No. 130 establishes
standards for reporting of comprehensive income and its components in a full set
of general-purpose financial statements. SFAS No. 131 requires reporting certain
information about operating segments in annual and interim-period financial
statements. Both standards are required to be adopted beginning March 29, 1998.
Management does not expect the adoption of these standards to have a material
effect on the Company's financial position or results of operations as presented
in the accompanying financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits." SFAS No. 132 revises and
standardizes employers' disclosures about pension and other postretirement
benefits, but it does not change the measurement or recognition of those
benefits. SFAS No. 132 is effective for fiscal years beginning after December
15, 1997. SFAS No. 132 further requires restatement of disclosures for earlier
periods provided for comparative purposes. Management believes that the adoption
of SFAS No. 132 will not have a material impact on the consolidated financial
statements or disclosures thereto.
In March 1998, the Accounting Standards Executive Committee (AcSEC) issued
AICPA Statement of Position (SOP) 98-1, "Accounting for costs of computer
software developed or obtained for internal use." This statement provides
guidance on accounting for the costs of computer software developed or obtained
for internal use and identifies characteristics of internal-use software and
provides assistance in determining when computer software is for internal use.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998, with
earlier application permitted. The Company has not yet determined what impact,
if any, the adoption of SOP 98-1 will have on the Company's consolidated
financial statements, results of operations, or related disclosures thereto.
In April 1998, the Accounting Standards Executive Committee (AcSEC) issued
AICPA Statement of Position (SOP) 98-5, "Reporting on the costs of start-up
activities." This statement provides guidance on financial reporting of start-up
costs and organization costs and requires that such costs of start-up activities
be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, with earlier application permitted. The Company has not yet
determined what impact, if any, the adoption of SOP 98-5 will have on the
Company's consolidated financial statements, results of operations, or related
disclosures thereto.
F-10
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUPPLEMENTARY FINANCIAL INFORMATION
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 29, MARCH 28,
1997 1998
----------- -----------
<S> <C> <C>
Payroll and related.................................................... $ 1,547 $ 1,965
Warranty reserve....................................................... 439 433
Commissions............................................................ 292 317
Interest payable....................................................... 121 1,364
Management fees payable................................................ 70 68
Other.................................................................. 391 654
----------- -----------
$ 2,860 $ 4,801
----------- -----------
----------- -----------
</TABLE>
4. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT
In connection with the Recapitalization (see Note 1), all outstanding
borrowings under the then existing revolving line of credit agreement and term
loans payable to a bank aggregating approximately $10.9 million were repaid and,
concurrently, the Company issued $90 million of Senior Notes and entered into a
new credit facility with a bank.
The Senior Notes bear interest at a rate of 9.875% per annum. Interest on
the Senior Notes is payable semi-annually, commencing on August 1, 1998. The
Senior Notes mature on February 1, 2008.
At any time on or before February 1, 2003, the Company may redeem up to 35%
in aggregate principal amount of (i) the initial aggregate principal amount of
the Senior Notes and (ii) the initial principal amount of any additional notes
issued under the indenture after the issue date, on one or more occasions, with
the net cash proceeds of one or more public equity offerings at a redemption
price of 109.875% of the principal amount thereof, plus accrued and unpaid
interest thereon to the redemption date, provided that at least 65% of the sum
of (i) the initial aggregate principal amount of the Senior Notes and (ii) the
initial aggregate principal amount of additional notes remain outstanding
immediately after redemption. The Senior Notes are redeemable by the Company at
stated redemption prices beginning in February 2003.
The Senior Notes are general unsecured obligations of the Company and rank
senior to all existing and future subordinated indebtedness of the Company. The
obligations of the Company as a guarantor of Elgar's obligations under the bank
credit facility are secured by substantially all of the assets of the Company.
Accordingly, such secured indebtedness effectively ranks senior to the Senior
Notes to the extent of such assets.
The Senior Notes restrict, among other things, the Company's ability to
incur additional indebtedness, pay dividends or make certain other restricted
payments, incur liens, sell preferred stock of subsidiaries, apply net proceeds
from certain asset sales, merge or consolidate with any other person, sell,
assign, transfer, lease, convey or otherwise dispose of substantially all of the
assets of the Company or enter into certain transactions with affiliates. The
Senior Notes are guaranteed by the Company's wholly owned subsidiary, Elgar.
Such guarantee is full and unconditional. The only direct or indirect subsidiary
of the Company that is not a guarantor of the Senior Notes is insignificant to
the consolidated financial statements. In management's opinion, separate
financial statements of the guarantors have not been presented as they would not
be material to investors.
The Senior Notes were issued on February 3, 1998. As such, the Company
believes the fair value of the Senior Notes approximates the carrying value of
such debt at March 28, 1998.
F-11
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT (CONTINUED)
CREDIT FACILITY
In connection with Recapitalization, Elgar, as borrower, and the Company, as
guarantor, entered into a Loan and Security Agreement with a bank to provide
Elgar with a $15 million revolving credit facility which matures on February 3,
2003. No amounts are outstanding under this credit facility as of March 28,
1998.
Indebtedness of Elgar under the agreement is secured by a first priority
security interest in substantially all of the Company's assets.
Indebtedness under the agreement bears interest at a floating rate of
interest equal to, at Elgar's option, the eurodollar rate for one, two, three or
six months, plus 2.50%, or the bank's prime rate plus a margin of 1.50%.
Advances under the agreement are limited to the lesser of (a) $15 million
and (b)(i) 85% of eligible accounts receivable plus (ii) 60% of eligible
inventory minus (iii) the aggregate amount of all undrawn letters of credit
issued under the Credit Facility plus the aggregate amount of any unreimbursed
drawings under any outstanding letters of credit.
The credit agreement contains restrictions on the incurrence of debt, the
sale of assets, mergers, acquisitions and other business combinations, voluntary
prepayment of other debt of the Company, transactions with affiliates,
repurchase or redemption of stock from stockholders, and various financial
covenants, including covenants requiring the maintenance of fixed charge
coverage, and maximum debt to earnings, before interest, taxes, depreciation and
amortization (EBITDA) ratios and minimum consolidated EBITDA. As of March 28,
1998, the Company was in compliance with all required covenants under the credit
facility.
The Company's long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 29, MARCH 28,
1997 1998
----------- -----------
<S> <C> <C>
Senior Notes due February 1, 2008 with an interest rate of 9.875% at
March 28, 1998....................................................... $ -- $ 90,000
Revolving credit facility due March 31, 2001 with an interest rate of
10% at March 29, 1997................................................ 643 --
Term Notes due through March 31, 2003 with interest rates ranging from
8.5% to 10.5% at March 29, 1997...................................... 14,573 --
----------- -----------
15,216 90,000
Less: current portion.................................................. 1,739 --
----------- -----------
$ 13,477 $ 90,000
----------- -----------
----------- -----------
</TABLE>
Interest expense under these facilities for the fiscal years ended March 29,
1997 and March 28, 1998 approximated $1.6 million and $2.4 million,
respectively. An affiliate of the bank that provided the revolving credit
facility in place at March 29, 1997 is a shareholder of the Company.
F-12
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT (CONTINUED)
DEFERRED FINANCING COSTS
In connection with the issuance of the Senior Notes and entering into the
credit facility agreement, the Company incurred debt issuance costs of
approximately $5.4 million that are being amortized to interest expense over the
term of the related debt. Accumulated amortization at March 28, 1998 is
approximately $83,000.
5. REDEEMABLE PREFERRED STOCK
In connection with the Recapitalization, the Company issued 10,000 shares of
redeemable preferred stock, designated as Series A 10% Cumulative Redeemable
Preferred Stock, for cash proceeds of $10 million. In connection with such
issuance, the Company also issued to the purchasers warrants to purchase 353,744
shares of the Company's common stock. A value of $1.7 million has been
attributed to the warrants. The $1.7 million warrant value is included in
additional paid-in-capital as of March 28, 1998.
Dividends are payable to the holders of the redeemable preferred stock at
the annual rate per share of 10% times the sum of $1,000 and accrued but unpaid
dividends. Dividends shall be payable at the rate per share of 0.10 shares of
redeemable preferred stock through January 31, 2001, and in cash on and after
April 30, 2001. Dividends are payable quarterly on January 31, April 30, July
31, and October 31 of each year, commencing April 30, 1998. Dividends shall be
fully cumulative and shall accrue on a quarterly basis.
If the cash dividends payable on the redeemable preferred stock shall have
been in arrears and unpaid for four or more successive dividend payment dates,
then until the date on which all such dividends in arrears are paid in full,
dividends shall accrue and be payable to the holders at the annual rate of 12%
times the sum of $1,000 per share and accrued but unpaid dividends thereon. Upon
payment in full of all dividends in arrears, cash dividends will thereafter be
payable at the 10% annual rate set forth above. There were no dividends in
arrears as of March 28, 1998.
Holders of shares of redeemable preferred stock shall be entitled to receive
the stated liquidation value of $1,000 per share, plus an amount per share equal
to any dividends accrued but unpaid, in the event of any liquidation or
dissolution of the Company. After payment of the full amount of the liquidation
preference, holders of shares of redeemable preferred stock will not be entitled
to any further participation in any distribution of assets of the Company.
The Company may, at its option, redeem at any time, all or any part of the
shares of the redeemable preferred stock at a redemption price per share equal
to 100% of the liquidation preference on the date of redemption. On August 3,
2008, the Company shall redeem any and all outstanding shares of redeemable
preferred stock at a redemption price per share equal to 100% of the liquidation
preference on the date of redemption.
Upon the occurrence of a change in control (as defined), the redeemable
preferred stock shall be redeemable at the option of the holders, at a
redemption price per share equal to 100% of the liquidation preference.
The holders of shares of redeemable preferred stock shall not be entitled to
any voting rights. However, without the consent of the holders of at least 85%
of the outstanding shares of redeemable preferred stock, the Company may not
change the powers or preferences of the redeemable preferred stock, create,
authorize or issue any shares of capital stock ranking senior to or on a parity
with the redeemable preferred stock or create, authorize or issue any shares of
capital stock constituting junior
F-13
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE PREFERRED STOCK (CONTINUED)
securities, unless such junior securities are subordinate in right of payment to
the redeemable preferred stock.
If any amount of cash dividends payable on the redeemable preferred stock
shall have been in arrears and unpaid for four or more successive dividend
payment dates, then the number of directors constituting the board of directors
shall increase, as defined, and the holders of the redeemable preferred stock
shall have the right to elect the newly-created directors.
If the Company fails to redeem shares of redeemable preferred stock in
accordance with the mandatory redemption provisions described above, then the
number of directors constituting the Board of Directors shall increase, as
defined, and the holders of the redeemable preferred stock shall have the right
to elect directors to fill the newly-created directorships.
6. COMMON STOCK
On February 3, 1998, immediately prior to the Recapitalization, the Company
effected a 9,340 to 1 stock split of the common stock to be distributed in the
form of a stock dividend and an increase in the number of shares authorized from
1,000 to 9,340,000 shares. As a result of this action, 9,339,000 shares were
issued to shareholders of record on February 3, 1998. All references throughout
the accompanying consolidated financial statements to the number of shares of
the Company's common stock and earnings per share have been restated to reflect
the effect of the stock split. In connection with the Recapitalization, the
number of authorized shares of common stock was reduced to 5,000,000 shares.
At March 28, 1998, a total of 353,744 shares of common stock were reserved
for issuance for the exercise of warrants at the initial exercise price of $5.00
per share to the holders of the preferred stock. The exercise price and number
of warrant shares are both subject to adjustment in certain events.
7. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------
THE COMPANY
PREDECESSOR ------------------------
------------- MARCH 29, MARCH 28,
APRIL 3, 1996 1997 1998
------------- ----------- -----------
<S> <C> <C> <C>
Current
Federal............................................... $ 97 $ 1,517 $ 3,753
State................................................. 220 105 588
----- ----------- -----------
317 1,622 4,341
----- ----------- -----------
Deferred
Federal............................................... 69 116 (286)
State................................................. (210) 134 393
----- ----------- -----------
(141) 250 107
----- ----------- -----------
Provision for income taxes.............................. $ 176 $ 1,872 $ 4,448
----- ----------- -----------
----- ----------- -----------
</TABLE>
F-14
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The provision for income taxes reconciles to the amounts computed by
applying the Federal statutory rate to income before taxes as follows (dollars
in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------------------------------
PREDECESSOR THE COMPANY
-------------------- ----------------------------------------------
APRIL 3, 1996 MARCH 29, 1997 MARCH 28, 1998
-------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Computed statutory tax.............. 34.00% $ (565) 34.00 % $ 1,261 34.00 % $ 3,135
State income taxes, net of federal
benefit........................... 6.00% (100) 6.00 % 223 6.00 % 552
Permanent differences from
amortization of intangible
assets............................ (51.70)% 860 14.17 % 525 5.70 % 526
Other............................... 1.12% (19) (3.70)% (137) 2.55 % 235
--------- --------- ----------- --------- ----------- ---------
Provision for income taxes.......... (10.58)% $ 176 50.47 % $ 1,872 48.25 % $ 4,448
--------- --------- ----------- --------- ----------- ---------
--------- --------- ----------- --------- ----------- ---------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 29, MARCH 28,
1997 1998
----------- -----------
<S> <C> <C>
Current Deferred Taxes
Section 163(j) interest carryforwards................................ $ 546 $ 451
State taxes.......................................................... 90 193
Other reserves....................................................... 104 166
Accrued expenses..................................................... 252 288
----------- -----------
Total current deferred taxes....................................... 992 1,098
Noncurrent Deferred Taxes
Section 163(j) interest carryforwards................................ 326 --
Depreciation and UNICAP.............................................. 218 249
Inventory reserves................................................... 322 321
Other................................................................ -- 83
----------- -----------
Total noncurrent deferred taxes.................................... 866 653
Total deferred tax assets............................................ $ 1,858 $ 1,751
----------- -----------
----------- -----------
</TABLE>
Management believes that it is more likely than not that the Company will
realize its deferred tax assets; therefore, no valuation allowance has been
reflected in the accompanying consolidated financial statements.
8. COMMITMENTS AND CONTINGENCIES (DOLLARS IN THOUSANDS)
LITIGATION
The Company is subject to various claims as a result of its ongoing business
activities. Management believes that the outcome of any such claims will not
have a material adverse effect on the Company's financial position or results of
operations.
F-15
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (DOLLARS IN THOUSANDS) (CONTINUED)
LEASE COMMITMENTS
The Company leases its facilities and certain equipment under non-cancelable
operating leases that expire through fiscal year 2003. The Company's primary
facility lease expires in fiscal year 2003 and contains an option to extend the
lease for two additional five-year periods. The Company's secondary facility
lease expires in fiscal year 2002 and contains an option to extend the lease for
an additional two-year period. Rent expense under operating leases amounted to
$776, $722 and $807 for the fiscal years ended April 3, 1996, March 29, 1997 and
March 28, 1998, respectively.
The Company also leases certain equipment under capital leases which expire
through fiscal year 2001. Cost of equipment under capital leases included in
property, plant and equipment in the accompanying balance sheets at March 29,
1997 and March 28, 1998, is $105 and $55, respectively, and the related
accumulated depreciation is $13 and $21, respectively.
Minimum future lease payments as of March 28, 1998 under capital and
operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING LEASES LEASES
- ------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
1999..................................................................... $ 19 883
2000..................................................................... 16 914
2001..................................................................... 5 920
2002..................................................................... -- 735
2003..................................................................... -- 536
Thereafter............................................................... -- --
--- -----------
Total................................................................ 40 $ 3,988
-----------
-----------
Less: amount representing interest....................................... (4)
---
Present value of obligations under capital lease......................... 36
Less: current portion.................................................... 17
---
Long-term capital lease obligation....................................... $ 19
---
---
</TABLE>
F-16
<PAGE>
ELGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCENTIVE COMPENSATION ARRANGEMENTS (DOLLARS IN THOUSANDS)
The Company instituted an employee bonus program on September 29, 1996 under
which all non-management employees are paid bonuses based on the achievement of
certain performance criteria, as defined in the bonus program. The Company
incurred expenses of $191 and $480 for the fiscal years ended March 29, 1997 and
March 28, 1998, respectively, under this compensation arrangement.
The Company also has a management incentive program under which the
management-level employees are paid incentives based on the achievement of
certain performance criteria. The Company incurred expenses of $356 and $467 for
the fiscal years ended March 29, 1997 and March 28, 1998, respectively, under
this compensation arrangement.
The Company also maintains a defined contribution 401(k) plan (the "Plan")
for all of its employees. Those employees who participate in the Plan are
entitled to make contributions of up to 15 percent of their compensation,
limited by IRS statutory contribution limits. In addition to employee
contributions, the Company also contributes to the Plan by matching 40 percent
of employee contributions up to the first six percent of contributions. Amounts
contributed to the Plan by the Company were $202 and $226 for the fiscal years
ended March 29, 1997 and March 28, 1998, respectively.
In connection with the Recapitalization, the Company entered into employment
agreements with certain of its officers and executives that provide for
stipulated annual salary payments. Termination of the agreements may occur by
either party upon 30 days prior written notice or in the event of death or
permanent disability. The agreements contain certain payment provisions in the
event the employee is terminated due to permanent disability or in the event of
death, conviction of a crime, or material breach or failure to perform
obligations under the agreements.
10. RELATED PARTY TRANSACTION
Pursuant to the terms of a ten-year Management Agreement entered into
between the Company and an affiliate of its principal shareholder, the Company
paid such affiliate a transaction fee of $1.0 million in connection with the
Recapitalization, and has also agreed to pay such affiliate an annual management
fee of $500,000, commencing February 3, 1998.
11. SUBSEQUENT EVENT
On May 5, 1998, the Company entered into a Stock Purchase Agreement with the
shareholders of Power Ten pursuant to which the Company will acquire all of the
issued and outstanding shares of capital stock for $17.8 million in cash. The
transaction is expected to close no later than May 29, 1998.
F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Power Ten:
We have audited the accompanying balance sheet of Power Ten (a California
corporation) as of April 4, 1998, and the related statements of income,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Power Ten as of April 4,
1998 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Diego, California
June 25, 1998
F-18
<PAGE>
POWER TEN
BALANCE SHEET
AS OF APRIL 4, 1998
(IN THOUSANDS EXCEPT FOR SHARE INFORMATION)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 1,240
Accounts receivable............................................................... 844
Inventories (Note 2).............................................................. 1,052
Deferred tax asset................................................................ 101
Prepaids and other................................................................ 30
---------
Total current assets............................................................ 3,267
PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated depreciation and
amortization of $435 (Note 2)...................................................... 101
OTHER ASSETS........................................................................ 41
---------
$ 3,409
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................................. $ 372
Accrued liabilities (Note 3)...................................................... 906
---------
Total current liabilities....................................................... 1,278
LONG-TERM DEBT (Note 4)............................................................. 350
---------
Total liabilities............................................................... 1,628
---------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock, no par value, 10,000,000 shares authorized, 768,000 shares issued
and outstanding................................................................. 141
Retained earnings................................................................. 1,640
---------
Total stockholders' equity...................................................... 1,781
---------
$ 3,409
---------
---------
</TABLE>
The accompanying notes to financial statements are an integral part of this
balance sheet.
F-19
<PAGE>
POWER TEN
STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 4, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
NET SALES.......................................................................... $ 10,076
COST OF SALES...................................................................... 5,482
---------
Gross profit................................................................... 4,594
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................................... 3,453
RESEARCH & DEVELOPMENT AND ENGINEERING EXPENSES.................................... 589
---------
Operating income............................................................... 552
INTEREST EXPENSE................................................................... 39
INTEREST INCOME.................................................................... 34
---------
Income before provision for income taxes....................................... 547
PROVISION FOR INCOME TAXES......................................................... 223
---------
Net income..................................................................... $ 324
---------
---------
</TABLE>
The accompanying notes to financial statements are an integral part of this
financial statement.
F-20
<PAGE>
POWER TEN
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED APRIL 4, 1998
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCE, March 29, 1997.................................................. 768,000 $ 141 $ 1,316 $ 1,457
Net income............................................................. -- -- 324 324
--------- ----- ----------- ---------
BALANCE, April 4, 1998................................................... 768,000 $ 141 $ 1,640 $ 1,781
--------- ----- ----------- ---------
--------- ----- ----------- ---------
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-21
<PAGE>
POWER TEN
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED APRIL 4, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 324
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................. 59
Gain on sale of property, plant and equipment................................. (16)
(Increases) decreases in assets:
Accounts receivable........................................................... 163
Inventories................................................................... 105
Deferred tax asset............................................................ (27)
Prepaids and other............................................................ (29)
Increases (decreases) in liabilities:
Accounts payable.............................................................. 30
Accrued liabilities........................................................... 438
---------
Net cash provided by operating activities................................... 1,047
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment........................................ (90)
Proceeds from sale of property, plant and equipment............................... 35
---------
Net cash used in investing activities....................................... (55)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on debt................................................................ (125)
---------
Net cash used in financing activities....................................... (125)
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................................... 867
CASH AND CASH EQUIVALENTS, beginning of period...................................... 373
---------
CASH AND CASH EQUIVALENTS, end of period............................................ $ 1,240
---------
---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................................................ $ 39
---------
---------
Cash paid for income taxes........................................................ $ 243
---------
---------
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-22
<PAGE>
POWER TEN
NOTES TO FINANCIAL STATEMENTS
APRIL 4, 1998
1. INCORPORATION AND COMPANY OPERATIONS
Power Ten, a California corporation (the "Company"), manufactures and sells
programmable power supply units to commercial and defense entities. The
Company's sales are primarily within the United States, Europe and Asia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents include short term investments with original maturities of
three months or less.
INVENTORIES
Inventories, which include materials, direct labor and manufacturing
overhead, are stated at the lower of cost or market and are comprised of the
following (in thousands):
<TABLE>
<CAPTION>
APRIL 4,
1998
---------
<S> <C>
Raw materials........................................................................ $ 433
Work-in-process...................................................................... 619
---------
$ 1,052
---------
---------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation of property,
plant and equipment is provided using the straight-line method over the
estimated useful lives of the related assets, which range from five to seven
years.
Property, plant and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
APRIL 4,
1998
-----------
<S> <C>
Machinery and equipment.............................................................. $ 393
Furniture and fixtures............................................................... 143
-----
536
Less: Accumulated depreciation and amortization...................................... (435)
-----
$ 101
-----
-----
</TABLE>
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which requires the use of the liability method in providing for income taxes.
Current income tax expense is the amount of income taxes expected to be payable
in the current year, based on the statutory rate.
F-23
<PAGE>
POWER TEN
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 4, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue when goods are shipped to the customer.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
SIGNIFICANT CUSTOMERS
Sales to two customers accounted for approximately 36% of the Company's
total revenue, and three customers accounted for 44% of the Company's total
accounts receivable balance, for the fiscal year ended April 4, 1998. The
Company performs ongoing credit evaluation of its customers' financial
condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." SFAS No. 130 establishes
standards for reporting of comprehensive income and its components in a full set
of general-purpose financial statements. SFAS No. 131 requires reporting certain
information about operating segments in annual and interim-period financial
statements. Both standards are required to be adopted beginning April 5, 1998.
Management does not expect the adoption of these standards to have a material
effect on the Company's financial position or results of operations as presented
in the accompanying financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits." SFAS No. 132 revises and
standardizes employers' disclosures about pension and other postretirement
benefits, but it does not change the measurement or recognition of those
benefits. SFAS No. 132 is effective for fiscal years beginning after December
15, 1997. SFAS No. 132 further requires restatement of disclosures for earlier
periods provided for comparative purposes. Management believes that the adoption
of SFAS No. 132 will not have a material impact on the financial statements or
disclosures thereto.
In March 1998, the Accounting Standards Executive Committee (AcSEC) issued
AICPA Statement of Position (SOP) 98-1, "Accounting for costs of computer
software developed or obtained for internal use." This statement provides
guidance on accounting for the costs of computer software developed or obtained
for internal use and identifies characteristics of internal-use software and
provides assistance in determining when computer software is for internal use.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998, with
earlier application permitted. The Company has not yet determined what impact,
if any, the adoption of SOP 98-1 will have on its financial statements, results
of operations or related disclosures thereto.
F-24
<PAGE>
POWER TEN
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 4, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In April 1998, the Accounting Standards Executive Committee (AcSEC) issued
AICPA Statement of Position (SOP) 98-5, "Reporting on the costs of start-up
activities." This statement provides guidance on financial reporting of start-up
costs and organization costs and requires that such costs of start-up activities
be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, with earlier application permitted. The Company has not yet
determined what impact, if any, the adoption of SOP 98-5 will have on its
financial statements, results of operations or related disclosures thereto.
3. SUPPLEMENTARY FINANCIAL INFORMATION
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 4,
1998
---------
<S> <C>
Payroll and related.................................................................. $ 233
Warranty reserve..................................................................... 29
Bonuses.............................................................................. 543
Professional fees.................................................................... 50
Other................................................................................ 51
---------
$ 906
---------
---------
</TABLE>
4. LONG-TERM DEBT
The Company's long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 4,
1998
-----------
<S> <C>
Related-party term notes due December 31, 1999 with an annual interest rate of 11.25%
at April 4, 1998, unsecured......................................................... $ 350
-----
350
Less: current portion................................................................ --
-----
$ 350
-----
-----
</TABLE>
The Company's revolving credit line provided for borrowings up to a maximum
of $125,000, bearing interest at prime plus three quarters of one percent
annually, secured by the assets of the Company and requiring that interest-only
payments be made monthly. The agreement expired in January 1998. The Company
repaid the credit line in April 1997 and did not utilize the credit line during
the remainder of the fiscal year ended April 4, 1998.
Interest expense under the related-party term notes for the year ended April
4, 1998 approximated $39,000.
F-25
<PAGE>
POWER TEN
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 4, 1998
5. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 4, 1998
-------------
<S> <C>
Current
Federal....................................................................... $ 212
State......................................................................... 38
------
250
------
Deferred
Federal....................................................................... (23)
State......................................................................... (4)
------
Provision....................................................................... $ 223
------
------
</TABLE>
The provision for income taxes reconciles to the amounts computed by
applying the Federal statutory rate to income before taxes as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 4, 1998
--------------------
<S> <C> <C>
Computed statutory tax................................................... 34.00% $ 186
State income taxes, net of federal benefit............................... 6.00% 33
Other.................................................................... 0.66% 4
--------- ---------
Provision for income taxes............................................... 40.66% $ 223
--------- ---------
--------- ---------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
APRIL 4, 1998
---------------
<S> <C>
State taxes..................................................................... $ 15
Inventory and other reserves.................................................... 28
Accrued expenses................................................................ 58
-----
Total deferred tax assets..................................................... $ 101
-----
-----
</TABLE>
Management believes that it is more likely than not that the Company will
realize its deferred tax assets; therefore, no valuation allowance has been
reflected in the accompanying financial statements.
6. COMMITMENTS AND CONTINGENCIES
LITIGATION
On February 24, 1998, Rapid Power Technologies, Inc., a New York
corporation, filed a third-party complaint against certain parties, including
the Company, alleging breach of warranties, product liability and negligence.
The case is in the early stages and the ultimate outcome is uncertain.
Accordingly, no provision has been made in the accompanying financial statements
to reflect any amounts that may be due or payable in the event that an
unfavorable outcome occurs.
F-26
<PAGE>
POWER TEN
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 4, 1998
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is also subject to various claims and litigation as a result of
its ongoing business activities. Management believes that the outcome of any
such claims will not have a material adverse effect on the Company's financial
position or results of operations.
LEASE COMMITMENTS
The Company leases its facilities and certain equipment under non-cancelable
operating leases that expire through fiscal year 2001. The Company's primary
facility lease expires in fiscal year 2001. Rent expense under operating leases,
net of sub-lease income of approximately $82,000, amounted to $390,000 for the
year ended April 4, 1998.
Minimum future lease payments as of April 4, 1998 under operating leases are
as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
FISCAL YEAR ENDING LEASES
- ----------------------------------------------------------------------------------- -----------
<S> <C>
1999............................................................................... $ 472
2000............................................................................... 484
2001............................................................................... 143
-----------
Total.......................................................................... $ 1,099
-----------
-----------
</TABLE>
LEASE INCOME
The Company sub-leases certain of its office space for approximately $7,200
per month. The lease expires in July 2000. As of April 4, 1998, the sub-lessee
was in default on certain payments required under the sub-lease agreement. In
May 1998, the sub-lessee cured the default by paying all past-due amounts.
Future income expected under the sub-lease is as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING INCOME
- ------------------------------------------------------------------------------------- -----------
<S> <C>
1999................................................................................. $ 86
2000................................................................................. 88
2001................................................................................. 26
-----
$ 200
-----
-----
</TABLE>
7. RELATED PARTY TRANSACTIONS
In 1996, the Company obtained unsecured loans from each of its two principal
stockholders totaling $350,000 (See Note 4). The loans call for monthly interest
payments at an annual interest rate of 11.25% with the balance due on December
31, 1999. In April 1998, the Company paid these notes in full.
8. SUBSEQUENT EVENT
On May 29, 1998, pursuant to a Stock Purchase Agreement dated as of May 5,
1998, Elgar acquired all of the Company's issued and outstanding shares of
capital stock for $17.8 million in cash.
F-27
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ADDITIONAL COPIES OF THE PROSPECTUS, LETTER OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE AGENT AS FOLLOWS:
BY REGISTERED OR CERTIFIED MAIL:
UNITED STATES TRUST COMPANY OF NEW YORK
P.O. BOX 844
COOPER STATION
NEW YORK, NY 10276-0844
ATTN: CORPORATE TRUST SERVICES
BY FACSIMILE:
(212) 420-6152
BY OVERNIGHT COURIER:
UNITED STATES TRUST COMPANY OF NEW YORK
770 BROADWAY, 13TH FLOOR
NEW YORK, NEW YORK 10003
ATTN: CORPORATE TRUST SERVICES
BY HAND:
UNITED STATES TRUST COMPANY OF NEW YORK
111 BROADWAY
LOWER LEVEL
NEW YORK, NEW YORK 10006
ATTN: CORPORATE TRUST SERVICES
CONFIRM BY TELEPHONE 800-548-6565
(ORIGINALS OF ALL DOCUMENTS SUBMITTED BY FACSIMILE SHOULD BE SENT PROMPTLY
BY HAND, OVERNIGHT COURIER, OR REGISTERED OR CERTIFIED MAIL)
NO BROKER DEALER OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFER
MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
UNTIL OCTOBER , 1998 (90 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN
THIS EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
OFFER TO EXCHANGE ALL OUTSTANDING 9 7/8% SENIOR NOTES DUE 2008 ($90,000,000
PRINCIPAL AMOUNT) FOR 9 7/8% SENIOR NOTES DUE 2008.
ELGAR HOLDINGS, INC.
PAYMENT OF PRINCIPAL AND INTEREST UNCONDITIONALLY GUARANTEED BY ELGAR
ELECTRONICS CORPORATION
AND POWER TEN
---------------------
PROSPECTUS
---------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Corporation Law") gives Delaware corporations broad powers to
indemnify their present and former directors and officers against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with threatened, pending or
completed actions, suits or proceedings to which they are parties or are
threatened to be made parties by reason of being or having been such directors
or officers, subject to specified conditions and exclusions; gives a director or
officer who successfully defends an action the right to be so indemnified; and
permits a corporation to buy directors' and officers' liability insurance. Such
indemnification is not exclusive of any other rights to which those indemnified
may be entitled under any by-law, agreement, vote of stockholders or otherwise.
As permitted by Section 145 of the Delaware Corporation Law, Article VII of
the Bylaws of the Company and Article VIII of the Certificate of Incorporation
of the Company provide for the indemnification by the Company of its directors,
officers, employees and agents against liabilities and expenses incurred in
connection with actions, suits or proceedings brought against them by a third
party or in the rights of the corporation, by reason of the fact that they were
or are such officers, employees or agents.
Article EIGHTH of the Company's Certificate of Incorporation provides that
to the fullest extent permitted by the Delaware Corporation Law as the same
exists or may hereafter be amended, a director of the Company shall not be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Purchase Agreement, dated January 30, 1998, between the Company and the Initial Purchaser
*2.1 Agreement and Plan of Merger, dated as of January 2, 1998, by and among the Company, JFL-EEC LLC,
JFL-EEC Merger Sub Co. and T.C. Group, L.L.C.
*3.1 Amended and Restated Certificate of Incorporation of the Company
*3.2 Certificate of Designations for the Series A 10% Cumulative Redeemable Preferred Stock
*3.3 Certificate of Designations for the Series B 6% Cumulative Convertible Preferred Stock
3.4 Amended and Restated Bylaws of the Company
*3.5 Articles of Incorporation of Elgar Electronics Corporation
3.6 Bylaws of Elgar Electronics Corporation
*3.7 Articles of Incorporation of Power Ten
*3.8 Bylaws of Power Ten
*4.1 Indenture, dated as of February 3, 1998, between the Company and United States Trust Company of New
York
*4.2 First Supplemental Indenture, dated as of February 3, 1998, among the Company, Elgar Electronics
Corporation and United States Trust Company of New York
*4.3 Second Supplemental Indenture, dated as of May 29, 1998, among the Company, Elgar Electronics
Corporation, Power Ten and United States Trust Company of New York
*4.4 Form of Note (included in Exhibits 4.1 and 4.2)
*4.5 Registration Rights Agreement, dated February 3, 1998, between the Company and the Holders of Old
Notes
</TABLE>
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
*4.6 Form of Warrant Certificate.
5.1 Opinion of Gibson, Dunn & Crutcher LLP, including consent
8.1 Opinion of Gibson, Dunn & Crutcher LLP with regard to federal income tax consequences of the Exchange
Offer
*10.1 Assumption Agreement, dated as of February 3, 1998, between the Company and Elgar Electronics
Corporation, assuming, among other things, the obligations of MergerCo under the Purchase Agreement
and the Registration Rights Agreement
*10.2 Investment Agreement, dated as of February 3, 1998, between the Company and Series A preferred
shareholders
*10.3 Shareholders Agreement, dated as of February 3, 1998, between the Company and the shareholders
*10.4 Shareholders Registration Rights Agreement, dated as of February 3, 1998, between the Company and the
shareholders
*10.5 Warrantholders' Registration Rights Agreement, dated as of February 3, 1998, between the Company and
the warrantholders
*10.6 Management Agreement, dated as of February 3, 1998, among the Company, Elgar Electronics Corporation
and J. F. Lehman & Company
*10.7 Stock Purchase Agreement, dated as of May 5, 1998, among Elgar Electronics Corporation, Joseph A.
Varozza, Jr. and Vincent S. Mutascio
*10.8 Employment Agreement, dated as of May 29, 1998, between Elgar Electronics Corporation and Joseph A.
Varozza, Jr.
*10.9 Employment Agreement, dated as of May 29, 1998, between Elgar Electronics Corporation and Vincent S.
Mutascio
*10.10 Employment Agreement, dated as of February 3, 1998, between Elgar Electronics Corporation and Kenneth
R. Kilpatrick
*10.11 Form of Employment Agreement entered into between Elgar Electronics Corporation and certain of its
executive officers (other than Kenneth R. Kilpatrick) on February 3, 1998
*10.12 Lease Agreement, dated February 1, 1984, between the Company and Carroll Park Ridge, for the
Company's principal facilities
*10.13 First Amendment to Lease, dated November 5, 1992, between RREEF WEST-IV and the Company
*10.14 Second Amendment to Lease, dated February 12, 1998, between The Irvine Company and the Company
*10.15 Amended and Restated Credit Agreement, dated as of February 3, 1998 and amended and restated as of
May 29, 1998, among the Company, Elgar Electronics Corporation and Bankers Trust Company, as Agent
*10.16 Amended and Restated Pledge Agreement, dated as of February 3, 1998 and amended and restated as of
May 29, 1998, among the Company, Elgar Electronics Corporation and Bankers Trust Company, as
Pledgee and Collateral Agent
*10.17 Amended and Restated Security Agreement, dated as of February 3, 1998 and amended and restated as of
May 29, 1998, among the Company, Elgar Electronics Corporation, Power Ten and Bankers Trust
Company, as Collateral Agent
*10.18 Subsidiaries Guaranty, dated as of May 29, 1998, made by Power Ten in favor of Bankers Trust Company,
as Agent
*10.19 Capital Call Agreement, dated as of May 29, 1998, among J.F. Lehman Equity Investors I, L.P., the
Company, Elgar Electronics Corporation and Bankers Trust Company, as Agent
</TABLE>
II-2
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
*10.20 Form of Term Loan Note
*10.21 Form of Revolving Note
*10.22 Form of Swingline Note
12.1 Statement re: Computation of Ratios of Earnings to Fixed Charges and Combined Fixed Charges and
Preferred Stock Dividends
*21.1 Subsidiaries of the Company
23.1 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
*24.1 Powers of Attorney
*25.1 Statement of Eligibility of United States Trust Company of New York, as trustee under the Indenture
filed as Exhibits 4.1 and 4.2, on Form T-1
*27.1 Financial Data Schedule for Elgar Holdings, Inc.
*27.2 Financial Data Schedule for Power Ten
*99.1 Form of Letter of Transmittal to be used in connection with the Notes Exchange Offer
*99.2 Notice of Guaranteed Delivery regarding Old Notes
</TABLE>
- ------------------------
* Previously filed.
(B) FINANCIAL STATEMENT SCHEDULE.
The following financial statement schedule is filed with Part II of this
Registration Statement:
<TABLE>
<CAPTION>
SCHEDULE NUMBER DESCRIPTION OF SCHEDULE
- ----------------------------------------------------- ---------------------------------------
<S> <C>
II................................................... Valuation and Qualifying Accounts
</TABLE>
ITEM 22. UNDERTAKINGS.
The undersigned registrants hereby undertake with respect to the securities
offered by them:
1. Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted as to directors, officers
and controlling persons of any Registrant pursuant to the provisions described
in Item 20 or otherwise, the Registrants have been advised that in the opinion
of the Commission such indemnification is against public policy as expressed in
the Act and is, therefore unenforceable. In the event a claim for
indemnification against such liabilities (other than the payment by any
Registrant of expenses incurred or paid by a director, officer or controlling
person of such Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, such Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
2. The undersigned Registrants hereby undertake to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
II-3
<PAGE>
ITEM 22. UNDERTAKINGS. (CONTINUED)
3. The undersigned Registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
4. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any acts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
5. That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
6. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
Registrants has duly caused this Amendment No. 2 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Diego, State of California on the 22nd day of July, 1998.
<TABLE>
<S> <C> <C>
ELGAR HOLDINGS, INC.
By: /s/ KENNETH R. KILPATRICK
-----------------------------------------
Kenneth R. Kilpatrick,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ELGAR ELECTRONICS CORPORATION
By: /s/ KENNETH R. KILPATRICK
-----------------------------------------
Kenneth R. Kilpatrick,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated (unless otherwise noted below, each person
holds the directorships and officers listed below for each Registrant listed
above).
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Director and President and
/s/ KENNETH R. KILPATRICK Chief Executive Officer
- ------------------------------ (Principal Executive July 22, 1998
Kenneth R. Kilpatrick Officer)
Vice President--Finance,
/s/ CHRISTOPHER W. KELFORD Chief Financial Officer
- ------------------------------ and Treasurer (Principal July 22, 1998
Christopher W. Kelford Financial and Accounting
Officer)
*
- ------------------------------ Director and Vice July 22, 1998
Donald Glickman President
*
- ------------------------------ Director July 22, 1998
John F. Lehman
II-5
<PAGE>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
*
- ------------------------------ Director July 22, 1998
George Sawyer
*
- ------------------------------ Director and Secretary July 22, 1998
Keith Oster
*
- ------------------------------ Director July 22, 1998
Joseph A. Stroud
- ------------------------------ Director July , 1998
Thomas G. Pownall
*
- ------------------------------ Director July 22, 1998
William Paul
*
- ------------------------------ Director July 22, 1998
Bruce D. Gorchow
*
- ------------------------------ Director July 22, 1998
Glenn A. Youngkin
*By: /s/ CHRISTOPHER W.
KELFORD
- ------------------------------
Christopher W. Kelford
ATTORNEY-IN-FACT
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Los
Gatos, State of California on the 22nd day of July, 1998.
<TABLE>
<S> <C> <C>
POWER TEN
By: /s/ JOSEPH A. VAROZZA, JR.
-----------------------------------------
Joseph A. Varozza, Jr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
President and Chief
/s/ JOSEPH A. VAROZZA, JR. Executive Officer
- ------------------------------ (Principal Executive July 22, 1998
Joseph A. Varozza, Jr. Officer)
Vice President--Finance,
/s/ CHRISTOPHER W. KELFORD Chief Financial Officer
- ------------------------------ and Treasurer (Principal July 22, 1998
Christopher W. Kelford Financial and Accounting
Officer)
*
- ------------------------------ Director and Vice July 22, 1998
Donald Glickman President
*
- ------------------------------ Director and Secretary July 22, 1998
Keith Oster
*
- ------------------------------ Director and Vice July 22, 1998
Kenneth R. Kilpatrick President
*By: /s/ CHRISTOPHER W.
KELFORD
- ------------------------------
Christopher W. Kelford
ATTORNEY-IN-FACT
II-7
<PAGE>
INDEX TO FINANCIAL
STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Schedule II--Valuation and Qualifying Accounts............................................................. S-2
</TABLE>
S-1
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ELGAR HOLDINGS, INC.
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND (A) END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
- --------------------------------------------------------------- --------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts (deducted from accounts
receivable)
Fiscal year ended March 28, 1998............................. $ 189 $ 15 $ (7) $ 197
Fiscal year ended March 29, 1997............................. 184 5 -- 189
Fiscal year ended April 3, 1996.............................. 170 33 (19) 184
</TABLE>
- ------------------------
(a) Includes write-offs and reversals.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Purchase Agreement, dated January 30, 1998, between the Company and the Initial Purchaser
*2.1 Agreement and Plan of Merger, dated as of January 2, 1998, by and among the Company, JFL-EEC LLC,
JFL-EEC Merger Sub Co. and T.C. Group, L.L.C.
*3.1 Amended and Restated Certificate of Incorporation of the Company
*3.2 Certificate of Designations for the Series A 10% Cumulative Redeemable Preferred Stock
*3.3 Certificate of Designations for the Series B 6% Cumulative Convertible Preferred Stock
3.4 Amended and Restated Bylaws of the Company
*3.5 Articles of Incorporation of Elgar Electronics Corporation
3.6 Bylaws of Elgar Electronics Corporation
*3.7 Articles of Incorporation of Power Ten
*3.8 Bylaws of Power Ten
*4.1 Indenture, dated as of February 3, 1998, between the Company and United States Trust Company of New York
*4.2 First Supplemental Indenture, dated as of February 3, 1998, among the Company, Elgar Electronics
Corporation and United States Trust Company of New York
*4.3 Second Supplemental Indenture, dated as of May 29, 1998, among the Company, Elgar Electronics
Corporation, Power Ten and United States Trust Company of New York
*4.4 Form of Note (included in Exhibits 4.1 and 4.2)
*4.5 Registration Rights Agreement, dated February 3, 1998, between the Company and the Holders of Old Notes
*4.6 Form of Warrant Certificate.
5.1 Opinion of Gibson, Dunn & Crutcher LLP, including consent
8.1 Opinion of Gibson, Dunn & Crutcher LLP with regard to federal income tax consequences of the Exchange
Offer
*10.1 Assumption Agreement, dated as of February 3, 1998, between the Company and Elgar Electronics
Corporation, assuming, among other things, the obligations of MergerCo under the Purchase Agreement
and the Registration Rights Agreement
*10.2 Investment Agreement, dated as of February 3, 1998, between the Company and Series A preferred
shareholders
*10.3 Shareholders Agreement, dated as of February 3, 1998, between the Company and the shareholders
*10.4 Shareholders Registration Rights Agreement, dated as of February 3, 1998, between the Company and the
shareholders
*10.5 Warrantholders' Registration Rights Agreement, dated as of February 3, 1998, between the Company and the
warrantholders
*10.6 Management Agreement, dated as of February 3, 1998, among the Company, Elgar Electronics Corporation and
J. F. Lehman & Company
*10.7 Stock Purchase Agreement, dated as of May 5, 1998, among Elgar Electronics Corporation, Joseph A.
Varozza, Jr. and Vincent S. Mutascio
*10.8 Employment Agreement, dated as of May 29, 1998, between Elgar Electronics Corporation and Joseph A.
Varozza, Jr.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
*10.9 Employment Agreement, dated as of May 29, 1998, between Elgar Electronics Corporation and Vincent S.
Mutascio
*10.10 Employment Agreement, dated as of February 3, 1998, between Elgar Electronics Corporation and Kenneth R.
Kilpatrick
*10.11 Form of Employment Agreement entered into between Elgar Electronics Corporation and certain of its
executive officers (other than Kenneth R. Kilpatrick) on February 3, 1998
*10.12 Lease Agreement, dated February 1, 1984, between the Company and Carroll Park Ridge, for the Company's
principal facilities
*10.13 First Amendment to Lease, dated November 5, 1992, between RREEF WEST-IV and the Company
*10.14 Second Amendment to Lease, dated February 12, 1998, between The Irvine Company and the Company
*10.15 Amended and Restated Credit Agreement, dated as of February 3, 1998 and amended and restated as of May
29, 1998, among the Company, Elgar Electronics Corporation and Bankers Trust Company, as Agent
*10.16 Amended and Restated Pledge Agreement, dated as of February 3, 1998 and amended and restated as of May
29, 1998, among the Company, Elgar Electronics Corporation and Bankers Trust Company, as Pledgee and
Collateral Agent
*10.17 Amended and Restated Security Agreement, dated as of February 3, 1998 and amended and restated as of May
29, 1998, among the Company, Elgar Electronics Corporation, Power Ten and Bankers Trust Company, as
Collateral Agent
*10.18 Subsidiaries Guaranty, dated as of May 29, 1998, made by Power Ten in favor of Bankers Trust Company, as
Agent
*10.19 Capital Call Agreement, dated as of May 29, 1998, among J.F. Lehman Equity Investors I, L.P., the
Company, Elgar Electronics Corporation and Bankers Trust Company, as Agent
*10.20 Form of Term Loan Note
*10.21 Form of Revolving Note
*10.22 Form of Swingline Note
12.1 Statement re: Computation of Ratios of Earnings to Fixed Charges and Combined Fixed Charges and
Preferred Stock Dividends
*21.1 Subsidiaries of the Company
23.1 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
*24.1 Powers of Attorney
*25.1 Statement of Eligibility of United States Trust Company of New York, as trustee under the Indenture
filed as Exhibits 4.1 and 4.2, on Form T-1
*27.1 Financial Data Schedule for Elgar Holdings, Inc.
*27.2 Financial Data Schedule for Power Ten
*99.1 Form of Letter of Transmittal to be used in connection with the Notes Exchange Offer
*99.2 Notice of Guaranteed Delivery regarding Old Notes
</TABLE>
- ------------------------
* Previously filed.
<PAGE>
Exhibit 3.4
AMENDED AND RESTATED BYLAWS
OF
JFL-EEC MERGER SUB CO.
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
SECTION 1.01 REGISTERED OFFICE. The registered office of JFL-EEC
Merger Sub Co. (the "Corporation") in the State of Delaware shall be at 9 East
Loockerman Street, City of Dover, County of Kent, and the name of the registered
agent in charge thereof shall be National Registered Agents, Inc.
SECTION 1.02 OTHER OFFICES. The Corporation may also have an office
or offices at such other place or places, either within or without the State of
Delaware, as the Board of Directors (hereinafter called the Board) may from time
to time determine or as the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.01 ANNUAL MEETINGS. Annual meetings of the stockholders
of the Corporation for the purpose of electing directors and for the transaction
of such other proper business as may come before such meetings may be held at
such time, date and place as the Board shall determine by resolution.
SECTION 2.02 SPECIAL MEETINGS. A special meeting of the
stockholders for the transaction of any proper business may be called at any
time by the Board or by the President.
SECTION 2.03 PLACE OF MEETINGS. All meetings of the stockholders
shall be held at such places, within or without the State of Delaware, as may
from time to time be designated by the person or persons calling the respective
meeting and specified in the respective notices or waivers of notice thereof.
SECTION 2.04 NOTICE OF MEETINGS. Except as otherwise required by
law, notice of each meeting of the stockholders, whether annual or special,
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder of record entitled to vote at such
meeting by delivering a typewritten or printed notice thereof to him personally,
or by depositing such notice in the United States
<PAGE>
mail, in a postage prepaid envelope, directed to him at his post office
address furnished by him to the Secretary of the Corporation for such purpose
or, if he shall not have furnished to the Secretary his address for such
purpose, then at his post office address last known to the Secretary, or by
transmitting a notice thereof to him at such address by telegraph, cable, or
wireless. Except as otherwise expressly required by law, no publication of
any notice of a meeting of the stockholders shall be required. Every notice
of a meeting of the stockholders shall state the place, date and hour of the
meeting, and, in the case of a special meeting, shall also state the purpose
or purposes for which the meeting is called. Notice of any meeting of
stockholders shall not be required to be given to any stockholder who shall
have waived such notice and such notice shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, except as a
stockholder who shall attend such meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Except as
otherwise expressly required by law, notice of any adjourned meeting of the
stockholders need not be given if the time and place thereof are announced at
the meeting at which the adjournment is taken.
SECTION 2.05 QUORUM. Except in the case of any meeting for the
election of directors summarily ordered as provided by law, the holders of
record of a majority in voting interest of the shares of stock of the
Corporation entitled to be voted thereat, present in person or by proxy, shall
constitute a quorum for the transaction of business at any meeting of the
stockholders of the Corporation or any adjournment thereof. In the absence of a
quorum at any meeting or any adjournment thereof, a majority in voting interest
of the stockholders present in person or by proxy and entitled to vote thereat
or, in the absence therefrom of all the stockholders, any officer entitled to
preside at, or to act as secretary of, such meeting may adjourn such meeting
from time to time. At any such adjourned meeting at which a quorum is present
any business may be transacted which might have been transacted at the meeting
as originally called.
SECTION 2.06 VOTING.
(a) Each stockholder shall, at each meeting of the stockholders, be
entitled to vote in person or by proxy each share or fractional share of the
stock of the Corporation having voting rights on the matter in question and
which shall have been held by him and registered in his name on the books of the
Corporation:
(i) on the date fixed pursuant to Section 6.05 of these
Bylaws as the record date for the determination of stockholders
entitled to notice of and to vote at such meeting, or
(ii) if no such record date shall have been so fixed, then
(a) at the close of business on the day next preceding the day on
which notice of the meeting shall be given or (b) if notice of
the meeting shall be waived, at the close of business on the day
next preceding the day on which the meeting shall be held.
2
<PAGE>
(b) Shares of its own stock belonging to the Corporation or to
another corporation, if a majority of the shares entitled to vote in the
election of directors in such other corporation is held, directly or
indirectly, by the Corporation, shall neither be entitled to vote nor be
counted for quorum purposes. Persons holding stock of the Corporation in a
fiduciary capacity shall be entitled to vote such stock. Persons whose stock
is pledged shall be entitled to vote, unless in the transfer by the pledgor
on the books of the Corporation he shall have expressly empowered the pledgee
to vote thereon, in which case only the pledgee, or his proxy, may represent
such stock and vote thereon. Stock having voting power standing of record in
the names of two or more persons, whether fiduciaries, members of a
partnership, joint tenants in common, tenants by entirety or otherwise, or
with respect to which two or more persons have the same fiduciary
relationship, shall be voted in accordance with the provisions of the General
Corporation Law of the State of Delaware.
(c) Any such voting rights may be exercised by the stockholder
entitled thereto in person or by his proxy appointed by an instrument in
writing, subscribed by such stockholder or by his attorney thereunto
authorized and delivered to the secretary of the meeting; provided, however,
that no proxy shall be voted or acted upon after three years from its date
unless said proxy shall provide for a longer period. The attendance at any
meeting of a stockholder who may theretofore have given a proxy shall not
have the effect of revoking the same unless he shall in writing so notify the
secretary of the meeting prior to the voting of the proxy. At any meeting of
the stockholders all matters, except as otherwise provided in the Certificate
of Incorporation, in these Bylaws or by law, shall be decided by the vote of
a majority in voting interest of the stockholders present in person or by
proxy and entitled to vote thereat and thereon, a quorum being present. The
vote at any meeting of the stockholders on any question need not be by
ballot, unless so directed by the chairman of the meeting. On a vote by
ballot each ballot shall be signed by the stockholder voting, or by his
proxy, if there be such proxy, and it shall state the number of shares voted.
SECTION 2.07 LIST OF STOCKHOLDERS. The Secretary of the
Corporation shall prepare and make, at least ten (10) days before every
meeting of stockholders, a complete list of the stockholders entitled to vote
at the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
SECTION 2.08 JUDGES. If at any meeting of the stockholders a
vote by written ballot shall be taken on any question, the chairman of such
meeting may appoint a judge or judges to act with respect to such vote. Each
judge so appointed shall first subscribe an oath faithfully to execute the
duties of a judge at such meeting with strict
3
<PAGE>
impartiality and according to the best of his ability. Such judges shall
decide upon the qualification of the voters and shall report the number of
shares represented at the meeting and entitled to vote on such question,
shall conduct and accept the votes, and, when the voting is completed, shall
ascertain and report the number of shares voted respectively for and against
the question. Reports of judges shall be in writing and subscribed and
delivered by them to the Secretary of the Corporation. The judges need not
be stockholders of the Corporation, and any officer of the Corporation may be
a judge on any question other than a vote for or against a proposal in which
he shall have a material interest.
SECTION 2.09 ACTION WITHOUT MEETING. Any action required to be
taken at any annual or special meeting of stockholders of the Corporation, or
any action that may be taken at any annual or special meeting of such
stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.01 GENERAL POWERS. The property, business and affairs of
the Corporation shall be managed by the Board.
SECTION 3.02 NUMBER AND TERM OF OFFICE. The number of directors
of the corporation shall be not less than 5 nor more than 12, with the exact
number of directors to be fixed, within the limits specified, by approval of
the board of directors or the stockholders of this corporation. Directors
need not be stockholders. Each of the directors of the Corporation shall
hold office until his successor shall have been duly elected and shall
qualify or until he shall resign or shall have been removed in the manner
hereinafter provided.
SECTION 3.03 ELECTION OF DIRECTORS. Subject to the provisions of
the Certificate of Incorporation, the directors shall be elected annually by
the stockholders of the Corporation and the persons receiving the greatest
number of votes, up to the number of directors to be elected, shall be the
directors.
SECTION 3.04 RESIGNATIONS. Any director of the Corporation may
resign at any time by giving written notice to the Board or to the Secretary
of the Corporation. Any such resignation shall take effect at the time
specified therein, or, if the time be not specified, it shall take effect
immediately upon its receipt; and unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
4
<PAGE>
SECTION 3.05 VACANCIES. Except as otherwise provided in the
Certificate of Incorporation, any vacancy in the Board, whether because of
death, resignation, disqualification, an increase in the number of directors,
or any other cause, may be filled by vote of the majority of the remaining
directors, although less than a quorum. Each director so chosen to fill a
vacancy shall hold office until his successor shall have been elected and
shall qualify or until he shall resign or shall have been removed in the
manner hereinafter provided.
SECTION 3.06 PLACE OF MEETING, ETC. The Board may hold any of
its meetings at such place or places within or without the State of Delaware
as the Board may from time to time by resolution designate or as shall be
designated by the person or persons calling the meeting or in the notice or a
waiver of notice of any such meeting. Directors may participate in any
regular or special meeting of the Board by means of conference telephone or
similar communications equipment pursuant to which all persons participating
in the meeting of the Board can hear each other, and such participation shall
constitute presence in person at such meeting.
SECTION 3.07 FIRST MEETING. The Board shall meet as soon as
practicable after each annual election of directors and notice of such first
meeting shall not be required.
SECTION 3.08 REGULAR MEETINGS. Regular meetings of the Board may
be held at such times as the Board shall from time to time by resolution
determine. If any day fixed for a regular meeting shall be a legal holiday at
the place where the meeting is to be held, then the meeting shall be held at
the same hour and place on the next succeeding business day not a legal
holiday. Except as provided by law, notice of regular meetings need not be
given.
SECTION 3.09 SPECIAL MEETINGS. Special meetings of the Board
shall be held whenever called by the President or a majority of the
authorized number of directors. Except as otherwise provided by law or by
these Bylaws, notice of the time and place of each such special meeting shall
be mailed to each director, addressed to him at his residence or usual place
of business, at least five (5) days before the day on which the meeting is to
be held, or shall be sent to him or her at such place by telegraph or cable
or be delivered personally not less than forty-eight (48) hours before the
time at which the meeting is to be held. Except where otherwise required by
law or by these Bylaws, notice of the purpose of a special meeting need not
be given. Notice of any meeting of the Board shall not be required to be
given to any director who is present at such meeting, except a director who
shall attend such meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.
SECTION 3.10 QUORUM AND MANNER OF ACTING. Except as otherwise
provided in these Bylaws or by law, the presence of a majority of the
authorized number of directors shall be required to constitute a quorum for
the transaction of business at any meeting of the Board, and all matters
shall be decided at any such meeting,
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a quorum being present, by the affirmative votes of a majority of the
directors present. In the absence of a quorum, a majority of directors
present at any meeting may adjourn the same from time to time until a quorum
shall be present. Notice of any adjourned meeting need not be given. The
directors shall act only as a Board, and the individual directors shall have
no power as such.
SECTION 3.11 ACTION BY CONSENT. Any action required or permitted
to be taken at any meeting of the Board or of any committee thereof may be
taken without a meeting if a written consent thereto is signed by all members
of the Board or of such committee, as the case may be, and such written
consent is filed with the minutes of proceedings of the Board or committee.
SECTION 3.12 REMOVAL OF DIRECTORS. Subject to the provisions of
the Certificate of Incorporation, any director may be removed at any time,
either with or without cause, by the affirmative vote of the stockholders
having a majority of the voting power of the Corporation given at a special
meeting of the stockholders called for the purpose.
SECTION 3.13 COMPENSATION. The directors shall receive only such
compensation for their services as directors as may be allowed by resolution
of the Board. The Board may also provide that the Corporation shall
reimburse each such director for any expense incurred by him because of his
attendance at any meetings of the Board or Committees of the Board. Neither
the payment of such compensation nor the reimbursement of such expenses shall
be construed to preclude any director from serving the Corporation or its
subsidiaries in any other capacity and receiving compensation therefor.
SECTION 3.14 COMMITTEES. The Board may, by resolution passed by
a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. Any
such committee, to the extent provided in the resolution of the Board and
except as otherwise limited by law, shall have and may exercise all the
powers and authority of the Board in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to
be affixed to all papers that may require it. Any such committee shall keep
written minutes of its meetings and report the same to the Board at the next
regular meeting of the Board. In the absence or disqualification of a member
of a committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board to act at the meeting in the
place of any such absent or disqualified member.
ARTICLE IV
OFFICERS
SECTION 4.01 NUMBER. The officers of the Corporation shall be a
President, one or more Vice Presidents (the number thereof and their
respective titles to
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be determined by the Board), a Secretary, one or more Assistant Secretaries
(the number thereof to be determined by the Board) and a Chief Financial
Officer.
SECTION 4.02 ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The
officers of the Corporation, except such officers as may be appointed in
accordance with Section 4.03, shall be elected annually by the Board at the
first meeting thereof held after the election thereof. Each officer shall
hold office until his successor shall have been duly chosen and shall qualify
or until his resignation or removal in the manner hereinafter provided.
SECTION 4.03 ASSISTANTS, AGENTS AND EMPLOYEES, ETC. In addition
to the officers specified in Section 4.01, the Board may appoint other
assistants, agents and employees as it may deem necessary or advisable,
including one or more Assistant Secretaries, and one or more Assistant
Treasurers, each of whom shall hold office for such period, have such
authority, and perform such duties as the Board may from time to time
determine. The Board may delegate to any officer of the Corporation or any
committee of the Board the power to appoint, remove and prescribe the duties
of any such assistants, agents or employees.
SECTION 4.04 REMOVAL. Any officer, assistant, agent or employee
of the Corporation may be removed, with or without cause, at any time: (i)
in the case of an officer, assistant, agent or employee appointed by the
Board, only by resolution of the Board; and (ii) in the case of an officer,
assistant, agent or employee, by any officer of the Corporation or committee
of the Board upon whom or which such power of removal may be conferred by the
Board.
SECTION 4.05 RESIGNATIONS. Any officer or assistant may resign
at any time by giving written notice of his resignation to the Board or the
Secretary of the Corporation. Any such resignation shall take effect at the
time specified therein, or, if the time be not specified, upon receipt
thereof by the Board or the Secretary, as the case may be; and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
SECTION 4.06 VACANCIES. A vacancy in any office because of
death, resignation, removal, disqualification, or other cause, may be filled
for the unexpired portion of the term thereof in the manner prescribed in
these Bylaws for regular appointments or elections to such office.
SECTION 4.07 THE PRESIDENT. The President of the Corporation
shall be the chief executive officer of the Corporation and shall have,
subject to the control of the Board, general and active supervision and
management over the business of the Corporation and over its several
officers, assistants, agents and employees.
SECTION 4.08 THE VICE PRESIDENTS. Each Vice President shall have
such powers and perform such duties as the Board may from time to time
prescribe. At the request of the President, or in case of the President's
absence or inability to act upon
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the request of the Board, a Vice President shall perform the duties of the
President and when so acting, shall have all the powers of, and be subject to
all the restrictions upon, the President.
SECTION 4.09 THE SECRETARY. The Secretary shall, if present,
record the proceedings of all meetings of the Board, of the stockholders, and
of all committees of which a secretary shall not have been appointed in one
or more books provided for that purpose; he shall see that all notices are
duly given in accordance with these Bylaws and as required by law; he shall
be custodian of the seal of the Corporation and shall affix and attest the
seal to all documents to be executed on behalf of the Corporation under its
seal; and, in general, he shall perform all the duties incident to the office
of Secretary and such other duties as may from time to time be assigned to
him by the Board.
SECTION 4.10 THE ASSISTANT SECRETARIES. Each Assistant Secretary
shall have such powers and perform such duties as the Board may from time to
time prescribe.
SECTION 4.11 THE CHIEF FINANCIAL OFFICER. The Chief Financial
Officer shall have the general care and custody of the funds and securities
of the Corporation, and shall deposit all such funds in the name of the
Corporation in such banks, trust companies or other depositories as shall be
selected by the Board. He shall receive, and give receipts for, moneys due
and payable to the Corporation from any source whatsoever. He shall exercise
general supervision over expenditures and disbursements made by officers,
agents and employees of the Corporation and the preparation of such records
and reports in connection therewith as may be necessary or desirable. He
shall, in general, perform all other duties incident to the office of Chief
Financial Officer and such other duties as from time to time may be assigned
to him by the Board.
SECTION 4.12 COMPENSATION. The compensation of the officers of
the Corporation shall be fixed from time to time by the Board. None of such
officers shall be prevented from receiving such compensation by reason of the
fact that he is also a director of the Corporation. Nothing contained herein
shall preclude any officer from serving the Corporation, or any subsidiary
corporation, in any other capacity and receiving such compensation by reason
of the fact that he is also a director of the Corporation. Nothing contained
herein shall preclude any officer from serving the Corporation, or any
subsidiary corporation, in any other capacity and receiving proper
compensation therefor.
ARTICLE V
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
SECTION 5.01 EXECUTION OF CONTRACTS. The Board, except as in
these Bylaws otherwise provided, may authorize any officer or officers, agent
or agents, to enter into any contract or execute any instrument in the name
of and on behalf of the Corporation, and such authority may be general or
confined to specific instances; and
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unless so authorized by the Board or by these Bylaws, no officer, agent or
employee shall have any power or authority to bind the Corporation by any
contract or engagement or to pledge its credit or to render it liable for any
purpose or in any amount.
SECTION 5.02 CHECKS, DRAFTS, ETC. All checks, drafts or other
orders for payment of money, notes or other evidence of indebtedness, issued
in the name of or payable to the Corporation, shall be signed or endorsed by
such person or persons and in such manner as, from time to time, shall be
determined by resolution of the Board. Each such officer, assistant, agent
or attorney shall give such bond, if any, as the Board may require.
SECTION 5.03 DEPOSITS. All funds of the Corporation not
otherwise employed shall be deposited from time to time to the credit of the
Corporation in such banks, trust companies or other depositories as the Board
may select, or as may be selected by any officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation to
whom such power shall have been delegated by the Board. For the purpose of
deposit and for the purpose of collection for the account of the Corporation,
the President, any Vice President or the Chief Financial Officer (or any
other officer or officers, assistant or assistants, agent or agents, or
attorney or attorneys of the Corporation who shall from time to time be
determined by the Board) may endorse, assign and deliver checks, drafts and
other orders for the payment of money which are payable to the order of the
Corporation.
SECTION 5.04 GENERAL AND SPECIAL BANK ACCOUNTS. The Board may
from time to time authorize the opening and keeping of general and special
bank accounts with such banks, trust companies or other depositories as the
Board may select or as may be selected by any officer or officers, assistant
or assistants, agent or agents, or attorney or attorneys of the Corporation
to whom such power shall have been delegated by the Board. The Board may
make such special rules and regulations with respect to such bank accounts,
not inconsistent with the provisions of these Bylaws, as it may deem
expedient.
ARTICLE VI
SHARES AND THEIR TRANSFER
SECTION 6.01 CERTIFICATES FOR STOCK. Every owner of stock of the
Corporation shall be entitled to have a certificate or certificates, to be in
such form as the Board shall prescribe, certifying the number and class of
shares of the stock of the Corporation owned by him. The certificates
representing shares of such stock shall be numbered in the order in which
they shall be issued and shall be signed in the name of the Corporation by
the President or a Vice President, and by the Secretary or an Assistant
Secretary or by the Chief Financial Officer or an Assistant Treasurer. Any
of or all of the signatures on the certificates may be a facsimile. In case
any officer, transfer agent or registrar who has signed, or whose facsimile
signature has been placed upon, any such certificate, shall have ceased to be
such officer, transfer agent or registrar before such
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certificate is issued, such certificate may nevertheless be issued by the
Corporation with the same effect as though the person who signed such
certificate, or whose facsimile signature shall have been placed thereupon,
were such officer, transfer agent or registrar at the date of issue. A
record shall be kept of the respective names of the persons, firms or
corporations owning the stock represented by such certificates, the number
and class of shares represented by such certificates, respectively, and the
respective dates thereof, and in case of cancellation, the respective dates
of cancellation. Every certificate surrendered to the Corporation for
exchange or transfer shall be cancelled, and no new certificate or
certificates shall be issued in exchange for any existing certificate until
such existing certificate shall have been so cancelled, except in cases
provided for in Section 6.04.
SECTION 6.02 TRANSFERS OF STOCK. Transfers of shares of stock of
the Corporation shall be made only on the books of the Corporation by the
registered holder thereof, or by his attorney thereunto authorized by power
of attorney duly executed and filed with the Secretary, or with a transfer
clerk or a transfer agent appointed as provided in Section 6.03, and upon
surrender of the certificate or certificates for such shares properly
endorsed and the payment of all taxes thereon. The person in whose name
shares of stock stand on the books of the Corporation shall be deemed the
owner thereof for all purposes as regards the Corporation. Whenever any
transfer of shares shall be made for collateral security, and not absolutely,
such fact shall be so expressed in the entry of transfer if, when the
certificate or certificates shall be presented to the Corporation for
transfer, both the transferor and the transferee request the Corporation to
do so.
SECTION 6.03 REGULATIONS. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with these Bylaws,
concerning the issue, transfer and registration of certificates for shares of
the stock of the Corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer clerks or one or more transfer
agents and one or more registrars, and may require all certificates for stock
to bear the signature or signatures of any of them.
SECTION 6.04 LOST, STOLEN, DESTROYED, AND MUTILATED CERTIFICATES.
In any case of loss, theft, destruction, or mutilation of any certificate of
stock, another may be issued in its place upon proof of such loss, theft,
destruction, or mutilation and upon the giving of a bond of indemnity to the
Corporation in such form and in such sum as the Board may direct; provided,
however, that a new certificate may be issued without requiring any bond
when, in the judgment of the Board, it is proper so to do.
SECTION 6.05 FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF
RECORD. In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights
in respect of any other change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board may fix, in advance, a record
date, which shall not be more than 60 nor less than 10 days before the date
of such meeting, nor more than 60 days prior to any other action. If in any
case involving the determination of stockholders for
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any purpose other than notice of or voting at a meeting of stockholders or
expressing consent to corporate action without a meeting the Board shall not
fix such a record date, the record date for determining stockholders for such
purpose shall be the close of business on the day on which the Board shall
adopt the resolution relating thereto. A determination of stockholders
entitled to notice of or to vote at a meeting of stockholders shall apply to
any adjournment of such meeting; provided, however, that the Board may fix a
new record date for the adjourned meeting.
ARTICLE VII
INDEMNIFICATION
SECTION 7.01 ACTION, ETC. OTHER THAN BY OR IN THE RIGHT OF THE
CORPORATION. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Corporation)
by reason of the fact that he is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit
or proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Corporation,
and with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement, conviction, or upon a plea
of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, that he
had reasonable cause to believe that his conduct was unlawful.
SECTION 7.02 ACTIONS, ETC., BY OR IN THE RIGHT OF THE
CORPORATION. The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that he is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him
in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Corporation unless and only
to the extent that the Court of Chancery or the court in which such action or
suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is
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fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court shall deem proper.
SECTION 7.03 DETERMINATION OF RIGHT OF INDEMNIFICATION. Any
indemnification under Section 7.01 or 7.02 (unless ordered by a court) shall
be made by the Corporation only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee or
agent is proper in the circumstances because he has met the applicable
standard of conduct set forth in Section 7.01 and 7.02. Such determination
shall be made (i) by the Board by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (ii) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (iii) by the stockholders.
SECTION 7.04 INDEMNIFICATION AGAINST EXPENSES OF SUCCESSFUL
PARTY. Notwithstanding the other provisions of this Article, to the extent
that a director, officer, employee or agent of the Corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 7.01 or 7.02, or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
SECTION 7.05 PREPAID EXPENSES. Expenses incurred by an officer
or director in defending a civil or criminal action, suit or proceeding may
be paid by the Corporation in advance of the final disposition of such
action, suit or proceeding as authorized by the Board in the specific case
upon receipt of an undertaking by or on behalf of the director or officer to
repay such amount unless it shall ultimately be determined that he is
entitled to be indemnified by the Corporation as authorized in this Article.
Such expenses incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board deems appropriate.
SECTION 7.06 OTHER RIGHTS AND REMEDIES. The indemnification
provided by this Article shall not be deemed exclusive of any other rights to
which those seeking indemnification may be entitled under any Bylaws,
agreement, vote of stockholders or disinterested directors or otherwise, both
as to action in his official capacity and as to action in another capacity
while holding such office, and shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit
of the heirs, executors and administrators of such a person.
SECTION 7.07 INSURANCE. Upon resolution passed by the Board, the
Corporation may purchase and maintain insurance on behalf of any person who
is or was a director, officer, employee or agent of the Corporation, or is or
was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against him and incurred
by him in any such capacity, or arising out of his status as such, whether or
not the Corporation would have the power to indemnify him against such
liability under the provisions of this Article.
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SECTION 7.08 CONSTITUENT CORPORATIONS. For the purposes of this
Article, references to "the Corporation" include all constituent corporations
absorbed in a consolidation or merger as well as the resulting or surviving
corporation, so that any person who is or was a director, officer, employee
or agent of such a constituent corporation or is or was serving at the
request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise shall stand in the same position under the provisions of this
Article with respect to the resulting or surviving corporation as he would if
he had served the resulting or surviving corporation in the same capacity.
SECTION 7.09 OTHER ENTERPRISES, FINES, AND SERVING AT
CORPORATION'S REQUEST. For purposes of this Article, references to "other
enterprises" shall include employee benefit plans; references to "fines"
shall include any excise taxes assessed on a person with respect to any
employee benefit plan; and references to "serving at the request of the
Corporation" shall include any service as a director, officer, employee or
agent of the corporation which imposes duties on, or involves services by,
such director, officer, employee, or agent with respect to an employee
benefit plan, its participants, or beneficiaries; and a person who acted in
good faith and in a manner he reasonably believed to be in the interest of
the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
Corporation" as referred to in this Article.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01 SEAL. The Board shall provide a corporate seal,
which shall be in the form of a circle and shall bear the name of the
Corporation and words and figures showing that the Corporation was
incorporated in the State of Delaware and the year of incorporation.
SECTION 8.02 WAIVER OF NOTICES. Whenever notice is required to
be given by these Bylaws or the Certificate of Incorporation or by law, the
person entitled to said notice may waive such notice in writing, either
before or after the time stated therein, and such waiver shall be deemed
equivalent to notice.
SECTION 8.03 AMENDMENTS. These Bylaws, or any of them, may be
altered, amended or repealed, and new Bylaws may be made, (i) by the Board,
by vote of a majority of the number of directors then in office as directors,
acting at any meeting of the Board, or (ii) by the stockholders, at any
annual meeting of stockholders, without previous notice, or at any special
meeting of stockholders, provided that notice of such proposed amendment,
modification, repeal or adoption is given in the notice of special meeting.
Any Bylaws made or altered by the stockholders may be altered or repealed by
either the Board or the stockholders.
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Exhibit 3.6
BYLAWS FOR THE REGULATION
OF
ELGAR ELECTRONICS CORPORATION
A CALIFORNIA CORPORATION
ARTICLE I
PRINCIPAL EXECUTIVE OFFICE
The principal executive office of the corporation shall be 9250 Brown
Deer Road, San Diego, California 92121.
ARTICLE II
MEETING OF SHAREHOLDERS
Section 2.01 ANNUAL MEETINGS. The annual meeting of shareholders
shall be held on the 15th day of June in each year (or, should such day fall
upon a legal holiday, then on the first day thereafter which is not a legal
holiday) at 10:00 o'clock A.M., or at such other time and on such other date as
the board of directors shall determine. At each annual meeting, directors shall
be elected and any other proper business may be transacted.
Section 2.02 SPECIAL MEETINGS. Special meetings of shareholders may
be called by the board of directors, the chairman of the board (if there be such
an officer), the president, or the holders of shares entitled to cast not less
than ten percent (10%) of the votes at such meeting. Each special meeting shall
be held at such date and time as is requested by the person or persons calling
the meeting within the limits fixed by law.
Section 2.03 PLACE OF MEETINGS. Each annual or special meeting of
shareholders shall be held at such location as may be determined by the board of
directors, or if no such determination is made, at such place as may be
determined by the chief executive officer, or by any other officer authorized by
the board of directors or the chief executive officer to make such
determination. If no location is so determined, any annual or special meeting
shall be held at the principal executive office of the corporation.
Section 2.04 NOTICE OF MEETINGS. Notice of each annual or special
meeting of shareholders shall contain such information, and shall be given to
such persons at such time, and in such manner, as the board of directors shall
determine, or if no such determination is made, as the chief executive officer,
or any other officer so authorized by the board of directors or the chief
executive officer, shall determine, subject to the requirements of applicable
law.
Section 2.05 CONDUCT OF MEETINGS. Subject to the requirements of
applicable law, all annual and special meetings of shareholders shall be
conducted in accordance with such rules and procedures as the board of directors
may determine and, as to matters not governed by such rules and procedures, as
the chairman of such meeting shall determine. The chairman of any
<PAGE>
annual or special meeting of shareholders shall be designated by the board of
directors and, in the absence of any such designation, shall be the chief
executive officer of the corporation.
Section 2.06 INFORMAL ACTION BY SHAREHOLDERS. An action required or
permitted to be taken at a meeting of Shareholders may be taken without a
meeting if a consent, in writing, setting forth such action, is signed by all
the Shareholders entitled to vote on the subject matter thereof and any other
Shareholders entitled to notice of a meeting of Shareholders (but not to vote
thereat) have waived in writing any rights which they may have to dissent from
such action, and such consents and waivers are filed with the minutes of
proceedings of the Shareholders. Such consents and waivers may be signed by
different Shareholders on separate counterparts.
ARTICLE III
DIRECTORS
Section 3.01 NUMBER. The number of directors of the corporation
shall be not less than 5 nor more than 12, with the exact number of
directors to be fixed, within the limits specified, by approval of the board
of directors or the shareholders of this corporation.
Section 3.02 MEETINGS OF THE BOARD. Each regular and special meeting
of the board shall be held at a location determined as follows: The board of
directors may designate any place, within or without the State of California,
for the holding of any meeting. If no such designation is made, (i) any meeting
called by a majority of the directors shall be held at such location, within the
county of the corporation's principal executive office, as the directors calling
the meeting shall designate; and (ii) any other meeting shall be held at such
location, within the county of the corporation's principal executive office, as
the chief executive officer may designate, or in the absence of such
designation, at the corporation's principal executive office. Subject to the
requirements of applicable law, all regular and special meetings of the board of
directors shall be conducted in accordance with such rules and procedures as the
board of directors may approve and, as to matters not governed by such rules and
procedures, as the chairman of such meeting shall determine. The chairman of
any regular or special meeting shall be designated by the directors and, in the
absence of any such designation, shall be the chief executive officer of the
corporation.
Members of the board of directors (or any committee appointed by the
board) may participate in a meeting by means of conference telephone or similar
communications equipment whereby all persons participating in the meeting can
hear each other, and participation in such meeting in such manner shall
constitute presence in person at such meeting.
Any action required or permitted to be taken at any meeting of the
Board of Directors may be taken without a meeting, if a consent in writing to
such action is signed by all of the Directors and such written consents may be
signed by different Directors on separate counterparts.
Section 3.03 INFORMAL ACTION BY DIRECTORS. Any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting, if a consent in writing to such action is signed by all of
the Directors and such written consents may be signed by different Directors on
separate counterparts.
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ARTICLE IV
INDEMNIFICATION OF DIRECTORS,
OFFICERS, AND OTHER CORPORATE AGENTS
Section 4.01 INDEMNIFICATION. This corporation shall indemnify and
hold harmless any person who is or was a director or officer of this
corporation, or is or was serving at the request of the Board of Directors of
this Corporation as a director, officer, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise (an
"Agent"), from and against any expenses, judgments, fines, settlements, and
other amounts actually and reasonably incurred in connection with any
"proceeding" (as defined in Section 317(a)) to the fullest extent permitted by
applicable law. The corporation shall advance to its agents expenses incurred
in defending any proceeding prior to the final disposition thereof to the
fullest extent and in the manner permitted by applicable law.
Section 4.02 RIGHT TO INDEMNIFICATION. This section shall create a
right of indemnification for each person referred to in Section 4.01, whether or
not the proceeding to which the indemnification relates arose in whole or in
part prior to adoption of such section and in the event of death such right
shall extend to such person's legal representatives. The right of
indemnification hereby given shall not be exclusive of any other rights such
person may have whether by law or under any agreement, insurance policy, vote of
directors or shareholders, or otherwise.
Section 4.03 INSURANCE. The corporation shall have power to purchase
and maintain insurance on behalf of any agent of the corporation against any
liability asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such whether or not the corporation would have the
power to indemnify the agent against such liability.
ARTICLE V
OFFICERS
Section 5.01 OFFICERS. The corporation shall have a president, a
chief financial officer, a secretary, and such other officers, including a
chairman of the board, as may be designated by the board. Unless the board of
directors shall otherwise determine, the president shall be the chief executive
officer of the corporation. Officers shall have such powers and duties as may
be specified by, or in accordance with, resolutions of the board of directors.
In the absence of any contrary determination by the board of directors, the
chief executive officer shall, subject to the power and authority of the board
of directors, have general supervision, direction, and control of the officers,
employees, business, and affairs of the corporation.
Section 5.02 LIMITED AUTHORITY OF OFFICERS. No officer of the
corporation shall have any power or authority outside the normal day-to-day
business of the corporation to bind the corporation by any contract or
engagement or to pledge its credit or to render it liable in connection with any
transaction unless so authorized by the board of directors.
3
<PAGE>
ARTICLE VI
WAIVER OF ANNUAL REPORTS
So long as the corporation has less than 100 holders of record of its
shares (determined as provided in Section 605 of the California General
Corporation Law), no annual report to shareholders shall be required, and the
requirement to the contrary of Section 1501 of the California General
Corporation Law is hereby expressly waived.
ARTICLE VII
AMENDMENTS
New bylaws may be adopted or these bylaws may be amended or repealed
by the shareholders or by the directors.
4
<PAGE>
[LETTERHEAD OF GIBSON, DUNN & CRUTCHER LLP]
July 23, 1998
(213) 229-7000 C 26292-00003
Elgar Holdings, Inc.
9250 Brown Deer Road
San Diego, California 92121
Re: ELGAR HOLDINGS, INC. -- REGISTRATION STATEMENT ON FORM S-4
(REG. NO. 333-55797)
Ladies and Gentlemen:
We have acted as special counsel for Elgar Holdings, Inc., a Delaware
corporation (the "Company"), in connection with the Company's registration of up
to $90,000,000 aggregate principal amount of the Company's 9-7/8% Senior Notes
due 2008 (the "New Notes") on Form S-4 Registration Statement No. 333-55797 (the
"Registration Statement") under the Securities Act of 1933, as amended. The New
Notes will be offered in exchange for a like principal amount of the Company's
9-7/8% Senior Subordinated Notes due 2008 (the "Old Notes") pursuant to that
certain Registration Rights Agreement, dated as of February 3, 1998, by and
among the Company, Elgar Electronics Corporation, a California corporation and
wholly owned subsidiary of the Company (the "Elgar"), and BT Alex. Brown
Incorporated (the "Registration Rights Agreement"). The Registration Rights
Agreement was executed in connection with the private placement of the Old
Notes.
We have also acted as special counsel for the Elgar and Power Ten, a
California corporation and wholly owned subsidiary of Elgar ("Power Ten," and
collectively with Elgar, the "Subsidiary Guarantors"), in connection with the
registration of the guarantees of the New Notes by the Subsidiary Guarantors
under the Registration Statement (the "Guarantees").
<PAGE>
Elgar Holdings, Inc.
July 23, 1998
Page 2
The New Notes will be issued pursuant to that certain Indenture dated as of
February 3, 1998, by and among the Company, the Subsidiary Guarantors, and
United States Trust Company of New York, N.A., as Trustee, as amended or
supplemented from time to time (the "Indenture").
We are familiar with the actions taken and to be taken by the Company and
the Subsidiary Guarantors in connection with the offering of the New Notes and
the issuance of the Guarantees. On the basis of such knowledge and such
investigation as we have deemed necessary, we are of the opinion that: (i) the
New Notes have been duly authorized by the Company and, when issued in exchange
for the Old Notes pursuant to the terms of the exchange offer described in the
Registration Statement and the Indenture, will be validly issued and will
constitute legal and binding obligations of the Company; and (ii) the Guarantees
have been duly authorized by the Subsidiary Guarantors and, when issued along
with the New Notes in accordance with the terms of the Indenture, will be
validly issued and will constitute the legal and binding obligations of the
Subsidiary Guarantors. Our opinions are subject to limitations imposed by
(i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally, including, without limitation the effect
of statutory or other laws regarding fraudulent conveyances or transfers or
preferential transfers or (ii) general principles of equity, whether considered
at law or at equity, including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing.
We hereby consent to the filing of this opinion as an exhibit to
Registration Statement No. 333-55797 and to the reference to this firm under the
heading "Legal Matters" contained in the prospectus that forms a part of the
Registration Statement.
Very truly yours,
/s/ GIBSON, DUNN & CRUTCHER LLP
KMD/wmr
<PAGE>
[LETTERHEAD OF GIBSON, DUNN & CRUTCHER LLP]
July 23, 1998
(213) 229-7000 C 26292-00003
Elgar Holdings, Inc.
9250 Brown Deer Road
San Diego, California 92121
Re: EXCHANGE OF 9-7/8% SENIOR SUBORDINATED NOTES DUE 2008
Gentlemen:
We have acted as special counsel to Elgar Holdings, Inc., a
Delaware corporation (the "Company"), in connection with the issuance by the
Company of $90 million principal amount of 9-7/8% Senior Notes Due 2008 (the
"Exchange Notes") issued in exchange for $90 million principal amount of the
Company's 9-7/8% Senior Notes due 2008 (the "Old Notes"). The terms of the
Old Notes and the Exchange Notes are described in the Form S-4 Registration
Statement No. 333-55797 (the "Registration Statement") and the operative
documents described therein.
This opinion is based on the accuracy of the facts described and
the representations made in the Registration Statement.
We have made such legal and factual examinations and inquiries as
we have deemed necessary or appropriate for purposes of this opinion. We are
opining herein as to the effect on the subject transaction only of the
federal income tax laws of the United States, and we express no opinion with
respect to the applicability thereto, or the effect thereon, of other federal
laws, the laws of any other jurisdiction or as to any matters of municipal
law or the laws of any other local agencies within any state.
<PAGE>
Elgar Holdings, Inc.
July 23, 1998
Page 2
Based on the foregoing, we hereby confirm our opinion in the
Registration Statement described under the caption "Federal Income Tax
Consequences."
This opinion is based on various statutory provisions, regulations
promulgated thereunder and interpretations thereof by the Internal Revenue
Service and the courts having jurisdiction over such matters, all of which
are subject to change either prospectively or retroactively. Any variation
or difference in the facts from those set forth in the Registration Statement
or the operative documents described therein may affect the conclusions
stated herein.
We hereby consent to the use of our name and our opinion under the
caption "Federal Income Tax Consequences" in the Registration Statement.
Very truly yours,
/s/ GIBSON, DUNN & CRUTCHER LLP
HB/wmr
<PAGE>
EXHIBIT 12.1
COMPUTATION OF RATIOS OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Interest expense............................................ $ 2,722 $ 2,979 $ 3,540 $ 1,824 $ 3,340
Estimated interest portion of rent expense.................. 41 59 62 55 66
--------- --------- --------- --------- ---------
Fixed charges............................................... $ 2,763 $ 3,038 $ 3,602 $ 1,879 $ 3,406
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) before income taxes........................... $ (1,338) $ (358) $ (1,460) $ 3,709 $ 9,221
Fixed charges............................................... 2,763 3,038 3,602 1,879 3,406
--------- --------- --------- --------- ---------
Earnings.................................................... $ 1,425 $ 2,680 $ 2,142 $ 5,588 $ 12,627
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Fixed charges............................................... $ 2,763 $ 3,038 $ 3,602 $ 1,879 $ 3,406
Preferred stock dividend requirements....................... -- -- -- -- 150
Accretion of carrying value of preferred stock.............. -- -- -- -- 28
--------- --------- --------- --------- ---------
Combined fixed charges and preferred stock dividends........ $ 2,763 $ 3,038 $ 3,602 $ 1,879 $ 3,584
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of earnings to combined fixed charges and preferred
stock dividends (1)........................................ 2.97x 3.52x
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) In fiscal 1994, 1995 and 1996, earnings were insufficient to cover fixed
charges by approximately $1,338,000, $358,000 and $1,460,000, respectively.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our report dated May 1, 1998, except with respect to
the matter discussed in Note 11, as to which the date is May 5, 1998, relating
to the consolidated financial statements of Elgar Holdings, Inc. included
herein. We also hereby consent to the use in this registration statement of our
report dated June 25, 1998, relating to the financial statements of Power Ten
included herein and to all references to our Firm included in this registration
statement.
/s/ ARTHUR ANDERSEN LLP
San Diego, California
July 22, 1998
