Exhibit 10.6
MANAGEMENT AGREEMENT
This Management Agreement (this "AGREEMENT"), dated as of February 3, 1998,
by and between Elgar Holdings, Inc., a Delaware corporation ("HOLDINGS"), Elgar
Electronics Corporation, a California corporation ("ELGAR") and J.F. Lehman &
Company, Inc., a Delaware corporation (the "ADVISOR").
WHEREAS, the Board of Directors of the Holdings has determined to effect a
recapitalization of Holdings and Elgar pursuant to which, among other things,
(i) JFL-EEC LLC, a Delaware limited liability company ("JFL-LLC"), an affiliate
of the Advisor, will make a capital contribution in the amount of approximately
$19.0 million to JFL-EEC Merger Sub. Co., a wholly owned subsidiary of JFL-LLC
and an affiliate of the Advisor ("MERGERCO"), (ii) MergerCo will issue to
certain purchasers shares of its Series A 10% Cumulative Redeemable Preferred
Stock (the "SERIES A PREFERRED STOCK") and certain warrants (the "WARRANTS") in
exchange for an aggregate of $10.0 million, (iii) MergerCo will offer and issue
$90.0 million in aggregate principal amount of 9 7/8% Senior Notes due 2008 (the
"SENIOR NOTES"), (iv) MergerCo will merge with and into Holdings, with Holdings
surviving such merger and assuming the liabilities and obligations of MergerCo
(the "MERGER"), including without limitation the liabilities and obligations
with respect to the Series A Preferred Stock, the Warrants and the Senior Notes,
(v) (A) immediately prior to the Merger, Holdings will effect an approximately
9,220 to 1 stock split, such at at the effective time of the Merger there will
be approximately 9,220,000 shares of Holdings common stock, $.01 par value per
share (the "COMMON STOCK") issued and outstanding, (B) Carlyle-EEC Acquisition
Partners, L.P., the owner of all of the issued and outstanding capital stock of
Holdings immediately prior to the Merger, will liquidate and distribute the
shares of Common Stock to its partners, and (C) each share of the Common Stock
issued and outstanding immediately prior to the Merger, other than certain
shares held by certain shareholders and members of management, will be converted
into the right to receive cash, and (v) Holdings and Elgar will enter into a new
credit facility providing for revolving credit borrowings of up to $15.0 million
(all such transactions shall be collectively referred to herein as the
"RECAPITALIZATION");
WHEREAS, each of Holdings and Elgar desire to retain the Advisor to provide
management, consulting and financial services to Holdings and Elgar after
consummation of the Recapitalization; and
WHEREAS, the Advisor wishes to provide such services to Holdings and Elgar
and Holdings and Elgar wish to compensate the Advisor for such services.
NOW, THEREFORE, in consideration of the premises and the covenants and
conditions contained herein, the parties hereto agree as follows:
1. COMPENSATION.
(a) RECAPITALIZATION FEE. Upon consummation of the Recapitalization,
Holdings shall pay to the Advisor a one-time advisory fee (the "RECAPITALIZATION
FEE") in the amount of $1,000,000 in consideration for services rendered by the
Advisor to Holdings in connection with the Recapitalization. The
Recapitalization Fee shall be paid upon consummation of the
Recapitalization in immediately available funds by wire transfer to such
account as the Advisor shall specify prior to the consummation of the
Recapitalization.
(b) ANNUAL FEE. In consideration for the advisory and consulting services
to be rendered by the Advisor to Holdings and Elgar hereunder, including
services in connection with strategic financial planning, investment management,
management and administration and other matters relating to the business and
operations of Holdings and Elgar, Elgar shall pay to the Advisor a fee (the
"ANNUAL FEE") in the amount of $500,000 per annum for each year during the
period commencing on the effective date of the Merger (the"Effective Date") and
ending on the date of the termination this Agreement. The Annual Fee shall be
payable in semi-annual installments, payable in advance (i) for the period from
the Effective Date through July 31, 1998, as soon as practicable after the
Effective Date, (ii) for every six month period thereafter until the date of
termination of this Agreement, on the first day of such six month period. If
for any reason the Annual Fee, or any portion thereof, shall not be paid timely
pursuant to this Section 1(b), then each of Holdings and Elgar shall be jointly
and severally liable to the Advisor with respect to the unpaid portion of such
Annual Fee.
(c) FUTURE TRANSACTION FEES. The Advisor shall be entitled to receive
additional compensation under this Agreement for services rendered in
transactions such as mergers, consolidations, sales or purchases of a
significant amount of assets or capital stock, and financings involving the
public or private offering of the debt or equity securities of Holdings or Elgar
or the incurrence of bank debt by Holdings or Elgar. The compensation to be
payable to the Advisor for services rendered in connection with any such
transaction shall be such compensation as is customary for the type of services
rendered in similar transactions and as may be agreed upon by Holdings or Elgar,
as the case may be, and the Advisor at such time.
(d) REIMBURSEMENTS FOR OUT-OF-POCKET EXPENSES. In addition to the fees
set forth above, Holdings and Elgar shall reimburse the Advisor for, and shall
be jointly liable for, all reasonable out-of-pocket expenses incurred by the
Advisor in rendering the services to Holdings and Elgar contemplated by
paragraphs (a), (b) and (c) above. All reimbursements for out-of-pocket
expenses shall be made promptly upon or as soon as practicable, and in any event
not later than 30 days, after presentation by the Advisor to Holdings or Elgar
of a reasonably detailed statement of expenses in connection therewith.
2. INTEREST. In the event that either Holdings or Elgar shall fail to
pay all or any part of the fees or out-of-pocket expenses described in Section 1
hereof within 10 days after the date when due, then the Advisor shall be
entitled to interest on the unpaid amount thereof at a rate equal to 10% per
annum until paid.
3. INDEMNIFICATION. Holdings and Elgar will jointly and severally
indemnify and hold harmless the Advisor, its affiliates and their respective
partners (both general and limited), officers, directors, employees, agents and
representatives (each such person being an "INDEMNIFIED PARTY") from and against
any and all losses, claims, damages and liabilities, whether joint or several
(the "LIABILITIES"), related to, arising out of or in connection with the
services contemplated by this Agreement or the engagement of the Advisor
pursuant to, and the performance by the Advisor of the services contemplated by,
this Agreement. Holdings and Elgar will jointly and severally reimburse any
Indemnified Party for all reasonable costs and expenses
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(including reasonable attorneys' fees and expenses) as are incurred in
connection with investigating, preparing, pursuing, defending or assisting in
the defense of any action, claim, suit, investigation or proceeding for which
the Indemnified Party would be entitled to indemnification under the terms of
the previous sentence, or any action or proceeding arising therefrom, whether
or not such Indemnified Party is a party hereto. Neither Holdings nor Elgar
will be liable under the foregoing indemnification provision with respect to
any Indemnified Party, to the extent that any loss, claim, damage, liability,
cost or expense is determined by a court, in a final judgment from which no
further appeal may be taken, to have resulted primarily from the gross
negligence or willful misconduct of the Advisor.
4. TERM. This Agreement shall be effective as of the date hereof and
shall continue in effect until the earliest to occur of (i) the tenth
anniversary of this Agreement and (ii) the closing of a sale to an entity which
is not an "Affiliate" (as defined in Section 12b-2 of the Securities Exchange
Act of 1934) of Holdings or any of its existing shareholders on the date hereof
of all or substantially all of the capital stock or assets of Holdings. The
provisions of Sections 1(d), 2, 3 and otherwise as the context so requires shall
survive the termination of this Agreement.
5. PERMISSIBLE ACTIVITIES. Subject to applicable law, nothing herein
shall in any way preclude the Advisor, its affiliates or their respective
partners (both general and limited), officers, directors, employees, agents or
representatives from engaging in any business activities or from performing
services for its or their own account or for the account of others, including
for companies that may be in competition with the business conducted by Holdings
and Elgar.
6. CONSULTING RELATIONSHIP. It is understood and agreed that the Advisor
shall for all purposes hereof be deemed to be an independent contractor and
shall not, unless otherwise expressly authorized by the Holdings or Elgar, as
the case may be, have any authority to act for or represent Holdings or Elgar in
any way, execute any transaction on behalf of Holdings or Elgar or otherwise be
deemed an agent of Holdings or Elgar. No federal, state or local withholding
deductions shall be withheld from the fees and other amounts payable to the
Advisor pursuant to this Agreement unless otherwise required by law.
7. MISCELLANEOUS.
(a) No amendment or waiver of any provision of this Agreement, or consent
to any departure by either party hereto from any such provision, shall be
effective unless the same shall be in writing and signed by each of the parties
hereto. Any amendment, waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.
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(b) Any and all notices hereunder shall, in the absence of receipted hand
delivery, be deemed duly given when mailed, if the same shall be sent by
registered or certified mail, return receipt requested, and the mailing date
shall be deemed the date from which all time periods pertaining to a date of
notice shall run. Notices shall be addressed to the parties at the following
addresses:
If to the Advisor: J.F. Lehman & Company, Inc.
450 Park Avenue
New York, New York 10022
Attention: Mr. Donald Glickman
If to Holdings or Elgar: Elgar Electronics Corporation
9250 Brown Deer Road
San Diego, CA 92121
Attention: Mr. Ken Kilpatrick
(c) This Agreement shall constitute the entire agreement between the
parties with respect to the subject matter hereof, and shall supersede all
previous oral and written (and all contemporaneous oral) negotiations,
commitments, agreements and understandings relating hereto.
(d) THIS AGREEMENT SHALL BE GOVERNED BY, AND INTERPRETED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE
PERFORMED IN THAT STATE. This Agreement shall inure to the benefit of, and be
binding upon, the Advisor, Holdings and Elgar, and their respective successors
and permitted assigns. None of the rights or obligations of the parties
hereunder may be assigned by either party without the prior written consent of
the other party hereto, PROVIDED that the Advisor may assign its rights and
obligations hereunder to any corporation or other entity controlled by or under
common control with the Advisor.
(e) This Agreement may be executed by one or more parties to this
Agreement on any number of separate counterparts, and all of said counterparts
taken together shall be deemed to constitute one and the same instrument.
(f) The waiver by any party of any breach of this Agreement shall not
operate as or be construed to be a waiver by such party of any subsequent
breach.
(g) Any provision of this Agreement which is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their duly authorized officers or agents as of the date first
above written.
ELGAR HOLDINGS, INC.
By: /s/ Donald Glickman
---------------------------------
Name: Donald Glickman
Title: President
ELGAR ELECTRONICS CORPORATION
By: /s/ Chris Kelford
---------------------------------
Name: Chris Kelford
Title: Treasurer
J.F. LEHMAN & CO., INC.
By: /s/ Donald Glickman
---------------------------------
Donald Glickman,
Managing Principal
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